Waiting — Curb Your Enthusiasm: Election volatility breeds opportunity

Join Chris Perras for the 8/21/2020 edition of Stock Talk!

Chris: Good morning. My name is Chris Perras. I am chief investment officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our weekly Stock Talk podcast: Keeping You Connected to your Money. After taking a few weeks off to go over a second half outlook, I wanted to return to our normal podcast. This podcast is entitled, “Curb your enthusiasm, election volatility breeds opportunities”.

This morning the S&P 500 sits around 3385. We are, against most CNBC oddsmakers, economists, strategists, and hedge fund managers, at a new all-time high in the overall stock market. The 10 for 10 V bottoms that started March 23rd is now 11 for 11. The math to 3400 has been a turbulent one since the first quarter top and mid-February. That being said, while the volatility of the path was different than expected, the overall markets are pretty much spot on where we had expected the markets to be when we wrote our first half outlook way back in December of 2019. We won’t recap the first six months of this year again, but you can listen to any and all of our podcasts at oakharvestsfg.com. Shortly, in a week or so we will be entering the dead zone of the third quarter, call it post-labor day weekend. Earnings reports will be done, economic data will slow, stock buybacks and money flows into stocks should wane. The leading indicators we followed for the March 23rd, 24th podcast and YouTube video that Choi and I recorded that was entitled “Healing signs” are now flashing a yellow caution sign. They’re flashing a “curb your enthusiasm” sign after the five-month rally.

Over the next two months, focus will turn back to two subjects through early November or maybe even into year end. The first is the COVID virus and it’s ebbs and flows. This one is pretty easy to follow on track. We have real-time data from our friends at Fundstrat, and they have been ahead at each and every virus curve, each twist and turn, and each ebb and flow since March. We know it’s hard to do, but one must focuse on the leading indicators such as testing and case counts, not the lagging indicators like hospitalizations, ICU bed counts and deaths. There should be another rise in cases in September, probably toward the end of the second half of the month as the 250,000 attendees of the recent Sturgis Motorcycle Festival returned home and spread the virus through their communities. This event, coupled with an even larger event of the return to school by millions of students, should undoubtedly cause a reacceleration in the virus rate. We will survive this uptick and adapt as testing has ramped along with our understanding of the virus and how we treat it. Every day, we are closer to a vaccine approval one that many experts are saying is likely before year end. Believe it or not, the signs we see in the market say it is actually likely to be approved in October before the election. This would be great news for later in the year in 2021.

The second event that is likely to give rise to an increase in volatility in the coming months is the approaching 2020 presidential election. Listeners, investors, we will get through this event as well regardless of the outcome. Some listeners have asked me why have I said on occasion that it shouldn’t matter really who wins in November. I want to clarify this statement. First, this is not a comment on who I want to win in November. As most of you knows, I’m a pretty conservative individual by nature. This is purely a statement on the resiliency of both the economy and even more so the stock markets over time to adapt to policy changes, and to grow and compound our investment dollars over time, regardless of who controls Washington, DC. Policy changes out of Washington can be headwinds to some sectors and companies, and it’s going to be tailwind for others. Our job as your investment manager is to fair it out where are the opportunities arise to take advantage of any tailwinds, and conversely to try to minimize exposure to areas that have headwinds. Overall throughout the years, the stock markets and its individual components have been fantastic long-term compounding investment vehicles under both governing parties.

As we have said all year we expect an increase in the rate of change and volatility post labor day through mid-October. This is normal stock market seasonality, and is doubly normal into a year with a closely contested presidential election. We’ll be using any volatility to position portfolios for an uptick in real economic growth in the economy in the fourth quarter of 2020 and 2021 regardless of who is victorious. Why? Because the federal reserve has set in motion monetary easing that ultimately causes at first a pickup in inflation, and right now that is up to about 1.75% as of a week ago, and subsequently between six and nine months later, a reacceleration in real growth in the economy.

“What Chris, there’s an uptick in inflation? I don’t see that anywhere,” or at least that’s what they say on TV every day. Really? The price of lumber has risen over 150% in under six months and now exceeds its early 2018 all-time high by over 20%. No inflation, huh? Tell that to the home builder or the millennial home buyer, who after sitting on the sidelines for 10 years to buy a home in the suburbs for school for their kids now finds themselves in bidding wars for limited number of homes. No inflation, for sure. Ask our clients how much they’re paying for healthcare versus 10 to 20 years. No inflation? Yes, right. It’s there, generationally it’s everywhere. We just don’t measure it very well on our overall economic data.

The team at Oak Harvest, we’ll be sharing our thoughts on what industries and sectors might be the winners and losers under different election outcomes over the months ahead as we progress throughout the rest of the year. We’re going to start here. The path year to date X the gut-wrenching decline caused by the unpredictable COVID virus event has been very normal year to date for an election year. Clients can log onto our web portal and see the accompanying charts. The first is the chart provided by LPL Research showing the normal seasonal path in election year. It gives the historical path when the incumbent party wins. That path, historically, has been generally calm with lower and lower volatility throughout the year, and with the overall stock markets being in a up and up to the right pattern on a chart the entire year, including the second half.

That chart also shows the performance path of the S&P 500 when the incumbent party loses. That path for the overall S&P 500 has been generally a down first quarter followed by a strong rally into the mid summer, followed by a second drop late in the third quarter in advance of the election, which has been a buying opportunity for the next year. The drop during late summer, during the third quarter has been usually between 5 1/2% and 7% variety, and usually takes you back to a rising 200-day moving average.

This has taken between two and two and a half months to achieve. Under this scenario the stock market has historically bottomed in front of the election not after.

What should be of note to investors, not traders, or to our own political desires is that the overall market return has been positive for the year of a presidential election under both outcomes. The overall stock markets have had a positive return in most election years, regardless of whether Republican or Democrat has won the White House. Under both outcomes, the market finished the year in the fourth quarter on a positive note.

Many investors have questions about what things like higher taxes, more regulations, higher tariffs, more government spending or increased immigration might do to our economy and financial markets. We will try to address a number of these topics with data in future podcasts in the weeks ahead. Suffice it to say, the investment team at Oak Harvest sees an upturn in overall volatility caused by the election during the next two to three months as an investment opportunity to take advantage of, not a frightening event to run and hide from. There will be industries and sectors that encounter tailwinds for upside gains under either candidate just as there are certain sectors that will face increased headwinds. Stay tuned in the weeks ahead. We will try to cover a lot of these what-ifs over the next few months.

On a separate note, a listener caught my ear from a podcast about four weeks ago, where I mistakenly said that Austin had rewarded Tesla with $1.1 billion in taxes incentives for their new plant. I clearly misspoke here as the size of Tesla’s investment in the cyber truck facility is the $1.1 billion I mentioned, and the total combined local tax incentives for Tesla over the next 10 years is about $64 million. Keep listening and let me know if I slip up on facts like these. At Oak Harvest, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets.

If you are retired or in the process of retiring, give us a call at 281-822-1350. We are here to help you plan your financial future and help smooth the financial path you have into and through your retirement years with a customized retirement planning. Many blessings. This is Chris Perras at Oak Harvest. Have a great weekend.

Announcer: 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.