The Easter Bunny is Bringing You a Stock Market Melt-Up… Not!

CIO Chris Perras goes on a “rant” regarding recent calls for a market “melt-up,” foreshadows our H2 2019 outlook and recaps this earnings season, on the 5/3/2019 edition of Stock Talk!

Chris: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the May third 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 in the markets, we also try to educate you as to how the stock and bond markets work. This week’s episode is entitled, Yes Emily, There is an Easter Bunny and He’s Bringing You a Stock Market Melt-Up…Not.

Here we reiterate our first half outlook in our belief that while the good times are coming and we will see 3,000 on the S&P 500 this year and materially higher next year at 2,900 to 2,925 on S&P 500, and we currently sit right about 2,925, 2,940, the overall market is lacking lots of opportunities. The S&P 500 is rallied back to briefly set a new all-time high at over 2,940. That’s about 1.5% higher than the team here at Oak Harvest thought it would go in the first half of this year. As our listeners know, this is in line with the outlook that the team published and first laid out in our first-half outlook published in early January.

This can be found on our website at oakharvestfg.com. We’ve discussed the number one reason for the rally many times over the past three months. The Federal Reserve posing its interest rate tightening cycle. This has caused a dramatic lowering of volatility and subsequent rally in the markets. The game of guess the next recession that was commonplace on the financial networks in October through February has now been replaced with the game show, let’s call for stock market melt-up.

These calls started near Easter and the S&P 500 was already around 2,900 to 2,925. These market calls call for a target of 3,000 on the S&P 500 as a melt-up after a 600 point rally in 4 months. These are the same people, brokerage firms, and experts who in the fourth quarter of 2018 were claiming an earnings recession, an economic recession, or certainty. They were telling people they were going 100% to cash on the way down in December because their technical indicators were saying it was time to sell after the markets had already dropped almost 15%.

They’re now out waiting for the all-clear melt-up ahead and possible cheerleading flags of S&P 500 3,000 and that’s out of stock market volatility of 12 to 12.5. I’m sorry, but I’m going to pull out my soapbox. I’m going to stand on top of it and I’m going to rant a little bit. People who know me well tell me I’m a pretty quiet, modest, thoughtful, and intelligent individual. I’m one of the last ones to talk about my educational compliments or the fact that I’ve managed multiple top mutual funds over the past 25 years. Including 1 over 30 billion in assets that I managed the hedge fund to a modest loss in the crash of 2008, 2009.

Here goes, I start my rant, if any listeners of this podcast have money being managed by these people calling for a “melt-up” from 2,925 all the way to 3,000 on the S&P 500, this is what you should do, this is what I recommend. You need to look at your portfolios this weekend, you need to then look in the mirror, and then you need to get on the phone, call up your adviser and fire them. Listen, I’ve said this before right here on this podcast, we all make mistakes in the investment world, everyone does, even Warren Buffett.

Listening to the advice for having your retirement money managed by an advisor or brokerage firm that either sold all your stocks on the way down in December of 2018 or who is now calling for a melt-up from 2,925 to 3,000 on the S&P 500, which is a whopping up 1.5%, sarcasm emphasized, is pure lunacy and virtually guaranteed to lose you money or miss your financial goals in retirement. The markets both stocks and bonds have done almost exactly what we thought and said it would. We laid this out in our weekly podcast starting back in November of last year through March of this year.

We laid out our first half outlook in early January over four months ago. We called for much lower volatility and much higher stocks in the first half of 2019 with most of this game coming in January through mid-April. Well, we’ve got that. In fact, volatility went a little bit lower than we thought, the VIX traded as low as 11 intraday a few weeks ago with a closing low of about 12. The S&P 500 has traded 1% to 2% higher than our optimistic outlook of 2,900. We are now in May. We are now entering the dead zone. Recall, that’s the period after most companies have reported, it’s the period when stock buybacks peak at about 95% to 97% of all companies being able to buy back stock.

That number now heads towards 5% to 7% of companies being able to buy back stocks by the end of June. This removes the demand for stocks and removes money flow into stocks. That’s the period we laid out four months ago in early January as a short-term peak and ripe for a second-quarter pullback in late June. We’re not in the melt-up zone, contrary we are in the danger zone. We’re in the go-slows zone, we’re in the be patient and deliver it zone. This isn’t a melt-up zone. Unfortunately, here’s a bit of foreshadowing of our second-half outlook in the 2020 outlook.

