Michael Carlin
Hello, everybody, this is Michael Carlin, president of Henry+Horne Wealth Management with you on our first quarter market outlook for 2020. This is the first market outlook of the year. Always most important, in my opinion, we’re really trying to set the table for what we’re looking at throughout the calendar year. And for those regular listeners and for those new, you need to know that we’re joined by Joe Taiber, Taiber Kosmala, our good friend, and tremendous, tremendous resource to our firm, to our clients, to everything that we do. Joe, good morning.
Joe Taiber
Good morning, Michael. Hello everybody.
Michael Carlin
Great. Well, hey, Joe, We’re gonna try to get this done in a half an hour. This is mission possible. So without further ado, let’s go ahead and dive right in. One of the things that became really apparent to me, I spent a lot of time reading Bank of America, JP Morgan, UBS, Citi Group, Vanguard, everyone’s market outlook for 2020. I can’t recall seeing a year where there were people that were further apart on both sides, from this is going to be a disaster to this is going to be you know, we’re looking great and strong for continued economic growth. Joe, do you recall seeing things where it’s like this disparate between both sides?
Joe Taiber
Yeah, I guess I’d agree with that. It all depends on what you looking at, what they are looking at, because there’s certainly a case to be made on the manufacturing side, maybe for the glass half empty. But I think a lot of things are glass half full.
Michael Carlin
Right. Well, it’s interesting. And I look back at, you know, the past couple of years. And, you know, what was interesting is that there’s been so much speculation that this was going to be the year that the market falls. We’ve been hearing that for a number of years, really, even since the financial crisis, as soon as the financial crisis said the market was down terribly and in every year subsequent, it’s like, oh, gosh, I mean, this has got to be the year where things fall apart. And I looked at the hedging strategies, you know, that worked. I mean, in terms of how do you protect yourself if the market goes down? Obviously, shorting has been the worst, the worst performing way to protect yourself with an average annual return over the past 10 years of negative 20 percent. But even looking around it now, all the different multi-strats and market neutrals and option rates it’s been a really difficult place for that whole market neutral space and the people that want to protect themselves in their portfolios. The best way that it’s that that had has worked the past 10 years has been like a 60/40 stock. The bond next. But but, Joe, moving forward, do you think that there’s other ways that people we should you know, we’re gonna be instructing people on how to protect their portfolios with alternatives?
Joe Taiber
I don’t know. As you and I talked over quite some time alternatives. Just in general. We like to paint with a guilty until proven innocent brush just because they’re pretty expensive. You want diversification, you want protection. That’s generally what is the most expensive to get it. So we’re a little skeptical of hedge funds, had one of their best years in many years yet they once again under performed the market in general. So that 60/40 portfolio was basically close to 20 percent last year, which is its best year since it’s had just a regular vanilla portfolio since 1987. So we’re hesitant given the relatively constructive view on looking for insurance right here. I think that this was the same conversation most people were having at this time last year. And the market just all it did was increased by about 30 percent last year or so. Skepticism on insurance. But I think that you’re pretty happy with how things look right now. Yeah.
Michael Carlin
And when I think about the way things are right now, Joe, I look at, you know. Sure. The length, and the duration of this expansion. 125 months, which is great. But you look at unemployment and you can look at it, it measured a bunch of different ways. And you three, you six. You can look at it just not here in the United States, but the G7, the largest seven countries in the world. And unemployment worldwide looks good, particularly here in the United States. Wage growth looks good bit, but it’s not it’s not excessive. So it is hard it’s hard to be pessimistic in a consumer driven economy when you’ve got jobs that are that robust in wages that are that, they’re improving. And it’s hard without anything being out of control where you feel like, oh, my gosh, how much longer can this roll? This feels like a controlled rate of growth where again, it’s hard for us to go in and get short here or it’s hard for us to go and get cash, cash heavy here without seeing other economic data points that are indicating, G.C., you know, this is time of trouble. Absolutely.
Joe Taiber
I completely agree. We talked several times, many weeks here, you and I. No one knows. You know, we really try to always keep our eyes focused on us. Liquidity, sort of. And yes, we’ve got a really robust housing market. Yes, we have a phenomenal decades, strong job market, but arguably most importantly, the liquidity backdrop and what we mean by that is just overall going to be in the market. The Fed like very supportive, very supportive here in the US, very supportive globally. So very much eating into our our constructive view. Yes, the cycle is long. One hundred and twenty five or twenty six months consecutive economic growth. But it’s not been over the top 10 longest expansions. In fact, this is the lowest cumulative GDP growth. So it’s been one of it’s been very long and duration in terms of the cycle that it’s not that, you know, an inflationary high growth environment, obviously, as well.
