President Trump & The Markets

On Wednesday we discussed how overreacting to headline risk often can be dangerous to your portfolio.  As of this writing the S&P 500 is about a percent higher than where it was at its lows on Wednesday as the potential impeachment of the President geared up.  So far the markets have seemingly shrugged off this news, likely on the assumption that based on what's been release so far there's not enough out there for an impeachment trial to pass muster in the Senate.  That of course may change in the coming days.  We have not seen the last of this drama.  However, our point then was to wait for the news to come out and see how markets reacted.  Doing so, even if you decide today to sell, would have likely saved you some money.

I am often asked why the economy and markets have done well under President Trump.  The reason for this is that whether you like them or not the President's policies have been seen as market friendly.  However, when reviewing all of this a more nuanced picture begins to emerge.  It is true that this Administration has seemed to have been singularly focused on creating jobs and growing the economy.  We have the lowest unemployment in two generations and GDP growth will likely come in around 2% for this year.  If that's the case then we'll have likely averaged around 2.75% for the first three years of the President's term.  That's lower than the Administration has touted over the years but better than the Obama averages.  The President passed a comprehensive rewrite of the US tax laws and lowered taxes for millions and not just the rich.  In the process though we have added billions to the Federal budget deficit and only time will tell how that will play out.  Also the economy has run into significant headwinds this year, most notably on trade related issues and these will not be going away as the calendar ticks into 2020.

In terms of the stock market, the S&P 500 is currently up about 40% since the President was elected back in 2016, excluding dividends.  Most of that gain came between his election and late January 2018.  Since that time the S&P 500 is up slightly under 4%.  We also experienced a 20% correction in the last quarter of 2018.  

Given the economic, interest rate and fundamental backdrop it is probably correct to say that stocks are currently fairly valued in 2019, although there is probably still potential for some gains as we head into the last quarter of this year which will start Tuesday.  We are at a point in time where earnings expectations flip over into 2020 and by the end of this year we'll start looking out at 2021.  Right now expectations are for corporate earnings to recover in 2020 with profit growth for the S&P 500 in the 10-12% range.  Wall Street analysts are traditionally optimistic about earnings out that far so it's likely that will be paired back as 2020 progresses.  Still if we have 6-8% earnings growth then we think the potential is there for stock advancement in the 6-8% range next year.  Throwing in a nearly 2% dividend yield for the S&P 500 and you see total return potential that could be around 10% next year if certain things pan out.

Of course there are things that could limit that advance and there is a higher probability that the gains next year will be front loaded into the 1st six months of 2020 as Wall Street focuses on the Presidential elections next year.  I believe the President faces a significant headwind to reelection next year and his likelihood of being given another four years will depend on who the Democrats nominate as their candidate.  A centrist candidate would decrease Mr. Trumps reelection chances while a candidate in the Bernie Sanders, Elizabeth Warren wing of the party would likely raise the odds of Mr. Trump being retained.  One thing is that it is unlikely that a Sanders/Warren candidacy would be viewed positively by the Wall Street community and there is a significant possibility of market headwinds should it look like that wing of the party advances.  But that's far in the future and let's see how the Democratic primaries play out next spring.

Finally in terms of the markets I would note a fact that I have pointed out repeatedly in the past ten years about the relationship of dividends and treasury yields.  Right now the current yield on the S&P 500 is just slightly under 2%.  Furthermore the dividends that make up that index will likely compound at a 2-5% clip over time.  The current rate on the US 30-year treasury yield is 2.15%. The 10-year rate is 1.65%.  If you invest today in a 10 or 30-year bond you are saying that you have so little confidence in American growth during those time periods that you're willing to accept a rate of return that is unlikely to beat the real rate of inflation over these years.  Equities or equity related investments will be volatile but I think a I'll take the bet that their rate of return will be bonds hands down over a 10-30-year period going forward.  We'll see and hopefully I'll be around in 30 years to see if I've won that wager!

