It’s a Normal Q4: Here Comes the Sun

CIO Chris Perras discusses the latest happenings in the stock market and goes into detail on the performance of small cap stocks.

Chris Perras: Good morning. My name is Chris Perras. I’m Chief Investment Officer here in Houston, Texas with Oak Harvest Financial Group. Welcome to the October 18th edition of our weekly Stock Talk Podcast: Keeping You Connected To Your Money. I bring to you the third straight fourth-quarter podcast for 2019 that is optimistically titled, It’s a Normal 4th Quarter, Here Comes The Sun. As of this morning, the S&P 500 sits almost exactly at 3,000. This is against a constant financial press commentary of how bad the economy is, how overpriced stocks are, how uncertain politics are making things, and how we have never seen anything like this before in history.

These are flat-out wrong across the board when it comes to the behavior of the financial markets in 2019, and the team Oak Harvest continues to see the markets heading considerably higher through the fourth quarter of this year into early February of 2020. The timing and the level of the S&P 500 as we sit here at 3,000, has been highlighted by the team at Oak Harvest all year. We first laid this out in early January of this year, and once again during our second half outlook penned in late June.

Year-to-date, this is a very normal year in an ongoing 10-year bull market. The economy and stock market structure look nothing like the 1930 depression times being touted for the past two years by billionaire hedge fund managers yet again today. I must ask, who is managing money nowadays that was alive and managing money during the Depression? Heck, why don’t we go all the way back to the Civil War for a comparison? We avoided that depression-era outcome in 2008 and 2009 due to both Federal Reserve and federal government actions, and I want to thank both entities for their programs.

We continue to see much higher year-end and new all-time highs sooner rather than later. These new all-time highs should be sustained at this time. Returns of up to 6% to 7% from 3,000 is now possible to about 3,150 on the S&P 500 near year-end, and even 3,200 into early February. The Federal Reserve is on investors’ side this year. Volatility should now continue to head lower, not higher in the fourth quarter and into January of next year. The dead zone of the third quarter has ended. Stock buybacks start to return later this week.

As I previewed last week, I want to take some time to talk about small-cap stocks as an asset class. Small-cap stocks, while generating good positive returns to this cycle as represented by the Russell 2000, have underperformed the S&P 500 the past year, as well as throughout most of the 10-year bull market. Why has this happened? This bull market cycle has been characterized by an overall trend in lower long-term interest rates, and generally a stronger dollar. While these things sound positive for domestic small-cap stocks, this cycle, investors have taken on less risk than other bull markets. This is very easy to see in the $250 billion that has exited the market this year, even while stocks have rebounded.

The team at Oak Harvest continues to allocate a portion of investors’ money to small-cap stocks as over long periods of time, they had a history of outperforming the overall market by 3% to 5% per year. The relative earnings valuation described by its PE ratio has small caps at their best value relative to large caps since 2003. Historically, small caps have outperformed large caps by over 6% over the following year when the spread widens to these levels, and that’s purely an average. In fact, from June 2003 through June 2004, the small-cap index gained almost 30% while the S&P 500 gained about 16.5%. Small caps gained twice as much almost relative to the S&P.

Given the positioning of investors who now pretty much hate small caps and hedge funds who are all short them, the team at Oak Harvest believes that the outperformance of small caps as well as other cyclical assets like financials, industrials, and international markets that began to outperform on the summer market lows of August 15th and started to improve at the pivot on about October 3rd that few investors have yet to see, will continue to build and continue throughout the first half of 2020. Historically, small caps have outperformed large caps when the Federal Reserve is cutting rates with a return of almost 28% in the next 12 months versus a return of about 15% in large-cap. That’s close to doubling the return of large caps.

I want to impress upon our listeners once again that what has happened this year is normal during the summer of an ongoing bull market. We continue to see a year-end move in the S&P 500 to new all-time highs that are sustained into year-end and even higher in 2020. 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 and new content 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 Perras.

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.