Well, first, of course, I want to wish everyone a Happy New Year. I do hope that 2017 was a good one, and you have my wishes (well, most of you do, anyway) that 2018 will be even better. But first we gotta get through this New Year’s Eve thing, right? And of course I’m spending it like I have every Sunday since time immemorial: sending out this silly note to a readership that has stuck with me through thick and thin (well, most of you anyway).
But (as sung by everyone from Ella Fitzgerald/Louis Jordan to Dinah Shore/Louis Jordan) Oh baby it’s cold outside. And getting colder. My research reveals that multiple parts of the country are already experiencing record low temperatures, and that a rapidly moving, incremental arctic blast that will hit contemporaneous to our seasonal rituals will render the Times Square Ball Drop the coldest one in history. I could go through an inventory of frigid temperatures expected across the fruited plain, but would rather lay the following picture on you of a Niagara Falls that is, for all intents and purposes, frozen:
So I reckon when I finish these infernal emails, I’ll just stay home. And watch me some football.
Touching on football, and with a dollop of irony, today marks the 50th anniversary of 1967 NFL Championship Game, a contest known to gridiron fanatics as the Ice Bowl. The game took place in Lambeau Field, Green Bay WI, with temperatures throughout hovering around negative 20, and wind chills doubling that carnage. In what would prove to be the final gasp of a magnificent dynasty, the Packer’s won: 21-17, on a last second touchdown by Bart Starr, who rolled into the end zone rather serenely after Guard Jerry Kramer managed to push Cowboys Defensive Tackle Jethro Pugh a couple of yards into the end zone.
It is the first football game I ever recall watching – at least with any awareness of the proceedings.
But here we are, 50 years later, freezing our asses off, and the NFL regular season just ending today. The Super Bowl is a month off, and though it will be played in Nordic climes of Minneapolis, participants will experience the relative comfort of practicing their craft in a new-age indoor area, the naming rights of which belong to regional banking behemoth U.S. Bank Corp. While the specific contestants have yet to be identified, we are able to state with certainty that neither the Green Bay Packers nor the Dallas Cowboys will have made the cut.
Yup, a lot has changed these two generations, and, to borrow from the magnificent Lewis Carrol, matters, from a certain perspective, keep getting curiouser and curiouser. No, unlike the lovely Alice, we do not observe our bodies elongating, like a telescope, to the point where our feet are no longer visible, but that don’t mean we aren’t lurching up the curiouser scale.
Case and point (and here I’m looking for a show of hands): who, going into the beginning of the year, had the SPX closing at 2673.61? Now, don’t be shy; faint hart, after all, never won fair lady. Howsabout the U.S. 10-Year at 2.41%? EURUSD at 120.00? The Dollar Index down from 103 and change to 92.30?
OK, here’s an easy one: who had Bitcoin at $12,314.70?
Who, for that matter, had the I-Phone replacement battery discounted to $29 – after the Company got caught red-handed having sabotaged the original power sources on older models? And, for what it’s worth, what did my buddy Joe know about this?
But hey, that’s the kind of year it’s been. The Gallant 500 fell about half-a-league short of everyone’s fondest hopes, but still managed to gin up a >19% gain for the year. Perhaps in a nod to those frozen football warriors of 50 years ago, it was outpaced by the quaint, anachronistic Dow, which not only rose 25%, but did so on Lilliputian volatility of 6.6%, and sub-atomic Downside Deviation of 4.0%. At no point during the year did the Dow, the SPX or the NDX print a single trade at a price below its closing 2016 threshold. Somebody check me here, but I don’t think that has ever happened in modern market history.
As mentioned in previous installments, this type of performance is decidedly not the norm. Most investment pools are fairly content with 10% annual benchmark returns, and expect to accumulate these in a volatility range, both upside and downside, in the mid-teens. So, for our favorite indices, we’ve managed to stroke double the performance bogie on about 1/3rd of the expected volatility. Extraordinary.
So what can we do for an encore?
In reasoning with my learned colleagues, I find that there is a consensus (to which many of said learned colleagues do not adhere) that we ain’t done yet. My thrice-mentioned learned colleagues are more wont to look down their collective noses at various valuation metrics, all of which seem to suggest that: a) a downfall is in the offing; and b) all that remains in doubt is its timing.
