The Market’s Dreams of Sugar Plums...
Yep, this decade is now about 97.5% over.
It’s hard to remember where it all started.
After all, when it began quantitative easing was the thing, our recovery from global meltdown was the talk of the day, every second financial news soundbite described a “double dip into hell", and earnings were a drop in the bucket compared to where they are today.
Interestingly, the earnings yield today on the S&P 500 is higher than a decade ago, dividends are nearly three times higher, and interest rates oddly enough are lower.
This data can be confirmed here.
So, as we peer into the ugliness of the future (per whatever media channel you may be listening too), note that the $170 or so this year in earnings is good.
And the $182 by this time next year is better.
No matter how much of the negative garbage you get inundated with online fight the urge to run if you can, even when it’s ugly:
The Thing About Octobers
Octobers tend to be as ugly as Septembers.
It’s a month where dreams of sugar plums go to die, and when most annual lows in markets have been made; at least the ones we all remember for a lot longer than we’d care to.
The third quarter went into the books as "choppy, volatile, full of angst, and uh, very close to where it started":
- S&P 500 – flat
- NYSE – flat
- Dow Jones – flat
- NASDAQ - flat
(Note: all within 50bps of where they started.)
In other words, had you gone to take a long nap as the summer began and awoke yesterday, you'd be just fine…and totally oblivious to all the garbage floating into our minds over the last 90 days.
Well, now we live through October.
And just as suggested recently, I suspect we may be seeing exactly the type of chop we need to shake the last of the weak hands away as 2020 approaches.
The earnings season is dead ahead and after ratcheting them down again, analysts have set the stage for the "earnings hook" as seen in many quarters over the years.
Look for the ugliness to bear fruit, and for new lows in sentiment, scared money, more bond buying, and value creating in the portfolios for those who can remain patient and disciplined.
Meanwhile, On the Road…
Truckers are doing just fine, thanks.
Product is moving as consumers get ready for the shopping season.
And the summer haze is slowly burning away as the better part of the economic calendar rapidly heads our way.
For those who sold in May and went away they now need to figure when to buy back in, which is always a tedious process and rarely profitable in the long run.
Have a look at the latest from trucks moving cargo goods and inventory for consumer needs:
Truck tonnage, which is published monthly by the American Trucking Association, has a strong tendency to track the level of stock prices over time, as this great chart from Scott Grannis shows.
Note that truck movements, which advance ahead of the S&P, tend to be leading indicators over the years.
In other words, if you move it, they will come.
Last month's post showed a huge spike in July truck tonnage, but to be fair the series has been unusually volatile of late…like for the last 25 years or so.
The most recent datapoint for August registered a 3.2% drop from July.
If you focus on that summer slowdown (which is normal) though, you would miss the 4.1% year over year gain noted.
The figure represents the physical volume of goods carried by trucks (which represents "70.2% of the tonnage carried by all modes of domestic freight transportation, including manufactured and retail goods," according to the ATA).
This should be a reasonable proxy for the overall economy, and stock prices tend to rise as the economy grows.
And a three-month moving average does an excellent job of smoothing out the inherent volatility of this index, and it shows the series to be in a definite uptrend (chart above).
All of which suggests the equity market may be a bit too cautious about the current health of the economy.
Pray for an October swoon.
Generation Y Update
The mainstream press has told you that Gen Y is lazy, they are not living by the norms, and they will cause our economy to perish.
By the way, that is almost exactly the outcome expected from the Baby Boomers when they were young, just before the 18-year positive run in stocks and our economy throughout the 80's and 90's.
And Generation Y owns the 2020's and 2030's.
Data released by the U.S. Census Bureau earlier this week show that some 27,000 millennials between the ages of 25 and 39 left big cities like New York, San Francisco and Houston in 2018 for greener, and less expensive, pastures, the Wall Street Journal reports.
Chicago, Las Vegas, Washington, D.C. and Portland, Oregon, are also seeing large numbers of residents leave. That marks the fourth year in a row that there has a noticeable decline in the millennial populations in major cities.
And where are they moving?
In order to combat the ever-increasing housing costs and lack of access to family-friendly amenities, they’re off to nearby suburbs, primarily.
But the Journal notes other, more affordable, metropolitan areas are also gaining millennials, including cities like Austin, Columbus, Ohio, Los Angeles, San Diego and Seattle.
A 2018 survey of 1,200 adults aged 20-36 from Ernst & Young also revealed that more millennials are buying homes in the suburbs than in cities. Much of that is likely to do with the price: A 2018 report from Zillow found that home buyers will pay 26.5% of their income each month for a median-value home in a city, compared to 20.2% for a similar home in the suburbs."
In other words, the death knell that so many headlines intend to scare you with is greatly exaggerated.
When all the dust has settled, we suspect Gen Z will be just as powerful and large as Gen Y - making the pipeline of growing demand here in the US economy very steady and strong - for decades to come.