I’m just going to say it:
This is by far the most bizarre investment environment that I’ve experienced in my 20+ year professional career.
This Bull Market has proven its resiliency time and again throughout its 8-year run. It has faced tremendous pressure and uncertainty in 2017, but very little has slowed it down. It’s not our job to be political. We stay away from that. But it is our job to interpret politics as it applies to your investments. It’s been quite a challenge. There is so much confusion and so many moving parts, which have been extremely difficult to analyze and understand where things are headed. Despite the increasing divide politically and socially in our nation, the Market has remained focused on pro-growth policies like tax-reform all year, even as it was looking less and less likely. But this week was different.
The Market’s Guy
The Bull got tripped up by a confluence of events, namely Corporate America walking away from the White House and more terrorist attacks overseas. Corporate America has been losing confidence in the President’s policies at a rapid rate and the mass exodus from the Corporate Councils, which led to complete dissolution, is a big reason why the strong gains for the DOW and S&P shrunk. Perhaps the biggest key is Gary Cohn, the President’s chief economic advisor, who was rumored to be considering resignation. Thursday’s selloff gained serious momentum when whispers circulated that Cohn was leaving. Gary Cohn is the architect of the growth plans and is widely considered the favorite to replace Janet Yellen at the Fed if she does not continue on next year. There has been massive turnover in the White House. For the Market, Gary Cohn probably matters most. As it stands, tax-reform and the other pro-growth policies are very much at risk. Without Cohn, they’re pretty much dead in the water. Gary Cohn is a Market guy. The Market likes Gary Cohn and does not like the prospects of his departure.
The S&P 500 saw only its sixth 1% decline of 2017 this week. It’s been over a year since it experienced a 5% selloff, something that historically occurs every 10 weeks. It has been way overdue for a snapback. We’ve already seen some cracks. The recent rally has not been broad-based. Leadership has narrowed sharply. Only 4 of the 11 S&P sectors have outperformed the overall index, and it has been dominated by Tech. The S&P is up 8% on the year, but the average S&P stock is only up 5%. The S&P 500 is naturally market cap weighted, and has been dominated by the 35% gains in Apple and 30% gains in Amazon. Small Caps are actually down on the year now. Energy has struggled mightily. The correction has begun.
Q2 Earnings Season is coming to an end, with over 90% of the 500 S&P companies having reported. It’s been very solid. Earnings have grown 12% year-over-year on the back of 5.5% revenue growth. Revenues are key, because it is the purest measurement of demand. It’s been strong. Corporate earnings have accelerated since the 2-year earnings recession came to an end last year. It’s earnings that drive stock prices, and these strong earnings should keep a tight floor under the Stock Market. But, the end of Earnings Season means the Market will be more susceptible to Geopolitical issues. And they’re certainly on the rise. Considering events surrounding North Korea, Russia, Venezuela and Spain, many around the world believe the US has become the biggest geopolitical risk. Think about that for a minute.
Normal Seasonal Weakness
We prepared for a correction. We wrote about it 2 weeks ago. We raised cash, we have used options as well as other Market hedges firmly in place. We also have heavy Gold positions, which are demonstrating strength. We are long-term investors who know how to deal with short-term risks. We’ve got one on our hands right now. It’s all about a strong defense. Historically, selloffs begin in August, accelerate in September and find a bottom in October setting up for a year-end rally. Though there has been nothing normal about 2017, we could definitely see this Market pattern play out. A correction was only a matter of time. It is normal and healthy, but never fun. We will get thru it just fine.
Have a nice weekend. We’ll be back, dark and early on Monday.