Waiting: Turning the Corner Slowly

Join Chris Perras for the 10.9.2020 edition of Stock Talk!

Chris Perras: Hey, this is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to our Friday Stock Talk podcast: Keeping you Connected to your Money. Last week’s podcast was entitled Waiting, but it’s about to get fun and profitable. This week’s podcast is the third in our waiting segment. It’s entitled Turning the Corner Slowly. 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 a very normal time in election year that volatility was set to pick up into September. That is exactly what happened.

We actually declined almost exactly 10% a little before we had expected. Stock market went down to about 3,200 a few weeks ago. Since then, the S&P 500 has quickly retraced its way back up to 3,400, 3,450 on the S&P. Since late March, our investment team has been discussing with you what we saw as a strong likelihood of a V bottom in both stocks and the economy most likely for the middle of 2020. Against almost all financial commentator opinions, that is exactly what happened.

A number of US small businesses and new business applications is exploding. Yes, millions have become unemployed suddenly in the past six months only due to COVID. The response, exactly what you would hope and want to see in capitalism. An explosion in risk-taking and hundreds of thousands of new businesses and new business applications and formations. This is how Americans have behaved for hundreds of years. God willing this is how they’ll behave for the next hundred.

For months, we’ve tried to educate our listeners and clients as to why the back half of the fourth quarter of 2020 through 2021 looked like a reacceleration in growth in our economy and a resumption in our secular bull market and stocks. For the past four to six weeks, we’ve discussed at length why we were so optimistic about the markets and the economy for that time period regardless of who wins the election in November. The upcoming election and the emotions around it are largely being driven by the media.

Over the past few months, our team has tried to educate you in advance and share with you how markets have performed under varied scenarios. How markets performed under Republican leadership, how they performed under Democratic leadership, and how they performed under a combined leadership, and are told the difference in realized investment returns in stocks is very small and is much more dependent on the Federal Reserve.

For whatever reason, this week, the financial press, and many Wall Street strategists have decided to parrot what we’ve been saying for months. They’ve been saying now all of a sudden that any volatility around the election, while an emotional event, is a buying opportunity. This week’s short-term volatility has been caused by the on-again, off-again second stimulus bill discussions in Washington DC.

On Wednesday, President Trump called off any stimulus talks until quote as he put it, “After I win the election, the S&P 500 dropped almost 100 points after this tweet.” Subsequently, the president changed his mind and the market has now rallied back to around 3,450, which is where it stood back in mid-August. This is what election periods look like, up and down and a lot of noise.

This is the type of short-term volatility we expect to continue over the next weeks. The bull case for 2021 is that the 2020 president, whomever that is, and Congress, whomever that is, put job growth in the economy first through additional spending and incentives. This is in addition to the Federal Reserve monetary expansion. We may not personally like how much of our money politicians spend or on what they spend it, but regardless of who is elected, they are likely going to spend lots of our money, probably trillions of our money in 2021. Those trillions are stimulative to the economy overall and more so for certain sectors and companies.

Does it matter to a long-term investor if they pass a fiscal stimulus bill now three weeks before the presidential election or if it’s in the first quarter of 2021? No, it doesn’t, not really. It might matter to politicians running for re-election in DC who appear as always to be trying to buy votes. It might matter to the short-term trader trading news headlines. It certainly does matter for the next few months to the millions of unemployed but it shouldn’t matter very much to a longer-term investor if the timing is off by two or three months. This week’s investors started to realize just this point.

For 2021, does our economic growth in the stock market outlook change materially? Does it matter if we vote a $1.6 trillion plan now or $2 to $3 trillion plan in the early first quarter of 2021? No, it doesn’t matter materially. I will continue to argue until proven otherwise, that 1.5 to 3 trillion in additional fiscal stimulus will be wildly positive for economic growth and the stock markets in 2021.

Listeners recall this is in addition to the Federal Reserves $1.8 trillion in additional monetary stimulus in store for the next 15 months. Our job as your investment manager is to determine who benefits most by that spending whereas who is hurt by the shifting of budgets away from things that used to be in favor, or if or when a rising tax rate would hurt the economy or the stock markets by its negating any of the stimuli.

The stock market has been broadening out since the second quarter ended and the third quarter began. It started even though net overall the market hasn’t gone anywhere for two months. This is what the early foundations of bull markets look like. Large investors jockey around trying to find things that will work better than what they’ve been sitting on for the last few quarters or years.

Long-term interest rates start rising. This isn’t a bad thing for investors if it’s gradual and they don’t rise too high too fast. Remember the Goldilocks and the Three Bull stories from the past two years? That’s what this looks like. Gradually rising long-term rates causing a steepening yield curve is a great leading indicator for accelerating real growth throughout all financial markets, bond markets, stock markets, and commodity markets. This is exactly what transpired in front of the Democratic win in 2012 and it is also what was happening in front of the Trump win in 2016. The political party didn’t matter. Bull markets can wear blue or red ties.

We have stressed all year here and on YouTube, don’t fight the Federal Reserve. We know it’s hard to remove our political desires and biases from the equation but from an investing standpoint, it is the correct decision that leads me to now. The Federal Reserve has given us a road map for the next 15 months. On September 17th, the Fed told us exactly what they were planning on doing. They announced that they plan on growing their balance sheet monthly through 2022. The Fed’s balance sheet was around 7 trillion at the end of September up from 4 trillion at the end of March.

By Christmas of 2021, the Fed’s balance sheet will be up about 1.8 trillion closings in on 8.5 to 8.8 trillion. Listeners, this is a massive tail win regardless of who is elected president. Even things like higher corporate tax rates in 2021 could be bullish for equities as historically, corporations have accelerated large capital spending in front of tax increases. This would pyramid a third form of real growth into 2021 on top of the Federal Reserve liquidity surge as well as any fiscal stimulus. Stock returns of up to 38% to 40% from wherever the market drops pre-election, is not out of the question under that scenario.

Stock returns of close to 20% year-over-year have happened like this cycle after there have been huge outflows of equities just like there been this year. We’ve already been through both of these things two times this cycle. Post-recession right after an emotional presidential election with opposite parties leading our nation against almost every economist and financial TV personality forecast. Over the next 12 to 14 months to the financial markets, Jerome Powell is every bit if not more important than who wins the election in three and a half weeks.

As we’ve said for two weeks, waiting is the hardest part. Right now, we are finding many technology companies starting to re-emerge as attractive because these stocks are down 10% to 20% the past two months while their businesses are booming and even better if the TV’s news channels are now talking negatively about them. This week’s it was non-stop talk of their monopoly powers.

We like to use multi-month downturns and strong companies to initiate positions or buy more of something we already own. Election periods, since the great financial crisis of 2008 and 2009 have shown similar patterns in stocks into and out of each election. The markets and economy are showing similar responses now. We want to be buyers of stocks into any pre-election weakness, which is also normal weakness in September and October, and the early fourth quarter.

Once again, for the rest of the fourth quarter as well of 2021, the economic and market outlook is improving. We are expecting another three to four weeks of volatility in the markets. The virus counts are starting to pick up again. This has been a bad thing for the markets. Moreover, the election results are likely to tighten over the next two weeks. It was exactly October 8th through October 11th in 2016, when the press and nearly everyone had written off now President Trump’s chances of election in 2016.

We know what happened, Vice President Pence had a good vice president debate. Check, that just happened again this week. Then Trump had a very strong second debate against Hillary the next week. The second debate is slated for mid-next week. Let’s stay tuned.

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 are 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 and have a great weekend. This is Chris Perras at Oak Harvest.

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 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 results.