Normal Not Needed Before Moving Higher

Join CIO Chris Perras for the 4/9/2020 edition of Stock Talk!

Chris: Hey, I’m Chris Perras, the Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our weekly Stock Talk podcast for April 9th: Keeping you connected to your money. This podcast is going to be titled, “Normal Isn’t Needed.” On the back of an almost daily firehose of Federal Reserve liquidity policy responses the past three weeks, combined with constant financial channel talk of, “It’s just a bear market rally and we will retest the lows that have been going on for the past two weeks,” the S&P 500 has regained its technically critical 200-day moving average at 2,630 and now sits near 2,800 as of this morning.

While this is still down almost 18% from its all-time highs reached only six weeks ago, it is up almost 30% from its intraday lows reached only two weeks ago. This is against the backdrop of the constant daily negative news slant of the financial press. Hourly calls on the TV channels that this is just a bear market rally, that there is a coming Great Depression, that we are replaying the 1930s, or that we will never return to normal again. Against this nonstop negative sentiment the last three weeks the trading bears have been gored bloody. Why? Because they have chosen to fight the Fed.

We said it since our Tuesday, March 24th podcasts, the stock markets will recover before the economy recovers. They will recover before the economic news improves, just as the markets peaked and rolled over while the data was still outstanding in late February only five weeks ago. News on the productivity of diagnostic testing and improvements in lowering the virus spread curve through social distancing has led this stock move. Listeners, you do not need to be perfect. We do not need to return to “normal”. Stocks do not wait for perfect or they don’t wait for “normal” to move higher.

Equities only need marginally better news to move higher from depressed levels like we’ve seen the past two to three weeks. We stated it a few weeks ago when others were negative. Domestically, Governor Cuomo in New York brought some optimism early last week to that state, as well as the outlook for the nation’s virus curve. That optimism has spurred further this week, with news of the country most likely slowly opening its economic borders come May. Social distancing does work and is working. The early thawing signs in the financial markets that we spoke of on our Tuesday, March 24th podcast, that started late the week of March 18th has emerged and others are beginning to see it.

Treasury collateral volatility is now back to 6 where it was on March 4th. Now readers this is two times the normal level of three. To put that in perspective, stock volatility would need to fall about 50% from today’s levels to reach that type of level. That would put the VIX between 25 and 30, which while high and double its normal calm level of 12 to 15 will continue to be very positive for equities rebounding sooner and higher than everyone expects. However, long-term investors know that the dollars they invest during economic downturns while uncomfortable have been their highest compound returning assets over the subsequent longer-term holding periods measured in years.

Buying assets when others are forced to sell, when volatility is high, or when you’re just emotionally panicked has been the way to compound your returns at higher rates of return over time. Buying stocks with strong balance sheets, high-quality dividend-paying and dividend growing growth stocks, and reinvesting those dividends over time into more shares of these companies has proven a long-term strategy for building wealth in stock markets. A single year or two is not long-term in the stock market. Listeners, if you buy stocks near the bottom of the bear market, or within a few weeks of the bear market, or a few months of the lows, what happens to your overall expected return over the next 10 years?

Your average annual return goes up from around 9% to 10% to 11% per year. You do not have to be perfect. Things do not have to return to “normal” next week or next month for you to compound your rates at higher than expected normal returns. What this means to you, while almost everyone’s emotional instinct is to sell stocks or raise cash and bigger stock market downturns, the correct long-term investment strategy is to put incremental cash to work. At worst, the right strategy is to sit tight in your allocation that was laid out during calmer times in your financial plan with your advisor.

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

At Oak Harvest, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisors should have a financial plan that is independent of the volatility of the stock markets. If you’re retired or in the process of retiring, please give us a call at 281-822-1350. We’re here to help you plan your financial future and help you smooth the financial path you have into and through your retirement years with a customized retirement planning. This is Chris Perras at Oak Harvest Financial Group in Houston, Texas. God bless, have a great Easter, and stay safe.

Speaker 2: 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.