Michael Carlin
Yeah. And I think that’s it. I obviously we you and I are singing for the same the same tune in. I had a couple of different elements. And I and I want to I want to make sure we spend time on the Fed. But before we jump off of, you know, the consumers, it just it seems to me that the the the consumer balance sheet with respect to, you know, what they what they have in their retirement portfolios, investment portfolios as a percentage of their incomes never been higher, meaning consumers have more on their balance sheet than they have had. You know, really, you can go back all the way to the 50s and in this. So with with an asset base that strong, with job market strong, the strong that with wages that are strong, again, it it’s hard it’s hard to be pessimistic, even though there are some models that are, you know, the J.P. Morgan model and others where you’re seeing that there that there were fears of recession creeping up in December. Those have subsequently come down significantly as well. So, again, with that and and and I want to dovetail this into the Fed with the Fed helping push us forward. That’s that’s something that I don’t think a lot of retail investors really understand that that that that we’ve got a Fed that’s helping row the boat here, that’s helping provide liquidity, that’s helping provide stability to markets. And as long as the Fed is helping, it seems very likely to us that that the market can continue to move forward. So there’s kind of that tale. Two Cities, is it? Yeah. Yeah. You know, we have the Fed helping, but. But we know where. How does that look long term? Is this a good long term thing for the Fed to be doing? Because it we can understand the benefit short term. But your how do you how do you weigh in and how do you handicap this whole thing? We can break down and explain the Fed helping the Fed pushing the Fed, you know, moving the economy long in and helping the stock market, helping the individual in a retail investor, retail consumer.
Joe Taiber
Yeah, we think that is the number one most important thing. I mean, the killer is most market cycles is in fact, the Fed. And typically a policy mistake on behalf of the Fed. So keeping a very close eye on the price of money which they set is very, very important. And, you know, they’ve been very clear this year about their intent to stay on the sidelines and make no rate hikes here in 2020. In fact, I think one anecdote of interest is the Fed is really revisiting their strategic initiative over there with their strategic goal. You know, the number one goal, which is price stability. Another word for inflation, keeping inflation modest at 2 percent target is what they are right now. But they’re pivoting seemingly. And that’s normally a similar activity to looking at their 2 percent inflation target from the context of a business cycle, not just with inflation, it’s 2 percent, which, by the way, it hasn’t. It’s averaged 1.6 percent since 2008. That’s right. But the fact of the matter is, they’ve been very clear that they’re going to stay on the sidelines and likely going to let inflation trend over 2 percent before they really start increasing the price of money. Otherwise, hiking rates, and that just means that they’re going to be on the sidelines and stay constructive or friendly, I guess, market friendly receivables. I think that’s a very important thing.
Michael Carlin
And I’ve seen Fed models that that were put out by institutions like Vanguard, where they’re showing that there’s a possibility of further rate cuts in 2020. And it’s a little early to call that. But but it but I’m interested to see how that how that comes together. And and I also look globally, Joe, and globally, we did not have a global coordination of of of where central banks across the world were working together. And they have been working more together lately. So in 2009. Team there were less rate hikes globally and there were and there were more a lot more rate cuts globally here in the United States where we hadn’t seen anything globally in 2017, 2018, if kind of central banks of the world sat on their hands, didn’t do much. We’ve seen that that start to change and that has to be supportive, not just here in the United States, but all over the world. Yeah, no question.
Joe Taiber
I mean, the three central banks that you and I keep close eyes on are obviously the European Central Bank and China, the three largest global economies, really, China, the U.S. and in Europe, the ECB resort to quantitative easing in November last year. November, 2019, 10 months off. So they’re back to a very accommodative stands right now. They have a news ECB and Christine Lagarde right now that took over at the end of last year. But that’s that’s one, again, constructive talk about the Fed being constructive. Lastly, PEOC, the People’s Bank of China, they do very much constructive. They made a significant cut in the last year in their banking system, injecting liquidity into their banking system. non-word their benchmark lending rate also. And more cuts are expected from that PBOC. So there you have the big three central banks, all of which, like you said, Michael, in addition to many others looking much leaning more, I guess, market friendly, I suppose
Michael Carlin
how how can we highlight the Fed being market friendly without saying that we might have had the the greatest and quietest liquidity boost ever. The Fed injecting more liquidity in the market ever since September of 2019. I’m telling you, Joe, clients are completely unaware of this until I mentioned it. No one’s aware that there were issues with, you know, with cash deposits in, you know, interbank lending, borrowing rates and lending rates, and that the Fed has stepped in and provided tremendous liquidity to that part of the market, which to me, you know, obviously signals that there’s there must be some lack of demand from international international buyers of our paper. That could be that could be a component. But but my goodness, the Fed stepped in in such a way where if you thought that the Fed was doing a lot, you know, post the financial crisis. Take a look to see what they’ve done since September. So it’s not a surprise to see the market performing well since September, especially given what the Fed has done and how it can positively impact peoples and investors in institutions mood. But, Joe, is this something we should be worried about? I guess that’s the real thing that, you know, that we would want to break down. Is this something we should be concerned about, the Fed, what they’re doing?
