Stock Talk - Shutdown, Inflation, Banking and More: October Stock Market State of the Union

Starting point is 00:00:00 Post the strong first half move in the stock markets into mid-July, the overall markets have been trading down in a very normal seasonal fashion, just as our investment team laid out back in late June in our old car was video titled S&P 500-4300 plus. It's summertime for a break. Here's a chart of the S&P 500 since last October's loaves. You'll see the overall market has gone nowhere since mid-June of this year. Zooming out further, you'll see the overall S&P 500 is now flat for over two years. since June of 2021. We've covered much of our fourth quarter market outlook previously over the last three months during this normal, seasonal, stall, and retreat in numerous YouTube videos, live streams, and weekly market update pieces that the Oak Harvest Investment Teams were released.

Starting point is 00:00:46 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, give our O'Carvest team a call at 877-896-040 to speak to our team and set up an initial consultation with an Oak Harvest advisor to discuss your personal financial situation. During times like this with little fundamental company news flow, our investment team

Starting point is 00:01:10 gets questions on macro and news channel topics. I want to briefly address a number of these topics and issues this week, so I'm titling this episode, Quick Hits. The first quick hit, our investment team received numerous questions on the impact of the government shutdown on markets. Believe it or not, historically, these shutdowns have not mattered to markets much at all. all. Recall most of the time, markets perform better when members of Congress are not in session and are instead on recess or vacation. Historically, the data says the same during government shutdowns. Since 1995, there have been five government shutdowns. The S&P 500 has traded positive during each of those periods, with an average return of positive 3.2%. The most recent government

Starting point is 00:01:53 shutdown was from December 22nd, 2018 to January 25th, 2019, which was the longest and the longest in the last 30 years and actually saw the S&P 500 trade higher by more than 10%. It's safe to say that stock markets universally like seeing less of politicians first more of them. Quick hit number two, inflation. Folks, inflation rates are falling fast from their peak rates in the second quarter of 2021. Most metals like copper and steel have plunged. Just last week, grain and other soft commodities tanked. Wheat, which last I checked was the basis for most breads in the world fell another minus 8.5% last week. It's down over 30% year-to-date and down 60% from its Russia-Black Sea embargo highs 18 months ago. It's quickly approaching its pre-COVID pandemic

Starting point is 00:02:40 levels. Even the Fed's favorite lagging measurement of inflation, Core PCE, has moved down to 3.9%. That's the lowest level since May of 2021. The Fed funds rate is now positive 1.4% above Core PCE. That's the most restrictive monetary policy we've seen since November of 2007, pre-great financial crisis. In fact, real inflation is likely closer to 1.5% than it is to 3.9%. Why? Because shelter is the largest component of CPI at almost 35%. That's being reported at near 7.5% year over a year. And that's massively lagging and overstated. In fact, real-time housing and rental costs using data from sources like Redfin or Zillow show shelter costs are maybe down 1% to up 1% year every year, not over 7%.

Starting point is 00:03:32 Here's a great chart from Duke Professor Campbell Harvey using real-time rental data to adjust shelter CPI stats. The more recent three-month trailing annualized inflation numbers are already well under 2.5%. This might be why real-time tradable fixed income instruments such as one-year and two-year break-even inflation rates are trading it about 1 and 3 quarter percent and just over 2% respectively. The same levels they were trading pre-COVID. Here's a chart of two-year inflation. Investors, the Fed has done enough, probably more than enough to tame inflation here.

Starting point is 00:04:07 They just don't either, one, see it due to their academic nature and data they look at, or two, don't believe it, or three, maybe they don't care. Investor sentiment quick hit number three. There's nothing like a few down months to turn investors and traders from optimists to pessimists. Back in late June, we warned our clients and prospects that optimism was running too high. Stocks were extended on AI hype and the markets were set up for a summer peak, stall, and downward move. Sure enough, that's what's happened. But here we sit three months later with the S&P 500 over 6.5% off its high. Investor sentiment is measured by the AAI Barron Bull surveys and hedge fund positioning measured by short,

Starting point is 00:04:48 interest in the NASDAQ stocks has now turned from rainbows and butterflies optimism to Debbie Downer pessimism, which of course has historically been a good contrary indicator that is nearing a better buy time, not a sell time. Here's a chart of the rolling two-month change in the AA bearish sentiment. It's tripled since the July highs in the S&P 500 and doubled in the last month. Viewers, it's accelerating negatively as fast as it did during the Christmas 2018 market bottom and close to the rate as the COVID lows in March of 2020. Smells like a better buy than a sell to me. Quick hit number four on market's seasonality.

Starting point is 00:05:24 Yes, investors, like it or not, it's been a real thing in our markets for years. And regardless of how much it's advertised, it continues to work most years. I think it keeps working mainly two to two reasons. First, America is largely a consumer economy. Around 70 to 75 percent of our economy is consumption of goods and services. We tend to consume more seasonally around the four. quarter and first quarters of the year, taking the middle quarters off for jobs and fun. Here's a monthly seasonal returns from the S&P 500 from CFRA and the daily, yes, daily average

Starting point is 00:05:55 returns since 1945 from Merrill Lynch. So the good news is what we have experienced the last two to three months is seasonally very normal and should be nearing an end. The bad news? I said nearing an end, not over and done with. And we still have likely a few more weeks to go on the calendar before investors exhale and return to quite a normal year-end. rally. Remember though, past performance is not a guarantee of the future and nothing in the stock markets is ever perfectly accurate or precise. Our final quick hit. Number five, banks and end of year banking concerns. This one is one of our concerns that our team does worry about. Liquidity concerns approaching year end in the financial markets and more so around commercial and regional banks.

Starting point is 00:06:38 Remember what happened back in the fourth quarter of 2018 into Christmas when Chairman Powell was aggressively hawkish as the economy was slowing into year-end. At this time, with interest rates having risen over 500 basis points in two years, our concerns over the Fed making a mistake into year-in are quite high given their non-stop hawkish talk. U.S. banks are facing roughly 600 billion, yes, 600 billion of unrealized losses, which accounts for roughly 25% of total banking capital. That's near the highest in history. Here's a chart from Alpine macro showing the magnitude of that problem. This issue as well as ballooning Federal Reserve balance sheet losses bears monitoring and washing is that it's a dicey problem for financial institutions balance sheets here and abroad.

Starting point is 00:07:22 So that's it. For the week, five quick hits. I hope you find this piece informative and our insights additive. O'Carvers Financial Group manages broadly diversified equity portfolios that balance risk and reward for our clients. We don't concentrate our clients' funds in only one or two sectors seeking to hit a grand slam. We try to hit singles and doubles. The investment, tools our advisors and financial planners use are usually a combination of market and insurance-based tools to meet your retirement goals. Our dedicated in-house investment team is busy working on some new and highly unique equity models, models and tools that few RIA advisor teams have access to and few investment teams have the experience ours does. One of these tools may even allow our

Starting point is 00:08:04 investment team to express negative views on single stocks, sectors over the overall markets if we so desire. Stay tuned. The future in the stock markets are always uncertain, and that's why our retirement planning teams plan for your retirement needs first and your agreed second. Give us a call to speak to an advisor and let us help you craft your financial plan that helps you meet your retirement goals. Call us here at 877-896-0040 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 whole team here at Oak Harvest, have a blessed weekend. All content contained with an Oak Harvest podcast expresses the views of

Starting point is 00:08:40 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.

Stock Talk - Shutdown, Inflation, Banking and More: October Stock Market State of the Union

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