“Lucy, You Got Some Explaining To Do…”

Last week showed once again that people who mistake October for the calendar’s "bad month" may have forgotten September’s history of choppy waters.

With that in mind, the downbeat first week of the month is not really an abnormal occurrence.

In fact it’s pretty good.

That’s because the haziness of summer should begin to burn off as we edge into this week and likely be gone by mid-September. 

My hunch is that we will see a September like we have seen many times before - choppy, and somewhat to the downside - with enough worrisome headlines to shake away the weak hands; and just in time for some lows later this month or in early October.

But that’s just a hunch.

The "Good" On the Way...

GDP was bumped up higher last week and truckers continue to move record tonnage of goods into the system. 

Jobs are plentiful and investment channels from companies long side-lined by regulatory burdens are now filled.

We see it in the manufacturing data, jobs data, retail sales data and confidence metrics - both consumer and small business (which is often one of the biggest missed drivers of jobs growth).

And values continue to build. 

Interest rate headwinds had kept the dividend-payers on the mat for the first 6-7 months of the year.  However, recent weeks have seen some of that headwind pressure burn off as value players have stepped in and prices have bounced for income investors. 

This is pretty much what we defined as a likely outcome as the year dawned and interest rate "fears" swamped the headlines.

Meanwhile on the other end of the spectrum tech continues to run away from the pack, even as they were hurt the worst over the last 5 or 6 trade sessions.

So, as investors we must constantly remind ourselves of two things:

1. The market works by looking out the front windshield and into the broad horizon ahead.

2. Humans, being emotional creatures, tend to instead frame their outlook by seeing the events in the rearview mirror.

As covered last week –

That latter point (above) is generally an unproductive way to build wealth over time, as our minds can trick us into fighting a battle that the market has already moved beyond. 

Hence, it feels a bit like that ‘dog chasing his tail’ feeling.

The Future Framework?

Tech is the future. Tech will be in all things. It will become so pervasive in our daily lives and corporate activities that we will no longer even notice it. 

It will blend into our lives in ways that will somewhat blind us from seeing just how quickly things are changing.

By example, this week Apple will unveil their newest phones and the buzz will start again. I remember reports on mobile phones back in the late 1990s even as the frenzied tech bubble had a bit more to rise before permanently driving fears into the minds of investors over technology development.

Back then it was reported by major and well-respected firms that "the global demand for mobile phones will peak at 375 million users.”

At the time it was considered a pretty large number. Today you scratch your head and wonder “how could they have been that far off?"

And tech changes things fast, folks. As more and more kids move into the work-force and the old folks (Baby Boomers) move out the other side of the system, expect this shift to ramp up even faster.

As the Millennials of Generation Y rises up the management ladder and or build more small businesses, the ONLY solutions they know of start with tech. 

Once that lightbulb goes on, the investor audience will begin to understand that the "spread" we see today in the broad market averages versus tech-heavy averages is just beginning.

People Drive Markets...

Yes, sometimes it’s choppy and drawn out, and sometimes it is (and will continue to be) flat out ugly for a while. But remain focused on the process because the larger picture is significantly more positive than the poisonous process that the daily headlines are depicting.

Let's Take a Step Back

The data is compelling:

Calafia Beach Pundit, Scott Grannis, has provided us some solid charts on manufacturing.

And yes, that’s the same "manufacturing" that was often referred to as dead and buried here in the US for much of the last 10 years.

Eh, not so fast...

Stay with me on this: That red line in the first chart above is the best rest reading ever as a percentage of GDP, which is also running on almost all cylinders now.

And that chart also compares the ISM manufacturing index with the quarterly annualized growth of GDP.

The manufacturing index is about as strong as it has ever been – and numbers like this have often been consistent with GDP growth of at least 4-5%.

While many will bark at the moon about the media’s perspective of impending doom don’t be at all surprised to see Q3/2018 in the 4% range again.

And if so, that would put us at year-over-year GDP growth levels not seen in 13 years.

The second chart is thrown in to show that the service sector is doing just fine as well.

So as far as the media stories are concerned, in the words of Ricky to Lucille Ball at least once per episode of I Love Lucy all those years ago: “Lucy, you’ve got some explaining to do…”