Dave Moenning

The Primary Driver May Be As Simple As…

The “retail wreck” is real. The shine of financials is fading fast. The technology darlings have taken it on the chin of late. Energy is uninvestable again. Inflation is heading in the wrong direction (well, in the Fed’s eyes, anyway). Yellen’s bunch insists on raising rates. Investors are complacent. Trump’s big plans for the economy appear to be off in the distance – at best. And valuations remain near levels seen prior to history’s greatest debacles.

In response to what would appear to be a table nicely set for the bear camp, what has the stock market done? Oh, that’s right, the S&P 500 is two days removed from its latest all-time high. So much for fear and loathing in the stock market!

So what gives? Why are stocks a stone’s throw from record levels when the backdrop can be viewed as questionable – especially by those who see Ms. Market’s glass as at least half empty?

Too Many Dollars Chasing Too Few Goods

The answer – well, in my opinion, of course – lies in the very simple economic concept of supply and demand. As SNL character Father Guido Sarducci so eloquently outlined in his Five-Minute University, economics – and in this case, the market – is all about one thing: supply and demand.

It’s the simplest of concepts, when there is more demand than supply, prices go up – and vice versa.

Thinking back to my Econ 101 course, another basic economic law would seem to apply here. If memory serves, the definition of inflation (i.e. higher prices) is, too many dollars chasing too few goods.

And while I can definitely be accused of oversimplifying the matter here, these two uber-simple ideas may help us understand what is happening in the stock market at the present time.

Follow The Money

Despite everything going on in the market today – from oil being back in a bear market to the talk of impeachment – stock indices are either at or near all-time highs. And the explanation might just be that investor dollars continue to flow into funds and ETFs at a record pace.

According to Bank of America Merrill Lynch data, in the week ending last Wednesday, investors poured $33.6 billion into stock and bond funds, which was the second largest weekly inflows ever. This total included $24.6 billion of inflows to equity funds, which was the most since the election.

BAML points out that during the five-day period where the S&P 500 tech sector dove nearly 3%, investors directed a net $100 million into technology funds. Oh, and by the way, this represented the 15th straight week of inflows into tech. As such, one can easily argue that there are still an awful lot of folks out there looking for “dips” to buy in the tech space.

Ben Eisen, of the WSJ, had this analysis: “It’s telling that the inflows came during a week in which economic data disappointed. An index of consumer prices on Wednesday showed inflation continued to wane in May. Retail sales also fell in May, the data showed. Plus, the Federal Reserve lifted rates and signaled that it plans to do so again this year, taking a more hawkish tone than some expected… But that isn’t deterring investors from deploying cash.”

Another interesting fact that the BAML report revealed is that as of the June numbers, fund managers have approximately 5% of their assets sitting on the sidelines in cash. Couple this with the recent inflows and the outcome is simple. As long as money continues to flow into funds, managers will have to keep putting it to work – regardless of Trump’s policies, the economic backdrop, or any other negative factor you can dream up. Remember, a great many funds MUST, according to their prospectuses, stay nearly fully invested at all times.

So, at this stage of the game, it might be a good idea to keep an eye on where the money is flowing.

Thought For The Day:

It’s not the size of the dog in the fight, it’s the size of the fight in the dog. –Mark Twain

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

The Real Inflation Problem

With Janet Yellen having raised the Fed Funds rate a fourth time last week to a target range of 1.0% – 1.25%, there is/has been an awful lot of talk about inflation. In fact, the current annualized level of inflation (~2%) is being used as justification for the Fed’s plan to return rates and monetary policy to more “normalized” levels.

However, in my opinion, all this talk about inflation is borderline comical and likely just a smoke screen for the Fed’s primary objective – keeping the economy moving forward and out of the deflationary ditch.

