The Song Remains the Same

CIO Chris Perras takes a look at the current market circumstances, how Oak Harvest responds to changing market conditions and argues that, yes, the financial media is still “dazed and confused”! This also features a new “I don’t want to invest now because…”!

Chris Perras: I’m Chris Perras, the chief investment officer at Oak Harvest Financial Group. This is the May 17th edition of our weekly Stock Talk podcast: Keeping you Connected to your Money. Each week, we share with you our views on the markets, try to educate you on how the stock and bond markets work. This week’s episode is taken from the Led Zeppelin live performance album released in 1976 entitled The Song Remains The Same. This album featured such hits as Stairway to Heaven and Dazed and Confused. Both of these songs and their titles perfectly describe the financial press’s commentary in reaction to the financial markets since Easter.

Just three short weeks ago, the loudest commentary expounded in the financial press was that we were in a Goldilocks environment for stocks and a vulnerable, perfect environment for a stock market melt-up. That was in an S&P 500 2,925 after the market had rallied 600 points in 3 months. If you believe these strategists and mouthpieces, we were close to riding a stairway to heaven. Then, on Sunday night, right at the start of the dead zone period, our president tweeted on how the Chinese had backed out of their trade deal commitments. Now, for three weeks, what we’ve increasingly heard is a screeching sound from those same market strategists.

They’ve already flip-flopped dramatically now back to the fourth quarter game show, “Let’s call for the next recession. Let’s throw out the odds of a recession over the next 6 months, 12 months, or even 2 years.” The same people who called for a market melt-up three weeks ago, now they’re lobbing out recession calls. Someone, please explain to me how this is helpful to anyone who is investing. Is it helpful to short-term trading? Sure. It’s helpful because it helps cause volatility and price movement, but investing? No, it’s not one bit helpful or value-adding. In fact, it’s 100% preying on most people’s reactionary impulse to be emotional about their money and about investing.

The S&P 500 fell roughly 4 3/4% into last Monday’s low, which was about 2,800. This took, roughly, three weeks. Volatility is measured by the cost of spot insurance versus the cost of insurance out six to eight weeks in the future, which got to about 25% backward as of Monday morning. From there, spot volatility has collapsed back to a more normal level and the S&P 500 has bounced to about 2,875. This is all taking place in the dead zone. The go-slow zone.

This is exactly in line with the outlook the team at Oak Harvest Financial Group laid out in our first half outlook published way back in early January. We believed that the market would peak and stall in late April or early May at around 2,875 to 2,900 on the S&P 500. This outlook can be found on our website at oakharvestfg.com/2019-first-half-outlook. We believe that today’s higher volatility will continue into late June or possibly, the July 4th weekend as investors wrestle with mid-year earnings estimate cuts with the excuse being, “China’s causing our slowdown.”

Investors and traders will continue to be dazed and confused for a few more months. The seasonality of our economy and stock market returns is well documented and very rational. As an economy that’s 70% to 75% consumer and service-based, most of our economic growth comes in the fourth quarter and first quarters of the year. The second and third quarters of the year are relegated to inventory builds and drawdowns. However, we are now entering the accelerated investment zone, the buy zone, the Goldilocks zone.

Recall, Oak Harvest believes the Goldilocks for the overall stock market. Not just the high-growth, high-priced-to-earnings stocks like the Cloud Kings or the FANG names will be accompanied by a sell-off in the long-term treasury market. That is the dynamic we see playing out post-July 4th. That is the dynamic we will lay out in our June second-half outlook. When volatility spikes over 20, we begin to add stocks a little faster.

Additionally, we are currently taking some losses now in stocks that we’ve been wrong about and that we do not expect to recover in the second half as fast as some of the opportunities that are already starting to arise from the current market pullback. Think [unintelligible 00:04:42] and bowing in at the right valuation. Earnings reports this week have included great reports from both Applied Materials and Walmart, and softer guidance from Deere, as they saw crop disruptions caused by Midwest flooding and a slightly slower second-half export outlook on trade concerns.

There should continue to be another four to six weeks of this choppy to-down market action. Ultimately, we think that the market will settle down in late June. From there, we will release our second half outlook in mid-June, but generally, Goldilocks for stocks will be accompanied by slightly higher long-term interest rates and falling bond prices as inflation and growth pick up in the second half of this year and then in 2020. We continue to believe we’ll see this dynamic starting post-July 4th. Accelerating growth and slightly higher inflation, if gradual, are Goldilocks for stocks. That is how and when we climb a stairway to heaven for stocks.

Those are the conditions that, eventually, lead to stock market melt-ups. Melt-ups in the stock market do not happen in an environment of slowing growth and lower inflation. This environment is particularly good for domestic small-cap stocks, international stocks, emerging market stocks, and value stocks. As for sectors, the second half outlook would be overweight financials, cyclical, technology, industrials, and things levered to an acceleration in growth. That’s Goldilocks. An expansion in the stock market of groups and sectors that are working.

On a final note, the newest week segment of the podcast, the “I don’t want to invest now” rational and excuse segment. This week’s newest excuse I read is an investment piece that I saw exclaimed that there’s a blood bath in stocks coming. Well, I’ve personally read over 100 of these so-called investment pieces and almost 100% of the time, they are not investment pieces or research at all. Almost 100% of the time these pieces are sensationalized opinions, well-scripted to your emotions, used to scare you, used to draw you in, and push you to sign up and pay for an investment newsletter.

In fact, almost always, the individuals writing these pieces do not manage money for other people. Most of these newsletters are penned by really smart people who are mainly marketing focused, who have never successfully managed other people’s money. They’re in the subscription newsletter business, not the fiduciary independent financial advising business. The financial newsletter business is the Wild West. It is lightly regulated and almost never supervised.

Oak Harvest Financial Group is a financial fiduciary. We are an independent investment advisor that provides both financial planning and investment management services for our clients. We are not in the fearmongering or newsletter subscription business. 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 website at oakharvestfg.com. You shared your vision for your money with us during our meetings, and we’re here for you. Our main job at Oak Harvest is to have you retire only once in your life with a customized retirement planning. Many blessings. This is Chris Perras, chief investment officer at Oak Harvest Financial Group.

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