A Normal Summer, Normal Q3 and Normal Pullback

On the 8/9/2019 edition of Stock Talk, CIO Chris Perras returns and recaps the action of the last week since the president’s latest tariff announcements, dives into some of the mechanics behind the volatile moves, and puts everything happening into the context of a “Normal Year.”

Chris Perras: Hi, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the August 9th edition of our weekly Stock Talk Podcast. Keeping you connected to your money. Having skipped last week’s Friday broadcast for a day with my family and our three golden retrievers at the lake, I wanted to cover the past week’s market moves. I’m going to title this episode, A Normal Summer, a Normal Third Quarter, and a Normal Pullback.

Have you been watching the financial news the last week? The sound and fury of what you hear on TV might lead you to believe that our economy is going into a tailspin and the stock market is at risk of another 2008-ish episode. This is literally two weeks after the same TV shows were out quoting longtime bearers on the market who were out quoting year-end melt-up targets in the S&P 500 of 3500.

The Oak Harvest team immediately called out those melt-up forecast and upside targets as both fanciful and absurd. Earlier this week, we sent out a note to clients calling this week’s end-of-the-world downside moves and calls from the same pundits are equally as ludicrous. First and foremost, as we’ve laid out all year, we expected a normal year in the markets through the end of the third quarter. Our first-half outlook first published in early January was spot on almost to the week. Our second-half outlook was first laid out in mid-June calling for a 5% to 6% pullback in the S&P 500 in the third quarter.

Both of these outlooks can be found on our website at oakharvestfg.com, under the Investment Management section. Or go ahead and just Google Oak Harvest 2019 Outlook. Just to put things in perspective, from the peak closing high and the cash S&P market on July 26th at 3025 to the trough closing low on August 5th at 2844, the S&P 500 dropped exactly 5.98%. That is almost exactly what the Oak Harvest team expected.

I point this out only to say that so far, year to date, this is one of the most normal years we’ve seen this cycle. The chain of events that has happened in the last 10 trading days that caused short-term volatility to double on the VIX from 12 to 25 and the market to pull back 6% is the following, one, the Federal Reserve “disappointed” on their comments post their 25 basis point easing mid-last week. Then, President Trump last Thursday unexpectedly set a date of September 1 to raise tariffs on the remaining Chinese goods that haven’t been subject to the tariffs at 10%.

This set off unexpected volatility in both treasury markets and currency markets for the last three to four days. These events caused a sudden and massive problem for hedge fund and at-risk parity investors whose investment business models to rely on leveraging, which is borrowing money and purchasing other investments. How do these funds borrow money? They usually short treasury bonds, which are traditionally thought of as no-risk, stable, non-volatile investments. When those treasury bonds rally and price anyone who has shorted these bonds have to rush to buy back those bonds.

When they rushed to buy back these bonds, it causes both exaggerated rallies in bond pricing and subsequent, fast, and indiscriminate selling and delivering of their long investments at these hedge funds and risk parity funds are long. These funds are forced to sell investments. They have no choice in this matter. They cannot sit idly by and think, “Hey, Microsoft, and Texas Instruments, or my real estate investment trust, or John Deere are great long-term investments. They are forced to sell.”

What does this mean as a long-term retail investor? It means opportunity. The team at Oak Harvest normally takes three to six months to reposition portfolios when we were hired by clients. During times of elevated volatility, and more so during times of distress, like we saw earlier this week, we accelerate our investment cycle. We use these panics and foreselling to make investments for our clients.

I’ve had numerous conversations this week with clients and prospects asking me if this week’s events have changed our outlook on the markets. Overall, the answer is a flat-out no. While I’m a bit more concerned and more uncertain as to the timing of two things that would be massively positive to the economy and the markets. Those being, one, the timing of President Trump’s pivot towards a positive outcome with China, and secondly, a focus away from foreign policy to a positive message on domestic growth.

I’m even more convicted that 2019 is increasingly a normal year in a long-term bull market with the first three quarters of the year setting up the fourth quarter of 2019 through 2020 for a positive and surprisingly large percentage upside move. However, I will say that President Trump is skating on thin ice, as the swing vote that got him elected in 2016, those being the Midwestern states that are largely are farm and manufacturing communities, those are the ones that are being hurt the most by his economic policies since the Trump tax plan was passed in January of 2018. He needs to pivot soon, regardless of Federal Reserve policy and overall stock market levels, or he does risk losing his swing vote for the 2020 election.

Right now, I’m going to step out on a limb, a limb that is precarious to step out of, and one that can change and will change the data in our environment change. Given how normal the year is looking, our team wanted to publish our thoughts for the timing and pivot upon the overall stock market after this third-quarter pullback and consolidation. One, that we had previously forecasted would happen. Though normalcy of this year leads us to believe that the S&P 500 will base and pivot very late in the third quarter or the first week in October, and should close the year in or around 3125 to 3150 and head materially higher in 2020.

Should our economic or market outlook change because of the data, we see we will tactically adjust your portfolios. For now, we continue to be very positive in the fourth quarter of 2019 through 2020 after the third quarter consolidation. If you find this content helpful, please forward it to friends and have them give us a call at 281-822-1350. Go browse our updated website and our new content at oakharvestfg.com. Our main job at Oak Harvest is to have retired only once in your life with a customized retirement planning. Many blessings.

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