The problem is that the Fed’s official mandate doesn’t include keeping GDP growing at a healthy clip. No, the only two tasks the country’s merry band of central bankers have are (1) full employment and (2) stable prices (i.e. low inflation). As such, during the aftermath of the Great Recession, Ben Bernanke and Janet Yellen have been forced to dance around the idea of equating 2% inflation with an acceptable level of economic growth.

Inflation Is Too What?

I grew up in this business in the 1980’s. To be sure, this was a time when investors feared inflation. I was there when Paul Volcker declared war on inflation. The investing industry then spent the next 20+ years worrying that the bad old days of runaway inflation would return. So, pardon me if I find the current fixation on getting inflation back “up” to an acceptable level a little amusing.

Why doesn’t Yellen & Co. just come out and say it; “Hey, our real job is to make sure the economy is heading in the right direction.” And then while we’re at it, perhaps the purchasing power of the U.S. dollar should be brought into the mix as well. After all, the state of the greenback is surely a topic of discussion at the occasional Fed meeting, right?

But alas, the U.S. Federal Reserve is stuck trying to keep the largest, most complex economy in the world rolling down the track by focusing on two simple targets: unemployment and inflation.

The Point…

The key point here (yes, I promise there IS a point coming) is that inflation and inflation expectations are currently trending lower – and have been for the better part of this year. Therefore, raising rates when inflation expectations are in decline would seem to be counterintuitive. Hence my reference to all the talk about inflation being a smoke screen.

Yes, it is true that inflation – according to the Fed’s preferred measures – is currently at or slightly above the 2% target. Yet, it is important to recognize that these measures tend to be a bit “rear view mirror” oriented and the more forward-looking inflation metrics are currently moving down and to the right.

So, why then is Yellen fixated on raising rates in such an environment? In short, because it is time for the Fed to get out of the way – and they know it!

In reality, the economy has been strong enough for the Fed to remove the low-rate life support for some time. But due to the silly focus on an acceptable level of inflation, which remained stubbornly low for years, the Fed has wound up with some unintended consequences.

The Law Of Unintended Consequences

You remember the economic version of the law of unintended consequences, don’t you?

Almost everyone agrees that Alan Greenspan’s decision to keep rates too low for too long basically created the mortgage/housing/credit crisis (aka the Great Recession of 2008), which, in turn, led to the worst economic downturn seen in the U.S. since the Great Depression.

So, with rates having been kept at generational lows for nearly a decade now, you can bet dollars to doughnuts that the Fed is likely worried – at least a little – about a repeat and/or the next bubble-induced debacle.

Although bubbles don’t tend to occur when everyone is looking for them, one of the unintended consequences of the Fed’s scheme to get inflation back to their 2% target has been the explosion of student loan debt.

While the official measure of inflation (which is reconfigured from time to time in order to make sure the government can afford to pay those pesky inflation adjustments tied to entitlement programs) has stagnated for nearly a decade, the cost of sending junior to college skyrocketed. And along with the rising cost of college came a massive steaming heap of student loan debt.

The cost of college just kept going up every year because the cost of financing it kept falling. Forget that CPI was uber low for years, college costs kept rising 5%, 6%, and more, year after year. And before you knew it, there was more student loan debt in this country than mortgage debt. Yes, even AFTER the binge of home buying in the mid-2000’s!

The key point is one of the unintended consequences of rates being kept too low for too long is that student loans will now become a macro drag on the economy. Yep, that’s right, instead of your sons and daughters buying cars, TV’s, washing machines, and taking vacations after they’ve graduated college and gotten a job, now they get to pay off that $30,000 – $50,000 loan.

From a macro point of view, the massive amount of student loan debt means lower economic growth for a very long time – perhaps even a decade or two.

So, from my seat, this is at least part of the reason why Ms. Yellen is ignoring the downtrend in inflation expectations and using the magical 2% target in PCE to justify the Fed stepping away. Something that probably should have happened years ago – if the Fed were allowed to focus on the stuff that matters, that is.

Thought For The Day:

Remember, you can choose to enter a peaceful mode at any point of any day…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.