Stock Talk - Really Bearish on Stocks Right Now?

Starting point is 00:00:00 Post the strong first half move in the overall stock market, we have now been trading sideways. Yes, the S&P 500 has gone net nowhere in a sloppy, choppy manner, since Wednesday, July 19th, which for trading nerds was the daily volatility options and future expiration for July. As this was written, the S&P 500 has been flat for two months. As the Oak Harvest Investment Team warned clients and prospects in early summer videos, we were set to enter a sloppy choppy sideways market at best, we'll pull back at worst time frame. Call it a trading range, call it a general consolidation, call it a lull.

Starting point is 00:00:35 A good swing stock trader will call it heaven or Goldilocks, buying selloffs and selling rallies, and a bad trader will call it a nightmare, getting chopped up, selling lows or breakdowns, and buying false breakouts or buying highs. Investors, the fact is, we can back up a little more in time into mid-June, and we've seen very little appreciation in the S&P 5th.

Starting point is 00:00:56 On Thursday, June 15th, the cash S&P 500 was at 4425. Almost exactly three months later, the overall S&P 500 sits within 1% to 2% of that level. I must remind investors that this was only three days after a hedge fund billionaire and market guru to many CNBC viewers, Ray Dalio, having missed almost 20% positively off the October 22 lows, said it was time to buy stocks. Here's the daily chart of the S&P 500 for the last 18 months. The bad news, we expect another four weeks to six weeks of the same, sloppy markets with a downtrend bias. The good news, well, that's the title for this week's episode.

Starting point is 00:01:35 The summer chop ages, but investors, it's really still too early to be bearish. Before we press onward, please take a moment to click on both the subscribe and notification bills, so you'll be alerted when our investment team uploads our latest content. Or better yet, give our Oak Harvest team a call at 877-896-0-0-40. Give our team a call, set up an initial consultation with the Oak Carbass advisor to discuss you and your family's personal financial situation. So investors, we got oversulled. Late option expiration Friday, August 18th, just as many bears emerged once again from their caves preaching a crash is forthcoming calls for the uptiem the last few years. Or decades, if you're Jeremy Grantham or Black Swan Guru, Nassim Taleb. Of course, just as sentiment had gotten dower, the market started to bounce just as they had.

Starting point is 00:02:23 historically have more often than not in the third year presidential cycle in late August through mid-September option expiration as this video is being released. While investors should now expect another month of sloppy and potentially downward pressure on the overall markets as third quarter earnings reports are released, fourth quarter in 2024 revenue and earnings outlooks are conservatively lowered by management teams, and many institutional investors close out fiscal year ends harvesting gains and losses at the end of September and end of October, it's likely that, one, it's still really too early to get Uber-Barrish on stocks for 2024, and two, the coming four to six weeks should present themselves as the buying opportunity that many investors have

Starting point is 00:03:07 wanted and waited for in front of fourth quarter, 2003, and first quarter, 2024, rally. Okay, so why do we believe that we are quickly approaching a buying opportunity when and so many other strategists are back preaching, they can't buy stocks, inflation is rebounding narrative. Because first and foremost, a fourth quarter bounce in inflation has been expected by the markets for months. It's the way base effects pulling down inflation

Starting point is 00:03:34 since June of 2022 and now pushing it higher work in the calculation. The markets are already anticipating this event, five-year real interest rates, which is the premium over inflation, investors earned by buying five-year treasury bonds, has peaked, and it's now rolling over. Here's that chart. Let it sink in. The market is saying you will earn

Starting point is 00:03:54 roughly 2.15% real return versus inflation over the next five years by buying a five-year treasury note. Of course, you will have reinvestment risk after five years, but that's historically high real return except for the periods into the great financial crisis 15 years ago. Okay, so now I know what you're thinking. Chris, pretty chart. Thanks for the update on real interest rate. But what does it mean to me? Well, first the bad news. The bad news is that there is no perfect correlation in the stock markets, one that works every hour, every day, every week, or every month that bats a thousand all the time. But the good news is that when one looks at historical time periods such as we look to be in,

Starting point is 00:04:35 when real interest rates peak, when they break up trends, and when they begin declining, they are historically very bullish for equity assets and coming returns in the overall market. How bullish? Let's look at the last three times this has happened. Those were late December 2018, late April 2020, and mid-October 2022. Investors, each time the S&P 500 ultimately gained over 12% over the next two to six months. Did the rally start immediately? No. It took a bit of time, and we expect the same here, but ultimately it turned into a tailwind for stocks. Why? Because the real interest rate premium is one of the key components that many equity quants use in calculating the ERP or equity risk premium that goes into calculating fair value or a fair

