My Dad served in the Navy. He was second in charge of a nuclear sub in his final year of service. The phrase “look out below” comes from the Navy, specifically submarine jargon. It refers to the order for seamen “lookout(s)” that are “topside” to descend into the sub from their lookout stations in preparation of the sub submerging…”Lookouts below! Dive! Dive! Dive!”
In markets you will often read references that investors should “look out below” as the writer wants to make you aware of impending risk to the downside. It sounds smart right?
Managers are listening to that ghostly call. The latest data from the BAML manager survey shows cash levels have hit a 15+ year highs as “risk” is perceived in a world of negative rates.
That’s self-fulfilling for those buying into it. It is kind of like when you were younger and someone would break up with someone else early just to make sure they did not do it first. Likewise, investors are choosing instead to earn nothing for a decade or more, as they prove their fears of losing more in the coming swoon. It is forgotten in time that the swoon has been coming – for one reason or another – since I began in the business in 1982.
Another finding in the latest manager survey is that hedging – a long-term futile effort of trying to time the bumps in markets – has hit the highest level in the history of the survey.
Take a look:
Let’s think about this for a moment. The S&P 500 has jumped about 8.5 percent – into new, all-time highs – since the “Branic” lows hit in the 48-hours after Brexit, but that has only made professional investors more nervous!
Check their view of the data below:
Earnings season, while young still, is not coming in nearly as bad as feared. Further, rising earnings expectations continue to litter the bears’ pathway ahead as we get closer to the round-trip of the energy valley. Heck, even banks are doing far better than the fears surrounding their ability to operate under such intense regulatory pressures.
More Housing Upside?
Seems more and more data are coming in to “experts”, suggesting “demand for housing is beginning to out-strip the flexibility of supply.” June housing starts were up a solid 4.8% year over year – nicely above expectations.
Don’t count us among the surprised. The data is set: plenty more of that coming…..for years and years ahead of us.
By the way, just in case one is still afraid of Brexit, the latest “beige book equivalent” data from the BoE suggest “they see no real slowdown in business activity since Brexit.”
The latest batch of surprises, the bullish move since Branic, the new highs, the continued fear-driven trade into bonds, the near-record levels of cash in funds all cause me to ponder this:
How come we are never warned about “Look Out Above” instead?
Foolish right? I still hope for a summer swoon.
The Fallacy of Confirmation
A few notes ago, I suggested the bears still had hope – the Transports had not confirmed new highs – yet. This is not new. It has happened before. One rather parallel time period was 1994-1995, the last time we had a near two-year standstill in headway for the averages.
Many fears in history have been written and espoused about non-confirms. They all leave out one small detail: They are non-confirmations – until they are confirmed. The snapshot above, of course, ended with an eventual confirmation by Transports – and a market that went straight up for the next 5 years.
No Party At All
There has been zero dancing in the Street for the new highs last week. That’s fantastic.
Indeed, fears have risen and cash has piled even higher. More than $269 Billion have been removed from mutual funds – in 2016 alone! There continues to be lots of naysaying, pretty much a normal attendant to this bull market – at least for the last 11,500 points or so.
The media continues droning on and one with a plethora of warnings. One focus remains the “paltry earnings season” underway. The warning goes something like this:
Earnings had better be great or else the bull will fall.
Mind you, pessimists rarely beat around the bush.
It is widely believed that stock prices are seriously overvalued. Dr. Ed tells us that at yesterday’s close, the average forward P/Es of the S&P 500/400/600 were 17.0, 17.9, and 18.5. To some, these seem high given S&P 500 operating earnings have been falling on a y/y basis for the past four quarters through Q2-2016 based on data compiled by Thomson Reuters.
The fallacy? Markets don’t focus on now – they focus on next.
As covered for many quarters here, one can expect this quarter will be no different than the last 4 – the actual result probably will be negative. As is almost always the case though, it will likely be far less negative than the armchair analysts too many track as messiahs.
We remain the same as noted: this and one more quarter of negatives, with the results for Q2 actually showing a small net positive YoY increase excluding the Energy sector. It has weighed on aggregate earnings since the fourth quarter of 2014.
Don’t fret – after Q3, the data also say comparisons will get easier, with industry forward earnings and revenues on the rise for many weeks now.
No Recession in Sight
I have referenced the “lunch stop” in the markets back in 1994-1995. It lasted about the same time as the last 21 months (pre-new highs last week). Then, as now, recession was the fear. Then, we called it a “double-dip.” A reference to an echo recession from the “weak recovery” post the commercial real estate collapse and recession in the early 90’s.
No recession ever arrived. One is just as unlikely now.
Any basis for that assumption Mike? Yes there is….
If one studies the past five complete economic recoveries and expansions in the Index of Coincident Indicators, this will be found:
During the past five cycles, the recovery periods averaged 40 months.
The expansion periods averaged 65 months.
(Note: Recoveries are measured from the trough of the cycle in the index to the recovery level that matches the previous cyclical (and usually record) peak. From that point through the next peak is the expansion phase of the business cycle.)
During the current business-cycle upturn, the recovery lasted 68 months, while the expansion has covered just 31 months – so far.
This mimics our previous point that calling this bull market aged is simply an abuse of previously used definitions. New secular bull markets begin at new highs on the previous peaks before a bear market. That puts this bull at a young three years old.
Now, if this expansion matches just the average of the previous five cycles, the next recessionary risk period – based solely on time – would be somewhere after Q2 – in 2019! Please keep in mind, this is in no way a projection or forecast – just a way of providing you a time measurement.
The follow up thought is then this: will the current expansion will be shorter or longer than the average. We have been clear about this for the last – oh – four+ years: we believe that it is not set to just match – but is set to exceed the average.
Oddly enough – due to all the fear and trepidation over global stagnation. The pause we are living through now is greatly misunderstood. Let’s keep it simple: one massive generation is passing the baton to an even larger generation as the driver of future economic growth.
The bottom line here in the fear-mongering?
It is having a wonderful effect – both inflation and interest rates are set to remain historically low, cash cushions are mountainous, recession risk is low and an earnings upside corner is in view. All this still, while fear and risk aversion measures remain near historic levels.
The better news? It keeps both sides – bulls and bears – completely frustrated and steadily fearful of the next shoe….while markets churn upward.
But Where is the Growth?
Right about now, as market’s slowly etch into new-highs, the refrain is the same in history:
“Where will the growth come from…?” It is really spooky how much today sounds like the early 80’s. Back then, one could not have imagined a 128GB hard drive on a two-inch clip you carry in your pocket for $15. That’s over 4,200 times larger than the hard drive in my first computer – it cost $6,000. And yet, we still somehow fear our economy is like it was back then. Complete and utter nonsense.
I have pasted in a snapshot from an article I read about leading-edge growth channels ahead. Mind you, they are not “new” – they have been being built and formulated for years….but just like the baby boom did, Gen Y is set to surprise us with change just as incomprehensible as back in the late 70’s / early 80’s.
Check it here:
Imagine trying to explain some of this stuff 10 or 20 years ago. Impossible.
Folks, the future is far brighter than the masses currently comprehend. The Barbell Economy says so.
Pray for a summer swoon….we still have August after all.
Later – 5 or 6 more arguments against the bearish malaise cloaking too many horizons.