Emotional Investing 101

Chris: This is Chris Perras, Chief Investment Officer at Oak Harvest Financial Group with the first edition in 2019 of Keeping You Connected To Your Money. Each week, we try to recap the prior week’s events and share with you our views on the market. Also, try to educate you a little bit along the way. This week, I wanted to entitle 2018 a year of emotional investing. Just as a little recap, 2018 saw the beginning of the year start out with an almost 7.5% gain in January, driving the market up to what we believed were high PEs and high evaluations. The market almost traded at 22 times earnings in January.

The market came back down very quickly in February and March as volatility started to increase with the Federal Reserve deciding to accelerate their pace of interest rate tightening. The period up until late September showed the market rallying back to an all-time high. The market almost up 10% at the end of September reaching 2,941. However, that market advance was only led by about five to 10 stocks and almost all of those were technology stocks. The vast majority of stocks sectors in groups peaked way back in January, Names in the industrial space, names in the technology space, semiconductors peaked way back in January and had spent that eight months going down. Federal Reserve came out in October and said that they weren’t near done tightening a market didn’t like that too much. Over the next three months, the market saw volatility spike dramatically, market falling all the way from the peak in late September, early October to the lows of the year on Christmas Eve, which was the worst Christmas Eve, I think in the recorded history of the stock market.

At that point in time, the market from peak to trough was down 20%, thus defining a bear market by all those educators and market historians. It ended the year down a little over 6% at 25, 25, at the very bottom of the market. It was down 14% on the year and that was on Christmas Eve. However, if you haven’t been around for the last three or four weeks, and you turned on the TV as a Friday, the market was right back to where it was on December 14th. That was, I think the last time we actually sent out an update, we’ve been in the midst of moving to our new headquarters, near Memorial City Mall. The team here wanted to wish you a happy New Year. Wanted to invite you to come by and see the new headquarters, come on in and chat with an advisor.

We apologize for missing those few weeks. It’s been a little hectic moving furniture around, getting systems up and running, but we’ve been here behind the scenes the whole time trying to supervise your money. The outlook for the coming year, we’re actually very bullish on the coming year. It’s going to probably be a tale of two halves with the first half being still volatile as earnings estimates have been coming down since the first quarter of 2018. Valuations have come down dramatically. As I said, they were up in the low 20s, 22, 23 times earnings in January of 2018. The lows in December, they get down to around 14 times earnings with given interest rates, and given the economic environment is very, very attractive.

Our view is that although growth is slowing in 2019, we actually are closer to entering that Goldilocks period, which I know we’ve talked about in the past. It’s not sexy, Goldilocks isn’t sexy, it’s boring. Goldilocks is 2 to 3% growth. It’s when the dollar is declining, we saw the dollar peak actually in late December. It’s been declining since then. The reverse of what we saw in January of 2018 when the dollar troughed and started rallying for the next 10 months. In late December, we also started seeing oil starting to rally. Although Houston loves the energy markets and loves a big oil rally stock market likes oil going up slightly, or stable. They like to see a little inflation. It helps companies raise pricing to their customers flow through to the bottom line. Get earnings accelerating. The fact that we already have two of those three Goldilocks events out there is very bullish for what would be the second half of 2019.

Right now we’re going to start up the earnings reporting period. We’re expecting a lot of volatility in single stocks, but we’re seeing a lot of signs that the bad news that has been being anticipated by the market is already in a lot of sectors and individual companies. The group that peaked first, all the way back in December 2017 is already rallying. I think year to date, it might be one of the best-performing groups. The semiconductor group is one of the best performing year-to-date groups. Emerging markets have been a very good group year to date. In fact, has actually been outperforming the S and P 500 since July of last year. Most people wouldn’t believe that, but when you look back, Virgin Markets, I think since July 4th now are pretty much flat. Where the US stock market’s actually down, five to 7% during that same time period.

The final piece that we’re missing, and we don’t think we’ll probably see it until we get through the first-quarter earnings, get through some more of this economic noise China deal with Trump or the government shutdown. We’ll start to see it is we need a slightly rising interest rate environment in long-term treasury rates. The federal reserve as we’ve spoken in the past controls short-term rates, borrowing costs there, but what the stock market likes is a slightly rising long-term rate that means slightly higher inflation, higher growth prospects in the future. Companies are expected to beat earnings down the road. We’re expecting the first half to be volatile, although not nearly as volatile as it’s been volatility in 2018, went from essentially 10 to 36. Just in the past three weeks, the volatility has gone from 36 back down to 20. 20 is a normal level for it.

However, given the federal reserve has talked for the last two weeks about being more cautious about raising interest rates over 2019, there is a good chance that volatility continues to decline later in the year after we get out of this period of the government shut down and China trade negotiations. This is Chris Perras with Oak Harvest Financial Group, Keeping you connected to your money. Just want to remind you the most valuable investment advice we can give you is to try to remain emotionally detached from your money. Keep an eye on it or keeping an eye on it every day. I know it’s very hard, particularly with periods like October through December, but if you actually hadn’t even looked at your accounts from December 14th through Friday of this week you were in the same place you were in mid-December while turned on the TV on Christmas Eve, and it was people predicting the next collapse as in 2008-2009.

We did not expect that to happen anytime soon years possibly a decade later recessions happen. Bear markets happen. We just went through one very quickly. They happen very quickly. Last year was a rotational bear market. There are many stocks, many groups that peak way back in January, even though the stock market didn’t peak till September. Just remember to keep in touch with your financial advisor, we’re trying to keep in touch with you as much as possible. That’s what this call is about in the coming weeks. We’re going to talk to you a little bit about the sectors and groups that we like in the year ahead and try to give you a little more specifics.

Once again, this is Chris Perras keeping you connected to your money with Oak Harvest Financial Group, many blessings Happy New Year.

Speaker 1: Content contained within this Oak Harvest podcast is for informational purposes only, and is based upon 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 a tax or legal advice. Investments involve risk unless otherwise stated particular investment returns are not guaranteed.