“You are not the victim of the world, but rather the master of your own destiny. It is your choices and decisions that determine your destiny.”
―Roy T. Bennett

Good Morning,

It seems one thing has become consistent in recent years as markets and our economy continues to unfold. It appears – on the surface at least – that the audience has become somewhat child-like. You know what I mean, like when you take away a 4-year-olds’ toy – and the temper tantrum takes center stage.

In the same way, quiet periods – those spots in the economic calendar when something is readily available to hold audience attention – temper tantrums seem to erupt. In the process of the “emotional” outbreak, rapidly shifting from one emergency to the other – and then back – many don’t recognize they are temporarily blinded to the “rest of the picture….”

Meanwhile…

As political vitriol goes on tilt over the next 30 days, much will be ignored. If, like last election, we find weakness and emotional, knee-jerk reactions leading to voting day – these are the elements which will be missed:

Fear will keep interest rates down – and likely move them even lower

Interest costs across all areas of the landscape will continue to plummet – improving cash flows to be used for many more productive uses

Fears will reduce expectations – leading to more surprise upsides

Fears will drive energy costs lower – again reducing to our economic structure – and likewise, improving profits, cash flows and margins

Fears will act globally to bring things to the strongest economy – the US will continue to benefit from on-shoring events already rapidly in motion

The News of the Morning…

The news of the morning is obvious – and we wish the President and First Lady a quick and safe recovery from their positive tests.

In the midst of the headline-grabbing events, jobs data was mixed but silver linings exist. The unemployment rate fell further than expected even as the headline number was lower than the “experts who sit behind desks and guess” had “expected.”

As you likely know, I always love it – and get a real chuckle – when we see the “negative misses” of expectations get so much more coverage than the positive beats of those same expectations.

To each his own of course – but do know this: following that media perspective with focus only on the downside – is a very, very poor way to meet goals – anywhere down the line.

ISM data and manufacturing orders continue to impress.

Earnings, oddly enough – also continue to ratchet upward. Recall it is perfectly “normal” for earnings expectations to steadily fall just before the next quarterly charade – I mean parade – begins.

In this case – we are a little under three weeks out – and indeed we would not be at all surprised, but instead very thankful – if we can just keep this back and forth chop and angst going until then.

Know this for long-term investors: the rocket is on the launch pad, being fueled and loaded for a long flight just ahead.

Feeling Punk – Almost Perfect

Many in the investing arena – as you may already know – already fear the Reaper – and have been fearing the same for months now…records continue to be set for the depth and length of this funk.

Bomb shelters are prepped, preppers are prepped, bunkers are supplied – and the bears – well, gladly they are solidly in control of the headlines and emotions.

…read ’em (all) and reap…




Your Choice

The good news is we live in a place where we get free choice. Sure – one can choose to ignore the poor record of being “in sync” with these sentiment indicators. One can also ignore The Barbell Economy™

Neither of those choices will negate either the fact – or the record.

Warning: Tough dose of medicine coming.

The 4 data snapshots above all tell you a few things:

Much of the crowd is already afraid.

A good chunk of the crowd that is not already scared – is steadily moving in that direction.

The red boxes on the two middle charts show you moving average (deeply embedded fears) suggest we are in rarified air indeed….perfect for long-term investors.

Here is the tough medicine:

a) go back to any time you would like to choose when these indicators were as deeply fearful as they are now – and find me ONE spot that was a high in prices – marking the end of a move up.

b) in sports terms, choosing to feel the same way as the crowd does today while we work through all this crap, is choosing to bet with the team that…has…never…won.

Inside the Chop

Ok, so we just wrapped up September – where we got the chop and setbacks and churn we honestly had expected in the summer doldrums of August. The headlines lived up to the historical record – Septembers are sloppy.

But guess what…in all the angst – something else was shining through. Tech was working hard to stabilize and retake the lead as we get beyond this upcoming election quagmire.

Last week we noted that the relative strength of the semiconductors had hit a new record high, which was a positive sign for the broader market long-term.

Taking a look at the semis from another angle, below we show Bespoke’s cumulative A/D line of the Philadelphia Semiconductor Index (SOX). After moving basically sideways for well over a month now, the SOX’s cumulative A/D line now looks to be breaking out of that range as it has moved to new highs in the last two days.

Our hunch? That is exactly what you want to see while the rest of the crowd is afraid, hunkered down, terrified of the future and hiding in bunkers.

Just because it is the weekend…

I had to send again the Yale Crash Index…it caps off the point of – “Hey guys – being afraid is not a secret for anyone…and markets do not work to address or serve the obvious.”

Like the reaper, markets tend to fool the largest part of the crowd most of the time.

So, with easily 70-75% of the crowd already not liking the odds of success, what does your gut say we will be chatting about 12-18 months from now?

I will throw out a hint: “wow, that sure was not as bad as we thought it was going to be…”

So, the data are clear: investors are spooked. The good news is that they are spooked – across the board -at levels seen at times when very important long-term lows are being formed.

Last for Now…

Focusing or reacting to a poor September is missing a larger point again. We just finished the best 6 months in the market since the Great Financial Crisis lows in 2009. We all do remember what happened after those lows right?

Here is the graphic of importance from Bespoke:

With all the turmoil going in in the world, the chart above shows that the end of September marked an “epic six-month (and one week)” run for the US equity market. Let’s think of these moves in a larger perspective – and see how things went after all prior six-month rallies of similar magnitudes.

As noted above, the last time the S&P 500 saw gains of greater than 30% in a six-month span was in 2009 coming out of the Financial Crisis, and before that, you have to go all the way back to March 1986!

So what Mike?

The table below show every period where the S&P 500 was up over 30% in a six-month span after not having been up 30%+ in a six-month period in the prior six months. In the nine prior occurrences since 1928, the S&P 500 has seen relatively strong returns over the following one, three, six, and twelve months and saw positive returns at least 75% of the time.

For the one month period, the S&P 500 had a median gain of 3.57%, and one year later, it was up by a median of 12.5% with gains 89% of the time.

So – when the Reaper knocks on the door of your fears — laugh at him and look forward – not back.

This rocket-ship ride is just getting loaded up for the trip.

Long-term investors have learned that when all of the above ingredients are baked into the pie, the road ahead has been marked by a clear and resounding message:

…surprises to the upside.

Summary

It is our job to withstand the assured storms ahead and be disciplined in our planning for clients’ goals.

It is imperative one remains patient during the quiet times. Sure, more choppy waters are likely as the election approaches. Sure, media will do its’ best to knock you off your focus, grabbing at your fears and taking you off your pathway.

Rise above that tension and pull your seatbelt tighter.