“Ho Ho Ho” Bows to “Let’s Make a Deal…or Two…or Three”
On the 12/13/2019 edition of Stock Talk, CIO Chris Perras covers recent major events in the news, and how they may impact the markets.
Chris Perras: Good morning. My name is Chris Perras. I’m Chief Investment Officer at Oak Harvest Financial Group here in Memorial Houston, Texas. Welcome to the December 13th edition of our weekly Stock Talk Podcast: Keeping You Connected To Your Money. Sitting at another, I’ll call it skeptical by most counts, a new all-time high of the S&P of 3,165 this morning, I want to follow up on last week’s podcast that was titled, when the S&P 500 was around 3,115, last week it was entitled, It’s Ho, ho, ho Santa, not, oh no, oh no, oh no, Mr. Bill Time, Santa packs up his sleigh for a December rally.
Today’s follow-up podcast is entitled, Ho, ho, ho bows to let’s make a deal or two or three. As of this morning, the S&P 500 sits around 3,165. The beginning of this week saw the market sell-off of less than 1% on China trade concerns. This was followed by four positive events that have concerned 95% of investors all year. First America signed a new round of trade agreements with Mexico and Canada called the USMCA. The USMCA is essentially NAFTA 2.0 with a few updates. The pack has been tweaked to include changes for automakers, some stricter labor laws, and environmental standards. Some intellectual property protection and digital trade provisions.
The second thing that happened is the Federal Reserve met mid-week and confirmed that it was on hold on the interest rate front, and it was standing by its Treasury and repo market stabilization facility through February of next year. Listeners, that’s the easing is easing monetary policy that the team at Oak Harvest has referred to for almost nine months.
Third, top congressional negotiators said Thursday that they had reached a deal to approve $1.3 trillion in federal spending for 2020. This is going to avert a government shutdown next week right in front of Christmas. Finally, and probably the most important to everyone, was this week’s short-term market movement around the news early Thursday morning that President Trump has agreed to finalize a phase one trade deal with China. This news was enough to send the S&P 500 up sharply yesterday. This morning, we wait for confirmation or denial from both China and the White House to if, when, and what a trade deal with China might or will happen.
As of this podcast recording, I do not know what the outcome of these trade talks and news releases will be. Honestly, in the short term, the team at Oak Harvest doesn’t care much about if the direction of the market next week is up or down. I would actually like some market weakness next week to find some more attractive entry prices. Because so far, it’s been a very normal fourth quarter in a fed easing year.
As we have highlighted all year, the overall year-to-date path in returns of both the stock and bond markets mirrors the last 10 years of this bull market during times when the Federal Reserve was easing monetary policy. Listeners, please remember, rule number one, do not fight the Fed, and rule number two is the Federal Reserve controls the overall direction of volatility in the markets as well. For Oak Harvest clients, please feel free to log onto your client portal to see and reference a few of the charts that we will provide as background information for a few points and topics that follow.
The most recent time period that we have been mirroring and the team at Oak Harvest believes we will continue to mirror through the first half of 2020, That time period was the second half of 2016 through the first half of 2017. We’ve talked about this all year, and it is either an amazing coincidence, blind luck, or just good analysis, but this continues. That period was the last two Goldilocks periods that the stock markets have gone through this cycle.
Please recall that there are three major Goldilocks indicators and two minor real-time indicators that you can follow for stocks because they help dry future earnings growth. Those Goldilocks indicators are the direction of the US dollar, the direction of long-term interest rates and the yield curve, and the direction of oil. The other two minor factors that you can follow are both copper and lumber pricing.
We’ve walked through those indicators multiple times over the last 12 months, and I will continue to highlight them going forward, but I want to highlight a few new things that have been going on in working in the markets since August of this year because I want to emphasize that once again, the team at Oak Harvest builds diversified portfolios for our clients. By diversified, we mean, we invest broadly across asset classes and industries. Sometimes these asset classes do better than the overall market, and sometimes they might lag the market. We’ve referred to this rotation as taking turns at the top.
Oak Harvest clients, go ahead and you can access this reference table and slide by logging onto your client portal. We use a diversified group of asset classes as tools for growth because there are times when investors favor large-cap stocks over small-cap stocks. There are times, again, when they favor international stocks over domestic.
For example, through August of this year, investors shunned emerging market stocks for almost a year in favor of US domestic large-cap stocks. However right around early September, a shift in the market began, and as clients can see on the chart in our portal, right around early September, our emerging market stocks as represented by the EEM ETF, pivoted off its bottom, which is around $38 a share, and started outperforming the S&P 500.
Why exactly did this start happening then? Because this is precisely the time that the dollar, our currency, the US dollar peaked against a basket of all other emerging market currencies. Whether it’s China or Korea or India, peak an emerging market currency, put a basket together, the dollar peaked against those currencies, right then. Emerging markets stock relative performance relative to the essence S&P 500 and other classes is heavily dependent on a weakening dollar for outperformance.
Our emerging market stocks have been handily beating the S&P 500 this third quarter and fourth quarter of this year. The team at Oak Harvest believes that this trend should continue at least through the second quarter of 2020 as the Federal Reserve is staying easy, and that will continue to weaken the US dollar and support emerging markets and other international assets.
Likewise, small-capitalization stocks is another asset class that lagged the market in late 2018 and early 2019. However, as Oak Harvests clients can see on their client portal, small-cap stocks as represented by the Russell 2000 or its the IWM ETF, began outperforming the S&P 500 in August as well. This outperformance started almost exactly when long-term interest rates bottomed in mid-August.
One can see on the chart, and this is much to the dismay of the financial press, that small-cap stocks have been outperforming the S&P 500 really since last year during the market lows in December. The team at Oak Harvest believes that this outperformance will continue into the second quarter of 2020 as growth and inflation reaccelerate due to what? Due to yes, the lagging effect of easing monetary policy by the Federal Reserve.
What do emerging market stocks and small-cap stocks have in common? Are they places that investors “hide or stash their money when times are uncertain?” No, they are offensive-minded asset classes that work when economic growth or inflation is accelerating. All year, including as recently as two weeks ago, the majority of the financial press and financial advisors were encouraging investors to go ahead and play defense. They were encouraging people to buy staples and utility stocks. They were touting low volatility strategies.
Listeners, when the Fed pauses and eases, you wait six months from the pause and then you play offense. When volatility spikes, you use those infrequent opportunities to buy or offensive-minded stocks leveraged to economic growth and inflation. Why? Because the Federal Reserve easing and tightening policies work, but they take six to eight months to gain traction.
Listeners, if you take something new away from this podcast, I ask you that you take this. Please, listeners, remember that this cycle since 2009, the Federal Reserve has been the gatekeeper of the overall direction of market volatility. By direction, I mean over quarters and months. I mean over investing time horizons. I do not mean to imply that they can calm and volatility over weeks or days or more importantly, intraday volatility that is caused by a tweetstorm.
If your advisor stopped buying stocks for you this summer because he was concerned about the outcome of the China trade deal, only to recently say they’re buying stocks again after they’ve already rallied 12% to 15% in four months because of a trade deal is coming, please 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. This is Chris Perras, Chief Investment Officer at Oak Harvest Financial.
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.
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.