Science and Data Trump Emotions

Join Chris Perras for the 8/28/2020 edition of Stock Talk!

Chris Perras: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas. Welcome to the August 28th edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money. This podcast is entitled Investing Data and Science Trump Emotions. The S&P 500 sits this morning around 3490. We are against all 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 path here has been a turbulent one since the first quarter top in mid-February. Shortly, in a week or so we will be entering the dead zone or 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.

Because of that, I wanted to focus this week’s podcast on a common and reoccurring theme of our podcast the past two years. That theme and lesson is trying to tame one’s emotions around a market. Both fear when markets are declining and greed when markets are rising, as in now. Currently, our data is flashing a yellow go-slower signal for the first time in five months.

What do we see and what gives us some short-term caution over the next few months? First, one of the leading indicators that gave us that thawing sign back in late March is now saying to proceed slowly and a better overall buying opportunity is ahead. This sign is one that is almost entirely caused by big institutional investors, mainly hedge funds’ overenthusiasm in the market.

These investors were late to see the economic and stock market fine and are now scrambling to get back in. They have FOMO, that’s Fear Of Missing Out. A good friend of mine, Chris Galippo, who’s Senior Investment Director at Putnam Investment, calls it getting out too far over your skis. There should be opportunities out there, but there are definitely fewer than there were a mere six weeks ago.

An expectant rise in the number of cases of the virus-driven largely by back to school and colleges throughout the country that is already happening, and in high schools in a few weeks. The school reopening is already driving a stall and the improvement in the virus counts that Fundstrat predicted weeks ago and has occurred. The New York Times has a great tracker that is following the virus cases across 700 colleges.

Like the Johns Hopkins data and all of the data that the team at Fundstrat provides us, we’d like to follow the data. Listeners, I know no dataset is perfect. I have a degree in Electrical Engineering, which required me to take mounds of math, including statistics. That being said, watching the trends of the dataset is what we are after. We’re looking at marginal changes. Think way back to late June, yes, that was only two months ago, when the virus case count had risen to levels that many liberal news channels were predicting and seemingly campaigning for more city shutdowns.

The team at Oak Harvest looked at the data provided by Fundstrat and continued with our optimistic messaging for both the economy and the stock markets. Listeners can find our July 2nd podcast titled V is for Bottom Not for Virus at oakharvestfg.com. 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 and investors, we will get through this event, regardless of the outcome.

The current data we look at is behaving exactly as one would expect. The odds of a Trump presidency repeat are increasing. Why do I say behaving as one would expect? Because the odds of the president’s reelection has swung pretty much in tandem with the rate of change and virus counts throughout the US. Clients can log on and see the current odds makers trends. What you’ll see is a clear narrowing of the betting odds.

In late June, just in front of the July 4th weekend, in line with peak virus hysteria on network news for reclosing parts of the country, the president odds had dropped to about 37.5% chance of winning reelection. Subsequently, as the case count peaked and has plunged, economic activity has picked up dramatically and the president’s odds are back up to near 48%. Now, listeners, as a frame of reference, since the pandemic began, the president’s highest odds of reelection were about 52%. Right now, 48%, it is going to be a close election, regardless of the outcome. It’s going to be a nail-biter.

As we have said all year, we expect an increase in the rate of change of volatility post-Labor Day through mid-October. This is normal stock market seasonality that we have talked about for the better part of two years. It should be doubly high in an election year that is closely contested. 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 we still believe in the same two things we first started over four mfonths ago when emotions were at their peak and were running high.

First, we believe in science leading us to a solution for the virus faster than others thought. Notice, I didn’t say cure. People, particularly many network TV commentators seem to have forgotten that we shut the economy down back in February and March to slow it down so it wouldn’t overwhelm our health care system and crush our hospitals. Secondly, a point that seems that most people have now come around to, we believed in the Federal Reserve.

We stuck to the mantra of don’t fight the Fed. The Federal Reserve set in motion monetary easing that ultimately causes at first a pickup in inflation check. Ongoing inflation is almost 1 3/4% percent up from about 1/2% in March, and subsequently six to nine months later, the Fed’s action help cause an acceleration in real growth in addition to that uptick of inflation.

Just yesterday, Chairman Powell, threw in the towel and announced a major policy change for the Federal Reserve. In the wake of a 35-year secular decline in inflation, which seems to me to be generational, but whose cause is now primarily being attributed to increased efficiencies caused by technology usage, the Federal Reserve said they would target an average inflation rate of 2%. This means that if or when that mythical 2% inflation goal is reached, the Federal Reserve will not likely raise rates and kill the party. They said that they are okay with letting inflation run hot.

This is good news for stocks and gold and bad news for bonds, in theory, one day. What listeners can be assured of is if the stock markets follow its normal path of increased volatility into early fourth quarter pre-election, we will be using a pullback to add to growth equities and equities that we find a value for a stronger economy in late 2020 and 2021. 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’re retired or in the process of retiring, please 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. Stay safe. Hope any of our clients that were affected by Laura, the hurricane, are safe. Chris Perras, Oak Harvest Financial Group Houston, Texas.

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.