Markets, Like Diamonds, Are Made Under Pressure
They say there's only one thing to focus on when you’re walking through hell; “To keep on walking…”
So, as we stare into the slowest stock market month of the year and close out the 7th month of this lockdown annus horribilis, I’m reminded of the many perils of the past, like way back when I started in this business and the Dow Jones was just 970 and the S&P was just two digits long.
So, forgive me if I struggle (very much) when the latest cast of today's characters they’re calling "experts" try to tell us all how we will never get over this.
It's like sharpening a sword in the heat of the flame. Diamonds come out of the ground covered in dark rock and mud. They do not get their brilliance until under searing heat. They’re cut at angles to release their most brilliant light.
All that pressure is required to make them brilliant.
The Rearview Mirror
Picture yourself in a car racing quickly away from a disaster (a painful one) with no map or GPS.
Mentally, investors are in that car right now, racing away from a catastrophe.
The problem is that they keep looking in the rearview mirror - terrified of what they are already leaving. And each mile on the odometer takes them farther away from what terrified them.
My suggestion would be to stop looking at it. Forget about yesterday. That’s because yesterday’s normal is not coming back.
Every major shift in life teaches us this. Trying to hold onto it causes us to miss the new, enhanced, and very often better-normal ahead.
Psychedelic Australian rock band Tame Impala says it well in their lyrics:
“Cause it might've been something, who's to say?
Does it help to get lost in yesterday?
And you might've missed something, don't say
Cause it has to be lost in yesterday
And you're gonna have to let it go someday
You've been diggin' it up like Groundhog Day
Cause it might've been something, don't say
Cause it has to be lost in yesterday…”
Like it or Not...
Folks, we are now leaving ground zero - virus and all – and racing into the new future.
Lessons learned, costs calculated, and rebuilding underway.
We’re walking through hell. Just keep walking. Don’t look back.
The biggest surprise so far has been how much easier than we expected the business world to adapt to the new things ahead.
We all get to pick:
- Participate in and potentially be blinded by the fear, or
- Pull the rip cord, take the leap, say goodbye to the ghosts and land in the future.
Those Damned Index Comparisons
There is almost nothing about the ingredients of the S&P 500 today that compares to, say, the S&P 500 of 1982.
Well, almost nothing.
So, why then do we constantly measure, rate, create stats, and stress out over every comparison to "the past" S&P 500?
And for that matter, why is anything today compared to 20 years ago? 30 years ago? The Great Depression? The Great Recession?
There is only ONE thing that is the same as all those other times today: The cost of human emotions.
It’s that plain and simple.
The long-term investor either learns this lesson or fails.
Speaking of Earnings...
Uh, how do you describe it?
"Knocking the lights out...?"
Where are my TUMS?
Here’s the latest data on earnings:
- With half of the S&P reporting, about 80% of companies have beaten the estimates, well above the historic norm of about 70%.
- They are beating by vastly wider margins than usual.
- The average earnings beat so far has been a record-shattering 13.2% above the consensus, which is way, way above the historic norm of 3.3% (according to Refinitiv).
- The beat rate is even higher than the rates seen in 2010, when many companies surprised Wall Street as we were coming out of the Great Recession.
I'd say that all hits right on the chord we suggested back in April; that we should expect a whole bunch of "that's better than expected" in the months ahead.
That’s because America does recovery, rebuilding and moving forward significantly better than anyone on the planet.
Most importantly on the earnings front is that forward estimates are rising, albeit modestly.
This underpins the idea that the second quarter was the bottom and makes us believe that, while the reopening will be very rocky and unsettling, things are slowly improving (short of another shutdown), even as certain industries, such as aerospace travel and leisure, will take longer.
More Signs of Improvement
The Richmond Federal Manufacturing index continues to improve, rising 10 points in July, indicating the first expansion in the region since March, and the highest reading for the index since January.
The only areas that remain on the weak side for both present and future conditions are for expenditures.
But do notice that the latest read is right in the centre of readings over the last 25 years:
ISM's are slowing improving as well - not overnight - but being back at or above 50 is always a solid sign.
Steady hands at the wheel are best as we work through the lightest winds of the summer.
The Chicago PMI's just came out as well and the good news is that they’re up and in expansion mode:
I’ve included a few of the latest high-frequency data points showing more improvement.
There are many miles still to travel up the mountain of recovery but there’s improvement nonetheless:
Now, let your eye wander back to the first of the year as a comparison.
It might help to explain why many parts of the economy are surprising so substantially to the upside.
Investor sentiment says it all:
It feels like a lifetime ago that we were within earshot of a 20% bullish sentiment reading.
It was early 2009, considered the end of the world as most knew it, with foreclosures, losses, bank shutterings, stock price collapses, and media carnage making it difficult to come out of the bubble of fear.
They call it the GFC now: The Great Financial Crisis.
Back to the Bulls
In March of 2009 - after 6 months of devastating price action - the bears were prowling in every shadow, the future was bleak, no confidence remained. The crowd was beaten and had raised the white flag to life as we knew it.
Things were going to change. It was forced upon us.
The Dow Jones had dropped to a gut-shattering 6,700.
The S&P collapse stopped right at the Devil's doorstep: 666.
And the reading on the same weekly data we posted for you then - for bullish sentiment - was 19.7%.
At the time it was the lowest reading of its type in 20 years.
The lower period by a half point was March 2003, which marked the end of the Tech bubble.
Notice a trend here?
And if you learn that lesson then two, three, five, or even ten years from now you’ll be thankful that you did.