Monthly Market Update- December
Another terrific month for stocks as a fully diversified equity portfolio will have racked up a 3+% gain for the month of November. ‘Don’t Fight the Tape’ and ‘Don’t Fight the Fed’, two market forces discussed in full in prior Monthly Updates, remained fully operative and, as in October, important groups such as semiconductors and banks continued to lead. Indeed, all four major U.S. market averages – the Dow Jones Industrials, the S&P 500, the NASDAQ Composite and the Russell 2000 Small-Cap - made big new all-time highs in the last week of the month. I suppose one can quibble fractionally that the Dow Jones Transportation Average still remains below it September, 2018, high, thereby providing ‘non-confirmation’ for those who espouse the Dow Theory*. But since the Transports were generally in line with the Industrials in November, that’s merely a quibble.
November- A generally positive month for stocks
Unlike in October as well as in several other strongly positive months earlier this year, the ‘internals’ of trading volumes and breadth showed considerable improvement. Perhaps they weren’t perfect but a resolute bear would have to be in total denial not to recognize that stocks are generally acting just great.
Market “Melt Up”
Acting so well in fact that to me this past few months, and most especially the month of November, has seemed like a ‘melt-up’ for stocks, quite reminiscent of the same timeframe in late 2017 when Wall Street was anticipating passage of what became the TCJA (Tax Cuts and Jobs Act). A melt up is a sharp and sudden rise in the price of an asset class. During a market melt up, investors are buying first and thinking later.
The S&P 500 back then rose almost the exact same 11-ish% that it has since early August, 2019. Once the law finally passed in very late December, stocks then rocketed a further 8% to its late January high, before dropping a stunning 12% over the next two weeks. Then with considerable volatility, stocks ended all of 2018 down about 7%.
This is also not a massively different melt-up than the one we experienced in March 2000 (and the last six months of the bull market leading up to it). Admittedly, those numbers were much bigger, nearly twice the size percentage-wise, but back then we had the NASDAQ nearly doubling as it drove the S&P up 25% and today’s NASDAQ, FAANG-y as it might be, is nothing like it was 20 years ago. In fact, I would submit that the ‘melt-up monster’ that was ’99-’00 may not be replicated in my professional (or even perhaps physical) lifetime. It came at the very end of a near-ten-year positive economic cycle, as today’s economic environment may very well prove to be. We all know very well what happened afterwards, the morphing into a very, very serious bear market.
Investing is behavioral
Never mind those unhappy endings to those first two. What do these three (and there have been others of course but these are the most recent) have in common? In my opinion, it’s FOMO – the Fear of Missing Out. It is widely understood that the act of investing money is just as much a behavioral as it is an economic exercise. At the extremes are fear and greed, with of course fear being the more dominant. To paraphrase something well-worn in another context, ‘Hell Hath no Fury……than a Hedge Fund Manager behind his/her Benchmark.’
Allow me to elaborate
I’ve oft referred to high-octane algorithmic traders (the ‘algos’) as driving much/most/often all of the marginal change in stock prices. These are actually a fairly small sub-set of the Hedge Fund industry, which is in the aggregate a catch-all term for those active investors who attempt to ‘beat the market’ by utilizing as many trading strategies as Carter has pills (remember that phrase?). Because of industry-wide success long ago – way, way long ago (back to the early ‘00s) – the ‘hedgies’ have been able to charge massive fees** for managing primarily Big Money, institutional and high-net-worth, investors. They’ve had a terrible run, for nearly ten years, with 2019’s underperformance particularly glaring. Facing the prospect of such massive client asset redemptions that their very investment careers might be in jeopardy, these folks appear to me to have been driving full force into virtually any and every stock with a live ticker symbol, trying to play catch-up with an S&P 500 that, because of their buying frenzy, drives ever and ever higher. Melting Up, if you will.
They are playing in every stock market sandbox, so those volume and breadth internals, as noted above, have roared back, further adding to the fear-driven imperative. Those hedgies who started on the later side, say within the past few weeks, have been likely even more FOMO-affected. This is no trivial matter. When your job, indeed your very essence as a Wall Street-er, is on the line, you leave no trade untried, no stock unbought, and no nickel of available capital unused, even if it’s just to simply stay in place for 2020, with at least some of your clients still on board.
Are fears of a recession impacting buyers?
