We live in a massively complex world. Our world has proven to be much flatter as information and events travel much faster and reach further and easier than ever. Look no further than last night’s actions taken in Syria. A geo-political conflict with missiles launched. Within seconds the news broke and spread like wildfire across the globe. This news instantly took the futures on the S&P 500 down 10 points and caused Gold and Silver to rally. The major difference today vs. 20 or 30 years ago is the speed of information flow and algorithmic trading.
Today, news breaks instantly and some trading algorithms are programed to find key words like “Missile”, “US bombs” etc. Those algorithms immediately trigger large-scale sell orders on the S&P 500 futures market and buy orders in the Metals Market. Makes sense on the surface, bad news event is bad for markets right? But other than very short-term fluctuations, seemingly large-scale negative news events or headlines are not worth anything more than exactly that, short-term fluctuations. If you look back over the past 60 years of Market data and plot out large scale “negative” and “positive” events and then compare what short-term, medium and longer-term implications those events actually had, you actually find statistically that those “events” are NOT positively correlated to what you think the market should do. In other words, as an investor these news events should not be driving factors when making investment decisions.
Using a great example given by Robert Prechter in his recent book “The Socionomic Theory of Finance”; what investment decision would you make if you where to get the newspaper the day before the awful 1963 day when JFK was shot? A US president being assassinated ranks pretty high as far as a negative news event, so selling stocks if invested on the long side, or selling short stocks if a speculator would be the normal decisions based on that preconceived bad news. Well 1 trading day after JFK was assassinated a short seller would be underwater losing money, and an Investor who sold all their stocks, would be forced to begin buying them all back at higher levels!
There are dozens if not hundreds of examples like this where the Market does not do what seems natural based on the “news”. We know this goes against human nature, we have all made a knee-jerk decision based on ‘fear’ and that decision has ultimately been the wrong one. Sometimes this even happens on the positive side right? The news flow is so positive that the ‘fear of missing out’ can be very detrimental. Tulip Mania was built on just that.
Nothing above dismisses the emotional or human or political feeling and component all of us have had regarding last night’s bombing in Syria. Together, we are going to go through more of these moments this year and for the years to come. It is our job to strip-out the emotional, human, and political feelings and remain vigilant in our research and analytical investment discipline. This is what has successfully driven our investment strategies in your portfolio, not the “news”.
All attention has been directed at the geopolitical event, all while they snuck the monthly jobs report for March in this morning: an addition of 98,000 jobs. In our work, that is not what we would like to see, and really this was the first bad report dating back to May of 2016. Now just like last May, one report does not make a trend, but we will absolutely be watching this closely.
Have a great weekend!
By, Mike Harris
We are officially one-quarter through the year 2017, and it’s certainly been eventful. Time has flown by. The DOW hit 20,000 then 21,000 for the first time ever. Importantly, earnings growth and an accelerating global economy have been the primary drivers of this rally. The anticipation of pro-growth policies like Tax reform and looser regulation are the sweeteners. Business cycles are the biggest drivers of Markets not politics. The foundation for this Market remains strong.
The Market got rattled a bit this week. It is certainly used to Republicans and Democrats disagreeing. But the internal discord within the Republican Party on Health Care is raising questions again about anything getting done in Washington.
The thinking is that if the bill failed, the likelihood for tax reform would decline, which could also drag down the chances for financial reform. Since the bill was pulled in the final hour, who knows where this goes. Health Care is such a complicated issue with no easy solution. Unfortunately, Congressional divide also increases the chances of a government shutdown in April and a messy fight over raising the debt ceiling in the Fall. This was a big test. It’s no wonder Congress began the year with just a 19% approval rating.
The rally since November has been driven by the strengthening US economy and the acceleration of Corporate earnings, both of which are still firmly in place. Tax reform is a key ingredient here though, so the Market stall makes sense. Stocks have been digesting the big move and we see that continuing a little longer before running to new highs again. As stated at our Outlook events in January, we felt the Market was going to give the new administration roughly 4 months to implement the pro-growth policies. It’s clearly paying very close attention.
An important factor this week: international markets barely budged. The catch-up play continues and many foreign indexes are holding their highs for the year while our Markets consolidate. That’s a material positive and part of the reason that we rotated money back into international markets for the first time in years. The Bond Market is functioning well too. There’s a strong foundation under this Market. But we expect more choppy price action ahead.