Joe Taiber
Yeah, I think you may be referencing slide slide 13, I wish. Which is a really fascinating chart. The around scene there, Michael, looks at just a parabolic spike up in total assets at the Fed. And you’re right. It’s all happens in September of 2019. There’s some nuance here. And I won’t get into any technical details here. But long story short, that was in direct response to a spike in overnight lending rates between banks here in the US. So overnight fear very short term lending rates spike. There was a liquidity vacuum in the Fed, basically stepped in to fill that gap to the tune of four hundred billion dollars, which, by the way, is retracing over 50 percent of the quantitative tightening or the balance sheet reduction that they did all the way through out the balance sheet reduction regime. There are so 400 billion dollars injected. The important thing and the reason that the Fed calls this, quote, it’s not QE. QE is because is because they’re focused on here is very, very short term paper. She got actual quantitative easing. They were buying intermediate duration or any medium maturities and longer term maturity, treasuries and mortgages here. This liquidity. Exactly. Actually, purely on the short term, a very, very short term end of the market. So it can be viewed a little differently. We think it’s much less of a risk of systematic risk than an all out quantitative easing. So I be concerned about it. No, we’re not. In fact, we think it’s more of a liquidity window that. A situation with regard to overnight lending in the banking sector. So it does look pretty concerning, but we we are too concerned about it right now.
Michael Carlin
Right. So, again, so. So the takeaway here is as long as the Fed continues to participate, continue to help, continue to push that boulder uphill, then then that that that’s a good positive tailwind for the market continue to continue to run higher. So the profit cycle, kind of the business cycle where we’re at. I don’t know. I saw, you know, BlackRock had an interesting slide. And by the way, Joe, reference slide deck. You know, for those you know, you can always email us. We just reach out to us at manage the funds. Any one of our social media handles, Instagram or Twitter or others to get the slide deck. Just let us know. We’ll send it to you. But it’s you know, BlackRock indicates that we are, you know, definitively late cycle. The thing that meaning, you know, meaning that we’re kind of in that that that that latter stages of economic expansion. What I was encouraged by by BlackRock’s research is that sometimes this cycle is pretty long. It’s pretty long. So, I mean, so I say this because the typical investor hears we’re late cycle. I’ve got to get risk off now. I’ve got to sell right now. I’ve got to make a change in my portfolio. And I’m here to say how I concur that we are late cycle. But let’s be encouraged by the fact that late cycle doesn’t mean it’s over by any standard. Does it make sense, Joe?
Joe Taiber
Yeah, it does. Absolutely. I mean, late cycle, long cycle. No question about it. Well, I don’t have a late cycle. Mid to late cycle is the label that we would hang out at, I think from a market perspective. The thing to think about is really, I guess the lens that we can encourage clients to look at things through is, you know, what period, what time period are really talking about. If you’re talking about the next one to three months, you can make a pretty strong argument. This market is overbought, arguably extremely overbought. So putting new money to work just be acknowledged, just acknowledging that there’s potentially some short term consolidation that can happen. But the longer term trend and the true north of that longer term trend truly is do you see a recession or an end of the cycle on the horizon? And that’s where you have to come back to True North, which is the liquidity backdrop, monetary policy and some of the economic and financial market indicators. And again, those I’d say are still relatively a relatively constructive.
