Inconceivable! Unprecedented!… Not!

Join Chris Perras for the 9/11/2020 edition of Stock Talk!

Chris Perras: Hi, this is Chris Perras, chief investment officer at Oak harvest financial group in Houston, Texas. Welcome to the 9/11 edition of our weekly Stock Talk Podcast: Keeping you Connected to your Money. Before I get into this week’s podcast, I wanted to pause for a moment and let us all remember the lives that were lost, and those that were forever changed 19 years ago during the four coordinated terrorist attacks on America and all Americans. I just want to say, God bless America, As always, prayers are with the families who lost loved ones and those whose lives were forever changed.

I take this week’s podcast title, topic, and lessons blatantly and without reservation from one of my favorite movie scenes of all time. It’s from the movie, The Princess Bride. It’s from the character Vizzini. Since the March 23rd rally began in both the stock markets and the economy, we have heard an almost non-stop commentary by financial TV hosts, hedge fund managers, politicians, and numerous other individuals on how what has happened in 2020 is “unprecedented”, particularly the five-month rally and stocks that took us back to new all-time highs with a peak late August, early September.

[unintelligible 00:01:20] the tone these individuals had is that it should’ve never happened. That it has been, as Vizzini said, and made famous in multiple scenes in The Princess Bride, inconceivable. As the investment team has tried to lay out since Troy and I made our late March YouTube video, where we discuss the early healing signs in both the economy and in the stock markets, these events were far from inconceivable and unprecedented. There were close to predictable. Thank you, Jerome Powell.

Looking back over the last five months, early on, we tried to consistently lay out the case through multiple podcasts and updates, the history of event-driven recessions, such as the one this virus has caused in both the stock markets and the economy. The current economy and stock and bond markets have followed these events with great consistency. After that, as other financial advisors and TV personalities were pontificating about retesting the lows, we were trying to educate our clients and listeners about the history in both the speed and size of the 10 prior V bottoms in stock markets over decades of history, not over days and hours of trading.

Fast forward to late June, we discussed the coming normal summer rally when others were calling for a big sell-off to the dramatic rise in COVID cases. Most all of the TV shows on the news networks were fanatically calling for more full shutdowns of cities and states because of a dramatic rise in COVID cases that were lagging, the Memorial day weekend celebration and the black lives matter protest surge.

Against the grain of those calls, we were steadfast in our analysis of the [unintelligible 00:03:07] virus data that we shared with you along the way, and in the leading economic data that were saying the cases were about to collapse and the economy was improving fast. As Vizzini would say, inconceivable, which brings us to the past two weeks and today, the S&P 500 sits today around 3,350 down about 6 1/2% from its top tech peak on September 2nd, but it’s still up since early August. For the past few weeks, we have been preaching that it was time to step back and watch, that it was time to reign in those bull horns for a month or two.

Why? We’ve listed many of the reasons already, but history says it’s very normal, particularly into a presidential election. Why? Because presidential elections often breed emotional responses and short-term moves by investors which are not entirely motivated by long-term financial outcomes and returns on their investments. We don’t have to look very far back in history to see these moves in investors and in the markets. We can look to 2008, 2012, and even 2016.

Each of those elections showed similar patterns in stocks into the election period in the stock markets, in the economy, showing eerily similar responses post-election. Think back to those three elections, the outcomes were far from similar. 2008, that was a blue wave. 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. More on that cycle later. In 2016, we all know that story, Trump’s surprise win, but probably the bigger surprise in the GOP House and Senate wins.

It was off to the races against the pessimism from almost everyone. Thank you, Federal Reserve and tax cuts, which brings me back to the movie, in The Princess Bride, and my favorite quote in the movie, the scene is Vizzini dueling of wits vs Westley. It is absolutely hilarious, but listeners recall, I set it up. They matched wits with poisoned cups of wine. In the end, it’s Vizzini whose death and quote we best remember, for after moving the cups all over the place in a rambling incoherent speech, he ends with this, “Haha, you fell victim to one of the classic blunders, the most famous of which never get involved in a land war in Asia, but only less slightly well-known is this, never go against the Sicilian when death is on the line, haha.” And he kills over and dies.

