Second-Half Surge: The Bulls Run Wild with 4 Ss

Join Chris Perras for the 6/19/2020 edition of Stock Talk!

Chris Perras: I’m Chris Perras, chief investment officer at Oak Harvest Financial Group in Houston, Texas. Welcome to our Friday, June 19th edition of our Stock Talk podcast: Keeping You Connected to Your Money. This podcast is entitled Second-Half Surge, The Bulls Run Wild with Four Ss. Having managed money for over 25 years now in all sorts of manners, I’ve run and worked as an analyst on large-cap funds, mid-cap funds, even micro-cap equity funds.

I’ve had the chance to be a portfolio manager on mutual funds, pension funds, hedge funds, and my position for the last five years has been helping manage money for registered investment advisors like Oak Harvest. I’ve had the luxury of being on index products that manage tightly to their benchmarks within basis points, managing financial service funds that invest only in banks and financial stocks. I’ve even managed heavily growth-oriented funds that owned upwards of 80% technology stocks, managed GARP funds, which is the acronym for growth at a reasonable price, and GAAP funds, which are growth at any price funds.

After doing this for 25 years, I can say without question, I have one of the most diverse careers managing money in public markets that listeners might find out there. What have I discovered over my 25 years of managing public money? I’ve discovered this. Almost universally, the bear case on stocks, the economy, and the markets always sound more convincing and well-researched than the bull case. Say what, Chris? Yes, those bears almost always sound smarter and more convincing than the bulls.

However, as investors know, being a bear on the US, our economy, our stock markets, is rarely a worthwhile position over the longer term. It has never paid off. To combat the current round of bearish calls that have clearly been wrong for almost 1,000 S&P 500 points since March 23rd, and continue to dominate the news channels, here’s the bull case for continued gains in the second half of 2020 and early 2021. They are four Ss. They are stimulus, science, sentiment, and seasonality. I’m going to repeat them one more time and then get into them. They are stimulus, science, sentiment, and seasonality.

First is the effect of the recent stimulus. The last three months have seen the biggest single combined stimulus of monetary and fiscal spending in the shortest period in American history. Both monetary policy by the Federal Reserve, which has almost doubled since the virus outbreak began in March, and fiscal spending by the government, which started shortly after in April, operate and stimulate the economy with a lag.

The Federal Reserve has almost doubled its balance sheet over the last four months. Listeners who are clients can log on to our web portal and reference the accompanying slides to see the following graphics. If you aren’t a client yet of Oak Harvest and you want an idea of the Federal Reserve’s effect on the stock markets, just go to the Federal Reserve’s own website. Go ahead and google Federal Reserve St. Louis, Federal Reserve and stats, they are all over the Federal Reserve’s website.

A synopsis of this cycle move is easy. If the correlation continues to hold, the S&P 500 should reach at least 3,700 within the next 6 to 12 months. Mathematically, if you felt that it was a one-to-one correlation, you would have to add another 1,000 points to that number on the S&P 500 before this leg of the move would end. If you want to check it all out, go to the Federal Reserve website, check out the Federal Reserve data. It’s at fred.stlouisfed.org. If the bears want to fight that, be my guest.

The second S in the bull case for the economy and stocks for the second half of 2020 and the first half of 21 is science. By science, what am I talking about? I’m talking about being bearish on the economy and stocks is a bet that the collective wisdom, effort in finances of the best minds and the biggest spenders in the world, not just the USA in science and healthcare, can’t develop an antiviral or a vaccine for COVID-19 in record time. Each week is bringing new knowledge and discovery of what the virus is, how it works, how it is spread, and how to slow it and cure it.

Whether it’s the recent news from Johnson & Johnson and the smaller Moderna on vaccines in stage three trials already, where the development of antivirals like Regeneron’s or others, science is moving at breakneck speed on a pretty unified front to solve this problem. Which brings me to the third S. The third bullish S is sentiment. What is sentiment in the stock markets? Well, it’s a combination in investor psychology in reality. It’s a combination of investor’s past positioning in the markets of what people have done with their money the past few months, where they currently are positioned, and where they plan to go with their money over the next coming months and years.

