A 'Mind, Body, Spirit' meeting...
...calls for Mind + Body Function drinks (healthy and delicious!) and Think! Bars (healthy!), plus some True & Clean bottles of water. Linda, you’re not in Pittsburgh anymore. This week I traveled in LA and Orange County. I didn’t spy any celebrities this time, but I can report sighting two Rolls Royce autos within 10 minutes, a Lamborghini and Mercedes that are as common here as Kias back in the ’Burgh. We met with advisors to very wealthy clients. ESG investing came up in nearly every meeting. And some version of “What should we tell our clients when we are so near to our firm’s year-end target and it’s only mid-January?” Everyone agrees that everyone is bullish. One advisor challenged me to “tell me something different” from what everyone else who visits him says. My response, “100% bullish is CREEPY.” But as I make my presentation, I can’t help but conclude, “It’s hard to be bearish here.” Still, sentiment is uncomfortably reminiscent of January 2018, when stocks got off to their best start to a year in 31 years, only to sell off sharply, with the Dow plunging a record 1,175-points in one day and 12% in two weeks. No reason to fear a repeat—retail investors only recently have started buying again, after a 2-year stock selling spree that was just shy of financial-crisis market capitulation. In my opinion, the Wall of Worry provided by the small investor eases worries of a melt-up. As the seasonal tailwind gives way to February, it makes sense to be on guard. It’s rare to see S&P 500 weekly momentum this overbought—95%, according to Strategas, a level typically associated with consolidation or a pullback.
Nearly nine of every 10 S&P stocks experienced P/E expansion last year, driven by low long-term interest rates, historically tight credit spreads and a record-low 29% index weight in cyclical sectors. On balance, Cornerstone Macro observes indexes with less cyclical weight tend to have higher multiples because their growth, stability and defensive characteristics garner a larger premium relative to their cyclical counterparts. This is largely why the Nasdaq is the most expensive market. It’s also why, with the outlook for cyclicals improving on an anticipated re-acceleration of global growth, P/E multiples are likely to head higher, too. (This is what a secular bull looks like.) Fundstrat’s work suggests a much broader market in 2020 compared to 2019, when only three sectors outperformed and when growth and value produced nearly identical returns. (This is what a secular bull looks like.) 2020 earnings estimates have turned higher on reduced trade tensions and bottoming manufacturing, implying most analysts think 2019’s slowdown is over. While Q4 numbers are just coming in, early reports suggest they'll likely eke out a year-over-year (y/y) gain vs. consensus for a slight decline. This would be in line with the past 16 years, in which quarterly earnings growth was revised higher 89% of the time. I appeared on Bloomberg yesterday, and the anchor asked which of her list of worries bothers me the most. My reply was not one of the items you mentioned, but rather earnings. For no matter how interesting is our politics, the debate of interest is how much earnings can recover after 2019’s flat results. Current consensus is just under double-digit growth.
Lots of discussion, unsurprisingly, about the election in my California meetings. And, still, no utterance of impeachment. Most advisors were concerned about the market’s reaction to Sanders’ rise in the polls for the Iowa caucus and early primaries. Unlike any previous presidential election, the U.S. now has 40%-ish “independent” voters; and for the first time, California with its many electoral votes, has its primary on Super Tuesday. Therefore, approximately 70% of Democratic electoral votes will be spoken for by the end of March. And the market, which historically doesn’t care about the election until October, may react much sooner this time. (My view is that what promises to be a most interesting election season could be a catalyst for a correction, and the market is likely to overreact, thus providing a buying opportunity. For, however interesting this election will be, the market will ultimately move on earnings!) My favorite quote from an advisor this week: “Part of me wants the millennials to see what it would be like to have a socialist president…millennials think it will be euphoria.”
- A confident consumer will spend Holiday sales climbed 4.1%, double the year-ago pace, the National Retail Federation said, and online sales jumped nearly 15%, also above expectations. Ex-autos and gas, the government’s tally of December retail sales increased the first time in four months, pushing y/y trend growth to a 13-month high. The spending came as consumers were as confident as they’ve been since 2000, according to Bloomberg’s gauge.
- It’s a great time to buy a house Already low mortgage rates dipped again, fueling the biggest surge in a year in mortgage purchase applications. January builder confidence eased slightly but, on a 2-month basis, remained elevated at a 21-year high as activity has jumped. December housing starts soared to a 13-year high.
- The Fed put remains Consumer prices remained muted and producer prices weakened in December, giving policymakers little reason to move off their hold when they meet in a few weeks.
- Nothing to worry about The National Federation of Independent Business monthly survey of small business confidence fell the most in 11 months. But it remained at elevated levels associated with solid employment. Deteriorating earnings led the pullback, although respondents still expect near-term sales to pick up as a greater share anticipate the economy to improve in 2020’s first half.
- The fiscal tap is wide open The budget deficit reached $357 billion the first two months of the new fiscal year and for the year, is on track to hit $1.05 trillion, its highest since 2012. The last time it surged during an expansion was the “guns and butter” era in the 1960s, which was followed by 1970s’ stagflation.
- A Brexit lesson for Trump? The U.K.’s prolonged exit from the rest of Europe caused November GDP to shrink and put Britain on track for no growth in Q4. Prior to the Brexit vote, it was outgrowing the continent. (If Trump wins, I think he may seek to secure his legacy by fighting a true trade war with China, a fight that probably must be fought, but global markets won’t like one little bit.)
At this week’s meetings, lots of interest in growth vs. value Value just suffered its worst decade on record (since the 1930s), underperforming by 25.7 percentage points. The only other decade during which value underperformed (though less extreme) was 1990-99. In the subsequent decade, value outperformed by over 100 percentage points.
Fabulous catalyst for a correction Betting odds show Sanders winning Iowa, New Hampshire, Nevada and California, making him the likely Democratic nominee. Of course, thanks to Pelosi’s delay in transmitting impeachment articles, Sen. Sanders—and Sens. Klobuchar and Warren—will be handicapped by not campaigning in Iowa during the Senate trial. This would be ironic as their supporters may say the system is rigged, much like Sanders’ supporters in 2016 due to super delegates.
How Californians view “affordable housing” Shared an advisor at one of my meetings: “I can’t buy a small house here for less than $1 million, though I realize it’s not that way across the nation.”