Stock Talk - Stock Market Turning Point - Make or Break Time?

Starting point is 00:00:00 Investors, turn on the financial news and almost daily you're liable to hear this is the most important interview, economic release, Fed meeting, earnings period, or employment report for the year. Almost daily, the financial channels are trying to height the importance of some little tidbit of information playing on their viewership in investors' emotions and fears. If this is the most important piece of information of the year, I better not change the channel. I might miss something key to my money. they want you to believe. More often than not, the piece of information or opinion presented as news is insignificant economic dribble and investors are best to ignore these segments. So investors, that said, I'm going to use the phrase for the second time in the last 12 months. This week, that is the week that we've just completed by the time this is released on Friday, October 20th,

Starting point is 00:00:51 and next week are probably the most important weeks for your money for the next six to 12 months. And with that statement, the title of this. week's episode, it's make or break time. 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'Carvus team a call at 877-896-004-0 to speak to our team and set up an initial consultation with an O'Carvis advisor to discuss your financial situation. Post the strong first move in the overall stock markets into mid-July, their broad markets, as measured by the S&P 500, have been trading down in a very normal,

Starting point is 00:01:28 seasonal fashion, just as our investment team laid out back in late June and our Oak Carvis video titled S&P 500 4300, it's summertime for a break. Here's a chart of the SP 500 since last October, 2022's low. You'll see the overall market has gone nowhere since mid-June of this year. Zooming out farther, the overall S&P 500 has been flat for two years now since June of 2021. Viewers, this dynamic is not unusual for the stock markets. Well, we've now entered, what is historically the sweet spot of the seasonal calendar for the fourth quarter rally. Believe it or not, I've had October 17th and 18th through Monday, October 23rd circled on my calendar since October 2022. Yes, for over a year. Yes, investors like it or not, seasonal stock moves have been

Starting point is 00:02:17 a real thing in our markets for years. Regardless of how much it's advertised, it continues to work most years. I think it keeps working for a few reasons. First, earnings and earnings growth in our economy, and the S&P 500 tend to be seasonal, with the middle of the year showing little or no growth and the end in the beginning of the years accounting for almost all earnings and economic growth year to year. Why? Because America is largely a consumer economy.

Starting point is 00:02:43 And about 70 to 75% of our economy is consumption of goods and services. Investors, we tend to consume more seasonally around the fourth quarter and first quarter of the year, taking the middle quarters off more for our jobs and fun. Those patterns show up in the earnings levels and growth rates of most major stock indexes. Take a look at the quarterly S&P 500 reported earnings

Starting point is 00:03:03 in forward estimates compiled by Bank America from the first quarter of 2023 through the fourth quarter of 2024. Investors, whether these forward estimates prove accurate or precise down the road, we don't know, but we do know what's happened already in 2023. It's interesting to note that the earnings growth estimates

Starting point is 00:03:22 for already reported second quarter of 2023 earnings were down minus 6% year-demeanor. year. From its July peak post second quarter earnings, the S&P 500 has fallen almost exactly 6 to 7 percent in line with reported earnings decline. Looking forward the next six to nine months, for the fourth quarter of this year through the second quarter of 2024, the comp numbers get easier and the estimated growth rate of earnings in the S&P 500 accelerates from 0% in the third quarter of 2023 to 9% for a year gain in the fourth quarter, stepping up to 12% year year to year in the second quarter of 2024. Investors, over longer time period, stock follow

Starting point is 00:04:01 earnings and earnings growth rates, assuming interest rates don't vary too widely. This earnings acceleration would support a strong seasonal fourth quarter, 2003 through first quarter 2024 rally. Again, take a look at the monthly seasonal returns for the SP500 from CFRA and the daily, yes, daily average returns since 1945 from Merrill Lynch. Earnings and earnings growth rates in our economy tend to be seasonal, and so do stock market returns in large U.S. indexes. So the good news is what we've experienced over the last two to three months is seasonally very normal and should be nearing an end. The bad news, if this positive dynamic from here doesn't start kicking in shortly, something is off, and what has been a very normal 12 months

Starting point is 00:04:44 off the October 2022 lows will quickly morph into something that it's different this time. And those are the most dangerous phrases in investing. Remember, past performance is no guarantee of future and nothing in the stock markets is ever perfectly accurate and precise. So sentiment and positioning are now also pretty extreme negative levels, which historically have lined up to support a strong rally over the next three to six months. One of the most overused phrases I've heard repeated in the investment business over the last two decades is cash on the sidelines. It's often used to support a bullish call in investors shifting money from cash or money market funds or other short.

