December 24, 2018
I can safely say that the year 2018 will not make the Hall of Fame for Investment years. The year has had its times of greatness followed by some serious bouts of negativity. And as I write this it is readily apparent that there will be no Santa Claus rally. Nothing but coal in our stocking this year. We started 2018 in a sprint and by February we were spent. To put it nicely, it has been a frustrating year.
Always remember that the Markets are separate from the Economy. Meaning that while obviously related, Markets and the Economy can at times move in different directions. As proof, I give you exhibit #1: Calendar Year 2018. The economy is growing on almost all fronts and the markets are, well, they’re not growing—they’re shrinking. And shrinking is not a strong enough word. Television pundits daily trot out their experts to explain what’s going on. Off the top of my head let me see if I can list the ones I’ve heard recently: (in no particular order)
The Election (Apparently both sides lost) Geo-Political Risk in the EU (This year it’s Italy.)
Flattening/or inverted yield curve Aging US Demographics
Tariffs Growing US Gov. Debt (That’s new?)
Brexit (to leave or not to leave?) Looming US Gov. Shutdown (not looming now.)
Oversupply of Oil Algorithmic Trading
Increase Fed-Funds rate Aging Economic Cycle
All of these issues are significant. And yet, two to three years from now we won’t remember any of them causing this year’s debacle. Eventually, what really matters to the market is the economy. The markets were ahead of their skis, perhaps the yield curve will invert, trade wars will heat up, interest rates will increase, geo-politcal & internal US politcal risk will always be there, and Brexit will or will not happen. It is always something. It must be so from now on–considering the world is as interconnected and as small as it has ever been.
My analysis for this year’s decline can be boiled down to one word, investors are skittish! Fear of loss is a trait that is shared by nearly everyone. Fear creeps out from our deepest, most primal region of our brain. Anthropologists believe that Humans have been around for about 300,000 years. Our ancestors survived by being afraid. Those who were unafraid of losses (or dangers) often did not get to pass on their genes. Over 12,000 generations survived and thrived by being cautious and alert to danger. You could say that we are naturally selected to be afraid of losses.
And lets face it, with 2008’s market drop still fresh in our minds, we can understand why investors are skittish. Recency bias is real and it shows up in our behaviors all the time. The Market crash of 1929 changed our parents and grandparents their whole lives. Most of those generations missed out on the great income generating power of investing. (My father stopped buying 7-11 coffee when it hit the crazy price of 50 Cents a cup.) And I am sure many of us know of those who got out of investing after the dotcom bubble burst in 2000. And I think it will be a long time before we can put 2008 and the “Great Recession” in the rear-view mirror.
What I think is different between those two recent nasty markets are the fundementals. The world economy is doing absolutely fine. The US has nearly full employment and worldwide corporations (companies that we own) are making more money than ever before. And we haven’t even had one full year of significantly reduced corporate or Federal income taxes yet.
As a result of that difference, our skitishness is actually a bullish indicator since the main ingrediant for an actual bubble is euphoria. As in the housing crash of 2008, people beforehand were euphoric and convinced that housing prices must go up. Or in 1999, Pets.com was the newest “can’t miss” internet retailer that sold $619,000 of goods in its first 8 months (at a third of their cost) and spent $11.8 million in adveritsing to do so. (RIP Sock Puppet!) Today, nobody is euphoric. Heck, most conversations today start out with some phrase that discribes how the world is so screwed up—it has become a part of our unconsciousness—we just think the world is in a bad place right now.
I disagree and here are some facts to help with the good cheer of the holidays; we could all use a dose of positivity.
- About 44,152 people per-day worldwide escape extreme poverty. 8% of the world’s population remains in extreme poverty—and it is estimated that it will only be 5% by 2030.[i]
- The balance sheets of Households and Non-profits are in excellent condition. Assets are about $125 Trillion and liabilities are $15.9 Trillion for a net worth of $109 Trillion. An all-time high.[ii]
- Small Business confidence is at an all time high—small businesses are closest to the customers so this is important. [iii]
- Unemployment is at a 50-year low, at 3.7%[iv] Full-time employees reached a record high of 129,212,000 in November 2018. [v]
- The US is now the Largest Oil producer in the world at 15,647,000 million barrels per day.[vi]
- The S&P Dividend Yield has risen for the 7th straight year to 2.12%.[vii]
- The S&P 500 Earnings are the highest per-share ever recorded at $130.18.[viii]
Enough already. Recently Mohamed El-Erian, a CNBC contributor and pretty highly respectred economist said, “I’m stunned by all this talk of recession.” Moreover, “It’s really hard to get a recession when the labor markets is strong, wages are going up, business investment is going up, [and] government spending is going up.”[ix] He thinks we are talking ourselves into a recession.
Lets face it, private industry and the free market are rocking the worldwide economy right now. And nearly all the problems we face are Government(s) created and media hyped. Does anyone else think the world has an unhealthy obsession with anything political? It used to be celebrity worship—now the two seem to have morhed into one. (I have an obsession with all things economic, there, I admit it). But give me economic numbers and data over anything some politician tweets or preeches from behind a podium, or screeds on ubiquitous social media.
I hope you and your family have a great Christmas and a happy New Years. I am looking forward to 2019. Thank you for reading.
Marty
[ii] https://www.federalreserve.gov/releases/z1/dataviz/z1/balance_sheet/chart/
[iii] https://www.wsj.com/articles/small-business-confidence-stays-at-near-record-high-1542106806
[iv]http://www.ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx
[v] https://tradingeconomics.com/united-states/full-time-employment
[vi] https://investingnews.com/daily/resource-investing/energy-investing/oil-and-gas-investing/top-oil-producing-countries/
[vii] http://www.multpl.com/s-p-500-dividend-yield/table
[viii] http://www.multpl.com/s-p-500-earnings/
[ix] https://www.cnbc.com/2018/12/21/mohamed-el-erian-stunned-by-recession-talk-warns-of-self-fulfilling-prophecy.html
