The Boxer

Equities start the day higher as…whoa boy….so much is happening. Last week was absolutely goat rodeo bonkers insane as tweets came flying in from all directions whipping the market around like a 6-year-old on a Tilt a Whirl. It is impossible to handicap what the market is thinking given how fast the narrative is changing. Futures were down last night because the United States ratcheted up tariffs on China yet when I walked in the door futures were up because of a tweet. Ok, I mean is it too much to ask for all of this not to happen live on (if you aren’t on TWTR I don’t even know what to say anymore). Let’s put all of that aside for a moment and try to ground ourselves in a few facts. Last week saw all of the following: Initial Jobless Claims fall (still near cycle lows), New Home Sales print a new cycle high (after June was revised), $TGT release incredible consumer based earnings (might I remind you their stores are within 10 miles of 80% of Americans), and Leading Indicators print a new cycle high. There’s still good news to be had here, it’s not all doom and gloom, LEIs and New Home Sales peak well before a recession begins and they just printed new cycle highs. However, think of our economy as a boxer, it can take a lot of punishment until it can’t anymore. The biggest threat to the expansion is a policy mistake, i.e. things just go a little too far with the Trade War and consumer/business confidence, which is as fragile as my ego, shatters. We don’t know which punch will knock the boxer down but we do know that less punches would help keep us on our feet.

All things considered it was a fairly quiet day as the market basically went sideways from the open. Luckily for us that sideways was in green territory led by Tech, Staples, and Financials. Headline Durable Goods beat expectations as did Dallas Fed and if you were to wander over to the Citigroup Economic Surprise Index you’d notice its had a heck of a run lately (economic data is beating expectations). That being said August has been CRAZY because Tariff and Trade War madness is leading us around like we’re on a leash. Winners:  FTI, DISH, HAS, DE, UPS, and AMGN. Losers PM, LB, GPS, ADS, and DD. There’s no way this works right? Also how often are you using a ladder on flat pavement with tons of room in both directions? I’m short this thing.

We closed on the highs of the session, 2,878, up 1.1% so at least there’s that! To be honest if I had to put a reason on the market rallying today it would be 1) we were due for a bounce after Fridays drubbing and 2) there were no new tweets? Here’s the thing, I think the entire World agrees that trade with China needs to be addressed, it really boils down to “how” we address it, that’s what has the market spooked. The US economy has weathered a great many storms over its existence and you could argue it is STILL weathering the current one. The real question is how long the winds of trade blow and what their final tally will be. Only history will tell us but know that we’re diligently watching the anemometer here at Baird (never in a million years did I think I could work that word into a recap. BOOM). 

Final Score:  Dow +1%, S&P500 +1.1%, Nasdaq +1.3%, Rusk +1.1% 

Tonight I wanted to end on something that made me smile or laugh. This kid right here, makes me smile. Get after it little man!!

Have a good night

Preparation Matters

There might not be anyplace I hate more than the dentist. Actually, hate isn’t the right word, it’s probably “fear”. The soulless waiting room, the bright lights, the whirring sound of a drill, the scraping sound of a metal pick, it’s a misery symphony composed of pain and regret. We should all be going twice a year but given my propensity to avoid things I fear, I’m not even close to that schedule. When I do go I vigorously brush and floss the week before as if that’s going to save me from a hygienist picking thru my gums like a ravenous eater scraping lobster meat from a shell. You know what would help me avoid all this fear and pain? Preparation. Not waiting until it’s too late before soaking my mouth in burning Listerine and brushing my molars like I’m cleaning shower tile. There’s a lesson to be learned from my fear of the dentist and it has to do with your approach to living thru a recession.

There have been 11 post WWII recessions in the United States that have lasted, on average, 11 months (nice symmetry huh?) Economic recessions are the primary drivers of Bear Markets and as you can see here, they crush stocks. Here’s a quote (and a great chart) from a recent Washington Post article on recessions: “About 40 million U.S. adults haven’t seen a single recession during their working lives. Almost as many, including most millennials, have seen only one since they turned 18. That recession, the devastating Great Recession from December 2007 to June 2009, was (hopefully) not representative.” 


