Summer Slowdown | Stock Talk Podcast
Two weeks ago, our weekly podcast was titled “nowhere to run to, nowhere to hide”. In it, we discussed the fallacy behind the notion of “hiding out” or trying to “hide out” in certain stocks or sectors during market corrections, bear markets or general economic slowdowns. We argued against the notion that there is “always a bull market out there” as discussed on TV by a few hosts. Unless you are running a hedge fund, that’s generally not how the markets or portfolio management works for the masses or most institutions.
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 on the summer slowdown but looking for second half hope, 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.
Earnings season is winding down but last week a few large well-known companies in the consumer space dropped earnings bombs on the market. In the span of a few days, Walmart, Home Depot, and Target all reported their first quarter earnings. While Home Depot reported higher than expected revenue and earnings, both Walmart and Target missed earnings and margin estimates by wide margins.
What happened? Exactly what we were afraid of in the late 4th quarter of last year, but in a much worse manner. Call it the perfect storm for retailing. The short story is this. Companies ordered goods for the second half of 2021. They did this into the Christmas 2021 selling season to restock their shelves that were pretty bare from the consumers buying during the Covid induced stimulus programs in the second half of 2020 and first half of
2021. Unfortunately, much of this inventory was stuck off the coast of California in containers for months when demand was strong. Ultimately, most of these larger items were delivered after the Christmas shopping season and restocked on the shelves, with these retailers having to pay both higher labor rates and shipping rates.
Then, in the first quarter of 2022, consumers did a couple of things in a dramatic and swift turn from the prior 18 months due to a combination of rising interest rates and the war in Ukraine. Consumers went from purchasing lock down oriented items, such as large home good items like furniture, outdoor grills, kitchen appliances, and clothes. And instead, they started spending more of their money on food, beverages, dinning out and travel.
They switched from spending on lock down items to spending incremental dollars on reopening types of goods and services. Additionally, consumers were forced into spending a higher amount of their paychecks and savings on energy bills, both gasoline for cars and home fuel costs. Why? Because energy costs rose dramatically in the first quarter of 2022 due to global sanctions on Russian energy exports.
Now, many investors are asking if we are headed for a recession? I do not know but suspect we could have a mild one given how the government GDP data is calculated. We covered the negative first quarter GDP contraction caused by imports a few weeks ago on our “news or noise” podcast. In that podcast we walked through mathematically, the way GDP is calculated by the government. Additionally, we stated that we thought we could have another negative GDP number this year because of inventory buildup and slowing consumer demand. And
unfortunately we look to have been proven right on the inventory correction by what just happened last week to many retailing stocks.
In the matter of hours, the stocks of retailers Walmart and Target went from beating the S&P500 year to date, because many portfolio managers were “hiding” in them due to their relative stability, to the stocks dropping -15 to 25%. I must admit the size of both stock declines surprised me. However, when looking at Target, I am not sure how investors saw that stock as defensive at 25x trailing earnings and 21 times 2022 earnings before their report. Of course, now that question is now moot.
To make matters worse, some of these retailers are considered “staple” businesses by the stock index creators. With this, their stocks get lumped in with many other truer “staples” such as Coke, Pepsi, or Procter and Gamble. So, businesses bundle all these stocks together into ETF’s. So, like it or not, when one or more retailer like Walmart or Target, or both, miss expectations and their stocks get sold and hit hard by big institutional players, other truer staple stocks become collateral damage to the larger retailers.
In affect there is nowhere to run to and nowhere to hide. This is not just guilt by association. No, this is worse. These stocks are physically tied at the hip of the other stocks that are declining, and longer-term shareholders of these stocks get shellacked over shorter time horizons regardless of corporate fundamentals. Each of these typically boring names were down -5.5-6.5% on the same day that Target reported earnings and dropped -25%. The collateral damage was widespread.
The moral of this story is in market corrections, in both price and time, like the one we are in on the S&P500, or during economic slowdowns, or bear markets as the Nasdaq has endured, there are really no places to “hide”.
