Never Say Never

By Scott Poore, AIF, AWMA, APMA
Chief Investment Officer, Eudaimonia Group

They say it only takes one generation to pass before history is forgotten...or, something like that. The reality is that investors should be students of history before they are students of charts. As I write this week's musings, I realize that I might be repeating a theme from a previous post a few years ago. This is the 200th Market Musings, so you'll have to cut me some slack. The 1983 movie "Never Say Never Again" is the inspiration for this week's musings. Here's some trivia about the movie:

This movie had a lot of buzz, long before filming ever started. Producer and screenwriter, Kevin McClory and Jack Whittingham, worked on a potential script for a Bond movie. That project was abandoned due to costs. Bond author, Ian Fleming, decided to put the idea into the Bond novel "Thunderball," for which he did not credit McClory or Whittingham. Years later, McClory & Whittingham's project was picked up by Irvin Kershner. By this time Fleming had passed away, but his trustees attempted to block the film, which was defeated in court.
The title of the film is attributed to Connery's wife, Micheline, who suggested it be called "Never Say Never Again" in reference to Connery's public claim after filming "Diamonds Are Forever" that he would "never again" play Bond.
Because the film is not technically based on a Bond novel, though the character is often referred to as "Bond" in the movie, is not called "007" at any point in the film.
Warner Brothers intended for this movie to go head-to-head with the official Eon Productions bond film, "Octopussy," starring Roger Moore, in 1983. "Never Say Never Again" was released four months after the competing film. The former film grossed $187 million at the box office, while the latter film grossed $160 million.
Some of the scenes in this film involve hand-to-hand combat, mixed with some martial arts. A young Steven Seagal was the movie's martial arts instructor. A frustrated Seagal became so angered with Connery's lack of training one day during filming that he broke Connery's wrist. Connery endured the injury for years thinking it was just some minor pain before realizing there were broken bones.

Here's what we've seen so far this week..

Never Say Never. While no two markets and no two election cycles are exactly alike, there are some similarities between today and prior markets that should make investors think carefully about the road ahead. If we look at yields, despite the recent moves by the Fed to cut rates twice over the past two months, the yield on the 10-year Treasury Bond is up 85 basis points since the first rate cut in September. As of this morning, the 3mth T-bill and 10-year are within 2 basis points of uninverting. The yield 2-year and 5-year Treasury have been lower than the 10-year for some time now. But, when the 3mth and the 10-year uninvert, it's been a pretty good sign of recession in the future. On average, based on the past 4 recessions, the uninverting of the 3mth & 10-year has preceded recession by 6 months. Investors, meanwhile, do not seem to be paying attention. The "Euphoriameter" measures investors sentiment, market valuation, and volatility. The level of the meter is higher than the previous peaks in 1999, 2007, and 2020. At the same time, investment managers are piling into stocks. The National Association of Active Investment Managers measures the average allocation to equities among professional money managers. That survey is at a 4-month high and has nearly doubled since August. And yet, CEOs do not seem as confident. The Insider Buy/Sell Ratio, specifically highlighting CEOs of major companies, indicates that more CEOs are selling the stock of the companies they manage at the same level as 2007 and 2019, just prior to those two recessions. Should this warrant investors to go out and sell everything? No, but it should cause investors to pause on major equity purchases (unless it's part of a dollar cost averaging strategy) and re-allocate their portfolios to a more diversified mix.

Shaken, Not Stirred. The economic picture is starting to look like one of James Bond's famous drinks as data points begin to shift in a different direction. The October Retail Sales report came out this morning. Though the final tally was higher than expected (+0.4% vs +0.3%), the categories within were not exactly eye-popping. If autos and food are backed out, the number actually would have been -0.1% for the month. In other words, outside of basic necessities and some steep discounts from auto makers to clear inventory for next year's model, discretionary spending is down. Holiday sales will be a key metric to watch this year. Meanwhile, personal and corporate bankruptcies have risen in the 2nd half of this year and are up substantially over the past few years. Chapter 7 bankruptcies (liquidation) are up 34% on a year-over-year basis. Chapter 11 bankruptcies (reorganization) are up 51% year-over-year. Finally, Chapter 13 bankruptcies (individual & corporate reorganization) are up 12% over the same time period. While we're not at 2009 bankruptcy numbers, we have exceeded 2020 numbers. As we previously noted, CEOs are moving out of their own company's stock and a hint as to why might be some troubling news on the jobs front. Approximately 26% of CEOs anticipate reducing the workforce at their respective company over the next 12 months. Within the same survey, 30% of CEOs stated that economic conditions have deteriorated over the last 6 months. This week, Fed Boston President Collins stated that a "December rate cut isn't a done deal." This is a departure from just one week ago when Fed Chairman Powell indicated a 25 basis point rate cut was likely next month. Fed funds futures dropped this week from an 85% probability to just a 58% probability of a rate cut in December. The mixed messaging from the Fed either means they are engaging in typical misdirection or they aren't really sure why the yield on the 10-year Treasury continues to rise.

Post Script - On an anecdotal note, it's worth looking at the 1980 election and the response from the markets at that time. Traders celebrated Reagan's election victory thinking that pro-business reforms would benefit stocks. After rising more than 9% in November of 1980, stocks gave up more than 12% over the next 4 months as reforms took longer than expected to be implemented. In other words, investors shouldn't read too much into recent stock movement until after Trump's first 100 days are completed.

Enjoy the official video for the title song of the movie...in vintage '80s style.
___________________________________________________________________________________________________________

Disclosures

The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.

Forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.

Any market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.

Past Performance does not guarantee future results.