Henry+Horne Wealth Management President Michael Carlin and Joe Taiber with Taiber Kosmala & Associates, a Chicago based investment firm, discuss the current capital market environment, and what we can expect from the second quarter of 2021.
Good morning, everyone. So pleased that you’re here with us today for again, our capital market outlook. As you’ve all known to grow and love, we’re here with, of course, CIO Magic Man. Mr. He knows everything about the market. Looks 50 today, Joe Taiber. Good morning, Joe. How are you?
Good morning, Michael. I’m feeling very good and my clothes are fitting very well. Thank you.
They do. They look wonderful. And I should always throw in, like, multi billion dollar man. Today is an extra special day because we are recording this live. As a new feature, you’ll be able to use your Q&A function with Zoom to go ahead and ask questions. So one of the things that we get is some people say I love what you said, but I wondered about this or I wasn’t quite sure what you meant about that. You got something. Now you got a feature that you can go ahead into the Q&A section, type your questions. Chelsea is there monitoring the questions as they come in, and she’ll let me know in the chat sidebar so that I can get to some, if not all of them.
Listen, we’ve got a ton to cover. As always, Joe, I feel like the world changes so much quarter to quarter. We’re going to work to try and give you, because again, it’s the most entertaining 30 to 40 minutes in financial services that we know, we’re going to work to get through a lot of information today quickly.
So with that, Joe, we’ve got to go ahead and dive in. Let’s look at the data. And again, just as a reference point, we’re constantly scouring the world of finance to find great economic data so that we can peer through the noise to review what the data is telling us so we can make good, fundamental sound decisions for you, our clients and their portfolios. Let’s take a look at how last year stacked up. Joe, what stands out is that last year, the return of the market was between 10% – 20%. This is using the S&P 500 numbers. What I find interesting is that people lose sight of the fact if you go back almost 100 years to 1926, the amount of times that the market is up 20% was 35 times. Almost in the past hundred years, more than 20%, between 10% and 21 times, and I also think it’s important to note that there were eleven times total where the market was down 10% or more percent.
We had an amazing fourth quarter run last year. We had an amazing market run last year in 2020. But this has no bearing on the fact that the stock market tends to be a volatile instrument. It is and always will be. We’re off to a pretty good start this year, which we’re going to talk a little more about. But market Volatility Joe, is a constant market.
Volatility is a constant. Close your eyes and go back twelve months from now, and that would be probably the most stark reminder for everybody. I mean, we are up in the market. The S&P is up over 75% from March of 2020 through March of 2021. Everybody knows on this call, it sure felt very different than March of 2021. Things feel pretty good, which I’m sure we’ll get into right now in terms of the indicators. But my gosh last year at this time. It took a real gut check to do the thing that was right back then. Fortunately, with Henry+Horne, they had the wherewithal to do some right things back in March of 2020 when there was blood in the streets. So, yeah, volatility is constant, difficult game to play, particularly in the short term. But keeping your eyes on the horizon is how you win the game. So well done over the past year.
It was great working with you and the group. By March 25, April 1, we had meaningful additions to stock market that turned out to be perfect. It also was a great time for us to rotate portfolios, which was helpful for tax purposes and for the first time in a long time what we’re seeing now here in this market cycle is we’re seeing value, the boring based value companies, the dividend paying stocks you tend to associate with economic reopening companies. We’re seeing a reversion there where this long standing tech domination is we’re seeing that value actually ticked up versus growth. We are monitoring that trend to see whether or not that’s meaningful and lasting because again, we’re noting that value rebounded versus growth. And it’s interesting, even on days like today. And today is the day where the Johnson &Johnson vaccine news wasn’t particularly great. With that, all those economic reopening stocks, your travel and leisure, your entertainment that had done so well the first quarter of the year are having a little bit of trouble today, down 1% or 2% where those stay at home stocks which had done so well in 2020, are winning the day today. But it’s going to be interesting as we start to handicap the ability for these economic reopening stocks to continue to outperform versus growth.
Yeah. Value economic reopening stocks. Cyclical stocks. These are things. What is value is the question a lot of callers have in their mind. Value means it’s on sale. That’s simple. Value stocks are stocks that are deemed cheap. And this is probably one of the most interesting conversation with the strategists that we work with over the past, really a few months, because this trend really began rotating in the fourth quarter of last year. This trend from growth to value is really redefining what is value. Value hasn’t had a day in the sun since the early 2000s. Truly like an extended day in the sun. Back after the tech bubble in the late 90s? If you really think about what is value today the most interesting conversation is not just a low PE stock. Cheap stock equals value, which used to be the best definition for decades. Graham and Dodd 101. Now there’s a bigger emphasis, given the complexion of the economy, there’s a much bigger emphasis on how do you value research and development on a balance sheet. How do you value goodwill? How do you value innovation? So coming up with new ways to find undervalued stocks with assets that might not be property, plant and equipment, but rather a trademark or a technology or an innovation or a therapy. So really interesting conversation. Definitely a rotation, something you’ve been in front of your portfolios, as I’m sure we’ll touch on, but yeah, definitely an inflection point.
