Waiting: Get Ready and Why

Join Chris Perras for the 9/25/2020 edition of Stock Talk!

Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our weekly Stock Talk Podcast: Keeping You Connected to Your Money

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Chris Perras: Good morning. This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group in Houston, Texas, and welcome to our weekly Stock Talk Podcast: Keeping You Connected to Your Money. This is an ongoing part of a multi-week series titled, Waiting is the Hardest Part. This segment is titled after the 1966 hit, and it was the last song Smokey Robinson wrote for the Temptations, Get Ready. The title today, Get Ready, Why?

Starting the second half of August, the investment team at Oak Harvest’s main message to our investors and listeners has been that a correction in stocks was ahead. That this was very normal in an election year. The volatility was set to pick up into September’s dead zone. In fact, our August 21st podcast, when the S&P 500 was trading near 3,400 for the first time since mid-February, pre-pandemic was titled, Curb Your Enthusiasm, Election Volatility Breeds Opportunity.

The S&P 500 is now sitting back around 3,225. As we anticipated weeks ago, and we discussed in last week’s podcast, nervous short-term investors and traders started feeling a little more jittery and sold stocks breaking the S&P 500 below its 50-day moving average. We are now below August 1st levels as well as the Federal Reserve August 3rd announcement previewing what I call QE5.

With stocks having retraced two months of gains, the investment team at Oak Harvest is getting more positive on stocks because they have come down in price and valuations are getting more attractive as the negative noise has been building. This podcast is about the future. It’s about the why we are increasingly optimistic for the fourth quarter and beyond into 2021, while others are now worrying more.

I started where every conversation on financial markets since the Great Recession should. Where is that? I start with what is the Federal Reserve doing with monetary supply? Time and time again, we have stressed it here and on YouTube, don’t fight the Fed. Why? I have three charts on the Federal Reserve balance sheet compared to the S&P 500 since 2012. This data is taken straight from the Federal Reserve’s own website. The link can be found by googling St. Louis Federal Reserve balance sheet verse the S&P 500.

The three time periods I picked are the second half of 2012 through 2015. The second time period is the second half of 2016 through 2018, and finally, 2019 through now. All these time periods are recent and all of them include emotional presidential election time series. The first time period, the second half of 2012. Why did I pick this time? I picked it because the Federal Reserve announced QE3 on September 14th, 2012, about six weeks in front of the 2012 presidential election.

Think way back then, or go ahead and Google what was going on during these times and you will see that the economy was kind of punk. It was growing very slowly. The Federal Reserve had succeeded at reigniting a little inflation in the economy post the Great Recession but, I repeat, but, real growth was way below normal levels. Capital investment was very low, the economy was slowing as it normally does into the third quarter and into a presidential election.

As a political conservative and a money manager, I was very concerned what a second term of anti-business and higher regulation White House would do to stocks and the economy. President Obama was reelected and what happened in the fourth quarter of 2012 through 2013? Well, if you don’t remember, I’ll remind you. By Christmas 2012, QE3 kicked in the Federal Reserve’s balance sheet started to grow and accelerate, and real growth pivoted higher throughout 2013 against the very backdrop of an anti-business and increase in regulation administration.

Fast forward to the second half of 2016, the second chart, we see a decidedly different Federal Reserve. Looking at that chart during that time period, what one will see is a Federal Reserve who was tightening monetary supply. They were tightening monetary conditions in front of the 2016 election, as well as throughout 2017. Whoever won the 2016 presidential election was going to have a headwind of the Federal Reserve draining liquidity from the financial markets. It didn’t matter which candidate won, they were going to be handcuffed a little bit by the Federal Reserve. They were going to have to implement policy while the Fed was tightening.

President Trump was elected and he and our then Republican-led Congress gave the economy a big shot of adrenaline by way of a tax cut and the economy and the stock markets were able to plow through the Federal Reserve’s headwind of tightening monetary policy throughout 2017. From the November 2016 election cash market lows through the late January 2018 highs, the S&P 500 rose 37.825%. Totally different presidents, totally different policies, totally different Federal Reserve policies, and literally almost the exact same outcome in stocks, which leads us to now.

