Michael Carlin and Joe Taiber discuss last November’s election results and how they’ve affected the market, and what we can expect from the first quarter of 2021.
Hello, everybody, it’s Michael Carlin, president of Henry+Horne Wealth Management. We’re here with your latest capital markets outlook.
This is critically important because this is the 2021 Capital Market Outlook and we’ve got too much stuff to cover. We also have our special guest, Joe Taiber, joining us. Joe, thank you so much. Joe, again, for those of you that don’t know, you should know Joe is key and central to our investment committee here at Henry+Horne Wealth Management and oversees countless billions of dollars. Joe, I forget how many, but I know it’s a lot.
It’s nice to see you again, Joe, thanks for coming.
Thanks for having me, as always, Michael.
All right. So we’ve got 30 slides. And I was kind of hoping, Joe, that if it was possible and it might not be, but that we could maybe, I don’t know, finish this in 30 and certainly under 40 minutes would be great. So we’ve got a lot to cover. We’ve got lots of data, lots of charts.
So without further ado, let’s start to dive into the capital market outlook, slide by slide in the first one, we’ve got to open with is, you know, there’s a few slides that we’re going to take a look at the year that was 2020, and it was a remarkable year for a lot of reasons. Again, we saw this negative thirty four percent print. The market was down a significant amount, certainly at one point in the depths of March.
I think it’s like March 25th of 2020, the market is down significantly, but oh, what a year we finished plus 16. And as I look back, I see it’s surprising to see so many positive years and what’s nice about this chart in the way that I look at it is this isn’t the only time we had a massive negative number midyear and negative 20 finished negative seven, negative 20 finished negative six negative thirty four finished plus sixteen.
What an interesting year, right.
I mean I’d say historic honestly. I mean, the last year I’d argue is one of the more difficult years to stay the course. And I know if if you’re listening and you’re a client of Henry+Horne, Michael and his team, you did stay the course and overwhelmingly unless you overrode his objections I’m guessing. But in the fact that what I mean by that is last year was the quickest 30 percent draw down that we’ve ever seen. One point one months, the market fell by 30 percent.
So it happened extremely fast. The median 30 percent drop historically is 18 months. So one month versus 18 on the downside. And then conversely, if you’ve got out of the market, God forbid, at the depth, the quickest recovery as well on record from the bottom to the new high end in 4.9 months. So the whipsaw risk, the median and by the way, bottom to high is 49 months.
So it’s just remarkable, really difficult to navigate, historic recession, historic recovery, historic market drop, historic market recovery, a tough one to navigate. But, Michael, I know how you navigated this year, so kuddos.
Thank you, Joe. So with your team and your help as well. We really continue to push client portfolios and our results were we’re quite good. I’m pleased because we were getting more aggressive. If those that remember buying on March 25th, buying in April going heavier in tech subsequent month after month, seemingly July and September, all of those things did wonders for the portfolio and they certainly just continue to even do well this year. It looks like our average portfolio return even so far to the start to this year, a couple of weeks in and we’re up about 1.5% on average.
So as we look at 2020, the year in review, it’s interesting to see again, January to February, market was up 4.8%, started to feel like a normal year. We had super low unemployment, interest rates were low, fed accommodate of all of those things were working for us. You had the COVID economy shut down, the market down almost 34%. And then that March 24th, just to your point, Joe, what a massive run up recovering all that was lost, plus we had the election uncertainty, which was typical. And that’s exactly what we were talking about in the previous couple of podcasts before, more than once we’re saying, hey, when you have the incumbent party that loses, this tends to be the market action. It followed suit exactly. And then we had a relief rally that was again, I think we were expecting a typically a good November, good December post-election, once you get the certainty and once things are known.
But I think that the rally we got was far greater than many had expected that we would get post certainly a post Biden victory and then a subsequent not only that, but a subsequent Democratic lite sweep as well. Right, isn’t that surprising, Joe? To me, it was.
Yeah. Well, surprising, yes. But like you said, I think it kind of followed the playbook that you described the past couple of quarters. So I don’t think that surprised, I guess surprising in the context of how big of the rally.
The magnitude, yeah.
Yeah, but I think you have a couple of slides on the political uncertainty clearing and that sort of thing, which will get to great year all in all.
