Fiscal Year End: It’s Two Weeks and Counting, of Waiting

On the 9/27/2019 edition of Stock Talk, CIO Chris Perras covers recent happenings in the market, and respond to themes that the financial media has been covering.

Chris: Hey, I’m Chris Paris, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the September 27th edition of our weekly Stock Talk Podcast: Keeping You Connected To Your Money. This week’s podcast is entitled Fiscal Year End, It’s Two Weeks and Counting. As of this morning, the S&P 500 sits around 2975. The almost 200-point up move that has taken place since mid-August has been 100% correlated with rising, not falling long-term interest rates.

The entire sustained up to move in the S&P 500, this cycle has come during periods of rising, not falling long-term interest rates, as it foreshadows higher growth, higher inflation, or higher both and those things eventually drive higher earnings. This week, the financial press is focused on two big news events and themes. First is the new democratic push to investigate President Trump and launch an impeachment procedure against him.

Secondly, the other event that happened this week is the collapse of the IPO market or the initial public offering market, most notably the failure to get public WI works and the recent poor performance of companies like Uber, Lyft, and Peloton that have all recently come public in the last couple of months. Addressing the second topic first, these poor-performing IPOs are virtually meaningless to the overall public stock markets.

In fact, one can argue that these stocks performing poorly in the public markets is actually a good thing for the overall market. As capital that is flowing into this hyper-growth, massively negative free cash flow companies should be better allocated to less speculative ventures, at least in the public markets. Private equity investors are much better suited to bear the risk-reward of these types of growth vehicles.

Biggest news event of the week was the release of the news of the president’s conversation with a Ukrainian leader and the democratically controlled House of Representatives launching an impeachment inquiry into this matter. There have been two impeached presidents in the United States. Most recently, in 1998, President Bill Clinton was impeached and then he was ultimately acquitted.

The Senate, which is led by the Republicans currently would have to vote two-thirds two oust President Trump, even if the Democratic-controlled House of Representatives voted to impeach him. The broad stock market like the S&P 500 in 1998, ’99, rallied over 20% over the next six months because the economy continued to grow and shake off the political sideshow of impeachment.

I am not saying that this is exactly the same situation that we are in currently, our economy is currently growing at a much more slow pace than it was in the late 1990s. However, the economy and the stock market should shake this event off, all things being equal. We are in the dead zone of the third quarter, liquidity in financial markets is extremely low. The financial press has made mountains out of an obscure market called the Repo market, which is essentially short-term overnight funding.

Illiquidity events like these often happen at the end of September or the end of December. Why? It is the fiscal year-end for many large financial institutional holders of assets like mutual funds and banks. Many large investors are making buy and more likely sell decisions largely based solely on tax positioning. Stock buybacks by Corporate America are on hold, with only 5% to 10% of companies actually active in the market buying their stock back.

This is the lowest level that we will see for the rest of the year. Earnings report cards for the third quarter aren’t out yet and investors are nervous and are awaiting guidance for the fourth quarter and for 2020. We should have about two more weeks left of this dynamic. We have laid this time period out all year as the most likely time for the last market weakness and pullback in the stock markets before a fourth-quarter market upturn and acceleration.

This is the time of the year that most investors ignore the good news and focus 100% on the bad news. They ignore the data points that are called green shoots for both the economy and the stock markets. We are currently seeing green shoots in the housing markets as low rates are already stimulating housing and construction for the fourth quarter of this year in 2020.

Apple’s new iPhone launch’s meeting better than expected demand and future demand in semiconductor markets looks better as demand should exceed supply in 2020 and help support pricing across the industry. I want to impress upon our listeners once again, that what has happened this year is 100% normal during the summer in ongoing bull markets. No, it is not fun, we continue to see urine move in the S&P 500 to a new all-time high that is sustained this time 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 this coming 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 it to friends and have them give us a call at 281-822-1350. Browse our website 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 Parris.

Speaker 2: 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.