Early Bull Markets: “Buy the Dips” and Making Sense of it All

Join Chris Perras for the 11/13/2020 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 our weekly Stock Talk Podcast: Keeping You Connected to Your Money. When it hit a new all-time high on the S&P 500 early Monday morning, and that was near 3,625 on the back of surprise timing of positive Pfizer vaccine news. As of this morning, we were sitting near 3,525 on the S&P 500. That’s about 2% below the September 2nd’s daily closing all-time high of 3,588.

What has transpired the last few weeks? What has transpired is the markets have vaulted from 3,225 to 3,525, which if we close here today is a weekly closing all-time high. Are things any more certain than when investors were worried two weeks ago with the market about 10% lower? Let’s go ahead and walk through a few things. The election, while the election results are primarily in, and while the vice-president looks like he’s the apparent winner, the vote count is still being contested and with vote recounts and multiple states and legal bills being run-up, the outcome is still a little bit uncertain. It’s at least less certain than most election cycles.

How about the outcome in Congress? Well, the House of representatives was held by the Democrats, but the GOP and Republicans massively outperformed expectations taking close to 10 new seats. Republicans and conservatives out there, exhale deeply. This vote shows that we are far from a left-liberal country, regardless of those fears by many. Do we know what the final vote tallies will be with certainty or the Senate makeup? Well, no, won’t know that for another few months because my former home state of Georgia is holding that outcome up with their double runoff for both Senate seats whose final outcome won’t be known until early January.

How about the COVID virus? We obviously must have cured that virus given the stock market is at or near an all-time high. Well, no. The COVID virus has ramped up again in a horrible way, across much of America. However, earlier this week, positive vaccine data was released by Pfizer. Of course, it will only be minimally available through 2020 and not widely available until 2021, but the data was much better than the science community had hoped.

I’m sure you’re saying, Chris, we’re no better off than we were weeks ago when the markets were 10% lower, that doesn’t make any sense. With this, on my older son, Kyle’s 23rd birthday born on Friday, the 13th, I give you the title of this week’s podcast, Early Bull Markets, Buy the Dips- Making Sense Of It All. All year, we’ve messaged the same thing with increasing confidence since late March when the Federal Reserve stepped up to the plate to provide historic levels of monetary stimulus. Election years tend to be very predictable in their patterns. This cycle, they have been the resumption of our bull market, not a change for the worse.

We’ve shared with you the outcomes of the fourth quarter 2012 through the first quarter of 2014, and the fourth quarter 2016 through the first quarter of 2018, which had two very different philosophies in Washington D.C., and the results and the stock markets over the next 15 months were nearly identical. They rallied almost exactly 38% off the election lows. So far, the fourth quarter of 2020 looks to be a resumption of our bull markets and another repeat of that same pattern.

The main thing this year that has been extraordinary is the elevated levels of volatility since March caused almost exclusively by the COVID virus. Believe it or not, outside of that, it has been a very normal election year. For the last six months into the election, we’ve shared our thoughts and as much data as we could in order to convince our clients in advance of the election into either staying with their investment plan or becoming more aggressive, not less aggressive, into pre-election weakness. For those of you who have entrusted your wealth with us this year, we want to thank you for that trust and allowing us to manage your investment accounts throughout the year.

If you turned on the TV the past two weeks, you probably heard the financial news reporter waxing about the big rotation in the markets the last few days into value over growth, into small caps over large. Well, if you’ve survived the last four to six months listening to my podcasts, this should come as no surprise to you. Why? Because it’s been going on since July 4th weekend. This is only news to those who don’t look behind the scenes to things that lead stock moves and stock rotations. There are signs that lead to big institutions sloshing money from one sector to another.

The worst reason given on TV, well, that’s an easy one. That’s one evaluation. That’s one there cheap versus this or cheap verse that. Listeners, that is historically one of the worst answers you should ever listen to. Clients, I give you the key to being ahead of the curve, of being ahead of rotation nation as I call it. As we’ve discussed in previous podcasts, there are two parts of a Treasury bond yield, there is the inflation component and the real growth component. You can add them together and that’s what the US government pays you for interest on your treasury bond.