Yeah, again, not all sectors were up. Again, I mentioned earlier that we were working hard to focus on technology. So when we were in stocks, we were trying to put an emphasis there. And if you look just as a highlight in general, I know you know all these, but again, the tech market up 48% last year. You know, large growth, which is very similar to large tech, up 38, but look at the value stocks only up 2.7. Your traditional dividend payers there, your small and mids up 35. Again, really nice rallies there. Those are and other things, but we know for those of you that have that equal weight, S&P 500 that was a trade to capitalize on some of that move. So we had a lot of different interesting maneuvers that were happening that emphasized winning parts of the market and thankfully, again, almost no energy exposure down 32% last year, very little to any financial exposure for the year, down 1.6 and very little real estate.
The things that we’re going to be and we continue to look at are actively identifying if and when we turn some of those things back on. And I realize that energy has rallied since the Biden win because mind you, the energy stocks are down about 50 % pre Biden, so Joe, I know that we’ve put on a trade for travel and leisure as a way to reflect things that weren’t working in 2020, but now we’re putting it on for clients in a way to emphasize that that gradual economic reopening trade and we are keeping our eye actively on the sectors and trying to figure out what we should be doing next.
Yeah, yeah, definitely. I think in the models that we’re working with you on, we did have energy if you recall we bought energy briefly.
Yeah, briefly. Positive trade by the way.
Very positive trade.
We rented it and then got out of the way. But overall, yeah I mean the flavor of your portfolios, obviously, as you well know, definitely has taken on more of a cyclical flavor toward the back half of the year. We’re getting more toward, as you just mentioned, more toward a reopening flavor, which is difficult to say, looking at the coronaviruses backdrop that’s happening in the country right now, but that’s how you have to look 12 and 18 months ahead.
So, yeah, got the exposure’s, I think a remarkable value growth. I know, I think you have got a couple of slides later on the growth market in tech stocks are pretty stunning when you look at large cap value up to up thirty eight. So, yeah, pretty that that’s probably the most remarkable number to me on this page.
And if we get that goldminer trade, that was a good one too, commodity trade. So this is the technology slide. Let’s just get to it right now. Listen, here’s all I need to say on it. I don’t really think we need a conversation, is that the rarified air with which technology stocks are being valued is two plus standard deviations. It is to say it’s almost completely unheard of and it rings a lot like the the markets of the late 90s where tech stocks were on fire.
I think the big notable difference there is the fact that tech stocks back then oftentimes didn’t make money. Tech stocks back then were often concepts. Some of them were even pre revenue. This is a very different kind of tech market as we’ve become more economically tech focused because we’ve had to, due to COVID shut down. There’s been really forced a forced move towards things like Zoom and Microsoft Teams, those kinds of technologies, more video cameras.
So again, there’s a lot that has happened within the tech sector. It’s happened for a reason. Valuations are high. They’re virtually unprecedented. We have to go back to the late 90s, we’re aware of it, we’re watching it. And I do want to switch gears on this, because this is, I think, a more comprehensive view, Joe. I don’t know. I couldn’t think of a better slide title, but it’s getting hot out here, can it get hotter? I don’t know, this shows you, you can look at all different kinds of valuation metrics and if they’re not, like bleedingly off the charts, they’re darn close. The one is, you know, price to free cash flow is only moderately hot. So on one hand, clients see this Joe and they say, how can you have me in stocks? On the other hand, I think we’ve got the lessons from 1970, 1980, which that even as things were super hot, super hot and continuing to stay hot, that the market continued to rally for another year or two at those levels before things completely unwound, so how do you handicap this overvalued situation?
I think the last point I’ll add to it, which is we look at all sorts of different market indicators, valuations obviously being one, and it is historically, arguably the worst market timing or market view metric you can choose. You’re much better off looking at fundamentals. You’re looking better off looking at earnings, better off looking at macroeconomic conditions. You’re overwhelmingly better off looking at the liquidity backdrop, the monetary policy and the liquidity backdrop, so that said, it is concerning.
The S&P 500 finished the year at a record high, trailing 12 month multiple of 31.4. So that’s that’s a pretty stunning longer term historical averages just for everybody is in maybe the 15 to 19 range on a trailing basis. So it’s pretty remarkable. The only thing I’ll add to that observation is what else are you supposed to do that? That whole concept, which is one of the research groups that I know, Michael follows pretty closely, Strategas, coined the term TINA.