I wanted to save this for later in May and early June, but I bring it to you as a foreshadowing of what we will write. We think we will see the beginning of a melt-up move starting later in the year. Likely from a lower starting point that will most likely be reached five, eight weeks from now in late June as buybacks trough and earnings estimates for the second and third quarters trough as well. Analysts will then start to look out towards 2022 value companies. A China deal will most likely be signed soon, this will stimulate the second half of 2019 growth as well as 2020 growth.

After this, our president will most likely start focusing 100% of his attention on domestic issues. He has already met with the democratic leaders who have agreed in principle to a $2 trillion domestic infrastructure spending plan. The combination of a China deal and an infrastructure plan would lead to accelerating growth in the fourth quarter of 2019 through the presidential election in 2020. Accelerating growth would lead to a sell-off in the long bond market, which is gradual, as we stated here many times, is good for stocks. As the yield curve steepens, more groups work in the market.

Instead of a few mega-cap stocks, utilities, and REITs leading the market, the market participation broadens out into other industries, more specifically value stocks lead. Cyclical stocks and financial stocks lead as well. Additionally, small-cap stocks lead. After almost two years of waiting, the market rallying cry in the second half of 2019 and 2020 will become without funds you can’t win. Goldilocks should return to the stock market. We will see some great stock returns over the next 12 to 15 months. However, as we’ve said for a few weeks, we now sit in the camp of being a patient and prudent investor for our clients investing back in a slow and deliberate path.

However, we want our clients to know that we believe a buying opportunity will show itself later in the second quarter in their traditional dead zone period for stock buybacks. We will use any weakness to buy cyclical technology and financial stocks just as we did in the November through January period. Recapping the current status of the Goldilocks indicators, long-term interest rates, they’re a little bit better if the yield curve steepened a little bit, but it’s not improving too much right now. Long-term rates look ready to rally one more time and slow growth in peaking inflation. This is bad for earnings.

The US dollar’s not helping, the US dollar’s been strengthening now for most of 2019. This will cause some cuts in second and third-quarter earnings estimates. Oil started actually dumping this weekend, which is bad for both sentiment and bad for energy companies’ earnings. It’s additionally bad for the junk bond market has roughly 20% to 25% percent of all junk bond debt is held by energy companies. The two bonus indicators corporate prices have peaked, they’ve rolled over, lumber prices collapsed as we said all the way back to the beginning of the year.

Currently, none of the top three and none of the top overall five Goldilocks indicators are saying Goldilocks for stocks overhead. That being said, once again, we see Goldilocks returning to the stock market, but that’s a second-half 2019, 2020 story. With the first-quarter earnings season almost complete, we wanted to update our scorecard and what we’ve seen. This week was a mixed bag note, Apple reported strong reoccurring service business and stocking nicely. Additionally, Carnival Cruise not reporting earnings was helped out because its competitor Royal Caribbean reported a strong second-half earnings outlook.

On the downside, Amgen and AbbVie both beat earnings estimates. Their outlook for revenue growth was tempered and the stock sold off. Additionally, both components of the DowDuPont spinoff reported weak earnings and the stock sold off. Finally, Google Alphabet reported a great earnings quarter and a disappointing revenue quarter. However, if the stock should trade back near 1,100 to 1,125 per share, it once again becomes a growth at a reasonable price name. On a final note, the newest weekly segment on the podcast. Then, I don’t want to invest in now rationale and excuse to segment.

This week’s newest excuse I heard, I don’t want to invest now because we are in a bubble, like the 1999.com bubble. I saw that Beyond Meat IPO, all over CNBC and this Uber deal will wreck the stock markets. First, at Oak Harvest, we do not invest in new IPO’s and hyper growth-oriented companies that are speculative. We search for value. We search for growth companies at a reasonable price. We search for proven companies that can consistently pay growing safe dividends to help compound your retirement savings. We use proprietary indicators to either say, go slow and patiently or accelerate investment positions.

We are currently in go-slow mode, but we are finding lots of great single opportunities for an upturn in the economy for the second half of 2019 through 2020. 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 oakharvestsfg.com. You shared your vision with us during our meetings, and we are here for you. Occasionally, the investment environment will change and in those rare cases, we will make strategic changes to your 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 stock markets in the economy. 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 with a customized retirement planning. Many blessings. This is Chris Perras.

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.