Good Morning,

The immense level of fear, seemingly missing the bigger picture unfolding in front of us, is rising as we type.  The indications of this are pretty much across the board.  Oddly, it seems as though few can believe that a) we made it through COVID and/or b) we made it through so well compared to what was being prognosticated last summer.  The outlook then – shall we say – was dire.

We are just about done with the main earnings season drivers.  The numbers were staggering – leaving Wall Street specialists in the dust.  Those betting against the US saw the same ending – they were smoked.

Mind you, emotions cause short term moves in markets – demographics drive long-term underling currents and forces that too many still overlook.

It’s why we say – forget economics – think demographics.

Yes, I know – boring – nutty – off-track.  If I had a nickel for every time I had been told “I don’t have a clue”, I’d be writing this morning note from my yacht off Monaco.  LOL

 

Here is the point:

The “Sell in May” crowd think is fogging up the picture.  Major battles are underway at important parts of the year.  Recall that in just another 10 days, some will begin their summer vacations.  The Memorial Day weekend kicks off the official start of summer – with Labor Day book-ending it for the close. That’s a long, boring, humid summer ahead.

Hunch?  Out of left field?  We are witnessing some of the summer swoon – early.  The evidence of such is building:

This, friends, is a piece of data the public is rarely told about nor do I recall seeing it covered much on the fancy “expert” financial channels these days.  However, it is important – and we try to include it at extremes for you to keep in mind while your gut may feel a little queasy is you are watching too much TV.

The data show Wall Street and Mutual Fund asset managers exposure levels to equities.  One can take this as a measure of sentiment and also as a solid contrary indicator at extremes – which we are approaching now.

The light blue line is the exposure level – the dark blue is the S&P 500 Index price action.  We have seen these levels two previous times – both of which were significant – and one of which was a global pandemic.  By matching up the lines, one can readily see that the lows in exposure closely correlate with lows in prices.  Notice these are not small lows either.

This would mesh with the idea that I am pretty sure almost no one is ready for how big earnings will be for the rest of 2021 – since every record was shattered in Q1 and analysts were wrong – only – 89% of the time.  What’s a poor analysts to do huh?

There is more…

Above you see the Fear and Greed Index on the close yesterday.  I suspect we get much closer to the 20’s on today’s open with futures currently in the red.  Angst is building, concerns are nearly everywhere – and no one seems to recognize that the US economy is doing – well, pretty darn good.

Here is the point.  Note the data in the graphic above – yesterday it was 38.  One year ago yesterday, it was 47.  One year ago – the S&P 500 was 39.74% LOWER than where it is right now – and, don’t forget, we were just 8 weeks into a global pandemic economic shutdown, never before experienced in our lives.

And for the record – here is the same fear data 30 minutes after the open this morning.  Note we hit the 20’s after less than 2 weeks of chop:

In other words – this morning for a few hours, the audience was more “scared” than they were a year ago, staring into the teeth of a global shutdown pandemic – and with prices 38% lower than right now.

Stunning.  Never kick a gift horse in the mouth they say.  At least they used to say that – now I might get in trouble.  Long-term investors should be feeling pretty good right now.

The point?  Simple:  Fear is setting the stage for the next very surprising leg upward.

And remember – we are in the process of completing a “recovery heavy” earnings season that did this:

 

More real dollars were earned than ever before (in billions).  Indeed, Q1’s take is nearly what was projected at end of Q4 this year.

We started the year on 1/1/21 with the expectation that earnings for the S&P 500 were going to be about $160 a share.  That number is already $185 a share – and we can quietly imagine how much those three remaining green bars above will need to expand as the earnings seasons still to be released for 2021.

 

One Last Item for Now

The cash levels of Institutional investors has just been released.  This is separate form the $19 Trillion we reference for you in tracking cash levels for the consumer in the US.

This week, cash levels of the large investor audience also hit near record highs.  They clocked in at $3.09 Trillion – just a little bit shy of the all-time high of $3.22T hit during the cascading of the averages during the pandemic shutdown.  In other words – almost everyone is nervous as just below record highs in the markets.

Yes, it is true that Tech is having a sloppy year far for 2022.  I hate it as much as anyone else does – but alas, we need to allow for these events after big up years.  Pretty normal to see this type of digestion before moving on to the next leg up.  It can indeed be frustrating – but risk is what we all get paid for in the end.

And this in the face of record-shattering earnings. 

The point – when reading sentiment data it is always important to think in terms of “what’s next” in each of those previous low points.  It is easy to get caught up in the emotional stress – but the key for long-term investors is to focus on what happens after the stress points.

Remember Friends – B.R.E.A.T.H.E.

These gyrations will become more numerous over time.  Tech is why.  Kids are why.  Emotions are why.

Markets pay for patience and discipline.  They pay for fighting the emotional surges that plague so many results over time.  They pay for believing in the future ingenuity of this country and the people in it.  They pay for having faith in your plan and the forces that built our lives together.

 

Buckle Up

This battle cry – like all previous Armageddons – will pass with time.

In the end, there is no end, really.  Just a continuation of time (your greatest ally) and the trek up this very high mountain ahead.  There will indeed be treacherous spots and perilous moments that will terrify many.  It will be our job to keep one focused on the long-term current driving us all forward.

That said – the tectonic shifts ahead are massive.

We have stated this many times over and at the risk of sounding too darn boring, here we go again:

The leverage of change and the Generation Y technology waves ahead are creating massive changes in margins.

Earnings will be far more leveraged and see many more benefits than currently understood.

The pandemic shutdown had one benefit:  if a company was not killed in the pandemic, we would argue it is now “unkillable”.

The armor created, the tools built, the technologies unleashed, the systems implemented and the capital invested during the shutdown storm has set the stage for a complete remake of all that we “know” – and the Q1 numbers are just a tiny glimpse into that benefit.

The Bottom Line

This chop during May has proven its value:  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. 

You’re missing out!

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