My Name is Bond… James Bond

CIO Chris Perras devotes an episode to discussing the Fixed Income and Bond markets, and explains how different economic factors impact both bond markets and the stock market.

Chris Perras: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the May 31st edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money. This weeks’ episode is littered with references to one of my favorite movie series of all time. This was the creation by Ian Fleming way back in 1953 of James Bond.

The James Bond character has now appeared in a series of 26 movies and I’ve been managing other people’s money for 26 years. I’m going to call this one My name is James Bond. I’ve chosen this title because I want to focus most of this podcast on a segment of the financial markets we rarely discuss, the fixed income and bond markets. Why am I addressing this topic?

Because since last October, when the Federal Reserve announced that they were not close to being done raising rates, and our president stepped up his tariffs and attacks on China and our other trading partners, tariffs, which short term are nothing more than additional costs and taxes born by US consumers, the long data treasury market as measured by the yield and the 10-year Treasury note has rallied over 100 basis points from about 3.25% yield to 2.25% yield, over the last eight months.

We talked about this unforeseen rally in the bond market when we laid out our first half outlook on January 4th. It can be found at oakharvestfg.com/2019-first-half-outlook/. I want to read a quote from that report. “Finally, we think that a third unforeseen reason will surface late in the second quarter, refocusing investors on slower global growth and concerns of a recession. Convenient reasons may include European Brexit, oil instability, watching additional auto tariffs, or federal deficit worries.”

“Regardless of the cause, we think that a short-term rally in bonds and in the dollar in the second quarter is likely. Being two of the three bears to earnings estimates and stock prices, a short-term and fast pullback in the global equity markets would ensue.” Please reflect on that for a moment. We wrote that back in early January of this year. So far so good on our first half outlook written way back in January, as played out on both the stock and bond markets.

The actual reasons that have appeared and seem to have caused the roughly 6.5% decline in stocks, in rally and bonds have been, one, a combination of both slowing global growth and lower expected inflation caused by ongoing trade worries with China, as well as, two, a very slow European economy. Three, last night, President Trump launching 5% tariffs against all imported goods from Mexico, which happens to be our largest trading partner in the automobile and agricultural markets.

Listeners when you have a chance, please go back and listen to our earlier podcast, where we laid out the three factors that need to be present for the Goldilocks in the stock market. A Goldilocks environment for stocks does not include lower trending long bond treasury yields. Why? Because of the evil villain of the stock market, its spectra group is lower long bond yields, and bond yields are driven by two components. They are a combination of both growth expectations and inflation expectations.

When that combination of growth and inflation is gradually trending higher, the longer-term outlook for the economy is improving. As a result, yields on treasuries and other risk-free assets rise and their prices fall. This creates a gradual steepening of the yield curve, while bad for bonds plays out as Goldilocks environment for stocks. At that time the economy is expanding faster, and inflation is rising not falling. Contrary to popular financial press articles making this out to be an issue that is just now surfaced the past four or five weeks, it is actually been going on more or less for 16 months.

“No, doctor since the Trump tax cut was put in place late January 2018, both the Federal Reserve and President Trump. Whether they’ve meant to or not have slowed both economic growth and inflation.” This is flat-out bad for both our economy and for stock markets. It is far from Goldilocks. The good news is that we have endured two almost identical periods this economic cycle already, that are very similar and both lasted about 18 months.

Those periods were 2011 through June of 2012 and 2015 through June of 2016. During these periods both economic growth and inflation were slowing. While this is the perfect market for bond market rallies, it is the opposite of Goldilocks’ environment for stocks. Melt-ups in stocks rarely, if ever occur, during periods of slowing growth and slowing inflation. In fact, these were the exact low and yields for bonds and high and bond prices for the next 18 months in both June of 2012 and June of 2016.

One should have been selling bond positions, taking gains in them, and waiting for higher yields. That is exactly what Oak Harvest has been doing the last week in our client portfolios that hold overweight and bonds. Yes, we are selling bonds, James Bonds. Conversely, these were the monthly lows and stocks for the next 18 to 24 months in the June of 2012 and June of 2016. From its 200-day moving average in July of 2012, which, “Had been broken, poor technicians and amateur chartists.”

The S&P 500 only returned 54% up the next two years. From its 200-day moving average was also had been declared broken and a sell signal by tactical asset allocators in June of 2016. The S&P 500 only returned 45% over the next two years. Did your advisor sell your stocks because the market had broken its 200-day moving averages? If so, did he ever get back in? One should have been accelerating their investment and equities during these times of volatility and uncertainty, and when people were flooding their investments into the safety of the bond markets.

Well, currently what has your current financial advisor been saying to you this year or doing with your money? Were they talking about melt-ups and Goldilocks only four weeks ago at over 2,900, 29.25 on the S&P 500, after sitting out the rally that started the week after Christmas of last year and lasted 500 S&P points and almost 15% up? Are their tactical asset allocation models now saying, it’s time to sell because we broke the 200-day moving average again? Worse yet, are they running to the safety of bonds after preaching the fear of inflation since 2009?

These systems do not work. Please give us a call at 281-822-1350. We will show you how these systems, and once again, I use those terms lightly, are merely simple but horribly poor market timing techniques that prey on investor’s emotional tendency to fear the inherent volatility and stock markets. Please give us a call. At Oak Harvest Financial Group, our investment advisors have a much better way of financial planning and investment management, one that does not prey on emotions.

No, these are periods that are not fun. However, these are times when one should be stepping up their investments and when they should be putting money to work. For 10 years, investors have said, “I want to buy stocks when they are down and things look good.” Well, that’s not the way the markets work. Your biggest returns are made by buying stocks when they are down and the outlook is cloudy. When the coast is clear, those who waited will have the smallest returns.

Today’s higher trend in volatility is 100% normal and as we’ve said in the past, could continue into late June or possibly July 4th, when the Dead Zone period is over. On a final note the, I don’t want to invest now rational and excuse segment. This week’s excuse, the stock market broke below its 200-day moving averages and my advisor told me, it’s time to sell stocks. I heard that this week. It’s funny because the team at Oak Harvest predicted this would happen late in the second quarter, weeks, if not months ago.

We addressed the results of this methodology, this economic cycle earlier in this podcast. To recap from January 2011 through June of 2012, the S&P 500 went nowhere. It was up 0%. It broke below its 200-day moving average for a few weeks in June of 2012, and then promptly rose 55% over the next two years. From January 2015 through June of 2016, the S&P went nowhere net. It broke below its 200-day moving average for a while in June of 2016. It then promptly rose 45% over the next two years. What now? We have gone net nowhere since January of 2018 when the Trump Tax Act was passed. Now, almost exactly 18 months later, we have, “Broken back through the 200-day moving averages again.” What’s your advisor doing? [background music]  The Oak Harvest team is buying stocks for your long-term investment accounts and [unintelligible 00:10:03] bonds, as we’ve seen this James Bond movie rerun multiple times in the past 10 years. 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 meeting, and we are here for you to help. 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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