Stock Talk School: Conventional Wisdom

Join Chris Perras for the 1/22/2021 episode of Stock Talk!

Chris Perras: Good morning. I’m Chris Perras, chief investment officer at Oak Harvest Financial Group in Houston, Texas. Welcome to our January 22nd weekly Stock Talk podcast: Keeping You Connected to Your Money. With the elections now firmly behind us, markets making you all-time highs almost daily, and many speculative names having moved parabolically upward the last four weeks, the investment team at Oak Harvest has gotten some calls and emails the past two weeks from clients and prospects asking, one, if we’ve changed our minds, strategies, or outlook for the economy and the stock market for 2021 and, two, what Biden’s agenda might mean from a market perspective.

This week’s podcast is titled Conventional Wisdom, It’s Comfortable, but is it Profitable? I’m not going to break out the down and dirty data for this one. I’m not going to go all the way back to the 1920s and 1930 analogies like I’ve heard endlessly on TV from a number of retired and semi-retired billionaire hedge fund managers the last three years. I’m going to stick to the time period since the Great Recession in 2008, 2009, because that’s the cycle we’re in. Think back to the early 2009 time period during President Obama’s first presidential term.

Into his election, and throughout the first years of his presidency, the conventional wisdom and conventional investment trading recommendations were that investors should buy guns and ammo companies like Smith & Wesson and Sturm, Ruger. That would benefit because national gun control was coming. I’m not kidding. I remember this. I was getting calls on this almost daily. We had unemployment rates around 10%, and I was getting these kinds of calls as investment advice. These names spiked higher in the fourth quarter of 2008 and very early 2009 in advance of President Obama’s inauguration.

Then, they traded sideways for the next four years of the Obama first presidential term, and the S&P 500 almost doubled. So much for conventional wisdom being right. Healthcare stocks, particularly HMOs, health maintenance organizations, which many of us have for our healthcare plans, were said to be uninvestable because of the looming Obamacare healthcare legislation passage, which subsequently took almost exactly two years to pass and barely passed on a Christmas Eve when no one was around to read the bill. Come on, we all remember those famous words from Nancy Pelosi that we’re going to kill every healthcare stock in the market.

I quote, “We have to pass it so that you can find out what’s in it.” Well, on the back of that healthcare bill, HMO’s like UnitedHealthcare went up over 200% to 400% the next four years, vastly outpacing the overall markets. Even moving a step closer to more socialized medicine couldn’t stop a large component of the overall healthcare sector from making huge investment gains. I personally hated my new, more restrictive healthcare options under Obamacare, but professionally as an investment manager, I found many healthcare companies to invest in that prospered under the rules of Obamacare.

That’s the investment team’s job here at Oak Harvest, as your fiduciary to protect and grow your investment accounts in line with your investment objectives, regardless of our personal feelings on certain legislative or policy matters. Fast forward to President Obama’s second term starting in January of 2013. Investors were supposed to sell defense contractors as we were going to be pulling troops out of a number of foreign conflicts. We were going to become a weaker country on the global front. That was the conventional wisdom. That was what was recommended by many market prognosticators.

What happened? Big, boring established defense contractors like Lockheed Martin gained upwards of 200% in the next four years. Conventional wisdom? It was comfortable, but it was wrong again from a financial and stock market perspective. Those are easy mistakes to make. That was under a Democratic Party President. Let’s look at conventional wisdom this cycle under our most recent Republican president, President Trump. Back when President Trump was elected in late 2016, I first recall almost no one thinking that the market would rise given his lack of political experience.

Well, clearly, that turned out to be wrong as the S&P 500 has risen almost exactly 80% in the four years of his presidency, but that was the Federal Reserve doing its QE stuff again mostly after February of 2019, you might say, ignoring the strong economy under his early leadership. Well, back in 2016, the conventional wisdom of what to buy under President Trump, what was it? It was buy defense companies for a strong national defense policy. Buy bank stocks and energy stocks to do lower regulations, and sell Chinese stocks on a strong domestic stance for overseas adversaries.

