Where We Stand: Normal Summer and Higher Volatility

Join Chris Perras for the 5/22/2020 edition of Stock Talk!

Chris: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas, and welcome to our weekly Stock Talk podcast: Keeping You Connected to Your Money. This podcast is entitled Where We Stand. It’ll recap the current rally, where we stand, and what we expect to happen over the coming summer months. The S&P 500 sitting near 2950, up 35% from the late March lows, and it’s back in the same trading range that the market was last summer, before the fourth-quarter rally that sent the market from about 2,875 to almost 3,400 in mid-February of this year, pre the virus outbreak.

Financial markets have moved far faster than the economic data has moved. Listeners, this always happens at the trough of the economic cycle. Waiting for the clouds to clear produces mediocre long-term investment returns. To those listeners, investors, who rely on fundamental visibility to make investment decisions, the rise in stocks since the mid-March lows would appear to be completely disconnected from reality. We’ve discussed how this happens at every trough and in every recession.

2009 had a similar lack of visibility from March to November of 2009, even Warren Buffett’s saying he saw no green shoots in June of 2009. Equally shocking to most listeners, the best performing sectors and groups since the March 23rd lows have been offense and cyclical-minded stocks, not the safety stocks most of the TV commentators have been pitching. The top sectors have been energy, which is at 57% from the lows, materials up 37%, and discretionary and technology up over 35%.

The groups that have trailed the honors, staples up 17%, financials up 22%, and utilities up 25% off their lows. After peaking on a relative basis way back in June of 2008, almost 12 years ago, which was not coincidentally, at the opening of the Beijing Summer Olympics, energy has been the stealth leader of the March 23rd lows. It actually bottoms five days before the S&P 500 bottom. Think about that. This group bottomed when it had zero fundamental arguments for buying.

There was an OPEC fracture. There was airline traffic was down 99%. Oil was being given away. Hell, people were paying other people to take it. The global economy was shut and energy stocks bottomed. Last Tuesday, May 19th, marked the 40th trading day since the market low on March 23rd. The S&P’s 31% change over those 40 days followed only March 2009 Great Recession lows as far as returns.

Listeners can log on to our web portal to see the top 10 V bottom returns from post-recessions. The last Tuesday, May 19th marked the 40th trading day since the market lows on March 23rd. The S&P’s 31% change over that stretch only lagged the rebound following the March 2009 Great Recession lows. Listeners and clients can log on to our web portal to see the top 10 V bottom returns post-recessions. As we have previously discussed on our No Re-test is Coming Theme, these V-shaped bottoms are not that rare when the Federal Reserve is helping.

Even better, historically, the investment returns over the next 6 to 12 months have been very strong, coming in much better than historical stock market return averages. What does this mean to you? It means if you are listeners who hired an advisor who employs trend-following tactical asset allocation strategies that promise to get you out as their risk management strategy, they promise to take you to cash so as not to lose money, well, they once again will most likely not be getting you back in to make money either.

Here, we go back on topic, back to the data. The average 6 and 12-month returns following, and I repeat, following the stock moves and recoveries like the ones we’ve just experienced have been 7.5% and 15% respectively. That’s 12 months return from here would put us firmly at new all-time highs. Well, this might sound outrageous to many of you tuned into every piece of bad economic news on TV, it’s not a fanciful dream. Of course, these rallies have not happened in linear fashion.

To this end, with a June deadzone of the second quarter approaching, we expect the markets upside momentum to slow and percent gains to be more subdued for a few months. Listeners this isn’t breaking news. As we’ve discussed in prior podcasts, the markets normally slow down during the summer months. Most likely, June will be filled with a rise in reported COVID cases, one or two weeks post the upcoming Memorial weekend. Moreover, go ahead and expect two or three untimely weekly tweets by our president to be fired off at China, the CDC, or others he chooses to blame for the virus.

More importantly, there will be little real-time relevant, and I repeat, relevant financial news in June, as most companies enter the blackout window. These things should keep volatility high and elevated over 28 to 30 over the next few months. We covered this last week, but I have to re-emphasize it again. Market moves tend to be symmetrical in both price and time. The faster they decline, the faster they recover. In 2020, the market’s high-speed decline suggests asymmetric high-speed recovery. Clients, please log into our web portal and review the chart brought to us by Fundstrat titled V Bottoms Rule.

What one will see is that there have been 10 declines greater than 36% since 1920. That is there have been pretty much 10 recessions in the stock market. What one will see is that historically, it has taken as little as 0.6 times as long to return to market highs to about 8 times as long. Given that the current recessionary stock decline we experienced in March was almost exactly one month, one could expect the market to regain its all-time highs sometime later this year or early 2021, much to the chagrin of those calling for depressions and repeats of the 1930s.