Michael Carlin
Yeah. So we’re aligned. But yeah. And we are being certainly very cautious with. Client cash capital that we’re getting now at this point, and we are definitely have a different investment philosophy than we did the beginning of last year. So so Joe, did you happen to catch that, that Apple’s market cap, the total value of Apple is greater than the entire energy sector? Does that mean. Wait, wait a minute. So that has to mean one of two things. So the fact that Apple is worth more than all the publicly traded energy companies combined, in my mind means either energy is overdue for some type of a of a rebound, given the fact that it’s it’s struggled for so long. And it has it’s been it’s been a really rough road since from 2007 to today where, you know, if you look by some measures, the energy complex has lost half of its value over that time period. But but doesn’t it also may be me that, I mean, an apple has gone up since since I’ve gathered this data. But but an apple is even gone up higher. But, Joe. You can’t have that. You can’t have one stock that a company that makes cell phones and iPods be worth more than all the publicity and energy companies in the United States. Right.
Joe Taiber
You know, yeah, it gets it’s one of those things that sounds it doesn’t pass the smell test, as I like to say, but that’s getting a lot of headlines. Michael, I’ll tell you one anecdote that we picked up just a couple weeks ago to look at the market. This is basically you’re talking about markets rupturing. Equity markets rupture into the top nature of the top, the nature of your apples, your Microsofts, your your Googles, your Facebooks. You know that stocks are often referenced. Those top five stocks are getting a lot of ink in the press. And how much of the S&P 500 that they represent is getting a lot of ink in the press. One really interesting anecdote, in 2019, the top five stocks in terms of their percentage of the overall S&P 500 was sixteen point one eight percent. So 16 percent now historical context. OK. The same top five heaviest weight over the last 30 years was actually detectable. Yeah, probably.
Michael Carlin
I saw I saw this soft touch part. Yeah. Keep going. Keep going.
Joe Taiber
So, so, so. So that was eighteen point six percent. So the high watermark is 18 percent. The current market is 16 percent. The low watermark of the top five stocks as a percentage of market cap is 50 percent. We’re actually somewhere in the middle where the top five stocks in terms of percentage of market cap generally has battled in the last 30 years, even though some you know, obviously a lot of headlines are latching on to that. So I think it’s interesting.
Michael Carlin
Yeah. And I guess sometimes sometimes this information is nothing more than just a good headline. Yes. I want to remind everyone that you that you need to stay invested. And so periodically I find this this same chart, the same chart where, you know, the value of staying invested consistently is important. And one of the roles of your advisor is to make sure that you that you are staying invested intelligently as the market and economy do what it normally does. It goes through cycles. So here, here, here is that this is I think this is this is an anecdote. This is data. But take a look at the previous 20 years from January 4th, nineteen ninety nine to the end of the year, 2018. You endured two massive market corrections to massive dot.com bubble bursting in the financial crisis. If you just left your money alone. You were in vet, you started investing January 4th, 1990. I was one of the worst times to start investing. And you took it all the way through to December of last year, where, by the way, to market December of last year, the market was down another 20 percent that quarter. So you had the financial crisis, you had the dot.com hit. All these different things come. You would have averaged a 5.6 percent rate of return. Here’s where it gets interesting. If during that those pockets of times you said, you know, I’m going to I’m going to take time. I don’t like where the market is that the economy is. And you end up selling over that 20 year period of time. If you may happen to miss the best 30 days. Days. In that 20 year period of time, and you’re gonna miss them because you don’t know when they’re coming, your return would have gone from 5.6 to negative. You would have averaged a negative 2.3 percent return. Completely defeating the reason why you’d be investing to start with, Joe. We got to remind people to stay invested. And I’m not saying that for self-serving purpose. There’s always a good place to be. But trying to pick pockets is impossible. There’s no one that’s been able to do it. So so let’s kind of keep your eye on the prize over the long term. Is there a better is there another way to look at this or say that?
Joe Taiber
Well, this this this chart, this chart absolutely paints the portrait of market is not a good idea. You know, it’s that simple. The numbers tell the story. And just anecdotally, I mean that we’ve shared this with you and your listeners, I’m sure, over and over time as we investment programs for pension funds and foundations and endowments and institutional money and the like. And the reason that they stay invested is right here. You can’t you can’t guess what’s going to happen tomorrow. You really can’t. It’s a money losing venture over time. The important thing now is making some of the margin at the margin decisions, which is what institutional investment programs attempt to do. You know, and that’s what clients are receiving, just intentional aimed at the margin levers and tilts. You know, to be able to play a little bit of defense when defense is warranted in your office is in partnership with your firm.
