7/26/2017
By Charles Payne, CEO and Principal Analyst

Co·nun·drum

noun

a confusing and difficult problem or question.

"one of the most difficult conundrums for the experts"

synonyms: problem, difficult question, difficulty, quandary, dilemma; informal poser

"the conundrums facing policy-makers"

The current conundrum for so many people is whether to get back into the stock market that’s trading at an all-time high.  It’s easy to understand the anxiety associated with such a decision at this time because millions of Americans lost billions of dollars in stock market crashes that happened just seven years apart.  One of the reasons why so many lost so much is that they panicked, and lost faith in the system (which is a legit concern) and the companies in their portfolios.

A lot of those companies have been around a century or longer and have demonstrated the ability to adapt to changes even while their underlying share prices sagged for years. The bottom line is they didn’t go out of business. I’m sure some are saying to themselves ‘What about Kodak? Look at Sears; I would say you are right, but I bet as a consumer you stopped using Kodak film and shopped at Sears long before the bottom fell out of their respective share prices.

The moral of the story: most folks know what’s happening long before the news reaches the ivory tower and fancy spreadsheets of Wall Street.

Anatomy of Two Rallies

Much has been made about the Trump Rally versus the Obama Rally with progressives that normally hate the stock market and paint it as a proxy for wealthy Americans, not a reflection of the mighty and the production of the American worker- they’re chiming in all the time how good stocks performed under the latter.  It is true the stock market put in a remarkable performance while President Obama was in office, but there is a distinct difference between the two rallies.

Valuations were a lot lower when President Obama came into office than they were for President Trump, reflecting an oversold opportunity to one this time that moves past survival mode and gets back to the premise of America, the economic powerhouse.

The U.S. stock market also benefited from being the best of the worst as money poured into our stocks and bonds as the rest of the world smoldered, and Europe was being forced to accept a form of austerity that was disingenuous but monumental for nations such as Greece, which had practiced zero economic discipline after decades of reckless spending and runaway debt.

The Post-Panic Rally (Obama Rally)

When President Obama was elected on November 4, 2008, the stock market was already amid a historic meltdown. The S&P 500 hit an all-time high on October 11, 2007, at 1,576 and closed at 1,046 when the polls closed.  The election might have reflected the will of the people invested that weren’t convinced, and the sell-off continued through the inauguration to March 9, 2009, when the index closed at 676.  This was the essence of a stock market panic. 

The meltdown of the stock market was the worst since the Great Depression; the underlying fundamentals were not the worst, but it was sheer panic.  Ironically, ‘the powers that be’ decided to stop calling the collapses a stock market panic, thinking it stoked the cycle of fear.  As the nation was dealing with the transition to the industrial revolution and consumerism, the market got ahead of itself from time to time and often policy mistakes triggered or exacerbated circumstances for the worst.

• Panic 1837
• Panic 1857
• Panic 1873
• Panic 1893

The Panic of 1907 led to the creation of the Federal Reserve in 1913, ostensibly to stop the boom and bust cycle of the American economy, or it was more probable to protect the generational wealth of a few families and banks. During the Obama presidency, the Federal Reserve swung into action with an assortment of schemes that mostly resulted in buying all the toxic junk off the books of big banks and leaving nothing for Main Street. The economy only began to really regain organic footing in the summer of 2016.

These moves helped to offset President Obama’s massive onslaught of regulations that resulted in 494 economic significant regulations (including 31 after the November election), costing the economy $100 million or more that crippled business investment and entrepreneurship. Big money either stayed overseas or got plowed into share buybacks.

President Trump has come into office with a blizzard of Executive Orders and Memos to undo the billions of dollars in economic damaging regulations. Those speed bumps are already having a positive impact, but there are brick walls that will need Congressional help to bring it down.  Moreover, there is the growth economic agenda that would add rocket fuel to an economy that has already lifted off the launching pad.

Reborn Greatness Rally (Trump Rally)

While the Gross Domestic Product (GDP) growth was mired at a sub 3% growth, corporate earnings made a bottom and are now regaining momentum.  It’s been three-quarters in a row with year-over- year profit gains; and now, the big test would be to take out the record high of $1,703 billion from third-quarter 2014 (3Q14).

To be sure, some of these gains reflect a rebound in the global economy, including surprisingly stronger results in Europe during the first quarter.  Like the broad economy and the stock market, the second half of 2017 will need the U.S. consumer to step up to the plate; an increase in corporate capital investments – major projects that create immediate building jobs and longer-term employment platforms (I think major oil rigging platforms on and offshore or new factories).

Optimism Begets Optimism

Optimism rocketed across all measures from businesses large and small, to homebuilders and to consumers. A series of miscues on Capitol Hill paused on optimism; while it’s pulled back, it remains at elevated levels. 

Small business, in particular, is impressed and hopeful that the regulations affixed to their larger richer counterparts will be removed, allowing them to continue their role as the largest job creator (60% of new jobs) and small-town economic incubators.

I think businesses can hold off on turning their optimism sour even if major parts of the economic agenda are put on hold until 2018 (even late 2018).

Yesterday, we saw a sharp rebound in consumer confidence, and that’s driven by real economic improvements from jobs to wages.  

Where to Invest?

The dilemma is whether to chase performance -which is a strategy that has worked out well -or to find laggards in the hopes that taking profits in momentum darlings will result in a rotation into underperformers.  In the last week, I’ve noticed brick-and-mortar retail staging a comeback, although it’s too early to know if this is the base for a longer-term rebound or an oversold bounce.

