Stock Talk - S&P 500 Hits New Highs: Did You Miss the 2024 Market Rally?

Starting point is 00:00:00 Investors, for the most part, so far the fourth quarter of 2024 S&P 500 stock index performance in the third quarter of 2024 earning season has been off to the races in a positive way. You've heard about the historic seasonality of the U.S. stocks with September and first half of October being some of the worst historic time periods of the year. This, coupled with many investors' concerns over the upcoming presidential election here in the U.S., kept many investors on the sidelines waiting for a better entry. I know a few investors who went all to cash at the beginning of 2024, trying to avoid the stock markets altogether. Take a look at the table from Bloomberg, showing the monthly returns and seasonality in the S&P 500 since 2009.

Starting point is 00:00:43 If you went to cash early in 2024, you've likely missed most, if not all, of the over 20% year-to-day gains in the S&P 500 index. If you were scared off in late July and early August during the normally weak time period, this year's excuse being the Yen-carry trade implosion and short-term volatility, spike and hedge fund de-levering, you've likely missed the recent 8% plus rally to new all-time highs in the S&P 500. The week's September, many equity strategists called for didn't happen, and it seems to have been pulled forward into the four weeks of late July and early August. However, as one can see by this table, those losses occurred intramunt, and all of the summer months netted positive S&P 500 index gains. Other investors listening to the Dumers,

Starting point is 00:01:28 including the likes of Robert Precter and Elliott Wave theorists over a year ago in October of 2003 never got back into the markets because they convinced themselves that a replay of 1987 was at hand, we were at the beginning of a crash, or worse yet, they were looking to call a generational top in U.S. stocks and forever cement their reputations as legendary market soothsayers. We debunked those analogies way back then and were advising investors that that was likely a major buying pivot. Many market strategists have thrown up alarm warnings for most of the year. Warning of stock market risk around the election. The work our team has done throughout the year has said much of this risk in the market that others have been warning of that have kept many investors from

Starting point is 00:02:12 investing and enjoying some, if not all of 2004's 20% plus year-to-day index gains had most likely been priced in already. And 2024 would likely turn out to be a very normal and good year for the markets. We've noted the same things since the year started. What's that? It's that almost everyone is already nervous and hedged with the same time frame insight. Investors, we're in the home stretch of 2004, and many are still sitting and watching waiting for the other shoe to drop, waiting for the presidential election, waiting on the end of the Ukraine-Russian war, waiting for peace in the Middle East, waiting on volatility to subside, which, as I've repeatedly noted for the last two months, already has and is likely to continue. Many investors are waiting on China economy to rebound, waiting on the U.S. consumer to collapse. I can go on and on and on with this list. And so far, quarter to date, what has mattered? What has mattered is our economy continues to grow at a moderate pace. Inflation continues to cool at a moderate pace, and the overall earnings in the U.S. economy continue to grow, and those stocks are rewarded positively.

Starting point is 00:03:17 A quick recap of the earnings quarter to date have been rewarded. Bank stocks like J.P. Morgan Stanley, Charles Schwab and Goldman Sachs. not to mention a few other large financials like BlackRock, the world's largest investment manager and traveler's insurance. Consumer communication and discretionary stocks like Netflix and cruise line companies have already reported better than expected subscribers or passengers and healthier margins. Industrial companies like Fastenol and Snap on tools beat modest expectations for growth and their stocks jumped substantially. The negative reports in stock price actions so far have been minimal. The main culprit widely missing their outlook was ASML lithography, the number one manufacturer of optical equipment for semiconductor manufacturing. That was caused by a dramatic slowdown in their China sales

Starting point is 00:04:05 on the back of regulations holding back Chinese demand. That was the main culprit. But Intel's financial situation also played a role there. In the healthcare space, Medicare and Medicaid insurance providers missed badly, as most of their new enrollees since COVID-19 have up their service usage and these insurers are taking big hits to their margins by way of higher medical loss ratios. One other area of weakness, many energy companies have given weaker guidance on the back of low oil prices and slower China demand. However, energy stocks account for less than 4% of the overall S&P 500 index. The upside standout in the healthcare space was ISRG Surgical, which is the number one player in the robotic surgery procedure market. New tool sales globally, as well as higher utilization of

Starting point is 00:04:51 their installed tools and higher consumable sales led to a massive earnings and margin beat, and the stock made substantial new all-time highs last week. By the time this video airs, almost 50% of the S&P 500 will have reported earnings, and we will be within two weeks of the presidential election. Many investors are sidelines waiting on volatility to decline. Folks, it's already has in the markets themselves. Take a look at the updated chart of realized volatility, that's our vol, which is actually happening in the markets. 30-day trailing volatility in the S&P 500 has declined to under nine as of this video. Volatility futures for the weeks following the election in mid-November, take a look at that chart.

Starting point is 00:05:32 It was 18.3 as of this writing, almost 115% premium to actual volatility. I've repeatedly said throughout 2024 that I thought anytime volatility futures rose to 20 to 22, sellers would come into those markets and buyers in the S&P 500 would show up. That's nearly exactly what's transpired. Take a look at the shorter term chart of the December volatility future. This contract is tradable and expires about five to six weeks after the election. During the time period that if there is any delay in results, we're likely to finally find out what the vote count is.

Starting point is 00:06:06 If this was a stock, most technicians would say it's a sell the rally, it's an upward channel that has been pierced, and it's starting to look like a trend reversal lower. Lower future implied volatility has historically led to, pressure stock prices higher, not lower over the weeks and months ahead. I found over the last 20 years of investing that while never perfect, nothing in investing is, it's very, very, very rare for the market makers who traffic in forward volatility markets, the volatility insurance salesmen, I call them, to misprice future market risks outside of black swan events like COVID-19 pandemics

Starting point is 00:06:43 or other unpredictable events. In fact, if anything, my work says most of the hedges around the election will expire worthless and cause market participants to cover higher, or at least pressure stock price is higher for longer in the fourth quarter of 2024 through early 2025. Investors were in the home stretch for the election as well as 2024 stock market returns, and they both argue for higher for longer into 2025 inaugural parties for whichever candidate might win. Do politics matter when it comes to equity investing? I've argued for the last three elections, not as much as you think. The ultimate issue is what is the economy doing, what are earnings doing, what's the Fed doing, and then what is going on in D.C. Even when it comes

Starting point is 00:07:28 to presidential and political policies, it's rare, but be it tax rates, energy regulation, or tariffs, sometimes they have the opposite outcomes first expectations. Earnings and earnings growth are far more important than who's sitting in the Oval Office. Yes, political policies can make or break certain sectors or industries, but overall, as political strategist James Carville said in 1992, it's the economy stupid. Well, the politicians say one thing and didn't do another. And the 92 campaign, as I recall, was pretty specific. It was called putting people first.

Starting point is 00:08:03 I think there was a sign that said, it's the economy stupid. First and foremost, when it comes to stocks and your investment returns. If you're uncomfortable with a wider range of possible equity outcomes, the Oak Harvest team has launched a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges and shock absorbers for your portfolio. Information on this new strategy of ours can be found at oak harvest funds.com. For myself, from Charles, from James, from Chris and Dwayne in Atlanta, and from Eric behind the camera, have a great weekend.

Starting point is 00:08:34 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 sort of 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

Starting point is 00:09:16 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 - S&P 500 Hits New Highs: Did You Miss the 2024 Market Rally?

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