Sometimes: You Gotta Close Your Eyes and Buy (or Laugh)

First off, neither the financial markets nor anyone we know had anything close to this in their 2025 Trump 2.0 playbook and his economic plan.  While the economy was slowing all 2h24, the markets thought Trump 2.0 would lead off with some pro-growth and pro-deregulation in November 2024 post-election.  Those thoughts quickly morphed into the 2h February though last week bear market selloff and the thoughts of a potential growth collapse.

The markets had corrected -10%, on 1^st year Presidential cycle, 1h move down on economic slowing. This slowing had been ongoing since last July but had slowed more post Xmas in the new year.  The markets were pricing in about 10% across the board global tariffs into liberation day.  The Navarro plan that was presented was nothing like anything anyone had ever seen and appeared like it was drawn up on the back of a napkin a few hours before the President’s speech. The bad news is that the tariff announcements were far worse than expected, causing a sharp drop in the market.

The Trump calculation substituted goods trade deficits for tariffs.  Here’s a link to our  last week’s video on the topic. https://www.youtube.com/watch?v=d9PYRR-wI_c

Frequent followers know that I am a student of market history.  While I am still under 60 years old and have experienced a number of major economic cycles and stock market crashes and bull market runs, I haven’t experienced everything.  But Those kinds of historical studies helped OHFG clients be guided and almost universally not panic during the Covid market collapse as our team studied the historical pandemic response to the 1918 Spanish flu.  We studied the ebbs and flows of the prior virus, what our leaders did to stimulate the economy, and what the financial markets did back then as well.  Remember the public financial markets are the summation of the collective behavior of investors, investors are human, and regardless of what generation yo are, Boomer, Gen-x like myself, Gen Z, millennials or others, humans tend to have similar behavioral and emotional responses time and time again.  Are financial emotions ebb and flow from greed to fear and back again throughout our lives, throughout economic cycle, and hell during weeks like the last few, even day to day.

But why have I titled this episode, sometimes you just have to smile and laugh?  I want you to sit there and think back to almost the entire universe of financial prophets that were saying and spewing just less than 6 months ago.  What were the headlines back then?  USA exceptionalism!  That the US was the only market financial market worth investing in.  That the Dollar was too strong and interest rates would rise due to the economic stimulation of a new White House.

People were dropping that term around because versus most other countries, investors money was treated best here in the US.  We have rule of law. While we do have government interference and regulation in our economy it tends to be much less than other areas of the world.  Overall, investors had enjoyed less friction in their investments and business owners enjoyed less government interference for decades.

And then the Trump tariff plan hit, however poorly it was structured and initially implemented, and in the span of what 3-4 weeks, the US and its financial markets went from exceptional to toxic in the minds of strategists and global investors?  The dollar went from strong to a joke.  Our Treasuries went from a safe haven to lit dynamite that investors were tossing around so as not to blow themselves up with?  US technology stocks when from the bride of the ball to “univestable” in a few months?

Here’s a chart of the S&P500 the last year.

Calmly up and to the right into the election, a little short term euphoria after even though the data was saying the economy was already cooling and on the way to having a growth scare. A normal early year pullback into 1q EPS cuts, and then WHAM. Navarro drops the global reordering trade and manufacturing bomb on everyone. The US goes from relatively smooth and orderly rules, to we are the Friction capital of the world.  Trade barriers imposed, walls lifted, rules changed, and businesses have a week to figure it out.  No wonder the markets tanked, and earnings visibility vaporized overnight.

Revenue visibility vaporized at the same time that costs looked to have increased.  Hedge funds and other traders and investors on margin blew up and were forced to sell.  At what price, it doesn’t matter.  Those are the rules of that game.

Which got me thinking, have I lived through a prior period that resembled this. My first thought was of course no,as history never repeats exactly, I don’t think a Presdeint has tried a sweeping global trade reorg like this since the 1930s, but for the last 2 years my mind has kept coming back to the Dot.com growth period and our current AI investment cycle.

Dot.com was the internet buildout.  The generational technology change and capex investment from 1995-2000. A period of decent economic growth followed by a tightening cycle in the mid-90s, a pause by Alan Greenspan around 1996, a soft landing, and throw in a short-term financial Crisis in the middle in 1998, that was Long Term capital in October 1998, and then another 2 years of growth as the Federal Reserve eased interest rates.