It’s an acronym for There Is No Alternative, meaning stocks or bonds are your primary choices and everybody knows what bond yields look like right now. Looking at ultra historically low bond yields makes the valuation of the stock market a little more reasonable. And so that’s one of the risks we think to valuations is the trajectory of rates. Looking forward, it may begin to rise that theoretically and probably practically will pressure some of the PE multiples, but equity risk premiums right now, and that’s really just a measure of the attractiveness of the stock market relative to the bond market are very attractive, and that’s historically speaking.
So the equity risk now is 250 basis points, 2.5%, the average is about six percent of attractiveness for the stock market. So again, something to keep in mind as you have the capital selling.
Yeah, because the last thing that you want to do is invest your money conservatively in an investment that not only won’t make a lot of money on a real interest, real interest or appreciation basis, and then in fact, lose money as interest rates start to creep higher, if that indeed is what ends up happening. Two other quick notes, is that on the PE multiple, S&P PE multiple got a lot worse or a lot more lofty as soon as Tesla got added in the S&P 500, given their size and weight, I want to add that in there.
And then, too, we don’t know exactly what the earnings are going to look like for the S&P 500 next year, but it wouldn’t surprise me if they aren’t able to leap over relatively modest hurdles in 2021. So we’ll have to wait to see exactly how the reopening goes, because that’s going to unlock the key. And then we get the stimulus. You get the ultimate floor with which that the market holds water and we got a nine hundred billion dollar stimulus package.
I like this chart because it broke down where the money’s going. What’s what’s notably missing in here is any kind of significant state support. But, small business support, direct checks, unemployment benefits, schools, they continue to try the government at least is continuing to try to negotiate a basis to target money to areas of the economy that are that need the support. It’s a stunning amount of money that we continue to drop into the economic coffers.
I realize that it takes once they announce it, it’s still going to take nine or ten months or maybe even more for all of that money, not only to filter through the system, for the first to feel the economic benefit, but this is the the kind of thing that has happened, and as Biden has indicated and he’s going to be announcing shortly here, his plans for additional stimulus in 2021, which is, again, supportive of the stock market.
Yeah, yeah, I’d argue it’s probably he was looking back and is looking forward to probably the biggest underpinning to the rally of 2020, as well as the underpinnings for a pretty constructive view looking forward to 2021. This package came, I believe, just before the end of the year. We expect another package from the Democrats here in 21. And I mean in terms of just context, the bank credit analyst sizes up fiscal stimulus for 2021 at about just shy of 13% of GDP.
That’s bigger, far bigger than what we saw in the global financial crisis.
So it is definitely high octane stimulus from DC.
And again, it continues to I like it because it continues to try to attempt to be targeted and I enjoy that. And keep in mind, people, most years that number is zero, so we don’t it’s not like we have stimulus every year and we’ll have to wait and see what it looks like. Is it going to come in the form of infrastructure spending or who knows what, but it’s it’s it’s coming and it’s likely to be interesting.
So, again, on a political note, what we always maintain an apolitical stance, but on a political note, from an economic perspective, here’s the bespoke information. And Joe I think this is one of your favorite research houses. I know you got a lot, I’m not going to try to pigeonhole you in, but I know Bespoke spoke one of your favorites. But the de-sweep here, we’ve had 20 occurrences of that going back 120 years and the annualized rate of return or the return on the Dow Jones Industrial Average looks pretty favorable there.
Obviously a Republican being, historically speaking the past 100 years. Fourteen instances of that, slightly better returns. And then you get to see kind of the different combinations of different machinations of what the government will look like in the White House and in Congress to get a sense for what historically has worked and what hasn’t worked. What’s interesting is that we’ve never had a Democrat president, a Democratic House and a Republican Senate. I thought that was interesting because we almost had that, we almost had our first one, but we did not because of the way the Georgia elections went, so here’s where we are. And I look at this and there’s a lot to unpack here, but can we just kind of chalk it up to like it looks like he’s using his history as our guide, it appears to provide favorable guidance for what the next couple of years may look like.
Yeah, yeah, I think so. I mean, the history, I guess the metric we try to stick to here is D.C. is highly overrated as an investment indicator, highly overrated. So looking at potential policy outcomes, of course, and their impact on particular sectors and industries and geographies and currency, that’s that’s what we’re focused on, the stock market almanac, stuff like this, it really basically says it doesn’t really matter. And frankly, it does say that gridlock generally is good, but a thin majority control, which is exactly what we have a very slim margin of control with the Democrats is just as good or Republicans literally controlling also just as good.
So that means the center likely will rue the day, meaning Republicans, centrist Republicans, centrist Democrats, which are generally most conducive to markets like we are going to have much bigger force or impact or influence, I suppose, in the scenario that actually turned out.
