Bear Market Returns

Senior Portfolio Manager James McFarland returns for the 3/20/2020 episode of Stock Talk. James covers this week’s market action, explains the opportunity that bear markets may offer, and then shares key excerpts from a recent Oak Harvest video release.

James McFarland: Hi everyone. This is James McFarland, Senior Portfolio Manager and Investment Specialist for Oak Harvest Financial Group. Welcome to the March 20th edition of, Stock Talk: Keeping You Connected to Your Money. Chris Perras will be back next week, so I’m filling in for hosting duties again this week. I’m recording this on March 20th, 2020 at 9:30 AM Central Time. The SMP currently trades at about 24.27, the SMP open Monday at 23.96, and has gone through another wild week of intense intraday volatility.

At the time of recording, we’re currently up about 1.2% for the week, and I’d like to point out something else that’s easy to overlook in all this intense up and down action that’s happening day to day, along with the non-stop gloom and doom scenarios being spread by the media. In the last week, since Thursday, March 12th, the SMP has declined 2%, only 2%. That kind of thing can get very easy to overlook in what looks and feels like a much more chaotic market. Of course, that doesn’t change the fact that the SMP has declined very far off its all-time highs and we have entered bear market territory.

That makes it even more important not to lose sight of what the market is actually doing. Of course, it’s not just stocks. This period has been difficult for just about every class out there. The SMP is down, credit markets are down, real estate is down, oil, of course, is down, small-cap stocks are down. International markets are down. Gold is down. The US dollar cash has been almost the only thing that’s done really well over the last couple of weeks. It’s a difficult time for investors and for our communities and for society generally. From an investment perspective, is it time to panic?

Well, no, it’s not. From a purely investment-driven perspective, it’s time, again, to stay rational and make decisions based on long-term goals. Value investor, Shelby Davis, once said, “You make most of your money in a bear market. You just don’t realize it at the time.” What does that mean? Well, it means that bear markets, which is what we are in now, offer investors opportunities to buy quality companies at tremendously depressed prices, to buy companies that are now paying higher dividends than they were just a few days ago.

As dividend and dividend growth-focused investors, we are seeing a lot of opportunities in this market and positions we are able to either initiate or add to now while things are so cheap, they’re going to be the names that show us and show our clients the most gains in the future when the bear market ends and the bull returns. The bear market will end. I don’t know when. Chris Perras doesn’t know when. No one knows exactly when, but it will end. Larry Williams, a legendary stock and futures trader recently came out with a buy signal based on his panic-selling indicator that he’s been using for 30 years or so now.

Other research analysts and investors are also starting to publish optimistic forecasts. Our own view sees the Coronavirus situation as more of an event-driven market rather than something systemic. I think something akin to the 9/11 tragedy versus the systemic crash of 2008. Event-driven bear markets and recessions tend to be sharp, fast, terrifying, but also to fade within a more compressed timeframe than structurally-driven bear markets. Now, all of these views could be right or they could be wrong. Either way, it’s not going to change our behavior, which is looking for quality names that pay and grow dividends that we believe have long-term potential to buy for our clients.

Managing risk where needed and continuing to manage our client accounts based on the investment plan and allocation that they’ve developed with their advisor. This week the investment committee, which is Chris Perras, our Chief Investment Officer, Troy Sharpe, our Chief Executive Officer, and co-founder and myself, sat down and we discussed this current situation and the current market environment. Based on that discussion, Troy and Chris then released a video to our clients. To wrap up this week’s stock talk, I’d like to share with you a couple of audio excerpts from that video since the points we raise are not only important for our clients, of course, but I think for all investors. Here we go.

Troy Sharpe: Hey guys, Troy Sharpe here, Chris Perras, coming to you from our corporate headquarters in Memorial city. We’re in the radio room where I record the show every single week. We want to talk to you a little bit about what’s going on in the markets, what’s going on in the economy and how this impacts your portfolio, how this impacts your retirement plan, what we’re doing over here at Oak Harvest, and also answer questions that you guys may have on your mind as far as what we’re doing and how this impacts you.