Like the Energizer bunny, the Bedell Frazier traveling hat keeps going and going. The hat recently went to the Panama Canal, Iceland, Egypt, Israel and Jordan. Below is a picture from Petra and Mr. Indiana Johnson. This is so cool!
Have a nice weekend. We’ll be back, dark and early on Monday.
The Market’s focus is shifting overseas. Globalization has been under assault. Post World War II norms are being questioned and re-thought on a daily basis. The movement for Brexit is picking up speed. Secretary of State Rex Tillerson has been in Asia all week, with a visit to China today. The G20 leaders have their first meeting of the year in Germany. German Chancellor Angela Merkel was at the White House today, meeting President Trump for the first time. This is a very complicated time on Planet Earth. But isn’t it always? That’s a rhetorical question…
British Prime Minister Theresa May is preparing to trigger Brexit by month’s end. That’s less than 2 weeks from now. The British Parliament passed legislation allowing the government to invoke Article 50 of the Lisbon Treaty which would begin the 2 year process to formally leave the European Union. The negotiations are not expected to be smooth nor friendly. Complicating things further, now Scotland is re-thinking their stance in both the EU as well as the UK. This is all coming 9 months after the Brexit vote was cast last Summer.
The majority of Britons feel the European Union is too bureaucratic, out of touch, ineffective, expensive and an obstacle to secure borders. Prime Minister May intends to formally pull the United Kingdom out of the single European market, which it has been a part of for nearly 5 decades. That would be defined as a “hard” or “clean” Brexit. The British Prime Minister simply wants the best possible deal, but she’s not likely to get it. The EU needs to be careful not to set a dangerous precedent of giving the British the benefits of membership without sharing in the responsibilities. Others would follow suit.
Theresa May is trying to understand the rise of populism and act accordingly. This protectionist movement around the globe is happening for a reason. Rules matter and most people just want a fair opportunity. Our Founding Fathers had it right with the basic common goal of life, liberty and the pursuit of happiness. Unfortunately, increased nationalism tends to lead to extremism. It plays on fear. There’s a great deal of hate. It creates wars. People feel threatened. People are scared.
I had the opportunity to meet former Prime Minister David Cameron, who does not think this is the end of the European Union. It is clear that Britain never loved the details of the union. The Brits never embraced the central currency. He believes Britain ultimately will maintain trade relations and will collaborate on security. Cameron believes Brexit will lead to a stronger and safer European continent. He shares a common belief that the UK was simply paying too high a price for the economic benefits.
2017 is another big year for elections. Many European leaders are relieved that the Dutch election this week did not go to the anti-immigration and populist candidate. The protectionist theme that drove Brexit and our Presidential election had been gaining momentum throughout Europe. Does the Dutch election suggest a reversal? We shall see. France is holding its election in the coming weeks and Germany has their election in the Fall. The future of the European Union will, no doubt, hang in the balance.
With all of these issues around the globe, you might be surprised to know that International Markets have outperformed our Market. It’s been led by Emerging Markets, which have exploded higher, up 13% on the year. The British economy has accelerated since the Brexit vote, counter to most predictions. The underlying Credit Markets are functioning well. That doesn’t indicate any mounting global crisis. These are very economically sensitive regions which are accelerating, and that is Bullish. Importantly, Emerging Markets have effectively done nothing for 10 years. But they just had their best week in a year. The Emerging Market Index is at the same level that it was in April of 2007. It’s renewed strength should not be underestimated. While the DOW and S&P hover near their all-time highs, the rest of the world has plenty of catching up to do. This is very normal and very healthy.
Have a nice weekend. We’re all over it.
The Bull Market turned 8 years old this week. It was born in the ashes of the Financial Crisis. Those days were simply brutal. I will never forget it. Selling was relentless. Panic was rampant. The system nearly failed. I’m a big believer that what doesn’t kill you makes you stronger. Investors that survived the crisis are mentally stronger. Those investors that use logic rather than emotion are financially stronger too. The S&P is up over 250% in 8 years. It’s the second longest Bull Market in history. It has to be the most hated and distrusted. This is such an important factor in understanding this current Bull.
