More bad news folks, Mercury’s in retrograde!

And, when Mercury is in retrograde, according to the astrology crowd, it is not a good time to make decisions about finances, love, communicating, contracting or just about any human enterprise. Thank you Angela Fritz (atmospheric scientist and WP Deputy Weather editor) and the Washington Post for educating me on this (People are freaking out about ‘Mercury in retrograde.’ …). Because, up until this day, I had heard this term, but did not know or care about its meaning. In all fairness, Ms. Fritz does not endorse this thought process or astrology, but, in her article, just tries to, in a scientific, unemotional fashion, explain the optical illusion of a retrograde planet traveling in reverse of the path of its normal orbit around the Sun. According to Fritz, on average, Mercury is retrograde about four times a year … leaving us many opportunities to reside under its dark cloud. The current retrograde position ends May 22. So, be careful out there!

I am proud to present this information

I am proud, because I believe that I am the only pundit, or pseudo-pundit to present this new negative facing the market. Everyone else is worried about the new-found weakness in the dollar, which I thought would be a good thing, since most spent all last year complaining about the damage a strong dollar was doing to our competitive position and earnings. They are also beginning to worry about the new-found strength in crude prices, which they said, last year as they plummeted, was a sign of weak demand and imminent recession. I mean, if crude prices continue to go up, it could choke off what little economic growth we are experiencing. Oh, let me not forget to mention valuation. I am proud of this new brick that I am adding to the ‘wall of worry.’ Now, as I write this, I have yet to read Barron’s. It is conceivable Randle Forsyth may have also picked up on this significant new negative for his weekly tale of woes (Up and Down Wall Street).

Gravity is the invisible glue that keeps our planetary system from flying apart. Interest rates have been likened to gravity for stock valuations.

This is not my analogy. It belongs to Warren Buffett, who always has ingenious ways to simplify the complex. In the attached link, Buffett asserts that interest rates act as a gravitational pull on stock valuations.  He made this analogy when answering another one of Carl Icahn’s dire predictions (“Don’t put too much stock in Icahn’s market ‘reckoning’ warning”). Buffett maintains that when rates are very low they exert very little pull. He posits that if you knew that rates would be zero forever, then it would be easy to justify stocks selling at 100 or more times earnings. There would be no pull and no return competition for stocks. On the other hand, when rates are very high, such as those we saw back in 1982 (15% 10-year Treasuries), there would be a tremendous gravitational pull on valuations. We saw this during that same time period when the PE on the S&P 500’s trailing-twelve-month earnings went to 8X.

Where are rates going? When and by how much?

The only one of these question that I can answer with any certainty on an intermediate or longer-term basis is: WHERE? My answer is, UP. Unless, the economy of the US and the rest of the world really takes off, an event that I would assume would to be a positive for equity prices, I’m betting this will be a very slow process.

You may find the following statistic of some comfort. According to Trading Economics, the Federal Funds rate in the US has averaged 5.88% between 1971 and 2016. In March of 1980 the FF peaked at 20%. We survived all of this with a seventeen-fold increase in the Dow Jones Industrials. The effective FF rate is currently is .37%. It is doubtful, even a 1.00% increase in the FF rate over the next 12 months is going to exert much gravitational pull on valuations, especially if it is accompanied by a more vital economy.

My bottom line is that many pundits continue to point to overvaluation as a key market risk. I say doing this in a vacuum, without considering the gravitational pull of rates (or lack thereof) is a mistake.

So, what’s your pleasure, Mercury in retrograde or Buffett on interest rate gravity?

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