More Normalcy — Check the Stats!
CIO Chris Perras discusses what a normal January actually looks like in the markets, covers our view of “rotation nation,” and discusses the latest crisis de jour — on the 1/24/2020 edition of Stock Talk!
Chris Perras: My name is Chris Perras. I’m chief investment officer here at Oak Harvest Financial Group in Houston, Texas, and welcome to the January 24th edition of our weekly Stock Talk podcast: Keeping You Connected to Your Money. This morning, we are sitting near an all-time high in the S&P 500 around 3,325. This week’s podcast is debunking the now constant financial press calls that we are in witnessing unprecedented and historic stock market action, that we are in dangerous times that are, dare I say, bubblicious.
Contrary to those calls that have been constant and loud since early 2019, we are experiencing a very normal January within this bull market cycle when the Federal Reserve is on hold or easing rates. The title of this week’s podcast is More Normalcy, Check the Stats. Throughout 2019 while other advisors and strategists were almost all parroting the exact same height and safety and played defense meme, the team at Oak Harvest was doing the opposite. The team here was upping client allocations to offense-oriented, economically sensitive stock sectors such as financials, technology, and industrials. Why? Because we saw 2019 as a very normal year in this bull market cycle.
We continue to see 2020 playing out in a very normal fashion, and to this extent, I want to debunk the nonstop financial press opinion disguised as news that this January is behaving in an abnormal fashion. The statistics, pure and simple, show exactly the opposite. This is a very normal January. For clients of Oak Harvest, please log on to our client portal to see the table that I’m about to reference.
During the time period 1950 through 2016, in years that the S&P 500 had a positive return in January which happened to be 60% of the years, the average monthly January return, and I’m saying the average for the S&P 500, was almost four and a quarter percent for the month. Contemplate that for a few minutes. I want listeners to note that this data doesn’t even include the last three years of 2017, ’18 and ’19, whose January returns were 1.8%, 5.4%, and 7.9%, respectively, the average of which is–? Anyone? Anyone? 5%.
As of this morning, month to date, the S&P 500 is up about 2.5% for the month of January. So far, this is a very typical up January, not only for the past 70 years, but also for this bull market cycle. To this end as we have stated for the past four months, these four-month moves normally end with an exclamation point during the last five to seven trading days of the move. They almost never end with a whimper or a fizzle.
What is the team at Oak Harvest doing? Well after preaching offensive positioning for well over nine months, we have taken a few gains at a small-cap technology, bank stocks that have moved too quickly, and some larger-cap biotech companies. We have redeployed those funds into more defensive themes that we believe will perform well throughout the rest of the year. That being said, for the second half of 2020 and the year as a whole as well as early 2021, we expect offensive-minded groups such as technology, financials, and consumer discretionary to lead stock market returns.
I see little reason to sell down most large-cap technology stocks in front of the normal slow summer period only to try to buy them back come the third quarter. Why? Because we love these names for the second half of 2020 do what is likely to be a rapid acceleration in fundamentals driven by two things. First, the upcoming presidential election is likely to be a boon to advertising and well-known network TV companies and online advertising vehicles. These types of companies will likely benefit from both an increase in ad dollars and an increase in pricing per ad.
Secondly, the rollout of fifth generation wireless technology is just beginning in the US and most of the world. China was an early adopter, the rest of the world is playing catch-up. With capital spending for semiconductor equipment only now ramping for this demand, we believe users of semiconductors will likely to be forced to order early and probably order often, stabilizing normal price declines across the semiconductor channel. We think that by the end of 2020, there will likely be double and triple ordering in front of a possible further 2021 tariff restrictions on China and other areas should President Trump win re-election.
If these things play out this way, we’d be reducing our large-cap technology holdings very late this year and early 2021 as growth comparables would become very difficult. Time will tell, but those are our very early thoughts. These should be considered preliminary, like our first thoughts on 2020 that we gave way back in June of 2019. They’re early and subject to change should fundamentals change.
