Monday Mash Up | Market Correction | Stock Talk Podcast
Hey, I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group here in Houston Texas. We usually just release a weekend update on Mondays, but given last week’s volatility laden sessions, coupled with our recently released 1st half 2022 outlook, I thought I would combine all this week’s material into one short video release. Let’s call this a Monday mash-up, much like the markets action last week.
Equity markets were broadly down last week with the S&P500 down 1.2%, now placing it about -3.5% off its closing November 5th high of 4697.5. If one were perfect, and listeners no one is, not even widely respected hedge fund billionaires, from the November 22nd intraday peak of 4744 to the trough intraday low last week, the S&P 500 fell 5.25%. If you were perfect, which no one is. The real weakness in the markets over that period has come in the areas of growth at any price software and reopening stocks, think of Zoom and Peloton, and energy and material names.
What are the attributable causes being thrown around for the recent weaknesses in stocks? Well, they appear to be 3-fold. First, the markets are trying to reconcile a potential growth hit from any Omicron Covid variant related supply and demand disruptions it may cause. Secondly, and more importantly in my eyes, the markets are struggling with the recent comments by Federal Reserve Chairman Jerome Powell and other Fed members, growing realization that monetary policy might be behind the curve, and they might have to taper QE more quickly and begin raising rates sooner than expected. And third, with the markets suddenly volatile, in an otherwise calm time, many institutional investors and retail ETF investors are scrambling to net out their tax positions for year end, recognizing some tax losses in year-to-date losers and harvesting gains in some winners.
Recall listeners, we released a YouTube video on November 5th, with the S&P500 making new all-time highs, titled “2 signs of increased volatility ahead, Getting Jiggy with it”. In this podcast we specifically highlighted volatility moves in the US Treasury bond market, represented by the MOVE Index leading periods of equity volatility. The Move index is the US, long term Treasury markets, equivalent of the equity VIX index.
We pointed out how the Move Index, can proceed two-to-four-week periods of very fast and gut wrenching, but brief downdrafts in equity prices on increased volatility in equities. Well, now our work is saying that bond volatility looks to be peaking right near the 4 weeks mark this week. So hopefully, we are almost at peak short-term volatility in stocks as well.
Many viewers might notice that we just released our 1st half 2022 outlook last week, under the title “Curb your enthusiasm Yields to a Bull Market buy”. Given that we first shot this video, pre-thanksgiving holidays and before the recent downdraft in equities and uptick in volatility, you might wonder why I didn’t rewrite it and reshoot the whole thing. Well, I did think about it for two or three days while I was on vacation. However, I chose not to because every time I read it to myself, I thought to myself there is nothing I would change except to say. It looks like if anything, we were off by exactly two months. Why do I say this? Well, here’s a little excerpt from the outlook. And this is a quote.
“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? Should we approach a parabolic move up in the S&P500 reaching 4900-5000 (which we have not), 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. (Which is where we currently sit). Call it over 4-8 weeks. While gut wrenching, should it incur, this would only retrace roughly the last 2 months of our up move in a very quick fashion.
We would expect a very sharp rise in realized volatility with the often-quoted spot Vix index rising back to 28-30 temporarily. (Which is where it stands) 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. First, 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. (Well that looks to have just happened the last two weeks) Secondly, we get a new Covid variant and investors get scared for a month or so (I think the Omicron variant is qualifies in doing this) , and third 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. (This is exactly what Jerome Powell has done since his reappointment). And of course, this would also Probably come just a few days after Ray Dalio, from Bridgewater hedge fund fame, goes on a global stage at a conference and 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.
Listeners, I wrote all of this before the thanksgiving holiday break. Listeners, Ray Dalio was on CNBC on November 30th just days ago, spewing this same cash is trash nonsense. As you can see, much of what we were thinking would happen in late January of 2022 and cause a period of market weakness and higher volatility is happening now. With that in mind, we feel that the timeline has just been pulled forward, but the ultimate outcome remains unchanged.
Suffice it to say, for now, we are sticking to our first half outlook for 2022, and optimistically, since the selloff we thought would come in the February through March timeframe, looks to have been accelerated to the here and now. We think it is equally as likely that the trough is sooner and not as deep, and we reach the other side of this pullback and volatility sooner than we expected.
The price action in the move index and movements in the forward volatility markets the first half of this week should go a long way in telling us if we are going to begin the next major rally, we expect in 2022 sooner rather than later. But, in most cases, we are expecting yet another banner year in the S&P 500 in 2022.
Given the S&P500 looks to end 2021 at lower levels than the short term “unsustainable” ones we had forecast as such a few weeks ago, we feel that the percentage rally to the upside for 2022 will be higher than we first projected and sustainable. From these levels of 4450 to 4500 on the S&P 500, we would expect another year approaching a positive 15% to 20%.
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.
YouTube Podcast- Friday 11/5/2021: “Two Warning signs for Market Volatility”
YouTube/Podcast – Friday 12/03/2021: Curb Your Enthusiasm Yields to Bull Market Buy
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.