First and foremost, I want to stress that we account for these type of event-driven recessions inside your allocation, inside your retirement plan. This is why we preach about risk management. This is why we talk to you about risk tolerance and the amount of money that we want to have exposed to stocks. This is why we talk about planning, because whether we’re using stocks, bonds, mutual funds, annuities, real estate, whatever the various financial tools are, first and foremost, I want you to understand that those tools are used in conjunction with one another and inside a plan that accounts for these types of events occurring.

Now, they don’t feel good. They’re painful, but they are accounted for in what we do for you. We expect these as professionals, building portfolios, building plans. These events are actually, even though this has been very quick in the rapid deterioration of values, we do expect these things to occur, not just once throughout your retirement, but they’ll occur probably 2 or 3 more times over the course of a 10 or 20, 30, 40 year period. These are accounted for, we do expect these two to happen, and there planned for inside of your investment allocation and also your retirement plan.

Chris Perras: Exactly. I remind my viewers that what we’ve gone through in the stock market right now, down 25% in a very short period of time down almost 30%, I think at the lows, you can call it a bear market, you can call it a correction. It is recessionary in its nature and we are going to have a recessionary type of pullback in the economy over the next couple of months because what we’re doing to combat this virus. However, your biggest returns compounded over time comes from every dollar that you invest during recessions, whether it was in 2008, 2009, whether it was in 2000, 2001, when it was after the 1987 crash in the stock market.

Your highest percentage returns always come during recessions because you hope to buy that asset at a reasonable price and these things pass. It takes time. Sometimes it’s 6 months, sometimes it’s 18 months, sometimes a little longer, but those assets that you buy during economic downturns are the assets that will compound the most over time.

Troy Sharpe: That’s important to know. 2008, there were structural deficiencies within the financial system from the real estate markets to the banks, to the financial institutions. When we say event-driven recession, that’s what this is. They are not the structural deficiencies that could, like 2008 took 4 or 5 years for the markets to recover and for things to rebound. This has been very rapid in the deterioration of values and it’s an event-driven recession that we’re essentially going through. Of course, that event was this flu, the coronavirus, the COVID-19.

Very, very important when we look to what do we anticipate as far as the market’s rebounding, we do not anticipate this to be a multi-year event or a multi-year structural crisis. This is more short-term event-driven and within the plans that we’ve put together for you, these things, again, they are accounted for. The best thing that we can do is stick to the plan. We should not worry too much about the ups and downs in the market, of course, on a daily basis. We talk about that all the time. It becomes more difficult from an emotional standpoint when we do see this rapid deterioration, but sticking to the plan is the number one thing and the very best thing that we can do to have long-term success.

I think back 1987, 2001, the dot com bubble, 2001 and ’02, 2008, investors that simply wrote those occurrences out, whether they were event-driven or structural in nature, they stayed invested if they stayed invested and grew so much more wealth and were much more secure in the long-term. I commend many of you for taking this approach. We’ve had very few people reach out to us and actually want to sell. For me, this says that what we’re doing, what we’re talking to you about, how that message is getting through, and also your understanding of financial markets and what it takes to be a successful long-term investor.

James McFarland: With that, we come to the end of today’s episode of Stock Talk. Thank you so much for joining me. If you enjoyed the show today, please share it around. As this coronavirus situation continues to play out and we continue to hear news day after day, sometimes hour after hour, I do encourage you to stay calm, stay safe, remember your investment plan, and remember that together with your advisor, you’re invested in the way that is purely aimed at accomplishing your specific goals based on your specific situation with your risk tolerance and long-term objectives in mind.

If you have any questions or would like to find out if we can help you with your portfolio, give us a call. Our number is 281-822-1350. Once again, this has been James McFarland. This has been Stock Talk. Have a wonderful weekend, and I’ll talk to you again soon.

Speaker 1: 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.