February 17th, 2019 – 7am –
I just returned from New York, where I had the great privilege of appearing on some of the most widely watched financial news programs in the entire world. I’m often asked how this came to be. How did a nobody from Kentucky not only receive an opportunity for one appearance much less the ability to go on regularly? At the core, I would have to say, it boils down to independent thought. You see, while I may not be the most handsome on a panel and never will I have the best hair, what producers can count on is a passionate, independent view of the markets, regardless of how popular or unpopular that may be. Sometimes, that view may be in-line with the norm and other times it may be quite a bit different. Unlike so many in the Wall Street game, I am not paid to push a product, nor do I run a mutual fund that mandates 100% stocks at all times. Have you ever wondered why ‘sell’ or ‘caution’ is such an unpopular view? Could it be because most money managers are incentivized to keep you in at all times, regardless of the environment? You bet it is.
This week, stocks added to their already impressive run. This marks the sixth straight week of higher prices since the December 26 low. The staggering 18% run off the bottom is as sharp a rally as I can ever remember since the 2009 bear market. While it’s easy to get caught up in all the excitement, it’s important to remember that we’re now simply back to where we were when we started December of last year. In fact, what’s so fascinating about this level, in both the Dow and S&P, is that it correlates exactly to the ‘China dinner deal’ when Wall Street opened Monday December 3rd last year assuming the worst was behind us. The reality was, we had never been farther from a deal. That realization kicked off the 16% decline that sparked one of the worst Decembers on record. While these past few months have been an incredible and volatile rollercoaster, I think it’s important to understand that we’re now just back to levels not seen since…. December, November, July, June, April and of course February of 2018. The point is really quite simple, there has been a plethora of noise but absolutely zero progress.
Our cash levels in our passive accounts (30% in aggressive) correlate with my lack of trust in this move and my concern regarding the underlying fundamentals. In the midst of all of this volatility, what seems to be getting lost is how many of the leadership companies are seeing slowing sales and earnings growth. This doesn’t mean we can’t see new companies replace these previous leaders. I’m certainly open to this idea; however so far, that hasn’t been the case. Utilities and Real Estate, both defensive and interest rate sensitive sectors, are not my idea of bullish leadership for the long haul.
So, what’s changed? I believe the bounce is being fueled by both a muted Fed and the prospects for a real deal with China. While the Fed tries hard to remain independent of the financial markets, it is almost laughable to think this is possible indefinitely. When markets fell in December, the Fed had to back off and reassure participants that it was aware of what was happening. The Powell Put, a fancy phrase to insinuate the Fed is willing to support financial markets if and when necessary, gave investors comfort which was enough to cease the decline.
While I have strong and complex feelings regarding the Fed, we’ll keep this positive and move to what is the most promising thing for our economy and markets, a real deal with China.
I’m often asked what will turn me back from cautious to positive on financial markets, and I always refer to company fundamentals. One must wonder, what will spark these improved fundamentals? Imagine a twofold approach to solving the issues with China; whereby, the Chinese agree to purchase billions of dollars of goods from US companies in order to close the trade gap, while also opening up their markets to our companies through fair and honest business practices. Allowing US companies the ability to market their products, without the fear of IP infringement, to the 1.4B Chinese people would be an absolute game changer.
I find it hard to imagine something like this happening quickly, or with the stroke of a pen; however, over time through years of negotiations and forward progress, it is what would definitely fuel the next great global economic boom. As is so often the case with financial markets, my belief is that many people are getting way ahead of themselves.
At present I continue to remain cautious and am waiting patiently for more information before adding additional capital. I believe that our risk levels are appropriate for a market that, despite its back and forth, has not gone anywhere in over a year. While my confidence level in this market is low, my patience is high; and, thankfully unlike so many others who find their way onto television, I have no incentive other than to take into consideration my clients’ best interest.