Where does all of this lead us going into the 2020 presidential election and the fourth quarter of 2020 through 2021? Well, I believe the Federal Reserve has given us the roadmap, one that seems to be working absurdly well and it has been working for the past 8 to 10 years. It hasn’t been working for just days and weeks. Looking at the third timeframe, 2019 through now. Soon as the Fed started QE last year in August or September of 2019, call that QE4, the S&P 500 turned up and rose into February, which is pre-COVID. The S&P 500 caught up to the Fed’s balance sheet expansion if you look at the graph.

Then in response to a swift COVID-induced global downturn, the Federal Reserve once again stepped in in mid-March of this year with more support. Looking at these Federal Reserve charts, it’s almost impossible to miss the almost perfect correlation between the S&P 500 and the Fed’s balance sheet since the March 23rd lows of this year. What now? Well, on August 3rd of this year, the Fed announced that they had another new balance sheet expansion program up their sleeve, and stocks soared. That’s why they soared in August. They soared in advance of the specifics of what I call QE5.

The Fed waited until September 17th to tell us exactly what they planned on doing. On September 17th, they announced that they planned on growing their balance sheet monthly through 2021-2022. They really didn’t put a date on it. They said that the rate of growth was an additional 120 billion with a B per month once they start. Recall way back in the 2012 election, there was a delay in the Federal Reserve from September 14th, 2012, before they started buying treasuries and other bonds, so expect a little bit of a delay now.

What do you do with all this? We can actually project out pretty precisely how big the Fed’s balance sheet will be by the end of 2021. We can map out the tailwind of the Federal Reserve for the next 15 months, regardless of whom is elected president. To me, the main question for investors is how much of this Fed Put as they call it in professional circles does whoever is elected in 2020, whoever is elected president use to their advantage to help drive the economy in the stock markets? Or do they spend it away on other programs?

The bull case for 2021 is that the 2020 President, whomever that is, and Congress, whoever that is, put job growth re-employing the 25 to 30 million unemployed workers and the economy first, through additional spending or incentives in addition to the Federal Reserve monetary expansion. I can almost guarantee you that regardless of who is in Washington, D.C., in 2021, they will spend money, lots of our money, probably trillions of dollars of our money in 2021. Those trillions are stimulative to the overall economy, and more so for certain sectors, stocks, and companies.

Our job as your investment manager is to determine who benefits the most by that spending or who is hurt the most by shifting of budgets away from things that used to be in favor. Ironically, even things like higher corporate tax rates in 2021 might be perversely bullish for equities as historically corporations have accelerated large capital spending in front of tax increases. That would be another thing that would pyramid a real growth surge in 2021 on top of the Federal Reserve liquidity surge.

The opportunity should continue to develop over the next four to six weeks for longer-term investors. As we said last week, waiting is the hardest part. We’re starting to nibble slowly with the market’s down 10% off its recent highs, however, we continue to see another few weeks of jitters ahead. We can look to 2012 and even in 2016, each of those elections showed similar patterns in stocks into the election time period, and the stock markets and the economy showed eerily similar responses post-election.

The current setup for the Federal Reserve, the economy, and the stock markets are so like those time periods it’s hard not to point these things out. We want to be buyers of stocks into any pre-election weakness, which is also the normal weakness in October and the early fourth quarter. Why? Because rule number one, you don’t fight the Fed.

Next week. I plan on covering in a little more detail, the when of when to get ready. Given percent returns and investing, or a combination of both, when, what price, and how long you own it, I wanted to go into more detail of the minutia of when next week. A teaser, the when hasn’t shifted much, since we first discussed it way back in our first half 2020 outlook, which we wrote way back in December of 2019.

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, this is Chris Perras at Oak Harvest.

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.