Stock Talk - 4th Quarter Market Risks

Starting point is 00:00:00 It was 110 degrees in Houston when I wrote this week's episode this weekend. This is going to be posted in front of the long Labor Day weekend. Clearly, summer in the southwest is far from over here. It usually doesn't cool off here in Houston until after Halloween. So why in the world would I ever think of writing about the risks for winter in the markets this year or in the first half of 2024? Because that's what a good portfolio manager does. They worry about what could happen in the future.

Starting point is 00:00:26 they size up the probabilities if it is happening and take action or more often than not inaction. The title of this week's episode is Looming Fourth Quarter Risks. Before we press onward, please take a moment to click on both the subscribe and notification bells so you'll be alerted when our investment team uploads our latest content. Or better yet, call our Old Carver's team at 877-896-0040 to speak to our team and set up an initial consultation with an O'Carver's advisor to discuss your financial situation. Post the strong first half move in 2023, we've entered what has become our anticipated sloppy choppy sideways behavior. Call it a trading range.

Starting point is 00:01:05 Call it a general consolidation. Call it a lull. A good swing trader will call it heaven or Goldilocks, as we have seen no net price appreciation in the S&P 500 since mid-June. More precisely, we've seen little to no net appreciation since Thursday, June 15th, option expiration, cash closing high of 4425 in the S&P 500. I have to remind investors that this was only three days after hedge fund billionaire and market guru to many CNBC viewers, Ray Dalio, having missed almost 20% up off the October 22 lows, said, it was time to buy stocks. Take a look at the daily chart of the S&P 500 for the last 18 months. We got oversold late Friday, August 19th. Just as many bears emerged once again from their caves preaching a crash is forthcoming calls for the upteteenth time in the last few years.

Starting point is 00:01:56 or decades if you're Jeremy Grant them. Of course, just to sentiment had gotten dour, the markets started to bounce just that they have historically, more often than not, in the third-year presidential cycles in late August through mid-September. With the stock markets bouncing around for the last four to six weeks, our investment team has been processing second quarter earnings reports. We've been looking at some of the important economic data, of which there's much less than most TV economists, politician, and newsletter writers want you to believe, and we're trying to position our portfolios for the fourth quarter of 2023 and the first half at 2024. Remember, nothing is certain in the markets. Nothing except investor behavior

Starting point is 00:02:36 does tend to repeat itself time and time again. What are the biggest risks of the markets in the economy for the fourth quarter of 2023? In my eyes, that's easy. First and foremost, Federal Reserve Chairman Jerome Powell remains inflexible and thinks inflation is running too high, and like Clubber Lang and Rocky Three, he feels the need to bring the pay. and keep interest rates high in the fourth quarter and beyond. What's your prediction for the fight with? Prediction? Yes, prediction.

Starting point is 00:03:03 Pain. As the investment team projected back in midsummer of 2022, inflation is measured by almost every metric in the CPI has plummeted symmetrically since it peaked at over 9%. Since the investment team at Old Carvis likes to look at the real-time data, not always adjusted and seldom write government data, Here are a few market-based time series and charts for you. One-year break-even inflation rates, which peaked out at almost six and a quarter percent in March of 2022 are back below one and a half percent.

Starting point is 00:03:36 The same level they were pre-COVID, pre-COVID relief money printing, and pre-government fiscal spending boom the last 12 months. One year, real interest rates, which is the premium over-inflation investors earned by buying treasury bonds, has gone from minus 4 percent during the Fed balance sheet, explosion in 2021 and 2022 to almost positive 4% currently. Look at the chart and let it sink in. What's this mean to you and an investor? Well, it means the market is saying you will earn a 4% positive real return versus inflation over the next year by buying one-year treasury bills. Of course, you will have some reinvestment risk beyond one year. But as one can see, that is historically high except for the fourth quarter of 2018, or Powell stayed too tight. monetary policy in Christmas into year end. Okay, one year's too short of a window to look at for

Starting point is 00:04:28 many people. Let's look at real-time market data for 10-year treasury bonds, inflation and real interest rates. Ten-year real break-even inflation rates in real time in tradable markets say inflation peaked at over 3.1 percent, and it's now down to around 2.3 percent. That's about the same level as pre-COVID. It's about the same level as peaks in inflation during the Trump presidency, and it's pretty much the same peak level every year since the dot-com bubble ended in March of 2000, 22, 23 years ago. The 10-year real return of an investor buying a 10-year treasury is now around 2%. Take a look at that chart.

