Last week saw stocks post impressive numbers as bulls ended a three-month stalemate. The Dow gained 2.2 percent. The S&P 500 rose 1.6 percent. The Nasdaq climbed 1.4 percent. And the Russell 2000 jumped 2.3 percent. Treasury bonds and gold weakened. And the dollar stabilized after months of weakness.
Why the positive returns?
Perhaps because Hurricane Irma did not turn out to be the beast the Weather Channel made her out to be. Or maybe it was Trump's effort at bipartisanship. Or headline fatigue related to Pyongyang. Regardless, patient investors continue to reap their due rewards.
One of our favored holdings, Nvidia Corp. (NVDA), surged to a record high Friday. Bringing its market cap to $108 billion. Five years ago, the burgeoning artificial intelligence giant was valued at only $6.9 billion. The incredible performance is a lesson to investors. As many chose to sell robust initial gains wrought by Nvidia's conquering of the gaming universe. Who could have foreseen their prescient and ultra-successful move into artificial intelligence, self-driving cars, factory robotics systems, commercial drones and cloud servers? Those who stuck around have been paid handsomely.
The Fed met yesterday. Few expected a rate hike. And they didn't get one. Not in lieu of the expected rebuilds after Hurricane's Harvey and Irma. It doesn't make sense to bump rates with the economic uncertainty emanating from the American Southeast and Southwest.
Regardless, global central banks remain accommodative. And savvy investors will continue to follow the signals and ignore the noise. Stocks are cheap. Fed policy is loose. The economy is growing. So long as "excess reserves" remain in the system, monetary policy will not threaten the recovery. And if it takes the Fed as long as we believe it will to fully tighten? This economic recovery could end up being the longest ever.
Two major catalysts sit on the horizon.
The first is yesterday's Federal Reserve policy announcement on "quantitative tightening." Which will begin soon. Unlike 'easing,' tightening represents the termination of a swollen $4.4 trillion balance sheet after years of bond purchases meant to stimulate the economy dating back to 2009. Investors appear largely unfazed.
The next catalyst heading into October will be hopes for a budget/debt ceiling/tax reform deal out of D.C. The skinny says Trump is looking to trade a softer immigration stance for increased infrastructure spending and middle-class tax cuts. A deal Democrats may be willing to make. The wildcard? Funding for a Mexican border wall.
Of course, Trump's recent dalliance with Democrats has enraged the Republican leadership, which seems to think they elected Trump. But they did not. In fact, they fought him at every turn.
Trump beat seventeen Republicans for the nomination. Nearly all of them establishment politicians. And he won a new coalition of voters by appealing to groups which Republicans typically avoid. Trump has never been viewed as the Republican Party's leader. But as the leader of the government. And in the ongoing political branding game, he just scored big.
Congress sports approval ratings of 8-13 percent. McConnell's ratings in Kentucky are at 18 percent. Trump's numbers are 36-45 percent, depending on which poll you consider. But his numbers are rising. And the military, with which Trump has aligned himself, has 70 percent approval ratings.
Suddenly, one begins to get a sense of the power games being played. The more Trump pushes for military spending while pushing against establishment political dogma, be it Democrat or Republican, the more he wins.
In a recent Rasmussen poll, 66 percent of likely voters welcomed Trump's outreach to Democrats. Only 19 percent believe Trump should rely on Congressional Republicans to pass his agenda. Leaving his GOP colleagues, whom had only been too happy to besmirch and ignore him, out upon the frozen tundra of political uncertainty. While the tide of voter approval continues to move his way.
Resultantly, Congress will be forced to move faster. Which Trump wants. As Congress had chosen to simply do nothing. Suddenly, a tax cut becomes much more likely. A military build-up has already begun. Trump will have his way with Fed appointments. And trade? The low Dollar is America's best weapon in the trade wars. He'll let it fall. Until the other side of the trade is more willing to deal. North Korea? A war increasingly appears to be very unlikely. We expect plenty of noise, but no war.
All of which is being priced in by the markets. So, when juxtaposed against all the gurus warning of the travails that lay ahead? These markets must be going higher. Nor would be surprised to see the U.S economy follow with an upside surprise.
