Fear & Greed

“Rule #1 - Most things will prove to be cyclical. Rule #2 – Some of the greatest opportunities for gain and loss come when other people forget Rule #1.”
- Howard Marks

For the last week or two it has not mattered to investors what facts have been covered.

Instead, what’s very clear is that we are in one of "those windows of time" where nonsense reins and emotions are - quite literally - out of control.

There is no rhyme or reason - and trying to make sense of it is a fool’s errand.

As per the chart above, the market has not improved and the chop has only intensified in certain areas.

Mind you, the trigger for all this market fear - interest rates - has actually been eased back into place. Once again, so much for the "news" cycle explaining price action after the fact.

And given all the ugliness you’d think things were looking pretty poor, eh?

Well, they aren't.

My hunch is that this turmoil has almost nothing to do with interest rates, but rather that there are an awful lot of investors who are completely terrified of the US election results.

Terrified of what? Democrats winning seats.

That’s right: The same folks who we’ve watched stoke public attacks, ignore civility and made a mockery of the legal system.  

And investors are the ones who have to take the short-term shellacking and pain in return for the long-term compounding effect.

Business will find a way to succeed almost all political fronts.  That said, the super-charged, emotional outbursts filling the airwaves of late are unlike anything in recent memory.

That’s the type of thing that will terrify a trading audience far more than interest rates:

What Ms. Harris may be missing is all the good news. 

After all, if the good news is discussed then why would anyone vote for changing anything in November?

And if we discussed all the true record highs (earnings, net worth, cash, margins, output, manufacturing, production, retail sales) and record lows (unemployment claims, unemployed persons as a percentage of the workforce), there would be little left to stoke the fires to change that vote.

And if I were a betting man (I’m not) I think we’re probably watching the same thing we witnessed before the elections two years ago – moving towards election eve there were 11 straight down closes.  Then we had people in a total quandary about who would win.

The press wanted you to believe Clinton had it in the bag - just as they want us all to believe a big wave of change is coming to put a halt to all these terrible improvements.

But I think there are as many people in for a surprise now as there were then - meaning the poison being spewed each day is likely not going to end soon, sadly.

So What's The Good News?

You would not know it, but all the red ink is hiding solid earnings. 

The fears of course are that we are watching peak earnings because the pace of growth in those earnings is slowing. 

I cannot make it any more obvious. We’re left with taking advantage of the insanity as time unfolds.  So keep following your long-term plan and remember that we’ve felt this type of frustration before. 

Red ink is part of the deal as we climb these mountains over time. 

Here is the latest backdrop from Thomson Reuters:

(FYI - 130 Members of the S&P 500 report this week - so it will be busy.)

The Latest Earnings Update:

• Forward 4-quarter estimate: $173.49 vs. $173.57 as of last week
• PE ratio: 15.9x
• PEG ratio: 0.71x
• S&P 500 earnings yield: 6.27% vs. last week's 6.27%
• Year-over-year growth of the forward estimate: +21.96% vs. last week's +22.32%.

I know I sound like a broken record but history is replete with all sorts of terrible circumstances, all of which unfolded at significantly lower prices in the market (meaning we got over them too).   

Each time we pierced a 6%+ earnings yield, it was a good thing to be an investor looking forward (out the windshield, not the rear view mirror).

Oh, And I Almost Forgot

Dr Ed Yardeni shows us that LEI's are also at record levels, which bodes well for post-election fears…unless Ms. Harris gets her way.

Note that the latest readings above from September were rising to new record highs.

It may help to relieve some stress if you take a quick look at those grey zones.  They are the recessions, including "The Big One."

A Couple of Thoughts…

• Note how many recessions there have been since 1983.
• Note how thin those grey periods are (7% of the time).
• Note that in ALL recessions, the LEI's are falling consistently before recession sets in.

One More Thing

In a business that is a sea of numbers, it is very easy to get lost in them.  I can only imagine what it must be like on the outside of this insanity looking in.

The Law of Large Numbers

“As a number gets larger, a steady pace of growth will appear to be a smaller percentage growth rate.” 

Yes I know that’s not a very convenient factoid for the press and media guys. But it’s true nonetheless.

Now here’s a chart that confuses the hell out of people. It shows US GDP Growth Rates over a long period of time (from Dr Ed):

I’ve added two dots to the overlay for a reason - the red dot and the purple one.

The red dot shows that we had extraordinary growth in 1983 (as the Boomers got their footing and began to get to work).  The GDP growth rate clocked in at 8.7%!

But that was on a GDP of - hold your breath:  $3.85 Trillion.

Fantastic, right?  Well, let's see.

Now the purple dot represents today.

We’re kind of in a slump, right? Pretty crappy.  I mean really: A paltry 3.2%, on its way back to likely the 3.7% to 4.1% range as tech takes more weight on in the output we have to build. 

But that 3.2% is on a $19.6 Trillion base economy, using the same GDP link as above.  

So let's look at what the numbers really tell us…

In 1983, when things were screaming: 

• $3.85 Trillion x 8.7% = $335 Billion in actual new output growth.

In 2018, with things "working to improve":

• $19.6 Trillion x 3.2% = $627 Billion in actual new output growth.

Don't let the number guide you to the wrong conclusion.   

For now, we have to peer through the political mess and all the garbage being thrown around in the media as important. 

Remember: Investing is not the study of finance. It’s the study of how people behave with money.