Robinhood Rally and Teaser of Optimistic Outcomes

Join Chris Perras for the 5/8/2020 edition of Stock Talk!

Chris: Good morning. I’m Chris Perras, chief investment officer at Oak Harvest Financial Group in Houston, Texas. Welcome to the May 8th edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money. I’m titling this podcast The Robinhood Rally and a Teaser of Optimistic Outcomes. I’m titling this podcast this because I want to shed some light onto why the stock market has rallied so far, so fast. I think it’s being led by a certain group of stocks.

As of this morning, the S&P 500 is sitting near 2,900. It is safe to say that 95% plus of the financial press in investing public over the age of 50 on TV who continue to pontificate on why the equity markets shouldn’t be here at these levels based on the economic data and based on the science of the virus. They argue and act like the rally from 2,200 to 2,900 doesn’t count. I hear daily from the pundits, who are almost entirely baby boomer age or older, that while stocks are “long-term investments”, you can’t invest now because times are so uncertain and volatility is way too high that you can’t buy an index fund right now and that you have to be a stock picker.

We turn on the TV and hear every investor opinion disguised as “breaking news”. It doesn’t matter whether they manage stocks, bonds, real estate, or private equity, or whether they are a billionaire whose wealth was created through means entirely unrelated to public stock markets. The richer they are, well, it has to mean the smarter you are. We see every piece of virus news and economic data in real-time on TV. We are told why stocks are overvalued by 10%, 20%, or even 30%, or why this rally will retest the market lows of March, even as the S&P 500 has rallied from 2,200 to 2,900 in about 6 weeks. People are still waiting for that retest.

We hear why people shouldn’t be investing in markets because times are “too uncertain” as if they are always uncertain or certain at any time that we are in historic times, that we are replaying the great depression or replaying the Spanish flu. Investors on TV keep arguing about the overvaluation of equities and lobbying out irrelevant PE multiples as justification on the market should be 20% or 30% lower. I hear the opinions every day dressed up as breaking news that we should be trading at a 14 or 18 or 20 times multiple like the market in your portfolio care about that opinion.

None of these sue-sayers mentioned that the difference between these value metrics say, a 14 times earnings PE and at 18 times price-earnings ratio is about 28% percent. Then, take the difference between an earnings estimate of $140 per share on the S&P 500 and $170 per share on the S&P 500. That’s another 21%. Add these two differentials together, 28 on valuation and 21 on earnings and you get a range on the S&P 500 of almost 50%. That’s quite a margin of error. That’s really helpful to nothing. The team at Oak Harvest continues to disagree with a day-to-day over-analysis of most of these discussions and data points.

When Troy and I filmed our YouTube video on March 23rd and entitled it Healing Signs, we weren’t guessing at price-earnings ratios of the S&P 500. We weren’t guessing at S&P targets or earnings per share. We were looking at real-time data behind the scenes that correlated with a stock decline in February and March. We were looking at virus case momentum which led us down in February. We were looking at a peak in country virus case momentum and a peak in stock volatility. We then overlaid normal historic investor responses to come up with how high and how long the first part of the stock market recovery rally should be.

We did this because one of our basic rules as investor is what? It’s not to fight the federal reserve. We aren’t supposed to fight the federal reserve. That means if we’re retirees, we’re not supposed to do it. We aren’t supposed to fight the federal reserve if we’re baby boomers. We aren’t supposed to fight the fed for Gen-Xers. If we’re millennials, oh my, the federal reserve, what have they done for millennials? Well, they made it rain. Plain and simple. It is not paid to fight the fed.

Here’s where the first part of this week’s podcast title comes in, The Robinhood Rally. Late the week of March 16th through 19th at the height of the acceleration in global virus cases and with market volatility as measured by the spot bits index skyrocketing to close to 80, the Federal Reserve as well as our leaders in Congress came to the rescue of both our economy and the financial markets by announcing programs to flood the financial markets, particularly credit and bond markets which have become gridlocked with liquidity to unfreeze them and to back stock the economy through the forced shutdown of businesses for the second and third quarter of this year.

As they did this, the vast majority of opinions on TV were this. It’s different this time. You can’t buy stock. Volatility is too high, or at best, it was safe to buy, but please, you have to buy safe stocks. Play defense. What has transpired? Exactly the opposite. The stock market has rallied for 6 weeks to 2,900, and volatility has been more than halved. What have been the best-performing stocks in the market? Have they been the safety plays? Has defense led? No, listeners, exactly the opposite.