Well, it isn’t stimulus, I think, again, the stock market’s pricing in the fact that there’s going to end up being more additional stimulus and we’re going to have to completely revisit the fact if there does indeed end up being some kind of tax reform, we reserve the right to reform our opinion about what the market’s going to do and what valuations and what earnings multiples may end up looking like if we get higher taxes, if we have time, will do a little bit more on that, more information on these sweeps.
Again, I’m not going to go through this book, but I just want a reminder, every quarter we get emails. Can you send me the slide deck? Just just let me know. And I don’t know if you listen to this on a podcast, if you listen to it from the website directly, if you’ve downloaded it, if you’re watching a video or not, but the slides are great and I’m happy to send them out to you just send me an email note and I’ll get it on to you right away.
I’m just going to make a note here, Joe anecdotally, S&P 500 dividends set a record. I think that’s shocking given the year that was 2020. I also think that’s surprising, given the fact that the dividend paying stocks were the ones that tended not to fare very well last year, so the dividend resiliency, I thought was notably impressive. That’s what I take from this chart. Right, I don’t know anything. Not much to add on this one.
No, we’ve got a lot of cash on balance sheets is one thing there. I mean companies massive cash on corporate balance sheets, a lot of leverage on corporate balance sheets as well. This is hopefully what they’re going to continue to do with it, returning to shareholders so that is a good sign certainly
An interesting anecdote is that banks got the green light to start using some of that cash to do share buybacks, which again, is also call what you will, but it’s favorable for the stock price of financial companies. So it’s, again, something we’re looking at. I just put that as a as an interesting note as to what we’re seeing on corporate balance sheets and what they may be doing with it in 2021 and in years ahead.
Again, you’ve had in pink here, you’ve had in certain recessionary areas the market going down. But what’s interesting here is that the trend, even with this recession, is evenly back in place. Let’s just refresh everyone’s memory is that pre-COVID we had record low unemployment, the economy was humming and a lot of different areas and things economically were terrific and it seems as though if you’re looking at the the S&P 500 market performance for as crazy as things have been, we really got right back on track with trend.
Yeah, yeah, I mean, this is a pretty impressive I love slides that to go back to the 1960’s because you can see you can really see long term trends, longer term trend, recessionary periods or change here and and certainly the more recent recession and the quick snap down. But as we said earlier, the quick, historically quick recovery that we had as well. So putting us right back on trend is really the message I take away from this slide.
Yeah, me too. Me too. And again, the concentration in large cap stock remains. You know, what I think is interesting, Joe, is that we talk we keep getting hung up on the S&P 500 returns and we should because it’s important, but January through August, look at the composition of those returns or who is contributing to those returns. It was Microsoft, Apple, Amazon, Alphabet and Facebook. These five contributed the vast majority and again, all others in the S&P 500 January through August were a negative one.
And then through September, November, the big five took a little bit of a hiatus. And then again, January, if you look at that broader period, January through November, they came back again with a vengeance. So I want to put this in context in that part of the way we emphasize this trade is by doing by kind of veering away in some instances and in a lot of instances in client portfolios away from the pure cap weighted S&P 500 and going into the equal weighted S&P 500 to participate in parts of the market that haven’t rallied yet.
Because when we’re talking about the market at these crazy valuations, it certainly isn’t the entire index. We’ve talked about certain parts of the market that haven’t worked in energy and financials, but cumulatively speaking, there’s a lot of the US broad market that hasn’t participated in this rally.
I think that’s critical and it’s reflected in your portfolios, too. That’s really important. The last five years, I’ve put it this is this is a look at 2020. In the last five years collectively, these names, in the last five years, the last five years, those names have returned 30 percent. That concentrated the top heavy annualized rate over the last five years or less.
So the S&P over that same time period, 10.4, OK, there remain the remainder of the S&P, so the nonpaying S&P 500, 7.2. So 7.2 up to 10.4 because of the 30 percent annualized importantly. Now, the valuation compression that we talked about earlier, the risk of some valuation scrutiny on the top heavy names on the Fang type names is why you and your portfolios have begun to move into an S&P 500, but just an equal weight S&P 500.
And in fact, in the fourth quarter, that equal weight outperformed the cap weight S&P 500, as we definitely are starting to see a rotation or I’ll call it a normalization, some reversion there, so that’s something that’s important to say.
