Good Morning,


Often, things tend to sneak up on us.  It is human nature, and unfortunately a sign of our history, that we assume the thing sneaking up on us is a bad thing.  It keeps one on edge – even if you don’t know it.  Kind of like white noise.  You don’t know it is there—until it isn’t.


My point….the breadcrumbs of fear form a lengthy pathway.  It has been the underlying theme for so many years now, it has become an all encompassing gray cloud.  How do we know?  Let us count the ways:


$9.3 trillion in cash – sitting in consumer bank/savings accounts


Less than 10 days ago, the 10-year bond auction had the highest number of personal consumer bids in the history of bond auctions at 2.12% (that’s what I call fear)


And then, there is the sentiment….a dead horse indeed – but worth yet another compelling look:

This is going to take a few minutes to sink in….


Take a close look at the two charts above.


The top chart is the Nasdaq 100 going back to 1990.  The bottom is the same sentiment chart I included for you late last week.  It goes back to 1986.


Focus your attention on the matching red and green circles.


Logically speaking – you would expect these to match.


In other words – the red dots mark the top of what became known as “the tech bubble.” The markets were at record highs – and sentiment (also marked in red) – had also reached then record highs.


In essence, the masses were certain stocks grew to the sky…which can be seen in their record bullishness at the time.


Now here is the eerie part.


As the top chart shows us – prices today are almost 25% higher than they were when the masses were clearly in love with stocks!  Yet, as both spots are marked in green, we are now near record lows in blended AAII bullish readings.


Logically…there is no reason for this.


It is all emotions – and those, historically, have been very expensive for most investors.  Look for a repeat of that mistake again.  There will be a time when the lower chart reaches the same levels we saw in 2000 (marked in red).


History teaches us that is unlikely to be based on lower prices.  Indeed, we have seen a rally of 15,000 DOW points since the lows of 2009.   And sentiment?  Well, the 8-week MA chart shows you we are barely above the reading seen in all of 2009.


I have typed this often in these notes:  Based on the underlying fears still solidly in place many years into recovery, the data suggest it will be thousands more points before people feel “good” about stocks again.


There will be a price.  But as stated before, that is unlikely to be a lower price from here.


Shocking….but again, the value is in the breadcrumbs.


Pay attention to the current, not the waves.


S&P 500 Earnings, Revenues & Values


Ok, Q1 earnings season is behind us – but – in another 7 weeks, the next season will begin for Q2 data.


But there is good news behind the scenes – just as too many fret over Comey’s statements and the comedy in DC:  S&P 500 consensus forward revenues rose to a second straight weekly record high!  At the same time, forward earnings was at a record high for a ninth straight week!


As Gen Y moves into the marketplace, we have often stated, we can soon expect margins to expand as their deflationary force brings costs down.  The good news?


Forward profit margins rose w/w to a record high of 11.0% from a long-standing 10.9%. The profit margin’s record high is its first since September 2015 and up from a 24-month low of 10.4% in March 2016 – right after the “the worst start to markets in over 80 years.”


Dr. Ed tells us that forward revenue growth for the S&P 500 was steady w/w at 5.4%, but that’s down from 5.8% in late January, which was the highest since May 2012 and compares to a cyclical low of 2.7% in February 2016.


Dr. Ed and his team also share, “Forward earnings growth improved to an 18-week high of 11.3% from 11.2%, which is down from 11.7% in January; that was the highest since October 2011 and compares to a cyclical low of 4.8% in February 2016.”


Beat or Ignore?


In the grand scheme of things, one may want to consider this:  where is it written that as an investor I should have the singular goal of “beating” the overall stock market on a total return basis?


For example…what if, instead, my goal needs to be more focused on satisfying a compounding income need in ways that the S&P 500 index is not capable of generating for me?


Hence, let’s say one builds a stock portfolio which produces significantly more dividend income (even better, if it compounds each year) than the S&P 500.  Has the investor somehow “failed” because partial capital appreciation components may be lower during certain periods of time?


Personally, I think that’s an error in mentally framing it – but let’s stay on that line of thought…


Sometimes, judging success or failure based on outperforming a benchmark such as the S&P 500 could really prove problematic to other important client goals and objectives.


The problem with doing so is many may misunderstand the vagaries of short-term price action.  Through that misunderstanding, the error can be compounded by actually assuming something “must” be wrong and then a change takes place – when nothing was really wrong at all.


Sure, at times, as an income investor, one risk is that it is possible one could be forced to “harvest” shares during a bad market in order to meet income needs. Therefore, I would be invading my principal and doing it at a time when I might be better served to simply hold.


However, the flip-side of that concern begins first with better planning for the pathway ahead – allowing for those risks.


Further, if one builds a dividend growth portfolio that is producing an adequate amount of dividend income to meet their desired income needs, short-term price volatility can become far less consequential.


We must all accept this reality:  short-term price volatility is surely very unpredictable (and always will be) and could, as described above, cause reactions which work against one’s better interests in the long-term.


We must remember this key element:  the compounding dividend income stream is based on the number of shares one owns and as such, tends to be more predictable and reliable – regardless of what the market may be doing on a short-term price action basis.


The  most overlooked aspect of all?  History shows repeatedly, even when the market price of a stock is falling, dividend incomes can actually be rising, assuming one picked the right dividend growth stocks.


The Bottom Line


The week’s theme as the summer haze grows and Congressional hearings proceed:


Ignore Politics – Focus on People.


Pray for the summer swoon.


Slowdowns and hiccups in the “monthly data” are dead ahead because everyone will be at the beach and spending time with kids….something I promise to do this year.


As it relates to that feared summer “swoon”, expect it – don’t fear it.


Why?  Simple:  Take a look at every other summer swoon in history.  They were all at lower prices than where we are now.


Enjoy the beach plans ahead and time with loved ones and friends – be well and please travel safe!


Until we see you again, may your journey be grand and your legacy significant.