Also on a bit of a side note I will be leaving over the weekend to deal with a family matter that may have me out of touch for parts of next week in terms of this blog.  I don't expect to post much here until maybe Wednesday, but it could extend out farther than that.   I will do an update if my absence needs to be longer.

*Long ETF’s related to the S&P 500 in both client and personal accounts.  I reserve the right to change these investments without verbal, written or electronic communication at any time.

Headline Risk

Headline Risk-is the ability for an event, or  news headline or even the rumor mill to influence the price of a stock, sector, or broader market.  The past several days have seen several examples of headline risk.  The most notable was the news today that the Democratic controlled House of Representatives may go ahead and start an impeachment inquiry over whether or not the President withheld funds for the Ukraine unless they would investigate Joe Biden's son.  Markets began their decline yesterday as this news leaked out, rallied when the President said he'd release the full transcript of the call that he had with the Ukraine's President but never completely recovered all those losses.    More news will likely emerge as the evening progresses on the House's plan and that could potentially roil stocks in the days ahead.  The national press is once again working itself into a fever over the President and in most of their minds he's already guilty.  However.....

Nobody knows exactly what's going on.  Political pundits on both sides are the first to jump and scream about the alleged atrocity the other sides doing.  Whatever the allegations are and no matter whether they come from the right or the left, these are almost always defined in a "death to the Republic" manner.  Trump may definitely be in hot water over his call with the Ukraine, but all those gunning for his head might want to first see what's in the transcript.  In the end the allegations may be as empty as the most recent ones leveled against Supreme Court Justice Kavanaugh seem to have been.  

Traders, particularly those of the algorithmic type get all itchy over headlines.  However, most of us don't adjust our portfolios by the minute so this type of thing is usually best ignored until hard evidence is presented that what today's headlines are suggesting is correct.  Investors who made hasty decisions today on inflammatory news stories may wind up with a cases of sellers remorse in the coming weeks.  Even if these headlines should prove correct, it may pay to first see how market's react.  Any impeachment trial passed on by the House would be held in the Senate. Right now the markets know there's very little chance that even if the House of Representatives would vote to impeach the President that there's a 2/3rds majority in the Senate to uphold impeachment. That of course may change once the facts are known.  Again though we need to see first what these are.

I already think the President is going to have a tough time getting reelected next year so if I were the Democrats I'd hold all this in reserve and go at him if he wins in 2020.  However, there is a sizable group within that party that wants to get rid of Mr. Trump and that passion may prevail in the coming days.  Better though I think to wait until we've seen what's in those transcripts.  Before we decide if this is impactful to markets longer-term.  

Back Friday.

T Boone Pickens

The oil entrepreneur T Boone Pickens passed away last week.  He was well known not just in financial circles but by a wide swath of the American public owing to his personality, charitable works and larger than life personality.  You can read about Pickens over at Wikipedia if you don't know who he was and you want to know a bit about the man.

Pickens left a farewell letter to the world which I am printing below.  He's was a life well lived and I encourage all of you to read it and then send a copy off to a young person.  God Bless and Godspeed .Here's the letter:

The following message from T. Boone Pickens was written prior to his passing on September 11, 2019. 

Mr. Pickens’ website and social media accounts are now being maintained by T. Boone Pickens Foundation team members.

If you are reading this, I have passed on from this world — not as big a deal for you as it was for me.

In my final months, I came to the sad reality that my life really did have a fourth quarter and the clock really would run out on me. I took the time to convey some thoughts that reflect back on my rich and full life.

I was able to amass 1.9 million Linkedin followers. On Twitter, more than 145,000 (thanks, Drake). This is my goodbye to each of you.

One question I was asked time and again: What is it that you will leave behind?

That’s at the heart of one of my favorite poems, "Indispensable Man," which Saxon White Kessinger wrote in 1959. Here are a few stanzas that get to the heart of the matter:

Sometime when you feel that your going

Would leave an unfillable hole,

Just follow these simple instructions

And see how they humble your soul;

Take a bucket and fill it with water,

Put your hand in it up to the wrist,

Pull it out and the hole that’s remaining

Is a measure of how you’ll be missed.

