Stock Talk - S&P500 : The “Old Normal,” Back to Our Regularly Scheduled Program

Episode Date: May 3, 2024

Lets talk about the recent performance of the S&P 500, including insights into earnings releases, inflation expectations, and interest rates. I'm going to share the implications of historical market cycles and draw parallels with past events, particularly the Dot-com bubble era. What do the projections from other notable market analysts such as Larry Williams, Steven Suttmeier, and Sam Stovall point to? Watch to find out.   #stockmarket2024 #sp500forecast #marketcycles   About Chris Perras, CFA®, CLU®, ChFC®, Chief Investment Officer: As CIO, Chris is the lead investment strategist and director of research at Oak Harvest Financial Group. Chris develops the firm's core market outlook, putting his decades of experience and expertise to work for our clients. He hosts Oak Harvest's podcast, "Stock Talk," available on the website with new episodes each week. He completed his undergraduate studies at Georgia Tech, and went on to obtain an MBA from the Harvard Business School. Driven by a desire to maximize his knowledge and skill set, he acquired financial planning and investment management qualifications, becoming a Chartered Life Underwriter (CLU®), a Chartered Financial Consultant (ChFC®), and a Chartered Financial Analyst (CFA®).   Stock Talk is a weekly vlog/podcast dedicated to discussing the Oak Harvest Financial Group Investment Team's perspective on what's happening in the market. Hosted by Chief Investment Officer Chris Perras, each episode brings you our views on stocks, the market, and the economy — with a little education thrown in for good measure. Listen each week and help stay connected to your money!   Do you need a retirement plan that goes beyond allocating funds to truly fit your needs? We can help you create a retirement life plan customized for your retirement vision and legacy. Call us at 877-896-0040 or fill out this form for a free consultation: https://click2retire.com/Connect   Important disclosures: Content of Oak Harvest podcasts expresses the views of the speaker and is for informational purposes only. Oak Harvest believes that any data, articles, or information cited are reliable at the time of creation, but does not warrant any information contained herein to be correct, complete, accurate, or timely. 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 constitutes 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. Any 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.

Investors, by the time this piece airs, will have already made it through about 75% of the S&P 500 earnings releases, including most large-cap technology stocks. The Federal Reserve will have already met for their early May meeting and disseminated their collective wisdom on the economy and interest rates. Investors, for those of you only listening to this week, Stock Talk, please note, you cannot see or feel my level of sarcasm around the term collective wisdom. when I talk about economists and the Federal Reserve members. The Last week's piece titled The Good, the Bad, and the Ugly, we once again updated and covered three data series we follow in real-time, which have been very good leading indicators for broad market moves, and they've been even fairly accurate and catching smaller, shorter-term, squiggly lines

which form from a trading standpoint, which are fun, but from a long-term investing position, are fairly irrelevant. The good was the real-time data, was saying inflation expectations were peaking two weeks ago, just as the doomsdayers were getting most vocal about its return. Investors, the real-time five-year inflation break-even rates. We posted this chart before last week's rally, noting the similarities to its late October 2023 peak, about four or five days before the stock markets troughed and promptly rallied 1,100 S&P 500 points in almost exactly five months. Inflation expectations and statistics in the U.S. are

very seasonal. That was the good news. The second, bad news, most likely reason for the broad market sell-off during the first three weeks of April, the bad news was the pivot higher, not lower, and five-year real interest rates. Remember, investors, this is the interest rate that comes most close to accurately forecasting whether investors are willing to pay higher P.E. multiples for the market or lower P.E. multiples. Investors hire real interest rates, historically compressed P.E. multiples while lower trending real rates historically lead to higher PEs and higher stock markets over the past 15 years.

Finally, the ugly, well, the ugly was we continued to follow the pattern of October in 1988 through 2000 when the dot-com bubble rally happened, but the Federal Reserve stayed too tight and eventually caused the recession in 2001. Of course, stocks anticipate future economic events, and the first leg down in the multi-year bear market began in mid to late summer of 2000, with the S&P 500 dropping minus 30% into the first quarter of 2001. Investors, stock market bowls want to avoid this outcome, while bears relish in this overlay, hoping they'll finally be right after 10 to 12 years of calling for a secular bear market. Which brings me full circle to this week's piece. Back to our regularly scheduled

program, return to the old normal. Take a look at the daily chart of the S&P 500, including last week's rally. Investors, five months up from late October 2003 through late March, 2004, almost spot on to the day. As our team had expected back in late October, 2003, the cash S&P 500 rallied 1,000, 100 points, which met our optimistic expectation for the first half of 2024. We discussed this for the better part of six months during the second half of 2003, while many others were talking recessions or worse yet, market crashes. Our team had this very positive outlook because this is what the old normal historically looked like during the second half of the third year presidential cycle in the first quarter of the fourth year. That factor,

as well as it's quite historically normal to have a big rally when the Fed merely pauses after a series of big interest rate increases without cutting interest rates. So where do we go now? What's more normal look like? Well, here it is, remembering that there are no guarantees or perfect in the stock market. This could be the forward path for the stock market, at least through late summer. This path has been derived from many of the same sources we often quote at Oak Harvest on the investment team. Who falls in this group? Those are the strategists, technicians, chartists, and historians who've been proven over many cycles to be both accurate while also being pretty precise in their calls.

