Retirement Investing: Will The Stock Market Perform Different This Time? What to Know
October option expiration week ended Friday October 20th, and closed on a down note. Both short term volatility as measured by the often mentioned, untradeable VIX index, and volatility futures which are traded, both spiked to a new five and a half month high, last seen on May 4th. Not totally unexpected, but nerveracking to investors and nerve wrecking for others. The general explanation for the sell off was to blame a quick rise in market-based interest rates caused by continued hawkish Fed speak, rampant federal government deficit borrowing and refinancing causing Treasury market supply to exceed demand, and stronger than expected economic data for the 3q.
In addition, while the OHFG investment team discussed with our subscribers and clients, for over 12 months, since the market low in October 2022, the importance of “real interest rate” to stocks and bonds, that is the risk premium embedded in the Treasury bond markets, the wider financial press and Wall Street strategists finally came out in mass the last few weeks talking about “real rates”, and not the inflation component of bonds, being critical. Better late than never? Not always.
Last week’s title was “its make or break time”, and this week, given how busy our team is with earnings reports, I’m keeping this video short and titling it, “is it really different this time”?
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The S&P500 has been trading, down and to the right in a very normal seasonal fashion since the mid-July 4600 peak. Here’s a chart of the S&P500 since last Octobers low.
You’ll see the overall market has gone nowhere since mid-June of this year and closed almost on top of its 200-day MVA a week ago.
We have now entered what has historically been the sweet spot of the seasonal calendar for a 4th quarter rally. I’ve had these dates circled on my calendar since October 2022. Yes, for over a year. With the markets down, and reviewing the “news” on the financial networks, it’s easy to question ones investment methodology and wonder if “it’s different this time?”
I’m giving you two charts of real time data that have proven early to tops and bottoms in the markets the last few years that many on TV are discussing as important but apparently aren’t following in real time.
The first is a chart of “real interest rates” that suddenly many other financial commentators on TV, after almost 18 months have finally discovered as significant.
I’ve discussed the importance of real rates to stock PE’s and the markets for over a year. I’ve shown charts of the 1-, 2-, 5-, and 10-year real interest rates at different times over the last 12 months. Their absolute levels all vary however the shape of their charts are pretty much identical. Up and to the right since late December 2021. However, investors, just as many other have now discovered their importance, guess what has happened? The trend, which they mostly ignored for 12 to 18 months, has finally changed. The 18 months uptrend has been broken.
Investors, this cycle, that has been an early indicator for good things to come. Look at the similar prior peak from this level. What was the date of that peak? Yes, it was Xmas 2018. Investors, recall what the stock markets did after XMAS 2018? Yeap, they V-bottomed and vaulted higher for the next 3-5 months as the Fed “walked back” some of their overly aggressive hawkish comments and tone. The markets ex-haled and rallied against the backdrop of negative calls for further market weakness. It appears to me that the Fed is already hinting to the markets that they’ve done enough on the interest rate front and are willing to sit back and watch how this plays out for the 4th quarter and year end.
The second and final real time data series I want to discuss in the dollar. For this cycle, dollar weakness has been good, and dollar strength has been bad for stocks. Most likely because so much of our large cap stocks earnings come from overseas, dollar strength marginally hurts the S&P500’s revenue and earnings growth rates while dollar weakness helps both. Here’s a chart of the broad dollar index most investors look at, the DXY Index.
If you overlay a chart of the S&P500 on this chart of the DXY index, you would see that rallies and selloffs in the S&P500 would coincide in an inverse way with rallies and selloffs in the DXY index. While the stocks market was selling off at the end of the week of October 20th, few TV commentators were looking at these 2 data series in real time. Both of these real-time data series would argue, that the markets should be bottoming shortly in their very normal seasonal way. It’s the OHFG investment teams’ opinion, that no, the summer selloff that we forecast from July was not “different this time” and a seasonal Santa Claus rally, starting late October and lasting into late December and potentially extending in a volatile manner into Mid-March 2024 won’t be either.
Investors, that’s it for this week. The market has pulled back and volatility has spiked as our team expected. We are finally in a very important time for the markets in both price and time. The pullback has created some value across the markets.
Oak Harvest Financial Group manages broadly diversified equity portfolios that balance risk and reward for our clients. The investment tools our advisors and financial planners use are usually a combination of markets based and insurance-based tools to meet your retirement goals.
Our dedicated in-house investment team is busy working on some new tools for our advisors and retirement planning teams to use in the future. Stay tuned. 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 or click here and schedule an advisor consultation. We are here to help you on your financial journey into and through 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.