3 “S”s: Spring and Early Summer Seasonality

Stock Talk: More “Normal” Patterns. Did algorithms used by ETFs and index funds drive up the market last week? Chief Investment Officer Chris Perras for Oak Harvest Financial Group, a wealth management and financial advisor in Houston, Texas, shares insights on recent action in the markets. Chris also looks ahead to this summer and the second half of 2021…

Chris Perras: Hey, good afternoon. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We are investment management as well as a retirement and financial planning consultant in Houston, Texas. Welcome to our April 23rd weekly Stock Talk Podcast: Keeping you connected to your money. I took a few vacation days off last week, and James McFarland, our Senior Portfolio Manager, brought you a podcast episode on what happened in the first quarter, and what we expect for the second quarter. I wanted to do a follow-up piece on our ongoing thoughts for the next two to three months. This podcast title, The 3’s: Spring and Early Summer Seasonality — More Normal Patterns and Rotations.

While I was out of the office, the S&P 500 accelerated up last week, closing the week at a new all-time high of around 4185. The main reason given on the financial channels for last week’s move up was a strong retail economic data. Listeners, I find this argument fanciful. Why? Because at the same time the data came out, long-term interest rates rallied. They did not sell off as one would expect if the move was based on strong data driving the market. No, I attribute the April 15th and 16th move up in the S&P 500 to something much more normal.

April 15th was a payday. Yes, your 401k dollars went from your employer to Vanguard or BlackRock or whomever manages your company’s 401k plan, and those companies took your money and they bought stocks on Thursdays. They bought stocks, and they bought bonds, regardless of their prices. Why? Because that’s what the index fund and the ETFs do.

Listeners, the S&P 500 was already up 20 to 25 points that morning before the economic data was released. Of course, the markets, they close the day on their absolute high. A dead giveaway that this was a day of price agnostic buying by index funds and ETFs driven almost entirely by money flowing into their funds, and then into stocks. It just so happens that their algorithms that the funds use were obviously off in their math calculations about how much volume of shares we trade throughout the day. They were forced to buy and buy and buy and buy everything up until the final closing tick on the day.

Additionally, with Friday, April 16th, being an option expiration day, that dynamic contributed to the market’s upside spike. As anyone who had sold calls as a hedge to generate income, they were left scrambling, buying back those options or the stocks that they really didn’t want to lose. This was at the same time big 401k providers were agnostically buying stocks. That’s how you get a 50 to 75-point move in the S&P 500 that happens in two days with almost no downtick.

The first two days of this week saw the markets give up the majority of those gains from Thursday the 15th and Friday the 16th. While Wednesday saw us rally over 55 points up to close back at 4173. Then, yesterday on Thursday, with most investors trying to process earnings releases and individual company outlooks, with every other stock market in the world closed for trading on Thursday, everything looked cool and calm until around lunchtime when a headline hit Bloomberg News about the Biden tax proposal, and in the span of an hour, we gave up Wednesday’s entire move in the S&P 500.

If an investor is watching these intraday and daily moves, or trying to trade them, they are most likely going to be whipsawed back and forth. Weeks, like the past week or exactly where the team at Oak Harvest said two weeks ago in our weekend update, we progress from a buy everything mode to a go-slow and pick your spots mode. Why do we say this? Is it because the S&P 500 is already up 10% year-to-date, and we think the gains for the year are already in the rear-view mirror?

That’s a no, and I mean, that’s a resounding no. Listeners, since 1991, so over the last 30 years, when the year-over-year price change in the S&P 500 was over 30% year-over-year. That’s a big gain over 12 months. This has occurred 10 times over the last 30 years. Right now, we’re on the 11th time. Over the subsequent three months during those 10 years that that happened, the average loss in the S&P 500 was almost 3%. It was -2.9%. There were only four years out of the 10 years that there was a gain. On average, you were down about 3%.

If you look a little further out over the subsequent six months, the average gain was 1% and the occurrences were 60% positive. Okay, so that’s just numbers, Chris. Here is where the fun begins. Here is where the stats that I like start. When you start looking out farther, after nine months, the average gain for the peak was 8.1%. That’s on top of the gains that you’d already receive year-to-date, and that was for all 10-time periods, 100% of the time. After 12 months, the average gain was 13.5%. That’s above the all-time high they reached late in the first quarter, early second quarter, and 100% of the time it was positive.

Now past performance is no guarantee of future, but I like those odds. I like staying with that trend, putting up with some spring and early summer chop and slop should be well worth the price noise over the next two to three months. We are in that time of the year. We’ve said this many times before. It’s a very normal presidential cycle. Please go back and reference 2013 and 2017 as nearly identical paths, rotations, and stock and bond returns were evident in those years. Moreover, this isn’t to say that the overall market doesn’t make new all-time highs in May or early June. Heck, I think this can happen again, as almost everyone on TV is now calling for a market correction forthcoming.

Seemingly, everyone is now front running the old, “Sell in May and go away,” saying. That’s a historic saying that is broadly, wrongly parroted in this representative. You have heard me discuss the saying in the past. My thoughts on it haven’t changed much because the data in the stats have not changed. It is generally misused and abused. Historically, if you analyze the data, the true timing is that you can sell Tax Day, and walk away for the summer and not miss anything net. The keyword there is net.

This doesn’t mean that you lose money long-term if you hang in there around stocks during the summer. It means that there’s usually one decent uptick in volatility in late June, and then, again, in September that makes it look and feel as if the investor is just spinning their wheels. However, being a patient investor, looking for longer-term opportunities, these are the times an investor should be waiting on and adding to their favorite long-term growth stocks or initiating positions that they did not have a chance to buy before.

We’ve spoken about this period of late June and the July 4th weekend being the most likely timing for the next tactical summer buy. We have even gone as far as disclosing some of the investment teams’ special sauce for seeing this kind of timing out in the future on our prior podcast. As for the markets, the investment team at Oak Harvest is already looking out for a better position for the second half of 2021. We’re looking at companies that investors should be looking at with the glass-half-full attitude come the back half of the year, and in the first half of 2022.

After July 4th, and likely no later than Labor Day this summer, big investors will once again be looking forward. They will be looking out to the second half of 2021 and all of 2022, and what they’re likely to be seeing is they’re going to be looking for higher secular growth companies. They’re going to be looking for companies that don’t have a cyclical bent to them. They might be looking at them because they’re likely to see that the economic cycle has started to peak later this year, and the third quarter of this year.

Cyclical companies that have big earnings leverage are going to be much, much higher in valuation and not as interesting for 2022. Big investors who’ve been chasing and pushing up value stocks since July, or September of last year, will start to ask themselves, “Am I paying peak multiples for peak EPS in 2022 in these names 6 to 12 months in advance?”

Listeners, we’re Oak Harvest. We’re comprehensive investment management and financial planning consultant located right here in Houston, Texas. Give us a call to speak to an advisor. We can help you craft a financial plan that is independent of the volatility of the stock markets. Give us a call at 281-822-1350. We’re here to help you on your financial journey through retirement with a customized retirement planning. Many blessings and have a great weekend.

Voice-over: All content contained within Oak Harvest podcasts 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, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice.

Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax, or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss, and past performance is not indicative of future results.