Stock Talk - What Could Go Wrong? It’s Deja Vu all Over Again

Episode Date: August 2, 2024

As an investment professional over the last 30 years, I've observed that questions about potential risks rarely arise, especially when markets are performing well. However, for those nearing retirement, it's crucial to consider changes to ensure a comprehensive financial plan. In this week's video, I discuss current market trends, historical patterns, and the importance of preparing for potential economic shifts. Tune in to hear my insights on what could go wrong and how to safeguard your financial future amidst increasing volatility and uncertainty.   #stockmarketcrash #retirementinvesting #sp500   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.   Best Financial Advisory Firms 2024 criteria was based on Assets under Management over 12 months and 5 years, respectively, and recommendations from 25,000 individuals among financial advisors, clients, and industry experts. Advisory services are provided through Oak Harvest Investment Services, LLC, a registered investment adviser. Insurance services are provided through Oak Harvest Insurance Services, LLC, a licensed insurance agency.

As an investment professional with over 30 years of experience in public equity markets, actually managing other people's money, that is actually, as they would say in the business, pulling the trigger that is not writing theoretical or academic papers and studies on the markets or publishing a $99 a month newsletter service, I seem to rarely get asked, what could go wrong? The fact is, this question rarely gets asked when equity markets are at or near all-time highs and volatility is low as it's been ending the first half of 2024. Outside of Troy Sharp or founder, I can probably count on two hands the number of times I've been asked that question the last six years by an investment prospect when the markets are up and to

the right. That's when investors' brokerage accounts are at new highs. That's when their net worth hits new highs. And that's when many people are marking to market their net worth to new highs almost on a daily basis. That's when emotional greed trade is hard to resist. I'm worth 2,500 or 25,000 more this month than last month. That's a common mentality that I've seen kick in. As if anyone in the investment world could go 100% to cash at the exact right day or week or month of a top, pulling their entire stack of chips off the investment table and out of the equity markets. Investors, those are the rose-colored glasses that are hard to take off,

and it's really hard for many individuals to switch financial advisors while the markets are up and to the right. Why? Because they look at their accounts and think, I'm making money. Why change horses? Even though, as one nears retirement or is in retirement, maybe an investor doesn't need to ride the same racehorse anymore or thoroughbred. Maybe it's the right time to look for a slower, steadier horse to take on your goals, aspirations, and motivations for the next race. The slower race in retirement when incoming cash flow is less certain. Investors, I'm here to tell you that if you're a retiree or near retiree or even pre-retiree five years

out, that's precisely when you should be looking to make a change. Why? Because an investment account is not a financial plan for retirement. The complexities of budgeting for monthly expenditures, generating income, minimizing taxes, maximizing Social Security benefits, or maximizing net benefits from other government programs such as Medicare, become a web of complexity, first when you're gainfully employed and saving for retirement. I've learned under Troy's leadership since coming to O'Carvis as CIO that those working years are the simple years, financially speaking. Those are the go to work, get paid, contribute to your 401k if you can, pay taxes, pay fixed monthly expenses such as rent, healthcare insurance, then pay yourself next if you're a saver or pay monthly variable expenses

such as travel, entertainment, discretionary items, and then save whatever if anything else is left over like most Americans living on the edge. Rinse and repeat every month X unforeseen events. wake up, work, get paid, pay taxes, spend, save, sleep, rinse, and repeat, day after day, week after week, month after month, year after year. It's a simple recipe if one can stick to the playbook. Before we continue, I want to give a shout out to the entire Oak Harvest team, as USA Today ranked us as one of the best financial advisory firms for 2024. The award is given to the top registered investment advisory firms in the United States based on two criteria, recommendations from individuals among 25,000 financial advisors, clients, and industry experts,

and growth and assets under 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 when you're younger, working and generating monthly income, time is on your side. You don't and shouldn't have to contemplate thinking, what could go wrong that often in the economy or stock markets. In fact, I'll argue that when you're younger, saving and investing, you should actually hope for things in the markets to go wrong for extended periods of time so you can dollar cost

average systematically at lower prices while you're saving and investing while you're not immediately needing those assets. All this semi-rant brings me to this week's topic, what could go wrong from here in the markets? First and foremost, what I'm presenting here to you are ideas that I'm looking at and things that are concerning to me. I'm not saying these things will happen. We're not saying that the markets will not make new all-time highs in the coming months or end-a-year post-election, as we previously discussed in our first half-24-outlook published months ago. However, just as I presented the optimistic investment case for stocks in the economy in October of 2022 and again in October of 2023, while other strategists, CIOs and legendary hedge fund managers on financial networks were talking recessions, crashes, and other doomer outcomes, I feel compelled to share with you. what the data we follow in Kyov of is saying.

