Market Outlook, H2, Part 1: Goldilocks — Let’s Get it Started… Slowly

CIO Chris Perras returns and, in a special “Stock Talk Only” exclusive, dives into Part One of Oak Harvest’s H2 2019 outlook for the markets! Join us for the discussion “Goldilocks: Let’s Get It Started…Slowly!”

Chris Perras: Hi, my name is Chris Perras. I’m Chief Investment Officer at Oak Harvest Financial Group, and welcome to the June 14th edition of our weekly Stock Talk Podcast: Keeping you connected to your money. This week’s episode is the first part of a two-part series addressing our second half 2019 outlook. For the next two weeks, our outlook can only be found on these audio podcasts by way of this email or our website.

Go ahead and Google Oak Harvest 2019 Second-half Outlook, if you want to direct others to listen to what we have to say. Broadly speaking, I’m calling our second-half outlook Goldilocks returns, and she kicks the three bears out of the party.

Today’s episode addressing the first part of her outlook is an ode to a great song by the Black Eyed Peas. I’ve entitled it Goldilocks. Let’s get it started slowly. As we have repeatedly said throughout the second half of 2018 and the first half of 2019, we see an almost perfect analogy in the economy in both the stock and bond markets to 2015 through 2016 for 2018 and ’19.

Our first-half outlook can be found at our website at oakharvestsfg.com/2019-first-half-outlook. So far so good as the markets have done almost exactly what we laid out in early January of this year. The investment team at Oak Harvest believes the second-half of 2019 returns will come largely during two very short time windows.

First, we believe that there is a very short term window for an end of the second quarter pullback in the market toward around 2,800 on the S&P 500 into July 1st through 3rd at the end of the quarter, largely on disappointment in trade negotiations or the Federal Reserve, or positioning by hedge funds. Beyond that time window, we believe that the first market rally really started on June 3rd, as the market became overly pessimistic on both inflation and global growth.

This rally could extend into August and reach a new all-time high of close to 3,000 on the S&P 500. Let’s go ahead and call this time period the normal summer rally during the very normal stock buyback window for second-quarter earnings. The second window of opportunity for a substantial move up in the second half of 2019 would come after a fall sell-off of about 5% on disappointing third-quarter earnings reports in the normal deadline period.

However, by later in the year, November and December timeframe, long-term investors should begin to refocus and position for 2020 economic upturn. Let’s call this year-end rally, the normal Santa Claus rally, which could propel the S&P 500 to close to 3,100 by year-end. As for treasury yields, we feel that we are currently seeing the low in yields for long-term treasuries and the high in their prices for the next 18 months.

What does this mean to you? It means that if you own bonds, we believe that prices will decline, and you’ll lose money over the next 18 to 24 months as yields rise. Why do we see this? During the first week of June, the Federal Reserve moonwalked back its assessment on the economy and said it was open to rate cuts in the second half of this year.

As you know, the team at Oak Harvest believes that most of the financial news is noise, it’s irrelevant, and it’s merely written or produced to create emotion in readers and listeners, and investors. This story for the second time this year is different. This one is market-changing news just like the early January one when the Federal Reserve changed its wording.

One of the most sacred rules for investors is don’t fight the Federal Reserve. Please repeat after us, ”Don’t fight the Fed.” There’s a reason why the stock market went nowhere for almost 18 months. The Federal Reserve was tightening financial conditions. It has now said that they will provide liquidity to the markets if needed. The bond market has known since January of 2018 that both inflation and growth peaked in that month on the implementation of Trump tax cuts.

Since then, the overall stock markets have gone literally nowhere for almost 18 months as both growth and inflation have cooled off. This slowdown has been caused by a combination of factors, but the two main causes have been the Federal Reserve tightening financial conditions throughout most of 2018. Number two, the Trump tariff of implementation against our trading partners has negated almost the entire benefit of the early 2018 tax cuts.

As you know, the Federal Reserve controls the general monetary supply, and they control whether credit and money are easy or hard to come by. Whether by desire or chance, by controlling credit, they also have had the effect over the last few years of affecting overall market volatility. When credit conditions are easy, go ahead and think back to the second half of 2016 and ’17, volatility typically declined and very few legitimate buying opportunities surface.

Contrary to most market pundits, except for a brief period over the next two weeks, potentially caused by disappointing Fed news, China currency concerns, or poor China trade negotiations, and then another period in Fall during the third quarter deadzone, we continue to expect a dramatic decline in overall market volatility in 2019, and even further decline in volatility in 2020.

This should not only help stabilize stocks, but propel them back higher. This is almost exactly what happened in the second half of 2016 through January of 2018. However, please remember, these trends develop over months, they do not happen in hours, days, or weeks.

This concludes the first part of our two-part series on our second half 2019 outlook. I will go ahead and preview the second part of this series that will air next Friday only by saying, it will include our first cut at the best case upside optimistic scenario for 2020 into the 2020 presidential election. 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 can find this podcast at our website for the next two weeks. After that, we will be publishing and distributing a hardcopy version of the complete outlook at the end of this month. 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. This is Chris Perras.

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