“Face reality as it is, not as it was or as you wish it to be.”

– Jack Welch

 

Good Morning,

Yawn.  That was the sensation after the Fed statement yesterday.  I was laughing a bit as I watched the myriad of reporters questioning Fed Chair Powell after the statement was released.  One could almost feel the distinct letdown as each question failed to create the “zinger” everyone seemed to be hoping for in his responses.  You know, the one where Powell makes some big error and the narrative can shift to the “see, we told you we were all knowing and that he has been hiding this monster all along…”

I really loved this quick headline afterward as markets “plunged” 47 basis points lower – 48 hours after setting all-time-new-highs:

“Gold, Gold Miners turn red after Fed raises inflation expectations…”

The chuckles only intensified as I peered down to the next headline:

“DOW Plunges as Fed Signals Rates Hikes in 2023”

Yes, the crack team of financial reporters and producers told you above, breathlessly, that gold fell as we were all supposed to be fretting over inflationary increases.  Parallel to that, getting the crowd into a real frenzy, they also suggested you worry about a “signal” of a potential rate hike – two years from now!  LOL

You can’t make this up friends.  And yes, it is hilarious.  Besides, let’s listen to what Powell says, not what the media reports.

He keeps it pretty simple:

“In terms of the two hikes, so let me say a couple things first of all, not for the first time, about the – about the dot plot. These are, of course, individual projections. They’re not a committee forecast. They’re not a plan. And we did not actually have a discussion of whether liftoff is appropriate at any particular year because discussing liftoff now would be – would be highly premature. It wouldn’t make any sense.”

The Chop is Good 

Let’s face it – nothing really changed yesterday.  Zero.

While the crowd gets lost in the latest churn, scratching and clawing as they grab the lids of their bomb shelters again, the incredible makeover of the structural underlying US economy  continues to slowly seep into the spotlight.  Earnings, earnings and earnings.  They should continue on their steady trajectory for the foreseeable future.

As more and more Gen Y kids move into their expansion years, we will see the exact opposite effect that, say, China will be witnessing in the coming years.

Take a look at the latest on earnings…this is not what one typically sees – steady increases between earnings seasons.  It will eventually overpower the chop of summer – and any “summer swoon” we are fortunate enough to experience:

The next earnings season kicks off in about 4-5 weeks.  Given it is summer, and most are already having visions of vacations in their heads, not much else will keep our attention until the season begins anew.  Note the current expectation (still way too low) is not just a huge increase from the “global shutdown” quarter last year – but it also shows a very solid increase over the comparable 2019 quarter.  That was light years before the pandemic rolled into the reset our lives for us.

Next, the dollar level of S&P earnings per share has not stopped rising between quarters,  This is rare indeed – and a long-term positive.  So pray for a summer swoon.  All 39 of them I have experienced before this one have been buys.  How do I know that?  We hit a record high 3 days ago.

…read ’em and reap:

Note the year began at about $162.  After a single quarter of peeling the “new economy” onion back we see a $20 per share increase.  We suspect this gets very close to $200/share in 2021 as we sneak into late summer/early fall, with $215/share on the horizon by Q1 2022.  Markets overpriced?

At 19 times 2022 earnings, which is all the Street will be chattering about by the start of Q4, it’s laughable to consider it expensive.  Don’t look now, but bonds are still 65+ times earnings – with no growth in site.

But Why?

One word – actually 4 words:  stark, raving, made fear.

You speak about anything good and you get nothing but “yea, but what about X” in return.  This – with record highs just completed – and over $19 Trillion still sitting safely in the bank accounts, CD’s and money markets of the consumer.

Proof?  Check it out –

I’d like to point out a few things for you on the latest fear and greed sentiment data.  First we are at 44 – 3 days after a record high.  Note the blue star.  Recall how excited everyone was about the markets as 2019 ended?  Look at that index reading versus now.  Then consider this fact: the S&P 500 was 30% LOWER than where it is right now.

Like I said, you cannot make this stuff up.  It does indeed show you the power of fear and poor sentiment, getting lost in a wave of narratives that are often not even remotely correct.

By the way, the AAII data mimics this almost exactly – with nearly 60% of the crowd NOT bullish in the latest data from this morning:

What Next?

Sorry – don’t mean to be repetitive.  It is summer.  Enjoy the time with family and friends.  Chop – hopefully – is the name of the game.  Volumes are drying up and it gets easier to push the averages around when no one is watching.

Fear is being embedded again – which is good for a solid run into year-end.

The chop is working too – while angst builds into a deeply-seeded myriad of concerns, markets are basically trading exactly where they were on April 29th and May 7th – as I type.

One thing about China

As I mentioned earlier above, I was expressing to a client the other day that most simply do not remember what is unfolding in China.  Yes, they export a ton.  We built that economy for them.  Yes, they consume a great deal of product – good for US companies as we built that demand for them as well.  They are a communist country.  You’d be amazed how many investors simply forget that issue sometimes.

Last but not least – we beat them hands down on demographics.  In that call, I expressed that China has more 80-year-olds than 10-year-olds.  The response was quick – “but Mike they changed just expanded their child policy limit to 3 per household.”  That’s true – there is just one tiny little problem.  We all learned way back in school that a Mom is required for a child.

In the 28-years of their infamous one-child policy in China, guess which sex was kept?  Do the math.

China will not recover from this horrible mistake for decades.  The US economy will rule – period – through thick and thin.

Don’t Fret During The Summer Haze

We have to do a couple things:

Stay patient

Stay calm

Remain focused on the long-term

Enjoy your life

Relax

Ignore bad headlines

Let the game unfold

Your head will be spinning at times because our minds will try very hard to make sense of it all – and the data being thrown at us will feel overwhelming.

Near-term, much will not make sense.  In time, it all will.

We must find a way to control our patience and expectations.  As stated before, much is often lost by reactions to short-term issues based on long-term plans and results.

In essence, investors want the lifetime benefit returns history repeatedly proves, but they want them today.

The Bottom Line

New doubts, new fears and new monsters are all forming bricks in the new foundation being built for the next leg up as the spring dawns and the US builds into its “new normal.”

So what now?  Cinch that belt tighter.  And grab your popcorn.

The pace of change is going to be head-spinning – with plenty of gut-wrenching interruptions along the way.

Get comfortable with this process…as it is set to be with us, forever.

Corrections and setbacks serve a role – they build your value for the next run – and we are unlikely to get very many of them in the years ahead.

Even when pauses, sector churn and internal chop hurt in the near-term, they work to build foundations which then create the gains of the long-term.

We must all remain diligent and prepared to always stand tall against the storms.  Standing apart from the crowd permits one to always be ready to do what most will not.

And remember, problems don’t come to stay – they come to pass.

Until we see you again, may your journey be grand –

and your legacy significant.

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