What If Part Two: The Two Rules

On this episode of Stock Talk, Oak Harvest answers the question raised on last week’s episode “What if?” What if things AREN’T different this time? What does it mean for the stock market the rest of this year? Join Chris Perras for analysis and discussion of the data!

 

Chris Perras: Hey, happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group. We’re an independently owned investment and retirement planning advisor located in Houston Texas. Welcome to our September 17th Stock Talk Podcast: Keeping You Connected to Your Money. Well, we are in the mid-September in the depths of the third quarter dead zone.  Why do we call it the dead zone? I call it this because starting the third month of every earnings reporting quarter of the year, companies and their management teams increasingly enter what is known as a quiet period.

This doesn’t mean that things are quiet. No, it means that this is the time of the quarter when direct company-initiated information on how their businesses are doing, well, that information slows and it eventually ends to comply with SEC and federal inside information and Regulatory FD rules. That means investors are left trying to filter out the noise and determine for themselves if and what macro or tangential information might be relevant to their investing time horizon. If anything, the noise level rises. It doesn’t fall during this time period.

Additionally, the window for company-initiated stock buybacks, it peaks and begins to decline all through September. As this happens, short-term volatility normally tends to rise as it has the last two weeks. The S&P 500 now sits about 2% to 2.5% below its all-time highs. If you tuned on the TV, you might think the economy  and the markets were on the verge of collapse.

Last week’s podcast was brief and postulated this question. This question was, what if? What did I mean by that I meant what if two of the simplest rules investing continue to hold true exactly contrary to all those recent tactical calls for corrections and weakness. Those two rules, rule one, don’t fight the Federal Reserve, and rule two, no it isn’t different this time. None of us knows what the future holds day to day or week to week. COVID proved that last year. Including the team at Oak Harvest, we don’t know. We use data and history and investor behavior and try to make educated and informed decisions.

I don’t know what the future holds but I can project what is the likely outcome if, and I do mean if investors continue to follow the two prior simplest rules that have held amazingly true this cycle since 2009 and since the COVID lows of last year. Those two rules, once again, don’t fight the Fed and no it isn’t different this time. Listeners, here are the results of my findings from looking at the world in that way. Please recall this has been our mantra all year. We are just using data during first presidential terms this cycle. This cycle since 2008, 2009.

I know that’s a smaller dataset than others are using but this is the data that I’m confining this due to the two rules. If the past is the same and continues into the future, if it isn’t different this time, if you aren’t supposed to fight the Fed, we will not get another minus 5% this year. No, it isn’t different this time. In fact, if these things hold true, this past week’s lows are the lows for the rest of the year, an more mindful numbing number for the bears.

The markets would begin their year-end rally over the next few weeks, and it would build higher and higher the rest of the year. It would be back to the lurching grind higher. I repeat, if it is not different this time, the lows we saw early this week and late last week would likely be the lows for the rest of the year. If it isn’t different this time.

Sorry, Barry Bannister or Mike Wilson or the rest of you. They’re calling for big moves down. It shouldn’t come until the middle of the first quarter of 2022 if those two rules continue to hold. That’s what the small dataset of the second half of 2009, the second half of 2013, and the second half of 2017 say would likely happen. The back half of September would likely give way to a rally bringing us back to flat for the month of September or maybe even up to new all-time highs, and that we would see more new all-time highs in early October and much higher new all-time highs in the fourth quarter.

Yes investors, no guarantees. If the two rules don’t fight the Fed, and no, it’s not different this time, that’s what the results would say from what’s happened this cycle.  I spent quite some time trying to think why it might be the same again this year, what the excuses would be after a rally, and why we could repeat this pattern for a fourth time. A pattern we’ve been repeating year-to-date already many times.

I’ll give you a few of my theories for you to ponder. First, despite all the concerns out there, the options market is saying that investors are fearful and still overpaying for insurance. Who makes money in the insurance industry? The insurers do. If and when these expensive hedges expire every month, the premium that is spent, which is currently about three times the true market volatility in the market, expires worthless. The casino operator makes the money, not the hedger or the gambler.

There’s been so much advertised about seasonal weakness. What happens later in September, if and when there are very few earnings warnings by companies, or if companies reports and their stocks don’t drop when they warn, like the recent behavior of the airline and auto stocks that pre-announced earnings and the stocks have been going up. That would leave negative position investors left covering shorts.

I think many people forget that the third quarter of our calendar year is rarely, if ever, a great earnings quarter for the overall market because we are a 75% consumer and service-driven economy, and late in the third quarter, people are generally focused more on back to school and end of summer things rather than consumption. This year, throwing the Delta variant to slow things down.

We typically leave consumption behaviors for the fourth quarter and first quarter here in the United States. I thought what positive things could dramatically and rapidly turn around both consumer sentiment and investor behavior after the Delta variant, which has recently done it both here in the United States and the globe? I think I heard that answer Wednesday morning on CNBC, while Dr. Scott Gottlieb was being interviewed. What did he say that got me thinking?  Wow, no one is discussing this and it was a big deal when it happened last year what’s that?

Well, Dr. Gottlieb is the former head of the FDA and he sits on the Pfizer board. The trial data on vaccinating children aged five to 12 should be released later this month and filed with the FDA in early October. Listeners, recall what happened in early November of 2020 on November 9th, when the original vaccine data was released in the midst of a heated post-presidential election swirl.

What happened? Well, the S&P 500 gapped to a new all-time high, trapped all the negative position investors, and didn’t look back again for almost three straight months, as volatility dropped by almost 10 points and the S&P 500 rallied 10% to 12% over the next three to four months. A similar reaction and outcome to such an event later this month or early October would place the S&P 500 near both Rich Ross of Evercore ISI and Dave Kostin of Goldman Sachs’ optimistic year-end first quarter ’22 targets of around 4,950 to 5,000 on the S&P 500.

Long term, interest rates would gradually rise and market breadth which everyone keeps talking about negatively would improve. Volatility would drop for a third and final wave down, and market bears would once again be proven wrong, as most likely, fourth quarter of this year and first quarter of next year would be an echo of the pent-up demand theme we had in the second half of last year.

The retail data this week already is pointing to an uptick in spending as the Delta variant looks to have peaked last week. The Gen X and Millennials are driving the overall US economy. They are the largest population in America. Millennials are the age group between the age 25 and 45, and as much grief as that group gets on CNBC and Fox News, they control the economy.  What are they worried about first and foremost right now? Well, they’re worried about their children’s health and returning to a normal school and work schedule.

What did the Delta Variant do? It slowed down their spending and their sentiment on the future. If the vaccine data for children under the age of 12 comes back positively, a great deal of their worries will be removed for the fourth quarter of this year and the beginning of next year. What happens then? Well, pent-up demand round two for the fourth quarter of 2021 and the first quarter of 2022 returns.

That would happen with earnings for the overall market doing what?  Well, those estimates for the fourth quarter of this year in early next year would be much too low as consumer sentiment turns positive, just as labor market rallies and just as stocks head into their normal seasonally strong period. After all of these, strategists are saying a big down move is forthcoming. All these things would be transpiring still under the backdrop of the friendly Federal Reserve.

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, talk to a financial advisor here, and let us help you craft a financial plan that is independent of the volatility of the stock markets. Have a great weekend and God bless.

 

Speaker 2: All content contained within Oak Harvest’s 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.