Rotation, Rotation — Anatomy of a Bull Market

Chris Perras discusses the ongoing rotation in the markets and the anatomy of a traditional bull market on the 9/13/2019 edition of Stock Talk!

Chris: Hey, good afternoon. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the September 13th edition of a weekly Stock Talk podcast: Keeping you Connected to your Money. This week’s edition is an ode to the great Fiddler on the Roof song, Tradition Tradition. In keeping with that song, I’ve titled this week’s episode, Rotation Rotation. Almost no one in the financial community talked about it except for us about two weeks ago. What was that topic? It was Market Sector Leadership.

Once again, now two weeks in a row, the leadership in the US stock market is an almost perfect reflection of a traditional bull market. What has led the up move again this week? Higher volatility, more economically sensitive groups like industrials, financials, old-line technology stocks, like semiconductors, emerging markets, and small-cap stocks. These are currently considered value stocks by most investors. What they share in common is that they are helped by either faster inflation, higher growth, or both.

Listeners, I’ve mentioned a single factor multiple times this year as a coincident indicator. I ask you, what financial instrument can we look at in real-time to see if this economic development is beginning to play out? Anyone? The answer is long-term interest rates, more specifically, the direction and trend in long-term interest rates. Long-term interest rates troughed August 15th in the S&P 500 troughed at 2,825. For two weeks, long-term interest rates trended sideways to slightly higher and the S&P 500 bounced between 2,825 and 2,925.

Two weeks ago, long-term interest rates began to trend higher on better economic data, an uptick in the economic surprise index, and growing optimism over a China trade deal. The 10 year Treasury yield has risen 40 basis points the last two weeks and what is the S&P 500 done? It has zoomed back to 3,000, 3,025, nearing an all-time high. I will repeat for, over the 100th time, higher trending long-term interest rates are a good thing in this bull market.

The breadth of the market expands. The strategies that most hedge funds and retail investors have flocked to over the past years, which are low volatility, price momentum, and growth at any price they stall and/or fall, and traditional investing methodologies such as value investing, growth at a reasonable price, and small-cap stock investing work.

These are the areas of the market where the value lies today but where investors have fled since August of last year. What groups have lagged in the markets in the last two weeks? Yes, the low volatility real estate, staples, and utility. Those are the low volatility groups that almost everyone has been hiding in for over a year as $250 billion have left the US stock market and fled to bond-like instruments. Please, investors, remember too, regardless of what you hear on TV, no investor hides in small-cap stocks.

To give our listeners an idea of the magnitude of the rotation that started in mid-August, the performance in the last two weeks of the energy sectors, the financial sector, and industrial sector were up 8.4%, 7.9%, and 7.6% respectively through Thursday of this week. While the low volatility groups of real estate, utilities, and consumer staples were up only 0.6%, 1.4%, and 1.8% respectively.

The investment team at Oak Harvest has been investing more heavily in the cyclical and value areas throughout the summer. We have been doing this in advance of the herd. We first laid out this as our strategy for the second half outlook way back in January of this year. We do not believe that these rotations are a mere blip as almost everyone in the financial press has stated this week. The team at Oak Harvest sees the past two weeks as just the beginning of what will be a multi-quarter move up in these groups and styles. This will not be a straight line move as they rarely are but the opportunity for sizable outperformance over an extended period of time is large.

We will be using any weakness the next three to four weeks in what we commonly refer to as the dead zone and into large institutional fiscal year ends to continue to invest in these areas for our clients. I want to impress upon our listeners once again, that what has been going on all year is 100% normal during the summer in ongoing bull markets. We continue to see lower volatility in the fourth quarter as the Federal Reserve continues along with its slowly easing monetary policy regardless of what the path that people project on TV.

We continue to see a year in move in the S&P 500 to new all-time highs that are sustained into year-end and even higher in 2020. If we begin to see 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 portfolios for continued low and slow growth economy vers an accelerating economy that we see.

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 once in your life with a customized retirement planning. Many blessings. This is Chris Perras.

Speaker 1: The proceeding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable and 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.