Marching Into April

For the last month, the investment team at Oak Harvest has been busy.  First Charles, James and I were busy digesting 4^th quarter EPS reports.  Then we were trying to get our hands around whether inflation had peaked enough for the Fed to slow their interest rate increases, stop them, or even reverse them in the second half.  Then over the first half of March, much of the economic data came in weaker than most economists expected so our team was trying to understand if the economy was slowing beyond its normal seasonals or too much?

Then our investment team and the advisor team at OHFG were out delivering our corporate philosophy of the merits of dividend growth stock investing for retirees and pre-retirees.  And of course, squeezed in to our normal daily routines, we were thrown a couple of regional bank-runs out in California and another across the globe in Switzerland, during the second half of March, both culminating in regulator and government actions to save depositors.  All of this of course happening while schools in Texas, Florida, and all of Canada were on holiday enjoying spring break.  Such is the life of a money manager.  And people ask me why I have no hair?

For this video, we are going back to discuss the markets.  I’m going to spend a little time on the “charts”, which is merely a picture of the supply and demand for stocks, some time on sentiment, or how investors are “feeling” about the markets and their willingness to take risk, and then market cycles and where we sit in the Presidential cycle and seasonals.

Before we get into this week’s topic, please take a moment to click on the subscribe button and click on the notification bell so you will be alerted when our team uploads our latest content. We do have a new location for our Oak Harvest Investment oriented content.  You can find it by typing “Stock Talk with Chris” in the Google search window or going to the Oak Harvest You Tube channel and clicking on the drop-down tab labelled “channels” and clicking on “Stock talk with Chris”.

With all the swirl and volatility, we experienced in the worlds banking system in the first half of March, one would have thought the equity markets would have been down materially during the month.  We haven’t been.  In fact, the S&P 500 has risen —% during the first 4 weeks of the month while the tech and growth heavy Nasdaq composite rallied  —% through March 24^th.  Let’s zoom out and look at the bigger picture.

First off, I am not a chart technician by trade so all you CMT’s, that’s Chartered Market Technicians, out there excuse me butchering your trade.  However, I have found over the last 25+ years of managing money publicly, that yes, a picture is often worth a thousand words, especially when it comes to equity markets.  The price of any asset is the equilibrium where incremental supply meets demand.  We can have endless arguments over whether that price or valuation is “correct” or efficient, but at the end of the day, the value on your screen is what the incremental market player believes the asset is worth.  So, here’s a monthly chart of the S&P500 going back almost 30 years and a weekly chart going back 8 years.

As one can see on the monthly chart, since the great financial crisis ended in late 1q2009 to early 2010, the S&P 500 index has traded in a broad upward trending channel from the lower left to the upper right.  December 2021 when the S&P500 reached 4800 brought us to the top of the channel, and the broad Fed induced selloff in 2022 took us to the bottom of that channel, only trading below it for a few weeks in October at the market lows in 2022.

Over the last 13 years the S&P500 has traded below the bottom of this channel during only 5 months of the year out of over 160 months, that’s about 3% of the time. We could break this data down into a weekly time series and you would see it’s even more rare.  Over the last 13 years, over 675 weeks, the S&P500 traded below this uptrend somewhere near only 2% of the time.  What’s going on here?  What’s this picture saying to an investor? For whatever reason, big buyers have shown up near the lower end of this channel for quite a long time.

Which leads us to, where do we stand now? Looking at the shorter-term weekly chart, the S&P500 has slowly found its footing since last October and has begun slowly recovering, hugging the lower end of this long term channel.  Buyers, much as they have for 13 years, have showed up just as the news on inflation, the fed, geopolitics, and now a banking crisis have littered the news headlines.  The monthly chart is saying that a monthly close over 4010-20 ish on the cash S&P500 is very important, that’s the 20-month moving average. If one looks at the technology heavy Nasdaq composite  index, the key monthly closing level there is 12000-55.

Viewers, what sector has led the market higher since the October 2022 lows?  If you guessed any of the best groups in 2022, energy, utilities, healthcare, you would be wrong. If you answered the semiconductor sector?  You would be right.  Here’s a chart of the SMH semiconductor ETF. While the ETF is still below its absolute price high it reached in December 2021, the relative performance of the group, the dark blue line just below the price chart, is now 89% and its close to hitting a new all-time high.

