Stock Talk - Stock Market Volatility: Seasonality or More - Buy the Dip?

Starting point is 00:00:00 Investors, we're filming this on Monday morning. It's around 7 in the morning in Texas, and we're amongst the global summer stock sell-off, the Niki Japanese market down 12% overnight, and pre-open, the S&P 500 down around 3%, the NASDAQ down around 5. Okay, so what's going on? The global stock market sold off violently last week,

Starting point is 00:00:20 particularly on Friday. The technology-heavy NASDAQ 100 index tumbled into correction territory, and the S&P 500 lost minus 3.2% in two days, its worst two-day stretch since March, 2023. Later cycle or slower cycle, GARP stocks, growth at a reasonable price, healthcare utilities and real estate companies, which pay dividends,

Starting point is 00:00:41 and are popular with investors when bond yields sink, were by far the best performers in the S&P 500 last week. Equity market losses were caused by a number of factors, including two things. One, a weaker than expected US jobs report, which showed continued slow job gains, with most gains being in government-sponsored programs, and part-time work.

Starting point is 00:01:01 And secondly, the Bank of Japan's is discussing raising interest rates while other nations are lowering them, setting off a massive reversal what is known is the Yen-Carray trade. From mid-July peak, the cash S&P 500 had fallen about 6.45% as of this writing on August 4th. From about 5666 to a low of around 5,300. Why has this suddenly transpired and volatility ramped higher? On the first point, the week's job data raised concerns that our Federal Reserve is late in recognizing a weakening U.S. economy. Our team first discussed this weakening U.S. consumer way back in February of this year after the last gas Christmas spending spree.

Starting point is 00:01:43 Investors, before we continue, I want to give a shout out to the entire Oak Carvis team. USA Today ranked us one of the best advisory firms in 2024. The award is given to the top registered investment advisors in the United States based on two criteria. recommendations from individuals amongst 25,000 financial advisors, clients, and industry experts, and growth and asset center management over the last year and five years, respectively. I personally am looking forward to helping us move up this list over the coming years by taking care of our current and future client base. So investors, what's going on? Concerns the Fed is too late once again to recognize what is really going on and that their higher for longer interest rate mantra is really just plain wrong.

Starting point is 00:02:24 Real time real interest rate has been flashing the yellow warning flag for months. The warning, the Fed is actually too tight for too long, and the motto should be changed to hire for wronger. As for the second excuse, the Bank of Japan's hawkish interest rate outlook and tighter monetary policy setting off a reversal at the yen carry trade, well, that one is really beyond my pay grade. However, simplistically speaking, a carry trade is when an investor borrows in a currency with a low interest rate, such as the Japanese yen for the last decade. and then that investor goes out and reinvest the proceeds in a currency with a higher rate of return. Most recently, that example has been Australia.

Starting point is 00:03:04 So with the Bank of Japan's recent hawkish talk, the Japanese yen currency is up a brown, 8% against the U.S. dollar over the last month, trading about 140884 on the dollar as of Friday. 8% moves in a month don't sound like much if you're trading NASDAQ stocks like Tesla or Nvidia, but in currency markets, where investors leverage their positions, five or 10, or even more 20 times to one, an 8% move against you is massive. You are now on the hook to repay whatever you borrowed to buy these investments, 8% plus more, this at the same time that most likely the investments you bought have depreciated in value. That's a double whammy to the downside to leverage investors. So getting back to more of my specialty in the U.S. equity

Starting point is 00:03:51 and bond markets, I'm going to discuss my first point about the Fed, Treasuries, and stocks in more depth and compare the recent rally in real interest rates back to other periods of times we've previously discussed. In a nutshell, I'll share with you the updated charts of the five-year real-time real-interest rates we discussed for the better part of a year. Remember, investors, the Fed is trying to get inflation on a control by controlling the real interest rate premium investors get paid for owning treasury bonds above the inflation rate. According to the real-time interest rates markets, they succeeded in this goal, but they don't seem to understand that. Back in mid-June, our team was discussing the Fed being too tight or too long in an effort

Starting point is 00:04:30 for them to defeat inflation. We shared with our subscribers a reconstructed treasury yield curve, an inflation break-even yield curve, and the most one important to me, a real-time, real interest rate yield curve. Back then, we discussed that the rate that the Fed controls, shorter-term real rates were too high, and the economy was cooling faster than most thought. At the time, the one-year real rate was about 3.5.5.5. 7%, while the longer dated real rates beyond three years were closer to two.

Starting point is 00:05:01 It got worse for a few weeks with the one-year real rate peaking around 4.13% on July 23rd. Take a look at the updated table with all the interest rate data then and now. So I know you're asking yourself, Chris, what do I make of all this data? Folks, the Fed is too tight. The bond market knew it weeks ago and the stock market just came to that conclusion over the last few weeks. If one believes in the real market data, not government data or lagging stale surveys, inflation isn't just cooling, it's plunging. I know it doesn't feel like that at the grocery store, but that's what the market data is saying.