You can splash all you wish when you enter,

You may stir up the water galore,

But stop and you’ll find that in no time

It looks quite the same as before.

You be the judge of how long the bucket remembers me.

I’ve long recognized the power of effective communication. That’s why in my later years I began to reflect on the many life lessons I learned along the way, and shared them with all who would listen.

Fortunately, I found the young have a thirst for this message. Many times over the years, I was fortunate enough to speak at student commencement ceremonies, and that gave me the chance to look out into a sea of the future and share some of these thoughts with young minds. My favorite of these speeches included my grandchildren in the audience. 

What I would tell them was this Depression-era baby from tiny Holdenville, Oklahoma — that wide expanse where the pavement ends, the West begins, and the Rock Island crosses the Frisco — lived a pretty good life. 

In those speeches, I’d always offer these future leaders a deal: I would trade them my wealth and success, my 68,000-acre ranch and private jet, in exchange for their seat in the audience. That way, I told them, I’d get the opportunity to start over, experience every opportunity America has to offer.

It’s your shot now.

If I had to single out one piece of advice that’s guided me through life, most likely it would be from my grandmother, Nellie Molonson. She always made a point of making sure I understood that on the road to success, there’s no point in blaming others when you fail.

Here’s how she put it:

“Sonny, I don’t care who you are. Some day you’re going to have to sit on your own bottom.”

After more than half a century in the energy business, her advice has proven itself to be spot-on time and time again. My failures? I never have any doubt whom they can be traced back to. My successes? Most likely the same guy.

Never forget where you come from. I was fortunate to receive the right kind of direction, leadership, and work ethic  — first in Holdenville, then as a teen in Amarillo, Texas, and continuing in college at what became Oklahoma State University. I honored the values my family instilled in me, and was honored many times over by the success they allowed me to achieve. 

I also long practiced what my mother preached to me throughout her life — be generous. Those values came into play throughout my career, but especially so as my philanthropic giving exceeded my substantial net worth in recent years. 

For most of my adult life, I’ve believed that I was put on Earth to make money and be generous with it. I’ve never been a fan of inherited wealth. My family is taken care of, but I was far down this philanthropic road when, in 2010, Warren Buffet and Bill Gates asked me to take their Giving Pledge, a commitment by the world's wealthiest to dedicate the majority of their wealth to philanthropy. I agreed immediately. 

I liked knowing that I helped a lot of people. I received letters every day thanking me for what I did, the change I fostered in other people’s lives. Those people should know that I appreciated their letters.

My wealth was built through some key principles, including:

• A good work ethic is critical. 

• Don’t think competition is bad, but play by the rules. I loved to compete and win. I never wanted the other guy to do badly; I just wanted to do a little better than he did.

• Learn to analyze well. Assess the risks and the prospective rewards, and keep it simple.

• Be willing to make decisions. That’s the most important quality in a good leader: Avoid the “Ready-aim-aim-aim-aim” syndrome. You have to be willing to fire.

• Learn from mistakes. That’s not just a cliché. I sure made my share. Remember the doors that smashed your fingers the first time and be more careful the next trip through.

• Be humble. I always believed the higher a monkey climbs in the tree, the more people below can see his ass. You don’t have to be that monkey.

• Don’t look to government to solve problems — the strength of this country is in its people.

• Stay fit. You don’t want to get old and feel bad. You’ll also get a lot more accomplished and feel better about yourself if you stay fit. I didn’t make it to 91 by neglecting my health.

• Embrace change. Although older people are generally threatened by change, young people loved me because I embraced change rather than running from it. Change creates opportunity.

• Have faith, both in spiritual matters and in humanity, and in yourself. That faith will see you through the dark times we all navigate.

Over the years, my staff got used to hearing me in a meeting or on the phone asking, “Whaddya got?” That’s probably what my Maker is asking me about now.

Here’s my best answer.