The Market is like a living, breathing animal. Despite the evolution of trading systems and technology, the human element still exists. Emotions cannot be disregarded. Living through 2008 explains why nerves are still so shallow. The Financial Crisis brought so much pain to so many people. It’s unfortunate that so many investors that panicked at the bottom resisted getting back in and have missed so much of this multi-year rally. It reminds me of the Mark Twain saying about the cat and the stove. “If a cat sits on a hot stove, that cat won’t sit on a hot stove again. That cat won’t sit on a cold stove either. That cat just don’t like stoves.”
What is clear now is the 4-year run-up into 2007 was a Bear Market rally. Technically, it was a cyclical Bull Market within a secular Bear Market which began in 2000 when the dot.com bubble burst. That rally into 2007 was artificially inflated with cheap, accessible money that plowed directly and indirectly into real estate. Another bubble was created. The foundation was very weak. It was rotten at the core which led to collateral damage. The Financial Crisis was ferocious.
The Spring of 2009 was like the morning after a massive hurricane. The damage was severe, but not all was lost. Risk takers and go-getters began the process of recovery. Green shoots popped up amidst the rubble. Selling was exhausted. The Bear Market, which began in 2000, officially ended. The Baby Bull born on March 9, 2009 is healthy. It has been raised with so much support but possesses strong internal fundamentals. It’s been a volatile Bull, but it’s understandable why. Those that have bet against this Bull have lost time and again. This Bull won’t last forever, we all understand that. But this Bull showed signs of strength last year and has been rewarded in 2017.
We appreciate and respect this Bull. We do see more room for it to run, although the path has gotten a little slippery of late. Peaks and valleys are part of the terrain. As soon as we sense investors becoming euphoric about this Bull Market, we will change our tune. The economy and earnings growth are accelerating. Interest rates are finally rising for the right reason. This Bull just might make a record run of being the longest before it’s all said and done. In case you were wondering, the longest living Bull was 10 years, ending with the dot.com bubble in 2000. It gained over 400%. From a distance, they might look the same. But there is very little similarity between those Bulls.
Have a nice weekend. Keep an eye on that stove. We’ll be back, dark and early on Monday. Don’t forget to change your clocks.
2017 was set-up to be different. It would be unique, for so many reasons. The Bull Market entered its 9th year. Political change has been the theme around the globe. The UK is leaving the EU. The Giants broke their even year streak. The Patriots had a historic comeback. Even Bonnie & Clyde just made a memorable return. Yes, 2017 was destined to be different than any year we’ve experienced.
The great news is, the US economy is growing. Entering the year, consensus expectations were for 2% growth. It’s coming in faster. It began accelerating last Spring and grew at a 3.5% rate over the Summer. A quick recent pause should lead to growth accelerating again in 2017. You may recall, the American Consumer represents 70% of economic output. Domestic demand growth remains healthy. The Labor Market has been consistent and solid. Consumer spending is picking up. They’re spending more on higher ticket items. The savings rate has been pushing 6%, which is twice what it was a decade ago. It looks like it’s going to slide. Americans are opening up their wallets again. Household balance sheets in general are very healthy. Debt to income is low. Americans have been more disciplined post-crisis. Business spending is on the rise as well. To be clear, that certainly doesn’t mean all Americans are benefitting. But the US economic engine is moving again.
It’s growing overseas too. The recovery is broadening this year. The global economy should grow around 3.5% this year and there will be even faster growth in the Emerging Markets. India is now the fastest growing major economy, expanding at a 7% rate. Japan is finally seeing price inflation for first time in over a year. Remember the negative interest rates? Europe entered the year on an economic upswing, but still has a tough road ahead. A formal beginning of Brexit and the French elections were marked on the calendar for March. We have officially entered March, and still have no clarity on these issues. Stay tuned.
For those that have followed the Janet Yellen-led Fed, you know how cautious she is and how reluctant she has been to tighten monetary policy. But tighten she has. The Fed outlined 3 more interest rate hikes for 2017. A rate hike in March was not initially expected. Now it is and it’s looking like 4 hikes are coming this year. The Market seems ok with it. The Market is now pricing in an 82% probability of an interest rate increase in 2 weeks. It was a mere 13% chance just 3 weeks ago. The Bond Market, the smartest of all Markets, is telling us growth and inflation are real. The benchmark 10-Year Treasury yield has jumped back to 2.5%. It has nearly doubled since its multi-year low last Summer at 1.3%. Times have changed. Growth is accelerating. Rates are rising for the right reasons for the first time in over a decade. A year ago, the Market panicked about the prospects of higher rates. Now it’s celebrating.