Let’s take a look at those things for a few minutes. Qualitatively speaking, it’s pretty easy to see where the overall investor sentiment lies. It’s cautious. I want to break it down into two categories. I’m going to break it down generationally. I first did this back in early May in a weekly podcast right here. Back before others on network TV were talking about millennials day trading from home or four people were idolizing Davey, the day trader on Twitter, I coined the term the Robinhood Rally back then in May.

The TV networks largely hosted by baby-boom age host and current and former baby-boomer age financial managers point to the dynamic of new millennial investors with a negative connotation. We have some stats and charts for our friends at Fundstrat. Clients can log on to our web portal to reference these. First off, what actually happened in the virus-induced downturn? What did investors actually do with their money?

Well, according to data from Fidelity Investments, who would seem to know firsthand– They do seem to be an expert in retail investors. They manage almost $2.5 trillion in assets directly, and they monitor almost $7 trillion in assets, and they touch over 32 million clients. I think they would probably have a good handle in real time what people are doing. Well, according to Fidelity, what did investors do? Well, according to Fido, as I refer to them, 30% of baby boomers went 100% to cash on the way down or near the bottom in the late first-quarter decline.

I repeat, 30% of baby boomers went 100% to cash on the way down. Yes, that’s right, 30% of people over the age of 60 sold all of their equity holdings on the way down. As the article notes, they have not bought their positions back. With equity markets nearing all-time highs, this is especially tricky and painful emotionally. At the same time that baby boomers were selling, well, what were millennial investors were doing, what were they doing with their money? They were opening new accounts at Robinhood, Acorns, Charles Schwab, and E*TRADE at record pace.

Investors don’t open new accounts to sell stocks and bet on market declines, they only open accounts because they’re optimistic and they want to invest and put money to work. They were buying stocks that baby boomers were dumping in a panic. Now listeners, in early May when I coined the term the Robinhood Rally, I did not subscribe to the theories that millennials were the source of 100% of the market’s rally. I did not believe it then and there is zero data confirming these kinds of statements which you might hear on TV, that millennials are 100% of the rally.

In fact, here are the stats according to the Federal Reserve. Older Americans control 76% of the $100 trillion of US household net worth. Doing the math, that means baby boomers born before 1965 over the age of 60 control about 76 trillion in wealth. Millennials whose average age now is 28.5 have a combined net worth of $5 trillion. Even if Millennials are bullish, their aggregate firepower in the stock markets is much smaller than baby boomers.

Why were millennials buying stocks while baby boomers were selling them? Were they gambling? Was it for entertainment, as many TV hosts are now surmising? That’s probably a little bit of it. My research and contacts say it was because, as a recently millennial-penned editorial on CNBC confirmed, it was because they saw this downturn as their generational chance to buy equities and didn’t want to miss out for a third time when they are now in savings mode.

Maybe it’s because they believe in the US economy and the US stock markets regardless of who will be running the nation in 2021. Maybe it’s because as Fundstrat points out, if one looks at the three worst GDP contractions since 1900, the average equity rally post-recession was up 331%. Yes, you heard that correctly. Post-recession, the three worst recessions America’s ever had the last 120 years, the average combined returning during those expansions were almost 325% in the stock markets.

Clients can log on and see these returns falling each recession since the 1900s. Where is overall sentiment now? It’s cautious. It isn’t even that overused and nebulous term, cautiously optimistic, whatever that means. Despite the V bottom in the stock market since March 23rd and Treasury interest rates at 0% to 1%, there is $4.7 trillion, with a T, cash on the sidelines.