Wow, that’s incredible, there are a TON of people who don’t even know what a recession feels like. 

Allow me to make two guarantees right here, right now. The just announced 4th Matrix movie is going to be godawful and there will be another Recession one day. It’s not a matter of if but when, economies move in cycles and every expansion inevitably has a contraction. No one knows when it’s coming and what it will do to the equity market but we do know one thing: preparation will be key to getting thru it.

No recession is the same, they are products of unique circumstances both economically and behaviorally. Billions of dollars of mortgage debt going sour and a wholesale rout of consumers biggest asset (their home) brewed up one of the ugliest periods in stock market history, but just because 2007-2009 was one of the worst recessions ever doesn’t mean the next one will be that bad. Maybe we get a shallow recession caused by a decline in business spending and corporations suffer more than you and I. Maybe it only lasts a few months instead of 12 or 18, who knows, what I do know is that there’s something you can do about it right now.

Financial plans are living breathing things. You don’t create one and then carry it around etched in stone like Charlton Heston. Now is as good a time as any to reach out to your advisor and say “Hey, thanks for all your hard work and caring about my family and their well-being. By the way, what would my portfolio look like in a bear market? What are the various contingencies for our spending if economic worries mount?” You know what those questions are? They are brushing and flossing, using that stupid water thing that gets all over my mirror when I turn it on. It’s preparing yourself for the inevitable day when that next recession arrives. It’s being involved and not letting the winds of fate toss you around like so many dried leaves. 

What’s that? You’re a younger investor who grew up during the GFC and have scars which run deep? Completely understandable, the vast majority of Millennials saw the economy plunge like a meteor and I won’t minimize how that shaped your view of the World. Just remember, time is on your side.  As odd as this sounds you should almost be rooting for lower stock prices because it dramatically shifts the odds of long-term success in your favor. There’s no 15+ year period where the S&P500 total return has been negative so while a recession and a bear market will be scary, they are part of the reason stocks return what they do. Get someone by your side to help you thru the next one, dig thru your spending and see what you would cut out, raise a rainy day fund to buy dips or even a home if mortgage rates plunge. There’s lots you can do right now.

I know that if I just put more effort into preparing for dental visits that things would go smoother but I’m human and stress does weird things to us. We like to pretend that difficult things don’t exist when we can’t see them directly in front of our face. Take the time to prepare yourself for the next economic downturn so when it happens you can look back and say “Thank God Mike’s dental hygiene is so bad otherwise he never would’ve written that blog post which helped me weather this storm”.       

Engage with your advisor right now and if you don’t have one who thinks about markets and investing the right way, the way we do at Baird, reach out and we’ll point you in the right direction. 

R Word

Equities start the day flat as I make my triumphant return to the blogging world. Actually it’s only been a week since my last post, the only people who miss me after a week are…well…let’s move on. What shall we talk about today dear friends? How about the R WORD. Check out how many times the word “recession” has been Google searched over the past 9 days. Incredible, and wholly understandable; we had a Yield Curve inversion that hit the front page of every website known to man including (yarn prices are economically sensitive, what do you want me to say). Look, here’s the thing with inversions, setting aside how cool it was with Maverick and Goose, they are at best warning signs not red alerts. The last 4 times the 2yr 10yr curve inverted it took, on average, 18 months for a recession to arrive and the market went on to gain 24%, 40%, 32%, and 34%. Does that mean history will repeat and good times inevitably lay ahead? Of course not, nothing is ever the same in markets, which is why good news needs to be viewed as good news. Wait, what? What are you saying Yacht Rock guy? I’m saying that economic data needs to firm up, we can’t look at a miss and say “well that raises the odds of Fed action so whatever, we’ll be fine”. Nope, from now on economic data, particularly in the consumer space, needs to beat expectations or dark shadows will grow. 

