I have noticed that volumes slacken in stages as the summer haze rolls onward in a normal summer. The next stage tends to kick-in right after the July 4th break with the final stage of slowdown rolling in as the haze peaks in August. After what has to be one of the quicker rebounds from the edge of the abyss on record, last week ended with a bit of a whimper as most were off on Friday for the long weekend.
The issue for the coming week will be some early stage second quarter earnings releases – but more important?
The jobs number of Friday. Anticipation will be thick.
The bears will be chomping at the bit. Last month’s slow number will be repeatedly reviewed – along with the doom which will surely unfold if we (gasp) have a second “poor” number in a row.
My vote? I have a hunch it will be “light” shall we say – and misunderstood. We do have a struggle here: record job openings are not being met with record numbers of applicants capable of performing the leading-edge type jobs birthing the new waves of growth in our society.
As in the early 80’s we may very well be bumping up against a bit of a wall on capacity. Then as now, a wave of recalibration and enhanced training may be needed.
Getting another solid sell-off over misunderstood jobs data would be a good thing. Your portfolio snapshot summary is above. Again, while the bounce is nice, let’s be patient as I suspect we have more summer chop ahead. Let’s expect the waves and not be surprised by them: an aftershock…or 4..would be good for value hunters.
Stuff We Could Be Missing
Some of the tougher things we do over time as it relates to portfolios is stay the course. The collective mind of the crowd has been well trained to use product after product as Wall Street creates them – often “dreamed up” just after they were actually useful.
Proving the point: have you ever seen so many ways to hedge away risk in your life?
The idea that you own a series of companies for many years, allowing them to build, expand and grow into their upcoming bell-curve of demand is rarely even discussed anymore. However, the snapshot above provides a glimpse into the reward for doing so – the reward for being boring or “too simple.” The cushion you see has been expanding since 2011 when the portfolios were just beginning to sniff out the Gen Y/Baby Boom shift.
Another Misunderstood Element
The bear story has met its latest failure. Brexit was the deal. This comes after the failed QE rants, the failed Greece rants, the failed PIIGS rants, the failed China rolling into the sea (or taking over the world) rants and the failed cheap oil will collapse the entire global economy rant.
You know I don’t often touch on technical issues, but a pretty rare circumstance could be unfolding in the markets today – even as we fret over everything under the sun.
First – the summary of the formation:
I reviewed a note from Citi on some interesting technical notes. Here it is in a nutshell:
On a yearly S&P 500 chart, they note that we’re likely going through a consolidation that leads to higher prices once resolved (we noted same for many quarters here). Here is the kicker though: they wisely note that 2016 has the potential to be a “bullish outside year” for the S&P 500 – meaning the highs and lows for this year’s candle are both outside of 2015’s range, with a close above last year’s high.
If this were to actually unfold by year-end for the candlestick of 2016, it would be only the 3rd time in history the S&P 500 posts a positive outside year.
Even more compelling are the underlying parallels of the explosive demographic structure come into play yet again. Why?
The last time this pattern unfolded was at the start of the last dramatic bull market for stocks – in 1982! This period not only eclipsed 16 years of brutal consolidation, ignited by the Baby Boom launching into the worst in earnest but once the “lost decade of the 70’s was finally shaken off, the 1966 top was left in the proverbial dust bin – and we never looked back.
Some pictures first for review (one you have seen here before on many occasions):
The first chart gives you a feel for the idea that while history may not repeat exactly, people – in masses – do have the same rhythm at times and can often act out in the same manner. People are markets. In 36 years, three annual pattern events – all with the same dramatic result.
What is most compelling is the 1982 parallel? We have often noted that time window here. Why? Recall the demographic structure of our country. Recall the haze and frustrations of the late 60’s and into the 70’s. Pretty much mimics the same level of frustration many have felt over the last 15 years. It runs across both economic and geo-political platforms.
What was the very last thing the masses expected of the US economy in both circumstances? New, and often explosive growth. The stage is set again. We have spent so long being fearful of things, it is my humble opinion that many will be unable to wrap their minds around the idea that we have some incredible opportunity coming at us.
The mere writing of it will be perceived as fantasy I am sure. Yet the numbers continue to prove to investors the Barbell Economy is real and it is doing much better than the hysteria-minded emotional crowd would imply.
The second chart above shows the noted three time periods of this pattern from the Citi review. See any overlaps? Thanks to Josh Brown for the head’s up.
