The character shift in the market which we have been discussing for many months is beginning to flex its muscles further.

Oh sure, there have been plenty of stress tests, plenty thrown at this ugly old stock market, plenty of reasons for the end of the world as we know it – and more than a flock of Black Swans found.

By the way, have you ever noticed that we never, ever had a “Black Swan” projected by any expert – before Nassim’s book was written? I digress.

A Little NLP

“The reason we are less confident about equities here is that there are a vast number of elements we are uncertain about in the future.”

A Wall Street phrase. It tricks one into thinking that if you just stick with the expensive expert – there will be a time in the future where certainty appears….as though, somehow, right now – it is just, well, missing.


I have read it over and over from various “experts.”

It impacts so many – but it overlooks one small fact, whether we like it or not:

The future is always – and I do mean always – uncertain.

One of the few things we can count on? People.

They exist in certain places. They demand and/or choose certain things as they go through various stages of life. They stop demanding/using things as they age and move to the next phase of life.

Those are basics – they are hard to manipulate. They are the fundamental pathway which will, short of human extinction, always exist.

They will survive the vast array of interpretations we will see ahead for the “correct” P/E, book value, , price to sales, margin, value, growth, style box, diversification plan or GARP value and any number of market multiples.

The latter elements always shift as time moves onward.

The former is simple and hard to miss – focus on people first.

And by the way, it is people who react to and solve every single problem which has been thrown at us over the last few hundred years in markets and economies. It is people who look at an event and have a choice between two possible outcomes:

Wow, this really is Armageddon, or

Hey, there is an opportunity here to bring a solution to market.

Surprises Remain to the Upside

The latest trade range ran for nearly 21 months until we broke to new highs roughly two weeks ago. For many months, we continued to suggest dips were good – and that we would look back on this and see it as more of a lunch stop – and not the end of the bull market.

Indeed, we have been consistent: the end of this bull market will be as perplexing to most as it was from 1980 to about 2000. This secular bull move is young by proper definitions. The data we track suggests – like it did way back in the 80’s – that the tectonic shifts are just beginning to show themselves.

The problem with slow moving forces (like demographics) is that they are best seen from 50,000 feet, where few observe. That’s good in the end. They move slowly – so much so that they are often ignored and misunderstood. That’s good too….

Think two things:

a) focus on people and then build action plans

b) first inning, second pitch….long game, lots of extra innings

Stress Tests By the Truckload

Banks, as much as the government has their hands in the business now, have never been more financially sound. They recently all passed the most vicious of stress test downturns.

The market has had its own bucket list of stress tests for years now – almost weekly since the Great Recession lows, added to what has seemed like a monthly series of monsters lurking since the 9/11 attacks.

Investors have been “on guard” for the next shoe to drop for so long they have lost sight of pre-9/11 perspectives.

Meanwhile an entire market of new-fangled investment products have been carted out to the world – most of which are completely useless.

I digress again.

Hard to Argue

Our diversified economy is something we should all be thankful for each and every day. It has done an admirable job of passing lots of Stress Tests.

Forget the season of political noise and banter. The US economy and real household incomes are in far better shape than suggested by either Donald or Hillary.

Let’s also consider the following:

The oft-referenced “Stall Speed” over the years.

Back in late 2010 and early 2011, when the GDP began to fall closer to 2%, the naysayers would remind you that 2% had always been the economy’s “stall speed” in the past. The banter when something like this, “Once growth dips that low, it will continue to drop as it turns negative during the rapidly ensuing recession.”

You guessed it: Growth has been hovering around 2% ever since. It was 2.1% during Q1 of this year – all with no arriving recession. Indeed, during that time period, records have been set on personal and corporate channels at almost every income and asset level.

This is also the period where the Barbell Economy began to separate itself from the blended economic picture too many focus upon. The baton began its process of being passed to the next generation – and they have a very long way to run.

European Stress Tests:

A vast number of European crises unfolding since 2010 haven’t been able to disrupt the US economy’s “slow and tedious” expansion.

Brexit has been a nonevent so far for the US, though it has convinced many more foreign investors to buy US bonds. The dollar rose 23% from July 1, 2014 through January 20, 2016 and exports have flattened since February 2015.

However, the strong dollar has also kept a lid on inflation. Adding that to the Brexit Branic, bond yields have been pushed down even further. Record-low mortgage rates are boosting residential investment.

