It’s “Ho, Ho, Ho,” Santa, not “Oh No, Oh No” Mr. Bill — Santa Packs His Sleigh for December Rally
On the 12/6/2019 edition of Stock Talk, CIO Chris Perras reviews recent positive and negative market calls from the financial media, and covers several factors that may impact the market during December.
Chris: My name is Chris Perras. I’m chief investment officer here at Oak Harvest Financial Group in Houston, Texas. Welcome to the December 6th edition for our weekly Stock Talk podcast, Keeping You Connected to Your Money. Sitting here around 3115 on the S&P 500 this morning, this podcast is entitled, It’s Hohoho. Santa’s not. Oh no. Oh no. Mr. Bill Time, Santa PAX Slay up for December. As of this morning, the S&P 500 sits around 3,115. The last week of November in the first few days of December brought with it a pullback in the stock market caused by ongoing concerns of the timing and magnitude of the China trade deal.
At least that’s what the convenient excuse is. The reality is, we were overbought, things were overhyped and a pullback in early December is normal. This pullback transpired over about three days and amounted to almost exactly 2% from the market’s peak to its low this past Tuesday. For the last few weeks of November, by the way of these podcasts and our weekly weekend update, the team at Oak Harvest had said, this pullback should happen. We warned our investors in front of Thanksgiving, that calls for a stock market melt-up at 3,150 on the S&P 500 were risky at best and absurd at worst.
We cautioned our listeners that one, the talk of a Santa Claus rally, two, the talk of all-clear for equities for straight-up December year-end market rally, and three, talk of no volatility were all premature. In fact, I’m going to take a minute and bore my repeat listeners and read an excerpt from our November 22nd podcast, almost exactly two weeks ago. It read as follows two weeks ago. “Most of the financial meter is now calling for a Santa Claus rally or a strong seasonal upturn in the markets from here. This of course is after the same people waited over 200 to 250 S&P 500 points to say, it’s okay to buy.”
“After being late to the fourth-quarter rally, not surprisingly, these same individuals have failed to tell their viewers that a normal fourth-quarter rally has a late November, early December pullback of up to 2% and another few weeks of choppy up and down trading in mid-December. The team at Oak Harvest did not throw some nebulous in meaningless range of possible down moves out there. We did not say, like about 90% of the financial press, that we expect a 5 to 10% pullback.” Listeners, please find me another profession besides weather forecasting, or being an economist that professionals with a straight face can make statements like that and be taken seriously or be taken as experts.
It happens five to 10 times a day on financial news networks and no one bats an eye. It should come to no one’s surprise that many of those same individuals who called for a Santa Claus rally and a melt-up into year-end at the very top of the markets at the end of November and who all missed the October pivot up in the stock market are already loudly declaring there’s at least 10% downside in the market if there is no China deal. The team at Oak Harvest disagrees with this premise entirely. The fact is that in a normal year, the Santa Claus rally that is often talked about starts from a down level in early December, not a high level in late November.
That is why this podcast is entitled. It’s ho-ho Santa Claus time Not, oh no. Oh no. Mr. Bill Time, Santa packed his sleigh, this packs Tuesday at about 3,085 on the S&P 500. You will hear all sorts of talk about a Santa Claus rally over the next three weeks. Please listeners ignore it. The fact of the matter is that December is normally one of the better percent return months of the year for the stock market because late November and early December are usually weak. Most of the return in the month of December comes in a handful of days during the month after early month weakness.
In December, overall market liquidity is very low as individual investors are wrapping up tax positioning and shopping for gifts for loved ones and not shopping for stock market bargains. Moreover, instead of stock buybacks, most corporations are busy hoarding cash for the year-end balance sheets. Yes, listeners, we are in the dead zone. Finally, pension funds are waiting to rebalance their portfolios closer to your end.
For those of you who have chosen to listen to this podcast into its entirety, I want to leave with you a preview of the Oak Harvest investment team’s outlook for the first half of 2020. This is a little early Christmas gift for patient listeners of this podcast. I’m going to remind listeners, this is subject to change based on market conditions and the economy, but we will update our clients of our thoughts if things change and we will be providing a more thorough outlook later this month. From the past Tuesday’s lows of 3085-ish on the S&P 500, our current base case market model has a move up in the S&P 500 of over 5% to over 3,250 on the S&P 500 into early February of 2020.
The fact is the math behind the market says that a move higher than that up towards 3,300 is probable, which is about 7% higher than this past Tuesday. That’s a very strong return for three months. Moreover, a move even higher than that for the first quarter of 2020 is possible. If it happens, it should not be sustained for long during the first quarter of 2020. In other words, if we get a rapid acceleration in February and March, we would be pulling forward expected returns from the second quarter of 2020 into the first quarter of 2020. What does it take to get there? First, it takes more of what we’ve seen since January 4th of 2019, when the Federal Reserve reversed course and started easing. It takes continued Federal Reserve easing or easy monetary policy. As you have heard time and time again on these podcasts, how it has done does not concern us, “easing is easing.”
Secondly, it probably does require some truce on the trade front with China by year-end. Does it have to be a great deal? No. Does it have to be a perfect deal? No, it just needs to get done so that investment can reaccelerate in 2020. Third, it requires the normal stock buybacks to return in earnest to the markets after we exit the December dead zone period at the end of December and in early January.
It requires them to ramp their buybacks as they normally do through late February. 4th it requires the normal 401(k) and retirement savings inflows into the market that restart from essentially zero at the beginning of each calendar year. These inflows are an added source of buying that is very minimal near your end. Think of your payday automatic 401(k) or IRA contribution. That is what I’m talking about. Finally, what could happen under this very normal scenario? Volatility would go down even farther than people think that lower volatility would embolden the latecomers to buy stocks.
Then, and only then might we get a little quote melt-up that has been talked about for the last six months and has not existed since the fourth quarter of 2017 and January 2018. Under that mini melt-up scenario in the first quarter of 2020 mathematically a target of well over 3,300 and almost 3,400 could be reached if volatility fell to low levels in the first quarter. Know these targets aren’t guaranteed and don’t have to be reached. However, under current market conditions, they are achievable. If your advisor stopped buying stocks for you this summer because he was concerned about the economic signals only to recently say they were buying stocks again for a year-end or Santa Claus rally, right before the recent market decline. Give us a call at (281) 822-1350.
Selling fear and buying greed is not a systematic investment plan. The team at Oak Harvest wants to help you navigate your retirement. We want to help you manage your emotions around your savings, and we want to make sure that you only have to retire once in your life with a customized retirement planning, many blessings. This is Chris Perras, Chief Investment Officer 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 future results.
CFA®, CLU®, ChFC®
Chief Investment Officer, Financial Advisor
Chris is a seasoned investment professional with over 25 years of experience working with some of the most successful money management firms in the world. Chris has made it a point in his career to adapt as the market landscape changes, seeking to utilize the appropriate investment strategy for a given market environment. His transition from managing billions of dollars at the institutional level to helping individuals and families retire is guided by a desire to see first-hand the impact he is making in the lives of clients at Oak Harvest.