Taper Tantrum? Seasonal Swoon? We think BOTH are unlikely.

Join Oak Harvest for today’s edition of Stock Talk! We cover two “hot topics” in the world of investment analysis – a taper tantrum and a seasonal swoon. Our view is that neither is likely this year, and in this podcast, Oak Harvest explains why!

Chris Perras: Hey, happy Friday the 13th. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We’re an investment management and financial planning firm here in Houston, Texas. Welcome to our Friday, August 13th Stock Talk Podcast: Keeping You Connected to Your Money. Well, if you don’t want to hear a modified replay of a couple of our recent podcasts, you go ahead and skip this one. Given it’s Friday the 13th, I’m combining two, which we believe are over-hyped fears and concerns into one podcast. That’s Taper Tantrum and Seasonal Swoon. The data says both highly are unlikely.

The latest fear-mongering on TV and in newsletters by many is the coming August through October seasonal swoon caused by anything. Choose your excuse, take your pick. A 2013-like taper tantrum, or maybe it’s the recent upturn in virus cases caused by the COVID Delta variant, or the third one I’ve heard recently is the looming debt ceiling battle in Congress. You name a bearish argument for the upcoming two to three months, and I’ve heard it.

We remind listeners that most of these strategists and commentators have been parroting the same type warning calls on the markets for upwards of 12 months. I’m not going to rehash the last 80 to 100 years of data that most of these forecasters are using to get their conclusions. Instead, I’m going to go ahead and stick to the data set the Oak Harvest team believes matters. What’s that data set? Well, the data set is the year since QE at the Federal Reserve began. That was in late 2008/early 2009 through current times. Yes, we are using less data rather than more. Why? Because time and time again, this cycle, since the great financial crisis, the last 10 to 12 years has shown itself to be consistent. We will use this data set so long as the model works for us.

More precisely, given we are in the first presidential year of a presidential term, we are looking at the years 2009, 2013, and 2017, all of which fell during varying QE cycles. Yes, I know data scientists will tell you more data is always better. In this case, I believe they are wrong. I ask you first, why are they using data all the way back to 1929 in the case of seasonality? Yes, that gives you more data, but is it relevant data?

My argument, as it has been for the last 15 months, is people are using way too much data looking for historic analogies. The number one reason I believe these prior timeframes encompass mainly irrelevant data is the Federal Reserve and its QE policies. Yes, its QE program did not exist before late 2008/2009, so why in the world are we using data back before that time period? I’ve argued and shown by way of data for the better part of 15 months that this recovery has mirrored more recent time periods that current investors are more attuned to. That time period, the post-financial crisis period of late 2008/early 2009, through current day.

As we confine our data to what we believe are the relevant years of 2009, 2013, and 2017, what do we find? What you find is that most of these strategists seem to be fear-mongering. Why do I say this? Because the data says this. First off, there have been three first-year presidential terms since the great financial crisis; 2009, 2013, and 2017. Two under Obama, and one under President Trump. I’m currently excluding the cycle we’re in now under President Biden. Obviously, these administrations had 180-degree differences in economic and fiscal policies. However, what they did have in common is they all had the Federal Reserve providing varying degrees of QE and monetary easing.

What happened during the second half of each of those years? Well, here’s the data. There were 16 months combined over the second half of those three years, the months being July through December. Guess what? In those three years, there were a total of only two down months out of the back half of the year. Two down months out of 18, you’re thinking, “You’re kidding, right?” The answer is no. Just look at the data. You must be thinking to yourself, “Yes, there were only two, but given all those dire warnings on TV, I’m sure the market cratered in those two months. Minus 10%, minus 15%, minus 20%, given all the warnings I’m hearing on TV and in newsletters.”

Nope, listeners. October 2009 was down just under 2%. The second one, August of 2013 was down just over 3%, about 3.13%. That’s it. Two months out of 18 months over the second half of three similar years to this year. Similar in QE status, similar in interest rate movement, and similar in volatility trend. Guess what, listeners. In each of those years, 2009, 2013, and 2017, that lone down month during the August through October time period was the only down month in the markets for the remainder of the year. That was it. You got one dip, and that was it.

To put this in perspective, should we behave in a similar manner over the next few months? That big swoon that most people are calling for would confine itself to 3% to 4%, putting the S&P 500 back around 4300, 4325, or a level we were at about four weeks ago. “Well, but Chris–” you’d say, “You’re leaving out that rampant increase in volatility that comes in August through October that most of these strategists are pointing to. Sure, we didn’t drop much in those few months, but I’m sure within that month, markets were wildly volatile throughout the monthly periods you’re talking about.” That answer, no.

Focus on the same time periods of 2009, 2013, and 2017, and what you will see is out of those combined 18 months between July and December in those years, in only five months did future implied volatility rise. Guess what, only one of those months came after the month of August, which we’re already halfway through. The lone month after August that future implied volatility rose in 2009, 2013, and 2017 was November of 2017. That’s it. One month in the second half of three similar years after August when volatility rose.

In the end, here is where the investment team at Oak Harvest stands. As far as we’re concerned, bears’ and strategists’ calls for minus 10%, minus 15%, and even minus 20% corrections continue to be grasping at straws. Those calls for a seasonal swoon, or a taper tantrum, or a debt ceiling swoon, most are being made by those wrongly calling [unintelligible 00:06:58] recovery the last 12 to 15 months are likely to be wrong again. It’s summer, and as far as the team at Oak Harvest is concerned, so far, it’s a very normal one at that. For now, we continue to sing the same tune, let the good times roll on.

At Oak Harvest, we’re a comprehensive wealth management and financial planning advisor located right here in Houston, Texas. Give us a call at 281-822-1350 and speak to a financial advisor. My name is Chris Perras, and you have a blessed weekend.

Speaker 2: All content contained within Oak Harvest Podcast 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.