However, separating the components is where one can see behind in the scenes what type of sectors or groups should lead or lag the overall market. Let’s take this year, for example, USGGBE10 Index, which is inflationary growth. Inflationary growth collapsed during the March COVID economic shutdown but recovered all the way back to early February 2020 levels by September 1st, September 2nd, thereabouts. Not coincidentally, this recovery is almost precisely exact same pattern that large-cap tech stocks such as FAANG and growth at any price stocks took with mid-August through early September, marking the peak in their relative performance versus the stock market.

If one were to look farther back in time, this trend has largely been in place since 2010 and more recently been in place since early 2018 when the Trump tax plan was passed. Conversely, if one looks at the real growth component of treasury yields as represented by USGGT10Y Index, one would see that since mid-August or early September, it’s been trending higher. Not coincidentally, since mid-August, small-cap stocks, value stocks, and traditional cyclical stocks such as Caterpillar, Deere, and other commodity stocks, have outperformed secular growth stocks.

Looking farther back in time, one would see this is the exact same pattern coming into and out of both the 2012 and 2016 elections with yet overweight extending with fits and starts for almost 15 months into the early first quarter of the president’s second full year. Overall, where does this lead us now? Well, it leaves us in the same position we spoke about two weeks ago when the market was 3,250 pre-election.

We are in a bull market, one that should be reaccelerating up starting late November and early December, almost exactly three months from the date of its early September peak. One that short of national shutdowns, again for the virus or a reversal of the presidential election results should limit downside moves and the overall averages to 3% to 5% for quite a while. Economically and calendar-wise, the risk window is closing and what should emerge on the other side is a buy the dip mentality by investors.

Remember back to the good old days when stocks never seemed to go down, back to the days of almost constant underlying bid to the market? Remember way back when volatility was so low, it looked like fake data or fake news? The VIX index, which is a measure of volatility, traded at its normal low minimum of about 12 to 12.5, not at its currently elevated level of almost 30. Remember those days? Well, it was only three years ago.

Remember when you longed for a pullback in stocks, a correction of 10% down to invest some stock that you wanted to own way back to 2017, only three years ago, and that opportunity never came because the most the market ever dropped was 3% to 5% peak to trough? In 2017, it didn’t even drop more than 2% to give you a buying opportunity. The S&P 500 closed 2017 at 2,675. Now, here we sit in early November 2020 with a hotly contested presidential election somewhat behind us, and with COVID virus interrupting a 12-year expansion, the S&P 500 sits at a new weekly closing all-time high of almost 3,525.

That’s not bad for three years. Including the turmoil of 2020, it’s almost exactly 10% per year compounded. That’s a bull market. That’s what stimulative market and consistent government policies can look like. What was that word I used a few weeks ago? We first used it months ago in our second half outlook entitled Running With the Bowls and the Four S’s, that word was stimulus.

We already know the Federal Reserve’s plan for monetary stimulus in 2021 and 2022, and they haven’t even started implementing it yet. We are calling it QE5, much like 2012 when the Federal Reserve paused before implementing QE3, the Fed is waiting to go all in QE 5 until the election has passed. Throughout all the financial markets, bond markets, stock markets, commodity markets. We’ve seen this movie and story before. What transpired after the Democratic presidential win in 2012 and in front of the Trump win in 2016 is happening again behind the scenes. The political party didn’t matter. Bull markets can begin with a blue or red flag. For now, our first-half market outlook has the S&P 500 optimistically reaching between 4,000 and 4,100 by early summer with further gains likely through the second half of the year. By further gains, I’m talking about 4,600 optimistically, to 5,000 on the S&P 500 if there’s a melt-up scenario into early 2022.

Each election period since the great financial crisis in 2008 and 2009 has showed similar patterns in stocks into and out of each election, and the markets and economies showed similar responses post-election. Easy money is made when others are scared or paralyzed and volatility is high. This is how early bull markets look.

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. Call us at 281-822-1350. We are here to help you on your financial journey in retirement through customized retirement planning. Have a great weekend, stay safe, many blessings, and happy birthday Kyle.

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.