Tom Petty: The Waiting is the Hardest Part

Recap and Outlook: The Waiting is the Hardest Part. Join Chris as he delves into what happened in Q1 2019 and looks ahead to Q2.

Chris Perras: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. Welcome to the April 5th edition of our weekly Stock Talk Podcast: Keeping you connected to your money. Each week we try to share with you our views on the markets, what we see coming down the pike for the economy and the markets. We also try to educate you on how the stock and bond markets work.

This week’s episode is our first quarter recap and our second quarter outlook, entitled Rally Hats, Give Way to Tom Petty, the Waiting is the Hardest Part. With the first quarter behind us we wanted to review what worked, what didn’t, and what we expect for the second quarter of 2019. We wrote our first half 2019 outlook in early January, and it can be found on our website at oakharvesfg.com. Look for the investment management tab, the market commentary section, and then a 2019 first-half outlook.

It was entitled, Put Those Rally Caps On. So far our outlook for 2019 has been scaringly yet positively accurate. The broad US stock market as measured by the Russell 3000 was up 14% for the first quarter, and it was led by small caps up 17%, large-cap growth of 16% and US real estate investment trusts up 15 3/4%. International stocks were up roughly 10.5% and emerging market stocks were up about 10%. It was a great quarter on absolute basis after a horrible quarter in the fourth quarter of 2018.

Looking back on the quarter, what did we do right? Starting with big picture and sticking with our discipline of trying to remove your emotions from your investment decisions, we stepped up and accelerated our buying of stocks in December through January, when our process, our systems and our proprietary indicators were flashing buy, buy, buy signals. This is exactly opposite of what most financial managers were doing and advocating in December.

In fact, in mid-December of last year, I was inundated with emails and alerts by a number of other managers with dire prognostications of recessions, death crosses, and 2008-2009 like risk. In fact, things were so bad that they were, “Tactically allocating their clients’ account 100% out of stocks and into cash, bonds, gold, and other things, like the Japanese yen.” In mid-December, after the general stock market was already down over 15% and many growth franchises were down 30 to 50%.

These are those, “I’ll get you out,” strategies. Those, “I’ll protect your money,” strategies, those, “I’ll tactically allocate all your risk in stocks pitches.” These are really just wolf in sheep’s clothing strategies targeted at continuing to prey on investors’ ongoing fear of a 2008-2009 light collapse. When the curtain is lifted, all they are is trend following almost always late to sell and late to buy market timing strategies.

Specifically, what did we do right? The investment team at Oak Harvest was buying growth stocks and cyclical stocks in the fourth quarter of last year and early 2019. For us, we were big buyers of technology stocks in the fourth quarter in early 2019. In technology we had some wins in names like Cisco, Apple, Texas Instruments and Facebook, as technology rebounded strongly.

In the cyclical space, we’ve had some good returns in names in the construction and consumer space in names like Home Depot, Deere, 3AM, and Caterpillar. Furthermore, our heavy holdings and public real estate through the Griffin Fund, and stocks like W.P. Carey served as a great barbell to the growth stocks we bought in the fourth quarter of last year, as interest rates rallied in the first quarter of 2019, and lifted the entire real estate sector.

What didn’t work for us? Everyone makes mistakes, and we had some in the first quarter like everyone else. Across the health care space, Bristol Myers, Amgen, and AbbVie have been underwhelming in both their business outlook and investment returns. We will most likely be managing our way out of some of these names as we find better returns for the second half of 2019.

Additionally, we were early or wrong in our timing of getting into a couple investments like in Federal Express and Carnival Cruise. We thought that other investors had already factored in a strong dollar and a slowing European growth and higher oil prices into their earnings estimates for these companies for the second half of 2019 and 2020. When they reported their fourth-quarter 2018 earnings, we were surprised by the magnitude of the short term downside moves in these valuable franchises.

Unlike some of our healthcare names, we’re most likely going to stay in these investments and possibly buy more, as we believe the global economy will turn up in the second half of 2019 and these companies, businesses will be huge beneficiaries of accelerating global growth. With the first quarter behind us, what do we see for the second quarter? Well, the market has recovered almost precisely to where we thought it could in mid-April. The S&P 500 is back to 2880, 2900, which is almost exactly where it, “Brokedown from,” in October of last year.

In fact, those same tactical asset allocating managers who were emailing clients, and they were out in the financial press in mid-December, saying they were selling everything and going to cash when the S&P was 2500, 2550 are now out in [unintelligible 00:06:00] saying, “it’s all clear. We’re starting to get back in, we’re starting to get your money back invested.” We disagree with these technical momentum-based market timing strategies.

While we remain very positive on the second half of 2019, and 2020, on both the economy and stock markets, we think Tom Petty said it best when he sang his song, “The waiting is the hardest part.” The economy is fine, in fact, it’s beginning to show signs of life for a good upturn and growth in the second half of 2019 and 2020, as we expected at the beginning of this year. However, with the market rally, valuations are much higher than they were three months ago, and most stocks are upright in front of reporting their first-quarter earnings.

This entire cycle for the last 8 to 10 years, has been a recipe for stocks to consolidate and pull back for a few months. Given this, at best, we see a general stall in the overall stock market for the second quarter from here. The second quarter should see continued sector rotations with we believe more boring staple names and healthcare sectors, leading for a few months.

We’ll most likely use this as an opportunity to pare back some of these positions in healthcare and start buying financials heavily for the first time in two years. The mantra for the second half of 2019 and 2020 is likely to be, “Without fins, you can’t win.” Post the stall in the overall stock market, we see a resumption of the bull market, March to 3000 in the early second half of 2000 of this year.

In closing, if you find this content helpful, please forward it to friends or have them give us a call at 281-822-1350. Go browse our updated website and our new content at oakharvestfg.com. You shared your vision for money with us during our meetings, and we’re here for you. Occasionally, the investment environment will change and in those rare cases, we will make strategic changes to your asset allocations.

These are rare, 1% events, but they happen both ways, not just negatively. They happen as tailwinds to stocks in the economy too. They happen as positive setups to both the stock market and the economy. When [unintelligible 00:08:16] see these rarities we will adjust your allocation. Our main job at Oak Harvest Financial Group is to help you retire only once in your life with a customized retirement planning. Many blessings. This is Chris Perras, Oak Harvest Finance Group.

Speaker 2: Content contained within this Oak Harvest podcast is for informational purposes only, and is based upon the information current as of the time of recording. It should not be considered an offer or solicitation to buy or sell securities, nor is it tax or legal advice. Investments involve risk. Unless otherwise stated, particular investment returns are not guaranteed.