Now, listeners, I hate this term, cash on the sidelines, because it makes it sound like this cash has to move. It doesn’t have to move off the sidelines, it’s been sitting there for 20 years. It’s been elevated even as interest rates have traded lower secularly for 30 years. That being said, I don’t recall in 25 years of managing money ever seeing a market top characterized by record cash on the sidelines. It’s not what has happened in the past, it’s doubtful what’ll happen in the future.

Listeners, let us stop blaming millennials for things we do not like or understand as baby boomers. Every generation is mostly the same with one difference in our separation. That separation is technology and its use. If we are open-minded to this, first, we will likely understand and get along with younger generations that will be driving this country and its economy for decades to come. Secondly, we will be open-minded to changes in secular themes that drive longer-term trends and higher investment returns.

Which leads me to my fourth and final bull market S, that being seasonality. The second part of this S argument will probably be controversial with my listeners, so I’m going to start with the easier part of seasonality. That’s the old “Sell in May and go away”. This stock market saying comes from the stock traders Almanac looking at the best six months of the year. Historical data reveals that the top-performing six-month rolling period on average has been November through April. Hence the saying investors should, “Sell in May and go away and come back in November.”

A closer look at this data reveals if an investor wanted to implement this strategy, he could actually really sell around tax day, April 15th, and return around mid-October and have slightly better results, but there’s no catchy rhyme for that timing model, so people stick with “Sell in May and go away”. Many investors, particularly hedge funds, get confused with this saying. They infer that this means shorting stocks during this period is the right move.

Well, listeners, that is not the case. Per Fidelity and others since 1945, the S&P 500 has gained almost 2% on a cumulative six-month return from May through October on a price return basis that doesn’t include dividends. This compares with a 6.7% average gain from November through April. Moreover, the S&P 500 has generated positive returns about 65% of the time from May through October, so over half the times the market is up during this “Sell in May and go away” time period.

It’s generated positive returns 77% of the time from November through April. Well over three-quarters of the time, the stock market is positive over the higher trending months, which are the fourth quarter of the year and the first quarter of the year. Arguing for a strong seasonal second half at 2020 and early 2021 in the markets is consistent with historical economic growth and stock market returns.

Finally, the second part of seasonality argument brings me to, it’s an election year. Here’s where I imagine I’ll get pushback from my listeners. Why? Because historically, it has not mattered who wins the presidential election. It’s been historically good for stocks. It doesn’t matter if it’s a Democrat or Republican. In fact, according to the 2019 Dimensional Fund’s report, the market has been positive overall in 19 out of the last 23 election years, from 1928 through 2016, only showing negative returns four times.

Clients, go ahead and log on to our web portal, see the historical pattern for election years, and it is positive. One can also see the annual return by year provided by our partners at Dimensional Funds, which too is positive. It has not mattered whether it’s a Republican or a Democratic winner, it’s positive. We can discuss and argue, what if Mr. Biden wins, or what if this happens, or what if that happens, but historically, it hasn’t mattered, it has been positive over 80% of the time.

The time to start worrying historically about elections is after the first quarter following election year. Guess what time that coincides with? Yes, you got that right. That coincides with a normal time the economy slows down for summer, and people come out and say, “Sell in May and go away.” The stock market’s recent 78% decline off its early June recovery highs, while rapid, is not abnormal in the early stages of a new bull market.

As we have said in our podcast three weeks ago, a June sell-off is normal. Moreover, actually breaking back below the 200-day moving average, which is around 3,020 on the S&P 500, which we did is normal. Also normal is testing the 20-month moving average, which was between 2,915 and 2,955 which stock futures did. Early Monday morning is normal. Chunk and check, both have happened. Our team believes 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 will not bet against science, technology in the human spirit to find a solution to the virus. At Oak Harvest, we are a comprehensive long-term financial planner. 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’re retired or in the process of retiring, give us a call at 281-822-1350. We’re here to help you plan your financial future and help you smooth the financial path you have into and through your retirement years with a customized retirement planning. Thank you. Have a great weekend. This is Chris Perras, chief investment officer at Oak Harvest Financial Group in Houston, Texas.

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