Waiting: It’s About to Get Fun and Profitable

Join Chris Perras for the 10/2/2020 edition of Stock Talk!

Chris: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to our October 2nd weekly Stock Talk podcast: Keeping You Connected to Your Money. Before I get started here with the podcast, I wanted to wish the Trump family and other members of the White House staff a speedy and safe recovery from the just-announced virus cases. Our thoughts and prayers here at Oak Harvest go out to anyone who contracts this virus.

This podcast is an ongoing part of a multi-week series we started a few weeks ago, and it’s titled Waiting is the Hardest Part. Last week’s segment was waiting, get ready. Today’s segment is entitled Waiting, But It’s About to Get Fun and Profitable. Beginning the second half of August, the investment team at Oak Harvest started messaging to our investors and listeners that a correction in stocks was ahead. This was very normal in an election year that volatility was set to pick up into this September deadline, and going slow was the right strategy.

In fact, our August 21, podcast when the S&P 500 was trading near 3,400 for the first time since mid-February, which is pre-epidemic, that podcast was titled Curb Your Enthusiasm, Election Volatility Breeds Opportunity. As we stated last Friday, with the S&P 500 near 3,225. We started to selectively nibble at some of our favorite names. Well, on the back of some rapid short-covering and some optimism over Congress agreeing on added fiscal stimulus in the fourth quarter and in 2021, the S&P 500 quickly retraced its way back up to about 3,365, which is, yes, the underside of the 50-day moving average.

How? Well, it’s been a very normal year if you weren’t watching the news every day. This morning, we suddenly failed at the 50-day moving average. Today’s raison du jour is the Trump family and its members of the White House coming down with the virus. In our last week’s podcast, we discussed at length why we are so optimistic about the markets and the economy for the fourth quarter in 2021. Believe it or not, we are increasingly so given what we’ve seen the last week.

The leading indicators are saying the sun is going to shine brightly and the moon will be full during the holiday season in 2021. Yes, I know it’s hard for investors, particularly retirees to try to disconnect themselves from the everyday news headlines, whether those headlines are COVID virus count numbers or election polling estimates. We know it’s easy to let one’s emotions drive their actions with their money and their investments.

It’s hard not to say to your advisor, “I want to grow my portfolio more. Let’s pour some gas on the fire,” regardless of your monetary needs. I know it’s equally as difficult to not feel fear, and not to sell stocks when everything is red with the idea that you’re lowering your risk. Whether it’s the COVID virus, it’s the 9/11 attack, or a presidential election, more often than not, doing nothing or doing exactly opposite what your emotions are telling you to do, is almost always the right course of action during these emotional events.

Take the coming election and the emotions that its coverage, the event, and its outcome is driving through the media. Over the past few months, our team has tried to educate you in advance and share with you how markets have historically performed under varied scenarios. Under Republican leadership, under Democratic leadership, under a combination of leadership, and all told the difference in investment returns overall is very small. It is more dependent on a different government body.

What government body has a bigger effect on the economy and stock markets than the President or Congress? The Federal Reserve has a much, much bigger effect. Time and time again, we have stressed it here and on YouTube, don’t fight the Fed. Last week, I walked listeners through three charts that show the correlation this cycle of the Federal Reserve’s balance sheet compared to the S&P 500 since 2012, approaching nine years. This data is taken straight from the Federal Reserve’s own website. The link can be found, once again, by Googling St. Louis Federal Reserve balance sheet versus the S&P 500.

The three-time periods I talked about last week were the second half of 2012 through 2015, which was an election time period, the second time period the second half of 2016 through 2018. Once again, 2016 election and on, and finally, 2019 through current. All these time periods are recent and all of them include emotional presidential election time series. What did stocks do? They soared starting a few weeks post-election, and they continued rising. In 2012, they soared throughout 2013, as volatility dropped considerably.

Remember listeners, this was under an anti-Business Administration with higher regulations who are threatening higher taxes, but those factors were offset by a combination of Federal Reserve liquidity and slow and steady economic growth. Life went on slowly, but it went on. If we have learned anything from the past 10 years, we should have learned that stock markets like slow and steady growth, they like it not too hot and not too cold.

The Federal Reserve matters more than our government policies. During this period, post-democratic presidential win in 2012, even with higher regulation and the threat of higher taxes, the S&P 500 rose from its mid-November post-2012 election low to its year-end 2013 high by 37.75%. Thank you, Federal Reserve and QE3. Fast forward to 2016 presidential election. The economy was growing slowly, but the Federal Reserve was tightening monetary policy. The Federal Reserve was draining liquidity.

