How much do I want to tell you to just go buy stocks? They have come down a lot. The majority are cheap. There's not a lot of alternatives to put your money.
But people are scared. They are afraid that something is dreadfully wrong or else the stock market wouldn't be falling like it is. There must be something that "they," the sellers, know. Or maybe there is something the Federal Reserve doesn't know, and it is about to act, which is even scarier.
My wife always tells me never tell her to "relax" because she wouldn't be agitated if there weren't good reasons. I like that. It's how I think many people feel about the stock market right now so I am going to give you the context that you need to be a little more clear-headed and a little less scared than you are, not because I want you to buy stock, or sell stock. I want you to be able to think about what you are doing so you don't regret it later. It's the type of thinking I do for the Action Alerts PLUS club and it is the type of oration I am going to give you now.
First, you have every right to be concerned here. We are on the eve of an employment number that could show a very hot economy, one with real wage growth that the Fed will want to be concerned enough about that it has to raise the fed funds rate this month. That's nothing new. In fact, at this point it is almost dog bites man.
But how about if man bites dog? What if there is no increase in wage inflation? What if we don't have a big hiring number? Then buyers might turn sellers because they will be questioning whether the Fed is being thoughtful enough. So, literally, we need a hot number, the number so many people are telling us we will get, or the Fed will seem too strict.
Now, take it a step further: Given all the uncertainty in the world, there might be a big faction that says, "holy cow, the Fed's nuts to raise." Instead of "one and wait" -- as I have been advocating -- they should be thinking "wait and one." They may think the Fed is tone deaf to what is happening to the real economy, the weakening home sales, the weakening auto sales, the weakening loan growth, the weakening rail carloads, the weakening electricity demand, the weakening construction market, the weakening high-end retail sales market, and, yes, the weakening stock market. That's an awful lot of weakening to balance against one number, the increase in wages that come from fuller employment.
I'm not done. Here's another step that makes the Fed seem out of synch. Almost every night we talk to the CEOs of companies or profile companies that are labor saving, which is code for you can fire more people and do more with less. We are starting to give companies credit for spending to lower prices and make things more convenient for shoppers. Witness how the stock of Kroger (KR) , the giant supermarket chain, went up when the company said it was spending to get a satisfied customer who will keep returning. Consider Costco (COST) , with a stock that's up huge on same-store sales of 9.2%, when the Street was looking for 5.4%.
Now there are two ways to look at this kind of Costco number. One that requires tightening -- the consumer is spending too much -- and one that argues for standing pat, that Costco keeps prices low, real low, to the point where there the Fed doesn't have to worry about the prices being too hot.
Plus, given that oil's down about $25 a barrel of late, you have to wonder if prices aren't actually in some sort of disinflation cycle. Hey, this isn't so weird. Have you checked your property on Zillow (Z) ? Do yourself a favor: don't.
We have a man versus machine situation where man is worried about price inflation and the machines are about price disinflation, holding costs down and allowing you to eliminate employees because they cost too much.
It's an awkward situation. The Fed is fighting three trends that it can't win against. First, decreased immigration where the immigrants have, by their own numbers, kept prices and wages down. Two, mandated minimum wage boosts that mandate inflation. Three, the lack of truckers who, it turns out, are far more integral to the modern economy than we thought and are becoming a major reason to raise prices for all sorts of goods. Finally, there is the potential for escalating tariffs as the battle against China heats up. Oh, and to be sure, the arrest of the CFO of one of the largest companies in the world, a Chinese telco company, is enough to change the odds against more trade cooperation and more tariffs than pretty much anything else I can come up with. Oh, and we've got this peripatetic Trump White House, which may or may not have had something to do with timing of the arrest of the Chinese national in Canada just when the G-20 confab got into full swing.
Think about it. The Fed can't change immigration laws. The Fed can't lower the minimum wage. The Fed can't train more truck drivers. The Fed can't stop Trump from raising tariffs. So, what can the Fed do? How about make it so you are too nervous to hire more people or that it costs too much. The Fed can frighten you the way it did at the beginning of October by saying it could have to raise rates four times to get those wages down. Where was the prudent data dependence? Where's the commonsense that maybe just by saying these alarmist rash things, business spending will slow?
Now remember when I said that that the Fed should raise rates this month if there is too much wage inflation in Friday's payroll number? I also said there is this camp which is concerned that markets are so whacky, where short rates are higher than long rates, where so many stocks are in a bear market mode, and where the financials are being shredded, that there is something lurking that's very wrong, some hidden credit crisis and the Fed was oblivious. You don't get the astounding collapse in the stocks of banks of all kinds if it is business as usual.
I don't know about this one. I think the reason why many stocks really did hang in, particularly the tech stocks, despite the Chinese/Canadian incident is because they have come down so much already. Witness that the pinata that is Facebook (FB) , which saw its stock fare well despite a vicious downgrade Thursday morning. Witness that Apple's (AAPL) stock didn't collapse, but came back from its low even as it is the most logical target of retribution by the Chinese government because of the arrest of the Huawei official.
The banks? We have a real herd mentality going on here where the stocks go down in unison and, as I mentioned, with all of those weakening categories of business, it's not encouraging.
But here's the bottom line: I think that if you take a Warren Buffett view of things, judging that, over the long haul everything from the stocks of Apple and American Express (AXP) to Coca-Cola (KO) and Bank of America (BAC) , will reflect their intrinsic worth not the minute-to-minute value, then I bet it will prove to be a decent time to do some buying and a too-late moment to do some selling. So, what's the big deal? There are two caveats: both the Fed after Friday's employment number, and the White House after the arrest of the CFO of Huawei, must be rational, prudent and not rash and judgmental to get a bottom in many stocks that are in bear market mode. You know what, though? One out of two wouldn't be bad!