Housing starts are strong and remain on a solid uptrend as Gen Y just begins to move out.

Meanwhile, Citi’s latest data is big:

You can say just about anything you like – but this chart is hard to mistake. Internal data on the economy is improving on a rolling 12-month basis.

The latest employment data continue to show us another good thing about impending doom. Jobs data always goes bad as an early sign of significant stress.

Nothing in the jobs data can be seen as bad – other than a real need for learning new skills. This is the same issue we had in the early 80’s as well and it worked out fine so be patient.

We have had plenty even bigger stress tests:

The downgrading of US government debt by S&P during August 2011 didn’t trip up the economy.

There was no “fiscal cliff” in early 2013 after all the fear-mongering about it at the end of 2012.

Payroll taxes were raised at the start of 2013.

There have been other tax increases since then.

ObamaCare substantially increased health insurance premiums, deductibles, and copay’s.

All the while, real consumer spending continues to outpace overall growth in real GDP. According to the Atlanta Fed’s latest GDPNow, (noted Monday for you as well) it probably rose 4.5% QoQ (saar) during Q2, which would put it up almost 3.0 YoY.

Commodities gave us a test too:

The 76% plunge in the price of oil from the summer of 2014 through early 2016 certainly depressed the energy industry.

Dr. Ed points out that “Payroll employment in the US natural resources industry fell 212,000 to 692,000 over the 21 months through June.”

Yet initial unemployment claims in the four major oil-producing states has remained near the lows of 2014. That logically suggests that workers who did lose their jobs in the oil patch had little problem finding jobs in other industries. Another hint is the record jobless claims consistency.

How about the junk bond crisis stress test?

Recall the plunge in oil prices was going to trigger huge fallout given the surge in yields on junk bonds, led of course by those issued by energy companies.

So far, there has been no financial crisis, and certainly no financial contagion.

In fact – almost the opposite has unfolded: BAML’s high-yield composite yield has dropped from a recent peak of 10.01% on February 11 to 6.62% currently.

Last for now: The Earnings Recession test:

The plunge in oil prices depressed the earnings of the S&P 500 Energy sector significantly, which weighed on overall earnings. The chant became focused on the “earnings recession” and it was sure to get worse. It didn’t.

Yes, S&P 500 operating earnings have been falling on a YoY basis for the past four quarters through Q2-2016 based on data compiled by Thomson Reuters. One will find that comparable data compiled by S&P, which more closely conform to GAAP accounting, show that the earnings growth recession has lasted seven quarters.

Yet companies continued to expand their payrolls and capacity. You think they see something analysts don’t?

All along we suggested here that it was a “pitch in the dirt” with experts hoping you would swing at it.

We merely needed to await the round-trip of the worst data.

Then we would “find” this surprising picture ahead. While oil was getting all the attention, the rest of the economy was just getting – better.

Now that the oil price has stabilized, the outlook for earnings growth is improving for the second half of this year and all of next year.

No one ever mentions this but the US economy very consistently tends to pass the “surprise test” as well.

Here is the deal though:

We have many years ahead to face higher noise levels from the chorus of naysayers. I am pretty sure they won’t like that Citi chart above – it’s the highest reading since December 29, 2014 – right on time as we get ready to leave the oil sector earnings recession in the dust bin of time.

Speaking of Energy….

The Dallas region is seeing its own round-trip effect. Check the latest and don’t be surprised when you see a positive number by end of Q3:

In Closing Today

One more note on consumers. After all, counting all those people means we can also count consumption curves. Their confidence is just fine.

It is the investor crowd that remains terrified even at highs. Let’s take a quick look:

The headline reading was better than expected. But this is an interesting tidbit from the internal data itself:

In the case of confidence based on income levels, numerous mentions have been made over the last several years as it relates to the differing paths of confidence for ‘middle income’ consumers and ‘upper income’ consumers.

While there had been some divergence over the years, this month’s report showed confidence among ‘middle income’ consumers leapt by 19% – to its highest level since August 2007!

I repeat: pray for a summer swoon in August.

When a market moves to new, all-time highs like ours has in recent sessions, watch for tests. The longer it takes to have a test of those lower breakout levels, the stronger the market tends to be.

The bottom line: This is a stronger economy than most are willing to accept. There is a lengthy pathway ahead.

For now, enjoy your summer…there are about 6 weeks left.

Until we see you again, may your journey be grand and your legacy significant.