I left an undying love for America, and the hope it presents for all. I left a passion for entrepreneurship, and the promise it sustains. I left the belief that future generations can and will do better than my own.

Thank you. It’s time we all move on.

Back Wednesday.

  

Valuation {09.19.19}

With the markets again near all time highs and headed higher at the open today we'll review our valuation analysis.

The S&P 500 closed yesterday at 3005.90  which is an advance of 20.32% for the year, not including dividends.  This represents an advance of approximately 0.35% from when we last reviewed these numbers on  July 19, 2019.  Below is our current valuation analysis.  We are still using a 168.00  earnings estimate for year end 2019.     We are currently using a mid-point $172.00  for a rolling estimate out  to the end of Q3, 2020 {down from $173.00}.    We also use a simple color code to give you some reference for these numbers.  Green will indicate that the valuation on the index on a strictly historical basis has become more attractive from the last time we did this review.  Red will indicate the opposite.  Black means unchanged.

Our Midpoint S&P 500 Earnings Estimate of $168 {Year End 2019}

Current PE:                       17.90% {PE has increased from previous review of 17.82%}
Earnings Yield:                   5.61% {Unchanged}
Dividend Yield:                  1.85% {Yield basically unchanged}

Current Expected Price Cone of Probability {COP}:   2,500-3,000 for 2019.  2,700-3,250 for 2020. 

Rolling Four Quarter Estimate for the S&P 500, Our Midpoint Estimate $172.00:

Current PE:                     17.47%
Earnings Yield:                 5.72%
Dividend Yield:                1.91.% {Estimated}

The current yield on the 10-year US Treasury is 1.796%.  That is a decrease from our last update when the 10-year US Treasury was yielding 2.055%.  {When we updated these same statistics last November the 10-year rate was 3.07%.  10-year rates are down over 125 basis points or over 1.25% since then.  That helps explain the underlying support for stocks this past year even as earnings have basically remained stagnant.}

The Cone of Probability {COP} is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, also are those estimates rising or falling, dividend yield, earnings yield and the current yield on the US 10-year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Back Monday.

ETFs Surpass Active Management

I started converting all of my clients to Exchange Traded Funds {ETFs}back in 2005.  I did this after noticing that ETFs had fared far better during the 2001-03 bear market than many individual stocks.  Back then I was one of the very few advocating these as an investment strategy.  Most investment professionals still preferred individual portfolios of stocks or mutual funds.  

Now times have changed and passive investing using ETFs is much more accepted than it was back then.  To that end I encourage you to go read the article, "End of Era:  Passive Equity Funds Surpass Active in Epic Shift".  The article chronicles the long shift away from active management into passive investment strategies which rely heavily on ETFs.  Such success breads jealousy and there are many that have claimed if not the death of passive investment strategies, which are how most ETFs are composed, but that ultimately investors that rely heavily on this type of investing will get their comeuppance.  Many that proclaim this also predict a brand new era for active managers which is often said to be just around the corner.  Of course most of the people predicting these things are active managers themselves.  

ETFs in general have performed exactly as they are advertised in every market pullback we've seen since their inception.  That is they mimic the underlying index they are meant to represent.  They will go up or down depending on how their underlying index performs but the tracking errors for major indices has been minimal and so far none of the major indices or the major firms that control these indices has seen a major issue.  The same cannot be said for common stocks, many mutual funds or many active managers.  Many active managers are closet indexers at heart.

I think it is too soon to say where we are in the ETF revolution.  Yes ETFs have come a long way but according to the article which quotes the Investment Company Institute "US stocks held in passive and active funds combined represent less than one-third of the total market, with the balance owned by individuals, pensions, insurers and other investors".  If that statement is correct then by all accounts we may not be in the early innings of this sea change, but we're also probably not late to the party.

Back Thursday.

Post & Comment {9.13.19}

This is a new feature I added over the summer where I respond with a brief comment to something I've seen in the news or online.  The headline question I've highlighted.

Market indices are near all-time highs.

