The Markets Are Up…No, The Markets Are Down…No…Now What? | Stock Talk Podcast

On Friday, March 11th, during the 1st quarter correction that took the cash S&P500 down -13%, from its closing high to cash closing low, if you were perfect, that our investment team had foreshadowed back in early November of 2021, we put out our Friday podcast titled “things that lead- early optimism, signs of bottoms, lows and pivots. Then the next Monday, The S&P500 closed the day at around 4170, and the bears came out of the woodwork, declaring the end of the world due to the S&P500 forming a “death cross” technical pattern.

 

We did a podcast a few days later on that topic, debunking that “myth” with the real data sets and facts. Since the March 14th, Monday closing low in the SP500 of 4170, the overall index proceeded to rally almost 11% in less than three weeks, ending the volatile first quarter on a high note. Short-term Measures of volatility, like the spot vix, collapsed along the way from close to 35 to under 20.

 

I digress for a moment to tell you that it’s funny that I got only one call from a client and prospect the last four weeks asking about why the markets were rocketing higher in a volatile fashion. You see, viewers, we have selective bias in the markets

like we do in most things human. Most of us tend to complain about high volatility when the markets drop, but we are seemingly ok and dismissive of “volatility” so long as the screen is green? Viewers, they are both markets of volatility. Volatility is a measurement of change, not direction. We just like that the direction of positive volatility changes our portfolio to green.

 

I imagine the question now is what’s next for the second quarter. Have we gotten through a turbulent first quarter as you said we would months ago? Are we off to the races, you might ask? Unfortunately, my answer there is that’s highly unlikely. The so-called crystal ball says that overall, there should be another two quarters of sloppy, choppy messy stock market action.

 

There will likely be more indecision and emotion in the markets over the next six months due to a myriad of excuses. Here’s an early list I can think of:

1. Federal Reserve interest rate policy.

2. Ongoing economic slowing due to Russia Ukraine.

3. Higher mortgage rates zapping some consumer demand along with sentiment.

4. Higher commodity costs pinching demand and margins.

With all of those worries, things should remain sloppy and rotational. If pressed, I would say that the market’s second quarter looks like a lurch and grind outcome higher. How much higher? Viewers, normal would have us approaching or even hitting new all-time highs over the next three months into late June. Call that a +4% up lurch and grind over three months. Viewers, that is actually the normal path of the markets this cycle since 2009.

However, should that play out, I would expect much or almost all of the 2nd quarter gains to be erased in the 3rd quarter of the year before equity investors could set their sights on a 4th quarter through first half of 2023 economic reopening, consumer-led rally as inflation would be peaking and other countries throughout the world would be moving on from Covid finally. Cycle-wise, this would take the overall markets to material new all-time highs in the 1st half of 2023. However, until later in the year, this should remain a sloppy, choppy, rotational, lurch and grind mess for the upcoming months.

Given that the volatile first quarter is now behind us, a number of clients have asked, Chris, if you saw this turbulence coming, why weren’t you doing more or trading more?

My response has remained the same since I came on board here at Oak Harvest. Viewers, while I have 30 years of experience doing this for other people, my friends, and business associates, we are not running a hedge fund at Oak Harvest. Being a math guy, one only must look at the numbers. Trying to market time anything other than a major recession or multiyear bear market is largely an act of arrogance, ignorance, and futility. Why? Because You must be right twice on both price and time.

Over the years and decades, our economy has expanded and grown. Over time, stocks have proven a fantastic compounding mechanism for investors, rewarding patient investors with, nonguaranteed, returns above bonds. The markets have rewarded patient individuals who have been willing to let the overall indexes or selective companies compound their money, largely tax-free, sans dividends.

Think of the math behind genuinely adding value to clients’ portfolios around positioning and repositioning for a -10-15% normal correction which I remind investors has occurred virtually every year. I will use the S&P500 index as my example

since everyone knows what it is. And I am going to ignore taxes which you can for retirement accounts, but we all know you can’t in other taxable accounts.

To truly add value, mathematically speaking, you would have had to move at least 30-50% of a portfolio out of the market or in another safe direction at the exact top and reenter at the exact low. Let’s take the recent -13% correction as a simple example.

Say you are Ax, on the show Billions, and you are perfect, and you liquidate 50% of your stocks at the close on January 3rd in advance of the selling and put it in cash, and then buy all of that back at the close on March 14th. Your portfolio would have still been down -6.5% overall.

And had you blinked or hesitated or been off by just a few days selling too early or buying back after the lows? That “savings” would have been greatly diminished. How much so? So much that had you waited just a few days or weeks because you were scared about the Russian war or the yield curve flattening and things didn’t look or feel good in March, what would your outcome have been? Viewers, by March 29th, your 100% SP500 allocation was down about -3.5% from its all-time closing high, while your now 50/50 equity and cash portfolio was down. Almost twice that at -6.5%. You were right on the sell, but you were off by a few days

buying back in, and now you are wondering what to do with that 50% cash.

Viewers, I walk you through this exercise only to educate you once again that almost always, market timing, in whatever form it’s called, whether it’s called “tactically asset allocating” or something else fancy, almost never works or adds economic value to what is supposed to be a long -term asset allocation that is determined one on one with you and your advisor. Yes, short-term it might make you emotionally feel better, and I admit something can be said for that. However, longer-term, it almost never adds economic value to your portfolio in a way that moves the needle. I will repeat this until my career is over. Ready? Viewers, the time to make or change your long-term asset allocation profile, which could change both your expected investment performance returns as well as your emotional wellbeing, is when the markets are up or stable and the atmosphere is calm and unemotional. This is when most of us are at our best at decision making, thinking clearly. This is when we tend to make decisions based on facts and probabilities.

Under stress, strain and volatility, most of us make decisions based more on feelings and emotions. This is normal human behavior in life and in the markets.

Viewers, we continue to expect more volatility in the upcoming second and third quarters, around which we are likely to make moves around the edges when we find value in single stocks or sectors. Should our market outlook and views change; should we determine that we are experiencing more than a normal corrective period in both price and time in this bull market, we will let you know and make larger adjustments that we believe can move the needle. Until then, we will be moving slowly and looking for companies that look to have either high and stable or improving and accelerating cash investment returns for the second half of 2022 and first half of 2023, when we believe there will be a resumption of the ongoing bull market.

At Oak harvest, we think our clients are best served by us helping them plan for their future needs and risks instead of focusing on the past. Our crystal ball is far from perfect, which is why our advisors and retirement planning teams plan for your retirement needs first, and your greed second.

 

Give us a call to speak to an advisor and let us help you craft a financial plan that meets your retirement goals. Call us at (877) 896-0040. We are here to help you on your financial journey into and through your retirement years.

I’m Chris Perras and have a great weekend!

Summary
The Markets Are Up…No, The Markets Are Down…No…Now What? | Stock Talk Podcast
Title
The Markets Are Up…No, The Markets Are Down…No…Now What? | Stock Talk Podcast
Description

We tend to have a selective bias in the markets like we do in most things human. Most of us tend to complain about high volatility when the markets drop, but we are seemingly ok and dismissive of "volatility" so long as the screen is green? Viewers, they are both markets of volatility. Volatility is a measurement of change, not direction. We just like that the direction of positive volatility changes our portfolio to green.