Stock Talk - Market Analysis: Continued Soft Landing After Strong S&P 500 Q1 Performance? Scenario One

Starting point is 00:00:00 Investors, the S&P 500 just closed out its first quarter with the best performance since 2019. That's the best in five years. It's a top 10, the last 54 years, and in the top 15 since the end of World War II. Investors, this is how stocks behave during a soft landing as we discussed last October. The cash S&P 500 closed out March at 5254. That's a little over 1% higher than our team's optimistic outlook for the first half of 2024, which we set way back in October of last year, when the market sat near 4150 and most strategists were preaching recession fears, lower lows on the charts, and worse yet, coming crashes.

Starting point is 00:00:41 Our team's outlook for the first quarter of 2024 was an exceptionally strong first quarter peaking in mid to late March. This was the normal presidential cycle timing we discussed throughout 2003. Investors for the first quarter, the S&P 500 gained a little over 10.2%. The value-based Dow 30 advanced only 5.6% in the first quarter, and contrary to many financial networks reporting and hyping the tech-heavy NASDAQ, while strong and ending the quarter up over 9.2% lagged the broader S&P 500. For the month of March, the S&P 500 gained 3.1%. The NASDAQ gained about half that at 1.8%. and the Dow rose 2.1%. It was the fifth straight positive month

Starting point is 00:01:27 for all three major averages. AI leader Invidia was the best-performing S&P 500 stock up 82.5% for the first quarter while Tesla's EV battery profit machine ran out of electricity and was the worst performing S&P 500 stock down almost minus 30%. Of course, the question now for investors is where do we go from here during summer?

Starting point is 00:01:51 the election period, and end to year end. Investors, this week, we cover the possible positive outcome of a continued soft landing scenario throughout the second, third, and fourth quarters, resulting in more Goldilocks for the rest of 2024. Next week, we'll present the negative scenarios. Let's start with historic data first, knowing that, one, there are no guarantees that history repeats. However, two, we also know that history often rhymes due to normal, repetitive human behavior,

Starting point is 00:02:21 particularly when it comes to finance and your money. Looking back to World War II, stock markets historian Sam Stovall of CFRA, research points out that strong first quarters have historically foreshadowed even stronger full year gains. Take a look at his table of the top first quarters since 1945. Stovall's data shows that 14 out of the 15 top first quarters since 1945 ended up with additional double-digit percentage returns. The only outlier was 1987. Those prior 14-year gains average 23% total return for the year.

Starting point is 00:02:58 Such a return from our current levels would triangulate to cash S&P 500 near 5,900 at year-end. However, Sam's data series also revealed heightened volatility on the way to those outsized gains. 13 out of the top 15 had declines of minus 5% or more, which is standard in most years. However, the average decline was over minus 11%, which is a little higher than average. Investors' Federal Reserve paused rate hiking almost a year ago, and as since last November, messaged a moderately more doveish interest rate outlook for the second half of 2024, supporting continued sizable gains for the second to fourth quarters of 2024. Investors might ask how stocks are performed during non-recessionary economic times when the Federal Reserve cuts interest rate.

Starting point is 00:03:47 That's when the Fed makes preemptive cuts in order to continue an economic expansion versus cutting rates out of need or desire to kickstart an ailing economy during a recession. With both Switzerland and Mexico cutting rates in the last two weeks and other countries' messaging coming rate cuts, one can make a case for a synchronized global interest rate cutting cycle to have just begun. Investors, this cutting cycle would be bullish for equity assets. Take a look at the great table from Michael Hartnett's group at Bank America Securities, showing previous preemptive cutting cycles since World War II. Investors, as one can see, such cycles have historically been overwhelmingly positive for equities. The additional returns post-initial Fed rate cuts have ranged from 10% over three months to over 15% a year later. I want to drop a triangulation number for the S&P 500 that keeps popping up in my work.

