Are We There Yet? Goldilocks for Stocks and the Return of the Bull?

Chris Perras returns for the 4/26/2019 edition of Stock Talk and discusses where the market is, where we believe it’s heading and earnings in Q1, and he introduces a new weekly segment!

Chris Perras: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the April 26th edition of our weekly Stock Talk Podcast: Keeping you connected to your money. Each week, we share with you our views on the markets, what we see coming down the pike for the economy and the stock markets, and we also try to educate you a little bit on how the stock and bond markets work.

This week’s episode is entitled, Are We There Yet? Goldilocks for stocks and the return of the bowl. Here, we reiterate our first-half outlook and our belief that while the good times are coming, and we will see 3000 on the S&P 500 this year, and materially higher next year, at 2875 to 2925 in the S&P 500, currently, we’ve set at about 2925. The overall stock market is lacking an opportunity. However, we are starting to find loads of opportunity in certain unlike sectors, like financials and industrials, for the second half of 2019 and for all of 2020. This is similar to our buying of technology and industrials in the fourth quarter of 2018, when others were scared to buy them.

The S&P 500 has now rallied back to about 2925, which is about 1% higher than we thought it could go in the first half. As our listeners know, this is right in line with our outlook, the team at Oak Harvest Financial Group published back in January of this year. This can be found on our website at www.oakharvestsfg.com 2019: First Half Outlook. We’ve discussed the number one reason for the rally many times over the past three months, that being the Federal Reserve pausing their interest rate tightening cycle. This has caused a dramatic lowering of volatility in a subsequent rally in the stock markets.

The game of Guess the next recession, that was commonplace over the financial networks in October of last year through February of this year, has now been replaced with a new game show. That game show is, Can I be the first to call a melt up? These are the same people and experts who in the fourth quarter of 2018 were claiming, one, an earnings and economic recession were an almost certainty in 2019. Two, telling people and our clients, they were going 100% to cash on the way down in December because their technical indicators were saying it’s time to sell after the markets had already dropped 15%. Three, are the same people who are now waving the Goldilocks cheerleading flag.

Yes, Goldilocks will return. We still see some great stock returns over the next 12 to 15 months. However, as we sit at 2925, we now sit in the camp of being a patient and prudent investor for our clients and investing on a slow and deliberate path. However, we want our clients to know that we believe a buying opportunity will show itself in the second quarter and their traditional dead-zone period for stock buybacks.

We will use any weakness to buy cyclical technology and financial stocks, just like the pause and pull back in the November through January time period. Recapping the current status of the Goldilocks indicators. One, long-term interest rates. While they’re not really helping, long-term rates are looking to rally one more time on slowing growth in peak inflation. This is bad for bank earnings. It’s great for FANG stocks and core growth stocks, but what happens is the breadth in the market narrows.

The US dollar, the second Goldilocks indicator, it’s not helping either. The US dollar has been strengthening over the last four to six weeks, which will then hurt earnings estimates for the second and third quarters. Third, the third Goldilocks indicator, oil. Now that has been helping. It’s rallying, which is actually helpful to S&P 500 earnings. The two bonus indicators, copper prices are rolling over and look like they’ve already peaked short term. Lumber prices have actually collapsed all the way back and given up their entire gains for the year.

Only one of the top three in one of the top five Goldilocks indicators are really saying, Goldilocks ahead. With the first-quarter earnings scorecard about 50% complete, we wanted to give you a little scorecard of what we’ve seen. Some stocks, Disney, Pepsi, Johnson & Johnson, Texas Instruments, Microsoft, Las Vegas Sands, Lockheed Martin, United Technology, JPMorgan, and Facebook, all reported strong earnings, and the stocks were generally very well rewarded. Of note, Facebook and Lockheed Martin stocks were up over 7%. Pepsi, Microsoft, and United Technology stocks were up well over 4%.

A particular note is Disney’s over 24% move in April alone on its new product offering and The Avengers movie release, which came out last night. On the downside, 3M was a big loser on its bad earnings release, dropping about 10%. The company announced earnings even lower than reduced market expectations and announced a corporate restructuring. We applied the restructuring. It is about time for that one.

The global economic turnaround that we see for the second half of 2019 and 2020, which we believe will be very similar to the second half of the 2016 and 2017 rally, should help companies like 3M. 3M stock experience virtually the same 10% to 12% drop in the third quarter of 2016, only then to regain over 55% over the next 18 months as the global economy ramped up. We will monitor this stock for an expected second-half turnaround as global growth returns to the world. If we come to believe that 3M will not benefit from this global upturn, we will look for opportunities elsewhere with a cyclical upside bias.

On a final note, I want to add a new weekly segment to this podcast. I’m going to cut entitle this segment the, I don’t want to invest now rationale and excuse segment. Go to our website, oakharvestfg.com. Look for the Lessons in the market. I don’t want to invest now because. The piece was penned by James McFarland, our senior portfolio manager, for the biggest excuses used by investors over the past 90 years.

This week’s new excuse I heard is, “I don’t want to invest now because America is or is going to be moving towards socialism.” Well, stop the presses. America has been moving slowly towards socialist capitalism since FDR’s new deal was put in place in 1933 through 1935. Since that time, the US stock market has returned only 22,000%. I repeat that, 22,000%. My response to this excuse, please, where’s the data that says it matters to the overall stock market? Up 22,000% in 85 years since we started to overlay a social safety net program on America, I’ll take that return any day.

In closing, if you find this content helpful, please forward it to friends or have them give us a call at 281-822-1350. Go browse our updated website and our new content at oakharvestfg.com. You shared your vision for your money with us in our meetings, we are here to help you. Occasionally the investment environment will change and in those rare cases, we will make strategic changes to our asset allocation. These are rare, 1% events, but they happen both ways, not just negatively. They happen as tailwinds to stocks in the economy too. They happen as positive setups to the market and your money. When we see these rarities, we will adjust your allocation. Our main job at Oak Harvest Financial Group is to have you retire only once in your life. Many blessings. Chris Perras.

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