Opportunity Knocks Early! | Stock Talk Podcast

The Oak Harvest team wants to wish you a happy, safe, and blessed 4th of July weekend as this video should be going to publication just in front of the holiday.

Opportunity knocks, almost always when markets are more uncertain than normal and when market volatility is high, not low. Your highest returning investments will almost always come from those investments you make during economic slowdowns or recessions, not during economic boom times.

Now that the S&P500 has joined the Nasdaq and has officially entered a bear market, should you raise cash? Or, now that Asset manager positioning, which is contrarian bullish, is beginning to flash a buy signal not seen since 2016 and 2011, should you marginally add to your investment holdings if you can.

Is it time to dump technology stocks, or would it be better to add some back? Take a look at the 20-year chart of the NASDAQ composite since the internet bubble bottom in 2002. The relative performance of the Nasdaq comp is now back to its 20-year trend line, and the index has found support on its 50-month moving average for only the 10th time in 20 years? Are you a buyer or seller of growth and tech stocks down here?

Think of your investment returns since the recession in 2008/09, or even since the Covid recession in early 2020, if you didn’t panic and you didn’t reallocate away from stocks at that time? You didn’t eject during those periods of elevated economic uncertainty. Think about how much better your incremental returns would have been if, instead of withdrawing from the markets and trying to hide short-term while markets were already down, you had instead added marginally to your holdings?

I am Chris Perras with Oak Harvest Financial in Houston, and welcome to our weekly stock talk podcast. Before we get into this week’s topic, titled “Opportunity knocks,” 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.

For the first time in years, it’s been a trying first half for investors invested in both the stock and bond markets. There has been no place to “hide .” The standard 60/40 portfolio has been a bust year to date. While our team had expected a rocky and down first half 2022, and we laid out the case for the market’s first correction in the first half of 2022 last November, we did not foresee the magnitude of this current downturn coming in the first half.

We had previously thought we would get a reprieve in the second quarter before succumbing to a summer swoon in the 3rd quarter, bringing us into a “bull market” buy in both price and time. Given what looks like the pulling forward of this “swoon” into the second quarter, we wanted to provide some early signs of optimism titling this week, “opportunity knocks early.”

Virtually everyone I hear on TV has ratcheted down their expectations for stocks this year. Understandable because the markets have declined, the economy has slowed, and inflation remains high. The bears, after being wrong for years, and early calling for calamity in 2021, have now been on the right side of the markets for the first half 2022. A few bearish strategists, who called for S&P500 4000 in 2021, only to see the markets rise 20% higher than that, have now been beholden to lower their “bottom” forecasts to 3000 ish now that we have officially entered a bear market. I guess the trend is your friend on the downside as much as it is for momentum investing on the upside.

Our investment team never expected 2022 to be a year of “buy the dips” or V-bottom lows. We have expected it to be a year of dollar-cost averaging. Now, we want to present some charts and data that we see as leading signs to what could be a very normal and strong 4th quarter finish to 2022.

First off, almost every investor is aware that the Federal Reserve has been aggressively posturing interest rate increases since mid-first quarter of the year. In mid-June, to combat inflation, the Fed raised the Fed Funds Rate by 75 basis points for the first time since November of 1994. 1994 was also a mid-term election year with an incumbent Democratic President and Democratic Congress.

The mid-terms in 1994 marked what has been described as the “Republican Revolution,” with the Democrats losing Congress just as the Federal Reserve tightened monetary policy to control inflation. Take a look at the monthly chart of the S&P500. In 1994, the markets troughed late in the first half and trended flat to slightly higher into the 4th quarter in a very normal mid-term election pattern. See the circle? That’s November 1994. The market exploded higher in late 1994 as Washington DC became gridlocked by the mid-term election outcome at the same time that the Fed moved aggressively to tame inflation. The stock market and economic expansion lasted another 5 years. Stocks gained over 50% from their first half 1994 lows over the next 2 years.