Michael Carlin
Joe, we’ve been able to do that better, better than ever. So. So, again, I know a thank you recently, but I’m going to thank you publicly. Again, I sincerely appreciate your insights and helping as we’ve had our portfolio performance. I mean, this is not a commercial, but, my goodness, crushing, crushing the benchmarks. So so thanks again for that. I would be remiss if we didn’t spend the minute or two or three of the as we start to wrap up the market outlook, you’re talking about the election. So a couple I have a few things that I want to throw out there. The third year of any presidential cycle, the third year of that cycle, which was which was Trump’s third year last year, is historically the best. Last year didn’t disappoint us either. So before we get too excited about last year’s performance, you know, again, 2018 was terrible. So 2019 was a bit of a bounce back. And it was the third year of Trump cycle. So you had a lot of tailwinds there, kind of helping push things forward. But then as we look forward, you know, when you’ve got a president in, when you’ve got a presidential re-election year, the market tends to perform better. When you got a presidential re-election year as opposed to having an open election where you don’t know. And when the incumbent party wins because you’re removing the uncertainty of what’s going to happen next, the market tends to perform well there, too. So, Joe, I don’t know. I look at this and I say. We’re in a re-election year. We’re coming off a 30 percent year. The economic numbers look good if the incumbent party wins here. It just seems to me that there’s again, a lot of things to feel good about. So I want to kind of I want to I want you to highlight that. Any comments on that? And at the same time. This is not to be political. And this is not to be. This is not this is not my trying to tip our hand in terms of how we’re how we’re gonna vote personally or individually. But but if there is some kind of change of guard it. Historically speaking, the market contend to sell off because of some of that uncertainty.
Joe Taiber
Yeah, that right there is the key word uncertainty. So, you know, what markets do not like is that everybody hears that frequently. And this is this is case in point uncertainty in terms of policy, in the context of politics, you know, and how the election goes is going to dictate fiscal policy more so, more so than anything else. Monetary policy is dictated by the Fed. So fiscal policy and I think this this is important. I mean, the the mitigating uncertainty of re-electing an incumbent is reflected in market returns because, you know, market participants and business owners and decision makers and the like. I have more clarity in the policies of the past four years. Three years have been pretty constructive. The markets obviously voted accordingly. Know those policies are more obviously of a deregulatory nature from an energy and financial industry and even health care perspective. Deregulation has been a big tailwind for financial markets. And from a spending perspective, I think I think things look a little bit less clear because frankly, the Democrats and the Republicans both have had a hard time finding spending restraint. So I think spending is going to happen no matter what. But any policy change, fiscal policy change, significant policy change. I would expect markets to get pretty anxious. But we still think there’s plenty of runway in front of us here before we really are going to start handicapping election outcome. The digital impact on markets, just because it’s a little bit clearer, less clear on the Democratic side, there’s there’s centrist candidates that frankly look a lot different from a Republican administration. On the Democratic side, the ticket. So we’ll see certainly as we approach the spring and how that started. Yeah.
Michael Carlin
And I and I in there’s a little secret formula in there that if you look at how the market return. The market return three months before the election. It doesn’t always work, but it almost always work. If the market looks good three months before an election, then you usually see the incumbent party winning. So. Okay. So in conclusion, Joe, China looks good from the standpoint of we got trade deal one, which as we as we’re talking today looks like it’s gonna be signed. So we’ve got a lot of trade tensions that seem to be easing. We got trade tensions easing. You’ve got no immediate no immediate Brexit concerns right now. We’ve got USMC, a trade deal signed. We’ve got low oil prices, we’ve got low inflation. We’ve got the Fed helping us in the economy. So as we sit here right now, in conclusion, things look things look constructively pretty good. This is not a time to fall asleep at the wheel. Well, we’re certainly not. We’re always ready to get more conservative. If the if the data points start to tip in any kind of negative or different direction before, right now things look OK.
Joe Taiber
Some of the political uncertainty you just mentioned, tariffs, European tariffs. Does the administration let that lapse actually in December as well? So the U.S. embassy, a European auto terrorists or temporarily at least off the table, the Chinese deal obviously being signed today. Yeah, some of the political things out of the way, monetary things I said and things of that, sir. Like we said, a very constructive and the economic data points, a service sector, job market, housing market rate, manufacturing cycle is something we’re keeping an eye on. And that’s the only real glass half empty aspect of the economic landscape.
Michael Carlin
Thank goodness we’re still service based economy, not manufacturing mostly, but anyway. All right. So, Joe, thank you. Thank you. Thank you again. Thanks for your friendship and partnership. Thank you again for listening. If you have questions, email us. Hit. Hit us up on social media. We’re happy to help in any way. This has been Michael Carlin. That has been Joe Taiber. Thank you. Take care and have a great day.
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