Summer Patience Needed to hit “Curve” Ball

Oak Harvest Financial Group, wealth management and financial advisor in Houston, Texas calls for patience, while attempting to stay ahead of the curve and the market action. Join Chris Perras as he discusses the current market action on this episode of Stock Talk.

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Chris Perras: Hey, happy Friday. I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, we’re a wealth management and financial advisor in Houston. Welcome to our May 21st, weekly Stock Talk Podcast: Keeping You Connected to Your Money. Well, market-wise, we continue to trade in a very wide band around our sell tax day and go away call. As of last night’s close, we sit almost exactly at the same levels as that week’s closing high. Short-term traders are either having a field day or getting whipsawed all over the place.

Before I get into this week’s topic, I ask a few of my listeners. How has that day trading cryptocurrency going? I believe in this stuff, I believe in the world of digital currency and payments, but make no bones about it, Bitcoin is not a currency. Well, unless you’re maybe comparing it to Zimbabwe or Venezuelan currencies that also can drop 50% to 75% in a few weeks.

In the span of just 10 days, you gave up your entire gain for 2021. We’re not talking about small gains that you gave up. At its peak, It was up 140% to 150% year-to-date. In the span of four weeks, you lost your entire year as Bitcoin dropped 50%. Well, such as like an early life on a speculative risk asset. Yes, Bitcoin is a risk asset, not a currency. It provides no cash flow and over the last two weeks, it finally succumbed to the same dynamic that things like hypergrowth, growth at any price stock, and as they are now known, Cathie Wood stocks have been in since mid last year.

They all succumbed to the same macro dynamic. What was that dynamic? Higher trending long-term interest rates led by inflation expectations. Herein lies the title of this week’s podcast, hitting the curveball requires one thing, it requires patience. Friends of mine know I love baseball. More than anything else, I love the art and science of pitching and hitting. I used to be a pitching coach and there’s one simple rule in pitching. What’s that rule? The rule is a pitcher’s job is to make strikes look like balls and balls look like strikes, that’s it. It sounds pretty simple, right?

In one word, even the average hitter being so good, a pitcher’s main job is the art of deception. It’s the art of changing speeds, changing eye levels, changing horizontal placement. That’s the job of a pitcher and a hitter’s job is to do what? It’s to adjust. Almost all great hitters do what? Well, they all look for a fastball and adjust to slower off-speed pitches. Besides a great eye and fast hands, what does this truly entail? It entails one word, patience. If one is looking for a hundred mile an hour fastball and knows that you’re over-matched, the hardest thing in the world to do is keep your weight, hips, and hands back and wait on slower moving off-speed pitches.

The hardest thing to do is let the ball travel to you and trust your hands to hit the gift the pitcher just delivered. Most impatient hitters just want to jump on the slower-moving pitch and try to yank it out of the park. Most of the time, they either end up fouling it off, miss it entirely, or just yanking it down the third baseline foul, missing out on an opportunity that’s been handed to you by the pitcher by being impatient.

Investors, it’s summer. It’s time to keep your weight back and as Nicholas Cage said, in one of the best car movies of all time, that’s Gone in 60 Seconds. He said this right before he and his team go out and steal 50 exotic cars in 24 hours. He said, “Let’s keep it real. Think slow. We should get through this just fine.” Since the second quarter of last year, long-term interest rates have headed higher on the back of a reopening economy, creating higher trending inflationary growth versus an uptick in real growth.

For the past three to four months, almost everyone on TV has been parroting the same sector allocation theory. What’s that theory? Long value overgrowth, small caps over large, international over domestic. Are the masses ever this correct at the same time after 12 months of a consistent trend? No, almost never. As we’ve discussed for over a month now, behind the scenes, the bond market is saying that the now widely parroted trade of investors saying it must belong value, not growth trade, it’s at an extreme measure in reversing course.

This should not come as a big surprise to listeners who have heard our thoughts recently on commodity prices and the recent continued missing on economic data as reflected by the Citi’s Economic Surprise Index hitting new right 52-week lows this week. The yield curve as measured by the ten-year Treasury interest rate minus the two-year interest rate, which is a much better predictor of sector asset flows and group outperformance peaked when? It didn’t just peak this week, it peaked around March 15th to 20th. It appears that just this week, someone big and new saw this.