The Dollar has been really strong too, particularly with expectations of higher rates. But a growing global economy should see foreign currencies strengthen against the Dollar for the first time in a while. That means Europe might not be as cheap this Summer. A room at the Marriott in Paris along the Champs-Elysees tomorrow night costs 455 Euros. That’s $482 in today’s currency conversion. It would have been over $500 last Summer and $650 a decade ago. You get the picture.
2017 is a new breed. The last 8 years were considered the “New Normal”, after the Financial Crisis. Sub 2% economic growth was considered permanent. The global economy was desperately dependent on central bank stimulus. That is no longer the case. We believe that new normal is old and over. Normal is a word that doesn’t necessarily reflect 2017. Tighten those seat belts. It’s going to be a bumpy ride. We’re with you all the way.
Enjoy the weekend. We’ll be back, dark and early on Monday.
The Bull rally continued this week, with both the DOW and S&P again reaching fresh, new highs. It’s been a remarkable run and one that has caught so many of guard. The S&P 500 reached $20 Trillion in Market Cap for the first time in history. The Global Stock Market is now worth over $70 Trillion. The Dow Jones Industrial Average did something Friday it hadn’t accomplished in 30 years and only twice in its 121 year history. The DOW recorded its 11th consecutive daily increase to close at new highs. The Dow Jones Industrial Average has not closed in the red since February 8th. It’s actually only closed down 3 times this month. It now rests over 20,800 this weekend, a level never before seen. It’s been a historic run.
To put this historic streak in perspective, the only other time the DOW hit 11 consecutive new highs was in 1987. In fact in ’87, it actually hit a record 12. Reagan was still in the White House. Bill Walsh was still the Niners head coach. Paul Newman won the Oscar that year for the “Color of Money”. A dozen eggs cost 65 cents and the median home price was valued at $85,000. 1987 was also the year that Oliver Stone released the film “Wall Street” starring Michael Douglas as the fictional investor Gordon Gekko. He coined the term. “Greed is Good”. Perhaps it’s ironic that this milestone is achieved ahead of the Oscar’s this weekend and the State of the Union speech next week.
Comparisons between 2017 and 1987 are becoming pretty common. This win streak is certainly adding fuel to the fire. The Bull Market which began in 1982 enjoyed a strong 5th year on the back of tax reform and looser regulations as part of Reaganomics. The DOW hit 2,000 for the first time in 1987. As you know, it hit 20,000 for the first time this year. Of course investors remember the Black Monday crash in October of ‘87. We see very little similarities in comparison. The current rally this year has also been driven by expectations for tax reform and looser regulations. Pro-growth policies are certainly being priced in today. But importantly, Corporate Earnings have been accelerating, as has the US economy. Both of these were evident in October, before the Presidential election. The 2-year earnings recession came to an end last year and growth has returned. Make no mistake, this is an aging Bull Market, but we still believe there is more life in it. The Stock Market is no longer dependent on zero percent interest rates and central bank stimulus. Interest rates have finally risen for the right reason. The growth engine is real and it’s humming.
For those interested in the Earnings scorecard: Nearly 90% of S&P companies have reported earnings for the 4th Qtr and calendar 2016. They’ve been good. 66% have beaten earnings estimates. Only 22% have missed. Both Tech and Health Care have had the highest percentage of beats, both over 80%. Utilities have the lowest, at 40%. Over half of the S&P companies have beaten on revenues. Overall, earnings for Q4 are tracking at 7.5% growth from a year ago. That is very solid. Even more important is the 5% revenue growth thus far reported. Revenue growth has been missing for years, and is the truest sign of demand. The estimate for 2017 earnings are now $133.49, which has this Market trading at 17.7X estimates. That’s not cheap but not wildly expensive either.
We do think this Market is a little overbought right now, and expect a breather. We have been enjoying this rally and have already been taking profits and raising cash to preserve capital. Our fundamental and technical signals we study are telling us that a minor selloff is likely. We still see higher levels ahead and believe the selloff will be buyable. We absolutely anticipate more bumps in the road ahead. A selloff is only a buying opportunity when you have cash to buy things. Something you might not have noticed was Gold hit a 4 month high this week. We see it going higher. We are maintaining our discipline. If the facts change, so do we.
Enjoy the Weekend. We will be back, dark and early on Monday. We’re all over it.
