Outlook: H2 2020, Part 1

Join Chris Perras for a special Stock Talk, covering the first part of Oak Harvest’s 2nd Half Outlook for 2020!

Chris: My name is Chris Perras, I’m Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas. Welcome to our second-half market outlook. This is going to be broken up into two parts given it’s relatively long. The first half will be a recap of what we were saying in the first half and what happened. The second half will be actually the outlook for the second half, although we’ve already alluded to this a number of times in the prior podcast.

Listeners, you can go see our prior podcast for the first half, there were issues. We issued one on March 24th. It was a special edition. It was labeled Early Helpful Signs. It was early turning signs in the market. We issued one on 5-8, way before everyone else was talking about day trading. It was labeled the Robinhood Rally. I think we’ve had some really good podcasts throughout this tumultuous second quarter. Look forward to presenting you new material in the second half.

Here we go. At the end of the first half of 2020, the S&P 500 stood at 3,050. This was up about 3.7% year over year. It was down 5.5% year-to-date and down about 10% from the February 19th all-time high in the S&P 500. What happened to the first half? Well, the path to 3,050 on the S&P 500 was not quite the one we laid out way back in late December of 2019 in our first half 2020 outlook.

Neither the investment team at Oak Harvest nor any other investment advisor could have foreseen the one thing that mattered after late February. Of course, that one thing was the out-of-left-field COVID-19 virus epidemic that caused the fastest and deepest decline in both global economic growth and stock markets ever from February 19th through March 23rd, when the S&P 500 peaked at 3,393 and hit a low of 2,192.

Back in late December of 2019, when we first penned our first half outlook for 2020, which was labeled Stay Long and Carry On, the team’s forecast was a strong rally in the early first quarter of 2020, stating, and I quote, “From where we sit near 3,200 on the S&P 500, the team at Oak Harvest sees an additional 5% upside in the first half of 2020.” That was between a range of 3,300 and 3,400, call it 3,350 on the S&P 500.

From a price perspective, we see the S&P 500 returns being front-end loaded in the first half of 2020 and reaching 3,350 midways through the first quarter of the year. 3,350 on the S&P 500 is roughly a 5% return from current levels. Now, we said this all in late December of 2019. From there, another 2% upside was possible to roughly 3,400 through the first half of 2020. However, if we should reach that level early in the year, the team at Oak Harvest would view this move as a too far too fast.

We continue that forecast, early 2020, we should see a continuation in It’s Time to Play Offense theme that the investment team at Oak Harvest first laid out back in mid-August 2019. By playing offense, we meant being long things like international assets, small-cap stocks, emerging market stocks, overweight sectors like technology, consumer discretionary, industrial and financial stocks. Those were the places to be heavily invested in the early first quarter of 2020.

Safer low and no growth and less volatile sectors such as utilities and staples should continue to lag on a relative basis. This is all what we wrote in late December. The S&P 500 peaked out on February 19th, at 3,393. That was within seven points of our first half max upside target. Moreover, we went on to say the pace of the market gains is likely to slow come mid-first quarter of 2020 due to a confluence of three factors. Those three factors we theorized back in late December, causing a first-quarter pullback were the slowing of the Fed balance sheet expansion, normal market seasonality, and the upcoming presidential election tax concerns.

On February 19th through March 23, COVID-19 epidemic caused an unforeseen and sudden shift in both global economic growth and in monetary policies. On March 23rd, Troy and I filmed a YouTube video on the subject about the healing signs we were seeing in both the bond and credit markets that few, if any people, were discussing on TV or in the stock markets. That was during the highest volatility markets we’d seen in 15 years.

I released the podcast on March 24th, as I mentioned, addressing this, it was a special edition, it was called Early Hopeful Signs. That was when the market was around 2,200 on the S&P 500. We released another podcast on April 6th, with the same topic entitled Trying to Thaw. Troy and I discussed the signs that historically preceded V bottoms in both the stocks and the economy. We were optimistic, while others on network financial news channels were calling for great depressions round two and replays of the 1918 Spanish flu.

We went so far as discussing early pent-up demand in housing and auto sales, which we were already seeing at that time. What is in store for the second half of 2020? Is it more of the same? I first released our early thoughts on June 19th. For the bull case for the second half of 2020, in a weekly podcast entitled Second-Half Surge, The Bulls Run Wild With The Four Ss. That piece was based on the following four Ss. They were stimulus, science, sentiment, and seasonality.