Yeah, I know you love that chart and I do, too that shows the Fang versus the S&P 500, I pulled it out. I’ve seen it so I’ve seen it so often, but you make a great point. I don’t think I included that one in here in the final version, but I thought this was interesting because I think I did this one instead Joe. This is not a I’m not trying to slam Bitcoin, but every client I can’t think of one, if you’re watching this and you’ve asked me about Bitcoin, everyone’s asking, which if you’re looking for something that’s a sign of a bubble, look no further than every single client asking you about one thing.
Look, I think this is great Bitcoin mother of all bubbles. You know, gold had a major bubble in the 70s. We had high inflation in Thailand and tech. This is the this is the dotcom bubble bursting. Can you by my sense of magnitude, does this does this make some sense? Because, again, I should have put the what the Holland tulip trade of the 1700’s in here, because I’m sure there was some kind of ultra parabolic price increase to the price of tulips back then too, but come on, I mean this, this has gone on like crazy. I understand the fundamental need to be wary about what governments worldwide are doing to create currency and then you lose a sense of faith in in fiat currencies worldwide. I get that. I understand that from an investment perspective, but for as much as Bitcoin’s gone up. I do look at the simple fact that, you know, Bitcoin’s unique in that it is becoming more accepted.
It is also limited in quantity and in fact, the quantity is fast running out. Soon they’ll be all the Bitcoin that will be in existence will be issued and so there has been a story of success for Bitcoin, but that doesn’t mean that there aren’t a lot of pitfalls and other difficult factors. We don’t know if Bitcoin is going to be the ultimate winner. We don’t know what the government’s going to do for taxation of Bitcoin. We don’t know, again, is it going to be Facebook or is it going to be the government’s going to come out with a cryptocurrency, we just don’t know what it’s going to look like long term. And trees don’t grow to the sky and all good things come to an end, so Joe I don’t know what else there is to say about Bitcoin I just wanted to address it.
Yeah. Yeah. I mean, the only thing I’ll say is, what our job is with working with you is to really put together a very solid, well-run, disciplined portfolio. And as you know well, Michael, we work with a lot of very sophisticated institutional pensions and endowments and things of that sort and virtually across the board, it is not an acceptable or allowable asset class, really, because it is so volatile. It is volatile to the point where if you have any sort of risk budget, you cannot make space for something this volatile.
It has volatility of 100 over the past week or two. And that’s just something you can’t fit into an investment program. The stock market just FYI is about 16 or 17. So it’s just a really difficult thing. It’s something that’s obviously worked really well for thousands of people that God bless. That’s a great thing. The fact that you can use the same number of Bitcoin in 2014 to buy it to Papa John’s pizzas, that today would buy 10 percent of the entire company is pretty remarkable, but it’s something that’s a really difficult thing to really carve into a disciplined investment program.
I want to make sure people understand what Joe said and which is what Joe said is, again, the Bitcoin pizza conversion, he’s not making that up and he’s not rounding it up. It’s actually indeed true. The cost, the Bitcoin cost for pizza, which, by the way, there have been people that have famously would use Bitcoin to buy pizza, Joe. I’m sure you knew that, but they did do that, but if they had maintained their Bitcoin position today, those couple of bitcoins that bought the pizza could buy 10% of Papa John’s today. That’s a real thing, but we spent more and more time on that that I thought I just wanted to mention. I’m aware that Bitcoin is there and we’re aware. And there’s a couple of clients, we did buy the BTGC, Bitcoin ETF, but it really isn’t for everybody and we really didn’t do it quite often.
So where is the money going? Where is the money going? The money’s been going, if you go back from March of 2020, this is again that bottoming of the stock market on that Friday. The money is universally gone into bonds, gone into bonds. It drove rates lower throughout 2020 and we’ve only really meaningfully in that like late December and again, even through to today, we’ve seen rates move against it, but the money Joe has gone into bonds. It certainly has rallied in that there was money being added into the stock market, into equities, broadly speaking, but it really picked up right around that Halloween time frame meaningfully. Lots of people want to point to the Robin Hood retail investors as the source of that and I’m happy to to see that there hasn’t been a precious metals mania to go along with everything there. I think the precious metals people have found Bitcoin and have put money there, so this, to me, again, is very suggestive of a of a market that has more room to go because, again, we have so much money that was was put into the bond market rather than the stock market saying that things aren’t crazy, crazy overdone yet.