That is correct.  We are back to levels now seen in late July on most major market indices.  However, we've used up a lot of buying power to get to these levels and investors should watch price action in order gauge whether there's enough enthusiasm at current levels to propel us higher.  Markets are currently overbought by our work.  That doesn't mean they can't work higher but it does mean that caution would be advised before deploying capital after this latest spurt higher.

There seems to be a thaw in the trade war with China.

Perhaps.  What seems to be out there so far is both sides willingness to sit down again and for both sides to offer small concessions that don't really seem to get at the heart of the matter such as intellectual property and open markets in China.  Markets have been held slave to trade all year and it seems would be vulnerable to the downside if relations take a turn for the worse.

The Democratic debates.

Biden still seems to be the frontrunner.   I think the President is in deeper trouble in terms of getting reelected than Wall Street currently expects for reasons I'll go into in a future post.  That being said if the Democrats nominate somebody from the hard left then his path to reelection becomes easier.  An Elizabeth Warren candidacy would be easier to run against than somebody who's closer to the center.

On the chances of the Democrats enacting much of what they're promising in the debates.

Unlikely unless they can control more than 60 seats in the Senate in 2021.  The lone exception to this may be gun control which I think is going to emerge as a bigger issue next year than most politicians currently expect.

Back Tuesday.

Go Read

BlackRock over on their blog has a compelling read out right now on why growth stocks remains valuable.  There's been a bit of a shift from growth oriented names to value investments in the past few weeks.  BlackRock tells you why longer term they think growth's the place to be.  If you've read any of the letters I've written over the past couple of years then you know I think the rapid advance and application of knowledge is the most compelling story to be told in terms of growth investing.  To that end pay attention to what they say about secular trends in the article.

Back Friday.

Website

So I wanted to let you know we've discovered there are significant issues with our website.  Right now it's off line and will remain so indefinitely.  What I think is going to have to happen is a total redesign of it and that's going to be a project that takes some time and effort.  Of course our blog will remain active and right now that's where most of the action is in terms of timely information and commentary from me.  

Sorry for any inconvenience.  

Time To Kick The Sand Out Of The Shoes

Years ago when I worked for a certain brokerage firm, the head of our division got on the squawk box {Yes that's where CNBC got the name for their show} and gave a speech each Tuesday after Labor Day to the troops all over the country.  It was always referred to as the "Time to Kick the Sand Out of the Shoes" speech because he always made that comment somewhere in his talk.  The message was simple.  Summer's over.  Time to get back to work.

In the wheel of the year under which Wall Street marks time, July and August are the only periods when making money takes a backseat to more leisurely pursuits.   As we've discussed many times in the past, folks in the investment class, particularly those out east, tend to be more interested in being at the beach or in the mountains than in front of their screens.  It's one of the reasons that August can sometimes be volatile.  Events come up and the "A" team is away.    There's perhaps no better illustration of that than this year where we likely had more 1% up or down days than any other August in recent memory.  

Now though summer is over.  September and early October with all their historical ugly ghosts looms.  After that  will likely come the mad dash into the end of the year for institutions to show positive numbers for the clients who pay Wall Street's bills.   As we begin to contemplate colder weather here in the north, here's  a partial list of what the investment community is going to be watching:

Will the Federal Reserve lower interest rates when they next meet in September?  If so, then by how much?  Irrespective of what happens at the next meeting, are we on the cusp of a more rapid easing cycle going into 2020?.

What will the economic data show in the coming months?  While the latest data is somewhat indicative of a slowing economy, does it mesh with what's happening down on Main Street?   So far the evidence seems to be no, but will that continue in the coming months?

What will be the political and economic implications of Great Britain's continued gyrations on Brexit?

And of course the issue concerning the markets the most, the continued trade war issues, especially those continued contentious talks with the Chinese.

Any Black Swan that comes over the transom.

That's the main list.  Others could come up.  Guess it's time to kick the sand out of the shoes!

Back Wednesday and Friday!