3,453 Days from the Abyss

3453 from the abyss

By David Nelson, CFA

After 3,453 days investors celebrate a milestone as we mark the longest bull market in history. Here we are a decade following the worst financial crisis in generations and the memories of Lehman collapsing along the value of your 401k are all but a memory.

The gallows humor for those of us who stared into the Abyss is gone. Today, the only concern for portfolio managers is “am I keeping up with my benchmark” and how much Amazon (AMZN) should I own. In 2008, sitting in a fox hole the conversation was a little different. Some of us remember the best trade was moving your cash into T-Bills because the money market you were in might break the buck.

In any event the celebratory nature of the last week forced me to take a walk down memory lane and recall some of those dark days. In addition to running money I was often asked to contribute to the New York Post business page. One day the editor gave me a call and asked me to try and find an industry doing well through the crisis.

“Are you kidding? Banks are on the verge of collapse and the mall looks like a ghost town and you want be to find something doing well?” He said absolutely, so I dug into the data. Something had to be surviving and I was determined to find it.

GUNS 2008 (Before I get started this piece has nothing to do with being for or against guns, just reporting the events as they happened) 

It appeared there was no shortage of people in 2008 who wanted to buy a weapon. My instinct was that these were citizens that were concerned their ability to purchase a weapon might be curtailed hence the increase in gun sales. So, I went to the nearest gun shop in the next town Norwalk Connecticut to see just what was going on.

New York Post article from 2008 by David Nelson, CFA
Retail Bullseye
Retail Bullseye story

Lines around the block waiting to get into the building to purchase a weapon or sign up for a pistol permit class. Really? I had to see what was going on, so I walked over and started interviewing some standing on line. These weren’t gun people. Most were first time buyers, and many were from Wall Street in particular traders from fixed income desks like JP Morgan and others.

They were convinced the financial system as we know it was collapsing and that it might be only weeks before you went to an ATM and nothing would come out. In other words, they were preparing for Armageddon.

I stepped up to Russ, a first-time gun buyer purchasing a Mossberg shotgun who said, “I was so concerned about what I was seeing in the credit markets I felt I had to take this step to insure my family’s safety in case there was breakdown in the financial system.”

We’ll never know for sure just how right or wrong Russ was, but I suspect we were a lot closer to collapse than most of us would like to believe.

Back here in present day the picture is little different. We recently had a monster 4.1% GDP print and we’re coming off one of the best earnings periods I’ve seen in some time.

Target CEO reported last week stellar earnings prompting CEO Brian Cornell to say during a CNBC interview that “this is the best consumer environment I’ve seen in my career.”

In any event a far cry from those dark days. Let’s hope we never have to go through that again.

Back to work

As I pointed out several interviews last week week too many will use the milestone as an excuse to get out of the market reacting emotionally instead of thinking with your head. Look, for the moment the data suggests continued growth.

It isn’t very often that markets turn South when earnings are heading North. If there’s a storm lurking to end the bull run it’s likely something we haven’t seen or considered yet.

The Fed is always on my mind. Fed policy is often the biggest wild card because the tools used i.e. fed funds and discount rate adjustment take time for the economy and markets to react. Very much like turning a battleship forcing the captain to cut back on power long in front of the intended turn.

I’ve long been in the camp that the Fed isn’t paying attention to the yield curve. We don’t live in a vacuum and with central banks everywhere still suck in a QE mindset I think it dramatically limits just how aggressive Mr. Powell can be with normalization policy.

Fed Chair Powell’s Jackson Hole speech Friday confirms he is still pushing ahead. “If the strong growth in income and jobs continues, further gradual rate increases in the target range for the federal funds rate will likely be appropriate.” That’s a pretty clear statement and all but confirms that we are likely to see 2 more hikes before the year is out.

Sure, we have continued BREAKING NEWS on convictions and more administration officials ready to talk and avoid prosecution but after 19 months investors seem to have learned to take it in stride.

On trade, the only good news seems to be coming from Mexico. As of this writing administration officials say we are very close to at least a handshake deal with Mexico. Keep in mind we still have Canada to bring on board and no matter what is agreed to it still must make its way through congress. Most Washington observers believe it will take at least 3 months to bring any agreement to a vote.

In the meantime, headlines will likely drive short term trading especially when volumes and liquidity is light but, in the end, expect stocks to follow earnings and cash flow. After all, a stock is just a piece of paper giving you the right to your pro rata share of the earnings and or dividend stream of the company.