Much has been made about the record amount of money exiting mutual funds last week.  Most observers are saying the $24.0 billion is part of the larger tranche of $100.0 billion that came pouring in at the start of 2018.  Sadly, those same observers have taken to calling these whipsawed would-be investors “dumb money,” suggesting their timing is always wrong and that the market is no place for them.

Beyond the fact that this is insulting (and to be frank), it’s really wrong because there is a larger narrative at play. 

The shakeout of so-called dumb money reflects a greater war in which the elites want certain privileges to themselves, especially owning and controlling the stock market.  

So, when you say, “every time I get in the market, it goes down,” perhaps that’s not your imagination; perhaps it’s not bad timing or dumb luck, either.

First, let me state this fact to everyone that has ever thought that the stock market was out of their reach and simply not for them: you are already in the stock market.

The moment you hit the snooze button on your alarm clock, put on your jogging sneakers, grab a cup of coffee, hop inside the car, and use the latest gizmo to avoid traffic, you are knee-deep in the stock market.

Each year, Forbes releases its list of the 400 richest Americans and states the source of their wealth, which includes hardware, software, retail, industry, casinos, coffee, and sneakers, to name a few. What they all really have in common is their stock ownership as the source of their wealth.

These people don’t dump their stocks because wages edged higher for the first time in years, or that the Fed must slowly unwind its balance sheet, or because the U.S. dollar is too weak. They make adjustments and diversify; for the most part, they never sell and in death, a trust maintains ownership for the next generation.

My message is don’t be the “dumb money” they claim you are with knee-jerk reactions based on near-term panic.

In fact, most of these folks look to the stock market for fresh investments like Oprah’s big investment in Weight Watchers, which has climbed to $70 from $10 in the last year and half, but only after losing 62% of its value in the six months prior.  Oprah didn’t panic.  If you’re using Weight Watchers, and told friends and family members to use it, then it doesn’t make sense you if don’t own the stock.

WTW

Beyond the Hysteria

When local television starts with an update on the stock market, you know it means there is turmoil on Wall Street. No local broadcast would begin with an update on trillions in wealth generated by the market. That said being said, even the financial media missed some critical news last week.

I know it’s not fashionable to talk about facts when it’s so much fun to speculate and point fingers, but we are now 68% through earnings season. It has been one of the best ever and completely ignored unless it was a rare company that missed and paid a steeper price than usual. 

Moreover, this earnings season is shaping up to be one of the best ever!

Sales

• 79% beat estimates record since FactSet began tracking in third-quarter 2008 (3Q08)
• 11/11 sectors beating estimates
• Blended sales +8.0%
• 1.6% above consensus beat – record

Earnings

• 74% beat estimates
• Blended earnings +14.0% from 13.2% last week and against 11.0% estimate

Forward-Looking

• First-quarter 2018 (1Q 2018) revenue growth +7.4% earnings growth +16.9%
• Fiscal Year (FY) 2018 revenue growth +6.5% earnings growth +18.5%

For the year, the Street is looking for 6.5% sales growth and 18.5% earnings growth, which increasingly looks too conservative.

Consequently, the fact the forward price-to-earnings (P/E) ratio has drifted to 16.3% means it might be below the five-year average of 16.0%.

Corporate profits are the ‘mother’s milk of the stock market, and this year should be phenomenal, which is something to consider when you’re ready to follow the herd over a cliff.

Message of the Market

The market exhibited real spunk last Friday because rallying into the close on any Friday is noteworthy, but after what was shaping up to be the worst week in a decade, it was remarkable.

Market Breadth told the story of Friday’s grit, but the week’s carnage.

On the NYSE, advancers led decliners; up volume was 110% better than down volume, but only 9 stocks hit 52-week highs, while 357 stocks finished at 52-week lows.

I wanted the Dow to close above 24,200, but I’ll take it where we finished as mission accomplished because, for all the talk of machines, yields, and the fear index, there will be a moment when the behavior will shift and that would be a great buy signal. 

Volatility has been unlocked, so don’t expect smooth sailing anytime soon, but remain focused on the underlying fundamentals. It could be a dent in consumer confidence and some negative wealth effect. We have an economy that augurs for higher stock valuation once the dust settles, and even in the midst of it being kicked up.

Today’s Session

Equity futures have been higher all night and morning, although, coming in as the market drew closer to the opening bell.  It’s the same pattern we’ve seen exacerbated by all the yapping aimed at trying to pinpoint bottoms and warnings of further impending doom.

The ten-year yield hitting 3.0% will be the big test for those that think it’s the ultimate hurdle for the stock market, a contention I continue to find puzzling.  However, if enough people say it so much, it becomes real, at least for a moment. 

All eyes are on President Trump’s budget and infrastructure plans today.  There is now talk of Trumponomics emerging, which takes a business-like approach to growing the government. This approach includes higher debt while the economy is in growth mode in a bid for outsized GDP gains.  Distinct differences between this approach and the $10.0 trillion in debt added under former President Obama is the removal of regulations and much lower taxes, which should allow for greater velocity of money to generate opportunities and more shared prosperity.

It’s a new approach and its premature to shoot it down considering the conventional approach in Washington left the nation with anemic growth and astronomical debt.

 

Comments

2-12 morning commentary is Excellent! Jim on 2/12/2018 10:03:15 AM

Good comments -- all true in my view. (my comment---Keep both eyes wide open and success is in reach for all.) John Cowger on 2/12/2018 11:02:13 AM

Charles, this is such a great observation about long-term investing. Spot-on as usual. David Lewis on 2/12/2018 11:47:10 AM

Thank you very much David appreciate it. CP Charles Payne on 2/12/2018 11:49:33 AM

Interest rates are still historically low. companies have plenty of cash on hand. Many wont be borrowing especially on increased sales they expect. They all have an additional monies from the tax cut in their hip pockets. Last week seems entirely sparked by Bears complaining loud enough about the run up. Dave on 2/12/2018 3:12:28 PM

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