Sensational Headlines… are Wrong

September 14, 2020

Market Update 2020-09-14.

Equity markets fell last week about 2.5% with energy, technology and banks posting the biggest losses, but the S&P 500 remains up about 4.8% year to date and up 13.5% from last summers “buy zone in September.”  Last week, the S&P 500 saw its weakest breadth since late June with decliners outnumbering advancers by over 8 to 1. The tech heavy NASDAQ was down almost 4% for the week but remains up 21%+ for the year and up 34% year over year.

Much has been made recently about the forward p/e ratio for the S&P 500 now sitting over 21.5 based on Bloomberg data. While we have not seen readings that high in almost 20 years, we also have not seen interest rates this low in 50 years.  You cannot discuss P/E ratios without discussing interest rates because the net present value of any asset producing free cash flow is almost entirely dependent on its “terminal value” out 10 to 20 years.

Sensational headlines

Here is a brief list of sensational headlines from the past week on the financial news networks!  These same types of headlines were rampant in 2012 and 2016 in front of the elections. The economy and the markets survived both elections and their outcomes:

  • Yes, The Crash is Coming
  • Four Causes for the U.S. Stock Bubble
  • Be Safe from a Market Crash with These Undervalued Stocks
  • Stock Pullback: Assessing the Damage
  • Beware the Bubble
  • The S&P 500 is Not Diversified and Looks Quite Risky
  • The Stock Market Has Not Been This Overvalued In 40 Years
  • NDX: a 75% Crash Should Surprise No One

Evidence trumps emotion

No amount of investment experience and market knowledge can overcome emotion. Emotion will be the curse of investors as long as there is a stock market. The better path to success in investing continues to be looking at the data from all angles and making decisions based on evidence and data over emotions and catchy headlines.

The setup for late-Q3 and early-Q4 into the election remains the same.  As of the time of publication, any pullback back below 3300, which is where the S&P 500 traded in July of this year, should be a buying opportunity setting up for post-election economic expansion.

Positive forces on stocks and the economy

Where are we seeing these optimistic signs that few on TV want to discuss when the markets are red for a few weeks?  Here are a few of them:

  • Real growth (not just inflationary growth) is starting to reverse its 2.5 year down trend (it peaked with the Trump tax plan in February 2018). The last time this indicator pivoted higher like this off its lows was in the earlyQ4 quarter 2012, during the peak pessimism of the 2012 election and worry of a second Obama presidential term.
  • Employment opportunities are started to boom again for the unemployed. According to the Bespoke Investment Group, “there have only been 24 other months in the last 20 years where the monthly JOLTS Job Openings Index was higher than it was in July.”  Job openings are one of the best leading economic indicators for real future growth… and stock market gains.
  • Finally, and probably most importantly, the Federal Reserve is continuing its pro-growth and recovery monetary policy moves. Expect further positive announcements this week when they meet (a potential “QE#5”). The Federal Reserve launched QE#3 September 14, 2012 about 6 weeks in front of the 2012 Presidential election.  Even so, the S&P 500 declined into the 2012 November election results.  However, that “dip” and pullback was the last meaningful decline the stock market had before making new all-time highs and gaining almost linearly on declining volatility for 13 months.

Right now, our view is to expect a similar repeat of this setup and outcome.

Resources

Our complete second half outlook has been also posted and can be found by clicking here:

 

Weekly market updates contain general information and expresses views of Oak Harvest Investment Services. Data, Articles, and information cited are believed to be reliable at the time of creation, but are not guaranteed. Nothing in this content is intended as, nor should it be regarded as, personalized investment advice. Strategies and ideas discussed may not be right for you.  Views and opinions expressed may change without notice and do not constitute a recommendation, or an offer or solicitation to buy or sell securities. In addition, Oak Harvest makes no assurance as to the accuracy of any forecast made. Indexes are not available for direct investment and your results may differ. Past performance is not indicative of future results. Investing involves the risk of loss.