Outlook: H2 2020, Part 2

Join Chris Perras for the 8/13/2020 “early edition!” of Stock Talk!

Chris: Hi, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to the second part of our second-half outlook. It’s pretty amazing that the market sits here at 3400 almost exactly. If you went back and looked at our first half outlook, what you would see is, this is exactly where we thought the market would be now. Now, yes, the path has not been anywhere near what we expected, largely because of the fast downturn in early April caused by COVID.

So far, outside of that massive volatility spike, the year is playing out pretty much as you would expect for a Federal Reserve easing as well as an election year. The second half of our outlook, most likely the market spend September through early October, maybe mid-October, consolidating the gains and pulling back during its normally slow period. We will enter in September the dead zone for the third quarter. As of today, with the president trailing in the polls, but starting to pick up ground with oddsmakers, the second half path is likely to mirror that of both the normal seasonal cycle in stocks and the path portrayed by the previously mentioned election year cycle chart.

The S&P 500 could once again test its 200-day moving average, which in the next few months will be rising. Right now that 200-day moving average sits around 3,050 but if you fast forward a few months into October, that moving average will likely be upward sloping and approaching 3,100, 3,150 maybe even 3,200. This is all very normal. Even in V-bottom patterns in most years this is what happens late summer due to economic growth slowing. This year, it’s even more likely to be normal as domestic growth concerns continue due to the virus.

Should the economy continue to regain its footing throughout the summer and into the third quarter, the odds of the incumbent presidential win by President Trump are likely to increase substantially and the gap with his contestant Biden will narrow. In this scenario, the S&P 500 is likely to continue its relatively linear upward move through summer and into year-end due to lower volatility and the prospect of continued low taxes. The normal incumbent when returns target for the S&P 500 is around 3,550 near the year-end.

Should we fear a Democratic blue wave in the upcoming elections? History would say no, not as far as the stock market is concerned. History would say, “Stay calm and carry on and stick with your financial plan.” History says that companies in the stock market can find a way through that even it can generate strong positive returns even under a blue wave scenario. Which brings me to the big finish. Targets on the S&P 500. Yes, I hate doing this but I feel compelled to as almost everyone else does it.

Here goes. It’s pretty much independent of who wins in November except the path and the volatility to get there. For now, we’re going to stick with a little below the average return in election year. Election year return puts the ending S&P 500 level around 3,450, 3,500. At the high side, 3,550, that’s up about 14.5% from mid-year and another 7% from the 3,250 level. The math behind the stock market hidden in option pricing says that 3,700 to 3,800 in the S&P 500 is likely in the first quarter of 2021.

If markets can regain their Federal Reserve induced calm post-election, I can even get to a blow-off top in the S&P 500 in 2021 in the first half of over 4,000. What level the market ultimately reaches over the next 6 to 12 months has not changed much over the last six months. Why? Investors have one reason and one person to thank, Federal Reserve Chairman Jerome Powell. If we fall short of these high lofty S&P 500 levels, it will not be the fault of central bankers. TV news anchors will likely say stock markets like certainty. As the first six months of 2020 has shown, there is zero certainty in life.

What markets and investors crave is consistency in policies. They might not like the rules, maybe it’s higher taxes, or more regulation, or maybe it’s increased costs by tariffs. But history has shown time and time again management teams and companies can adapt and maximize investor returns so long as these policies are not moving targets. Set the rules and don’t move the goalposts mid-play. Just to let readers know, in July of 2016, months in front of the 2016 presidential election, in almost the exact same place in financial markets, the economy, and pre-election worries, this same option calculation said the S&P 500 should reach 2,800 by January of 2018.

The calculation was only off by 3% or about 75 points 18 months later. The difference in the calculation essentially was the passage of the early 2018 Trump tax plan, which caused volatility to drop three points lower than historic lows. As far as 2021 and beyond, we are in a new bull market. Given the lag effect of Federal Reserve monetary policies on economic growth and inflation, I expect a positive pickup in both in the second half of 2021.

Yes, I am on Jeremy Siegel’s side of the early call for an upturn in inflation. The declines this cycle had been almost exactly two years peak to trough, to the week. The decline in real interest rates from 2010 through late 2012 took almost exactly two years. It lagged. The first round of quantitative easing initiated in 2010. The latest round of declining real growth started when? It started around November 2nd, 2018. What happened on or around that time?

Recall way back then, it was almost exactly on this date that the Federal Reserve made their big mistake and raised interest rates at the time stating, “We had a long way to go in raising rates to equalize.” What has happened to real growth ever since? We have had a consistent downward trend that is approaching two years exactly. In fact, looking at the attached chart, one would see that two years from November 2nd, 2018 gets you to when? Oh, yes, I think that’s in a few months.

I think that works out to be almost exactly Election Day. This concludes our second half 2020 outlook. We will return to our normal podcast next week, where most likely will be focusing the next two months on the election, it’s outlook for the economy, and more so the stock market. How the election, whether Trump wins reelection or Biden wins, how that will affect not really the stock market, but sectors and rotations and what is value, and where we find value, and where we see the opportunities for the fourth quarter of this year in 2021. Have a great weekend. Stay safe, mask up, many blessings.

Speaker 2: The proceeding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data statistics and sources are not guaranteed. Content, ideas, and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.