March Madness in college basketball brings excitement and heartbreak. We're seeing that in the market right now as certain pundits are stretching economic and statistical information in order to achieve confirmation bias when excitement over equity returns should be the order of the day.
The inspiration for this week's musings is the 1994 movie, "Blue Chips." This film was loaded with basketball stars in order to give it a realistic feel. Here's some trivia about the film:
While this film is among my favorite basketball movies, it was a failure at the box office. Because of the loaded cast of A-listers and basketball greats, the budget swelled to $35 million, but it only earned $26 million in ticket sales. Here's a list of just some of the basketball greats who appear in the movie:
Bob Cousy
Bobby Knight
Larry Bird
Shaquille O'Neal
Penny Hardaway
Rick Pitino
Dick Vitale
Jerry Tarkanian
Allan Houston
Bobby Hurley
The film depicts a coach (Nick Nolte) at a fictional university, Western University Dolphins, in Los Angeles. The fictional Athletic Director of the Dolphins is former Boston Celtic great Bob Cousy. During one scene where Pete (Nolte) is talking to Cousy about the state of Dolphin basketball, the director told Cousy to just shoot the basketball while filming the scene. Cousy doesn't miss a shot during the entire scene, prompting the ad-lib line from Nolte, "Don't you ever miss?"
Nolte shadowed Bobby Knight during Indiana's 1992 basketball season in order to prepare for his role. In fact, Nolte was so emersed in the role that he wrote a 200-page novel about Pete Bell (his character) in order to get into the character's psyche. I'd call that dedication.
The scene where Bell visits Larry Bird at an outdoor basketball court was filmed at Bird's real home in Indiana. This court was also used in the 1986 Converse TV commercial featuring Bird and Magic Johnson.
Here's what we've seen so far this week...
It Just Isn't Good Enough. When markets zig at times that the pundits think they should zag, we tend to get nonsensical commentaries. When economic data doesn't match the prescribed market outcome, pundits tend to reach for new or interesting data (so-called) points.
That appears to be where we are in the current market cycle. This bull market rally is constantly being compared to 1999 and 2007 as the "calm before the storm." That may end up being true at some point in the future, but the evidence just hasn't surfaced yet. For example, going back to 1957, the current bull market is lower than the median bull market in terms of performance to-date. It's not even close to the most aggressive rallies. This data doesn't fit the narrative of the permabears. And, by the way, we just had a bear market in 2022, that the permabears seem to conveniently forget.
As we near the end of corporate earnings season, results have slightly exceeded analysts' expectations, with 73% of S&P companies beating on earnings and earnings growth at +4% on a year-over-year basis. Interestingly, corporate CEOs and CFOs have cited "recession" the fewest since the 4th quarter of 2021. Only 47 companies (out of the 500 in the index) cited the word "recession" on 4th quarter earnings calls, which is below the 5-year average of 85 companies and below the 10-year average of 61. This too, does not fit the bear case narrative.
Equity allocations for institutional investors is not in line with extremes either. The current statistics show equity allocations below the extremes of '99 and '07 and running just about at the 15-year average. This makes the case for further expansion of equity returns, especially if rotation continues to occur among equity sectors and asset classes. And yet, this isn't good enough for the permabears. Like the final scene in "Blue Chips" when Coach Bell admits to cheating, but scolds the media about his previous "average" team, "They gave me everything they had, they played up to the MAXIMUM of their ability! They gave it everything, and it wasn't good enough! Wasn't good enough for me, wasn't good enough for you, wasn't good enough for anybody! That's pathetic."
Believe In The Rules. When Pete Bell sits down with his players after winning the big game and admits to cheating in order to win, he tells them, "Boys, the rules don't make much sense. But, I believe in the rules." When the "rules" don't fit the narrative, again we get wild swings of commentary from the cheap seats.
February's inflation data came out and for the life of me, I don't see what all the fuss is about. First, CPI was described on Tuesday as "red hot." The number was +0.4%, which is just slightly higher than 0.3% in January. The year-over-year number was +3.2%, which is just slightly higher than 3.1% in January. In addition, the historical average for CPI is 3.5% on a year-over-year basis, which means we are still below the long-term average. Second, since inflation bottomed in June of last year, inflation has been fairly stable. While that doesn't fit the bear case narrative, pundits have now moved on to a metric called "super core" inflation. This metric excludes food, energy, and housing prices from the CPI number. And, by the way, if there is no inflation (i.e., the speed of money) there is little-to-no economic growth. So, normal inflation is a good thing for future growth.
If we examine the components of February's CPI number, fuel and housing were primary contributors to the increase, while food was flat-to-lower on a month-over-month basis. At the end of the day, consumers are affected by food, energy, and housing as much as the other components of inflation. Picking and choosing which components to focus on could lead to mistakes in one's economic outlook.
Much is being made recently of the run in technology stocks in comparison to the other sectors of the S&P 500 Index. This is nothing new. At different times in history, one or two sectors have led other sectors for a time. For example, in the 1950s, Energy and Materials were the highest concentration of the index. In fact, the concentration at the peak was equal to Technology today. A particular concentration is not necessarily indicative that the end is near.
The number of stocks that are moving higher might be a better indicator than sector concentration at this point. We have mentioned the rotation that seems to be occurring and this looks very different from 1999. Leading up to the "Dot.com" crash in 2000, the number of stocks making new all-time highs was fading into that bubble bursting. Today, we are seeing the opposite. The number of stocks making new all-time highs is growing. This may be an indication that the current market environment is more akin to 1995-96 than the end of 1999. Time will tell, but we will reserve a concrete decision on comparisons to prior bubbles when the data becomes more apparent.
Here's the scene of Cousy draining every shot...
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