Which wreaks of opportunity.
If corporate earnings move to $150 on the S&P 500. At a P/E multiple of 18x? Markets will price in the 2,900-3,000 level. Nor does that include the benefit of a lower Dollar. Which will likely be the case for the next few years.
The total gain for the S&P 500 since the start of the latest bull market is 269 percent. That's a lot, but analysts at Bespoke Investment Group point out it is only 16.9 percent annualized. An unremarkable historical pace for a bull market. While the current bull cycle remains the second longest in history, it has by no means been the strongest. Great news. As it can still intensify while remaining within historic norms.
Meanwhile, the American Association of Individual Investors (AAII) sentiment survey showed bullish opinion among individual investors to be less than 40 percent for the last 34 weeks. The level of bulls in the survey just inched up to 41.3 percent. Even with that move, bullish sentiment among independent investors remains under 50 percent. Where it has been for 141 straight weeks. Meaning that stocks have hit record highs without the support of individual investors.
Imagine where the indexes could go when the public climbs aboard?
Geopolitically, last week's North Korean missile launch over the Sea of Japan has dominated headlines. Though the market impact has been muted. In fact, the S&P 500 Volatility Index ($VIX) was down three percent last Friday. The lowest level of September. Proving that investors are cool with current conditions.
Perhaps they sense the rising deterrence afforded by the nation's growing military might?
As we've long touted, defense contractors continue to provide fat profits to prescient investors. Nor will that opportunity end soon. As Tuesday saw the Senate pass a $700 billion defense bill. $80 billion more than last year's appropriation. Moreover, the National Defense Authorization Act passed by a vote of 89-8.
Now that's bipartisanship!
We've long loved defense stocks. Because in times of financial and consumer uncertainty, preparation for war never ends. Name the threat, and one quickly finds that defense stocks participate in its mitigation.
Terrorism. Cyber-security. Border control. Nukes. Drones. Drugs. On land, sea, air and space. Red state or blue. Defense contractors have it covered. And politicians love to express their macho patriotism by bolstering defense spending.
Moreover, the defense industry is consolidating in ways that will drive share prices even higher. Northrup Grumman offered to buy our space-defense position, Orbital ATK (OA) at a 20 percent premium (Thank you, NOC!). And United Technologies (UTX) will pay $23B for Rockwell Collins. Representing another 20 percent premium.
Such consolidations will build pseudo-monopolies. Not to mention fat profit margins. And with robust earnings growth, defense stocks remain reasonably valued. With many of our favorites still valued alongside or less than the S&P 500 index.
Over in the Swamplands, Mueller's Russian probe has been largely operating outside the public's eye. Like an ominous cloud looming just beyond the horizon. Currently, the probe is trying to understand how Russian spies used social media to influence voters. And how the Trump administration may be implicated in those efforts. Though social media is not illegal. So we're having a hard time making the connection.
By way of unwanted news, a subway attack in London injured 18 people and is being considered a terrorist attack. It represented the fifth terrorist attack on Great Britain this year.
And a quick recommendation...
I recently read a book entitled, "The Obstacle is the Way." Written by Ryan Holiday, the book is a modern-day summation of the stoic philosophy. Explaining how its adaption can help to right your mind. And conquer whatever has been impeding your path to success. This video provides an excellent eight-minute animated review. For most, the video and the book will be time well spent.
Also, readers of this missive know that we've been following the lectures, books and white papers of Canadian clinical and academic psychologist Dr. Jordan Peterson. Who has been releasing a series of YouTube videos that deal with everything from the culture wars to art and existentialism. Peterson is an articulate polymath who leads with reason and logic. He recently appeared on The Joe Rogan Experience (again). And like other such appearances, this is well worth checking out (here).
Finally, we wanted to congratulate our friends at Integrity Express Logistics. IEL has ranked among the fastest growing companies in the region for more than five years. Last week, they moved into and cut the ribbon on their beautiful new facilities in Blue Ash. It was a great morning featuring such local IEL fans as Bengals HOFer, Anthony Munoz. Wishing the team at IEL continued success.