3rd Quarter Recap, 4th Quarter Reprieve

On this week’s edition of Stock Talk, Oak Harvest recaps what happened in the third quarter and looks ahead to discuss our view of what’s coming for the last quarter of the year (Hint: Our outlook hasn’t changed!)



Chris Perras: Hey, happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We are an investment and retirement planning, financial advisor, located in Houston, Texas. Welcome to our October 8th Stock Talk Podcast, Keeping You Connected to Your Money. Well, the third quarter is behind us and this podcast is a recap of the quarter that was and our view of the quarter ahead. It’s titled Third Quarter Recap, Fourth Quarter Reprieve.

For Oak Harvest clients who are familiar with our Second Half 2021 Outlook, first published way back in June, our outlook hasn’t changed. If you want to, you could skip this podcast. For new listeners or for new clients who missed it, please go to our website at oakharvestfg, as in “Financial Group”, .com. Look for the Investment Management dropdown tab in the center of the menu, and then look for the Market Commentary tag. You can see all of our bi-annual outlooks, they’re all on the website.

Well, the S&P 500 gained slightly more than half of 1% over the third quarter, closing essentially flat for three months. Financials, healthcare, technology, communication services, and utilities were the sectors that closed the quarter positive. However, only financials closed up over 2% percent. By style, in the US, large-cap growth eked out a positive 1.2% gain, while small-cap stocks, in general, were down over 4%, and small-cap growth brought up the arrear down over 5.5%. Internationally, developed markets were down minus 1%, with Japan leading at up over 4%, while emerging market countries returned a dismal minus 9%, led by horrifying declines in China down negative 18% for the quarter, and Brazil down negative 20% for the quarter. Once again, teaching investors that communism and socialism are not good for investor returns. US real estate had an up quarter of roughly 1.25% and remains a top performer year-to-date after experiencing a large COVID-induced decline last year.

For all the ongoing ESG talk by politicians in DC, the energy sources, we still mainly use those old-line dirty energy commodities, such as natural gas, oil, and coal. Well, they all experienced double-digit gains with both coal and natural gas rocketing over 50%, 5-0% over three months. As for the TV press and newsletters’ favorite defensive inflation hedge, well, gold was down 1%, and its ugly sibling silver was down over minus 15%.

Inflation hedge, I still can’t find any supporting data to back up those claims. Send in my way If you have the data. For all those screaming “Inflation” earlier this year and “Stagflation” now, interest rates as measured by the ten-year treasury market rose by 8 basis points over the third quarter to about 1.55%. That sits where? Well, it sits exactly where we sat pre-COVID for interest rates in February of 2020, and at the same level, it stood in the summer of 2016, right before President Trump was elected. Going backwards, it was at the exact same level in December of 2013 when President Obama was elected to his second term.

Yes, the Fed’s purchase of bonds is keeping interest rates below where they should probably be, but no, in my opinion, a return to 1970s inflation, it’s not in the books. It’s still not right around the corner, which brings me forward to our forward outlook for the rest of the year, and here it is.

Shockingly to some continued skeptics, the team at Oak Harvest continues to see a substantially positive fourth-quarter rally. No different than we did when we panned our Second Half 2021 Outlook in June. I’ll keep our reasons concise. One, even with the swirl and concerns over a Federal Reserve tapering schedule coming in November, we still do not think it’s time to fight the Federal Reserve. I refer our clients to log onto our web portal and see the two accompanying charts on this topic. First, the same chart we posted in the past, the Fed’s balance sheet versus the S&P 500.

We updated the Federal Reserve’s balance sheet chart versus the S&P 500, which has been a great predictive tool for the last 10 years. What’s it saying now? It’s saying the Federal Reserve’s balance sheet is still growing and still accelerating, currently up about 20% year-to-year. The S&P500 is nearing the same discount to that balance sheet that we last saw when? Well, that was October of 2020, which of course, was really the last meaningful buying opportunity into the 2020 presidential election when everyone seemed to be scared.

Listeners. at the sake of sounding repetitive, it’s still not time to fight the Fed. Even when the Fed begins its tapering process, history has shown that stocks can continue their gains, albeit at a slower pace. The second chart that’s been uploaded to our web portal that clients can see is that during most of the recent Fed tightening cycle of 2015 through 2018, the markets wobbled a bit at first, and then proceeded to march higher for the next two to three years. We repeat, it is still not time to fight the Fed.

