Summer Stall, Stocks and the Economy

Join Chris Perras for the 7/24/2020 edition of Stock Talk!

Chris Perras: Hi, I’m Chris Perras, Chief Investment Officer at Oak Harvest Financial Group, and welcome to the July 24th edition of our Stock Talk: Keeping You Connected to Your Money. First of all, thanks to James for recording last week’s podcast in my absence. This week’s podcast is entitled Summer Stall Stocks in the Economy. As of this morning, S&P 500 sits around 30 to 35. This is almost exactly flat year to date. Although it’s flat year to date, it’s been a wild ride thanks to the virus. The second-quarter earnings reports kicked off late last week and have been ramping this week.

Most of their prints have been better in earnings, a little weaker in revenue. The stock price action around these earnings might be a bit confusing to many investors. Why? Because the names like Tesla, Texas Instruments, Netflix, and Microsoft all smashed analyst estimates, but their stocks dropped. While companies like Pepsi, CSX Railroad, Verizon, and Hershey beat earnings estimates. They pulled their third-quarter guidance and their stocks all rose.

Why did this happen? Largely because investors had already bid up the former stocks in anticipation of the great news, while the latter names had been lagging and most investors had been dismissing them as boring and had not then overweighed them going into earnings. Additionally, technology stocks traditionally peak for summer in or around July 4th, as investors anticipate a normal slowdown in their business as summer ordering for their products slow. This year, many investors are particularly nervous as a combination of pantry loading and technology products, both semiconductors and software.

Which is something, pantry loading is very similar to the pantry loading you might have done as a consumer for toilet paper and canned goods and water to the virus. These companies that buy semiconductors most likely ordered more than necessary for the third quarter. They did this in front of the third quarter due to their concerns about additional China and US trade issues this summer, as well as concerns of increase in pre-election volatility.

Additional reasons I think technology will have a little bit of an issue here in the third quarter besides it normally does, is I think there’s going to be a lot of insider selling and technology stocks in the third quarter as these stocks have had huge runs this year versus the market. They trade at the upper end of the valuations and insider selling windows open for insider sales. If I were Jeff Bezos or Mark Zuckerberg worth tens of billions of dollars and my net worth was almost solely concentrated in my stock, I would sell a lot of stock right now and not wait around for the election outcome or investor tax rates could change in 2021 and beyond.

It’s just simple, I would do it now and not wait. That being said, smaller, more diversified investors shouldn’t fear these moves and fear this summer. We’ll have a lot more on this with our second-half outlook over the next few weeks. I do want to leave our listeners thinking about a much discussed, but for almost 30 years, unseen dynamic, I think will be coming in 2021 and beyond. That is the increased likelihood of accelerating not decelerating inflation. We’ll address the specifics of this in future podcasts, but I’m 100% in agreement with Wharton Professor Jeremy Siegel, that it is coming in the second half of 2021 and beyond.

It shouldn’t be feared by investors for quite a while, but it can slowly change investor dynamics and asset allocation in the years ahead. I know people have discussed this topic for 20 to 30 years and it hasn’t materialized. However, I was taken aback by a recent article on CNBC that shows, in a very simple way, how inflation is already here. Amongst all the economic issues that COVID-19 virus has caused, a little talked about one is the velocity of cash.

By cash velocity, I mean, even though the use of good old cash has declined pretty dramatically over the past 30 years due to the increased usage of things like credit cards, debit cards, gift cards, online banking, and now direct online payments, there is still a very large part of the economy that pays cash for items. Think of small purchase items or tipping at a restaurant. A lot of people pay cash for those things, they don’t put them on a credit card. The COVID virus has accelerated the move to digital transactions and away from good old analog cash, which leads me to my point on inflation.

The manufacturing costs of that penny that you drop on the ground, or you say, ”Hey, keep the change,” what’s the cost of making that penny? Anyone have a guess? If you guessed it costs two cents to make a penny, you’d be right. Yes, it costs the taxpayer twice as much to make a penny as it’s worth. We lose money when we make pennies. That’s inflation. Oh, how about that nickel? That five-cent piece? What does it cost to make that shiny silver piece? If you guessed it costs almost 10 cents to make that nickel, yes, it costs a dime to make a nickel, you would have been right.

That is inflation. It’s right under your noses, it’s right in your pocket, it’s in your spare change cup, or it’s in the seat of your car. That’s inflation. Inflation is a monetary and generational phenomenon. I think it will return slowly in the years ahead, but if you stick to your financial plan and stay diversified, you can keep up with inflation, and possibly even benefit from it in the years ahead. We’ve been slowly leaking our second-half outlook on the markets and the economy, but we should be releasing it in its entirety next week.

Troy and I will be releasing another interim YouTube video early next week, much like we did on March 23rd, addressing some of the topics we expect to be at the forefront of investor minds throughout the second half. Tune in to it and pass it along to your friends if you find it of interest. At Oak Harvest, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets.

If you are retired or in the process of retiring, give us a call at 281-822-1350. We are here to help you plan your financial future and help smooth the financial path you have into and through your retirement years with a customized retirement planning. Many blessings, stay safe, mask-up. This is Chris Perras, Chief Investment Officer at Oak harvest.

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