A Tale of Two Markets/Halves: “Rotation Nation” and “Whole-Market Resumes”

Chris: This is Chris Perras, Chief Investment Officer at Oak harvest Financial Group with the January 25th edition, Keeping you connected to your money. Each week, we try to recap the prior week’s events to give you a little insight into what we think is going to transpire in the weeks and months ahead, I want to label this week’s edition 2019, The Tale of Two Markets. The first half of 2019, I want to call it rotation nation, and in the second half of 2019, I’ll call it the bull market resumed. We talked for about nine months about the rotational nature of the stock market. In 2018, it was very similar to 2015 where the market went from group to group to group rotating trying to find leadership and overall the market didn’t really go anywhere.

The market peaked on all that optimism of the Trump tax cut back in January 24th through 28th, 2018. We did make a marginal new high in late September. That was entirely led by about five to 10 tech stocks, including Apple and Amazon and Netflix, and a few others. As we’ve spent said on previous calls, 2018, very similar to 2015. We’re starting out 2019 almost exactly the same as we started out 2016. We’ve spoken to this model going forward as the one that we’re looking to for the whole year of 2019. It’s transpiring that way largely because the Federal Reserve was tightening monetary policy, all of 2018, slowing down credit, trying to slow the markets and the economy down.

They were concerned about inflation. We are not concerned about inflation here. They were just concerned that things were getting a little too frothy. What happened in late December after the market plunged on all the year-end tax selling and on the $150 billion that left the market in November and December, Federal Reserve said, “The data’s starting to say that we’re slowing. Almost every country in the world has slowed already maybe we should start talking a little more dovish about our outlook for interest rate increases in 2019 and economic growth in 2019. The market bottomed on Christmas Eve and has had a significant rally year to date off the bottom. As we sit here, I think the market is around 2,665 on the S&P 500. That happens to be exactly where it closed 2017.

We’ve spent one year pretty much going nowhere, but the interesting thing about the year-to-date returns are there are groups that are beginning to work, and we’ve anticipated this that are very positive for the stock market and the second half of this year. Semiconductors and semiconductor capital equipment is a leading group both on the upside and the downside for predicting how the economy is doing. The group peaked all the way back in December of 2017. The stock market pretty much peaked the month after that. This group bottomed two months ago, it started to move up names like a matte applied materials, which is owned in some accounts was up 17% this week, Texas instruments, big semiconductor company, huge operation over in Austin that company stock was up 10% this week month to date, emerging markets are up seven and a half percent, and most people won’t tell you this, but emerging markets are actually flat since lacks July.

They’re actually doing better than the S&P 500 and believe it or not, they’ve actually been less volatile, so even with all the trade talk about China, even with the collapse of Venezuela, even with the goings ons in Turkey and Brazil, emerging market stocks are actually outperforming the S&P 500. We expect that to continue the rest of the year. It will be volatile. Emerging market stocks are volatile. We do own that allocation and most portfolios through the dimensional fund’s mutual fun, where they can diversify the single stock risk away and give us that growth dynamic that’s provided by the emerging market asset class.

A year today the groups that are lagging or the safety stocks, so drug stocks which are a group that a lot of people run to when things are slow. That group is not rallying as fast as the stock market is consumer staples names like Pepsi Disney.

That group is not rallying as fast. We expect that those groups actually to start to perform pretty well here in the second quarter. We expect this market rally to continue into February assuming the federal is, it comes out next week and continues their dovish talk. Market can get as high as 2,800, which sounds sack religious, I guess, to some degree it can get there by the end of February if these factors like the federal reserve talking dovish remain in place. The market was at 2,800, literally on December 4th, so it was less than two months ago that we were at that level. We expect the rally to then stall pretty much, and what we’d do is spend most of the second quarter into the July 4th timeframe back-filling as people will probably get increasingly concerned again, that the federal reserve will raise rates or the economy is going to slow, but it should set us up for a very good second half of 2019 and a resumption of the bull market.

We do not think a recession is at hand the last four to six months of people trying to play the new game show guests that recession ludicrous. I know no one who’s been able to predict the recession within two to four months accurately on an ongoing basis. The leading indicators that we see are very positive for the second half of this year. Some people talk about Dr. Copper as a leading indicator. The commodity actually tends to lead everything is lumber and lumber has actually been starting to trend up here for the past four weeks. You haven’t heard about it yet on CNBC, just because it’s not a sexy thing to talk about. It’s very positive for stocks like Home Depot international paper for the second half of this year. Semi stocks, which we just spoke about earlier Texas instruments Intel reported a quarter reported a good quarter, but there was disappointment in their outlook going forward.

It was one of the few semiconductor stocks that had held in there, so it sold off today. We expect it to rally back with the rest of the group until it’s not a sexy semiconductor company, it’s not a fast-growing one. Come the second quarter, if that stock rallies back into the low to mid-fifties we may actually look to sell into and swap it into a higher growth semiconductor name out there to get some more growth for the second half of 2019. We’ll just see how all that plays out, but that’s our line of thinking. We’re not wedded to any given stock they’re just tools to help you meet your financial goals in retirement. Additionally, in the second quarter, things will begin to look at buying in the portfolios are increasing allocations to are cyclical stocks, names like Caterpillar and John Deere 3m, which actually is a closet semiconductor name.

They have a big electronics business. We’ll also start to look at buying financials for the first time major in over a year. People talked about them all last year as being a group that you had to own. They were horrible investments for last year. People have stopped talking about them, it’s getting to the point in the investment cycle where you want to own financials. The valuations are unbelievably attractive, interest rates, dividend yields are getting to be very attractive. We think they’ll probably be some choppiness in later in the first quarter, a bunch of the banking CEOs are going to have to go in front of Congress and talk to the new house-led democratic party. That’s going to be a lot of grandstanding. We’re going to try to use that as an opportunity to buy some more financial stocks, some bank stocks may be some processing stocks.

Remember the most valuable investment advice we can give you in retirement and throughout your life is discipline. You guys shared your goals and values with us during your visits. We’ve gotten to know you and your family got to know what’s important to you in retirement, and what’s important for your savings to do for you. Investment climates change. We will make adjustments as we see the climate changing. Everything is customized to your own personal financial goals. We believe your assets should keep working when you’re in retirement.

This is right. Chris Perras, with Oak harvest financial group, Keeping you connected to your money. Many blessings content contained within this Oak harvest podcast is for informational purposes only, and is based upon information current, as of the time of recording, it should not be considered an offer or solicitation to buy or sell securities, nor is it a tax or legal advice. Investments involve risk unless otherwise stated particular investment returns are not guaranteed.