“Hiding” is not something one should try to do in the equity markets. That’s not how they are structured. You should either subscribe to the ability of the equity markets, our economy, and good businesses to compound your investments over years and decades, or you look to find lower risk and lower return alternatives, elsewhere. Remember, and I know we have all heard this rule before, the number one rule of investing in the stock markets is long term compounded returns are about time in the market, not market timing.
I am not going to leave you on a sour negative note. I want to provide you a few data points the can point to an improved outlook for the markets in the second half of the year, particularly in the 4th quarter and on. Of course, no guarantees.
First off, I saw a statistic about last week even with its big down Wednesday. Here’s the stat. During the prior three days, the S&P 500 rose over 2% coming off its 52-week low. The last two times that has happened in the past 20 years. March of 2009 and March of 2020. Both instances were near the weekly lows for the indexes for the next 12 to 18 months. Are we nearing selling capitulation? That stat would say it could be close at hand.
Second, while earnings estimates are always in flux during the summer, valuations have dropped considerably the last 6 months and we now sit near the 16 to 16.5x forward earnings. This is pretty much spot-on the average of the last 20 years. Here’s a
chart provided by Goldman Sachs. Yes, inflation is running higher than the last 20 years, however overall interest rates still sit materially lower than other times during the last 20 years. Prices have declined which is making stocks more attractive on a valuation basis.
Here’s another point of note. Sentiment data is extremely pessimistic. Recent surveys by Merrill Lynch on global growth are at levels not seen since the Great Financial crisis in 2009 when fear was high and there was true wobbling in the banking system. Those dynamics do not exist now due to tighter banking regulations and oversite.
On the question of bear markets, how low do they go and how long they last? Here is some great data from LPL Financial summarizing non recessionary bear market moves in the S&P500 over the last 75 years. I think the most interesting thing to note is that 5 out of the 6 last bear and near bear markets that didn’t have a recession declined within a range of -19.3% to -22.2% and lasted on average a little over 7 months.
Right now, the SP500 sits down around 18-19% and we are in our 5th month of this decline. So historically, we should be approaching attractive levels in both price and time as the second quarter ends. The one outlier in the data the last 55 years was the 1987 stock market “crash” that dropped -33.5%. However, I must remind investors that the market was up ++35% year to date before that drop and the markets finished the year up.
Brian Belskis Group at BMO Investments provides us the data on historically what returns have looked like on the other side of these larger moves down in the overall markets. Their research found that looking back at all 20% or greater peak-to-trough
declines since 1945, that the S&P 500 posted average gains of 18.7% and 25.7% in the three and six-month periods following bear market troughs.
Additionally, during the three and six-month periods following 15-20% price corrections like the one we have seen so far, the index registered positive gains of 17.1% and 26%. Following bear market troughs, on average, it has taken US stocks 36 and 138 calendar days to gain 10% and 20%, respectively. The recovery time has been shorter for 15-20% corrections with the S&P 500 posting returns of 10% and 20% after 31 and 115 calendar days, historically. Of course, no promises or guarantees.
Finally, we have discussed the normal volatility of Midterm election years in prior podcasts. Recall midterm years have been historically volatile for stocks with the average decline of over -17% peak to trough before rallying late in the year. The good news is the S&P500 has gained, on average, +32% over the next 12 months off those lows. Here’s that data for those who are interested in the history of elections and the stock markets. The
results have been similar under both parties’ Presidential “leadership”, however the best outcome for stocks has historically been the neutering of the current party’s power from the midterm elections. Shorter term Investors looking at a few quarters to a couple of years, have historically agreed that Washington DC being handcuffed is positive for markets.
Our team here at Oak Harvest knows that the last 5 months has been a trying time in the markets with sustained higher market volatility for the first time in over two years. We know these sharp market moves tend to create emotional angst and the urge to make changes to what are supposed to be longer term asset allocations.
If you are feeling uneasy, I would urge clients to give us a call and schedule a review of your retirement plan with your advisor. Do that before making any dramatic changes during times of heightened market volatility. These types of long-term asset allocation changes are usually best done when markets are calmer and one’s emotions are less elevated.
At Oak 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 is always uncertain and that is why our advisors and 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 281-822-1350, 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.