Waiting: It’s the Hardest Part

Join Chris Perras for the 9/18/2020 edition of Stock Talk!

Chris Perras: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our September 18th edition of our weekly Stock Talk Podcast: Keeping You Connected to Your Money.

Before I begin with this week’s podcast, I want to send our thoughts and prayers out to anyone living on the Gulf Coast near the Florida Panhandle whose been greatly affected by Hurricane Sally. Having lived through a similar horrific event in Hurricane Harvey three years ago, I personally know the difficult journey back from these types of events. Just wanted to wish everyone out there stay strong, please.

This week’s podcast title is taken from the 1981 Tom Petty hit The Waiting. The course goes something like this, and listeners, you don’t have to fast forward through this part, as I’m not going to be singing it. Here it goes, the waiting is the hardest part, every day you see one more card, you take it on faith, you take it to heart, the waiting is the hardest part.

The S&P 500 now sits at around 3,350. It’s down month to month from August 21st weekly close about 3,400. It’s down from its short-term closing weekly high on August 28th, which is a Friday payday, which we’ve discussed in the past and that was about 3,500. It’s down from its blow-off daily high on September 2nd at 3,588. We’re at the 50-day moving average, and you can start to feel the traders and short-term investors are starting to feel a little bit panicky, and investors, that is a good thing.

This is what we’ve been looking for all year and discussing the past four weeks in our podcasts. We are in the normal pre-election dead zone time period, when traders and short-term investors get itchy trigger fingers. We’re getting too much supply of stock sales in the form of IPOs, SPACs, which are those special purpose acquisition vehicles that are constantly talked about on CNBC.

We’re getting insider stock sales verse the demand for stocks in front of the normal third-quarter economic slowdown and the upcoming election. This pullback is particularly noticeable in high-flying technology stocks. If you turned on the TV the last two or three months, you might think that the entire stock market was made up only of technology stocks, and then if you didn’t own at least 50% or more in technology stocks in your portfolio, you are missing out.

If you were just invested in technology stocks or growth at any price stocks, you weren’t getting rich. Listeners, this is pure rubbish. Have you missed out not being massively overweight technology stocks since the summer rally started July? No, in fact, few people will tell you that since the summer rally started technology stocks as represented by the broad QQQETF have actually underperformed the overall S&P the last two months.

What has been leading the market during these two months, it’s been unloved names like John Deere in agricultural machinery and consumer names like Nike in the consumer retail space. Why? Because the overall economy is healing, not just the parts that initially benefited from economic shifts of the virus or the low rates of the Federal Reserve. This is exactly why the team at Oak Harvest uses diversified models to create investment portfolios.

Over any given time period, different sectors, assets, and industries take turns leading the economy in the markets. It isn’t always all tech, or all hyper-growth all day. Herein lies the opportunity developing over the next four to six weeks for longer-term investors, but here is also where Tom Petty’s lyrics ring through, every day we see one more card. The waiting is the hardest part. We sit and we wait for some better valuations in technology stocks as others trade them short-term or take tax gains.

As we stated last week, and in prior podcasts, we don’t have to look very far back in history to see these moves in shorter-term investors in the markets, we can look at 2008, 2012, and even 2016. Each of those election periods showed similar patterns in stocks into the election time period, and the stock markets in the economy showed eerily similar responses post-election.

Think back to those three elections, the outcomes were far from similar. 2008, that was a blue wave, all Democrats controlling things for two years, and stocks did great post-inauguration in 2009. 2012, that was Obama’s second term, but the GOP held the house, hooray, and the markets zoomed. I mentioned this period last week and I will dive into it more later in this podcast.

In 2016, we know that story, a Trump’s surprise win, but probably a bigger surprise as a GOP House and Senate wins, a red wave, and it was off to the races against the pessimism of almost everyone pre-election. Thank you Federal Reserve and tax cuts.

