Friday, February 2, 2018

This Week's Second Message: My Thoughts From Last November

Don't know if you're at all rattled by today's "plunge" in stock prices, but, seriously, we haven't been kidding here on the blog when we've said that such action is long overdue, and, in fact, necessary for the ongoing health of what remains for now a bull market.

I keep a journal that I've found to be most helpful for my own keeping-things-in-perspective. Below is the 11/10/2017 entry (unedited, other than bolding). 

By the way the Dow today (after a 665 point drop) is 2,100 points higher than it was on 11/10/2017

You'll see in the following why this kind of volatility, given how we got here (the utter lack of volatility over the past year), along with the macro fundamental backdrop, is not something we're the least bit concerned about at this juncture.

I'll bold the pertinent parts:

Seems like sources I respect are talking more about over-boughtness, weakening breadth and expectations of, at a minimum, consolidation. Thing is, it’s November of a year that has seen the kind of momentum that typically bodes for remarkable gains during the last 6 weeks of the year; which happens to be my expectation.
The consumer, via a number of surveys, is outright promising to spend big time on Christmas. I suspect iPhone X’s are being ordered like mad; what a great Christmas gift for virtually anybody. That’ll translate to bullish moves in a number of ancillary players, not to mention Apple. While I’m less enthusiastic about tech -- given my expectations for the dollar going forward, and, after the end of this year, my expectation that it’ll be high-flying tech stocks that receive the brunt of what I suspect to be a healthy letdown (5-10%) sometime in Q1 -- I suspect the sector will do very well between now and year-end.
Again, my best guess is that the market loses some altitude early next year. However, our fundamental analysis would have to markedly deteriorate from what is currently its highest ever score before we begin moving to less growthy, more defensive, sector targets.
What could get in the way of my short-term thesis? Well, in terms of the market not seeing some selling early next year, it’d likely be policy measures: I.e., the passing of tax reform, the proposing of an infrastructure bill, and/or mass deregulating of the financial sector (if any of that could even get done in the next few weeks). Of course such “progress”, along with the prevailing macro backdrop, would do a number on bonds. And higher rates, while to an extent bullish for banks, will cause consternation in other sectors. 
Earnings will be fine, but by themselves, not enough to stem at least a mid single-digit % drawdown during Q1.
Beyond all that, the technical setup and our macro analysis looks strikingly similar to the mid-90s. Which simply means that this bull market lasting a couple more years+ is certainly within the realm of possibilities
Long U.S. Equties; Long Foreign Equities; Long U.S. Dollar; Long Industrials; Long Materials; Long Financials; Long Tech; Long Russia; Long India; Long Eurozone; Short UK; Short Bonds; Short Gold

In summary, recent action is of no surprise whatsoever to us here at PWA: We anticipated a pullback after the first of the year, more so in tech (which we lowered our target to late last year). If it didn't occur in early January it would likely be due to fiscal policy (like "the passing of tax reform") -- which, if indeed that was the reason, only delayed the inevitable for a month or so. We anticipated that the macro backdrop, and fiscal stimulus, "would do a number on bonds"; and bonds are getting creamed! And that, while bullish in some dimension (financials), a bond rout would cause consternation in other sectors; yep!  

I know there's a reader thinking, "then why didn't we maneuver around it?". Well, if we were truly market timers we surely would've sidestepped the market first thing January. Which means we would've sidestepped the best month for stocks in years. Then what would we do? Jump back in, only to then suffer the worst week in two years?

Nope! No playing with equity exposure amid an economy that is producing jobs, wages, corporate earnings, etc., in such positively-trending fashion.

Now, make no mistake, the day will indeed come when we're sounding a far less bullish tune herein. And it will be consistent with the prevailing macro trend(s) at the time, -- and we'll be adjusting our target weightings accordingly.

Thanks for reading!

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