Innovation is a powerful thing. Human beings have consistently innovated throughout history, in pursuit of better ways of life. It’s evolutionary. Today, there’s so much we naturally take for granted. Our ancestors didn’t have the same, handy devices at our disposal in this digital age. But of course, we have our own stresses and challenges that we deal with on a daily basis. Life is never perfect. But the greatest inventors are always striving for perfection. The invention of the wheel was a big one. Maybe the biggest. It sure made hauling things easier. Transportation took off. The oldest wheel ever found was in Mesopotamia, and believed to date back to 3500 BC. That sure was a game changer.
The internet of things today connects devices to the web and they’re always on. It’s not just your phone and your iPad. Cars, refrigerators, TV’s and air conditioners are all interconnected to the web and smarter than ever before. Disruptive innovation is making it happen. Companies that don’t innovate face extinction. A Tesla is not a car. It’s more like a supercomputer with wheels. Cars that use gasoline are far more fuel efficient today than they used to be. Will there be a time when they don’t use gas at all? Driverless cars are now the rage, and the future of self driving is very much in question. There will be special, assigned lanes for driverless cars that will be far more efficient, in terms of speed, fuel consumption and accident prevention. Will 6-year olds today need a driver’s license 10 years from now? Will people even need car insurance down the road? These are issues that will undoubtedly change the way we do things and disrupt companies that aren’t prepared.
None of this is new mind you. Innovative machinery and automation has been a driving force for centuries. Henry Ford used to joke that before the roll out of his Model T’s, people simply wanted faster horses. Our President had this to say: “The automation problem is as important as any we face. We must take advantage of every opportunity for technological development. But we cannot disregard the human values involved.” That President was John F. Kennedy, and he said it in 1962. It still applies today. You could argue that existing global leadership is not set up for the new connected world. A case is being made that Brexit and the Trump victory are really about going backwards to a place more predictable and seemingly safe. It’s gut check time on planet Earth.
A common belief in Silicon Valley and at startups across the country is that any company designed for success in 20th century is destined for failure in the 21st. Every company today has to be a technology company or they face extinction. It’s grow or die. Amazon is an obvious disruptive threat. They have come a long way since just selling books. Amazon has changed how people shop forever and its innovative ways continue to disrupt the status quo. Amazon is competing with everyone. It’s great for consumers but scary for companies and employees. Jobs are hard to find in the digital age. In fact, most business models in Silicon Valley are job crushers. Contrary to what politicians think, the greatest source of job loss in the US has not gone to China or Mexico. Innovation and automation have eliminated jobs for decades. Robotic solutions are popping up everywhere and are stealing jobs from humans. Robots don’t take vacations and don’t require medical health care. Jobs that don’t require creative, innovative thinking, and provide a valuable, specialized service to customers are at risk. Robots get upgrades all the time. The last upgrade for the human brain was roughly 50,000 years ago. Disruptive innovation shocks the conventional immune system. The establishment fights change all the time. That is human nature.
One of the most exciting aspects of this disruptive innovation is in the medical arena. Handheld devices are about to beat doctors for accurate diagnosis. Artificial intelligence, such as IBM’s Watson, is having a profound impact on cancer research. The Memorial Sloan Kettering Cancer Center has partnered with IBM and has been “training” Watson for more than a year to develop a tool that can help medical professionals choose the best treatment plans for individual cancer patients. Clinicians and analysts are training Watson Oncology to interpret cancer patients’ clinical information and identify individualized, evidence-based treatment options that leverage the cancer center’s decades of experience and research. This is a fantastic example of human intelligence and artificial intelligence working together.
Innovation is the theme. It’s been the driving force in humanity since the very beginning. There’s a great deal of logic to Darwin’s term “Survival of the fittest”. That applies to physical fitness and intellectual fitness. It also applies to cultural fitness. The digital age has sped up the change, faster than ever before. New ways require new cultures. The world is more connected than ever before. Competition is fierce. Driverless cars and drone delivery will bring a great deal of ease and efficiency to our lives. But like all benefits, it comes with a cost. As an investor, today’s innovation creates endless possibilities for growth. As a father, it is a constant mental weight worrying what the job market will be like for my 3 little girls. Fitness matters. Stay fit America.
Have a nice weekend. We’ll be back, dark and early on Tuesday; we are closed President’s Day.