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)

https://youtu.be/LIS00fluB5o

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.

Noisy Fed

Equities start the day higher after it turns out Jerome Powell is a mediocre communicator. Actually that may be a bit harsh, let me see if I can re-phrase that. Jerome Powell stumbled a bit in his language at yesterday’s press conference but the market is filled with millions of people interpreting his words in a million different ways so the bulk of them thought he sounded hawkish and sold stocks. Ok, if you were hiking in the woods or sitting on a beach the Federal Reserve cut interest rates by 25bps and the market freaked out because it thought this might be the only cut in 2019. Is that Powell’s fault? Maybe, his choice of language was odd (called it a “mid cycle adjustment”). Does it really matter? Not if you’re a smart investor who likes to think about the big picture. This is really all the Fed needed to say “UNCERTAINIES ON OUTLOOK REMAIN, WILL ACT AS APPROPRIATE” yet my man JPow got tripped up by a barrage of questions from eager reporters. Let’s put this all aside and go back to the notion of “big picture”. The economy is churning along (2-3% growth) like it always has, earnings are still growing, people still have jobs, the consumer is still consuming, and the trend of the market is higher. The Fed is now on watch for weakness and guess what, if they need to cut again THEY WILL. Here at BullandBaird we like to 1) educate you on the market 2) have you smile or laugh while reading 3) ignore noise and 4) gain wisdom about life. Yesterday’s overreaction to a Fed meeting feels like it needs to be in #3.

After the open it looked like everything would be fine. We spent the entire first half of the day grinding higher (+1%) as people reconsidered their view that the Fed was muddling its message. Unfortunately right around lunch we heard that the current administration plans on placing additional tariffs on Chinese goods and, well, the market looked like that Price is Right game “Cliffhanger”. In terms of things that can have an outsized impact on daily price movement in 2019 the Fed is #1 and “tariff / trade war talk” is #2 (earnings #3). There’s a few ways to think about stuff like this: either you think the cumulative effects will add up and impact both the economy and the stock market or you think the negative headlines are transitory in nature and possibly serve as a way to dampen investor sentiment (i.e. it’s a huge brick in the Wall of Worry). For now I’m in the second camp, having a Sword of Damocles could be useful in avoiding bubble like conditions (as long as the economy hangs in there). 

We closed down -0.85% and while that sounds somewhat benign it was basically a 2% drop from the highs. Remember how I said this is a seasonally tough period for stocks in my last recap? Yea, throw that tidbit on top of fresh tariffs and a quirky Fed meeting and all of a sudden you have a table set for weakness. That being said, we aren’t day traders or people who freak out about every little thing on this here blog so let’s be patient and see what happens. That being said, strap in for the next few months because not only is this the best time of the year but things could finally get spicy. Did I mention the first college football game of the year is only 23 days away!

News Highlights:

Is this final link dumb? I think it might be but it really cracks me up for some reason. I think I’ve been spending too much time in our IT dept. (you need sound)

https://www.youtube.com/watch?v=WEWG6kSYqlY

Have a good night.

Rate Cut Incoming

Equities start the day lower as July comes to an end. Can you believe that? July is ending. The summers die one by one, how soon they fly on and on (as a father of a boy I’ve never made it thru this song without shedding a tear). At least this July is ending on a high note, as of the open the S&P was +2.8% MTD and 20.5% YTD. Incredible right? +20% YTD when it seemed like 2019 would be tough on the market. A trade war, tariffs, slowing global growth, slowing earnings growth, the list goes on and on. But that’s just what markets do, they climb that wall of worry. Speaking of a wall of worry, we have a Fed meeting on Wednesday and the big questions is “how much will they cut rates?” The market has priced in 25bps and I think that’s right, especially given all the commentary leading up to their blackout period. Is that priced into the market? I think 25bps is, 50 likely is not. Is this a “sell the news event”? I’m not sure to be honest but a great many people think it is so the contrarian in me has his ears perked up. My friends at Strategas looked at the performance of the S&P500 between the first rate cut (going to happen on Wed) and the next rate HIKE (who knows) and what they found was pretty darn good. There’s a couple of time frames where stocks fell but on average the index gained 20% in the interim period. Again, anything can and does happen in markets, all we are trying to do it make high probability decisions. NO ONE KNOWS what the future holds but in this specific instance the market has reacted favorably to the first cut (especially if a recession was not imminent). 

