The Continuing Rally of 2019: Baby It’s Cold Outside

February 3, 2018


I am told that our titular theme bears the same name as a song that evoked some controversy this past holiday season. In my distracted state, as I was watching with horror what amounted to a wholesale plunge in global equity valuations, I must’ve missed it. Yeah, I know the song; it doesn’t fill my pencil with lead, and part of me wonders what the fuss is all about. But lord knows, in this time of heightened sensitivities of every shape and size, where long-established idioms of communication can be transmogriphied into triggers and dog whistles, I don’t wish to offend anyone.


But Oh baby, it’s cold outside. Or was.


Midweek, my home turf of Chicago registered some of the lowest temperatures in recorded history. There’s been a great deal written, said and filmed on this topic, but to me, one fact captures the torturous physical reality of the arctic blast more than anything else. For the first time in its history of world class erudition and scholarship, The University of Chicago (one of my three alma maters), actually cancelled school. Ye Gods, they didn’t shut down during the Blizzard of 1967, and the only reason no classes were held in the wake of the Great Chicago Fire is that the University itself did not exist, would not be formed for another 20 years. Must have been pretty cold on the Midway last week.


And the mercury wasn’t the only thing plunging in the Windy City. The (somewhat) widely watched Chicago Purchasing Managers Index took a polar plunge on Thursday as well:

I really don’t want to make too much of a thing of this. After all, it is Winter, and drops of this nature (as well as those described above) are perhaps nothing more than what the Good Lord intended.


And yesterday was Groundhog Day, which, at least for me (along with Mardi Gras) is the point at which it becomes appropriate to begin the countdown to longer days, warmer temperatures and (dare I mention?) Green Shoots sprouting from the now bare trees and frozen ground.


Meanwhile, temperatures in the market have remained, well, temperate. Our equity indices put up an impressive run last week, to cap off the best January in, well, in quite a while. I must somewhat shamefully admit that after the previous week’s somewhat tepid performance, I was harboring fears that the triple digit annualization rate, so enthusiastically celebrated in these pages, was unthinkably at risk. But this past week renewed my faith, and I’m happy to report that all of our benchmarks regained sufficient vigor to suggest that their doubling or more this year is still in the cards. Winding the clock back to Christmas, each of them looks like a 3x. Or better.


And there’s still better news that I am able to share. Returning to our holiday theme of addition by subtraction, I feel that the miraculous rally is, at this point, justified by the underpinnings of the global capital economy. By way of elaboration, I must dwell yet another spell in the realms of the Ghosts of Christmas (Recently) Past. 5 weeks ago, as we all sipped upon our egg nog (or other strong waters), there was much on the investment horizon to disturb our seasonal tranquility. Earlier that week, the Fed had not only hiked rates, but done so with rude, aggressive accompanying language. The trade representatives of the United States and China were at long daggers. The economy was showing signs of deceleration, and all along the corridors of Wall Street, there was banter not of Peace on Earth and Goodwill to Men, but rather about Peak Earnings and Recession.


There was, in summary, a great deal to vex our troubled souls as we contemplated our return to our investment battles on January 2nd. And somehow, since that point, virtually every catalyst for short-term consternation has broken favorably.


As we entered the last week of the month, the tailwinds were already gathering. Fed rhetoric had softened, as had the dialogue between the Trump and Xi factions. But by the 2nd full week of January, it was time to undertake the often-arduous task of hunkering down and dealing with what looked to be a very iffy earnings cycle.


All of which led up to the events of last week, by far the most important Monday-Friday series of this young year. And by god it was a good one. The major action began after Tuesday’s close, when Apple CEO Tim Cook took to the podium. His performance won’t go down as one of the Company’s finest, but in the wake of his January 2nd tape bomb letter, the consensus was relief that Apple was able to hit at least the low end of the socialized ranges, that trade-related slowdowns in China accounted for more than 100% of the revenue and earnings shortfall, and that its recently lauded service business had a blowout quarter. Apple, in other words, has yet to complete its Newtonian destiny and hit the ground full stop.