Here is some other data on Presidential cycles and stock markets compiled from Merrill Lynch. On average, the S&P500 has been up 81% of the time the 2nd half midterm year through the first half of year 3. I want to point out 1962, 1970, and 1982 as returns were very bad during the first half of all those years, all down -11 to -24% but after that? The next 12-month returns ran from +27 to +53%
Additionally, I must point out that in both 1970 and 1982 we had inflation, as measured by the CPI, running +6% to 8.5%, much as we are now. We were officially in a recession both years, and guess what? The markets subsequently rallied +33% and +37.32% off the summer lows into year-end! Don’t believe everything you see on financial TV. Stocks can have very high returns even in bad first halves.

Here’s some more data from LPL, showing that historically, a bad first half doesn’t always mean trouble for the S&P500 the rest of the year.
Several things we’ve previously discussed that have led to market tops, troughs, and pivots have also looked like they are turning up as leading indicators for the 2h22. Lumber, as we have noted many times over the last four years, is almost always a better early indicator on the domestic economy than the often quoted “Doctor Copper.” Take a look at the weekly chart of lumber. Many on TV are now pointing to it as having dropped over 65% from its highs a year ago as a deflationary signal. In our work, they are late to this observation.

As we have discussed for the last four weeks, the entire commodity complex looked like it had peaked to our team, and the individual components were headed lower in their normal order. Lumber was first, followed by steel, then copper, grains, and agricultural products were to be next, and many in the press finally picked up on that last week. Energy prices usually peak last as they are the most widely affected by broad global economic activity.

However, in our work, lumber now looks to be nearing a bottom as it is First in and first out, even though housing demand looks to have peaked. I recommend you build that fence you’ve put off for a few years.

Inflation. Everybody I know is worried about higher prices and inflation. Yet, this is almost exactly two years after many of the same individuals were worried about deflationary forces caused by the Covid lockdown. While we know many viewers and listeners follow the government economic data sets, we try to find real-time data series priced by the market to follow. In that vein, the bond market’s pricing of inflation, also known as the 5-year breakeven inflation rate, peaked months ago at over 3.75% and has already dropped below 2.75%. Lower commodity pricing will surely help the second half and 2023 inflation numbers.

The shorter-term inflation reading measured by the 2-year breakeven peaked at 5% back at the end of March and has dropped 1.25% points already. These charts look to be heading in the direction of a longer-term inflation rate in the 2.25-3% range over the next 12 to 24 months. Yes, this is higher than the long-term Fed goal of 2%. However, if an investor waits for the “official” inflation data to roll over, most likely, you will be late, and the markets will have already moved substantially higher off their lows.

Finally, I’m going to leave you with one last data series that has proven for years to be an excellent contrary market indicator. That is the Citi Economic surprise index which tracks reported government data versus economist expectations. This series just broke the -75 level for only the 5th time since the 2008/09 financial crisis. Each time we have previously reached this level, including the Covid recession in the 1st quarter of 2020, it was near the lows in both economic sentiments, activity, as well as stock market returns.

Viewers, remember that over shorter time frames, stocks tend to behave around a combination of sentiment, expectations, and momentum. Meaning, in layman’s terms, they reflect, “are things getting better or worse for a company?” Toward extremes, both to the upside and downside, many investors, due to their enormous size, those who need to buy or sell millions of shares, have to start selling before they see a top in fundamentals, and they have to start buying before they see the reported low in how bad things are. They need a very long runway to establish meaningful positions for their funds. This is why stocks often peak when things are still looking rosy and perfectly clear, and why they trough when things are still looking cloudy and uncertain.

Our team here at Oak Harvest knows that 2022 has been a trying time for those in the equity and bond markets who are not trading oriented. Almost all financial markets, both stocks and bonds, have sustained higher volatility this year. This volatility is a harsh reminder to investors that stocks do not always go up. Remember, unlike the insurance markets and those tools, there are no guarantees in the public equity markets. We know these sharp market moves drive emotions and the urge to make changes to what are supposed to be longer term asset allocations.

If the ongoing market volatility is making you feel uneasy, give us a call, and schedule a meeting with an Oak Harvest advisor. Our team does have insurance-based tools that do not have the volatility of public markets. However, we remind you, that these investments will also have lower long term expected returns for your savings and retirement.

At Ok harvest, we think our clients are best served by us 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 (877) 896-0040, and schedule an advisor consultation. We are here to help you on your financial journey into and through your retirement years.
I’m Chris Perras and from everyone here at Oak Harvest, have a great 4th of July!