Starting point is 00:05:33 Use car pricing? Tanking. Copper pricing? You know that Dr. Copper tagline? At new lows. Oil prices? Where was the surge in gasoline demand for the summer? It didn't happen.

Starting point is 00:05:44 But we've seen this playbook before. Take a look at the next few charts. The first is the most recent 10 years. the real-time five-year real interest rate. The chart clearly forms what technicians call a head-and-shoulders pattern and has broken the relevant moving averages decisively last week. Next is the exact same chart with the same moving averages back during the dot-com capex peak in mid-2000, and then again pre-great financial crisis in mid-2007.

Starting point is 00:06:11 So before you panic, remember both these periods. Or before Federal Reserve found QE that's quantitative easing and many other programs they use to dull or delay economic and market downturns. A few things to note from these charts. As one conceived from both 2000 and 2007, this same real interest rate broke its moving average at first. Then it rallied for about four or five months again before rolling over and succumbing to a slower economy

Starting point is 00:06:38 and heading lower. So what did the S&P 500 do back then pre-QE programs? Believe it or not, in late July 2000, the cash S&P 500 fell about 6.8% in the second half of July, a normally weak period for stocks. Really in the great financial crisis in the summer of 2000, what did the S&P 500 do on the same interest rate move? Yep, you guessed it.

Starting point is 00:07:02 It dropped about 6.44% the last few weeks of July in 2007. And yes, I admit it did go lower a bit more, minus 3, minus 4% or so for the next few days, but then again, it rallied sharply in August in September. The markets didn't cascade lower from there in a straight line. No, in fact, both of these summers, which eventually ushered in a bad period of 18 months plus for stock returns and recessions in 2001 and 2008, the markets rallied considerably into September of 2000 and mid-October of 2007. By considerably, I mean, eight or nine percent taking the cash S&P 500 back to near all-time highs in 2000, or in the case of the third quarter of 2007, an absolute number.

Starting point is 00:07:47 new all-time high. Take a look at the chart of the cash S&P 500 back during both those periods. Well, yes, we're selling off hard last week in the beginning of this week. A similar move now would take the cash S&P 500 above its previous high of 5666 towards 5,800. No, that's not a projection or a guarantee, of course,

Starting point is 00:08:06 but that's with volatility now where it is, and a weaker economic data out in full display for the Fed, we would expect a parade of dove-ish Fed comments over the coming month. Additionally, earnings will, for the most part, be ending this past week, and companies should be back in the stock market buying back their stocks, particularly now with their stocks down between 5 and 25% from recent highs, and cash flow is still reasonably good. Since the July, Consumer Price Index report, markets have been volatile and have moved down quickly.

Starting point is 00:08:36 Historically, we have only seen one significant meltdown around the commencement of a cutting cycle, and that was in 2001. Otherwise, historically, we've seen semi-ordily but highly volatile daily returns and equity. within 60 days of the first cut during cutting cycles. Take a look at this great chart of the S&P 500 turns around the first Fed Open Market Committee cut from Stano Research. The cutting cycles we previously discussed in 2000 and 2007 did end in recessions.

Starting point is 00:09:04 They were pre-QE and characterized by a lack of liquidity. Quantitative easing in a significant size has been implemented since then, and you know what that has historically done to tame volatility in markets. Even with the recent sell-off in the markets, and particularly tech stocks, market breadth has broadened out and the equal weight index is down less than 3%

Starting point is 00:09:24 off its closing highs. That's a good thing on the good bad scale. So investors, if over the years you found yourself reacting emotionally in your portfolio to presidential elections in their uncertainty or when volatility is high like it is now, now is the time to step back, take a deep breath, give your advisor a call to talk and walk you through

Starting point is 00:09:44 your long-term financial plan. Maybe it's time to take it's time to take. allocate a little more into equities on a pullback. I don't know because I personally don't know you in your financial plan. But if you have a good relationship with your advisor and not just an investment account relationship, then get on the phone and give them a call and set up a meeting and see what might work for you longer term in your financial plan with the volatility in the markets right now during summer. Investors, our main message for the second half of June and the first half of July was with markets making fresh all-time highs,

Starting point is 00:10:16 if you are going to make a reallocation decision to shift money out of stocks and equities into less volatile assets such as bonds, it's best to do it when indexes are up and volatility is low. Now, volatility is ramped up quickly. Given so, maybe it's time to think about doing nothing or maybe doing a little nibbling if your plan has the flexibility to do it.

Starting point is 00:10:36 If you're uncomfortable with a wider range of possible equity outcomes, the Ocarbist team has launched a new strategy. It retains the ability to go long stocks, short stocks, as well as buy partial hedges and shock absorbers for a stock portfolio. Information on this new strategy of ours can be found at oak harbust funds.com. From 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.

Starting point is 00:11:17 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 - Stock Market Volatility: Seasonality or More - Buy the Dip?

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