We love these themes for all of 2020, but risk management tells us to rotate out of some smaller capitalization technology assets in front of the herd for the second and third quarter of 2020. This is an example of the kind of portfolio construction and risk mitigation decisions that the team at Oak Harvest makes all the time as we continue to manage our clients’ portfolios. With the markets up strongly in a normal January manner, the China trade deal now inked in Washington, DC and many strategists sounding that it’s time to get offense into your stock portfolios, the team at Oak Harvest has been recently doing the opposite.
The financial press has yet to see it because it’s early, but the period of mid-February through early summer is likely to be another extended period of what I call rotation nation versus the summer of 2019 when offense-minded stocks became value. Now, lower volatility in defensive areas such as staples and real estates have again become attractively valued. Continued low and slow economic growth, some caused by Boeing manufacturing issues, 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 the companies that supply to the housing industries such as paint suppliers, tool manufacturers, tool renters, lumber suppliers, and big-box retail housing supply stores. The rally that in the market that started the week of October 2nd last year is now approaching the four-month mark. We have two major events in the next 10 trading days that could put a short-term exclamation point on the four-month move that started October 2nd through 4th of last year. First, mid-next week, the Federal Reserve mates look for more Fedspeak around the timing and magnitude of the ongoing repurchase program.
After that early the first week of February, more precisely, Tuesday of February 4th, President Trump gives the annual State of the Union Address after the market closes. Both of these events have historically been bullish, however, they have coincided with short-term market tops. As we have stated over and over for the past year, the moves since January 4th of 2019 have been very normal for this cycle. We expect this normalcy to continue through the first half of 2020. 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.
I want to revisit a segment of the podcast we reintroduced last week after taking a few months off. That segment was fictionary. It’s where we highlight and/or educate our listeners on a financial term that is often abused by the financial press. Listeners, I know it was just last week that I said I would not pick on another billionaire hedge fund manager for quite some time. Well, I my hiatus lasted just two weeks. Why? Because they just keep giving me such great material and sound bites.
Just this past week, many of the herd of them flew on their private jets to meet, party, and pontificate together in Davos, Switzerland. We got to hear nonstop from the financial elite, most of whom have no background in science, most of whom all fly private jets throughout the world on the horrors of climate change, which is now the politically correct term for what a few years ago was global warming, but I digress.
What Davos, my favorite hedge fund billionaire turned philosopher the past four years, came out again and declared– Ready? Guess. Almost two years to the day that Ray Dalio declared “cash is trash” on January 24th, 2018, he came out again on January 21st, 2020 and declared “cash is trash” again. I remind listeners what happened last time Mr. Dalio came out and pronounced cash as trash. Yes, Mr. Dalio was right for a total of three days. For only three days later, the S&P 500 peaked and dropped close to 12% in less than two weeks. Even more telling, the S&P back then went literally nowhere net from the day of his proclamation on January 24th through October 2nd of 2019.
Yes, cash was not trashed for 21 months versus the S&P 500. In fact, in 2018, cash was literally the only asset in the world that had a positive return and beat inflation. Before I end today’s podcast, I want to address the financial presses’ crisis du jour this week. That’s the China coronavirus outbreak. For the past three days, if you turn on the financial news networks, you would swear that this was the second outbreak of the Black plague that swiped through Europe in the 1300s. The comparisons are being made to SARS and MERS viruses over the past 20 years.
Over the past 20 years, fewer than 1,700 deaths globally have been caused by those viruses. That’s over 20 years on a global population approaching seven to eight billion people. Annually, our own CDC estimates that 10,000 to 60,000 people per year in the US die of what? Of the flu. That’s at a population of 300 million in the US. Stop and think about that. The event in China, while tragic for a few affected, will have next to no long-term negative effect on the global economy and stocks. If anything, it is massively bullish for the second half of 2020, as Chinese consumer companies have to restock their shelves with essential items that there’ve been a run on.
The next time you hear one of these cutesy terms, pithy sayings, or the crisis du jour, please stop and think about its context. Think about the intent of the messenger and think about, is it really right for you? If your investment advisor has been following the herds, selling stocks when they were down, and 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 for you on your way to retiring and staying retired with a customized retirement planning. This is Chris Perras with Oak Harvest Financial. Many blessings.
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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.