As it is the day after a holiday I will keep this column brief and light in keeping with Friday's truncated trading session.
I hope you have seen it already, but if you have not, the Woman Yelling At A Cat meme has taken over the internet. A weird mashup of a still of "Real Housewives of Beverly Hills" star Taylor Armstrong hysterically yelling at an unseen tormentor and a very cute cat, Smudge, with a very smug look sitting incongruously in front of a plate of vegetables, this silly meme also captures the level of narrative in today's markets. The bulls are hysterically yelling and those of us who actually take the time to value stocks -- both individually and as a group -- are sitting back like Smudge and remaining unconvinced by the bulls' specious arguments.
Make no mistake, though, one of the reasons I love finance is the scoreboard. With the S&P 500 up 25% in 2019, the bulls are clearly winning, but false narratives can lead to quick crashes as we saw last December. So, with a sneaking suspicion that we are about to see such a pullback again, I will present the bulls' main narratives with the Housewives-style hysteria that is often represented on Bravo's sister network, CNBC, represented by multiple exclamation points, and a Smudge-like succinct response.
The U.S. and China are about to close a trade deal!!!
The day the tariffs were first announced, Feb. 7, 2018, the S&P 500 closed at 2695.14. I remember it well, because that day is my birthday. On Wednesday it closed at 3153.63. Who could believe the "trade war" has hurt the market given the 17% increase in the S&P 500 since it began? So, then, Smudge might note, why would a "trade deal" cause markets to rise since a "trade war" did not cause them to fall?
Stocks are cheap!!!
There is no measure, whether micro-derived such as price-to-earnings (P/E) or macro-derived such as S&P 500 value/GDP, that is not materially above its recent norms. Smudge smirks at those who make arguments without even basic numerical background for them.
The Fed is flooding the economy with money!!!
That one is difficult to dispute with feline insouciance, because it has been true. Only a besotted Southern California housewife would be foolish enough to think that the Fed's recent "repo fix" has been anything other than quantitative easing 4 in a very thin disguise. That said, smart cats know that those dollars never enter the real economy. The Fed's own somewhat obscure statistic -- Velocity of M2 Money Stock -- has been slowing for all of 2019. So perception does not equal reality.
Interest rates are going up and the yield curve is no longer inverted!!!
Technically true, but remember that in the past year three-month Treasury yields have fallen in line with the cut of 75 basis points in the fed funds target rate (79 basis points to be precise,) but the 10-year Treasury yield has actually fallen 128 basis points in that time period. Smudge knows that 10-year Treasury rates have been trending downward since peaking in June 1984. We are one bad macro event away from the 10-year yield (currently 1.78%) falling back below the 3-month rate (currently 1.58%). It would not take much.
The consumer is strong!!!
Retail earnings were mixed in the now-ended reporting season, but I am sure there will be amped-up reports on CNBC Monday morning stating what a "blowout" Black Friday was. They say that every year. Smudge looks at numbers and actually noticed that despite an upward adjustment by the Bureau of Economic Analysis to account for the General Motors GM strike, real disposable income fell 0.3% in October. That was the first decline since June 2017 and the largest magnitude of decline since March 2015. The Trump Jump has been amazing to watch, but the U.S. consumer is finally getting winded.