The Market? I’ll Be Blunt…
Summertime doldrums are supposed to cause market chop, investor angst and much nervousness.
They’re not supposed to kickstart new highs.
Bear with me before you shoot the messenger.
My long-held mantra of 'If tis the season for chop, then bring on the chop’ remains.
Historically that very chop has helped the Q4 rally have a bit more punch.
And besides setting new highs - albeit in anticipation of a rate cut next week which (psst: we don't thing is coming yet) - sometimes sets the stage for an uglier August.
Be that as it may, let's get a grip on where we are in this hazy period.
With the doldrums of August still dead ahead, I'll be blunt:
- No - we don't think we have a rate cut on the "next week" horizon.
- Sure - we could be dead wrong, but a glance at the 10-year sitting at 2.07% (or a nice fat 50 P/E) suggests the market has done the Fed's work for it. They can sit pat and not look like Trump is telling them what to do.
- Besides, I have a hunch that if they don't cut rates, the market will simply rally bonds even more and make the rates lower for them...and by the way - if this sounds nutty, don't call your doctor just yet - because it is.
- This is what happens when a gigantic wave of deflationary forces is building on the horizon. Thank the kids for that (it's good, by the way).
The Other Shoe
It is also important to note something about the earnings season.
I’ll be blunt: It's not a disaster. The patient is not dying. We live in a world where the global debt market will do the Fed's job for it more and more as the future unfolds.
Because everyone hates stocks, and every 150 point move on a Dow Jones at 27,000 terrifies them.
Besides, what would you do if you were sitting in Germany and your 10-year bond was a NEGATIVE 38 basis points?
Keep in mind that means German investors buying their government's 10-year bond for say, $100,000, get back a shade under $99,700 in a friggin' decade!
I’ll be blunt. That sucks.
Of course, you’re going to buy a 10-year US bond.
That way you get a whopping $102,070 in 10 years.
(My sides are hurting from laughing.)
There’s More, But It Ain't Bad…
First, there are more earnings season beats thus far; more beats on revenues and earnings.
By the way, we’re comping against a HUGE tax benefit bump from last year at this time. Weaker numbers should not scare you out of your mind.
In fact, a pause should be expected.
Here is Thomson's take which may help ease concerns:
"Scorecard: More Companies Beating EPS and Sales Estimates than Average. Percentage of Companies Beating EPS Estimates (79%) is Above 5-Year Average Overall, 16% of the companies in the S&P 500 have reported earnings to date for the second quarter. Of these companies, 79% have reported actual EPS above the mean EPS estimate, 4% have reported actual EPS equal to the mean EPS estimate, and 18% have reported actual EPS below the mean EPS estimate. The percentage of companies reporting EPS above the mean EPS estimate is above the 1-year (76%) average and above the 5-year (72%) average. Earnings Surprise Percentage (+7.0%) is Above 5-Year Average. In aggregate, companies are reporting earnings that are 7.0% above expectations. This surprise percentage is above the 1-year (+5.2%) average and above the 5-year (+4.8%) average. The Information Technology sector (+10.0%) sector is reporting the largest positive (aggregate) difference between actual earnings and estimated earnings."
Add these items below to that backdrop and you get the drift: We’re getting ahead of ourselves on a rate cut.
So, don't faint when it does not happen at the Fed meeting next week.
None of the above is bad.
Indeed, were the press not frightening you to death with garbage headlines to get your attention during a slow summer the crowd would actually note this is good news.
Heck, housing stocks are even rallying!
Because the next thing we’re going to run out of is…houses.
And just remember that in the midst of all this it seems people would rather pay attention to the non-event in China and run from stocks at record outflows:
This too is good, by the way.
Don't interrupt your stay at the beach if we get a little red ink in here as it relates to the Fed cut next week.
By the way, the PMI's are fine even though the headline wants you to blink.
Check the services PMI on line 3 (above), and all this is happening "during the Trade War."
Just a couple more items.
Retail sales are coming in just as one would expect when everyone has a job:
And then - this note from Blackrock's CEO (below) sort of makes the point for us.
It is all about “Longevity Planning” now friends....
So, sure there’s still plenty of time for the summer to be choppy.
But I’ll be blunt, the investors who will win in the future unfolding ahead will be those who focus on the long game, with patience and discipline.
Welcome to the second half of summer, friends.
The paint is still drying, the teams are still warming up, and the best part of the game is still ahead…once the haze clears.