As the introductory quarter of 2019 melts into Number Two, and given that it’s Sunday (the Lord’s Day across all of Christendom), I feel I must yet again bust out some of that Old Time Religion. After all, today marks roughly the midpoint of the Lenten season, an interval in the Julian Calendar when, by all rights, we should be working ourselves up into something of a holy frenzy.
So I base this week’s note on the elegant quote taken from the Gospel According to Saint Matthew (6:34). It derives directly from his the recounting of the Sermon on the Mount of one of the earliest homilies offered by Jesus (after his being baptized by, well, by John the Baptist), and certainly his longest, unfolding, as it does, across three long chapters in this book of the New Testament. It covers a wide range of topics: from the Beatitudes (which – let’s face it — would make a great name for an Alt Rock band), Lamp Under a Bushel, Light of the World, and a number of other matters pertinent to the day.
It’s a soaring piece, but, as the world knows, I’m much more of an Old Testament Guy, favoring in particular the Book of the Ecclesiastics, and especially that bit about there being a season to everything – a time for every purpose under heaven. I will admit to have wondering what was up with the part about the casting away and gathering of stones, which, to me seems like a rather pointless exercise. Why gather stones only to cast them away later? And you can hardly cast away stones before you’ve gathered them, so what gives? But whatever; it’s a fine book, Ecclesiastics that is, and to me it floats above Joshua, Judges, Ruth, Genesis, Exodus and even the elegantly-named Leviticus. However, I freely recognize that this is by and large a matter of taste.
The Old Testament also is the source of all of the psalms that grace our religious experience, including the divine 23rd, which wants no further elucidation. I will also give a shout out to King David’s old, reliable 32:1 “Blessed is he whose transgressions are forgiven, whose sins are covered. Blessed is the man whose sin the Lord will never count against him”.
Perhaps, in this interval of great strife and dissent, we can at least agree on the following. As we wend across these troubled times into an uncertain future, David 32:1 is likely to become increasingly handy.
But our theme here is the merciful stylings of the New Testament; not the judicious teachings of the Old. “Sufficient unto the day is the evil thereof” reports Matthew on behalf of Jesus, and my observation is that he was onto something.
Meantime, Q1/19 is now in the books, and oh what a ride it was! Domestic equity indices put up their best showing in a decade – since those first tentative steps towards recovery from the Crash began to gather steam.. Now, as was the case then, the rocket ride came on the heels of some stone cold investment carnage, as, while the Spring of ’09 is nothing but a foggy memory for most of us, the last grueling weeks of ’18 should, by all accounts, remain fresh in our collective memories.
At the risk of regressive redundancy, allow me to reassert that the magnificent recent performance of the Gallant 500 and its fellows was in large part justified as I see it. For one thing, at a beggarly Christmas Eve level of 2335, the benchmark SPX was, in retrospect, deeply oversold. At the time, everybody was rationally concerned about a pant-load of difficulties, any combination of which, had they extended themselves, may have deepened the carnage well into the current year. Central banks were doing war dances, as were the key players on the global trade stage, and, for that matter, so too was a new Congressional class, hell-bent on removing the President, and believing that they had the means to do so.
But then, somehow, a series of minor miracles transpired. We’ve covered these ad nauseum, but they bear recounting (albeit as briefly as possible). The Fed turned from potential market combatant to staunch ally, proclaiming its valuation-supporting allegiances on multiple occasions in Q1. The ECB followed suit. The U.S and China signaled that, at minimum, some sort of détente was in their mutual interest. The 116th Congress emerged with smoke emanating from every orifice, and were organizing their forces for a full-on assault on 1600 Penn. Avenue. But their plans went awry. Their frontline troops, led by one General Mueller (whose mission it was to lob pre-invasion, terrain-softening, defense-weakening artillery at the principal target), bailed on them in ignominious retreat, leaving the main thrust of the offensive in disarmed disarray. They may seek to regroup, and perhaps can yet lay siege on their enemies, but their prospects for success have been reduced to little more than hopes and prayers.
All of which places the SPX more than 500 basis points to the good — relative to its pre-yuletide position of shocking retrenchment. But anyone who thinks that from this point on, the troops are looking at a milk run to previously unconquered territory is entitled, during this season of reflection and repentance, to another think.
One does not require the vision of the Creator to see obstacles on the horizon.
Though the ritual will not commence in earnest for another fortnight, let’s nonetheless begin with earnings. They’re supposed to be weak, in case you hadn’t heard – particularly against a backdrop of an P/E-turbo-charging) 15% (depending upon which index “up” quarter. Factset has cranked up its analytical engines in time-honored fashion, and the following graphs tells a story that promises little in the way of holy redemption:
In the days and weeks prior to CEO’s being next called to the pulpit, a consistent rhetorical theme has emerged – particularly in technology components and industrial manufacturing. Q1 was weak and Q2 is a bit impaired as well. It goes as follows: we’re clearing out our inventories, folks, and when we’re done this summer, the good times will roll yet again. While we won’t know for another couple of months, here’s hoping they’re proved to be correct. Because whereas I feel that the Lord won’t count against CEOs any sins of over-optimism, the latter are likely to feel the full wrath of investors on that score.
But hey, like I said, it’s a couple of months off, and, in case I haven’t mentioned it, sufficient to the day is the evil thereof.
We can thus turn our attentions to the bond market, which continues its yield-crushing, heavenward ascent. Rates on the U.S.10-year stabilized at the historically tepid level of ~2.41% last week. But at those thresholds, we’re talking about Uncle Sam paying 8 times the vig imposed upon the Government of the Grand Republic of France (0.314%), and over 100 times what the Dutch are offering up (0.022%) for their own paper of the same maturity. You can fuhgeddaboud Germany, Switzerland and Japan, as here, the practice of ratio calculation fails us, because all are at sub-zero levels.
Domestic macro numbers are mixed to negative, but most point to a slowing, sluggish cycle on the horizon. On Thursday, I took a peek at Atlanta’s GDP Now metric, and encourage everyone, just as I did, to freeze that moment in time. Though they got there by different paths, this was the first and only occasion in my long history of tracking this metric where the estimates of the Street and those of the Fed came together in precise harmony:
It didn’t last long; nothing, after all, does. By Friday, the two sets of estimates had passed one another like ships in the night:
In any event, it looks like we’re in for a slow patch, not only in these here realms but indeed across the globe. Particularly if the earnings paradigm is weaker than even expected (and especially in terms of forward guidance), April might be as good a time as any to pause on our climb to the mountaintop of Olympian valuations. But if the Central Banks stay true to their rhetoric, one way or another, the world will remain awash in idle cash and cheap financing, which should be accretive to risk assets.
At some point it will all have to end. Lenders committing capital for multiple years need, ultimately, to be better compensated for tying their money up and assuming default risk than what is now built into the equation. I don’t know when this reckoning will come, nor how deep a price we will pay upon its arrival.
However, as Jesus purportedly told Matthew and the other disciples on that hot afternoon in the Israeli desert approximately 20 centuries ago “sufficient to the day is the evil thereof”. And while this sort of thing runs contrary to the rhetoric upon which we risk management types rely, I think the point is a valid one. In fact, I couldn’t have said it better myself.
Just do me one solid here. This is a tricky tape, so watch yourself a bit, OK? And, as always…
TIMSHEL