No better way to do that than with the travel and leisure trade that was put on in January, which was favorable. Copper and copper miners and things like that helped. So in this chart here, I wanted to highlight the tale of the two recoveries that we experienced last year again from March to August. Look at the stock market surged 61% here. On this axis, it shows the S&P 500 growth. Then there was a notable pause, and the pause was, in many ways, the stock market a chance to sit back and recalibrate as we dealt with the uncertainty of the upcoming election. Election results were then known and the market took off yet again. Age old proverb that the market hates uncertainty. We see the market take off another 14%. But what I wanted to highlight here in the bottom, Joe and that is you get this technology trade up 81% big pandemic beneficiary with the stay at home and you can see again in consumer discretionary. These are the two major winning areas as we were going through the pandemic recalibration of what the economy is going to look like. And then as the reopening trade started to happen en masse after the election results came in, you saw energy and financials lead the way. It was one of the kinds of things that we took as a hallmark where we did own and buy energy for really a short pocket of time in 2020 with a successful short term trade. It’s shocking to see how much energy stocks have rallied really off from the bottoms. In financials rallying, of course, with the steepening of the yield curve, which we’ve got a lot more data on coming up. But Joe, case in point, this rotation has been absolutely historic because you don’t always see these kinds of returns in these short pockets of time.
Yeah, again, a lot of that is the base effect coming off at depressed level back in March of 2020. But no question, technology where these stay at home stock. So there’s your exercise equipment. Netflix. Zoom. Hello, Zoom. Technology tech stocks. During the real thrust of the pandemic. A pause. No question. The reopening. I’d expand beyond energy and financials. It’s really cyclicals across the board cyclicals meeting energy financials for sure. You do have a financials trade on with the bank play specifically, I believe, but also industrials, which you participated. Materials also very kind of center of the fairway cyclical reopening type trades, as well as the travel and leisure entertainment or reopening thematic.
To your point, Joe, one of our top 15 holdings has been the regional bank trade which you put on in February up double digit since we put it on. So that was great. And then you’ve got our bonds so that’s the stock market encapsulated. But how are bonds doing? Lousy. So I’m going to put a little bit of context to it, but from a performance perspective. So I thought this chart was great. Joe, this is one that you shared from Bianca Research. It shows the treasury performance year to date. This is 2021. Treasury is down 7%. You’ve got the aggregate bond index down some 3% plus percent year to date, because again, interest rates rose meaningfully. We’ll talk more about what they did and what we think they’re likely to do. But if you look from a historical context, this is about the second worst bond market over the past 50 years. Each one of these Gray lines is an annual performance for bonds. Again, if you’re getting bond performance up here with a 35%, what you know there, is that this happened in a year where interest rates cratered. When you have bond performance down here, you’re likely seeing interest rates recalibrating or rising significantly. But Joe, contextually speaking, second, worst bond performance for the first quarter of the year. We’re going to talk about handicap whether or not we think interest rates are going to continue to rise, which would also lend itself to what we’re going to do to help ameliorate bond positions or how to best position our client portfolios for a potential rising rate environment. What do you think of this data?
As great as stocks have been, that’s how bad bonds have been in 2021. Truly, this is the ten year trade rebond, the long term tread rebuild, which is another benchmark, just a long, safe bond worst quarter in 41 years. And you have to go back to the late 1970s to see a quarterly return like we just experienced January through March. So very difficult. That was down 13%. So bonds rough road recently, surge in interest rates. We’ll put that in perspective that we’re in surge here, I’m sure in a few minutes, but, yeah, very difficult row. Credit, meaning high yield bonds or corporate bonds fare a little better than treasury bonds because you’re getting a premium return for the risk you’re taking by taking the risk of a single credit or a single order for sure.
And here’s the thing for clients that I want you to get is that again, the more conservative your portfolio, you’ll expect to find more bonds. And so it’s particularly alarming when the conservative part of your portfolio, which we hope and expect to be consistent, stable performer, has a negative number assigned to it. We’re happy that on balance, and again some clients fared far better than others depending upon your mix between municipals and taxables and corporates as Joe was alluding to, but we saw far better performance because we had very little treasury allocation across the board. So our clients tended to do particularly well. One of the things that I wanted to highlight here on this chart is that not all is bad with the ten year treasury rising. People say, oh, my gosh, the ten year treasury is rising. This is going to put pressure on the stock market. This is going to put pressure on dividend paying stocks. This is going to be something we have a huge amount of concern about. However, it’s interesting to note, Joe, that as the ten year treasury rises historically, so does consumer confidence, and we all know the most important link in the chain to our US economy is consumer spending. A more confident consumer spends more. So, yeah, we’re seeing a rise in ten year treasury, but historically, that usually goes hand in hand with more spending and more consumer happiness.