This brings me to what happened this week. On Wednesday, September 16th, the Federal Reserve announced even more dovish monetary moves. First, they announced another $120 billion per month in additional Treasury and mortgage bond purchases on top of what they’re already doing. Secondly, they said they do not expect to raise short-term rates for the next two to three years until 2023.

As I mentioned a few weeks ago, I’m calling this QE5, and what happened? I immediately got a bunch of calls from my hedge fund friends, saying, “Look, the Fed put is there, go out and buy stocks,” and I said, “Thanks for the call, I’m not doing it,” I said I will wait, as we have discussed for almost a month now. Why? Let’s go back to the 2012 election, the current setup for the Federal Reserve, the economy, and the stock markets are so similar to that time period it’s hard not to point them out.

What happened in 2012? Well, stocks had rallied strongly into early September on better earnings to a new recovery high on optimism of an economic recovery, and then what? On September 14th, 2012, the Federal Reserve announced QE3, and what happened? What happened to stocks? They peaked. What? Yes, they peaked. They peaked the day that QE3 was announced to the day September 14th, 2012.

The S&P 500 then fell for a few weeks about 4%. It rallied for a few weeks into month and September, and then it continued to fall in October into the election swirl in its normal seasonal pattern, which includes a third quarter that’s slower for the economy. Peak to trough, the S&P 500 dropped about 9%. In fact, looking at history, the normal peak to trough decline in the third quarter of a contested presidential election year is about 9% to 10%.

Which, listeners, that may sound like a lot, but one must be reminded that at 3,335 to 3,350, we are already about 7% off the September second peak. Secondly, that no one can top tech sells and stocks and buys in the market consistently, and three, that a 10% decline this year, would do what? Would merely give up what? It would be the return of the month of August, yes, that’s it. A drop of the equivalent of 2012 would have the markets at about 3,265. A 10% peak to trough decline, would put the markets at around 3,200, which is where this year’s summer rally started in early July.

These are not disastrous outcomes. Long-term investors, we should be relishing this outcome, not running fearfully away from it, but once again, I repeat, the waiting is the hardest part. Every day you see one more card, the waiting is the hardest part. I don’t know who said it first, but the saying goes something like this, that the stock market is the only market in the world that when things go on sale, the masses run away, they don’t run to the sale.

The team at Oak Harvest is already seeing early signs of green shoots for the real economy, these green shoots extend beyond the asset economy. The real economy usually joins the asset inflation economy with a lag when the Federal Reserve stimulates. That lag is usually six to eight months, placing that economic upturn and acceleration in place for a post-election acceleration in both the economy and stock markets, regardless of who wins.

Going back to the 2012 time period. From the November 2012 election lows and panic, the S&P 500 rose over 25% the next six and a half months to a new all-time high and beyond. That was a gain of over 15% above the summer highs of 2012, and against the backdrop of an anti-business White House, a White House bent on higher regulations and taxes.

The path here has been a turbulent one since the first quarter top in mid-February. We are in the dead zone of the third quarter, the go-slow warning signs were there and we heeded their warnings when others on TV were preaching FOMO which is fear of missing out, and TINA, there is no alternative. Now we’re in the Tom Petty zone, the waiting zone while others look like they are scrambling to make changes to their portfolio as the market declines.

We’re sitting and watching for value to develop in areas that we might have missed out on on the way up off the lows in the second quarter. Those areas might be more technology, healthcare, or consumer discretionary. Wherever they may be, we will remain disciplined in staying diversified for our clients.

We’re looking forward to finding better value and equities into any pre-election volatility which should be heading our way through October. Why? Because there is a high likelihood of much lower volatility post-election results and into 2021 as the economy continues its economic rebound and the Federal Reserve stays on investors’ good side.

With that in mind, the team at Oak Harvest thinks it’s going to be a very Merry Christmas and a Happy New Year in the markets in 2021. But as Tom Petty first sang in 1981, “The waiting is the hardest part.” 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. Have a great weekend. 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.