It’s Deja Vu all Over Again; and Behavioral Finance

What does Deja Vu have to do with investor behavior in the stock market? Join Chris Perras for the 3/22/2019 edition of Stock Talk as he discusses how patient investors may be able to take advantage of repeating phenomena in market cycles.

Chris Perras: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the March 22nd edition of our weekly Stock Talk Podcast, Keeping You Connected to Your Money. This week’s episode is titled, As Yogi Berra said it’s Deja Vu All Over Again. This podcast is really a case study in behavioral finance. It’s really ultimately if we’re patient investors, how would you take advantage of one, other investors emotions, two, the tendencies of investors to repeat the same behaviors over and over again, and finally three, this is my own observation, it’s the same people managing the same money in the same ways, so the outcomes are biased to be the same.

I want to give you three examples of how the current economic environment from 2018 through 2019 is playing out almost exactly as the same period from 2015 through 2016, and how investors in stock market reactions have been almost identical. First, China. In the second half of 2015, China’s growth slowed dramatically. The government launched its second-biggest stimulus spending bill ever. By the second half of 2016, their economy re-accelerated and the Chinese stock market rallied 22% in the first quarter of 2016.

Fast forward to 2018. In the second half of 2018, China growth, it’s slowed dramatically due to the Trump-China tariffs that started in the first half of 2018. China pledged its third-largest stimulus ever, and the China markets have recovered 19.5% off their first quarter of 2019 lows. Europe, the second case. On March 8th, 2016, in response to slowing economic growth, driven largely by slowing trade, as well as concerns of the upcoming Brexit vote, the European central bank lowered its economic forecast and announced a monetary stimulus policy to stimulate growth.

This year, on March 7th, European Central Bank announced the launch of a third round of what they call LTRO, Long Term Refinancing Operations, which is basically a more new monetary stimulus. They launched it due to the effects of slowing growth, concerns over a China slowdown as well as concerns of the upcoming spring Brexit. Finally, here in the United States. On January 26th, 2016, in response to slowing economic growth caused by tighter credit in 2015, the Federal Reserve announced a pause and interest rate increases.

By February 17th, 2016, the Fed took additional measures and said the risk of an economic slowdown had increased and more rate increases for the rest of 2016 were unlikely. The S&P then rallied 16.5% over 8 to 12 weeks give or take right back to where it was in the third quarter of 2015. Fast forward, almost exactly three years to January 4th, 2019, and in response to slowing economic growth due to China trade tariffs, as well as European concerns over Brexit, the head of the Federal Reserve, Chairman Powell stated they would be patient for 2019 raising rates.

Then a few months later, on March 20th, the federal reserve took further rate increases for 2019 off the table and guided towards adjusting their balance sheet by the fourth quarter, 2019, in order to stimulate the economy. From its lows, the S&P has rallied almost 22% right back to where it was in the third quarter of 2018. Same people, China, Europe, the United States, same response. China spent money, Europe eased credit, the United States easing credit, same outcomes in the stock markets, in the bond markets, and in the currency markets.

All of this leads us to where are we now. First, please revisit our first half of 2019 outlook on our website. You can find that at oakharvestsfg.com, look for the investment management tab, then look for market commentary first half outlook. As we sit here, the S&P 500 is about 2850. We are cautious on equities overall for the next three to five months. We believe there’s likely to be an air pocket of minus to 5% to 6% in the second quarter. However, we do see this as a huge buying opportunity.

We expect more boring dividend yield stocks like Pepsi and J&J, and Home Depot to outperform the market through the second quarter, as investors wrestle with valuations, global growth worries, as well as slowing money flows. As we have mentioned multiple times in the past, the golden block’s environment for stocks is a higher trending long-term interest rate due to higher growth, two, slightly higher oil helping to cause slightly higher inflation, and three, a lower trending us dollar. We currently do not have these three factors in the market.

However, we do see them reappearing in the second half and all of those three factors lead to higher earnings for the overall market, which drives the market higher. What we’re looking to do in the second quarter and third quarter while these trends are emerging, we’ll probably be looking to buy financial stocks after everyone has given up on them. Financials should improve in the second half as well as 2020 with pickup in the economic environment, looking to increase our technology weighting, technology stocks pull back as well as increasing our cyclical waiting in late second quarter as people are just overly concerned with slowing economic growth in 2020.

In closing, if you find this content helpful, please direct people to our website at oakharvestsfg.com. We’re out there looking out for your money. We care about you reaching your retirement goals. We’ll make changes to your portfolio as we see market environment changes, always keeping the long-term in mind. Remember, patience and discipline are the best tools you have as an investor. We strive to be patient and disciplined in our investment approach for you. This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Many blessings.

Announcer: Content contained within this Oak Harvest Podcast is for informational purposes only and is based upon information current as of the time of recording. It should not be considered an offer or solicitation to buy or sell securities, nor is it tax or legal advice. Investments involve risk. Unless otherwise stated, particular investment returns are not guaranteed.