Seventh Inning Stretch

On the 8/23/2019 edition of Stock Talk, CIO Chris Perras discusses what’s happening in the markets in Q3 2019, what we believe may be the reasons behind it and what we see happening for the rest of the year.

Chris Perras: Hi, my name is Chris Perras, I’m Chief Investment Officer at Oak Harvest Financial Group. Welcome to the August 23rd edition of our weekly Stock Talk podcast: Keeping you Connected to your Money. The third quarter continues as Oak Harvest had expected and as we first laid out in both our first half and second half market outlooks published back in early January and early June of this year. We continue to see the pause in this year’s rally and volatility in the third quarter as merely the seventh-inning stretch in an ongoing bull market.

You’re watching and listening to the financial news every day, your head is probably spinning, you’re confused and fearful at every new story and every 2% to 5% move in the stock market. Even after 25 years of managing money professionally, I find these periods both frustrating, non-occasion, and nerving myself. However, while uncomfortable, listeners, so far, it’s a normal summer in the economy and a normal summer in the stock markets.

Our second half outlook first laid out in mid-June called for a 5% to 6% pullback in the S&P 500 in the third quarter. It can be found on our website at oakharvestfg.com under the investment management section or by googling Oak Harvest 2019 Outlook. Against almost all market calls made on TV just two weeks ago when the S&P was around 2,840 for three or four days, for further downside risk in the market, the S&P 500 this morning sat at around 2,925.

The peak to trough pullback and the closing cash S&P 500 for the third quarter has been 5.9%, which is a hair short of our expected maximum drawdown of 6% in the third quarter. We expect this trading range on the S&P to continue to consolidate for another four to five weeks with the second half of September and very early October being the most logical time for a retest of the recent market lows. Why did we think that this would happen during this period all year? Here are a few reasons, and we will also give you an idea of what we plan on doing during this time.

First off, the first reason is the normal seasonal weakness in September, which is it’s the dead zone period for stock buybacks. As we’ve previously highlighted, early in the third month of every quarter, large corporations begin being restricted in their ability to buy back stock. Early in the third month of the quarter, around 95% to 97% of all corporate buybacks are active and in the markets.

However, by the end of the third month, only 5% to 10% of all companies can be in the market buying their stock back. That is up until they report earnings and they wait 48 hours after that earnings report, then they can restart their buybacks. A declining rate of stock buybacks equates to declining demand for stocks.

The second phenomenon occurring in September that allows for normal stock market weakness is mutual fund tax selling. Many actively managed mutual funds tax years end at the end of September and the end of October. With this deadline, most professional portfolio managers use late August, September, and early October as time periods for a tax loss, selling, and harvesting. This allows their accountants two to three months to calculate year-end distributions for their mutual fund shareholders. This selling for tax purposes can weigh on stocks during the seasonally weak period of the third quarter.

The team at Oak Harvest was cautious on economic growth during the second half of 2018, as others were touting Goldilocks. We favored more bond-like asset classes like real estate and staples. More recently, we have begun positioning the portfolios for an economic upturn in the fourth quarter of 2019 through 2020 on the back of President Trump positioning himself for growth and reelection.

However, the more aggressive stance that President Trump has taken towards China with him once again this morning lashing out at China, is leading to continued slow growth, higher volatility, and uncertainty. Volatility coming in, it doesn’t matter what the market is, whether it’s treasuries, currencies, commodities, or equities. What does this mean to you as an investor?

For now, the team at Oak Harvest is using this volatility in names that we believe will be rewarded in the fourth quarter of this year and beyond and selling some positions that we have losses in and that we do not expect to recover as fast. If we begin to see the data and feel that the ongoing 18 months slowdown is not looking to change course early in the fourth quarter and beyond, we will begin to tactically adjust the portfolios for the continued low and slow-growth economy.

If you find this content helpful, please forward it to friends and have them give us a call at 281-822-1350. Browse our updated website and new content at oakharvestfg.com. 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 at Oak Harvest.

Speaker: 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.