Suffice it to say, it's not all rosy. It's not doomer or dire, but it is cautionary and early warning. First, since the CPI data was released in mid-July, the market is quickly and violently rotated away from technology, semiconductor, telco growth stocks, and many other growth at high-price stocks. It moved away rapidly from the Mag 7 and into small-capped stocks, the Russell 2000,

and the equal-weight S&P-500, RSP, EMP, EETF. And more broadly, what I call GARP stocks, growth at reasonable price. After many strategists wrongly called for it in 2024, market breadth has finally broadened out. As J.C. Parrots points out, the equal-weighted S&P 500 finally broke out to a new all-time high after marking time for two years. Take a look at that chart, big base, or some call it a cup and handle. Investors, hear a few index returns here today into the July 11th CPI number. The NASDAQ and tech stocks were up over 20% and the S&P was up over 17% year to date. The then lowly Russell 2000 bringing you up the rear. It up only five-ish. I say that sarcastically because remember investors, long run average return

of equities has been somewhere between 8 and 12% per year depending on your starting point. Here are the same indexes, returns since the CPI data was released. What was leading year to date, the NASDAQ and large-cap tech like the QQs have gotten crushed or is lagged. While the laggard and unloved year-to-date Russell 2000 index lit it up, up almost 5.5% and 10 trading days. So these are the same index returns year-to-date through July 26th. Investors, while the NASDAQ is still leading, its lead has shrunk considerably. While the Russell 2000 is still lagging behind the S&P 500, it made up almost 8 percentage points of relative performance in only two weeks. It was lagging the S&P by 12% into the CPI, and now is only about 4% of 4% of the CPI.

behind the S&P 500 in 2024. So Chris, everyone says market breadth is a better thing. I have to agree with them most cases. Check out the great table from Willie Delwich, summarizing the recent strength in small caps and how things have historically played out going forward. Everyone I know knows me because that I love history because investors are humans

and humans are creatures of our habit, particularly with their money. Same people, managing the same money, doing the same things, expect the same outcome. comes more often than not. Investors looking at this table would say you would most likely need to be roaring bullish small caps the next 12 months after a few weeks of a lull.

Look at the summary like, plus 19.4% subsequent average return and an 85% positive hit rate over the next year. Those are Draft King like house at the casino odds. Sign me up. Or not. The issue with this data set is if one looks at the years and timeframes, virtually all of the periods were at the beginning of long economic cycles up. Post October 1987 crash,

post-great financial crash, post-COVID crash. And unfortunately, this data set happens to include the time period I've alluded to for almost two years now, up until lately, very positive manner, while others were promoting doom and gloom and bubbles. Yep, October 1998 through 2000, the dot-com investment bubble. In fact, as of this table shows, one of the worst time periods for small-cap stocks

came after the rally that started in June of 2000, about the same time we just had our big small cap rally. Yellow flag number one, what could go wrong? We could continue to trade in a very similar pattern at both the index level, sector level, and single stock level as 2000. Yep, late in the economic cycle of the first wave in the internet build out.

And while value, garp, and small cap stocks did okay the second half of 2000, we all know what happened to the overall market in the NASDAQ and tech names after August, of 2000 into year end and post-election 2001. Secondly, what could go wrong? The Federal Reserve has done a great job at getting inflation to come down back towards two, two and a half percent.

However, ex-government job, the job market is weakening. A weakening jobs market is represented by initial jobless claims. It's big warning sign for the economy and stock markets looking out a few quarters. Check out the chart from Game of Trade showing the historical correlation. This is a big yellow flag warning from this. data set for the fourth quarter of 2024 and 2025 for equity stock returns if jobless claims keep heading up. Third, what could go wrong? A faster economic slowdown at both the consumer and corporate investment level into the fourth quarter due to increased uncertainty of the