Since futures were quiet overnight we spent the early part of today drifting around aimlessly looking for something to talk about. Earnings from a couple retailers (HD, TJX, KSS) was about the only thing worth mentioning so let’s go. HD rose 4.5% to trade close to a new all-time high which, to be honest, sounds like consumers are still spending? Frankly this is the kind of stuff I’d rather be watching: consumer names like WMT, TGT, HD, SBUX, etc. Names that normal everyday people go to that would be impacted by worries about an actual recession and not one just talked about in the media. Other winners: MDT, RTN, DHI, and EA. Losers were KSS, DOW, MKC, CAG, and M. By lunch we were sliding lower, down about three quarters of a percent to 2,901 in the S&P which is precisely where we closed. Overall a boring day but the close was notably ugly. 

Let’s circle back to the R word one last time: the last recession was kicked off by the wholesale destruction of consumer’s greatest asset: their home. What if we do have a recession but this time it’s led by a decline in manufacturing and capital investment and not, you know, trillions in mortgage debt. I’m supposed to believe it will have the same severity because….reasons? I just hate the notion that because we lived thru one of the worst recessions ever that all future recessions will be the same or worse. Yes, a recession will come one day (our view at Baird is that one is NOT imminent) so you know what the best thing you can do is right now? Prepare. Talk to your advisor about what your portfolio might do in a bear market. Talk to them about a spending plan in a tough economic environment. Financial planning is an ongoing thing, not something you fire and forget like a heat seeking missile. Call them up and if you don’t have one shoot me an email, I’ll point you in the right direction! 

Final Score:  Dow -60bps, S&P500 -80bps, Nasdaq -70bps, Rus2k -60bps   

News Highlights:

I have two briefs clips to end on tonight

The first is one of the most beautiful things I’ve ever seen, watch this on as big of a screen as you can.

The second is one of the scariest things I’ve seen in my life.

Have a good night

Thoughtful Thursday

Equities start the day higher as Mr Toad’s wild ride settles down a bit. We got Madhouse Monday, Turnaround Tuesday, Wild Wednesday, , so right now I’m praying for a Thoughtful Thursday.  Why is the market of a sudden winging around like it’s head got chopped off? Well, to be honest, that’s just how all of this works. Slow periods of gains are interrupted with violent periods of selling. The market doesn’t move like a sine wave, it moves like that mark on Harry Potter’s forehead (h/t Cullen Roche). What are we so worried about right now? Global Growth. How is it expressing that worry? By focusing on the Bond market, particularly the 10yr yield (I hope you can see TWTR from your desk, I got a lot of quality TWTR links tonight). This kind of singular attention happens every now and then but it doesn’t persist. Remember when we cared about Greek Debt? Ebola? Crude Oil? Yea, all of things were at one point a major concern for stock investors only to be forgotten about a short time. Is this selloff over? No one knows, so let’s do a quick check of sentiment. AAII Bears DOUBLED, which is an eye opener, but if we use the broader based NDR Crowd Sentiment poll (my favorite) we see that sentiment didn’t really wash out like it did last May-June so I guess there’s not much to go on there. Could we head lower again? Sure. Could we head higher? Sure. See why market timing is so hard (and dumb)??

After the open we got a rip roaring rally that took us above where we closed on Friday. You hear that? Wiped out the entire selloff that we saw earlier in the week. Now I was debating posting a chart that shows some of the best days in the market follow the worst days but my readers already know that because they’re super smart. I love you guys. Did I mention that your behavior as an investor is 10000x more important than “macro forecasts” or worrying about what the market is doing on a day to day basis? No? Well I just did. Speaking of behavior, NAAIM measures active investor exposure to the stock market and, get this, it had its single biggest weekly drop since 2013. I hope this puts to bed the notion that the stock market has “deep seated bullishness”. A 6% selloff from the highs and people ran out of the room like Costanza at that birthday party. Winners were AMD, SYMC, ADSK, and a whole host of other tech names. Losers were FOX, UA, PRGO, and KHC. Poor KHC, I guess KRANCH and MAYOMUST never really took hold? I’m shocked. What’s that? They see Soy Sauce in China as a growth opportunity? Wait…

We closed at 2,938, up 1.89%, and at this point new all-time highs are back in our sight. So does this mean the “all clear bell” has been rung? Nope, I’m not here to tell you that. We might make news highs, we might fall back to the lows, and we might go sideways. This blog exists to remind you that the market can and will do all sorts of crazy things (and that it’s ok to laugh about it every now and then). What truly matters is how you ACT when the market freaks out because that will largely determine your success as an investor. You know who helps people like you avoid costly overreactions to random market panics? Advisors, we got a bunch of really amazing one’s here at Baird. They sit a few floors down from me and think about the markets and investing the right way. Now if they’d only buy me lunch from time to time I’d sing their praises more. CHICK FIL A PLEASE. 