Starting point is 00:05:23 short-term liquid investments into stocks. Folks, I look at reams of data, and it's almost never been proven to work as a good short-term timing tool. But with that said, I might have found a chart that supports this position, at least for the next six months. Once again, past performance, no guarantee of the future. But this chart does say investor optimism is not high.

Starting point is 00:05:45 This is the allocation of Merrill Lynch private client base that is in short-term cash and substitutes. It's now reached over 15% percent. 15% of their allocations, levels only reached during the depths of the great financial crisis in 2008, and the COVID-induced bear market in the first quarter of 2020. More broadly, turning away from just Merrill's client base, with the S&P 500 minus 6.5% off its high, investor sentiment as measured by AA, Bull and Bear surveys and hedge fund positioning measured by short interest in NASDAQ stocks, is turned much lower in only three months.

Starting point is 00:06:18 This has historically been a good contrary indicator that's nearing a better buy time in the overall market than a sell time. Take a look at the rolling two-month change in AAI bearish sentiment. It's tripled since the July highs in the S&P 500 and doubled in the last month. It's accelerated negatively as fast as it did during the Christmas 2018 market bottom and close to the rate at the COVID lows in March of 2020. Take a look at additional sentiment chart measuring the put-call ratio. I spoke about this one last week. As one can see, this ratio has quickly approached levels that except for the COVID lows in March of 2020 and year-end spike in the ratio in late 2022 marked coincident short-term bottoms in the S&P 500.

Starting point is 00:07:02 Investors, I'm going to leave you with a few more charts that all triangulate to the market finally being set up for a quite normal and quite strong year-end rally. Take a look at the market breadth chart from Steve Sutmeyer at Merrill Lynch. The breadth of the market has gotten so bad now that historically it's good. you're looking at the yellow highlighted time periods with the S&P 500 chart on the top half of the chart and the market breadth below it. Okay, this overlay screams to me after waiting for a pullback all summer, we're finally in the pocket to broadly buy stocks. Likewise, as I've tried to stress time and time again since the market lows in October of 2022, the behind the scenes key to the markets is not inflation

Starting point is 00:07:42 or nominal interest rates, but rather the trend and level in real interest rates. Essentially, the risk premium one is getting paid to buy treasuries and other bonds. Higher real interest rates lead to lower PE multiples in stocks, particularly for high growth stocks that act like zero coupon bonds, with most of their value being their terminal value years or often decades down the road. Investors take a look at the chart of the real-time, one-year real rate calculated from Bloomberg. The short-term uptrend has been broken. That's great news. Look at the similar prior peak from this level. What was the date of that peak? Yes, it was Christmas 2018.

Starting point is 00:08:20 Recall what stock markets did after Christmas 2018. Yes, they V-bottomed and they vaulted higher for the next three to five months as the Fed walked back some of their overly hawkish comments in tone. The markets exhaled and rallied against the backdrop of negative calls for further market weakness. It appears to me that the Fed is already hinting to the markets that they've done enough on interest rate front and they're willing to sit back and watch how this plays out for the fourth quarter and in year end. Investors, that's it for the week. After waiting for three months, the market is pulled back and volatility is spiked, as our team expected. We're finally in the very important time for the markets in both price and time. The pullback has created some value across the markets and things should be looking up for the rest of the year. It all covers financial group. We manage broadly diversified

Starting point is 00:09:08 equity portfolios that balance risk and reward for our clients. We don't concentrate our client funds in only one or two sectors seeking to hit a grand slam. Try to hit singles and doubles. The investment tools or advisors and financial planners you use are usually a combination of market-based and insurance-based tools to meet your retirement goals. Our dedicated in-house investment team of five now is busy working on some new and highly unique equity models. Models and tools that few RA advisor teams have access to and few investment teams have the experience ours does. 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 greed second. give us a call here to speak to an advisor and let us help you craft a financial plan that helps you meet your and your family's retirement goals. Call us here at 877-896-004-0 and schedule an advisor consultation.

Starting point is 00:09:59 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 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

Starting point is 00:10:39 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 - Stock Market Turning Point - Make or Break Time?

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