Curb Your Enthusiasm “Yields” to a Bull Market Buy
Note : Post our production and this release of our 1h22 outlook, two significant events have occurred that look to have pulled forward the period of increased volatility in the markets the OHFG team has been speaking into yearend 2021: 1) the emergence of the Omicron variant of the Covid virus at Thanksgiving and 2) the discussion of a sooner Federal Reserve tapering of the balance sheet which was slated to begin in late January 2022. At this time, the investment teams outlook for the 1h2022 remains unchanged, and optimistically, the markets are just pulling forward the period of higher volatility and market weakness our team was forecasting by 2 months which in turn should pull forward the clearing skies on the other side of these events in 2022. Our current view continues to be: the markets experience two to three months of high volatility, the S&P 500 lows should be around 4450~ on the S&P500, and then we return to bull market optimism.
I am Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, we are an investment management and retirement planning advisor located in Houston Texas. Welcome to our November 26 YouTube, stock talk “keeping you connected to your money”. This week we cover out first half 2022 outlook and throw an early wildcard estimate for year end too.
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First, a quick reminder that our second half 2020 market outlook was titled “Election worries breed investment opportunities. This was followed by two 2021 market outlooks for the first and second halves. They are posted for all those to see on our website at OAKHARVESTFG.com. I will not recite them in their entirely as we think the titles speak for themselves.
For the first half of 2021, our title was “You ain’t seen nothing yet-one buy in the 1st quarter” and our second half outlook was titled “Let the Good times roll”. I will only quote a single sentence from that piece. And that was this line written 6 months ago, “If pressed we see a seasonally strong 4th quarter 2021 and 1st quarter 2022 time period (that) can lift the S&P500 over 4800-4850 and could approach 5000 in a blowoff in January of 2022. That was written back in June. No revisionist histories. No inching targets upward every month. That’s what our data said way back then.
I am going to pause here for a moment and let that sink in. Viewers our team first had a target on the SP500 for year end 2021 of 4600 back in December of 2020. That was a year ago and well before almost every strategist and economist and other TV personality came on the financial news networks and gradually moved their pensively bullish forecasts higher. How did we see 2021 so early and so well when so many others got it wrong? We followed the data of this cycle, since 2008 and 2009 under QE or quantitative easing.
We did not data mine back decades to the 1930 like some big well-known hedge fund managers. We did not try to make analogies to periods of time when no one living was managing your money. I admit, we did do that in March and April of 2020 back when Covid first hit to see what happened to the economy and stocks markets post the 1918 Spanish flu outbreak that killed 10’s of millions globally.
We did that research and afterwards called for a period like the roaring 20’s almost 6 months before that talk was on TV. And guess what, our current stock market and economic response is almost identical so far. Which leads me to our first half outlook for 2022.
As clients and frequent listeners know, one of my favorite sayings is no “it isn’t different this time”. Why? Because investors sentiment, emotions and their subsequent behaviors are generally predictable over time moving from outright fear to begrudgingly acceptance very slowly at first, over a long period of time, and then to greed quickly, but when things “hit the wall”, many investors’ emotions go right back to fear pretty quickly even in multiyear or multidecade bull markets.
Viewers, I’ve studied all those economics’ theories that economists and other strategists talk about on CNBC and Fox news and write about in newsletters. I took all those finance and business classes at Harvard where I got my MBA, and yes I attained the CFA designation, and I will tell you this. They are all virtually meaningless in managing clients’ money in public markets. The eloquent dribble you hear on TV about GDP data, or interest rate futures, or what the dollar is doing? 99% is meaningless and worthless mental dribble. My dad had a name for it with the initials MMT, standing for Mental M —- Talk. Politely, its eloquent verbal economic dribble. Did they help you in the second half 2020 get long stocks or get back in the markets if you panicked during covid and sold? Did they calm you down in the first half of this year if you were worried about political policies and still waiting for clarity? Did that government data clarify your views during the delta virus spike around July 4th?