election and political outcomes in D.C. Investors, nine times out of 10, I tell investment prospects and clients that worrying about political strife or investing based on your political biases is a great way to lose money or keep yourself out of the stock markets. I ran the stock market return numbers for a video a few weeks ago. The total return to the S&P 500 from Election Day in 2016 when Donald Trump won the vote through summer of 2020. First, Election Day 2020, when Joe Biden won through the current highs in the SP 500, nearly identical returns near 80%. I have to dig up the data, but under both presidents, wildly different policies, different deliveries, different focuses on the market themselves, nearly the same stock returns at the

index level on the S&P 500. So Chris, why the possible deviation from your normal pay no attention to the men and women behind the political curtain? Well, looking back in time, economically and politically speaking, the current environment. Data keeps reminding me a lot of 2000. The Fed had aggressively raised interest rates in 1999 and 2000, but they were slow to act in the second half at 2000 is the economy rolled over. Here's an excerpt from the June 2000 FOMC meeting. The incoming data were suggesting that the expansion of demand might be moderating toward a more sustainable pace.

Consumers had increased their outlays for goods modestly during the spring, home purchases and starts appearing to have softened, and readings on the labor market suggests the pace of hiring might be cooling. Moreover, much of the effects on demand of previous policies firming's had not been fully realized. Financial market participants interpret signs of economic slowing as suggestion the Federal Reserve probably would be able to hold inflation in check without much additional policy firming. However, whether aggregate demand had moved decisively onto a more moderate expansion track was not clear and labor resource utilization remained unusually elevated.

That's a long sentence. That's the Fed. Sounds remarkably like the current Fed's thinking in comments in 2024, but that was written 24 years ago during the summer of 2000. Yes, it currently appears the Fed is more aware of the slowing economic environment and worsening the labor markets than in 2000. It still seems apprehensive to take easing action, lest they ruin their reputation again. Investors, the real-time data the Fed controls has me on edge for the first time in years. Here's the one-year real-time market price, real interest rate. Given short-term market one-year inflation break-even

rates, it currently is trading over 4%. Both, probably, times, this rate was this high, both led to very bad 12 to 24 month outcomes for the overall equity markets. Investors, this is the real-time bond market saying the Fed's too tight. Take a look at the longer term, five-year, real-time, real-interest rate chart dating back those two periods. It gave a warning signal to the Fed was too tight in late summer of 2000 and late summer of 2007. Now take a look at the same five-year real rate chart today. It's copy-looking to me. At first, lower real interest rates are a good thing. It lifts almost all equity votes usually, until it isn't. At least that's the way it played out pre-QE and other extraordinary Fed policies

that were put in place in 2009 and currently extended into now. Recall investors in 2000, it was a rollover in economic growth, followed by lower confidence and investment in the second half of 2000 that was amplified by a hotly contested results from the November 7th, 2000, presidential election whose outcome dragged on until mid-December due to the hanging Chad controversy in Florida. So investors, that's my take on what could go wrong beyond the summer of 2024. Do I have a strong conviction in this negative outcome? No, not currently. But as I've said for 18 months now, I think I've seen this show before. And while the first three acts of the play are fantastic, I'm not sure what the hand, the Fed, and the markets will deal the next president of the United States,

regardless of who wins. It didn't matter in 2000. It didn't matter in 2008. A script was already set by Federal Reserve monetary policy that, as Milton Freeman first said, operates with a long and variable lag. If over the years you found yourself reacting emotionally in your portfolio to presidential elections and their uncertainty, now is the time to talk to your advisor to walk through your plan. Well in advance of other investors' concerns of what will likely be a third quarter, 2004 that is a soft landing pullback that refreshes or the beginning of a much more painful economic market downturn. Our main message for the second half of June and the first half of July has been, with the markets making fresh all-time highs, if you're

going to make a reallocation decision to shift money out of stocks and equities into less volatile assets, it's best to do it when indexes are up and volatility is low. Over the last few weeks, investors have seen a rapid uptick in volatility and a quick drop of about 5% in the S&P 500 and upwards of 20% on many NASDAG tech stocks. Looking out into the second half of 2024, our team is expecting more of this, including some strong rallies, one of which is likely forthcoming. These rallies will likely make investors feel great and exhale while they're in process. However, that shouldn't change your actions of contacting your advisor

and walking through your financial plan to see how you and your financial plan might fare just in case what could go wrong does. If you're uncomfortable with a wider range of possible equity outcomes, the Oak Harvest Team has just launched a new strategy that 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 harvest funds.com. From the investment team, Charles, James, Dwayne, myself, and the production team, Eric, Anya, Corinne, thank you and 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 as personalized investment, tax or legal issues. 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.