So I want you to look at this chart of the SP500 during the 1h Dotcom buildout from 1997 into LTCM in October 1998 and then onward.  This is overlaid with the current AI capex buildout into last weeks, volatility shock, and mass hedge fund liquidation. Into the markets run toward safety of cash and gold and out of stocks and bonds and other risk assets.

I know you’re saying to yourself it’s different this time Chris.  Maybe it is. But so far, it looks and feels a lot like it did back then.  The SP500 dropped about -22.4% peak to trough in about 2 months back then into peak global uncertainty and hedge fund blow up and forced liquidation.  The S&P 500 has currently fallen almost exactly the same % peak to trough, using intraday highs and lows.

But Chris, I’m sure back then with the Dollar being the worlds reserve currency there was a flight to safety of the USA dollar.  Everyone wanted to hoard dollars and I’m sure the DXY rallied back then.  Well the answer there is also, no it played out near exactly the same and the dollar declined almost exactly -10% back then during LTCM.

Right now the DXY declined about -10% peak to trough into its Friday April 11 low hysteria of the dollar-demize talk, when only 3 months ago all I heard on financial news was how strong the dollar was and how it would hurt companies.  I have to laugh.  A strong dollar is bad 3 months ago?  But now,  3months later a weak dollar is bad as well?

Ok but back during Dot.com growth was great, I’m sure commodities were doing well.  I’m sure oil was fine but now its been dropping for almost a year.  Big Difference Chris.  So I looked it up.  Here’s the overlay of oil in mid Dot.com build out versus mid AI build out right now.  Pretty much the same.  Declined into LTCM in October and troughed on that day In 1998.

Seems to me Friday April 11^th, was the likely low in oil for the next 9-12 months.

Semiconductors, Chris those have been total dogs now since July 2024. I’m sure they were booming in 1998.  Nope, they were tanking, it was only the 2h of the dot.com buildout that semiconductors went wildly higher.

But Chris, the AI bubble has popped, and Trump tariffs were the final needle needed to pop it.  I mean MSFT is already cutting back on data centers others will too.  Maybe, but when I hear things like demand for new AI consumer apps like video creation is already melting NVDA GPU’s due to the demand for inferencing and computational power, I find it hard to believe that spending is about to collapse.  Maybe MSFT just decided to let some of the AI startups spend up front as they let their own cash flow grow for future AI investments.

That and one of the most interesting things I heard last year on CNBC.  I can’t recal which tech investor was on TV but he said, listening, cloud capacity has now natural borders referring to borders of countries that are affected by tariffs.  Outside of a few countries, do most US countries care where their data is hosted?  Do they care if the data sits in Germany, Japan, Mexico, Canada or the USA? He hypnotized and I believe rightly so, if on premise technology costs in the USA skyrocket due to tariffs, don’t you think this will actually accelerate cloud usage and demand more as US companies defer high upfront capex for additional outsource cloud usage and capacity?

Yes, I know that earnings visibility is almost nonexistent short term. However, it always is at lows.  Remember stocks are discounting mechanisms looking forward into the future.  A great chart from Josh Brown and another from Michael Batnick and the Irrelevant investor reminding investors how far in advance stocks bottom before the economy improves and earnings visibility returns.

Price bottoms almost 9 months before earnings due in bull markets. As long-term investors like to remind newbies, the market doesn’t wait for an all clear.  Just look back at Covid or the 2022 earnings recession for recent examples. In fact, post Covid, the S&P 500 was almost 50% higher than its pre-covid high, before S&P500 earnings bottomed and turned up.  If you wait for the all clear in covid, you were “late” by 100% of the Covid lows and 50% late off the prior covid highs.  Stocks anticipate turns.

We hear a lot from prospects that the markets are too volatile right now. I’m going to wait until things settle down.  I get it.  When things are moving this fast it feels horrible.  However, historically, this is exactly when individual investors should be slowly adding to their long-term stock allocations not retreating.  Why? Because time is on your side.  Volailty has ramped because there are many traders being forced to sell at the lows.  Being “derisked” Being blown out for taking excessive risk at the wrong time.

A great chart from Jay Kaeppel at Sentiment Trader on 10% 5-day trading ranges, historically marking lows not highs in the markets.  As I like to say, they don’t liquidate Hedge funds at highs.