The tools we use to help up with our general outlook and forecasts do include 1) the price of insurance on your portfolio. They include 2) where we are in the economic cycle both from a monetary and fiscal perspective, and finally they throw into the equation 3) lot of investor sentiment data including market flows, option pricing, and this cycle, investor positioning and psychology.
Six months ago this led us to forecast and say “If pressed we see a seasonally strong 4th quarter 2021 and 1st quarter 2022 time period (that) can lift the S&P500 over 4800-4850 and could approach 5000 in a blowoff in January of 2022.
So now as we approach those levels and that exact timing, what is our team seeing. Our team is seeing the first half of 2022 as a period of higher realized volatility. Not just high implied volatility which is covered in the options markets. Even though we believe the bull market will remain alive and kicking in 2022, we expect the fear, rhetoric, and negative commentary on TV and in newsletters to continue and most likely pick up speed in the first half of 2022 as the markets experience its first correction of over 10% in 18 months.
How could this play out? Here’s our best thoughts. After this wave of positive enthusiasm is completed over the next 4-8 weeks and the 2021 stock buybacks wind down, we would see an air pocket down in mid first quarter of 2022. This time period should give us the deepest percent dive in stocks since the March 2020 lows. Should we approach a parabolic move up in the S&P500 reaching 4900-5000, we would expect our first -10%-12% correction all the way back down to 4450 to 4500 on the S&P500 in a very quick fashion. Call it over 4-8 week. While gut wrenching, should it incur, this would only retrace roughly the last 2 months of our up move in a very quick fashion.
Viewers, please listen to me carefully. If this were to happen, All of This would be entirely normal! Just as the overall stock and bond markets move for 2021 have been. This would be keeping with the normal behavior or our markets the last 10to 12 years. No different than the normalcy of us forecasting both the 2nd half of 2020 and the 1st half 2021 and second half 2021 market moves well before they happened. Regardless how the exact year end 2021 plays out, we see an substantial uptick in volatility in 2022 in the first half. Which should lead to a very bumpy ride over the cumulative next 4 to 6 months.
We would expect a very sharp rise in realized volatility with the often-quoted spot Vix index rising back to 28-30 temporarily. Why? I do not know. As I always say in advance, I can make up reasons just like anyone else. What would be the TV anchors rationale for such a fast correction finally? I don’t know. A few of my early guesses? Here are my early ones 1- The Federal Reserve hints of a faster tapering of its balance sheet or raising rates earlier and some hedge fund blows up which is a dynamic we tend to love here at Oak Harvest. 2- we get a new Covid variant and investors get scared for a month or so , 3- 4th quarter earnings come in strong but companies warning of “little visibility or margin concerns”, 3- increased China and Taiwan worries, 4 -a spike higher in winter energy prices, and 5 -and viewers this is the most likely one, and I know it isn’t sexy sounding but here it is, normal investor profit taking almost 2 years after the covid lows as investors finally decide to book long term capital gains in front of a 2023 income and capital gain tax increase.
I could see this as a response to our Federal Reserve moving faster at tapering and or telegraphing an earlier rate increase at their end of January meeting. And of course, this would also Probably come just a few days after Ray Dali, from Bridgewater hedge fund fame, goes on a global stage at a conference as proclaims, “cash is trash” for the 5th time in 5 years. You know what That would be exactly the normal and ideal time for a selloff to begin much the way it did in late January of 2018. Viewers, I warn you, Mr. Dalio is now an unheard of perfect 4 for 4 making that cash is trash claim and announcement literally within days of our stock markets declining 5% to 12%. 4 times in a row. It’s amazing. If you are a tactical trading type, keep your ears peeled and check your calendars for when he is speaking.
However, listeners please hear me out. Just like we warned in late August of 2020, to “Curb your enthusiasm” right in front of a normal pre-election sell-off. A sell off that took the S&P500 down almost exactly 10% if you were perfect, to the day and hour selling and buying, which no one is. We told our listeners that that could be one of the the last and best buying opportunities for 18 months in front of not after the election.
Right now, the investment team at Oak Harvest sees any steep and fast first quarter 2022 correction in the S&P500 of say 10-12% down as a strong, and potentially one of the only, “buy and mold” entry points for almost all of 2022.