Starting point is 00:04:41 For the first quarter of 2025, what's that number? that number is 6,000. It's the number one gets in a normal soft landing economy target for the first half of 2025 should the Fed navigate the summer storms. That's the number you get, assuming the Fed follows through with their first rate cut around judish of this year and by taking the average nine-month return post-fed cuts from our current level, the 5254 times about 14%. That's around 6,000. While our team had expected a strong first quarter of 2004, calling it Goldilocks in the fourth quarter of last year, we didn't anticipate its near linear rise with a very little volatility at the index level. There's only been one four-week stall since the October 28 through 30th pivot higher last year in the markets.

Starting point is 00:05:29 Additionally, there's only been one pullback by the S&P 500, over 3%, and that was out of the gate during the first week of 2024 to start the year on tax selling. Since then, the largest decline in percentage terms has been barely 2%, and spot volatility as measured by the VIX has dropped to year historic low bound X the historic low volatility year of 2017. As many followers of Oak Harvest's investment content know, I've developed a forecasting model that is largely based on volatility of the markets. Its secret is guarded in the investment kitchen here at Oak Harvest, but it did forecast 4,650

Starting point is 00:06:07 to 4,700 for year-end 2020. way back in the summer of 2020 post-COVID crash, as well as other market levels, including the optimistic forecast of 5200 for mid-March of 2024 back in the summer of last year in 2023. Following this model and this model only in knowing that unpredictable economic events do happen, this volatility model also gives a target

Starting point is 00:06:32 for the first quarter of 2025 of at or near $5,000 on the S&P 500. investors, that would be the Goldilocks outcome. This is the economic soft landing scenario for the rest of 2024. This is the low volatility by the dips. It's a secular bull market market. It's also quite a normal outcome for a fourth year presidential cycle should the economy hold in there and slowing but good enough into election and the quarter after.

Starting point is 00:07:00 While most investors would view this forecast is inconceivable and I'm not willing to get it tattooed on my arm just yet, many of the signs behind the headlines continue to say its outcome is quite possible. Investors, just two Thursdays ago on March 27th, with the S&P 500 over 5250, the positive to negative breadth on the S&P 500 was almost 10 to 1. That shows a broad market movement. Moreover, while lagging most of 2003 and 2024, the small cap Russell 2000 index just broke out to both 52-week and two-year highs. Take a look at that chart. This isn't generally thought of a sign of impending top. This isn't historically bearish. This is a subtle sign of an expanding breadth in the markets. In fact, on Wednesday, March 27th, the NYSC had a four-to-one breadth

Starting point is 00:07:48 advance, and the S-P-500 advance decline was near 10-1. With these things in mind, our investment team at O'Carvis often gets asked, what do you like in the investment universe? Most often, my sarcastic answer is, we like it when our longs are green and our shirts are red. Even though I can't give more specific advice here, I'll leave my viewers for the audience. with the little data that might help over the coming year. Here's the table also from Bank America Securities, showing the historic sector performance of the S&P 500 sector's pre and post-Federal Reserve

Starting point is 00:08:18 interest rate cuts. This shows the percent of time a sector outperforms the S&P 500 around the time the Fed first cuts rate since 1974. Investors, if you want a little peek into the future of where our team may be going with our clients' money that can be tactical in nature, this is a table that's a good place to start.

Starting point is 00:08:36 Investors next week, I'll give a little bit of the same rundown, but present what a negative hard landing scenario for the second half of 2024 or 2025 might look to the markets. Investors, right now, our investment team doesn't see the leading signs of a future recession, but I can say we will have one again someday in the future. For investors or retirees uncomfortable with a wide range of possible equity outcomes, the Ocarbiz team does have a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges and shock absorbers like insurance for a stock portfolio. Information on this exciting new strategy can be found on oak harvest funds.com.

Starting point is 00:09:18 From the whole team here at oak harvest, thank you again and have a great 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. 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

Starting point is 00:09:55 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.

Stock Talk - Market Analysis: Continued Soft Landing After Strong S&P 500 Q1 Performance? Scenario One

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