High Hopes and IPOs

Join Chris Perras for the 12/11/2020 edition of Stock Talk!

Chris: Hi. I’m Chris Perras, chief investment officer at Oak Harvest Financial Group in Houston Texas. This is the weekly Stock Talk podcast: Keeping You Connected to Your Money. This week’s podcast is titled High Hopes and Stock Prices, Panic in the Disco, and in the IPO Market. As of this morning’s down open, we’re sitting around 3,650 on the S&P 500, which is about 2% above the market short-term top on September 2nd. With equity futures having traded down last night, that put it actually overnight at a flat December. I’ve been asked the past few weeks, “What concerns do you have right now? What worries you?” This podcast should give listeners an idea of what’s on my mind, nor I remain very positive for 2021 what I think that concerns are in the market.

First off, I can feel it, I can hear it, and I can see it in the markets. What is that “It”? Well that it is FOMO, F-O-M-O, the fear of missing out, the fear of, “I’m not making enough money.” The fear of, “I’m not being aggressive enough when others are.” That fear is completely opposite, the fear most investors felt late in the first quarter throughout most of the year into the election, when many retired investors were liquidating stocks at worse or sitting on their hands at best. This week, the overall markets were basically flat. However, individual and speculative stocks like Lemonade and Roku were up 20 to 50%, and new IPOs like Airbnb, AI, and DoorDash traded up over 100% from their IPO prices. This was on top of those IPOs already being priced up 100 to 300% over their down private venture capital rounds that were done only six to seven months ago.

I often get asked what the internet bubble was like in the late 1990s. I was managing a fund in San Fransisco in the early days of that bubble in 1998 and ’99. Well, listeners, the early days of that bubble looked a lot like this from a technology standpoint, and hence the title of this week’s podcast, High Hopes and Stock Prices, Panic in the Disco and the IPO market. 

The Team at Oak Harvest has messaged all year, we expected a strong pre-election fourth quarter in early 2021 in the markets, and the economy because the Federal Reserve was providing ample liquidity to the financial markets. At the same time, we had faith in the scientific community’s ability to figure out the virus in a timely manner. On May 8th, long before the mainstream media was discussing it, we aired our weekly podcast that was entitled, The Robin Hood Rally, and Teaser for Optimistic outcomes.

At that time, the S&P stood at around 2,900, and the TV news channels were filled with non-stop talk of stock being overvalued, and the S&P due to retest its March lows of 2,200. They were busy talking about historic times and calling for replays of the great depression, or replays of the Spanish flue. What was the team at Oak Harvest doing? We were using data, not emotion or nebulous arguments, to help guide our decisions. So much so that at the end of that very podcast way back on May 8th, what did I do? Well, I reminded listeners that post-1918/1919 Spanish flu and all of its death and economic destruction short term. What actually happened in the economy in its stocks? Yes, we experienced the roaring ’20s on the back of a younger generation reentering the workforce, forming families, spending money on pent-up consumer demand, and investing in stock markets.

In subsequent podcasts, we laid out our case for a strong fourth-quarter rally that would start in advance of the election, not after, and could carry the market to 3,800 by year-end, and 4,000 sometime in the first quarter. This week’s market action within the technology sector and more specifically the IPO and [unintelligible 00:03:58] should be living proof that all is good in the financial markets. So good that investors like myself who manage money throughout the internet bubble start having flashbacks to that time period. Having the prior experience of living through it and managing money during it, I can start to see a very similar resemblance to the early days of that move which should give anyone pause, but it should not stop people and investors from investing in their normal systematic way.

I caution my listeners if you didn’t want to up your allocation to stocks or get more aggressive in the growth component of your allocation over the last nine months, now is probably not the time to shift your overall strategy to get more “growth” and speculate more. You probably are allocated correctly for your real long-term tolerance. The second worry I have is political and fiscal. Outside of pure political games, propaganda, headlines, and ego, I cannot for the life of me understand why the cohort re-elected in Washington DC has not signed a second stimulus plan to help get the economy through the upcoming winter months. This bickering and stonewalling along with money flowing out of large-cap technology into more speculative names, more than anything else, has been the cause of the overall market’s stall this week.

I do still believe that rational minds will prevail, and we will get a stimulus deal in the next few weeks. Third and finally, the thing that concerns me most about the tock markets down the road isn’t valuation or speculation, it’s actually forward fundamentals mid-first quarter. What am I talking about? Well, seasonally what happens, if the fourth quarter fundamentals are really strong is that most Southside analysts raise and jack up their price targets to justify where stocks are trading. This usually coincides with the short-term peak in stock prices. Go ahead and think back to late January 2018 on the back of the Trump tax plan, and all those analyst target price increases. What happened with stocks? Well, stocks topped and fell sharply short term.

It actually the exact opposite dynamic of what happened this past March and April when analysts were slashing estimates and price targets. What happened back then? Well, stocks bottomed. Most of the time stocks are early to fundamentals both ways, they move up before things are really improving, and then when things are slowing they actually peak a little before then. This leads me to a more specific concern I have for a mid-first quarter if the markets have rallied substantially in January as we still expect. That is one of indigestion. What do I mean, and what concerns me?

Well, listeners, I’m pretty sure there’s rampant double ordering going on in semi-conductors in the yearend. Semi-conductors have become the building block for the technology economy, as is apparent to everyone by now the COVID pandemic has rapidly accelerated the adoption and demand for newer technologies from anyone who can afford them globally. This is at the same time the COVID virus massively disrupted supply chains throughout the world. If you think the likes of Apple who makes your phone and computer, or Sony who makes TV and game consoles, and even Tesla and Ford who makes cars. All these companies who’ve seen a rampant acceleration in end-user-demand, aren’t ordering more semi’s than they currently need, and stockpiling them just in case, you’re putting your head in the sand.

Listen, my household has four extra cases of toilet paper and paper towels, and if you don’t think that similar behavior is rampant throughout the business community right now, you probably haven’t looked behind the scenes of early business cycles. At Oak Harvest, we’re trying to help you see what might be around the corner before others do, or give you some answers to questions even before they’re asked. Hopefully, we are helping educate you in advance of what you might hear on TV news, financial networks or shows, or on your social network feeds. We are in a bull market, one that should be just accelerating up. While I’ve listed a few concerns of mine for the mid-first quarter, this is how early bull markets look.

At Oak Harvest, we are a comprehensive long-term financial planers. You and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. Give us a call at 281822150, we are here to help you on your financial journey throughout retirement through a customized retirement planning. Many blessings and have a great weekend.

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 and 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.