Starting point is 00:05:07 Okay, so I know you're thinking, Chris, pretty charts, thanks for the update on inflation and interest rate, but what does this mean to me as an investor? To me, it means that the Federal Reserve is already plenty tight in monetary policy, and they should not only not raise interest rates further, they should tone down the academic economic mumbo-jumbo-jum-speak around our star and get back to looking at the real world and looking at real-world real-time evidence. You don't get to a 4% real return on one-year treasuries if the Fed is not too tight. You don't get massive amounts of crime at lower and mid-tier retailers when the economy is rocking higher.

Starting point is 00:05:45 You don't get T-Mobile laying off 5,000 employees in good times. You don't get Macy's surprised by the exponential increase in credit card delinquencies and losses in Goldilocks moments, do you? No. You don't get commodity prices trading at two-year lows when the global economy is on fire. And you don't get regional bank stocks trading at multi-year lows if credit is easy to come by. The biggest risk to the economy and the markets in the fourth quarter this year is that Jerome Powell and the rest of the crew at the Fed are too tight into the fourth quarter.

Starting point is 00:06:16 It's that job layoffs increase. The U.S. consumer doesn't show up for the holidays, and the Fed creates a repeat mess in the stock markets and in the banking system. Just as they did in the fourth quarter of 2018, when liquidity evaporated into year end and Jerome Powell had to reverse his course. Will the same things happen in the fourth quarter of 2003 that happened into Christmas of 2018? Because the Fed wants to prove a point. They want to prove that they have it, inflation under control, even though it already mostly is. For now, our investment team thinks no. And we expect the second half at 2003 and the first quarter of 2024 to play out much the same way most third-year presidential cycles do.

Starting point is 00:06:57 A pause and a consolidation in the third quarter, an early fourth quarter that refreshes a year-end rally and a strong initial 2024. But we like others are busy monitoring our data in client portfolios, busy watching how the remainder of 2020 plays out. At O'Carvis, we currently manage broadly diversified equity portfolios that balance risk and reward for clients. We don't concentrate our client funds in any one or two sectors seeking to hit a grand slam. We try to hit singles and doubles and occasionally a home run if someone makes a mistake and we find a stock in the right price at the right time. For those investors who are less optimistic and don't like risk taking as much, those seeking higher dividend income that grow, those investors willing to forego some potential price appreciation in favor of lower volatility, we have a dividend growth equity model. For those investors who are more optimistic,

Starting point is 00:07:48 seeking higher long-term price appreciation, which does carry higher expected volatility, without the focus on dividend income, we have a blue-chip growth equity model. The overall tools our advisors and financial planners use are usually a combination of market-based and insurance-based tools to meet your retirement goals. Our investment team is busy working on some new

Starting point is 00:08:06 and highly unique equity products, and few advisor teams have the experience behind them that our investment team has. We plan on introducing one of these new equity products for advisors to use as tools for our clients in the not so distant future. One of these tools may even allow our investment team to express negative views on single stocks, sectors, or the markets in general, if we desire. Stay tuned. The future in the stock markets are always uncertain. That's why our retirement planning teams plan for your retirement needs first and your greed second.

Starting point is 00:08:35 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 877-896-0-0-0-40. and schedule an advisor consultation. We're here to help you on your financial journey into and through your retirement years. For myself and the rest of the team are here at Oak Harvest. Have a great Labor Day weekend. All content contained with an 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.

Starting point is 00:09:15 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 clients. portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - 4th Quarter Market Risks

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