Keep On Truckin'
“What a Long Strange Trip It’s Been” The Grateful Dead
If you are over 40 this lyric likely doesn’t need further explanation. If you’re over 60 you’re likely humming this tune in your head. If you’re a millennial, we will need to explain. This music comes from a time when bands used musical instruments instead of synthesizers to create their sound. Lyrics were the product of tortured poets, not suits in corporate management. Before any of our millennial friends decide to reply with a snarky response, our reply back will remind you that your generation gave us Nickelback. We will rest our case and you will hang your head in shame. The song Truckin’ was first released in 1970 and the song’s climactic refrain “what a long strange trip it’s been” has become a popular expression in our culture. This song was recognized as a national treasure in 1997 by the United States Library of Congress. The song captures the spirit of a journey that is often difficult and confusing, but ultimately arrives at the intended destination. The Dead is renowned for their guitar riffs. In that spirit, we will riff about markets. Domestic stock markets just keep on truckin. The S&P 500 and Nasdaq closed at all-time highs Friday. This was our intended destination, but what a long strange trip it has been. Our trip started on March 9, 2009. Along the way many strange things have happened.
Let’s start with the perma-bears, and there are a lot of them. This bull market is often referred to as the most hated bull market in history. The Bears are beside themselves. They insist this bull market is rigged and it must end badly. The perma-bears point to the Fed and the Central Banks of Europe and Asia and their ultra-easy monetary policies. They argue easy money and low interest rates make bonds unattractive for investors. It allows for corporate buyback of stock and cheap borrowing by investors. Many economists in the perma-bear group keep promising us a recession. Eventually they will be right, but for now these economists explain, “we are not wrong, we are just early”. Demand side economists economists have warned us about supply side “voodoo” economics. Many geopolitical fears have come and gone during this bull market. The threat of nuclear war with North Korea, tensions with Russia to name a couple. At home, political discourse has many investors worried. Perma-bears also have global economic fears about slowing Chinese growth and an anemic European and Asian economy. So much to hate, so little time. We are understanding of the parma-bears' concerns. They have legitimate concerns. Ironically, we believe it is the perma-bears that are allowing this bull market to continue for so long. Without the “wall of worry”, it is almost certain that this bull market would have become overbought before now. The wall of worry has tempered investor emotion and not allowed for overvaluation. To the contrary, we have seen multiple large sell-offs during this bull market. Most recently we sold off 19.8% during Q4 of last year, not quite reaching the 20% threshold that would officially end the bull market. Rightly so, these sell-offs spook investors and keep dry powder on the sidelines for the next move higher. Our belief is that this bull market is being driven by rising earnings. While the Q1 earnings season is not yet over, so far companies are reporting higher than expected earnings. This is not surprising. As we wrote in our February commentary Season's Greetings, “let's first talk about an amazingly strange but consistent tendency earnings analysts have displayed over multiple earnings seasons dating back many years. Analysts have a tendency to be too optimistic well before earnings season. As earnings season approaches, they become more realistic and start cutting their estimates. Then right before earnings are released, they usually become too pessimistic, and lower estimates further. This leads to companies usually beating these more cautious estimates.” Once again this appears to be the case for the 2019 Q1 earnings season. To be a successful investment manager, we believe we must also focus on why we might be wrong. We took a deeper dive into the sectors of the S&P 500 to explore our thesis that earnings are the reason the market is moving higher. The chart below shows sector returns since the start of the bull market. Consumer Discretionary (+658%), IT (+593%), and financials (+443%), are leading the way. Energy (+63%), communication services (+91%), and utilities (+156%), have been the laggards. Overall the S&P 500 is up close to 400%.
The same can be said for the earnings growth of each of these sectors. Consumer Discretionary (+559%), IT (+319%), and financials (+234%), are leading the way. Energy (-.8%), communication services (+16.7%), and utilities (+25.6%), have been the laggards.
This gives us comfort. We are not dismissive about the Bears' concerns, we just believe the Bears are over-thinking, and in some cases being stubborn or bias, about the underlying fundamentals. The economy is good, earnings are good, and markets are not overvalued. Markets have risen faster than earnings and valuation has moved from undervalued to fair value. Without further multiple expansion, markets would be expected to move higher at a comparable rate to earnings growth, somewhere in the 5%-8% range. This bull market should continue until we have a recession or markets rise so much that they become overvalued. We don’t believe either is imminent. Before signing off, we want to inform you of a change to our website. Our market commentary that you receive via email is also posted under our insights tab on our website. Our market commentary is designed to give a select group of clients and friends of GreenPort access to our thinking and our portfolio positioning. We want that to continue. Our insights tab has been experiencing unusually high traffic. Some of that traffic appears to be taking advantage of our proprietary thinking and using our insights as their own. We have set up a very straightforward and simple solution. You will continue to receive emails with our insights. However, if you would like to access our insights tab please go to our website, click on insights, and sign up as a new user. We will instantly recognize your email address and allow you access. You will only have to do this once, after that you will be recognized. We apologize for this inconvenience. We trust that you understand our work is meant for your benefit, not other advisory firms. Keep on Truckin’ The GreenPort Team