Burying the Lede: Fear Sells

On this edition of Stock Talk, Oak Harvest discusses the recent news that the S&P 500 has gained 100% since the 2020 lows and wonders why so many strategists seem to have taken a negative tone when discussing this news. Join us as we explore the topic!

Chris: Hey, Happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group here in Houston, Texas. We’re an investment manager and financial planning shop and welcome to our August 20th Stock Talk podcast: Keeping you connected to your money. Turn on the TV, the sky is falling, the economy is cratering due to the Delta COVID variant, the economic data is missing horribly, and get out of stocks, raise cash now because one, seasonality is coming. Two, the Federal Reserve is about to announce tapering, and three, we’ve just rallied 100% the fastest off the bottom of a bear market since the Great Depression.

That is what I heard. That is what I read and that is what I saw on TV most of the week in newsletters and written by most strategists in their recent updates. No, I’m not going to get into the weeds and do a quick Google search and review the history and see if these people have been correct in their calls the last 12 to 15 months. No, instead, I’m going to stick to the data they are presenting and see if we are getting the whole story, or instead, we’re getting a biased version based on the parcel data series. Listeners, I call this podcast S&P500 100% gains, burying the lead fear sells.

I’m specifically discussing the headline news stories this past week that touted the rally in the S&P 500 since March 2020, as the “fastest 100% rally since the Great Depression.” I must have read 10 of these pieces over the past week. Each one of them had a negative tone. Yes, up 100% returns have a negative tone, I find that amazing. You must not have been invested in equities if you’re writing this article with a negative tilt. Yes, each one of these strategy pieces I read and each TV new show I saw, instead of celebrating a fantastic recovery in the markets and economy, I read and listened to them with a negative tone.

They presented this amazing statistic for everyone who’s been invested with a negative light, a negative spin, 100% plus returns like this is a bad thing. Even Merrill Lynch, whose data work I love and whose data I’m going to use, led this story with a negative tone. I’m going to read directly from one of their research pieces that were wildly quoted throughout the week. I remind you this is how all the articles I read sounded and all the news stories I saw on this topic, negative. Here it goes and I’m quoting. “The rally of 100% for the S&P 500 from March 23rd, 2020 through August 16th, 2021 happened in 353 trading days.

This is the fourth fastest cyclical bull market rally for 100% for the S&P out of 11 cyclical bull markets of 20% or more that have exceeded 100% going back to 1929. The S&P 500 rallied from its March 2020 low has outpaced the rallies from 1942, 1974, and 2009 generational lows as well as the rallies from the 1987 crash and the 1982 lows. In terms of speed, the S&P 500 rally from the 2020 low is the fastest since the Great Depression. The 100% rally for the S&P 500 from March 1935 through July 1936 has the best fit with the 100% rally that we’ve just incurred from March 2020 through August 2021. In our view, the pace of this rally is not sustainable.”

That’s all from Merrill Lynch. They go on to discuss the weaker breadth readings in the markets which we have discussed in the past. More quotes from this piece, the resilient S&P 500 achieved another record yesterday, but with the narrower breath, for the broad NYSC, only 32% of NYSC stocks were up on 29% advancing volume, which points to internal weakness. It’s only a five-page note but as good as the headline might sound, the piece reads 95% negative, which I guess makes sense given this strategist has been warning of impending negative seasonal weakness now for a few months. Now here’s the problem I find with this story. It’s incomplete. It is incomplete on two accounts that I find amazingly positive for the remainder of this year.

Here are those two points. First, the pre-2020 election talking about bull market rallies both in their length and magnitude. While we are now up about 100% off the bottom, the average bull market has returned almost 114% before succumbing to a cyclical downturn. While we are factually up 100% since the March 23rd, 2020 lows, history would say the bull market shouldn’t be over yet. The second point I have about this story is the writer notably points out that the quote best fit for the current market rally is the 100% rally for the S&P from March of 1935 through July of 1936. That’s news to me, I’ve never seen that time reference before. He got me interested with this analogy when he pointed out that time.

He goes on to overlay that time period on a chart with the current March 2020 through August rally. It’s insanely close to a perfect overlay. “Wow, this is great stuff,” I’m thinking. I’ve never seen this before and then I paused. Then I thought, “Man, is that where the data ends? July of 1936? Was that the top in the bull market run-up 100% almost exactly?” My history researching stock market cycles has told me that these moves tend to last almost exactly two years before things get dicier and volatility really expands and the trends drop negatively in the market.

It takes quite a while to get investors in. To get that FOMO, the fear of missing out, kicking in, and sentiment to bullish. Fortunately for me, the writer provided both the timing and magnitude of that secular bull market move, even though he left out that punchline in his commentary. He left out the lead, the bull market that he referenced matching so perfectly this one that started on March 14th, 1935 lasted until March 10th, 1937, almost exactly two years and it gained an oppressive 131%.

You would have never known that from his commentary or the tone of the research piece. The writer selectively chose to leave out that the bull market in the cycle he referenced lasted another 8 to 9 months and the markets gained another 30% over that timeframe. Now, listeners, I’m not implying that this cycle will do that over the next 9 months. This is not to infer that we believe again of another 30% on top of the current 100% rise is possible in the next 3 or 4 quarters. What I do mean to show is that there is no perfect model. There is no perfect answers. We as investors are trying to balance risk and reward and return using all the tools and knowledge that we have available to our clients.

Those calling for a seasonal swoon or taper tantrum or debt ceiling swoon, most of whom have been wrongly calling the twists and turns in the recovery now for the last 12 to 15 months, are likely to be proven wrong. Again, it’s summer and this week it’s even more fun. Its auction expiration week during summer, which makes it nice and volatile, which is far as the team at Oak Harvest is concerned so far, it’s a very normal summer and a very normal option expiration week. We see this week’s pullback is likely the last decent dip we get in the second half.

Keep it simple and so far against almost all pessimistic projections and emotionally driven calls, it continues to be a very normal bull market for this cycle. At Oak Harvest, we’re comprehensive wealth management, financial planning advisor located right here in Houston, Texas. Give one of our planners a call at 281-822-1350. Let us help you craft a financial plan that is independent of the volatility of the stock markets. I’m Chris Perras and have a blessed weekend.

Speaker 2: 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 site of 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.