Larry Williams and his great stock market cycle work. Steve Settmire and his Quant Data Group at Bank America Merrill Lynch and Chartist Rich Ross at Evercore, to name a few. Take a look at two charts from Larry Williams, which he first published in late 2023 for his 2024 forecast. The first of these charts is Larry's natural cycle forecast for 2024, which takes prior year patterns, compares it back in time to similar time periods and projects forward what the next year could look like based on that. Remember, investors, trend is more important than absolute levels in most of Larry's work. However, so far so good on this forecast of 2024. If projected in early down January, check. A significant

rally into mid-March to new all-time highs, check. And then about a three-week sell-off into mid-April, triple check, before finding a bottom and heading to new all-time highs into summer where one wouldn't worry again until after July 4th or into August for one more down move into the third quarter pre-election. That one remains to be seen. The second of Larry's charts, which we referred to months ago and used in late October 2023 to support our positive outlook for the fourth quarter of the year in the first quarter of 2024, that one, it's his daily long-term cycle projection. Here's that chart again. His projection for 2024 is the red line. It too has been money as it forecast a big first quarter of 2024

rally to new all-time highs in late March before a seasonally normal week, first part of April. This work also supports another bout of weakness to come over a mid-May period before a strong early summer rally, taking the markets back to at least towards new all-time highs they reached in March. Call that a rally back to 5250 on the S&P 500 into July 4th weekend. Another strategist's work we follow is Steve Sutmeyer's work at Bank America, which also supports this forecast for the next three to four months. Take a look at the monthly seasonality of the S&P 500 for the fourth year. in a presidential election cycle since 1928.

The average four-year returns have April flattered down a bit, and we did see a minus 5% sell-off this year, the first three weeks of the month. May has historically been the worst month of the fourth-year cycle, averaging a loss of close to 1.5%. However, under this forecasting tool, investors should not be panicking, as May has historically been the low

for the remainder of the year, most presidential election years. Looking at this pattern of returns and this one only, one has seen a cumulative positive return of almost positive 6 and 3 quarters percent post-May during the summer months of a rally from June through August. Using this pattern and this pattern only, a quite normal scenario for the next four months could see the cash S&P 500 resuming its down move into late May, making a new marginal low versus the S&P 500, call it 4,900 before rallying strongly into the summer months. Call it a rally back to near its all-time highs of about 5250 on the S&P 500. However, investors recall that the 10.2% rally in the S&P 500 in the first quarter of 2024 was the 14th best first quarter going all the way back to 1928. Investors, outside of the normally seasonal week period, were entering, and another two months prior

to the election in November, this pattern has been very bullish for stocks. and the remainder of 2004 and 2025 look good. Back to Stam Soval's historic work, take a look at the returns from the best first quarters in the markets in market history. Stilvall's data shows that 14 out of the top 15 first quarters since 1945 ended up with additional double-digit percentage returns with no down years.

The only outlier was 1987. Those prior 14-year gains averaged 23% total result. on the year. Such a total return from current levels would triangulate to cash S&P 500 near 5850 to 5900 at year end. However, Stovall's data series also reveals heightened volatility on the way to those outsized gains. 13 of the top 15 first quarters had declines of minus 5% or more, which is standard in any year. And of course, we had that during the first three weeks of April. However, the average decline during those years was over minus 11%, which is a little above average. While this upside seems like a stretch even to the most bullish cheerleaders,

and I have a hard time getting to these levels by year-end, 2024, historically, the markets would say market moves to 5,900 to 6,000 over the next 9 to 12 months is actually more likely than this being a replay of the 2000.com bubble and the market's tanking back to 3,500 to 3,600. So if the very few strategists, technicians, and market historians who've been right for the better part of two years. If Larry Williams, Steve Soutemeyer, and Stam Soval's work continues to be prescient, while most economists, academics, and equity strategists who whiffed on their 2023 forecasts, here's a possible roadmap for how the S&P 500 may rally to new all-time highs and beyond in the coming year. No guarantees or no promises from me. Viewers, for those of you who've made it this far,

I want to give a shout out to the entire Oak Carvest team as last week, USA Today ranked us as one of the best financial advisory firms of 2024. USA Today gives us award to the top registered investment advisories in the U.S. based on two criteria. The first, recommendations from individuals among 25,000 financial advisors, clients, and industry experts. The second criteria, growth in assets under management over 12 months and five years. I personally and looking forward to helping our team move up this list over the coming years by helping our current clients and future clients in their retirement goals. For investors or retirees uncomfortable with a wider range of possible equity outcomes, the Ocarbus Investment Team has launched a new strategy that retains the ability to go long stocks,

short stocks, as well as buy partial hedges or shock absorbers for a stock portfolio. Information on this strategy can be found at OcarbustFunds.com. For myself and the whole team here at Oak Harvest, 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. 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.