Financial Market Spoiler Alert

CIO Chris Perras recaps the year-to-date action in the markets and previews our view of what to expect over the coming weeks.

Chris Perras: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the May 24th edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money. This week’s episode is primarily a recap of the year-to-date stock and bond market action, including the recent downturn since Easter. I’m going to call this one, Financial Markets Spoiler Alert, We Called This on January 4th.

Before I get into the meat of this podcast, I want to personally thank the millions of people who saw the final episode of the Avengers Endgame released by Walt Disney company about four weeks ago. First, let me thank you for spending over $2 billion so far, viewing the movie, and helping the Disney stock reach an all-time high of about $140 recently. Secondly, and most importantly, let me thank you for not ruining the ending for all those fans who waited days or weeks to see the movie. The second quarter dead zone continues.

Time-wise we are now almost exactly halfway through the period that we predicted way back on January 4th in our First Half Outlook. I urge listeners to go back to our website and read and review our First Half 2019 Outlook, for the markets. It can be found at www.aokharvestfg.com/2019firsthalfoutlook. I’m going to read to you a few excerpts from the piece, first, from paragraph three of our outlook on what we see happening in the first half of 2019.

Quote, “The investment team at Oak Harvest Financial Group believes the overall market returns from 2019 will come largely in two very short time windows, with the first being a sharp recovery in the first quarter of 2019.” That worked out pretty well as the S&P 500 actually rally to over 29, 25 into Easter. As far as why this would happen, our rationale back then was the following, contrary to most market pundits, we expect a dramatic decline in stock market volatility in early 2019, which should not only stabilize stocks but propel them back significantly higher.

Volatility fell from over 35 back in late December of 2018 to 12 over Easter weekend. So far so good on our outlook. Furthermore, we stated that besides lower volatility induced by an easier federal reserve, we expected a combination of both passive flows into 401(Ks) and IRAs and accelerated stock buybacks to support the markets into April. As far as the markets, roughly 5% downturn to 2,800 on the S&P 500 that has occurred since Easter until earlier this week. Please go back and read the second half of our First Half Outlook.

It read as follows, while positive on the early 2019 rally, we expect the price momentum to weigh in as companies re-enter their blackout window later in the second quarter. Moreover, we postured that another reason would surface in the second quarter that would, quote, “refocus investors on slower global growth and concerns of a recession. Convenient reasons we thought would include or could include European Brexit concerns, oil instability, the launching of additional auto tariffs, or federal deficit worries.”

“Regardless of the causes, we think that a short-term rally in bonds and the dollar are likely in the second quarter.” Please stop for a moment. Think about what you just read. Does it sound almost exactly like what you are now hearing in the financial press? Does it look almost exactly like what you’re seeing in the financial markets? What was your financial advisor saying back then, or more importantly, what were they doing with your money? Was your current financial advisor selling all your stocks in December on a flight to safety as the S&P broke down below 25.50?

Or even worse, were they saying, our tactical models are all saying it’s time to sell? Were they saying, we’re selling your stocks because the S&P 500 broke below its 200-day moving average? Were they saying, we’re selling because the S&P 500 just entered a death cross? These systems don’t work. Give us a call at 281-822-1350. We will show you how these systems, and I use that term lightly or merely simple, but horribly poor market timing techniques that prey on investors’ emotional tendency, to fear the inherent volatility in stock markets.

Did your advisor reverse course in late March and declare, the coast is clear. We’re going to get you back invested in the S&P 500. That’s when it was over 2,800 or even 28.25. Even worse, did they come out a few weeks later as part of the crowd that said it 2,900, 29.25, that Goldilocks is here and a melt-up is close at hand? Please, give us a call. Oak Harvest Financial Group, its advisors, its investment management team have a much better way of financial planning and investment management. We have a process that does not prey on emotions.