What has transpired internally in the markets this week? Yes, the previous momentum trade of long value, long cyclicals, and long reopening stocks have been for the most part Dogs this week. Everyone was huddled on the wrong side of the boat and extreme in sector allocations. Conversely, what groups had huge out-performance this week? Yes, you guessed it, the much-maligned large-cap tech, FANG stocks, biotech stocks, online gaming stocks, secular growth stocks, and even the growth at any price groups like solar and software as a service software have led week’s furious rally.

If you want one true reason for these shifts, one that doesn’t change day to day or rely on the opinion of someone parroting a stale theme, look no farther in real-time to the shape and momentum in the interest rate yield curve, and look to the trend in its two components of long-term interest rates. Those components that we’ve talked about in the past are the inflationary component and the real growth component. What you will see is exactly opposite what you have been hearing on TV for the last two months. You will see inflation peaking and real growth beginning to accelerate.

Listeners, regardless of the short-term moves in the overall stock markets, the rest of the second quarter up or down, this is what Goldilocks for the overall stock market would look like for the second half of 2021. We are in a secular bull market and rotations happen throughout bull markets. I will repeat this until things change and until we see things differently, but this is a very normal bull market.

How normal is it? Here are some statistics. Statistics from Merrill Lynch going back to 1929. There have been 26 bull market periods without a 20% bear market correction. Since 1929, of those 26 bull market periods, since the low last year on March 23rd of last year, the S&P ranks at what level of these 26 bull markets, is it number one? Is it number two? Is it even in the top 10 of 26? No listeners, it’s number 11, far from unprecedented. Yes, you heard that right. The median of those 26 bull markets made it to up about 77% before experiencing a 20% decline and average bull market return of those 26 bull markets, the average was almost 115%, which would equate to the S&P 500 of roughly 4,750 to 4,800.

Listeners, the Oak Harvest projection targets for the year-end 2021 on the S&P 500, which stand at between 4,600 and 4,700, those aren’t as stretched by historical standards, they’re far from unprecedented. In fact, our targets are merely within the statistical average of a bull market. This is also probably why the forward option market thinks that an S&P 500 target near 5,000 is possible in the first quarter of 2022. No guarantees, not a projection, the math guys and wizards in the option market have that as a possibility.

The sell-off we experienced in the late first quarter of 2020 is much closer in behavior to the 1987 October stock market crash that merely interrupted an ongoing bull market and didn’t create a secular bear market or a period of stagflation. If one were to look back to the second and third quarters of 2020 in the midst of the non-stop TV forecasts for depressions and deflation, if an investor were to squint and look behind the scenes at what was really going on in the markets, one would see that starting early third quarter of last year was when the cyclical and economically sensitive stocks were being under accumulation and started to gradually outperform the overall market.

It didn’t just start this year or when Biden was inaugurated. It should come to no one’s surprise that these cyclical sectors outperformed starting when? They started outperforming almost exactly when the interest rate yield curve started steepening in what is called a bull steepener fashion. That is when long-term interest rates start rising faster than shorter-term rates.

It looks like right now, what’s it doing? Yes, it’s peaking. You heard that right. The yield curve looks like it’s already losing momentum. After July 4th and no later than Labor Day this summer, big investors will once again be looking forward. They’ll be looking out at the second half of this year and all of 2022, and what are likely they going to see? They will likely see that higher secular growth companies that peaked way back in mid-2020 have stalled out for over a year, that their valuations have compressed, and now that they look cheap versus their long-term growth and free cash flow profiles, they’ll be buying them.

Big investors who have been chasing and pushing up value stocks since mid-last year will start asking themselves, “Am I paying peak multiples for peak EPS in 2022 in these names?” We want to be ahead of the curve and not parroting the same old things that others are 12 months after the trend began.

At Oak Harvest, we are comprehensive wealth management and financial planning advisor located right here in Houston, Texas. Give us a call to speak to an advisor and we can help you with a financial plan that is independent of the volatility of the stock markets. Our phone number here in Houston, Texas: 281-822-1350. We’re here to help you on your financial journey with a customized retirement planning. Have a great weekend. This is Chris Perras at Oak Harvest.

Speaker 2: All content contained within Oak Harvest podcasts 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 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.