Stalled: Goldilocks forthcoming in H2 2021

Stalled and waiting. For the past 3–4 months, almost everyone on TV has been parroting the same sector-allocation theory. And the squawking amounts to this: Have your positions long in value vs growth, small caps vs large, and international vs domestic.

Stalled and waiting, explained

Chris Perras, CFA®, ChFC®, Chief Investment Officer, explains why these assessments are late at best. He also explains why they are wrong for H2 2021. Then he lays out his take on market action in June, the second half of 2021 and early 2022.

 

Resources

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• Check out these helpful podcasts by Chris Perras, CFA®, here.

 

Chris Perras: Hey, happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We are wealth management and financial advisor in Houston, Texas. Welcome to our June 4th Stock Talk Podcast: Keeping you connected to your money.

First off, no singing this week for me. Second, I hope you had a great long Memorial Day weekend. Third, I hope you’re not taking your market cues from the crowd day trading memes stocks like AMC, GME, and KOSS, because those names are virtually irrelevant to the overall market, and are definitely irrelevant to your retirement plan. Fourth, know our outlook for the summer in 2021 has not changed this week at all.

We still expect June to be a very choppy, sloppy month for the markets, but we see it as the likely time to find additional names for the second half of 2021 through the first half of 2022. Marketwise, we continue to trade in a wide band around our sell tax day and go away call the week of April 16th when the S&P 500 closed at 4185. In fact, as of last night’s close, the S&P 500 stood a whopping 15 points higher than tax day seven weeks ago.

It’s summer in the markets. This is what a normal second quarter in the first-year presidential term looks like. Go back and look at the S&P 500 chart in 2013 with President Obama or 2017 with President Trump. It takes time to assimilate first-quarter gains. For the past three to four months almost everyone on TV has been parroting the same sector-allocation theory. What’s that? That’s long value overgrowth, small-cap over large, international over domestic. In this podcast, I want to lift the curtain on why these missives are late at best, and I believe flat-out wrong for the second half of 2021.

The investment team at Oak Harvest seems to be early to ferreting out the emerging trends. Whether it was pent-up demand for housing and autos, which we first spoke of in May of last year by watching for turn up in lumber prices and copper prices, or being early to the current surge of double ordering for some lower-end semiconductors, which we spotted early in the first quarter of this year.

How do we do this? We do this by looking almost entirely behind the scenes for real-time market indicators that are leading not lagging indicators. We’re not trying to wait around for stale government data on jobs or wait until the coast is clear when management teams are all parroting the same themes.

What do we see now before others do? First and foremost, we see that the true Goldilocks for both the economy and stock market is right around the corner. What you might say. The markets are already up 10% year to date, and now inflation and raising taxes are likely going much higher under President Biden. We say you ain’t seen nothing yet for the second half of 2021 through early 2022.

Forget what you’re hearing on TV. The bond market is saying that inflation has already peaked. In fact, I can give you the actual dates the market says it peaked. What are those dates? May 10th through May 12th. Guess what happened on those days? Yes, you’re correct. The real growth component of interest rates started turning up. Listeners, as aside, if you wonder when the meme stocks like AMC, KOSS, and GME reignited upwards; yes, you guessed it right, exactly those same days.

The real-time breakeven inflation interest rate curve up every maturity peaked weeks ago. The 2-year inflation rate, the 5-year inflation rate, the 10-year inflation rate, and, yes, the 30-year inflation rate measured in real time, not by government data, peaked at the end of April. Things that lead inflation indicators that troughed a year ago in line with our pent-up demand call back then look to have now all peaked. Yes, listeners, scrap steel, lumber, and agriculture commodities, which you hear about on TV all day, all looked lower not higher now.

Conversely, what groups are starting to outperform? Yes, you guessed it. Large-cap tech, FANG stocks, biotech stocks, online gaming stocks, secular growth stocks, and even growth at any price groups like Solar and SaaS software have led the last week’s rally. When did all this happen? It happened exactly when about 99% that the TV commentators were out there parroting the exact same theme of buy value, buy and sell calls, and stay away from growth stocks.

If you want a true reason for these shifts, look no further in real time to the shape and momentum in the interest rate yield curve, the trend in the inflationary component, and the trend in the real growth component. What you will see is exactly opposite of what you’ve been hearing on TV for the past one to two months. You will see inflation peaking and real growth beginning to re-accelerate. Listeners, this is exactly what Goldilocks looks like, slightly higher trending long-term interest rates led by the real growth component, not the inflationary component.

Just yesterday, we got a strong jobs number than the federal government number. What happened to the bond market? What happened is the long-term interest rates rose as you would expect. However, if you look behind the scenes at the components of the bond market, one would see an incredibly bullish dynamic developing for the second half of 2021 much the same way we saw the bullish move in stock markets setting up weeks and months before most others in the second quarter of 2020.

You would see Goldilocks is developing for the second half of 2021. Goldilocks is accelerating real growth with peaking inflation. When this happens, like it did both in the second half of 2013 and the 2017, long-term interest rate grind higher over months and quarters. Companies beat on both revenue and margins, and EPS expectations generally are too low for the next 9 to 12 months.

Earnings estimates and analyst targets tend to be too low, and the overall stock market surprises most everyone to the upside as volatility subsides back to lower not higher levels, usually getting cut in half with spot volatility dropping into the 12 to 12.5 range.

We are in a secular bull market, and rotations happen throughout bull markets. We’re still stuck in the summer stall, but I wanted to point to these things because they’re real time as they’re happening, not five to six months later after they’ve already been factored in the markets. We expect June to remain choppy, sloppy, weepy, and thoroughly frustrating to most investors who are trying to make something out of every news story, piece of economic data, or meme stock move.

The Oak Harvest projecting for year end 2021 and early 2022 hasn’t changed. It remains 4600 to 4700. This is not a stretch by historical standards. Our targets are merely within the statistical average for a bull market. The selloff we experienced in late first quarter 2020 is much closer in behavior to a 1987 stock market crash or the 911 terrorist bombing that merely interrupted an ongoing bull market. It didn’t create a secular bear market or a period of stagnation.

After July 4th, and no later than, say, Labor Day this summer, big investors will once again be looking forward to the second half of 2021 and 2022. What they will see is that higher secular growth companies that peaked way back in around September of 2020 on an absolute and relative basis have stalled for a year. The evaluations have compressed and now they look cheap but still long-term growth in free cash flow profiles.

Listeners, at Oak Harvest, we are comprehensive wealth management and financial planning advisor located right here in Houston, Texas. Call us at 281-822-1350. We’re here to help you on your financial journey. God bless. Have a great weekend. I’m Chris Perras at Oak Harvest.

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Voice-over: All content contained within Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created but any cited data, indicators, statistics, or other sources are not guaranteed. The views and opinions expressed herein may change without notice.

Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax, or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment, and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss, and past performance is not indicative of future results.