Of Potential Pandemics and Pullbacks
On the 1/31/2020 edition of Stock Talk, CIO Chris Perras discusses the Corona Virus, recent market action, and our view on why the recent market decline is a potential buying opportunity.
Chris Perras: Good morning. My name is Chris Perras. I’m Chief Investment Officer with Oak Harvest Financial Group in Houston, Texas. Welcome to the January 31st edition of our weekly Stock Talk podcast: Keeping You Connected to Your Money. This morning, we are sitting back near 3,250 on the S&P 500. That’s close to a flat year today.
If you watched the financial news networks late this week and early last week, you’ve been treated to two extremes. First, the financial elite was flying on private planes and partying in Davos, Switzerland, while telling the rest of us that cash is trash, and warning the rest of us as well of the perils of climate change and how we must reduce our carbon footprint.
I suggest that the first step in reducing one’s carbon footprint should be a 100% to 200% carbon tax on fuel used in private jets. Later in the week, emerged the stories of the second coming of the great plague to be caused by the coronavirus and emanating out of China. While I do not want to make light of the loss of life due to this breakout such as these, I must again point out that between 10,000 and 60,000 Americans die every flu season. That’s on a population of about 325 million.
This virus emanated from a rare, exotic, and illegal seafood market in a city in central China named Wuhan. Even though many people had warned that something like this could occur, this wild meat market was allowed to continue to operate. Now, most of China is on extended lockdown for what was a very bad last supper for some adventurer’s diner.
Past pandemics have created enormous investment opportunities for investors over the next 3 to 12 months, and we feel that this will follow a similar pattern. This shut down in China will slow in an already low and slow first-half global growth trend. Part of our rationale for selling down some offensive-oriented equities two to four weeks ago and buying more defensive was the notion of a slower first-half caused by Boeing shut down and auto manufacturing slow down.
This China issue, while unforeseen, will likely cause this slowdown to play out a little more dramatically than we had expected. Against the backdrop of a domestic stock market that had rallied 12% from early October 2019 in just less than four months and close to 30% from its early lows in 2019, stock markets around the world have sold off this week.
I remind readers that many Asian stock markets were set to be closed all week for an extended Lunar New Year holiday. What does this mean? This means that anyone in Asia wanting to sell equities and take down some risks couldn’t. They couldn’t sell their local equity holdings. If you were a hedge fund, long momentum names in Asia, you were trapped. If you were a risk parity fund that had been trend following lower volatility throughout the fourth quarter of 2019 and steadily increasing your leverage, you were trapped.
The only choice you have is to sell international risk assets that are trading. That means they go out and sell US stocks and European stocks, and they particularly sell offensive-minded stocks such as biotech, semiconductors, and financials.
With that in mind, the S&P 500 has dropped about 3% from its peak 10 days ago to its current levels. The current decline is in line with the market’s normal first-quarter downturn during the previous second years of the Federal Reserve easing cycle. We’ve previewed this risk many months ago and again as recently two weeks ago.
The current sell-off is likely one of the year’s better entry points and better times to buy equities for the first half of this year. Why do I say this? I say this first from a mathematical goal perspective. Mathematically speaking, the panic and for selling, we’re seeing throughout this week is beginning to show signs of a short-term climactic bottom.
If any clients or listeners would like to discuss the signs that we see in more detail, go ahead and give us a call at 281-822-1350. While I will not divulge our methods precisely, I would be happy to discuss them generally.
We currently see a normal consolidation and basing period getting underway. Four-month rallies normally take about four weeks to find footing, two weeks to rally, and another two weeks to retest those bottoms. What you’re talking about is that the market tends to go about nowhere net for about two months. The second reason for believing that we are near a first-quarter buy is one purely based on the emotional psyche.
To most investors, the feeling one gets when markets decline is one of nausea. They know that in their brain, they should be adding to their favorite holdings when the stock markets decline, but their heart and stomach override the rational behavior, and they at best freeze and do nothing and at worst sell when others are panic selling. At Oak Harvest, we try to do the opposite. We try to buy when others are panicking and sell when others are euphoric like two to four weeks ago.
Regarding the economic effect of the coronavirus, it obviously isn’t a great thing for the first quarter for most companies. However, it does make me increasingly more bullish for the second half of 2020. How come? While the coronavirus will undoubtedly create a slower economic environment for the globe for the first half of 20 caused by Chinese consumers and others pulling in their horns on discretionary items, as well as global manufacturing supply chain that China provides is going to slow down dramatically.
However, on the second half of this year, it is likely that all of these things will create built-up demand for the second half of 2020 by way of companies restocking drawn down inventory and consumer staple products, as well as a strong wave of new industrial orders for semiconductors and capital equipment for the fifth generation roll-out of new communication networks.
For the second half of 2020 and the year as a whole, we expect the offensive-minded group such as technology, consumer discretionary, and financials to lead stock market returns. Time will tell, but those are our current thoughts. These should be considered preliminary, just like the first thoughts on 2020 that we gave way back in June of 2019. They are early and subject to change should fundamentals change.
As we have stated over and over for the past year, so far, the moves since January 4th, 2019 have been very normal for a Federal Reserve easing cycle. For now, any weakness in the first quarter should be viewed as one of the buying opportunities that investors should get in the first half of 2020.
If your investment advisor has been following the herd and selling stocks when they were down and buying them again when they were much higher and calling that tactical asset allocation, 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 Financial Group.
Voiceover: 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.
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.