Click the play button below to listen to a new conversation between hedge fund manager and MacroVoices podcast host Erik Townsend and Hedgeye CEO Keith McCullough. (Click here to get a special offer on Hedgeye's "Best Deal of the Year.")
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Erik Townsend: Joining me next on the program, and back by popular demand, is Hedgeye founder, Keith McCullough. Keith, last time we had you on the program everybody and his brother was screaming, hey, the top is in, this is it, stock market’s about to roll over, get out, get out, get out! And you very boldly and confidently told us, look, it’s expensive. And expensive things get more expensive. That’s just how it works. And you were very bullish.
And, of course, you’ve been proven right to date. It’s so timely: As we speak again, on Wednesday morning, we’ve got the equity market down a few percent. And, of course, once again, the chorus is all over the internet: The crash has begun, it’s all over, the end is nigh, it’s all coming. What are we down? Three–four percent? And the world’s coming to an end. Where are you at now? Is it time to join the chorus of bears? Or are you still on the bullish side of this camp?
Keith McCullough: Well, thanks for the lovely introduction. It’s always good to be, I guess, a bull when most people doubt the bullish narrative. What’s interesting, is the S&P 500 – it depends on where it finishes today – has corrected literally 60 basis points from its all-time closing high. Not just year-to-date high, or some kind of a trending high – I mean from the all-time. I continue to remind people "all time" is a very long time.
And if you go all the way back – and I’m sure we’ll review this – all the way back in market history, you’ll learn that, provided that profits and growth are accelerating, what happens to an “expensive market” (and I argued that it wasn’t expensive enough) is that they get more expensive.
So at this stage I think it’s less easy, obviously, to have an epic move to the upside. These 60 basis point corrections clearly aren’t corrections. The ramp – and particularly in growth stocks – if you look at the returns associated with either growth as a style factor or just being long in the Nasdaq, they have been equally epic.
So it begs the question as to what happens next. A couple of the river cards that I was looking for fundamentally were 3% GDP, in back-to-back quarters, which we got in both Q2 and Q3. It’s unlikely that we get a third here in the fourth quarter – our predictive tracking algorithm on GDP is currently tracking around 2.5 to 2.6 – so it’s marginally less great. And on the margin I think that might matter.
The other thing is that earnings, in terms of accelerating from 2016's easy comparisons, was our call for the last 12 months. The comparisons get harder because of the massive acceleration. I know that might be a little quirky or geeky to call out. But that’s a big concern of mine, as we go into 2018, is that the massive acceleration that we saw in both S&P and tech earnings really has a massive comparison in the first quarter of 2018.
Of course, that’s not reported until April of 2018. So, between now and then, it is Mr. Market’s debate on what does and does not matter. And, frankly, I think there are a lot of different macro tourist ideas out there on why the market should have always gone down, so I expect to hear and see a lot of those things. It’ll be fun to risk manage it or to trade it.