Meaning that the broad semi group is beating 89% of the S&P 500 on a broad basis.  Recall back in the early 4^th quarter of 2022, many  financial news networks were saying semiconductors were “univestable” because of their massive inventory glut and because President Biden was cutting off a large source of their future growth by restricting semiconductor sales to China?  Those two events marked the groups lows not highs. Historically, the semi group leads at the beginning of upward market moves, not at the end.  A move that would be very normal given both current investor sentiment levels and historical seasonal and Presidential election cycles.

Where does investor sentiment stand?  Viewers, Investors are pessimistic once again.  According to sentiment data that the Ned Davis Research Group follows, Investors first existed their 2022 market pessimism on January 26^th of this year.  Of course, that was 4 months after the stock market lows last October and almost to the week of the short term top in the S&P 500 year to date.  With the markets quick and steep February decline, the Ned Davis data showed sentiment negative once again by February 24^th only 4 weeks after investors had registered optimistic.  In the early stages of market pivots off lows, or early bull markets, it is quite normal for sentiment readings to flip back and forth as the most nervous and weakest handed buyers sell at the first sign of trouble resurfacing. Here are two charts from the quant team at Merrill Lynch showing the contrarily bullish current nature of investor sentiment. First is their Fund Manager Survey showing investors perception of risks.  Much as it did exiting the Great Financial Crisis in 2009, investor risk appetite was slow to build.  That’s a good thing!  Rallies and bull markets start in skeptism not optimism.  As one can see, investors are currently taking lower than normal risk.

 

In fact, according to the survey, investor risk appetite is near the low end of both the GFC in 2009 and Covid lows in 2020.  This is backed up by the often quoted “Cash on the sidelines” chart, showing investors desire to hold cash, as represented by money funds reached a record high of over $5 trillion.  Peaks in investors desire to hold cash has historically coincided with troughs in the S&P500.  Here’s the cash mountain chart also from Merrill.

I’m, going to end this video on the topic of the window opening for historically stronger market returns due to seasonality as well a 3^rd year Presidential Cycles.  As the month of January was closing and the previously discussed investor sentiment was finally turning positive, the OHFG investment team entered February messaging and warning of the normally weak month of February for stock returns.  Almost like clockwork, after an almost +6.2% rally in January, the S&P 500 fell -2.6% in February.  However, with the markets down in early March, against the backdrop of negative economic news, we titled one of our investment pieces “Marching higher” largely on our belief that earnings and buybacks would come in better and seasonality historically improves late in the first quarter.

We’ve presented these “seasonality” charts a few times since late 3^rd quarter 2022, and here they are again.  The first chart shows the month of February being consistently one of the worst months of the year for stocks as well as one of only two historically down months of the year, the other being September.

This second chart on market seasonality includes only years that were third years of a Presidential cycle.  2023 is President Biden’s third year in office.  This data set includes the 3^rd years of all Presidents, regardless of party affiliation.  Studies show that party affiliation does not materially alter this data.

If one believes in human behavioral finance and stock market cycles, we have entered the strongest 5 months period for stocks in 2023, March through July.  In fact, we are about to enter the historically strongest month of the year, ex-January, April.  Historically speaking in Presidential cycle 3^rd years, the S&P500 has been positive in April almost 83% of the time with an average gain of over 2.5%.

With these things in mind, and given the likelihood of the Fed becoming more dovish on interest rates, the investment team at OHFG believes that even with the current news being quite negative on the surface, the markets will continue to rally gradually into mid-2^nd quarter.

Viewers, there is no perfect investment philosophy, there is no all-weather equity strategy that outperforms every stock cycle or in every economic environment. However, long term research finds partnering with an advisor can add value to your portfolio and retirement by helping you minimize estate taxes, maximize social security timing, and remove some of the emotional whipsaw that many investors feel during times like this that causes them to make emotionally biased decisions in their investment portfolios or allocations.

At Oak Harvest, we have many tools, both market based and insurance based,  to help our clients meet their retirement goals and objectives. We are not just an investment manager solely focused on the stock and bond markets.  We have specialists in the fields of tax preparation. We have social security experts to help with when to take SS, and we have insurance experts who can help you construct life, health or medical care backstops should you need those in future years.

The OHFG team serves our clients by helping them plan for their future needs, instead of focusing on the past. The future and stock markets are always uncertain and that is why our retirement planning teams plan for your retirement needs first, and your greed’s second.

Give us a call to speak to an advisor and let us help you craft a financial plan that helps you meet your retirement goals. Call us here at 281-822-1350 and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.