In honor of the Thanksgiving holiday this week, I thought I’d reshare the fabled Wall Street tale about a character named “old Turkey” from the 1923 classic Reminiscences of a Stock Operator. The book is one you should definitely read if you have not read it before, and reread if you have, for it is filled with all sorts of trading and investing wisdom. None perhaps is so famous, though, as the story of old Turkey, who, when asked why he wasn’t going to sell his stock in a company and buy it back later at a lower price, responded as follows:
“My dear boy,” said old Turkey, in great distress “my dear boy, if I sold that stock now I’d lose my position; and then where would I be?” Elmer Harwood threw up his hands, shook his head and walked over to me to get sympathy: “Can you beat it?” he asked me in a stage whisper. “I ask you!” I didn’t say anything. So he went on: “I give him a tip on Climax Motors. He buys five hundred shares. He’s got seven points’ profit and I advise him to get out and buy ’em back on the reaction that’s overdue even now. And what does he say when I tell him? He says that if he sells he’ll lose his job. What do you know about that?” “I beg your pardon, Mr. Harwood; I didn’t say I’d lose my job,” cut in old Turkey. “I said I’d lose my position. And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller.”
And yes, pulling this story out the week of Thanksgiving may be a tad bit eye-rolling, but I was actually reminded of it last week when a few people asked me if they should be doing some selling right now while the market seems to clearly be in “risk-on” mode and many stocks have jumped very quickly. My reply echoed some of old Turkey’s wisdom by reminding them that this is a bull market and no one knows how high it could eventually go. You want to make sure you ride your gains for all you can get out of them, and, unless, a stock is breaking down below a critical level, selling it may end up costing you in the long run. There’s no guarantee that you’re going to get a significant correction to buy back in on either, and there is certainly the chance you don’t time it correctly even if you do. And if this does end up being one of those buying-stampede-type runs, you definitely don’t want to lose your position.
This rally still doesn’t really show signs that it wants to end, but holiday weeks such as this one can be a little unpredictable with the generally lower volume. Going back to 1945,the week of Thanksgiving has largely been better than average, with a 0.62% average gain and almost 75% of weeks finishing positive, but during this current bull market, the week has actually been a bit tough, with a 0.37% average loss. It’s not all bad news, though, since the negative Thanksgiving returns have usually set the market up for a strong finish to the year, with a 3.68% average return over the last month of trading going back to 2009 (Source: Bespoke Investment Group). And we’ll just have to see if some turkey and dressing can slow down the Russell 2000, which has now been up 11 consecutive sessions and continues to play the role of market leader. The small cap rally prompted Sentimentrader to do a study and this actually marks the best performance during a 10-day winning streak in the Russell 2000’s history (13.2% as of Thursday’s close). What’s more, the near-term performance following other 10-day streaks in the past has actually been quite good. One month later, the average return was 3.5% (median 3.7%) and 13 out of 16 periods ended higher, so that, too, bodes well heading into year end.
The third quarter earnings season has come to a close, as well, and 62% of companies ended up reporting earnings above analyst consensus estimates, which is right in line with the historical long-term average (source: FactSet). More interestingly to me, though, was that the cyclical sector earnings beat rates were, in fact, led by technology (74%) and the financials (69%), which means the profitability of the financials was already trending up and doing well even before the election result. This strengthening earnings performance also helps confirm why we saw the KBW Bank Index start to break out over the summer, and, of course, the banks could have more ground to gain in the next couple of years with higher interest rates and a possible rollback of some regulations.
So, overall, U.S. stocks don’t seem too concerned about much at the moment, but could a stronger U.S. dollar start to put pressure on future profitability and prices? You may have missed it last week, but the U.S. Dollar Index actually broke out above the two previous highs from early and late 2015 to reach its highest point since 2003! This recent spike likely concerns anyone who remembers the role the strong dollar played in 2014 and 2015 when oil prices collapsed and corporate profitability took a hit, but it is less likely we’re going to see a repeat of that type of impact this go-around. For one thing, the 10-Year U.S. Treasury rate has already risen 70% since July but the U.S. dollar has only jumped about 7% and oil prices have remained relatively stable during that time. By comparison, the recent move in the dollar is a far cry from 2014-2015 when it surged almost 30% as the market started to anticipate higher interest rates. In fact, we have only now returned back up to where rates were back then, and most investors seem to be okay with the current outlook for the Federal Reserve over the next several months. All in all, the strengthening dollar is something to monitor, but at this point it does not appear to be a game changer at current levels.
As mentioned, too, the fact that oil prices have remained relatively stable despite the recent strength in the dollar should be viewed as a favorable sign for the future price of the commodity. This resiliency is further evidence that we are in a completely different environment than in 2014-2015 when the combination of a surging dollar and tremendous oversupply led to oil prices collapsing, and, accordingly, our Raymond James energy team still expects crude to hit $60-70 in the next few months. A pause in the dollar, therefore, may be all that is required for oil to take yet another shot at getting and staying above the $50 mark.
The outlook for gold, however, is a little more questionable, as it has not held up as well recently and the price remains under pressure. Remember, people buy gold for many different reasons – protection, an inflation hedge, speculation – but it’s tough to make a strong case for it right now. As we have seen over the past couple of weeks, the market seems to be feeling better about overall conditions, which means investors are less likely to seek protection, and while there does finally appear to be a path toward higher inflation with the coming administration, it’s going to take some time for the expected stimulus measures to trickle down into the U.S. economy. We are also unlikely to go from worrying about world-wide deflation to world-wide inflation so quickly, and the Fed is obviously monitoring the situation closely and may be ready to raise rates at the first sign of a pickup in aggregate price levels. It is likely no surprise then that legendary billionaire investor, Stanley Druckenmiller, said last week that he has sold his large gold position and is now betting on a strong economic recovery (Source: CNBC.com) So, when it comes to gold, despite the fact that the $1200 level may result in some technical support, the metal still has some work to do to prove that it has hit a bottom and there appear to be better investment options in the near term.
And that leaves the call for this week: Further consolidation in the stock market is certainly possible with most equity indices still a bit extended and volumes likely to dry up with the Thanksgiving holiday here in the U.S. It remains unlikely we’re going to experience a meaningful dip, though, unless the market completely changes its opinion on the near-to intermediate-term outlook, so it is probably best to remain constructive. As old Turkey reminded us, you don’t want to lose your position in a bull market, and while it can be hard to just sit there and stare at your paper profits, it is the sitting that makes the big bucks over time. Therefore, remain patient, and if you do have some large profits to consider taking, remember to give some thanks to Mr. Market this week and he may just reward you with more.
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