The first S, stimulus, is a combination of historic Federal Reserve monetary policy, in likely additional fiscal stimulus out of Washington DC for the remainder of 2020 in order to combat the virus. This should be followed up by increased federal spending in 2021 to home source jobs from overseas, particularly from China, and through additional much-needed infrastructure spending. The accompanying charts, which listeners can go to our website and see, the accompanying chart of the Federal Reserve balance sheet for the S&P 500 shows the strong direct correlation the last eight years between Fed monetary support and the S&P 500 this cycle.

The second S for the back half of 2020 and the first half of 2021 is science. By science, what am I talking about? I’m talking about science and healthcare, finding an antiviral or 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 and Johnson, or the much smaller Moderna on vaccines, in stage three trials already, where the development of antivirals by likes of Regeneron and others, science is moving at breakneck speed on a pretty unified global front to solve this problem. Every day brings us closer to a solution, and seemingly, every day that we hear positive news on the science front, the S&P 500 jumps 1% to 1.5%. I would say that a positive outcome is far from factored into stocks.

The third S is sentiment. What is sentiment in the stock markets? It is a combination of investor psychology and reality. It is a combination of investors’ past positioning in stocks, that is, how long they are or are not, and what people have done with their money the past few months, whether they bought more stocks, or they raise more cash, where they currently are positioned. Are they happy with their current allocation? Where they plan to go with their money over the coming months and years. Do they feel compelled to buy or sell stocks? Let’s look at these things for a few minutes.

First off, what happened in the virus-induced downturn? What did investors do with their money? Let us look at data from Fidelity Investments, who manages almost $2.5 trillion in assets directly and monitors almost $7 trillion in total assets, and they touch over 32 million clients. According to Fidelity, 30% of baby boomers went 100% of cash on the way down or near the bottom in late first-quarter decline. You heard that right, 30% of people over the age of 60 sold all their equity holdings. Not only did they sell stocks, but according to Fidelity, they have not bought back their positions. With equity markets nearing their all-time highs, it is an emotionally tricky and painful decision for these investors to “get back in”.

While baby boomers were selling, what were millennial investors doing? They were opening new accounts at record pace. Investors do not open new accounts to sell stock and bet on market declines. They open new accounts because they are optimistic on the economy, the future, and stocks, and they want to invest and put money to work. Millennials were buying stocks that baby boomers were dumping at a panic. Why were millennials buying stocks? Were they gambling? Was it for entertainment, as many TV hosts surmise? Well, partly, but our research and contacts say it was mostly because as a recently penned editorial and a CMBC confirmed, they saw their generational chance to buy equities and didn’t want to miss out.

Maybe it is because they believe in the US economy and stock markets regardless of who will be running the nation in 2021. Maybe it is because as fun strap points out, that if one looks at the three worst economic contractions since 1900, the average equity rally is up 331%. Yes, you heard that correctly. Post-recession, the three worth recessions America has experienced the last 120 years. The average combined return during the next expansion was over 325%, which leads me to the fourth and final S, that being seasonality.

Per fidelity since 1945, the S&P 500 has gained almost 2% on a cumulative 6-month average from May through October on a price basis. 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 and positive returns 77% of the time from November through April. The outperformance is consistent across market caps and regions. Arguing for a strong second half of 2020 and early 2021 in the markets is consistent with historical economic growth and stock market returns.

The second part of the seasonality argument brings me to it being an election year. Almost everyone likes to talk about politics and their effect on stock markets. However, historically, it has not mattered who has won the presidential election. It has been historically a good year for stocks. In fact, according to a 2019 dimensional funds report, the market has been positive overall in 19 of the last 23 presidential election years from 1928 through 2016, only showing negative returns four times.

It hasn’t mattered whether it was a Republican or a democratic winner. It has been historically a positive year. The time to start worrying about the election outcome has been August before the election, and again, the late quarter following an election year. Why? Because stocks move in advance of outcomes. Secondly, policy changes usually take quarters and months to become reality. Where does all this data and analysis lead us? The most likely scenario for the second half of 2020 is the market approaches and regains its all-time high near 3,400. Technology stocks are already there on the back of much lower long-term rates caused by a virus slow down.

With that, I’m going to conclude this first half of our second-half outlook. I’ll be back next week and record the second half. You can get the whole outlook already on our website. It’s posted, just go to oakharvestfg.com. Look for the investment management tab. Look for our outlook section. I’m going to leave you there kind of as a cliffhanger. You can go read it. Please log onto our website. I hope you have a great weekend. Stay safe. This is Chris Perras with Oak Harvest Financial Group and the first part of our second-half outlook. We are here to help you on your financial journey in retirement through customized retirement planning.

Operator: The preceding 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 site of data, statistics, and sources is 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.