After the open it turned into a “sell the big winners” kind of day. AMZN, FB, PYPL, ADSK, ADBE, lots of high flyers were cashed in close to month end. It happens, in fact the market was weak most of the session. If you’re gonna square up your risk before a Fed meeting you’re going to do it a couple days out. I would bet Tuesday and the first half of Wednesday are super quiet. Hey how about this factoid: NASA was signed into existence on this day (July 29) 1958 by President Eisenhower. 11 years later they would land a man on the Moon. Let’s also remember that humanity’s first powered flight was in 1903, so it took 66 years from powered flight to landing on the Moon. What an incredible feat that is, are you kidding me? How can you not be relentlessly optimistic about the future? Sure, I’ll grant you that there’s things to worry about in life but think of all the things that happened in the 20th Century and look how far we’ve come. Incredible, I can’t wait to see what happens the rest of this century. Or at least while I’m here, even though I ate a Big Mac on Sunday and probably took a few days off my life. Still excited!! (I’ve been re-watching this on HBO, it’s so darn good)

We spent over half the day in a 3 pt range so let’s wrap this up and go outside. 50% of the S&P has reported and I’ll let my friend Urban Carmel update you on the results so far: “Sales at a new ATH +4.3% YoY, EPS (GAAP) at new ATH: +8.7% YoY, Margins compressed a bit 11.3% vs 11.6% a year ago”. Guys, earnings are hanging in there, the worst case scenario of an “earnings recession” is rapidly fading. 2% GDP growth, earnings chugging along, unemployment still low, rates about to be cut, the macro picture is ok in the US (for now, that can always change). That being said, we are heading into a seasonally weak part of the calendar so a pullback is entirely possible (especially given that we are up 20%). For now we keep on keeping on knowing that if that pullback does come, its just part of how markets work. Final Score: Dow +0.1%, S&P500 -0.16%, Nasdaq -0.4%, Rus2k -0.6%   

News Highlights:

Did you know you can open a bottle of beer with a piece of paper? I had no idea

https://www.youtube.com/watch?v=EfUM3-3KvIs

Have a good night

Here’s your Market Menu

Equities start the day higher as we get into the meaty part of the earnings season.  We’ve got quite a bit on our plate this week so let’s break it down, shall we? For an appetizer, we have Middle East tensions, which, to be honest, really haven’t impacted the market all that much.  Here’s a 10-year prediction for you:  Disney will be making amazing movies, my hair will still be gray, October will still be the best month, and the Middle East will occasionally flare up making people nervous.  For the second course, we have earnings and economic data.  Roughly 16% of the S&P has reported already and another 30% will report this week.  Factset tells us that on a blended basis Q2 EPS is tracking a 1.9% decline so far.  But (there’s always a but in markets) if things play out like they have over the past few years the average estimate is usually exceeded by around 4.8% which implies that this quarter will end up with POSITIVE EPS growth of 2.9% (4.8% – 1.9%).  We also get Q2 Advanced GDP on Friday so prepare for a whole lot of takes surrounding that (anything near 2% would be fine in my eyes).  For the main course, we have an upcoming Fed meeting.  Smoke signals from the WSJ on Friday told us that a 25bps cut is in the cards and like we always say here at BullandBaird, don’t fight the Fed.  Finally, for dessert, we have a lovely berry cobbler made by my friend Helene Meisler who reminds us that 200 days ago (market days not calendar) was Oct 1, 2018.  Which means that each day that goes by will drop off another awful session from late last year.   The 200-day MAVG will start to get a lot prettier soon. 

After the open, it was another slow summer Monday.   While this week is jam-packed with earnings the bulk of them aren’t until Wednesday or Thursday.  So, Mike, lover of all things Yacht Rock and Disney, who/what matters over the next week or so?   Well here’s three small companies you may have heard of:  AMZN, AAPL, FB.  Those three plus MSFT have accounted for nearly 20% of the gains in the S&P500 this year (chart courtesy WSJ).   You want something to root for how about FAAM!   That’s right, we need our FAAM to not fight at the dinner table for this rally to continue (MSFT has done its part).  What else should we be rooting for?  GDP on Friday to be above 2%, better than expected New Home Sales, sentiment to cool off, fresh lime juice in all your drinks, and summer to never end.

Unfortunately, most of today was forgettable and since that Fed meeting isn’t until July 31 any trading day that doesn’t have a ton of earnings will be as exciting as the semiannual Muncie Dirt and Fertilizer show.  Here’s something I want you to remember:  earnings season is fun to watch but no one should be changing their long term investment plan based on what a collection of companies had to say about the past few months.   Yes, of course, professional investors trade around them, but for most of us, a well-crafted plan isn’t going to change because the CEO of a machinery company is worried about tariffs or the dollar.  One of the keys to success in stock market investing is filtering out the noise and earnings season is basically a weeklong EDM concert.   Final Score:  Dow +0.07%, S&P500 +0.28%, Nasdaq +0.71%, Rus2k -0.20% 

News Highlights:

So I was never much of a skateboarder.   I, like many children, gave it a shot but quit after falling for the 20th time.  This guy does a trick that looks impossible, even in slow motion.

https://www.youtube.com/watch?v=sYTxYuUoSRg

Have a good night