The Dirty Little Stock Market Secret

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by: Wade Slome, CFA

Shhhh... don't tell anyone, I have a dirty little secret. Are you ready? Are you sure? The world is not going to end... really.

Despite lingering trade concerns (see "Trump Hits China with Tariffs on $200 Billion in Goods"), Elon Musk being sued by the Securities and Exchange Commission (SEC) for tweeting his controversial intentions to take Tesla Inc. (NASDAQ:TSLA) private, and Supreme Court nominee Brett Kavanaugh facing scandalous sexual assault allegations when he was in high school, life goes on. In the face of these heated headlines, stocks still managed to rise to another record in September (see "Another Month, Another Record"). For the month, the Dow Jones Industrial Average climbed +1.9% (+7.0% for 2018), the S&P 500 notched a +0.4% gain (+9.0% for 2018), while the hot, tech-laden Nasdaq index cooled modestly by -0.8% after a scorching +17.5% gain for the year.

If the world were indeed in the process of ending and we were looking down into the abyss of another severe recession, we most likely would not see the following tangible and objective facts occurring in our economy:

  • The New Revamped NAFTA (North American Free Trade Agreement) 2.0 trade deal between the U.S., Mexico, and Canada was finalized (the new deal is called United States-Mexico-Canada Agreement).
  • Leading Economic Indicators are at a record high (a predictive statistic that historically falls before recessionary periods - in gray).

(Source: Yardeni.com)

  • Unemployment Rate of 3.9% is near a record low.
  • Small Business Optimism is near record highs.
  • Consumer Confidence is near record highs.

(Source: Scott Grannis)

  • Corporate Profits are at record highs.
  • Interest Rates remain at historically low levels despite the Federal Reserve's actions to slowly migrate their interest rate target higher.
  • Economic Growth (GDP) accelerating to a +4.2% growth rate in the recent quarter.

(Source: Scott Grannis)

Are we closer to a recession with the stock market potentially falling 20-30% in value? As I have written on numerous occasions, so-called pundits have been falsely forecasting recessions over the last decade, for as long as this bull market has been alive (see "Professional Double-Dip Guesses are "Probably" Wrong").

Why so much investor angst as stock prices continue to chug along to record levels? One reason is investors are used to historically experiencing a recession approximately twice a decade on average, and we have yet to suffer one since the Great Recession around 10 years ago. While the mantra "we are due" for a recession might be a true statement, the fact also remains that this economic recovery has been the slowest since World War II, which logically could argue for a longer expansionary period.

What also holds true is that corporate profits already experienced a significant "profit recession" during this economic cycle, post the 2008-2009 financial crisis. More specifically, S&P 500 operating profits declined for seven consecutive quarters from December 2014 through June 2016. The largest contributors to the 2014-2016 profit recession were collapsing oil and commodity prices, coupled with a rapid appreciation in the value of the U.S. dollar, which made our exports more expensive and squeezed multinational corporation profits. The stock market eventually digested these profit-crimping headwinds and resumed its ascent to record levels, but not before the S&P 500 remained flat to down for about a year and a half (2014-2016).

Doom-and-gloom, in conjunction with toxic politics, continue to reign supreme over the airwaves. If you want in on a beneficial dirty little secret, you and your investments would be best served by ignoring all of the media noise and realizing the world is not going to end anytime soon.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2018).

Disclosure: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in TSLA or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.