The Worst of All Possible Worlds

That sure was an ugly start to the week. 

Didn't anyone tell the machines that Monday's are already bad enough without a market pounding to add to the emotional doldrums?

Guess not.

Well, we’ve got a different perspective on the market news (and Mondays): Rejoice my friends.

Even while the hate-mailers say:

"You are an idiot Mike. The market has technically gone nowhere for nearly 18 months. I mean we are just below where we were after that great start to 2018 - when everyone felt a lot better, I might add.  In case you did not notice, that was almost 18 months ago. It seems you may just not understand how bad it really is out there."

I really do understand the frustration.

In fact, I always love hearing these critiques (I get this stuff a lot).

Why?

Well, because the great news is that I only usually get them when the markets are temporarily ugly, and they’re forming what often becomes a very solid foundation from which the next upside builds.

Now, for the sake of clarity, that does not mean the upside will suddenly appear on a specific day or time - or even via some market event.

What it means is that this is a process.

Consider the perspective that we’ve referenced many times here over the last 15-18 months, about how this trade range feels an awful lot like 1994-1995, in fact more and more each week.

There’s lots of turmoil, lots of angst, and too much volatility for most folks’ temperament, with darkness on the horizon here and abroad, capped off with an extreme level of political in-fighting (just go back and Google the headlines from that time).

And those all too infamous words are now slowly making their way around the investment landscape:

"It's Never Been This Bad...."

Yep. right on time, the lemmings are forming their lines and speaking with their money. Out with the ugly volatile risky stocks and in with those safe, less volatile 2.40%, 10 YEAR revenue streams.

Geez-o!

It all, of course, suggests only one thing: That the masses presume to know how bad it will be around these parts a decade from now. 

And that’s complete and total lunacy. It’s a fight to the death for their capital and long-term wealth interests.

So, first let’s look at the theatrics of dire headlines, a creative talent required for all producers on financial channel websites:

And then, of course, the facts ma'am - just the facts:

Re-check that data on flows.

The moment this light bulb comes on is the moment your wealth starts adapting to the world ahead.

The reason for the "dire" indication being surmised is that bond yields are doing precisely the opposite of what these same experts told you to fear 18 months ago. 

In short, rates are falling, not rising. 

Why is that?

Is it a slow economy? Nope, we’re still getting steady growth.

Are we seeing falling earnings?  Nope, we’re still seeing steady growth.

How about job losses? Nope, it’s more like we’re running out of humans for the jobs being created.

Folks, that only leaves about one thing remaining: Fear. Fear of the future.

And there’s no dire consequence there, my friends. The only thing you’ll find in that dark hole is lost opportunity.

Interest rates are low because of the flood of demand for bonds. The flood of demand for bonds is due to the hatred of the risk of stocks. The hatred of the risk of stocks is because they move in both directions - up and down – and sometimes in very quick timeframes, which causes the worst of all possible worlds - human emotional reactions.

Here’s what it looks like in real-life:

This is the graphic view of the data from last week. It shows plummeting bullish sentiment (by the way - that does not happen before bad old bear markets begin).

For reference, the jagged red line across the chart is the S&P 500. The blue arrow shows the highs of early 2018, and the purple arrow shows the most recent prices levels, which have basically gone nowhere.

But not everything stayed the same.

The dark blue jagged line is the dots being connected from all the weekly readings on the Bullish sentiment. The purple box helps you focus your eyes on the lower readings of this data for years. And all those lows correspond well with the lows in markets.

Currently 70% of the audience hates stocks - hence the flooding into bonds. But what are they really doing? They are buying an investment with a P/E of over 40 times earnings, locked in for a decade.

They are flooding out of things that are priced - on average - between 15.5-16.5 times earnings.  Those things are called stocks - and they are not guaranteed.

Speaking of Earnings

Earnings are rising, which is a universe away from "It's never been this bad...."

They did not plummet in Q1 2019 as projected during the panic of Q4 2018. Earnings have gone up. Prices have flattened.  Bond yields have fallen from massive fears noted above for you.  Add this all up and you get?

Stocks have become relatively cheaper during this 16-month odyssey - while also become more valuable long-term.

While painful at times, the price of being an investor is very tough sometimes, and often for long periods.

And then, the dam breaks.

The "earnings recession" so many feared - has been avoided. Hence, with the S&P 500 basically treading water (very nervously at times) over the last 16 months, the new stage of lessons is set. 

And now we wait, patiently, for when capital flows begin to sniff out faster earnings growth, like that beach ball we have often spoken of being held underwater by fears, the S&P 500 should eventually break out to all-time-news-highs.

Only then, far further up the mountain, will the masses begin to feel better about the future looking clearer, long after the huge opportunities have passed.