Of course, there has to be some at least perceived economic and fundamental analysis that provides the intellectual justification, or at least rationalization, for jumping into this buying mania. You might remember that it wasn’t all that long ago - the end of August - when fears of an imminent economic recession were in full sail. But since then, virtually all market-based recession indicators reversed solidly and, though still arguable in some ways, there have been some signs of stabilization within a domestic manufacturing sector that indeed suffered a severe Q2 and Q3 contraction. Because of the low interest rates as well as a monster-large millennial demographic now entering true adulthood, the housing market is red hot.
Consumer spending, so far anyway, has been really, really good. I can’t imagine we won’t as a nation be setting all sorts of holiday-spending records, even with the absolute shortest possible holiday shopping season (27 days, versus 33 last year) from Thanksgiving to Christmas. Clearly, sayeth the bulls, the economy is on the cusp of re-acceleration.
Add to that we have a very friendly Federal Reserve, seemingly totally committed to leaving interest rates well below targeted economic growth. By the by, the Fed seems to have been running the monetary printing presses full bore lately, putting much more cash on the banking system’s balance sheet, which in turn the hedgies are delighted to feast upon.
Private equity update
Also feeding at the trough of the great big monetary pit is Private Equity, those huge pools of private partnership capital who these days will seemingly pay any price to buy virtually any asset with a pulse, just to keep all that cash from burning a hole in their pockets. No fewer than five major buyout deals were announced in the last week of the month, several via PE. Today’s Wall Street Journal reports that PE unspent cash totals nearly $800 billion.
And, add to that, we have our anticipatory 2019 version of the TCJA, that of the maybe-yes/maybe-no U.S./China trade deal, to which I devoted a full paragraph last month. It is so, so anticipated right now, perhaps to the point that even if indeed it does happen, the melt-up already in the books will have largely priced it in. I could add another half-dozen less high-profile issues to this Wall of Worry*** that Wall Street is hurling itself over.
Quite frankly, for all us ordinary investing mortals, us Rightful Owners, it’s been, and so far continues to be, quite a terrific ride. Even if one’s (like mine) long-term investing discipline has created a small tactical underweight to stocks over the past bunch of months, the relative opportunity cost versus the absolute terrific absolute performance is barely a rounding error.
Will December 2018’s performance impact December 2019?
The December stock market debacle of 2018 was just so, so ‘last year’. Famous last words perhaps but I can’t imagine that, barring a total collapse in the U.S./China negotiations, we aren’t in for more of the same in December, 2019, that we just had in November, perhaps at a little bit of a reduced level. Over the past 90 years, stocks have advanced in December nearly three-quarters of the time, with the average rise close to 2% after a positive first eleven months. But maybe it won’t be so reduced, if indeed the hedgies keep on piling in and piling in, FOMO-ing all the way.
However I am not budging off of our modest tactical underweight for you, our clients here at KLR Wealth. In my opinion, in order to buy stocks here to being over-weight, at these elevated index levels, one must have near 100% confidence that 1) this trade deal must be signed, sealed and delivered soon, 2) that the bullish economic narrative must stay intact, if not get even better, and 3) that no other uncertainties upset the Wall Street applecart to even the slightest degree. On the first, it’s anybody’s guess. I’m not there on the second at all – I still worry about a baby 2020 recession. As for the third, did anybody say 2020 Presidential election? That said, as long as Wall Street wants to push higher, we’ll continue to enjoy the ride, and if, to mix my metaphors, the music suddenly stops, we have all the chairs we need.
Year-end approaches. I defer of course to our Wealth CEO, Peri Aptaker, and our outstanding Wealth Advisory colleagues for the execution of any client-specific tax-oriented strategies, such as for gifting and estate planning. Please let us know, sooner rather than later, if you have anything you’d like to do or even discuss.
We hope your holiday season is wonderful. We are always here for you.
*Discussed in the September Update, that the stocks of companies that makes America move must perform as well as those of the products that America makes, in order for the bull market to remain in force.
**’Two and Twenty’ – a 2% fee of all Assets under Management plus 20% of the ‘excess’ profits. Do the arithmetic on a $1 billion fund (that’s small by the way) up a ‘mere’ 10% versus its benchmark. I can live on $40 million a year.
***An old Wall Street saying that Wall Street ‘climbs a Wall of Worry’, meaning that the more negative issues are front and center, the lower stock prices already are, making it therefore far easier for stocks to rise than to fall. A truism to be sure, true unless it’s not.
Published on: 12.02.19