From say a low in the range of 4450 on the S&P500 on a 1st quarter correction, we see the market being able to achieve new all-time highs once again in the summer as volatility subsides, capital investment acceleration kicks in from stimulus, and the normal pre-midterm election festivities begin. Let’s call it the summer of 5075-5100 and a year end of 5400-5500 is pressed right now. Our volatility “crystal ball” is a little murky on the details here, as the holiday heavy December and January time periods have yet to play out.
As for bonds yields in government Treasuries. We think there is a slow upward bias on long term rates for the first half of 2022 with the 10-year treasury reaching between 2.1% to 2.25%. Let’s call that, higher but not harmful.
Recall listers, the overall stock market has loved gently rising long term interest rates this cycle. The data does not lie. Your utility and staple stocks might not like it. Your growth at any price stocks might underperform for a while, but overall, the indexes in general have benefited by slowly rising long term rates the last 12 years.
Almost regardless of where we end 2021, we see a positive year for equities. Our year end precent return forecast depends on whether we see the final exponential up move the next 2 months. Regardless of where we end 2021, we see a lot more realized volatility early in the year. For those tactical traders out there, if our forecast holds for the year of 2022, we could easily see a trough to peak move of 22-25% in 2022.
Here is a little data to back up our forecast.
- QE affect is still positive in the first half of 2022. There can be little argument that the Federal Reserve monetary policy of QE, Quantitative Easing, has been supportive of liquidity and risk assets. According to BMO Capital Markets, the S&P500 has rallied on average 19.6% per year during all four Fed QE programs. However, even while the Fed was out of the bond buying business, the S&P500 has average about 7.8% per year.
- Long term rates look to gently rise in 2022 on either higher growth, higher inflation, both, or just less demand. More data from BMO, since 1980, the S&P500 has average +19.2% when the yield curve rose by 50-100bps year over year. You heard that correctly. The S&P has liked rising long-term rates over the last 30 years. Why? Because rising long-term rates are a sign of either a strengthening growth rate, higher inflation, or both, which has led to higher earnings by the overall market. We expect S&P500 to rise further in 2022 as most companies pass on inflation to consumers.
- Many investors are concerned about the affects of the Federal Reserve raising short term interest rates immediately after they end their tapering schedule which is currently scheduled to end in June of 2022. According to BMO research, since 1994, during the prior 4 Fed tightening cycles, the S&P500 has, one average gained 13.5% over the year prior to the first interest rate increase. If the Fed were to immediately raise rates in July of 2022, that would equate to a triangulation for the S&P500 of just about 5000 given the markets stood at about 4350 on July 4th, 2021.
- Volatility, as measured by actual realized volatility in now at 6.9. Pre-covid that number has historically troughed around 5.5-6 for a few months than risen quickly on corrections. We expect this to rise in the first quarter of 2022 as investor complacency has started to take over in the near term and “FOMO”, fear of missing out, 18 months into this rally has become commonplace. However, and this is where the tea leave reading, and crystal ball stuff, or special sauce comes in..given the hedging costs one is having to pay to insure a S&P500 portfolio out into the late first quarter and second quarter sits around 26 or roughly 4x what real volatility is. Any quick spike up toward 28-30 in the vix, which would equate to a 10-12% S&P500 correction would be quickly bought and should turn out to be the lone buying opportunity for the 1st half of 2022.
Should the markets to behave in the manner our team expects in the first half of 2022, and we finally get a -10-12% correction, Oak Harvest clients might expect to hear from your advisor and their teams in the matter of accelerating your ROTH conversions for 2022 to early in the year, much the same as we recommended in April of 2020 and then again in 1st quarter of this year on the market’s brief pullback. Newer clients would likely see an acceleration of our investment programs as our team likes to accelerate purchases when large short term volatility spikes occur.
Viewers, give us a call here at Oak Harvest and ask to speak to one of our advisors. Let us help you craft a financial plan that meets your retirement goals and needs first, and your greed’s second. Call us at (877) 896-0040 we are here to help you on your financial journey into and throughout your retirement years.
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.