Final Score:  Dow +1.43%, S&P500 +1.89%, Nasdaq +2.24%, Rus2k +2.10%   

News Highlights:

We’ll end tonight with my old pal Fail. How I missed thee (the pumpkin at 3mins is so funny)

Have a good night

Your Price Of Admission

Equities start the day sharply lower as you pay your price of admission to the equity market. Let’s circle back to that thought in a second but first let’s look at the lay of the land.  August is off to a terrible start for a couple of reasons. First, we were up nearly 21% at the end of July based solely off multiple expansion (earnings have done very little this year). When a market is up dramatically off valuation alone, it can reach a fragile state. Second, we had that really odd Fed meeting where Powell muddied the waters on rate cuts. Finally, and this is the big one, China vs the US escalated. We raised tariffs and they responded by weakening their currency and potentially banning US ag imports. The last time China devalued the Yuan global markets shook and the Dow opened down a 1,000 points so yea…volatility could be with us for a while. That being said, the market is up 39% since then so let’s circle back to my intro. Selloffs, losses, nervousness, doubt, these are the COSTS of equity returns. You accept these risks because you know that nothing is free in life, especially not stock returns. This one of Morgan Housel’s best articles, I adore it, everyone should read it (especially advisors). I’ll let him have the final word: “Returns are never free. They demand you pay a price, like any other product. And since market returns can be not just great but sensational over time, the fee is high. Declines, crashes, panics, manias, recessions, depressions. The trick is convincing yourself that the fee is worth it. That, I think, is the only way to deal with volatility; not just putting up with it, but realizing that it’s an admission fee worth paying.”

After the open it was a full blown, sell everything not bolted down, my entire screen looked like the elevator scene from The Shining intraday puke fest. Down 2.5% in only a few hours as babies and bathwater were summarily tossed. You hear it all the time but “stairs up, elevator down” continues to be the best description of stock market selloffs. It took all of six trading sessions for the S&P500 to drop 6% and while equities quaked bond yields plummeted with the 10yr note hitting 1.73%. Here’s a tidbit for all of you super smart savvy investors playing at home: The S&P500 div yield is now above the 10yr Yield (2% vs 1.73%). The last time that happened?  2016. Anyway, it’s silly to say “markets hate uncertainty” but when you see this sharp of a selloff it’s clear that something wasn’t priced in correctly (trade war escalation). What were the biggest losers? Everything. Were there any winners? TSN rose 5% to a new all-time high. Tell you what, when I’m feeling down there’s a couple of things that will automatically cheer me up: my family, Disney, 1986 Lynch Bages, and a hearty portion of chicken tenders with ranch. Get ‘em Tyson!

We closed down 3% on what was one of the worst single days in the past 5 years. Rough one boys and girls. My friend Charlie Bilello has a really cool chart I want you to see. Click that link and then come back. You’re back? Great, then you’ve seen that selloffs are PART of how markets work so the sooner you accept that the better. All of those events you just glanced at seemed like the end of the world and yet here we are, alive and kicking. There’s a term in finance called the “equity risk premium” which simply states that stocks have higher returns than cash because they are riskier. You earn that excess return on days like today and all the other selloffs to come because even though you walk thru the valley of the shadow of death, you will fear no evil. This is what it takes to be a good long term investor and that will NEVER change. 

Final Score:  Dow -2.9%, S&P500 -3%, Nasdaq -3.4%, Rusk -3%

News Highlights:

We’re gonna skip to the big finish because, frankly, we could use a laugh or two

The first video is a young Jedi learning the extent of his powers. Wait for it…

The second video shows what happens when you don’t think your plan all the way thru. Honestly what was their plan?

Have a good night.