Waiting: The Final Countdown

Join Chris Perras for the 10/23/2020 edition of Stock Talk!

Chris Perras: Good morning. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. Welcome to the October 23rd edition of our weekly Stock Talk Podcast: Keeping you connected to your money. This is the second to last an ongoing multi-week series entitled Waiting. We started this the series way back in late August with the stock markets moving parabolically upward to almost $3,600 on the S&P 500. That segment was entitled Curb Your Enthusiasm, Election Volatility Breeds Investment Opportunity.

Mid-September during the first steep sell-off, we released Waiting is the Hardest Part, and on September 25th with the S&P 500 around $3,300 and almost 300 points and 10% off its recent all-time highs, we produced an optimistic Waiting Get Ready. The last two segments were titled waiting, but it’s about to get fun and profitable, and October 9th waiting but turning the corner slowly. Today will be the second to last in the series, which I will end next week. Today’s piece is entitled after the top one-hit-wonder song on Spotify. That’s the 1990s band called Europe and the song was The Final Countdown. A close second for this week’s title was the 1970s, one-hit-wonder song by the Stealers Wheel entitled, Stuck in the Middle.

What do I mean by the final countdown? Well, since late March, the investment team has been discussing almost weekly with clients and listeners that we saw a strong likelihood of a V bottom in both stocks and the economy most likely for mid-2020. Against almost all financial commentator opinions, this is exactly what happened with the S&P 500 making new all-time highs in August. Thank you, Jerome Powell and the Federal Reserve.

For the past two months, we’ve tried to educate our clients and listeners as to the normalcy of pre-presidential election volatility. All over, we have stressed the investment opportunity that this volatility brings if one can control one’s emotions and biases. The period of higher implied volatility is when long-term investors should be pushing their chips and dollars into the market, not abstaining or fleeing the markets.

We’ve had to educate our listeners and clients through the use of statistics and data as to why the back half of the fourth quarter of 2020 through 2021 looked like a major reacceleration in real growth, not just inflationary growth in our economy and a resumption of the secular bull market in 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 the late fourth quarter and 2021, regardless of who wins the upcoming election in November.

We’ve tried to share real-time data of the leading indicators, not a coincidence or lagging ones that say the sun is going to shine brightly, and the moon will be full during the holiday season in 2021. 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.

The overall difference in realized investment returns over a one to two-year period is very small. It is most dependent on the Federal Reserve, not who was elected president. We continue to believe that volatility around the election while an emotional event is a buying opportunity. The options market has been pricing this scenario all year, even in advance of the COVID outbreak.

Option market makers are some of the smartest financial and mathematic minds in the world. They get paid to sell insurance in real-time each and every day. There is a reason why most options buyers lose money trading options. The other side of these trades is just smarter and faster. I personally do not bet against these pros being wrong. When they are wrong, they are not wrong for long. We expect short-term volatility to continue over the next two weeks because this volatility should amount to noise come no later than say, Thanksgiving. Why? Because 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/or incentives. This is in addition to the Federal Reserve’s monetary expansion.

We personally may not like how much of our money politicians spend or what they spend it on, but regardless of who was elected, they will most likely 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 in the stock market and for certain companies. Does it matter to a long-term investor if they pass a fiscal stimulus bill now, two weeks before the presidential election in the first quarter of 2021? No. It might matter to the politicians running for reelection in DC, who appear as always to be trying to buy votes.

It may matter to the short-term trader trading news headlines. It does matter for the next few months to the millions of unemployed workers we have out there. It doesn’t matter much to a long-term investor if the timing is off by two or three months. Some investors started to realize just this point about two weeks ago. For 2021, does our economic growth and the stock market outlook change materially if we vote for a $1.6 trillion plan now, or if we vote for a $2 to $3 trillion plan in the early first quarter of 2021? No, it doesn’t. I will continue to argue until proven otherwise that a $1.5 to $3 trillion 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. In fact, the Federal Reserve literally just started implementing this program. I’ve been calling it QE5 earlier this week. 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 as an investor is not to like or dislike political outcomes. This defined accelerating return on invested capital, high-end stable return on invested capital, or in the case of higher dividend stocks, moderate and consistent return on invested capital to invest in for you. The stock market has been broadening out since the second quarter ended and the third quarter began. It started even though net, the overall stock market hasn’t gone anywhere. This is what the early foundations of a bull market look like. Large institutional investors jockey around trying to find things that will work better than what they’ve been holding onto for a while.

Long-term interest rates start rising. This is not 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, gradually rising long-term rates causing a steepening yield curve is a great leading indicator for accelerating real growth that is already happening throughout all financial markets, bond markets, stock markets, and commodity markets. This is exactly what transpired in front of the Democratic presidential win in 2012. It is also what happened 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.

Now what? The Federal Reserve has given us the roadmap for the next 15 months. On September 17th, the Fed told us exactly what they were planning on doing. They announced that they planned on growing their balance sheet through 2022. The Fed’s balance sheet was $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 tailwind, regardless of whom is elected president.

Even things like higher corporate tax rates in 2021 could be bullish for equities as historically corporations accelerate large capital spending in front of tax increases. This would pyramid another form of real growth in 2021 on top of the Federal Reserve liquidity service. Stock returns of up 38% to 40% from wherever the market troughs pre-election, and so far that’s around $3,200 is not out of the question under this scenario.

Stock returns of close to 20% year over year have happened this cycle each time there were huge outflows of equities like there event this year. We’ve already done both of these things two times this cycle. Post great recession, right after emotional presidential elections with opposite parties leading our nation against almost every economist and financial TV personality forecast, over the next 12 to 24 months to the financial markets. Jerome Powell is every bit, if not more important than who wins the election in two weeks. The reappointment of Jerome Powell in early 2022 is potentially as important, if not more important to your investment turns over the next 18 months than who was elected in the next 10 days. Each election periods, since the great financial crisis of 2008 to 2009, have shown similar patterns and stocks into and out of each election and the markets and economy showed similar responses. Post-election we want to be buyers of stocks into any pre-election weakness, which is also a normal weakness in October and early fourth quarter. Once again, for the rest of the fourth quarter, 2020, as well as 2021, the economic outlook and market outlook is improving while we are expecting another few weeks of volatility in the markets. [music] Of course, once the coast is clear to most bystanders, the markets will already be at new all-time highs, trending higher, and TD pundits will be declaring that the easy money has been made. Well, listeners, the easy money is made when others are scared or paralyzed and volatility is high. It always seems easy.

In the rearview mirror, don’t let politics cloud your investment judgment, stay the course or take advantage of other people’s emotions and as Warren Buffet says, be greedy when others are fearful, I don’t carve us. We are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisors should have a financial plan that is independent of the volatility of the public 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 through a customized retirement planning, many blessings. This is Chris Perez at O’Charley’s.

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 when created, but any site of data, statistics, and sources are not guaranteed content ideas and strategies discussed may not be right for your personal situation. It 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.