March Madness

Join Chris Perras for the 3/5/2021 episode of Stock Talk!

Chris: Hey, good morning. I’m Chris Perras, chief investment officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our March 5th weekly Stock Talk podcast: keeping you connected to your money. After foreshadowing the recent S&P 500 market pullback to around 3,800 back in late January, and both figuratively and literally taking some chips off the table, and now having spent the last few weeks of February discussing interest rates, and their two components, and its the rotational effect on equities in the markets, rotational meaning money flowing from groups to groups, space-time computer algorithms, I’m offering up this week’s title as an ode to one of my favorite sporting events each and every year. The college Basketball National Championship tournament of 68 teams happens the second half of March into early April. This week’s podcast title is “They call it March Madness for a Reason”. Be sure to listen to this whole podcast, as I plan on circling back to two prior topics I’ve discussed in past podcasts. I’ll close the loop on one and preview next week’s podcast topic, which I think is going to be a must listen to.

Accompanying the recent rapid rise in long-term interest rates has come about a short-term increase in equity volatility, particularly in the ultra-high growth sectors of the market which rely primarily on the terminal value of their businesses 10, 20, even 30 years out for their valuations. We foreshadowed this rise in both inflation, first, due to federal reserve QE programs and real growth, next, led by government fiscal spending since the early second quarter of last year. We’ve discussed it more than the velocity of these bond market moves is what disrupt markets rather than the overall rate increase. What happens is those volatility increases in the bond market bleed over into stocks. We’ve called this collateral damage. To draw from the bond charts now is, as we’ve discussed for about the past two weeks, inflation worries should be peaking. I saw a research piece yesterday written by Goldman Sachs with their estimate that inflation peaks year over year by around tax day, that is mid-April.

I agree with them, and I’m just looking at the charts we drew back in the second and third quarters of last year. I’m looking at the past 10 years of the economic cycle. It looks to me from the charts that inflation rise is slowing already, and should be peaking for the first half of 2021. Listeners, remember, we are most interested in the rate of change in these moves. That is as much, if not more, than overall velocity. We’re worried about are things getting marginally better or marginally worse are things troughing and improving, or are things peaking in slowing. Inflation and its worrying effects in the stock markets should be peaking and slowing. Why do I say this when others are being alarmist? I have two words for you. I’ve used those the past three years at Oak harvest, they’re the two extra bears. Those are the tells. In the story, they tell about Goldilocks and the three bears being the indicators of the economy. I’ve told that in a number of podcasts in the past. Those extra two indicators are lumber and copper. I’ll discuss those more next weeks.

Meanwhile, on the other side of inflation, real growth is now picking up, which is what I’ve been told that equity’s earnings in our economy long for. Once those factories in the economy start returning to 80%, 100% capacity utilization rate, supply starts to catch up with demand and prices tend to peak. Manufacturers spend more money on CapEx to add capacity to meet demand. This is a boon to the economy and tends to dampen future inflation expectations. Remember one of the key tenants at Oak Harvest, on the investment team, is volatility breeds opportunity. While not enjoyable at all while it’s happening, and in fact, I’ve told my partners here at Oak Harvest it’s been a bad month this week only semi-jokingly, your best returns on a percentage basis come when you buy assets during times of spikes and short-term volatility. We are recommending that clients take advantage of the recent weakness in long-term growth stocks, particularly in the technology and healthcare sector to do early Roth conversions for 2021 instead of waiting until the end of the year as most other investors do.

For more details on this topic, listeners go to Google, YouTube Troy Sharpe Roth conversions, and view Troy’s recent video on this topic. The main rationale for accelerating these conversions now is that when certain stocks are lower, you can convert more shares into your Roth for the same dollars, and then use time in your Roth for those assets to grow tax-free forever. We’re in early March. From afar, the markets are behaving in a maddening way to most investors, the best and highest valued businesses in the world with the best fundamentals, those stocks are declining. Look at Apple, look at Amazon, look at Home Depot over the past three months. Great earnings reports, great outlets for 2021, and their stocks, well, they’re going down and underperforming the overall markets since late last August.

Companies like Rocket Mortgage, which is a great company, it’s a mortgage origination business, but their business slows and gets worse when interest rates rise as fewer houses are bought, and mortgage refinancing slow and normally decline. What’s happened to that stock earlier this week? The “read it, trade it” crowd found it, saw it had a big short interest, and they ran that stock up almost 100% in five days. Hence the podcast title, “They don’t call it March Madness for Nothing”. However, I remind clients and listeners, this is exactly why we at Oak Harvest do not run overly concentrated portfolios. We don’t own 100% growth or 100% dividend stocks only. We try to remain diversified across industries and sectors.