This is a contrarian indicator and it’s got a long way to go. It’s just I think it is this November, November’s ETF and mutual fund flows where where we finally saw some some net positive flows, significant net positive flows into equities that is so definitely early in the game and much more to go, so this a good time.
So in a deeper look at cash positions, what we’re seeing is that the the amount of money that’s been sitting in money markets has started to come down a little bit. We know that that money this, again, as Joe indicated, and I suspect that you’ll continue to see when the new numbers come out, this is to continue to to move in this direction is we’re seeing money leaving the zero percent yielding money market to back into the market some way, shape or form and getting back to kind of the practical reality, I’ve got a couple of slides on jobs, this one. And again, I’ll fly through this one, Joe. But look at the again, there was an announcement again, April 2020 where the total number of businesses that were shut, red, there were some that were permanent, the vast majority were temporary and as the economy reopened and then started to shut down again and then reopened, what we’ve seen is we’re following this number is that the number of permanent closings are rising and the ones that are temporary are shrinking.
Which kind of goes hand in hand with some of these consumer numbers, and I’m going to come back to this one, and I know I’ve got a couple of market job anecdotes here where if you look at department stores, the trend here has been less employment. Yes, COVID hit. That was a big one. Leisure and hospitality was showing gradual improvement. My goodness. And then COVID hit. That’s bounced back, but nowhere near prior levels. Government employees, COVID hit, that is nowhere near prior levels. Air transportation, obviously nowhere near prior levels, which is in so many different ways to break this down Joe. Before I get into like three or four slides, what kind of things do you see regarding the employment picture?
I think the best way to sum it up is we are still roughly 9.3, 9.5 million jobs below where we were pre pandemic.
If you extract leisure, travel, hospitality, unemployed persons out of that nine point something number, you come all the way down to 3.8 million. So, it’s overwhelmingly concentrated and unfortunately, in those areas those are lower income areas as well. So that’s that’s really what it looks like right now. The trajectory of job gains has slowed and there’s no question in lockstep with the uptick in COVID occurrences here in the United States, we’ve seen a definite slowing in October, November, December, but again, the stimulus which rescued it back in the spring, is that that calvary is coming. So, again, we’re looking out 6 to 9 to 12 months and still feel that the recovery is on track despite the job market, maybe B minus C plus background.
Right and we actually got a jobs number this morning that wasn’t so hot, indicating that maybe this round of the 900 billion dollar stimulus was a little late. So what we’re seeing here is that, again, you’re looking at what regular state unemployment benefits look like, pre COVID, then COVID hit. You’re seeing some of these things down, the extended benefits here and the pandemic assistance, all of these numbers coming down rather notably. And what I find interesting is that this has this job market for as much as the consumer here may be positive about their finances, surprisingly enough, and I think a lot of that has to do with the stimulus that has been received. You’re looking here in orange. There’s kind of been yes, there’s there’s movement to it. But there’s the trend is people feeling pretty decent about their own finances, but at the same time, people not feeling decent about the economy. And I think that that’s reflective in the fact that high income people have spent, on average, 9.5% less and low income households who spent 2.5 % less.
And this is the change from January to through November. It’s hard for me to handicap it, but this has got to almost all be leisure and hospitality, lack of spending. It seems like they’re certainly spending in other areas. But as I handicap all of these different elements, Joe, I’m rather encouraged by what I see here, particularly about people’s feelings about the economy, despite everything that’s going on.
Yeah, yeah. Two thirds of the economy is you and I, the consumer, so fiscal stimulus and the addiction to fiscal stimulus, given the fact that we’re still in the throes of a pandemic, really isn’t a surprise, but it’s definitely something that makes a lot of sense when you look at the data.
Here, home prices, I just wanted a quick anecdote on home prices is that, you know, housing inventory, if you look here in green, is this is this this tells a story that there’s very few homes on the market. You look at the average 30 year mortgage rate, this kind of dotted line over here, you can see that as interest rates were low, mortgage rates got low and, you know, obviously mortgage backed bonds got low, all of these things working in tandem continue to allow the home price index, as interesting as mortgages, got cheaper in a really in-sync, perfect sync and harmony, home prices rebounded. It’s going to be interesting to see Joe, if we end up seeing with this slight increase in both the 10 year Treasury and longer dated Treasury. And we’re seeing a slight increase in mortgage backed security interest rates. How that’s going to translate into home prices, because it’s certainly been supportive of high home prices.
