The Final Countdown?

CIO Chris Perras covers the latest action in the markets, and discusses what we expect for the rest of Q3 and Q4 in 2019 — and why our outlook still remains bullish.

Chris Perras: Good afternoon. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the August 30th edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money. I’m going with the title, The Final Countdown, for this week’s episode. First, I want to prepare my listeners for one of the longest run-on sentences I’ve ever written and that you’ve probably ever heard. Contrary to the daily negative calls for -10% correction in the market, which hasn’t happened, and earnings recession, which also hasn’t happened 2700 or lower on the S&P 500 nope, that hasn’t happened yet either.

A daily guesstimate at that percent chance of an economic recession happening, which is one of the newest and most ludicrous things I’ve heard almost daily as if one can be that precise as to the percent chance of a recession on a weekly or monthly basis. Now something publicized in the press from a negative technical chart pattern referred to as a negative megaphone pattern, which the only thing that has been used as a megaphone in the third quarter is the constant negative drone and spin in the financial press about how bad things are and how we’ve never seen a stock market like this before.

The S&P 500 sits as of today at 2940. We expect as we enter the dead zone starting next week, four more weeks of a narrowing wedge in stocks in the market, that is, four more weeks of up and down. 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. That outlook can be found on our website at www.oakharvestfg.com under the investment management section or by Googling Oak Harvest 2019 Outlook. The peak to trough pullback in the closing cash S&P 500 for the third quarter so far has been -5.9%. That’s a hair short of our expected maximum drawdown of 6% on the quarter.

We expect this trading range on the S&P 500 to continue to consolidate for about another four weeks with the second half of September and very early October being the most logical time for one last final pullback in the third quarter. I want to impress upon our listeners what has happened this year is 100% normal during the summer in ongoing bull markets. In fact, things like the huge negative outflows in stocks and into bonds like we have witnessed the last 18 months to the tune of $250 billion leaving stocks and $350 billion into bonds has happened in the past at market lows, not at market highs.

Does the last time flow look like this was, anyone? Yes, it was the first quarter of 2009. What happened to stocks after that? Well, the S&P 500 rose 45% the next year. That was an extreme you say because we were coming out of the worst economic downturn in 40 years. Okay, I agree with that. More recently, there were extreme outflows from stocks into bonds in the summer of 2016 as people were worried about what? They were worried about Brexit, they were worried about China, they were worried about the upcoming election, and they were very worried about an earnings recession.

What was the result in the stock market the next 12 to 15 months, the S&P 500 went up over 30% the next 15 months. I’m not saying that we expect the exact same upside next year. However, we continue to believe that come the fourth quarter of this year, the bond market will regain its footing, and we will finally break out and stay out for good after going sideways in a very wide range since February of 2018 when the Trump Tax Plan was passed.

We continue to see lower, not higher volatility coming in the fourth quarter as the Federal Reserve continues along with its slowly easing monetary policy. We continue to see urine move in the S&P 500 to a new all-time high in the market that is sustained this time into your end and through 2020. However, listeners, please remember, as we first noted way back in early January in our initial 2019 outlook, we expected and continue to expect that most of the net gain in the market this year will come during two very short windows of time, with this second window being early October through year-end.

If listeners want to get a general idea of what stocks we expect to outperform in the fourth quarter of 2019 through 2020, take a look at the stocks that outperformed mid this week when yields on long-term treasuries rose ever so slightly. The boring, stable, low growth, high dividend yield stocks such as utility staples and real estate lagged the overall stock market, while the cyclical areas like technology, capital equipment, and financials outperformed.

Small-cap stocks also outperform large caps. I want to point out a mind-boggling piece of data that I came across a few weeks ago, show how defensive investors are in stocks. Besides the massive stock outflows that have transpired in the last 18 months. There is an ETF that tracks low volatility higher dividend boring stocks. That ETF is the SPLV, that is V is in vector. That’s the S&P 500 low volatility tracker. Its assets under match management or AUM have now surpassed over $12.5 billion. It was launched in mid-2011.

The PE ratio on that ETF is now 22 times earnings. On that same day back in mid-2011, another ETF was launched, that was the SPHB as in boy, ETF. This is the S&P 500 high beta ETF it tracks higher growth or cyclical stocks. Its assets under management on that ETF sit now at a paltry $90 million. Its PE ratio is 17 times earnings. People have not only pulled money out of the markets that last 18 months, but they have also positioned that money in the market much more defensively. The last time this happened, yes, the summer of 2016 right before both the economy and the stock markets turned up in unison in the fourth quarter of 2016 and did not look back until early 2018.

Our outlook continues to be the same people managing the same money doing the same things and we were looking for similar positive results in the fourth quarter of 2019 through 2020. If we begin to see the data and feel that our ongoing 18 months slowdown is not looking to change course early in the fourth quarter and beyond, we will begin to tactically adjust portfolios for the continued low and slow-growth economy. If you find this content helpful, please forward 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.

Speaker: 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 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.