It’s that time again: Rotation Nation, or, “Goodbye old friend, it’s been a great ride!”
On the 1/17/2020 edition of Stock Talk, CIO Chris Perras discusses the company’s recent views on the market and portfolio construction, and our expectations for another period of “rotation nation.”
Speaker 1: Good morning. My name is Chris Perras. I’m Chief Investment Officer here at Houston, Texas with Oak Harvest Financial Group. Welcome to the January 17th edition of our weekly Stock Talk Podcast: Keeping You Connected to your Money. We are sitting at another new all-time high this morning on the S&P 500 at around 3320. Team at Oak Harvest live-streamed our first half 2020 outlook just last weekend. If you want to listen to our first half of 2020 outlook, just Google Oak Harvest 2020 Outlook. Once again, this week’s podcast, I’ve titled it, “Yes, listeners, it’s that time again. It’s rotation nation, defensive time to lead again. Goodbye old friend, it’s been a great ride.”
The team at Oak Harvest prides itself on being flexible. We tailor portfolios to our client’s individual needs. We are adaptive in our approach and we are willing to use whatever investment tools best enable us to most cost-effectively meet our client’s financial goals and objectives. We put our client’s interests first. To this end, over the past two years in many client portfolios, we have diversified the number of tools we are using for clients to include relatively lower-cost mutual funds as well as ETFs and more single stocks where it is appropriate. For many growth-oriented portfolios, this has meant the addition of new technology-focused single stocks and ETFs.
Throughout the summer of 2019, while other advisors and strategists were almost all parroting the exact same, “Let’s go ahead and heighten safety and play defensive,” meme, the team at Oak Harvest was doing the opposite. The investment team was [unintelligible 00:01:51] client allocations to offense-oriented, economically-sensitive stock sectors such as financials, technology, and industrials. However, very recently, we have made a decision to reduce our exposure to smaller capitalization earlier-stage technology investments.
The investment team chose to reduce this exposure based on two factors. First, we are starting to see parabolic moves upward in well-known technology-related names in the market. For example, Tesla, which we do not own, has risen almost 150% over the past seven months. As good as the company Tesla might be, we are compelled to reduce exposures to allocations that move too far too fast when these types of moves happen.
Secondly, with a recent rapid rise in offense-minded groups such as technology in the fourth quarter of 2019, we have chosen to pare back some of our exposures to this sector and redeploy the proceeds into more defensive sectors in advance of the herd. This is an example of the kinds of portfolio construction and risk mitigation decisions that the team at Oak Harvest makes all of the time as we continue to manage our client’s portfolios.
With the markets up strongly for the first part of January, the China deal, now inked in in Washington, DC, and many strategists sounding the, “It’s time to get offense in your stock portfolios,” the team at Oak Harvest has recently been doing the opposite. We’ve moved some additional investment allocations into areas that we have waited since mid-2019 to invest in. The financial press has yet to see what is going on because it is early, but the period of mid-February through summer is likely to be another extended period of what I call rotation nation.
Versus the summer of 2019 when offensive-minded stocks became value, now lower volatility in defensive areas such as staples and real estate have again become attractively valued. Why? The dollar has been trending lower since September of 2019. This trend of gently depreciating dollar is very beneficial for an earnings acceleration in sectors such as staples and healthcare as well as internationally-biased companies as we progress through 2020.
Additionally, continued low and slow economic growth is positive for hard assets with built-in inflation protection, such as industrial and business real estate. It is also very beneficial for domestic housing and companies that supply the housing industry, such as paint suppliers, tool manufacturers, and tool renters, lumber suppliers, and big-box retail housing supply stores. The rally in the market that started the week of October 2nd last year is now approaching the four-month mark. As we have stated over and over for the past year, the move since January 4th, 2019 have been very normal for this cycle. We expect this normalcy to continue through the first half of 2020.
We have already started getting calls on TV for a repeat of the February 2018 move down that we saw in stocks. As we have said for months, while we do expect a mild pullback in the first quarter, in the range of 3% to 4%, we do not expect anything like a repeat of 2018. For now, any weakness in the mid-first quarter should be viewed as one of the few buying opportunities that investors should get in the first half of 2020. We’ll be looking for opportunities to redeploy allocations into areas that we believe will return handsomely in the second half of 2020 and beyond.
On a tangent, I want to revisit a segment of the podcast we haven’t visited for a few months. That segment is titled ‘Fictionary’. It’s where we highlight and/or educate our listeners on a financial term that is often abused or misused by the Financial Press. Sometimes, they pay homage to a market opinion, outlook, or comments I find comical or verging on absurd. The year 2019 was filled with these opportunities, largely on the backs of the Armageddonous billionaire hedge fund manager.
Well, listeners, this year, I won’t pick on that crew as much. However, today, I’m going to highlight an equally absurd market commentary coming from the world of– Anyone? Anyone? Yes, index investing. Joe Davis, the Chief Economist and Head of Investment Strategy at fund giant Vanguard, came out a few weeks ago in early January in the Financial Press and said he remains cautious on equities.
Early last November, he said, “In the year ahead, we do not foresee a significant reversal in the US-China trade tensions that have occurred so far. Our near-term outlook for global equity markets remains guarded and the chance of a large [unintelligible 00:07:01] down for equities and other high data, more volatile assets remains elevated and significantly higher than it would be in a normal market environment.” He added, “It might be better to keep the powder dry for now heading into 2020, as there will be better entry points,” he said. Remember, he said these things in early November 2019.
Okay, listeners, where do I start with my rant? Jack Bogle, Vanguard’s founder, is turning over in his grave. Vanguard, the largest mutual fund and ETF provider in the world, with close to $6 trillion assets under management, whose very foundation of existence is based on low-cost, market efficiency, has an investment strategist who is being widely quoted in the Financial Press for his market timing opinion. Please sit quietly in thought for a few moments and let that sink in.
First, Vanguard has a market strategist, which I cannot believe. He manages no money, but he recommends market timing, even though the existence of Vanguard itself is based on being 100% invested in an asset allocation around your long-term financial plan. There isn’t enough time for this full rant. I am speechless. If your investment advisor has been following the herd selling stocks when they were going down then buying them again when they were much higher and calling that tactical asset allocation, please give us a call at 281-822-1350. We are here to help you on your way to retiring and staying retired with a customized retirement planning. Many blessings. This is Chris Perras with Oak Harvest. Have a great weekend.
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Chris Perras
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.