Yeah, yeah. We’re watching that. Mortgage rates have not really been impacted by the recent uptick in interest rate, which is definitely something to keep an eye on. We think the driver of the housing market, though, is that green light. It’s the inventory. It is it is historically low inventory and that’s been a big driver of the tactical position and very successful one, I might add, that you had of homebuilders, which has been an absolute gangbusters successful trade.
So something we still feel like there’s plenty of runway with a constructive view on the housing market, but rates certainly are something we’re keeping a very close eye on.
Absolutely. Financial Conditions Index, this this is the data that indicates and backs up what we’re saying is, that the Fed is accommodative, the government’s accommodative. There’s anything that we can have financially, fiscal and monetary policy is working in our economic favor and if you’re looking for different data points and kind of add it all up in a nice clean index line, we’re at an all time low, meaning things are all time easy money.
Yeah, yeah. This is so so important. This is a mix of monetary policy, equity markets, credit spreads, a whole bunch of other factors and an all time low, which means all time accommodative monetary financial conditions. Again, it’s a great backdrop to kind of a forward looking view.
And so what we do is we look at trend reversal. If there’s a reversal to this chart, we’ll let you know, because that would be something that we’d have to figure out. Well, if we can we do can we do a three hour version? Because I want to do more on on how the Fed’s borrowing short. I want to do more about Fed flexibility, how if you look at what interest rates are, less inflation, the real rates net negative. So we don’t have negative interest rates here, but if you if on an inflation adjusted basis, we do and we have had them for some time, I would love to spend more time on that. I’d love to spend more time on this chart where we would talk about if you think that the Fed has done a lot and they have. Again, many trillions of dollars in the economy. If you look at all these different programs, they still have a lot more bandwidth to go, they’re not even done yet. I mean, there’s more that they could be doing. And if you look this, this is the Fed, the Bank of Japan, European Central Bank, People’s Bank of China, if you’re looking at all the central banks across the world, Joe, this is a worldwide coordinated effort of balance sheet increasing that’s going on across the globe and financial conditions, what these central banks are doing, adding up all these factors, Joe, what I think what we’re really looking for is that can we identify a reversal to any of these trends, because as of right now, I just don’t see anything that is going to stop these trends from continuing to happen.
Yeah, no, I agree, the Fed is very clear and they, as this chart suggests, are not alone. Bank of Japan, Europe, China, everybody’s all gas no brakes that is from a QE perspective, which is what this speaks to, their buying assets, buying bonds, Treasury bonds and the like, mortgage backed securities from a Fed policy, a rate perspective. They’re very hard and firm on record that that they are not moving that rate at all throughout 2021. So, you know, buying assets, low rates, no foreseeable change, yet another, I’d say, check mark in the positive ledger of sort of a liquidity backdrop to feed into your forward view here.
Yeah, I’ve actually seen those the Fed survey studies that show that it’s really 2024 til you start to see any of the Fed governors that are anticipating any kind of increase.
We could do a whole bunch of this national debt, I find it interesting that how quickly we’re reaching new trillion dollar milestones from 25, even better from 24 trillion to 27 trillion. This happened from April to October. In fact, you know, a trillion dollars used to take us thousands and thousands of days and we’re doing them multiple and years, so we have our eye on it. We’re watching it. Yeah, we’ve talked about that. Again, so if I’m going to throw any kind of water on the fire, that is, you know, we are and continue to be and have been as I’ve written in emails to clients, you’ve read them, you’ve seen them. We are and continue to be optimistic, but we are aware of some of the cautionary elements. So we’ve seen the 10 year Treasury move, so I’ve been asked a lot like the 10 year Treasury is going up so should we get out of stocks? I understand what you’re saying, because you’re saying that somewhere in the back of your mind, you know, that as interest rates rise significantly, PE multiples tend to go down. This is kind of a plot chart of going back some number of 50 or 60 years that shows that this is a really rich history of connection between the 10 year Treasury as it goes up, PE ratios come down.
But, Joe, you know, again, this is not the overwhelming factor that’s going to determine whether or not we get out of stocks right here.
No, no, it may determine or may influence our view of particular sectors for sure. So logically, if rates again rates leaving bunker mentality levels, which is where we are still today, is one thing, but rates, when they get into that normal range of 3 % to 4% to 5% range, that’s where you can definitely see some more scrutiny on some higher multiple stocks.