Investors, regardless of how you look at it or how you are feeling, historically, buying the SP500 and walking away from weeks like April 11^th, you had a over 80% chance of generating an average return of +17% over the next 12 months.

And one final note on volatility creating opportunity for longer term investors, that is not hedge funds being zeroed out at the lows, from my friend Chris Galipeau and Wookash (Lukasz Kalwak) at Franklin Templeton.  Per their research, since 1950 the S&P 500 has dropped more than -10%, or corrected, 38 times.  Those are both recessionary periods and non- periods. Investors on average the correction lasted 44 trading days before the bottom was found and the recovery process began.

If you don’t engage the Oak Harvest Investment Team to help you manage your portfolio, besides the SP500 index what would history say you should you buy?  Most likely, technology stocks and growth stocks that have been suffering since mid last year when real growth expectations peaked.  Why? Because President Trump just reversed a large part of the draconian tariffs that were going to technology and semiconductor businesses and had been crushing their stocks YTD. A reminder of % of sales outside the USA by index.  Mag7 tech stocks almost 50% foreign sales.  The NDX technology heavy index, almost 46% of sales overseas.

Whether it is foreign government purchases of USA technology goods and services, or foreign manufactured and sourced hardware backed by American designed IP, think DELL and Apple, almost 50% of technology sales are made outside the US.

More specifically in relation to recently announced technology, smart phones, and electronic exemptions according to government data, the U.S. Imported almost $390 Billion of semis and computers in 2024, including U$100bn or 23% of total imports from China.  According to Rand China Research, the biggest category related to China is smartphones. Last year, the US imported phones worth around $41billion. Smartphones alone, accounted for almost 9% of total imports from China. Thank you, Apple. Computer hardware accounted for another $36 billion in 2024, think of the likes of Dell, HP, and other AI box makers.   Altogether, the new “exemptions” cover semiconductors and consumer electronic worth almost 22% of Chinese import in 2024.

Another great table from Jay shows the returns of the Nasdaq 100, tech heavy index AFTER the VIX crosses back below 45 like it did early Friday April 11^th.

Yes, you are reading those numbers correctly.  A 94% 1-year win rate with +42% average return, median return of 46.6% and very high hit rate.  And yes, investors this does include the LTCM blow up time period of late 1998 during dot.com that we previously noted.

I will leave you with some more historic data that we share before the lows late in the week of April 11^th, that said this is was NOT the time to panic and sell out of your portfolio of stocks, particularly if you are working with a financial advisor and have a long-term financial plan that has been stressed tested for economic downturns, recessions, and hopefully one-off events like this one.

Historical volatility spikes like we just saw are buy and mold points, not pull the rip cord and eject points.  Charlie Bilello and Creative planning always out with great data showing historic 1yr through 5 years forward returns on VIX spikes like these.

As we’ve tried to message many times over the last 7 years, periods of super high volatility have historically been the time individual investors should be investing, not retreating for the long term. Periods measured in years, adding some to stocks slowly and  walking away, or dollar cost averaging, as your best percentage returns historically have come when putting money into the markets during recessions are other economic downturns such as these.

No there is not a lot of good economic news out there on the screens right now.  These are definitely the times that are stressful for investors and those cared with managing others savings and financial plans. Can the markets go lower, of course there are no guarantees. But at extreme levels of volatility historically, equities being long term assets whose returns are measured in years not weeks and months, its been better to add to investments slowly rather than panic and pull the ripcord.

Regardless of the path for the economy and financial markets in the next few months, the investment team at OHFG will be here manning the ship and adjusting our models and long/short, hedged equity fund where we can.

Until next week, have a blessed weekend and know that the OHFG team is doing what we can to plan for you and your families future regardless of what stage you are at in your career or retirement.

 

1 Mo-TR       2025-YTD           6 Mo’s            2H24+

OHFGX Fund         +4.8%           -1.2%            +1.1%           +4.85%

S&P500                   -3.6%            -8.7%            -7.1%            -1.0%

OHFG BCGrwth     -3.5%            -8.6%            -5.7%            -0.86%

Nasdaq Comp        -5.2%            -13.2%           -8.5%            -5.9%

OHFG DivGrwth     -4.8%            -5.0%            -5.3%            +5.2%

INDU Index            -4.1%            -5.1%            -5.4%            +4.0%

https://finance.yahoo.com/news/trump-exempts-phones-computers-chips-124707368.html

 

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