Where do we go from here in the markets? Set it for about four weeks. We’re in the dead zone. We’re about halfway through a second-quarter pullback that we called for back at the beginning of the year, the S&P 500 stock this week at roughly 2,800. There’s a very small chance that that’s it for the down move. That’s roughly 5% off the all time high we set near Easter into early May. We do think that there’s still a little more risk to the downside over the next four to six weeks, call it 27.55 on the S&P 500, maybe 27.85.

A total off the top of the market of about 6.5% off the all-time highs, that would take place still over another four to six weeks into July 4th. These periods are not fun. I do not enjoy these periods. I’ve been doing this for 25 years. I have no hair largely because even when you see these periods, they are stressful. However, these are the times when one should be stepping up their investments, when they should be putting money to work, not running from stocks.

For 10 years, investors have told me I want to buy stocks when they’re down and things look good. I’m sorry that’s not the way markets work. Your biggest returns are made by buying stocks when they are down and the outlook is cloudy. If and when a China deal is announced, our president will turn his focus to the domestic economy and getting reelected. By then the stock market will already be up and heading to 3,000 on the S&P 500. The coast will be clear, and those late to the party will have the smallest returns.

Today’s higher trending volatility in the second quarter is 100% normal and should continue into late June or possibly July 4th weekend, as investors wrestle with mid-year earnings estimate cuts largely driven by China tariff concerns, a higher dollar and a slower economic growth outlook. Investors and traders will continue to be dazed and confused for another four to six weeks. As we predicted back in early January, the bond markets have been rallying at an accelerated pace since Easter into what we believe will be a top in bond prices, and a low in bond yields late in the second quarter.

Utilities and real estate investment trusts are the best performing sectors of the stock market year today. The utility sector now trades at a higher priced earnings multiple being over 20 times earnings, than both gross stock sectors of technology and healthcare. That is not Goldilocks. That is fear. Goldilocks begins when long-term interest rates trough on a trough in both inflation and growth expectations. That’s when the breadth of the market can expand into such sectors such as banks, industrials and technologies.

When those groups return to leadership, that’s Goldilocks. A market where ultra high growth fang stocks are the only stocks working or low-risk utilities and real estate investment trusts are leading, is not Goldilocks. For many clients with longer long-term legacy bond exposure, we’ve been using the rally and long-term treasuries to sell down these bonds. We continue to feel that the current second quarter flight to safety move into bonds on a combination of both lower growth and lower inflation concerns, is creating what should be the low yield and a high price for treasury bonds, for the next 15 to 18 months.

The price movement in the markets continues to be remarkably similar to what transpired in the second quarter of 2016, on both lower global growth concerns, lower inflation, slower China growth and Brexit concerns. As for single stocks, we recently bought Home Depot for single stocks clients who didn’t already own it, as some investors were very late to recognize the short-term effect that lower lumber pricing has on their business. The stock fell to under $188, after their recent stellar earnings report. We added to Apple under 180 recently, on concerns of a China slowdown as that stock has fallen almost $30 a share in four weeks. On a final note the, I don’t want to invest now rational excuse segment. This week’s excuse is, we’ve been in the markets for nine months and we’ve lost money so we’re getting out. I heard that last week, it left me almost speechless. Clearly, these people do not grasp how the stock markets work and how they compound as leverage to economic growth over years and decades, not days, weeks, or even months.

We’ve been invested for nine months and we lost money. Think about that. Think about if it was a house, and you just bought a house as a place to live for 5 to 10 years, but also as a store of wealth. You buy a house, and then either interest rates rise and your house value goes down, or storm hits, and the value of your house drops, or your neighbor sells his house for less than what you think yours is worth. You decide, “Yes, I’ve lost money the last 6 to 12 months, I’m selling my house and moving.” It would be absurd. Stocks and other financial instruments are merely financial tools.

Tools one uses over long periods of time to protect, save, and compound your wealth. 6, 9, 12 months is not a relevant time to analyze or hold a financial tool to meet your long-term financial goals. [background music] 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 are 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, Chris Perras.

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