Well, on balance, I agree with them. The bible (specifically Proverbs 16:18) instructs us that pride goeth before the fall, and let me ask you: has there ever been a more prideful investment environment than the one we are now experiencing? Well, OK, I’ll spot you the late ‘90s, but that’s exactly my point. By my count, the late ‘90s ran all the way through December 1999, and even then the valuation boilers were running at full throttle. It wasn’t until mid-spring 2000 that they began to overheat and eventually cool considerably.
So yes, the market will need to cool its jets, but if you’re gonna ask me when this cooling takes place, my best answer is not yet. One can view this as a grubby “consensus” opinion, but to my way of thinking, sometimes going with the consensus, and, while doing so, thumbing one’s nose at the “anti-consensus”, is precisely the most anti-consensus step on can take.
However, occasionally, my market sense rises above a simple determination as to which response to fashion-driven stimuli is most particularly suited to my dignity, and when I look at the key drivers, I see an investment environment under which, on balance, it will behoove participants to continue to accumulate assets:
- They’re just aren’t enough of them out there. Lots of capital pools like their investment inventories, are hard-pressed to trim them, and more likely to add to their rolls at the slightest inducement to do so.
- The economic recovery, now entering its 10th year, is by most measures either continuing apace or perhaps even accelerating; certainly the latter is true if one views matters on a global basis.
- The following important inputs do not appear to be fully priced into valuations: o Q4 earnings, which everyone tells me are shaping up to be reaching blowout proportions.
- Q1 earnings, which will start to reflect the corporate windfalls embedded in the new tax law.
- The market benefits of the new tax law itself. Analysts estimates appear to be stubbornly unwilling to make the adjustments tied to the new rate, but they’ll have to.
- Opportunities for a white hot capital markets cycle. Feel free to fry me in hog fat if corporations don’t use the tax windfall to: a) buy back more stock; b) go on an acquisition spree; c) increase dividends; or d) all of the above.
- The sustained and likely sustaining impact of miniscule interest rates around the globe.
These, my loves, are all formidable tail winds for the markets, and, while something is sure to go wrong eventually, my experience suggests that it does not pay to predict the timing of these negative catalysts, no matter how inexorable they be.
So my word to the wise as we enter 2018 is to beware the compelling lure of the short side, and, for what it’s worth, this applies not only to stocks but also to bonds. We enter the new year with yields on 10-year notes about 1.3 basis points (0.013%) higher than they were precisely 12 months ago, and the same stasis applies to virtually every major bond-issuing jurisdiction on the planet. Meanwhile a titch of gravity has seeped its way into such macro metrics as Consumer Confidence, and our old forgotten friend, the Atlanta Fed’s GDPNow model.
It seems, based upon the foregoing, that it may take some sort of divine intervention to burst the government bond bubble, now entering its 4th decade, and when your investment strategy relies on help from above, it is as sure a sign as any that you’re in trouble.
We can do better, I think, by going with what we know. The 1967 Packers entered the frigid conditions of the Ice Bowl warmed by dwindling embers of a dying dynasty. They made one final push – against a team that would inherit their mantle of hegemony, and came out, improbably, on top. Lombardi soon departed the scene and died a couple of years later. The runs of Starr, Nitschke, Adderley and that great O-Line were at a close. They gathered themselves one last time, on their frozen home field, and completed their date with destiny.
And even then they weren’t quite done. Their 1967 Ice Bowl triumph bought them an invitation to a follow up game, at the time considered little more than an exhibition, against the Oakland Raiders, champions of the emerging but suspiciously regarded American Football League. The game, Super Bowl II, was played exactly 2 weeks later, in the sunny, inviting confines of the Orange Bowl in Miami, FL. Warm and confident, the Packers won that one too, by the comfortable score of 33-14.
There’s something perhaps we can take from this story, as we seek to warm ourselves on this chilly New Year’s Day. For the life of me, I can’t put my finger on it, but I can keep trying, and that, my loves, is sufficient cause for celebration in this veil of tears. So I take my leave for the last time in 2017, wishing you aHappy New Year, and, as always…
TIMSHEL