Even comparisons of the current virus situation to the outbreak of the Spanish Flu in 1918 would argue for economic downturn to be short and sharp. The final chart I want to share with listeners and clients is the one showing the length of each of the 22 US economic recessions we have endured since 1900. The recession brought on by the Spanish Flu in 1918 lasted seven months. That’s it. It was the second shortest in US history. Yes, it was painful health and economic event, but the economic hit lasted less than three-quarters of a year. A replay of this would have the US exiting or event-driven recession in the fourth quarter of this year. We all know that stocks move four to six months in advance of this.

The team at Oak Harvest believes that the economy is going to be much improved and better than the TV networks’ tout in the second half of 2020 and 2021. Why? First, the collective energy of the global healthcare intellect is racing to develop antivirals and vaccines for the virus. We won’t bet against science, technology, and the human spirit to find a solution to this virus.

Additionally, we see concrete real-time signs of a resilient and optimistic economic recovery, particularly the millennial population, and it’s everywhere. It’s everywhere. It is continued housing purchases, low mortgage rates, and a desire to exit crowded cities for the suburbs is incenting many millennials to buy homes for the very first time. This is helping drive a rapid recovery in home sales. You can see it in a swift rebound in millennial car purchase intentions. Many young millennials living in more urban areas are buying cars for the very first time. The virus has been terribly inconvenient to those relying on ride-sharing services, the companies like Lyft and Uber for transportation.

It’s even out there in travel and leisure intentions. Do you really want to go hang out in an Airbnb when you travel next year, or is it more likely you’re going to go to a bigger, more established hotel chain where you trust their sanitary services? You generally will not see these positive things emphasized on network TV. Why? Because network TV channels viewers and eyeballs are you and me. We are the baby boomer demographic and older. Network news channels are in the business of marketing to viewers my age and older. Let’s call it the over 50 crowd. During times like this, TV networks have found that the best way to hold viewers’ attention is through shock, fear, and “breaking news.” By marketing fear, the TV networks will likely slow the blooming of optimism in the demographic most at risk from a reemergence of the virus. Who is that? That’s the people in their ages of 65 and older. Who is that? That’s the baby boomer age and retirees. Listeners, I want to tell you a secret or two about the millennials. I have a bit of direct knowledge of them through having two sons between the age of 20 and 25, a stepson who’s 20, and two other 20 something-year-old females in my extended family. You ready?

You might already know these things, but they bear repeating. First, millennials do not watch network TV. They don’t. They don’t watch Fox News, they don’t watch CNBC or any other channel you and I grew up watching or currently watching. If you are sequestered at home during the virus-induced lockdown, you’re probably watching 5 to 10 times as much news on network TV as you were previous virus.

These channels shaped our views and opinions during our formative adult years, say, between the ages of 20 and 50. Listeners, millennials do not watch these shows and they never will. Instead, they watch YouTube, Netflix, and Twitch. They get their news from Facebook, Twitter, Reddit, Instagram, and their friends online. They do not get the news by watching a cable news channel screaming, breaking news, 100 to 200 times a day. Listeners, I’m not kidding about that. If you get bored, try to count the number of times, CNBC has breaking news between 7:00 AM and 7:00 PM every day now.

They don’t shop at the mall and never will. They shop at Amazon and online for everything. They don’t listen to the radio and they never will. They listen to Spotify, they listen to Apple Music or some other streaming channel. Their Twitch and YouTube stars are Joe Rogan. They are the modern-day, Tom Bradys, Howard Sterns, and Oprahs. Listeners, YouTube star, Joe Rogan, who you might know from his previous life as the host of TV network show Fear Factor, Mr. Rogan has over 8 million YouTube subscribers, his podcast over 200 million downloads per month. He just signed a $100 million deal to move his content to Spotify. Why? Because that’s where the audience is. It’s online. Rogan is the millennial’s, Howard stern.

The modern-day Tom Brady for millennial boys isn’t on the football field. It’s the ninja on the Twitch channel. He’s a professional gamer who mostly streams his Fortnite gaming on the Amazon-owned Twitch streaming network. You know what? He makes five to seven and a half million dollars a year as a 26-year-old sitting at a desk with a headset on and a game controller. He doesn’t have a football on his hands, and guess what? He has zero concussion risk or risk of blowing out his ACL.

While baby boomers are looking at today’s volatility as a curse, the millennial generation is seeing it as their buying opportunity. It seems they have already learned that volatility and recessions, while uncomfortable, they breed opportunity and the potential for higher than normally expected returns in the equity markets, not lower expected returns. Amongst this higher market volatility, give us a call.

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 are retired or in the process of retiring, give us a call at 281-822-1350. We are here to help you plan your financial future and help smooth the financial path you have into and through your retirement years with a customized retirement planning. Many blessings, this is Chris Perez at Oak Harvest Financial Group.

Operator: The preceding 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.