Stock Talk - The Good, The Bad, and The Ugly

Starting point is 00:00:00 Investors, over the last three weeks, we've recapped the first quarter of 2024 returns, and we've covered what the remainder of the year in the first quarter of 2025 might look like for stock markets under three different scenarios. First, scenario one, a continued soft landing outcome, kind of like 1995, where Goldilocks plays on, which would project the S&P 500 to 5,900 or 6,000 in the first quarter of 2025. The second scenario we presented, which is a bit of a downer, which is a bit of a downer, a hard landing outcome, like late 2000 through early 2001, post the dot-com bubble. When the Federal Reserve induced an economic slowdown and a recession ensued, the markets dropped minus 30% in the first quarter of 2001. This scenario equates to 3,500 to 3,500 on cash S&P 500. This, of course, is where the markets were late October 2022 at the most recent major market low 18 months ago.

Starting point is 00:00:57 scenario three, well, that was presented last week, and I titled that one, muddling through with a shot of volatility, creating a very wide range in the markets, but not much net gain over the first quarter high we struck around 5250, call that a range from 4,800 to 5,400. This final scenario is actually the least likely outcome for the fourth year presidential cycle as politicians are busy trying to win votes and trying to win the November election by keeping the economy chugging along. this week, I'll give you a quick recap of the last two weeks behind the scenes. Let's call it the good, the bad, and the ugly, a classic Clint Eastwood movie released in 1966. Investors, before I get into this week's content, I just want to let you know that I'm proud to announce that Oak Carvish has been awarded by the USA Today as one of the best financial advisory firms in 2024. More information about this award and our firm can be found on our website. First, the good. The good, regardless of what the government data is saying,

Starting point is 00:01:57 what politicians on TV are spewing, and what academics are trying to hypothesize. The real-time data says inflation, yes, inflation expectations just peaked last week. You heard that right. Inflation fears looked to have just maxed out, just as they did in the late October of last year, about four to five days before the stock markets troughed and promptly rallied 1,100 S&P 500 points in almost exactly five months. Investors, take a look at the daily chart of the real-time five-year inflation break-even rates. You can use most any maturity, but they pretty much look all the same. This chart peaked back at the end of October last year as the financial media was talking

Starting point is 00:02:39 crashes and recessions and then dumped for a solid six weeks, helping the S&P 500 rally back to its then all-time highs near 4650, 4750. Investors, I've repeated this many times in advance of inflation rallies and sell-offs. Inflation expectations and statistics in the U.S. are very seasonal. They nearly always peak in late March through May and head lower. Take a look at the 10-year chart of the five-year inflation expectations. The late first quarter peaks are marked to make it easier to see. That's the good news.

Starting point is 00:03:13 Peak inflation fears have historically meant short-term stock lows, and of course, we've recently sold off about minus 5% over the past four weeks. Second, the bad news, and the most likely reason for the brinkly reason for the brink. market sell-off and an even worse sell-off in tech stocks and high-growth stocks the first three weeks of April. What's the bad news? The pivot higher, not lower, and five-year real interest rates. First recall, late last October, the trend break lower of this real-time data series was the key indicator to our team that a significant yet very normal fourth-quarter stock market rally was near. It was one of the main reasons why on October 26th Thursday night's live stream, our team message

Starting point is 00:03:55 that the lows for the market should be the next few days, while others were spewing nonsense about similarities to the October 1987 stock market crash. Take a look at the real-time chart of the five-year real interest rates. Remember, investors, this is the interest rate that comes closest to accurately forecasting whether investors are willing to pay higher P.E. multiples for the market

Starting point is 00:04:17 or lower multiples. One can clearly see that the entire first half at 2022 sell-off transpired as real interest rates were skyrocketing higher from minus 2% to positive 2% in September of 2022, which happens to be almost to the day the S&P 500 troughed and most, if not all, of high-tech growth names, found their footing for their big 12 to 18-month rally. Investors, the markets can handle higher real rates over time. However, they hate changes in trends in this measure. And what we've seen the first three weeks of April was enough of a bounce in this measure that the computer algorithms

Starting point is 00:04:54 triggered sell signals across Quantland, that's the bad, rising real interest rates. Finally, investors, I want to give you the ugly. What's the ugly? The ugly is we continue to follow the pattern of October 1998 through 2000 when the dot-com bubble rally happened, but the Federal Reserve stayed too tight and monetary policy for too long and eventually caused a recession in 2001. And the first leg down in the multi-year bear market that began after a big, rolling top between late first quarter of 2000 and the third quarter of 2000 with a drop of minus 30% into the first quarter of 2001. I'm going to give you the few updated overlays that I've been sharing for over a year and leave you with a few hopeful ones too. First, the S&P 500

Starting point is 00:05:42 overlaid then and now. Next, the more tech-heavy NASDAQ composite back then during the dot-com bubble and now. Here's another interesting one, the Philadelphia's semiconductor socks index, back during the dot-com bubble and now, and almost everyone's favorite AI semiconductor play, Invidia, then and now. Remember investors, Nvidia came public in mid-1999 in front of the dot-com run-up, and back then, Invideo was merely thought of as a video game and graphics accelerator chip company. AI wasn't even clear in most people's mind, except maybe a few at Stanford, MIT, and Caltech. And finally, I'm going to give you a more hopeful overlay. Here's one of the defense company, Lockheed Martin, back then and now.

Starting point is 00:06:29 This one actually had quite a good 2000 year throughout the whole year after a relatively weak first quarter in 2000. So investors, that's the good, the bad, and the ugly. And while the first three weeks of April were certainly ugly for most high growth stocks, but not unexpected after a five-month rally up, I don't want to leave you on a down note. Investors, even if we continue to play out in a similar way of the post.com bubble in 2000, recall that markets hung in there for the better part of five to six more months.

Starting point is 00:06:59 In fact, the tech stock sector actually rallied strongly post April options expiration for two or three weeks before selling off again in making a slightly lower low in mid-May. They then went on to a strong rally led by semiconductors all the way back to near their prior all-time highs into July 4th and midsummer. Investors, right now our team does not see the leading signs of a future recession this year, but we can say that we will have one again this decade, and a recession in the stock markets is a minimum of minus 30% down moves. For investors or retirees uncomfortable with wider range possible outcomes and equities,

Starting point is 00:07:36 the Oak Carvest team has launched a new strategy that retains the ability to go long stocks, short stocks, as well as buy partial hedges for your stock portfolio. Information on this new strategy you found at oakharvestfunds.com. From myself, from the whole team here at Oak Carvest, 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,

Starting point is 00:08:06 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.

Starting point is 00:08:44 Investing involves the risk of loss, and past performance is not indicative of future results.

Stock Talk - The Good, The Bad, and The Ugly

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