2019 Half-Time Show: Exit the Dead-Zone

On the 6/28/2019 edition of Stock Talk, CIO Chris Perras explains “the Dead Zone” and why it matters for the stock market. Chris also reaffirms our second-half outlook and does a new “I don’t want to invest now!” segment!

Chris Perras: Hey there. This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the June 28th edition of our weekly Stock Talk Podcast: Keeping you connected to your money. This week’s episode is entitled 2019 halftime show, exit the dead zone. As of today, the S&P 500 sits at 2925. As one would expect, the exact same financial press that a mere four weeks ago was out in mass playing the guess the next recession timing game show, or the how low is the stock market going to go at the end of May, when the S&P 500 was around 2750 is today out there touting June as the best June since 1938.

These are unproductive and meaningless headlines, aimed at investors’ emotions, and the team at Oak Harvest sees these articles and exclamations as an out-and-out waste of time for investors. With the Federal Reserve expressing a willingness and desire to ease financial conditions first on January 4th, and for the second time on June 3rd, the S&P 500 has rebounded back to its late third quarter 2018 highs of around 2925.

However, I want to remind investors that the stock market has gone absolutely nowhere since late January 2018, when investor optimism peaked on the Trump tax passage. These periods of sideways for 18 months or more are very normal in stock markets, and even more normal in bull markets. We are now entering July. We are exiting the dead zone. That’s the period when few companies can buy back their stock due to them being prohibited from transacting in their stock in the few weeks before they report earnings.

The SCC does not want them essentially insider trading on their own non-public information. Stock buyback momentum is troughing with roughly only 5% to 7% of companies being active in the market, buying back stock here at the end of June. Now, that number will rise throughout July into mid-August, where it’ll peak at almost 95% of all companies being active in their stocks. The timeline is such that companies report their earnings and then 48 hours later, they were able to enter the market and repurchase shares in the open market. This is a big deal.

This is a huge tailwind for the market through early August. The biggest buyer of stocks over the past five years returns to the market. That buyer is corporations themselves doing stock buybacks. We expect many large multinational companies to miss earnings expectations or to guide down their second-half earnings outlook due to multiple excuses, including, one, a stronger dollar hurting foreign currency translations, two, bad weather and torrential flooding in the Midwest hurting sales, three, China tariffs and their uncertainty lifting their costs of doing business and four, the generic excuse, but it’s a goodie and oldie, “We’re seeing a global economic slowdown.”

We expect these companies’ stocks to react negatively for one or two days as active managers tend to dump their shares hastily. However, we expect many, if not most of these stocks to immediately recover and move higher a week or so later after they report, as they re-enter the market and buy back their own stocks. We got an early glimpse of this behavior last week as a semiconductor company, Broadcom and a shipping company, Federal Express, both reported disappointing earnings guidance for the second half.

In the span of about an hour, Broadcom stock traded down over 10% in after hours trading on June 14th. 48 business hours later, come June 18th, when Broadcom was in their stock buyback window, the stock jumped right back to where it was the day of their bad guidance. Since June 18th, Broadcom stock has been up almost every day this month. The effect of stock buybacks is a powerful short-term and intermediate-term driver of stock moves. Over the long-term, when done prudently, stock buybacks are used to enhance shareholder returns by lowering the total number of shares outstanding in a company, thus driving higher earnings per share outstanding.

In theory, shareholders who decide to remain a shareholder of the company by holding their stock, get a bigger slice of a pie in the future. I remind investors that we have now posted on our website and distributed by way of email, a two-part podcast series on our second half outlook for 2019, as well as a first glance at 2020. We are highly optimistic about the economic and market outlook for the second half of 2019, and even more so in 2020. This outlook can be found by Googling ‘Oak Harvest FG second half 2019 outlook’. We will be releasing a text version of these podcasts during the week of July 4th.

On a final note, returning to our weekly segment of the podcast, ‘I don’t want to invest now’ rationale and excuse segment, this week’s newest excuse I heard was, “I don’t want to invest now because the 2020 election has too much uncertainty, and I want to see how that one plays out.” Everyone, there is always uncertainty. There are always unanswered questions out there. Please go visit our website and read the piece penned by James McFarland, our Senior Portfolio Manager. It’s entitled, I Don’t Want to Invest Now.

Yes. The 2020 election is out there. Yes, it is uncertain. However, political leadership has made very little difference in long-term stock markets. As we have said many times, what matters most is a growing economy and a slow and steady is the optimal growth rate for both the economy and the stock market. 1% to 2% growth plus 1% to 2% inflation equals 2% to 4% total growth. That isn’t sexy, it isn’t exciting, but it is very profitable. What matters most after a growing economy is the Federal Reserve.

What matters is the Federal Reserve, are they in a monetary policy of easing money or tightening money? By the time the 2020 election comes around, the stock market will have already priced with 75% to 90% outcome. What will happen? It will be too late. The reward will have largely passed. In closing, if you find this content helpful, please forward it to friends or give us a call at 281-822-1350. Go browse our updated website and our new content 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. This is Chris Perras.

Speaker 2: The proceeding 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.