Starting point is 00:05:23 PE for the overall market. Lower real yields, lower real interest rates translates to higher equity valuations and higher PEs, all else being equal, where all else is usually earnings. The market's performance in the first half of 2023 is a great case study in this dynamic in that almost all of the markets, plus 15% first half gain was PE expansion. Most equity strategists who were bearish on 2003 and missed the move up in equities in the first half were focused on either, one, there being little to no earnings growth in the S&P 500 in the first half of the year, or two, the rise in nominal interest rates and inflation levels. Their theories or models being either or both dynamics would be bad for stock returns. Investors O'Karvis' first half outlook

Starting point is 00:06:11 of 2023, which played out, as we expected, was based on a realized peak in October of 2022, in real interest rates, peak in volatility, and the historic norms for presidential election cycle year three. So far, the summer is also playing out, as expected, and playing the tune of normal. What do we see for the fourth quarter of 2023 and the first quarter of 2024? Much to the dismay of many, we expect more of the same. What's that? That's more normal. normal by historical standards, which is up and to the right in the markets post mid-October. Besides the recent breakdown in real interest rates supporting valuation and equities, the seasonals are there, and the presidential election cycle work becomes much more favorable

Starting point is 00:06:54 after third-quarter earnings reports. First, Steve Settmeyer's work at Merrill Lynch, when the S&P 500 has been above average returns in January through August, in year three of a presidential cycle, the rest of the year tends to be much stronger than average. Here the fourth quarter returns historically. O'Carvis has had a year-end target on the S&P 500 of 4750 to 4,800 since early in the year. Using the above data, with the fourth quarter

Starting point is 00:07:20 up 79% of the time averaging about 3.5%, that would equate to roughly 4650 to 4675, a little short of our triangulation, but in the ballpark. For what it's worth, if the markets were to continue, what has been an eerily similar path to the normal cycle we've been following, One would expect, after a brief first half October sell-off, a rally into Thanksgiving nearing 4,600,

Starting point is 00:07:47 a year-end rally nearing 4750 to 4,800, and a mid-year first quarter peak approaching 5,000. Yes, 5,000. That would be very bullish overall, but with increasing volatility, that would be normal. It's interesting to note that the strongest year-end stock returns for the markets have come not, when the markets are up the most through summer. Nope, not when they're up over 20%, but rather when they're up between 10 and 20% for the first eight months of the year. So for all those dire warnings of impending crashes like 1929 or 1987, Mott Capital and the rest, while possible, they're historically unlikely as those came after runs of over positive 20% through August,

Starting point is 00:08:33 which we fell short of this year. The most recent, greater than 20% run through August was 2021. And while 2021 closed strongly and at all-time highs, we know what happened in the first half of 2022. The biggest risk to the economy in the markets in the fourth quarter is that Jerome Powell and the rest of the crew at the Fed are too tight in the fourth quarter on monetary policy. The U.S. consumer doesn't show up for the holidays. The Fed creates a repeat mess in the stock markets and banking system just as they did in the fourth quarter of 2018, when liquidity evaporated into year end, and Jerome Powell had a reverse course.

Starting point is 00:09:11 Well, the same thing happened in the fourth quarter of 2023 that happened into Christmas 2018 because the Fed wants to prove a point. They want to prove that they have it, that it being inflation under control, even though it already mostly is. Our investment team thinks no. And we expect the fourth quarters of 2023

Starting point is 00:09:30 in the first quarter of 2024 to play out much the same way most third year presidential cycle year, do. A pause, a consolidation in the third and early fourth quarter that refreshes in a year-end rally and strong initial 2024. At O'Carvis, we currently manage broadly diversified equity portfolios that balance risk and reward for our clients. We don't concentrate our clients' fund in any one or two sectors seeking to hit a grand slam. We try to hit singles, doubles, and occasionally a homer if someone makes a mistake, and we find a stock at the right price at the right time.

Starting point is 00:10:04 For those investors who are less optimistic and less risk-taking, those seeking higher dividend income that grows, those investors willing to forego some potential price appreciation in favor of lower volatility, we have a dividend growth equity model. Those investors who are more optimistic seeking higher long-term appreciation, which does carry with it, higher expected volatility, without the focus of dividend income, we have a blue-chip growth equity model. These overall tools, our advisors and financial planners use, are usually a combination of market-based and insurance-based tools to meet your retirement goals.

Starting point is 00:10:37 Our Oak Harvest Investment Team is busy working on some new and highly unique equity models, and few advisor teams in the country have the experience our investment team has. We plan on introducing one of these new equity products for our advisors to use as a tool 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 so desire. Stay tuned. The future in the stock markets are always.

Starting point is 00:11:03 uncertain. That's why our retirement planning teams plan for your retirement needs first and your greed second. Give us a call here at 877-896-0-0-40 and schedule an advisor consultation. We're here to help you on your financial journey into and through your retirement years. For myself, the rest of the investment team, Troy and Jessica, and all the advisors, have a blessed 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

Starting point is 00:11:50 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.

Stock Talk - Really Bearish on Stocks Right Now?

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