Investors breathed a collective sigh of relief, and girded their loins for a Wednesday session that would likely set the tone on a going-forward basis. It began with Chairman Powell’s FOMC testimony, which in addition to the happy and expected announcement of a “stand pat” on short-term rates, featured pledges to the masses that his crew would be patient in terms of its overall rate normalization objectives. Well, the markets swooned with delight, as well they might’ve, particularly given the cooing and wooing language emanating from the U.S. and China in the wake of Wednesday’s trade summit.


And, just as investors were catching their collective breath after some frenzied buying into the close, the stage was set for the quarterly reporting rituals of Microsoft and Facebook. In terms of the former, the Company generated better than expected results in its cloud and other business service units. Its guidance was similarly encouraging. However, in a perversely encouraging sign of higher expectations for U.S. companies, the response was tepid, and the stock has actually traded down since the announcement.


We now come to the quixotic case of Facebook, which endured about as difficult a 2018 as any of God’s favored should ever be forced to withstand. At the end of the their Q3 earnings call, in one of the most astonishing “oh-by-the-way” events in quarterly reporting history, their CFO actually guided down for the next three years. Well, what a difference a couple of quarters make. The Company announced blowout numbers and told of its gleeful optimism for the future. Investors, of course, responded with an unmitigated , and the stock regained over 10% of ground it lost during the dark year of MMXVIII.


The final earnings bark of the week by the big tech dogs came from Amazon, after the close on Thursday. Team Bezos, too, beat every marker but suggested caution in terms of the remainder of MMXIX. But Amazon is Amazon, and we must render to Bezos what is Bezos’s (except, of course, what his soon-to-be ex-wife’s lawyers wrangle out of him). Investors weren’t impressed, but I was. Their macro-critical business unit: Amazon Web Services, in my mind a leading indicator of business sentiment, clocked in with a whopping 45% increase in sales; 61% in Operating Income. Let’s face it, guys and gals, it coulda been a lot worse.

Next week brings the Alphabet Googlers to the podium, and I don’t think they’ll disappoint – at least by much, and, by the time they’re done, most of what we care about in terms of earnings will be in the books. It has not been, by any measure, a blowout quarter, but the SPX looks poised to meet or beat the aggregate, full-year Mendoza Line of $170, and when I asked a number of investment warriors whether, back at Christmas, they would’ve been satisfied with corporate performance as it appears to us today, the answer was a resounding, unilateral yes.

The week ended with a highly gratifying January Jobs Report, which only the dowdiest of Debbie Downers could evaluate with a jaundiced eye. Non-Farm Payrolls blew through the partial government shutdown and spit out more than 300,000 new permanent gigs. Labor Force Participation increased, and even my acquaintance Debbie D was forced to admit that the figures showed no signs that the American economy is grinding to a halt.


So, as compared to all that Christmas agita, we are now operating in an environment where the Fed is on ice, America and China are converging in their trade dance, earnings are showing a stronger than expected pulse, and the domestic economy is chugging along in robust fashion. I feel, therefore and on balance, that the risk overhangs of the market have dissipated dramatically, and that the underpinnings of the V-bottom are by and large justified.


As to what happens next, well that’s another matter entirely. I kind of doubt that all of this good vibe news will catalyze an extended rocket ride; in fact, a strong argument can be made that stocks are at present fairly and fully valued. But I think that the winds have broken favorably in divine fashion and my main takeaway is as follows. Investors now have my blessing to put their full positions on for any name for which they have done the appropriate work and drawn constructive conclusions. Such a statement hardly puts me out on much of a limb; such a blessing, in a better world, should be the rule rather than the exception.


But I haven’t felt this comfortable since the summer. It’s been 6 long months since the macro risk overhangs have been this benign, so when I offer my blessing, it might be well to, well, count our blessings.


I’m also happy to note that temperatures in the Chicago have risen more than 50 degrees since that polar vortex blew threw town. To the best of my knowledge, classes have resumed at the city’s eponymous university. On the other hand, it’s still February, and the frigid gales may not have fully run their course.


The mercury and the index charts could always take a southbound turn. However, while it as always behooves me to urge caution, perhaps we can take a moment to enjoy the gentle breezes while they continue to blow.




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