So we’re definitely looking at that. But there’s also, again, rising rates do not mean that stock markets and I think the slabbed speech, I think that’s really important in the sense that just because rates are rising does not mean that stocks are going to do poorly, because the reason rates are rising is because usually is because growth is rising. And when growth is rising. Earnings are rising. So that’s definitely not a broad brush stroke type of a view, but more of an industry sector type of an overlay on the models that we work with.
Right, again, so let’s what the earnings numbers look like. We’ll make adjustments. We’re not going to say when that likely is going to keep things in the same sector forever. We will make moves. We will make adjustments. We will try to find value. Lots of money earning negative yield. Joe, to your point, there is general levels of fear and panic out there. I think it’s expressed well in the fact that there’s 18 and a half trillion dollars sitting in negative yielding securities. Holy cow.
Dollar weakness, so we continue to emphasize our international positions, which we don’t always have a relatively heavy handed exposure, but we’re relatively heavy now and maybe getting heavier going into 2021 because of the falling dollar. Other anecdotes and things in data that you want to point to to help support our thesis.
Well, the thesis on the falling dollar, twin deficits, twin deficits, a very, very large budget deficits and very large current account deficits that’s happening right now to record levels and expected to even grow more with the outcome of the election. So that feeds into a weak dollar, weak dollar feeds into several feeds, international assets in particular. So, yeah, we definitely have already started to move in that direction and I think that may as we work with you Michael, we might well be emphasizing that a slightly bit more here.
Yeah, a lot of this for those of you that surf, a lot of this is like looking at the ocean, seeing where the waves are, paddling over to where the waves are so that you can catch that ride, that’s that’s in much the same way that we’re looking to do here. This is the chart that you were referring to, Joe, is that, again, when we have higher interest rates and higher inflation, if those two things do end up happening, we’re already aware of what what parts of the market do well, and should you be surprised that the best performing area of the market, high interest rates, high inflation, is tech. Best able likely to pass along higher prices with higher inflation in particularly in today’s in today’s market those would probably be companies that end up borrowing the least anyway. Usually these days, pretty good balance sheets. Energy will be interesting to see how they they perform. But again, higher inflation means, again, higher prices. That tends to mean higher margins for them as well. But we’re aware of what parts of the market that do well when this happens. We’re also aware of parts of the markets that we would want to stay away from, high interest rate, high inflation. Just want you to know that we see the data out there.
When yields rise, what happens to the market, another way of looking at it. The point being here is that when yields rise, Joe, you even mentioned this on this podcast already, is that when rates rise, the market tends to rise 64% of the time. And again, depending on how you look at, it’s a pretty significant rate of return to your point because interest rates are rising, because economic conditions are better.
I don’t know, I mean, what do you want to say? I mean, listen, we get it. We see what’s happening. We see it.
Yeah, yeah and I think to be really clear on this slide, I think it’s important when rates are rising, the percent of the time that the market is positive is 92%.
I’m sorry. Yes, you’re right. I grabbed this. Sixty four. Yes, it’s the ninety two percent of the time. Yes. Thank you, Joe. Thank you.
Yeah and following yields percent of the time positive is only 64% because of the that’s because of the market backdrop. So important not to run to the exits just because the ten year ticked up a little bit.
Listen, we didn’t come we didn’t do a half an hour, we didn’t, but I want you to know that we tried, we tried, we worked hard, we strove, we strove for that, but going into 2021, coming off a year like 2020, there’s no way to consolidate this anymore. And you can see how we were trying to speed through a bunch of the slides anyway.
There’s a lot here. I understand that. We understand that if there’s anything that we said throughout the course of this presentation that you need more clarity and information on, shoot us an email, give us a call, let us know because we’re happy to go through and dive in deeper. The overarching opinions are here is that we continue to be, we continue to be, again, positive about where the market is right now.
Again, there are a number of different factors that we’re looking at. If, again, the financial conditions index change, we’re going to be monitoring that. If there’s a different tax policy, we’re going to be monitoring that. We’re monitoring every aspect of the economy on an ongoing and proactive basis. You know that. So we’ll make changes as needed, we’ll be we’ll be in touch. But for now, things look pretty good. I should have just said that we could it has been done, I don’t know.
I’ll just say a pleasure working with you and your team Michael, you guys do a great job for your clients and I look forward to talking to everybody next next quarter.
And it goes it goes both ways, Joe. We enjoy you in every one of your team members. Thank you so much for listening, whether you download it or look on the video or wherever you can see this information and thank you for doing so. Take care. We’ll be in touch. Have a great day. Bye.
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