Whoever got elected president would have to implement policy fighting the Fed. 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. The tax cut didn’t come until early 2018, but the stock market moved in advance of it. The economy and the stock markets were able to plow through the Federal Reserve’s headwind of tightening monetary policy throughout 2017.

From November 2016 election, which was about two weeks before the cash flows in the 2012 presidential election through late January 2018 highs in the S&P 500, the S&P 500 rose 37.825%. Yes, it rose by almost the exact same percentage over the exact same time period as 2012, 2013 post-Obama second term election. Totally different presidents, totally different policies, totally different Federal Reserve policies, and literally, the stock market had almost the exact same outcome, which leads me to now, where does all of this lead is going into this election in the fourth quarter, 2020 and 2021?

Well, I believe the Federal Reserve has given us the roadmap, a very precise roadmap. On September 17, the Fed told us exactly what they planned on doing. They announced they planned on growing the balance sheet monthly through 2022 at a rate of $120 billion per month once they start. There were a few months delays with QE3 in 2012 before they started the program. There’s currently a little bit of a delay before the Federal Reserve starts buying for their balance sheet. Our team at Oak Harvest is following this weekly data. We’re following it in real-time.

At the start of the third quarter of 2020, the Fed’s balance sheet stood at about $7 trillion, up from $4 trillion at the end of the month of March. By Christmas of 2021, the Fed balance sheet will be up to about $8.5 trillion to $8.8 trillion. That’s up between $1.5 trillion and $1.8 trillion in about 15 months. Listeners, that is a massive tailwind regardless of who wins the election. This is the Fed put, as it’s called in professional circles. The Uber bowl case for 2021 is that the 2020 President, whomever that is, and Congress, whomever that is put job growth re-employing that 25 to 30 million unemployment workers and the economy first through additional spending or incentives in addition to the Federal Reserve monetary expansion.

Now, listeners, we may not like how much of our money politicians spend or what they spend it on, but I can almost guarantee you that regardless of who is in Washington, DC, in 2021, they will spend money, lots of our money, probably trillions of dollars of our money, and those trillions are stimulative to the economy overall in 2021, and more so for certain sectors and companies.

Say, they pass a fiscal stimulus in 2021 of $1.5 trillion. $1.5 trillion in additional stimulus plus $1.8 trillion in Federal Reserve stimulus equals about $3.3 trillion in year over year stimulus. It’s not hard to see. This is extremely powerful and positive to economic growth, and thereby stocks in 2021. Our job as your investment manager is to determine who benefits most by that spending or who is hurt by the shifting of budgets away from things that used to be in favor. Our job isn’t to like or dislike political outcomes, it’s to find companies with improving returns on invested capital or to generate you and your family retirement income.

Ironically, even things like higher corporate tax rates in 2021 might be perversely bullish for equities, as historically, corporations have accelerated large capital spending projects in front of tax increases. This would pyramid another block of real growth on top of 2021, including the federal reserve liquidity surge. Stock returns of up 38% like in 2012 and 2016 from wherever the market troughs pre-election, would certainly not be out of the question under that scenario.

We’ve already done that two times this cycle. Post-recession right after emotional presidential elections with opposite parties and leadership. Over the next 12 to 14 months, to financial markets, Jerome Powell is every bit, if not more important, than who wins the election in five weeks. As we said last week, we started to nibble slowly when the markets were down about 10% off its recent high. However, we continue to see another few weeks of jitters ahead. This morning, we are getting one of those jitters, but listeners, it should not matter greatly if you’ve missed the lows.

Why? Because the economy and the markets have a tailwind for the 2020 holidays and for 2021. We can look to 2012 and even 2016. Each of those election has showed similar patterns in stocks into the election time period, and the stock markets and economy showed eerily similar responses post-election. Rule number one, you don’t fight the Fed. Rule number two, you don’t fight the Fed. Rule number three, you might not like who leads our country, but they are all politicians and they will spend your money.

As investors, we need to put set aside our political opinions and find who benefits from spending, and we need to draft those who benefit economically. We will remain disciplined for our clients and staying diversified across companies and industries. There’s a likelihood of much lower volatilely post-election results in 2021 as the economy continues its economic rebound and the Federal Reserve stays on investors’ good side.

At Oak Harvest, we are comprehensive, long-term financial planners. What this means is that as our client, you and your Financial Adviser should have a financial plan that is independent of the volatility of stock markets. If you’re retired or in the process of retiring, 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 stay safe and have a great weekend.

Operator: 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.