Equity investors should not fear rising rates at these levels, particularly now that it looks like inflation component is peaking after starting its rise late last March. Of the 16 rising interest rate environments, the market has rallied 13 of those years. Rising rates are simply currently reflecting the fact that the economy is recovering, vaccinations are working. We’ve pulled back about 4% to 5% on the S&P 500 to flat with February’s returns. The 1.9 trillion American rescue plan is set to be released in one or two weeks. It looks to provide $400 per week of unemployment, ensuing benefits through August. An additional $1,400 rebate checks to most individuals, although that was recently scaled back the number of checks, and that’s up from the $600 payments just granted two months ago, and more aid for vaccine distribution, schools, childcare, and some other democratic programs that were high on President Biden’s list.

Doubling the federal minimum wage to $15 an hour has been scrapped. The TV personalities who were bullish on stocks at 3950 on the S&P 500 just a few weeks ago because the spending of this plan was going to lift the economy are now starting to sound the warning bells on the overall market just because they pulled back in late February and early March, as they normally do. This program should be good for the economy and stocks throughout most of 2021. The collateral damage caused by the, repeatedly, of the recent rise in interest rates has caused leverage players to sell and to likely miss out on the positive effects of these programs, much as they were forced to sell in front of the election last year. They turn around and scramble back into stocks at a higher level in December and January.

As I mentioned at the start of this podcast, I want to circle back to two prior topics and close the loop on one, and preview what we’re covering next week in our podcast. Closing the loop on my January 22nd podcast, which was titled “Conventional Wisdom”, team at Oak Harvest tries to stress that stocks and equities are forward-looking investment vehicles and that a lot of times, by the time the TV personalities are discussing it or newsletters or writing about it, the equity moves are mostly over. Frequent podcast listeners might recall that I covered why the team at Oak Harvest wasn’t jumping on board the most common thematic trades and investments surrounding a Joe Biden presidency back in late January. We would go over the historic data of prior presidents and how poorly these conventional wisdom trades had performed over the few years of each president, including President Obama and President Trump.

Wrapping up, the three most talked about conventional wisdom investments we heard at Oak Harvest around President Biden and his election. How have they performed? Here goes. The first of many Biden conventional wisdom equity trades that I recall hearing was “Buy handguns and ammo”. Hey listeners, we live in Texas. It sounded reasonable to most of our clients. Those stocks topped out about four months before, not after, the 2020 presidential election, just as they did back when President Obama was elected both in 2008 and 2012. The other conventional ideas were “Buy new, clean energy and alternative energy stocks over old, dirty oil and gas energy”. Well, those sexy new technology names largely peaked between Christmas of last year, 2020, and mid-January. The third and final theme I can think of that was supposed to work under president Biden was “Buy Chinese stocks as President Biden will be softer on China than President Trump was”. Yes, the Chinese market is measured broadly by the FXI large-cap Chinese ETF. Well, it peaked for the S&P 500 when? Well, it peaked the day Joe Biden’s odds of winning the presidential election turned upward, which was the very end of March 2020, almost exactly a year ago. Not coincidentally, Chinese stocks vastly outperformed the S&P 500 during the first few years of the Trump presidency, even with his hard-line China approach being so much of the conventional wisdom. Maybe all these themes are now bought. The lesson is, one need not rush into themes just because everyone else is and the stocks are green on your screen.

As for the second topic, that’s next week’s topic, it’s for more lessons and data on interest rates, and specifically on inflation. Long-time listeners might recall way back in April of 2020, in the midst of the pandemic, our investment team was one of the first to spot the rebound in the economy, stocks, and inflationary pressure. We were one of the first to discuss pent-up demand in housing and automobiles. We did so because we watch a few indicators that lead the economy, ones like lumber and copper. These indicators are leading us again and telling us almost opposite what we are hearing on TV. Just as others are discussing and some are panicking about rising inflation, it looks to our team that inflation is peaking and should be on the decline by the mid-second quarter. We’ll go back to these indicators and discuss them, and show you the data that will hopefully calm your worries, and get you ahead of the herd, and help you better understand the rationale behind tactical shifts in our portfolios.

At Oak Harvest, we are 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 with a customized retirement planning. Many blessings, stay safe. God bless you and your families, and may God bless America, we are stronger together than we are divided.

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