Fill ‘er Up
Posted on Sunday, September 15th, 2019
“There are decades when nothing happens; and there are weeks when decades happen.” — Lenin
For the past few weeks we have fielded more than the usual number of calls from clients as they saw the Dow Jones rise and fall by hundreds of points at a clip. We gave them reassurance that we were on the case and markets were still stuck in their trading range of the past year and a half. This week, while maybe not as extreme as Lenin’s famous quote, was another deal entirely. Ironically, from the outside it would appear that nothing of importance had happened at all.
There was a massive shift in sentiment in the parts of the market investors were favoring. Growth stocks took a tumble while long hated value stocks began to rise. The discrepancy between growth and value had grown historically large and this was the markets way of correcting it. Rule #2 When everyone thinks something is going to happen something else does. Suddenly, value stocks, financials, energy, and small caps were back in vogue – especially energy.
This was the best week for Small Caps since Dec 2016 and best for Transportation stocks since Dec 2017. We have been warning that your ammunition needed to be held until small cap stocks and transportation stocks were able to break out of their recent doldrums. They now have. A good portion of the recent rally was due to short covering. That brings out a bit of a caution flag. If small caps and transports can hang in there next week and continue their break out then money managers will be forced back in to the market. Managers are under invested as it seems everyone expects the recession to hit any day now. When everyone expects something to happen something else will. One word of warning – the market will perform well as the yield curve begins to steepen. The Fed is meeting this week and that should help push that along, however, the steepening of the curve is when the danger starts. Market valuations are extremely elevated. Caution must be paid – but for now – the bulls have the ball.
This week we saw inflation rear its head with a hotter than expected CPI accompanied by increased wage growth. At this point, late in the cycle, we have the ECB, China, Japan and the US lowering rates and increasing liquidity with the S&P 500 near all time highs. Combine that with expanding wage growth and higher CPI data. Inflation is coming and with it the market is rotating towards financials, energy and small caps. Why is the Fed lowering rates? The yield curve is one answer. We think that they foresee a yearend liquidity problem on the horizon. Kind of reminds us of Y2K when the Fed flooded the system with liquidity and the market, flush with cash, soared to create the final stage of the Internet Bubble. Move forward but with caution.
Before we go any further this is where we need to tell you to stop what you are doing and go fill your car up with gasoline. A drone attack on the largest Saudi oil field has shut in production of approximately 5% of the world’s oil. Saudi oil is some of the finest, cleanest oil on the planet and not easily replaced. Repairs are already underway but prices will be rising in the next few hours and certainly by tomorrow morning’s commute.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.