Westley moves on with his life. I love this scene, but I’m sure listeners are asking, Chris, what in the world does this mean to me? How does this help me through year-end in my investments? Well, Vizzini forgot the number one rule of investing. That same rule all of the TV pundits chose to ignore from April through July of this year. The rule has nothing to do with Sicilians or land wars in Asia, but that rule is particularly notable around elections.

What rule is that? It’s don’t fight the fed. It’s far more important than our political beliefs and outcome. Case in point, the 2012 election, the current setup in both the economy and the stock markets are eerily similar to that time period. Why does it look the same? Conservatives like myself were deathly afraid of a second democratic term of President Obama. I didn’t think we could survive four more years of regulation and anti-corporate policies. Way back then the economy was uncertain as always, but it was slow and punk just like it is now.

The real economy had not yet picked up from the great recession of 2008 and 2009. Inflation expectations had recovered, as they have now, but the real economy measured by real interest rates was low and slow in need of a booster shot. What happened over the next two months prior to the elections, clients can log on and see the S&P 500 charts as well. Listeners, I’ll tell you what happened. In the election year 2012, the S&P 500 pulled back from its peak [unintelligible 00:07:33] almost exactly the same time as this year, early September.

The S&P 500 pulled back even as the federal reserve announced and launched QE three on September 14th, 2012, which would be next week, essentially, when the federal reserve meets again. The S&P 500 rested on its 50 days moving average for a few days, much like it is right now, then it broke below it. It then rallied for a few weeks on the back of the federal reserve announcement on September 14th of QE3 only to fall into the election swirl and its normal seasonal pattern, which includes a slower third quarter for the economy.

So peak to trough in 2012 in front of the election, the S&P 500 dropped almost exactly 9%. In fact, looking at history, the normal peak to trough decline in the third quarter of a contested election year is about 9% to 10%, which may sound like a lot to listeners, but one has to be reminded that one at 3350, we’re already 6 1/2% off the tipping top peak on September 2nd.

Two, no one in the world, I repeat, no one sells top ticks and buys the market lows consistently. Three, a 10% decline this year would merely give up what? It would give up the return for the month of August. That’s it. A drop of the equivalent percent in 2012 would have the markets sitting at, and I think we’ve had this number on the last couple of podcasts, around 3,250, 3,265. A 10% drop peak to trough decline would put the markets around 3,200, which is where this summer’s rally started in early July.

These are not disastrous outcomes, which leads us to the punchline of this podcast. Far from unprecedented or as Vizzini would say, inconceivable, the stock market’s path, post bottoming in late March, has been very typical for past the V bottoms in election year worries. We want to be buyers of stocks into weakness in late September through late October. Why? Because rule number one is you don’t fight the fed, unlike Vizzini in The Princess Bride, try not to overthink it. The team at Oak Harvest is already seeing the early signs of green shoots for the real economy.

These green shoots extend beyond the asset economy. The real economy usually joins the asset and inflation economy with a lag when the Federal Reserve stimulates. That lag is usually six to eight months, placing the economic upturn and reacceleration in place for a post-election acceleration in both the economy and stock markets. In fact, from the November 2012 election lows, the S&P 500 rose over 25%, the next six and a half months, to new all-time highs and beyond. That was against the backdrop of an anti-business White House. That was a gain of over 15% above the summer highs of 2012 and against the backdrop of more regulation. Thank you, Federal Reserve.

The path here has been a turbulent one since the first quarter to top and mid-February. We will be using higher third-quarter volatility to position portfolios for an uptick in real economic growth in the economy in the fourth quarter of 2020 and ’21. Why? Because we still believe in the same two things we first started over five months ago when emotions were at a peak and volatility was at its highest. We believe in science leading us to a solution for the virus faster than others thought. Secondly, we believe in the Federal Reserve, we stuck to the mantra of don’t fight the Fed.

Unlike Vizzini and many others throughout the financial world, we have tried not to overthink it. There is a high likelihood of much lower volatility post-election results 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. At Oak Harvest, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisors 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, give us a call at 281-822-1350. We’re 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.

Speaker 2: 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.