Fear is Driving Market Performance

Join CIO Chris Perras for the 3/27/2020 edition of Stock Talk: Keeping you Connected to your Money!

Chris: Hey. Good morning. This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas. Welcome to our weekly Stock Talk podcast: Keeping you Connected to your Money. First off, there is no denying that headlines fear and rhetoric surrounding the coronavirus have become the primary driver of investment performance since mid-February.

While the duration and volume of the virus-related news is yet to be determined, we continue to counsel our clients and prospects to control what they can control. Investors should be mindful that perspective matters in investing time horizon always matters, the longer the holding period, the lower in assets volatility, whether it’s stocks or bonds, and the higher ones expected total return.

As of last night’s close, we had rallied almost 20% off the intraday lows on Monday. The markets were sitting around 2630 on the S&P 500 last night, which is the 200-week moving average. That moving average had been support for the majority of the last 10 years. This morning, US equity market futures are pointing lower again, tracking down about 2.5% from last night’s close as I sit here and record this.

It’ll be interesting to see how the week closes after yesterday’s forceful rally lifted the S&P 500 20% above its early week lows. For what it’s worth, the junk bond credit markets are better today, even with the stock market down and that’s a very good sign, but shh, don’t tell anyone, that’s our secret.

Besides the early [unintelligible 00:01:41] signs we spoke of on our Tuesday podcast, the good news that the market is keen on over the past three days includes the massive US stimulus program that runs at about $1.6 trillion in direct support, or that’s about 7.5% of GDP. It includes a mix of direct handouts and incentives for firms to keep employees on the payroll through the crisis. President Trump is apparently championing an early removal of lockdown measures. This has also helped sentiment this week as the market has already started accepting that the second quarter will be a complete write-off as far as earnings go in the stock market.

Some optimists now seem more interested in when the recovery will begin. Case in point, yesterday, the S&P 500 rallied more than 6% in one day on the back of an almost unfathomable high jobless claims report in the three-plus million range for the month. I remind listeners that we alluded to some behind-the-scenes early healing signs in our Tuesday podcast. Much of the buying this week has been attributed to much larger than normal quarter and pension funds reallocating money into stocks and out of bonds.

A similar thing happened in early– the fourth quarter 2018 bottoming process, and happened again last year in December, right after Christmas. On the negative side, we have not seen anything close to a peak yet with respect to the virus cases here in North America. It has spread beyond New York. Our thoughts and prayers go out to our prospects, listeners, clients in the New Orleans area which is starting to get hit bad.

The numbers will surely get worse as the testing backlog clears. In fact, Johns Hopkins now reports the US has around 86,000 cases, that’s more than China had during the outbreak. That said, if more data means the reported mortality rate declines, that’s a bigger denominator and confirms that the prime-age workers are much less at risk. It would support chatter of an earlier than expected opening of the economy. Although I think President Trump is a little optimistic in his Easter reopening, time will tell.

Treasury yields are a little lower this morning with the 10-year yield sitting around 80 basis points. Oil prices are steady, but still barely in the low 20s. Markets are going to remain volatile for a few more months. Valuations have dropped significantly the last six weeks. The S&P 500 had been trading at almost 20 times trailing earnings in mid-February because the economy was accelerating to over 3% growth. While earnings guidance is currently impossible to predict, the market quickly adjusted earlier in the week to a valuation of around 14 times trailing earnings, which has historically been a very good entry point for investors the last 30 years. The markets have already priced a recession into the markets.

Long-term investors know that the dollars they invest during recessions while uncomfortable have been their highest compounding return assets over the subsequent two, five, and 10 years. Buying assets while others are forced to sell, or you’re just emotionally panicked, has been the way to compound your returns at higher rates over time. Buying strong balance sheet, high quality, dividend-paying and dividend growing stocks, and reinvesting those dividends if you don’t need the cash, over time into more shares of these companies has proven to be a long-term strategy for building wealth in the stock markets.

I remind listeners how strong things were in the US economy just a few weeks ago, and how quickly markets have bounced 20%. New home orders for January and February were up over 20% [unintelligible 00:06:00] our home builder. Millennials were just starting their early household formation buying patterns. Those trends will only accelerate on the other side of this virus outbreak and they will build for the next five to 10 years in secular trends in our economy.

Home internet usage is exploding during this downturn as more workers work from home. The build-out of 5G technology will happen over the next few years. Besides homes and new technology, this millennial generation will also be buying stocks for their eventual retirement.

There was a new story today that CEO at SoFi has said they have seen mainly buying from millennials during the past two weeks. Trying to predict the final timing events like what has transpired over the past six weeks is impossible. The markets and economy are being hit with a historic event. However, our Federal Reserve through its monetary policy, or elected political officials through unprecedented fast fiscal action, our scientific community through global coordination, which people are totally underestimating, and our shared public sacrifice through social distancing have taken and are taking historical steps to combat this virus.

Listeners, please remember, your highest compounding returns come from buying equities during economic downturns regardless of their cause. One of the worst things you can do is to sell all your equity positions and go to cash during times like this with high volatility. History has proven over and over again that long-term investors with patience and with the ability to turn out the noise, make the most money, and have the greatest security.

At Oak Harvest, we pride ourselves on being 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 largely independent of the volatility of stock markets. For now, investors should maintain a balanced approach to asset allocation given the uncertain nature of the outbreak.

Anxiety and risk aversion is likely to continue through the second quarter ahead as our country implements continuing measures to fight the spread of the virus here in the States, which undoubtedly will cause short-term negative growth.

If you’re retired or in the process of retiring, give us a call at Oak Harvests at 281-822-1350. We are here to help you plan your financial future and help smooth the financial path you have into and through your retirement years with a customized retirement planning. Thank you. This is Chris Perras at Oak Harvest Financial Group.

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.