I Know – Big Risks Exist
But the dirty little secret we only talk about in rooms with few people is this: since the beginning of building any wealth or success, there have always been big risks. Always have been and always will be. We cannot escape that but we can consider adjusting our radar.
Here is a thought:
We can all agree that “Black Swans” are rare events, yes?
Black swan events can re-shape the world for certain. But so can a nuclear weapon detonating in downtown Chicago or the atmosphere collapsing in on itself extinguishing all of us….even gold buyers.
Does that mean we can plan for it?
My point in a not so comical way: there is a significant difference between respecting outlier events versus the amped-up emotional cycle of seeing them around every corner.
Sure, we need to respect the power of deep recessions but must we have a cadre of experts telling us that every blip is an already lit fuse to the second coming of the Great Depression? Further, planning for it over and over again is very unproductive as we have shown many times before.
Lots of very, very bad things have happened since I became a part of this industry helping clients. Nightmarish events one could have never predicted. But young people still become adults and the markets went from 900 to 18,000 while all the terrible things were sending many into emotional tailspins.
Wisdom Properly Noted
Nassim told us that the danger of black swans is that people underestimate their impact. I suggest we also consider this possibility: constantly overestimating the risk for them like a roller-coaster to hell can be just as dangerous.
Accurately predicting a financial crisis isn’t such a big accomplishment if an expert spent their entire career before it falsely predicting doom.
Many may have not even realized that the while the Great Depression was horrible for most, stocks only fell back to where they were in 1924, five years before the peak (adjusted for dividends and inflation).
Further, it was in the depths of the Great Depression where the seeds of some of the greatest pools of wealth ever built were planted. The riskiest of periods right?
Hence, were some of the 24-hour financial channels playing back then, an expert consistently predicting doom for years too early would have been better off just living through the market crash of the 1930s rather than trying so hard to warn about or avoid it.
As anyone studying the history of people, psychology, emotions and market results will tell you, far more money has been lost preparing for bear markets than in actual bear markets.
The takeaway is something that sounds blindingly obvious but just as surely easy to be overlooked in the manic-depressive nature in which we now consume economic events:
Yes…rare is rare.
As such, maybe the healthier and more productive way to view risk is this idea: we may want to focus on planning for/expecting more common events to have a higher probability of occurring.
Examples? Well, I suppose that the next bear market could be as bad as 2008’s punishing ride, ending in March of 2009.
But there are alternatives to that Black Swan view. We could get a normal bear market of 20%-30% or, if it were as bad as 2008-2009 again, maybe it happens 5 years from now – from a DOW 15,000 points higher.
Carrying that a little further, the next recession could be worse than 2008, but it is far more likely (since all we ever do is plan for that in today’s media frenzy) to be something that reduces GDP by maybe a couple percentage points at most and raises the unemployment rate to 6%, 6.5% or even 7%.
In fact, both of these dire sounding events could be over before most people realize they began – if for no other reason than we have collectively assured ourselves it will be so much worse.
We live in a world today that seems to be totally focused on the extreme edges of events – as though we can actually regularly predict same.
Taking my word for it is unnecessary. Instead, just take a sampling of headlines in any given week. A few recent ones:
- A recession worse than 2008 is coming
- The end is coming
- Brexit Drives 100% Chance of Crisis Worse Than 2008
- The table is now set for the next financial crisis
- The next crisis After Brexit will be worse than 2008
- ‘Sell Everything’: Global Bank Warns Investors of Coming Financial Crisis
The trick bag in our mind we have to overcome is pretty scary: I have stated it often before, “The 2008-09 event was our generation’s Great Depression and it will last for decades longer than the actual event (mentally).”
Simply because it was so rare and painful.
The real risk being overlooked?
By paying so much attention to every little ripple under this cloak of constant fear or finding monsters around every corner and lurking in every shadow, the masses are driven to now overweight the real odds of it happening again anytime soon.
I am certain this is why we often see levels of investing fears equal to 2009 today, even as the DOW has risen 10,000 points since.
The Stage is Set
Like the charts above – our country is going through another shift. It is masked by the noise. In almost every area of measurement, the negative is being assumed – with the positives often brushed aside.
We have lived this platform of belief before – it was the late 70’s / early 80’s.
Only this time, there is more fuel in the engine driving growth ahead. Said another way: It’s a bigger watermelon going through the python.
Cheer up, stay focused, be patient and have a great weekend break for the 4th.
Until we see you again, may your journey be grand and your legacy significant.