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Uncertainty is Normal

Good Morning,

 

As earnings pour in, a solid majority continue to be, well, solid beats.  This is normal as the best are usually in the first few weeks of the earnings season.  Once we get past the companies that make up say 80-85% of market capitalization, the focus moves forward as the "misses" tend to come last.

 

What is "Normal"?

 

It is normal to not know the future.  I have yet to meet anyone who does.  Which is why I always chuckle when I read headlines about uncertainty and the future.  It is said we are witnessing some of the lowest percentage levels of available capital exposed to the US stock market in decades.  And yes, that is at record highs.

 

Just an opinion here but I think with markets are record highs, a close higher the next day by say 6 points, on 22,800 should not be all that heralded as a new record.  It is I suppose but not in the true spirit of an exciting record, right?

 

I suspect also that this is why people yawn - with each record - and only think of how far things can fall.

 

Why that?  Because we don't know the future - only the past.  We only know where we came from - not where we are going.  We only know we have witnessed markets be cut in half from previous records.  We don't "know" that 22,800 will indeed go to 28,200 and beyond in the future.  We hope but we don't know.

 

The human mind tends to stress when it cannot have a reason for something.  Hence, the wonderful sounding headlines to explain things away, only after they have unfolded.

 

It is normal to have ugly periods in markets.

It is normal that we have corrections.

It is normal that the future looks cloudy.

It is normal that there is uncertainty.

 

By the way, all of those things have been true since the market came into existence.

 

It is not appropriate to assume all of those points mean something bad is coming our way,

 

I am amazed when someone says, with a completely straight face - "I will put my money to work when the future is more clear."

 

Really?  Think about that for just a moment.

 

It truly is miraculous when you consider that the entire financial system pretty much exists on faith.  A sense of trust that it will all keep working - that the pieces will keep moving in order and on time.

 

We saw what happens when money stops moving as it did for a brief moment in 2008-2009.  It was the opposite of "I'm all in."  That slow thaw of money movement has a literal mountain of work still to do all these years later.  Our "paltry recovery" can be blamed squarely on ourselves - and the $10++ Trillion sitting idle in the bank.

 

I repeat, if tomorrow morning, this country's consumers - who control those 10 Trillion indications of fear - suddenly decided they were only $9 Trillion worth of "afraid of the economic uncertainty" and the "unclear future", our GDP would explode for 6 or 7 quarters in a row.

 

But then the experts would tell us that is bad as well.

 

We should indeed be thankful for the slow and steady pace of this economic cycle.  When it gets too hot, it tends to need to get cold....and that is never fun.

 

Speaking of Steady

 

Here are a few charts that bear noting - always solid from Calafia.  No surprise if we have faith in the future - they all suggest the global recovery is not only fine, but expanding steadily:

 

 

 

Note the history of how a simple story of movement of goods can mesh well with the movement or expansion of markets.  Recently, the DOW Theory once again confirmed this as well for technicians.

 

Overall, you can see in the chart above that the value of the S&P 500 has tended to increase pretty much in line with the physical expansion of the US economy  - for the past 40+ years!

 

Sure - there have been a few times values in the equity markets have diverged from the trucking index.  Note the late 1980s, the late 1990s, and of course, during the depths of the 2008-2009 Great Recession.

 

In time, it will become evident to more (I hope) that those periods were more about extreme reactions, emotional events and levels of optimism and/or pessimism well beyond what was actually warranted by the then present progress of the overall economy.

 

On a good note, the present position of these readings seems to be nicely in sync.

 

 

 

Note in the second chart above, we see the September ISM readings from service sector businesses in the US were very solid - and record-setting.

 

Like the auto sales in the next chart, let's be aware that we could be seeing some extra oomph from the hurricane reactions and the significant demand burst created from same (along with solid recovery from temporary swings in job claims during the storms).   However, it does suggest that the US economy continues to improve.

 

More important?  A similar index from the eurozone has been pointing higher for the past several years.  Don't look now, but the data suggest we are witnessing a synchronized global growth cycle.

 

 

 

As referenced earlier, car sales had been dipping as Gen Y trains the auto-world that it must adapt. The September data shows a nice bounce-back.  Again, be patient, this could be storm/insurance related replacements or some seasonal quirk, but it remains encouraging.

 

Huge change is coming though - and wonderful opportunity.  Note this release from Nvidia recently as it relates to the future of "movement":

 

 

 

 

It's Always the Same....

 

It is about choosing.

 

We always get to choose what we are going to listen to and take in as important.

 

It's the long-term current we need to invest upon - not the short-term waves which will assuredly always roll ashore to block the horizon.

 

Those waves are the noise too many get lost in...and the reason the long-term game is so hard to win based on fearful activities.

 

Play it Again Sam....

 

The earnings season is flowing - with a steady flow of beats - more on that tomorrow.

 

Expect more but pray for that correction.

 

I sure would like to see one.

 

In the end, like it or not, long-term investors have learned that Demographics Rule The Long-Term Game

 

Generation Y is set to do much greater things - far beyond what the Boomers accomplished.

 

Faith or fear?

 

They both ask of us the same quality:  To trust something we do not yet see.

 

Until we see you again - may your journey be grand and your legacy significant.

 

InvestingMike Williams