What happened? From a financial standpoint, each one of these conventional wisdom financial leanings were dead wrong the next four years. Three of the worst groups in the entire market from early 2017 through the 2020 presidential election, what were they? They were banks, defense stocks, and energy and oil stocks. Where are we now? What is conventional wisdom? Well, as far as I can tell from the news channels and reading research reports, conventional wisdom is this.

One, 2021 will be a year of high volatility due to COVID-19. We’ve said it here a number of times before, we do not see this at all. Quite the contrary, our investment team sees one short-term bout of higher volatility mid-first quarter in the next, say, three to eight weeks followed by an all out collapse in volatility the rest of the year. Very loose Federal Reserve monetary policy is the main reason, but a return to a quieter and few real-time policy decisions on social media is a second good reason.

Conventional wisdom is interest rates rise somewhat throughout the remainder of the year as inflation picks up, and that could hurt the overall market. Our team actually sees the 10-year Treasury interest rates rising to over 2% by the end of the year, led by real growth, not inflationary growth. The stock market loves real growth accelerations because earnings growth explodes higher when real growth picks up. What sectors are supposed to be hurt and not work? Well, old-line energy stocks, non-ESG companies like pipeline companies, drillers and refiners aren’t supposed to work.

Meanwhile, clean energy and renewables are supposed to be all the rage going forward. Additionally, banks and defense stocks are supposed to be hands off, and I’ll throw into the mix the big-cap tech stocks on regulation worries, and a basket of social media stocks. Of course, the leading groups since the early November election results, what have they been? Those have been bank stocks and old-line energy stocks. Some new tech clean energy stocks have done very, very well in this speculative environment here the last couple of weeks. However, large-cap tech stocks have re-emerged the last two weeks as leadership.

What’s the plan here? What is our investment team seeing, thinking, and planning to do if this price action continues? I’m stressing, this is if short-term price upside price action continues. Behind the scenes, our indicator is staying consistent. It continues to say, be increasingly cautious and go slower in initiating new capital into higher risk, more volatile stocks right into the end of this month in the first few days of February. Listeners, we have not changed our outlook and strategy for months. Why? Because contrary to headlines, we have yet to see anything abnormal this cycle.

What we are looking at is merely a tool we use to help us tactically allocate some of your money movements and investments. These air pockets that almost always come at least once a year, even in bull markets like this, are the real opportunities that get us excited. Those are the periods when we see volatility that has spiked over multiple weeks as people who are late selling and are really starting to panic. That’s when that volatility starts to peak. That’s when the team at Oak Harvest likes to accelerate our investment programs for clients. That’s when we go from a more measured pace to accelerating our buys for clients with cash or newly opened accounts.

The data hasn’t changed. All the data continues to line up with our team message since our second half 2020 outlook was published last year, as well as our recently published first half 2021 outlook. That message was the fourth quarter of 2020 through early 2021, which show accelerating stock returns with the market making and sustaining material new all-time highs and January showing what could be an exponential move up to a short-term peak near month-end or early February.

Fast forward four weeks from there, and we should be looking at more attractive valuations. Fast forward another four weeks from there, and we should be looking at the clouds clearing for the rest of the year and volatility plummeting to new levels that few are predicting. In a nutshell, that’s our plan. We are in a bull market, one that is trending higher to new all-time highs but on the verge of going too far, too fast. Should it continue a while longer into month-end, we’ll be tactically selling some winning positions down, harvesting some losses for taxes, and waiting for better valuations and opportunities in the next few months.

We’ve released our first half 2021 outlook a few weeks ago by way of a podcast. We just posted it on our website at oakharvestfg.com. Go there, please, and check it out. At Oak Harvest, we’re comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. Give us a call here in Houston at 281-822-1350. We are here to help you on your financial journey in retirement through customized retirement planning. Many blessings, stay safe. May God bless you and your families, and God bless America. We are stronger together than we are divided.

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