The second rule we are currently sticking with through year-end is no, it’s not different this time. Three charts we’ve uploaded are representative of this. The first is investor sentiment, which time and time again has proven to be a fantastic contrary indicator.

Investor sentiment as measured by the AAII, that’s the American Association of Individual Investors, that’s generally retail investors, they call their bears the bull indicator, hit a year-to-date high than over 41% last week. That’s nearing its magical 50% number that at last hit when? In October of 2020, near their pre-election lows, and once again, that was one of the last few decent buying opportunities. Prior to that, the last time it was near 50 was March of 2020 at the COVID bottom, proving once again that the thundering herd is almost always wrong at extremes.

The next chart, I bring you back to one of my favorite misunderstood topics in the market, volatility. I do this after receiving many questions on this topic over the past two to four weeks. For many investors when the stock markets were red and down and receiving no calls, yesterday when the markets were ripping higher by about 1.5% percent the first hour or two, proving once again what behavioral finance teaches us. Losses are four to five times more painful mentally to most investors than gains are.

A minus 1.5% move in the market down and a positive 1.5% move in the market up are exactly the same amount of volatility. However, I have never once received a call from our investor on a big update, like yesterday saying, “Hey, Chris, my portfolio is up too much today, get me out.” I’m still waiting on that call. I’m looking forward to it coming to my phone one day.

While short-term volatility as measured by the spot VIX has risen since that China Evergrande warning about two weeks ago, longer-term volatility, which is tradable and is a better measurement of market risk, has barely budged and has been consistently for sale for the time period beyond mid-October. That was the truth this week. Even more so as the S&P 500 probed 4,300 multiple times the last five to seven days, each time it did that, big sellers of volatility came in expecting the markets to go up over the next three to five months. Our work continues to show we are setting up for a decline in volatility into and through the fourth quarter, which is the historic norm, which is bullish.

Finally, we bring you back to how normal of a year this has been with a chart of the seasonal path of the S&P 500 to the last 20-plus years. I defy anyone out there to look at that chart and show me the difference in this year, 2021, its upward path in the markets versus the normal average market path, particularly under QE the last 10 years. As much as the TV’s news outlets want to scream about unprecedented moves, it hasn’t been, and it should remain so pretty much through mid-first quarter of next year. Thank you, Federal Reserve, which gets me to the difference between trading and investing in stocks and the stock markets.

In building client portfolios to meet your retirement goals, the Oak Harvest team is trying to build diversified portfolios for our client for long-term growth and to find value when others are forced to sell or sell out of fear. Three days, three weeks, three months, three quarters, or even three years, most of the time is not an appropriate time horizon to measure one’s investment performance.

The cash S&P 500 dropped roughly 5.25% percent from its peak daily closing high to its trough daily closing low in four weeks. That’s 20 trading days. That’s it. On a weekly basis, its weekly high close to its weekly low close was even smaller. It was just under 4%, 3.9% to be exact. On the daily closing numbers, that’s about 1% to 1.5% worse than we thought it would be as we stated months ago in advance of this period and almost exactly in line with our often repeated 3 to minus 4 expected decline during the seasonally wobbly period.

The team at Oak Harvest looks for indicators that lead markets, not for ones that are lagging or coincidence. Things like lumber pricing have turned a corner. Copper pricing looks to have troughed. Future volatility looks to have peaked. Investor sentiment is as low as it was into the 2020 election and the overall Economic Surprise Index has troughed in its normal fashion.

For all those still wondering, have we changed our minds based on four weeks of red stock prices during the normally wobbly, third-quarter dead zone period which should last into maybe late next week? No, but if and when we do change our stance, we’ll tell you, usually well in advance that we are worried, why we are worried, and what we plan on doing. At Oak Harvest, we’re a comprehensive financial planning advisor located in Houston, Texas. Give us a call to speak to an advisor and let us help you craft a financial plan that meets your retirement goals. Our number here in Houston, 281-822-1350. I’m Chris Perras. We’re here to help you on your financial journey into and through your retirement years. Have a great weekend.

Male Speaker: All content contained with an Oak Harvest podcast 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.