What most people recommended, back-ending worked the best. The fastest-growing, most volatile names, and most speculative names have rallied the most. Big cap tech names like Amazon and Netflix and Paypal were up between 40% and 70% in 6 weeks. Smaller tech names like Twilio are up a mind-boggling150% after 6 weeks’ loves. Outside of technology, whoever thought that trading chicken wings could be so profitable and fun? Wingstop restaurants sought stock rise, sit down listeners, 173% in 6 weeks. These guys sell chicken wings. DraftKings, the recent reverse merger of the online fantasy sports gaming and gambling or prize-winning platform has risen from $10 to $27 dollars in 6 weeks.

Go back and think about Virgin Galactic, what it did in December of last year, rising from $7 to over $40 in less than 6 weeks. What do these names all have in common? Some will say they are all stay-at-home stocks, to which I can’t disagree really, but does that justify moves of 75% to 150% in 6 weeks? I don’t know or care really if those moves are justified. I just want to know why these stocks led. Besides hyper-revenue growth, I argue that these stocks have led the rally. What these stocks have in common is that most of them are millennial stocks. Specifically, they are stocks that most millennials are familiar with, millennials that instead of having investment accounts at Charles Schwab or fidelity, have their trading accounts at Robinhood, hence the Robinhood Ralley moniker on this podcast.

Now, listeners, we do not own these latter names or most of these type of hyper-growth names for our retirement clients. We do own some larger cap technology names, but I want to bring them up to show you that what is going on is not unusual in stocks. TV hosts are mystified. Of course, most of these hosts do not manage money professionally nor have they ever. Why is this rally happening with such bad unemployment data? The answer, thank the federal reserve.

The lesson from the last three months remains the same. First, you have to be in it to win it and stay the course with your financial plan during periods of high volatility to earn the longer-term investment performance rewards of owning equities. If you want the potential average return that equities have given over long periods of time of 8% to 10%, you have to endure the ups and downs. What now? We expect the pace of gains to slow pretty dramatically as the normal post-mid-mayday payday and option expiration is next week. However, we will be using the ongoing but anticipated period of sustained higher volatility through around July 4th to continue to position portfolios for a much better year-end.

At these levels of volatility, every week presents opportunities. What is required to capture these opportunities is patience, patience knowing while this event-driven downturn has a unique reason, the virus, our elected political officials and federal reserve is reacting with unprecedented speed inside to combat this event. Our nation and our economy and stock markets have endured numerous unforeseen, unpredictable events over the last hundred years. We’ve endured them, return to growth, and subsequently prospered.

On that note, I want to leave our investors and listeners an optimistic cliff hanger that I will address throughout the second quarter. Clients can go log on to the Oak Harvest web portal and view this accompanying chart for the answer to my question. Here’s my question. What if worst case health-wise, this pandemic, the COVID 19 virus, is the second coming of the Spanish flu that happened in 1918 through 1999. My question is what happened to the economy and stock markets after the Spanish flu? Was it bad? Was it good? Did the Spanish flu matter over the next three to five years after it was over a little hit to the answer and no, I wasn’t alive back then, there was a nice little period of growth and prosperity for about five or eight years called the roaring 20s on the back of the end of the Spanish flu and what caused this roaring 20s? Was it, what would now be the baby boomers or retirees? No, it was the younger generation. Re-entering the workforce forming families spending money on pent-up demand and guess what? Investing in stock markets, older, baby boomers, and retirees, nothing against this demographic. I’m 55. I’m on that edge of baby boomers, but that would not be us.

That would not be us in our retirement age. That would be the millennials driving the economy and stock markets, which is probably why most everyone quoted on TV has missed the current rally. If you want a bit of a preview of our optimistic case for the next few years on stocks and the economy, please go Google recent interviews with professor Jeremy Siegel. His recent bullish comments are very much in line with the investment team here at Oak Harvests, thinking farther out over the next year to five years at Oak harvest, we are 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 independent of the volatility of stock markets. If you’re retired or in the process of retiring, give us a call (281) 822-1350). We are here to help your path to your finish. Future in LTU smooth, the financial path that you had into and through your retirement years with a customized retirement planning, thank you many blessings, and stay safe. This is Chris Perras.

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.