Department stores are probably trading ideas, but there are brick-and-mortar names that are buys for investors prepared for some near-term volatility. I think all long-term investors should have some exposure.

A month ago, tech flagged and funds clearly shifted into financials. The S&P Financial Index (XLF) is up only 7% year-to-date - there is an opportunity there.

I think the big banks will do fine as the fed hikes rates, but I see regional banks outperforming. The KBW Bank Index (BKX) is the best gauge for regional banks and it is on the cusp of a major breakout.

As for energy, the S&P Energy Index (XLE) is down almost 14% year-to-date; crude inventories have begun to decline at a greater pace, and there are signs of potential demand increases - especially from China.  There are a couple of ways for exposure:

1. Large cap names with strong dividends
2. Smaller names that survived the onslaught

Material stocks will benefit from the cheaper dollar helping to drive commodities, including copper prices. It’s the demand component that will really make the difference. The full-year guidance from Freeport-McMoRan (FCX) might have placed a base of support for a rally into the remainder of the year.  Material Index (XLB) is up 11% for the year, but it has a lot more room to the upside.

Technical Breakouts and Short-Term Trading

Another investing technique investors should consider is chasing breakouts, moves to new all-time highs, or coming off the bottom of channels with convincing volume. This kind of trading can be very rewarding, but it requires serious discipline (read: the ability to take losses and not get bogged down with what-ifs and hesitation).

Conclusion

We are in a rally that reflects material improvement in the economy that has the potential to be long- term sustainable growth that moves the needle in wages and encourages corporations to invest in America.  Lower taxes and fewer regulations help, but organic growth is infectious and the best economic elixir around.

I cannot say there will not be corrections, although the notion it’s “due” is the kind of hunch that has caused a lot of people to miss the rally.  I don’t see the market crashing as valuations aren’t exorbitant.  Anything can happen, but what is happening is good stuff that’s edging toward great stuff.

I think it would be a shame for folks to miss not only this rally but also the potential for American greatness for years to come. 

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Understanding Your Goals…Understanding Yourself

In an ideal world, we would all buy and hold stocks forever understanding the cyclical nature of the economy and stock market.  I’ve read every single issue of Forbes 400 Richest list issue since its inception, and the one concurrent theme is ownership – most of the folks on the list have assets that increased in value and earn money for them when they are sleeping or frolicking on a beach.

Of those assets, much of the wealth is steeped in stock ownership.

Even as a young teenager growing up in Harlem in the 1970s, I equated wealth with Wall Street.  I think everyone makes that connection at an early age, too.  But people also equate stock market crashes, insider trading, and an unleveled playing field with Wall Street.  I have always stressed to any would-be investor to separate Wall Street, that psychical location on the tip of Manhattan, from the great family restaurant you take your family to twice a week and wish you owned.  Because you can own that restaurant and most of the great businesses where you spend your hard-earned money.

There are keys to investing beginning with your goals and your mentality.  Buying and owning stocks is about emotional quotient as much as intelligent quotient.  This is not to mean the market will morph to your anxieties, but there are approaches that could mitigate those anxieties and let you sleep at night. 

But keep in mind, there are risks, and there will be challenges, it’s not a random walk or stroll in the park. 

Help me help you. 

Let’s begin with your goals and expectations.

1. What percentage annual return are you hoping for in your portfolio?
2. How would you describe your current approach to investing?
   • Fundamental
   • Short-term trading/technical
   • Tips from TV and other sources
   • No approach
3. How much of a paper percentage loss interrupts your daily life and keeps you awake at night?
4. Have you ever sold stocks in a panic or out of anger?
5. Are you holding losing positions from several years ago – waiting for them to come back before investing again?
6. Did you buy one or two stocks years ago and close them at a loss concluding the market isn’t for me?
7. Do you have money in mutual funds that never seem to move even as the market soars higher?
8. Do you have a financial adviser that never beats the market, but you are reluctant to leave for a variety of reasons?

Here is the rub when it comes to investing.  To be successful, it must be a long-term endeavor.   This isn’t to say you will always have all your funds committed to stocks, but you are connected to news and developments and positioned to buy and sell.

Hindsight is fine as a learning exercise but not to become mired with doubt that stops forward progress.  One of the biggest mistakes investors make is dwelling on a big loss, or holding broken positions, and refusing to take on fresh positions.

This always hurts investors during market meltdowns when they are holding when they should be selling- which is what understanding is about, but it is compounded when they refuse to buy a market that is now substantially less expensive. 

Other Key Mistakes Investors Make

Determining value in share price and buying a lot of shares while ignoring “expensive” stocks out of your price range is a classic mistake.  In my opinion, most stocks under $10 are overvalued and most over $100 a share are undervalued.  Beyond that generalization, the fact of the matter is that buying a lot of shares doesn’t make you a tycoon and actually puts money at more risk than they want to take. 

If you buy one share of a stock that doubles in a year- you’ve doubled your money.  If you buy 10,000 shares of a stock that goes down 50% you’ve lost half your money.

When people tell me they didn’t buy a stock because they could only get a few shares, a big red flag begins to flash.

Beyond buying a lot of shares, the other classic mistake is buying one stock to see how it works as if a single stock reflects the entire market.  Ironically, people taking this approach do so because they think the market is gambling – gambling is putting all your eggs in one basket.

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Charles Payne

Founder, CEO, & Principal Analyst

Wall Street Strategies

Charles Payne
Wall Street Strategies

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