Kind of a chicken and the egg scenario, because when people start feeling better, they start spending more, more jobs are being created, et cetera, et cetera. Therefore, growth is increasing. Therefore, inflationary or potential inflationary, growth pressures would be increasing. Therefore, interest rates go hand in hand upward as well. So what do you do in this situation. You feel like there is an upward bias to interest rates, yet you are a conservative investor. What you probably don’t do is buy 30 year treasury bonds. What you probably do is shorten your maturities, go a short duration, and if you feel okay about corporate bond risk, you buy corporate bonds to get that premium interest rate over a treasury bond. And again, I believe that’s something you have on your investment program. It is so something that we see making sense, not just to this point, but for the foreseeable as well.
Yeah. And that’s a great point, Joe. So in 2020, we removed our 20 year treasury piece. Thank goodness. And we replaced it with short duration, which was just a magnificent trade, which is a big part of the reason why many of our clients out performed. And so while we’re on the consumer, let’s talk a little bit about what the state of the consumer is. And there’s two different elements that I want to touch on. And that is one I want to touch on inflation, because again, if the cost of living rises, it’s a concern to consumers, and it’s a concern to consumption because again, if the cost of living rises a lot, what that essentially means is that you should be consuming less. Less consumption means to less economic activity. And you can understand what starts to fall through the rest of our economic system if that happens. And at the same time, is that what are we seeing with the amount of debt and indebtedness? Yes, there was a surge in Google searching for inflation. We’ve seen that come down a bit, but the trend here is pretty meaningful. We know that consumers right now are aware of inflation, the cost of living rising. We get that we haven’t yet seen that translate into consumer behavior yet. But what we have seen translated into consumer behavior, Joe, which I am impressed by, startled by, in some way, shape or form, is that the amount of this kind of bad debt? Consumer credit card debt, revolving debt. It was on a very steady climb from 16 all 2016 all the way through to COVID. And as COVID came, what you’ve seen is a consistent steady decline in the amount of this kind of I’m going to consider it bad debt, high interest debt, revolving debt, consumer credit card debt, which to me, says a couple of things.
One, it improves consumer balance sheets, which is beneficial for future consumer spending. And two, you’re seeing consumers do things behaviorally as they were a little bit more concerned as they were conservative with their finances. And we also know concurrent to this. We talked about this last quarter, and I don’t have more data on it because the data hasn’t really changed much, is the amount of cash sitting in bank accounts, $1.7 trillion. The amount of cash in retail money markets at $4 trillion. So you’ve got cash on balance sheets not featured in charts. You’ve got consumer credit card debt, which is vastly improved. So, Joe, I like what I’m seeing from consumer behavior and what this portends to future consumption moving forward.
Yeah, I’d say if you use one word, it’s probably spring loaded. When you look at the balance sheet, it’s hard to, of course, there’s all sorts, there are millions of people out there that wouldn’t necessarily agree with this little glass half full of view, but largely just generally speaking, absolutely. Personal savings rates surged up to 33%. And so big savings, big cash on balance sheet, labor market improving. Clearly, Google search trends you have up here searches for travel, vacation, rental, cars, restaurants, etc. Is really starting to show an energized or emerging consumer. So definitely one of the more bullish trends that we’re seeing right now.
Yeah, there was a lot in that Google trend, Joe, that I had to pick one. I really wanted to put a bunch on there, but I try to give two different sizes the consumer marketplace. So we’re going to spend a couple of slides here, Joe, on the bond market because I do want to come to a consensus because our clients common thread is I can say this for our younger clients all the way to our oldest clients. And that is we’ve they do have a strong desire for us to play defense and to be conservative when appropriate. And again, the bond market is one of those great areas within which that we look to seek that kind of stability. And when we look at the bond market, a couple of things I wanted to highlight is here on the left. If you’re looking at the ten year we have had this peak. But it’s interesting to see the difference between where we were in December, here in this kind of called almost like a dark green line from the one month treasury all the way to the 30 year treasury and how much it has increased. Again, you’re looking at a 1.3% or a 70 basis point increase here, 80 basis point increase here, on the 20. And as you start to look through other parts of the yield curve, it’s just a remarkable increase in a short period of time on the longer part of the yield curve. This move is what created the dislocation and the negative performance in the bond market. This move from where we were in December to March, believe it or not. And if you look at where kind of things could be at its worst in terms of a spread between the ten year treasury minus the two year treasury, it could be here. So we have a little bit of room to go before we get to a point in time where we would be seeing some historical stretching on the yield curve steepness. So I wanted to talk about this, Joe, and also at the same time, this chart. Here, the way that I look at it is a couple of different ways. This lime green line is the two year treasury going back from 1995 to today. You can see that the two year treasury is somewhere between 14 to 16 basis points today, which is almost virtually zero. And then the ten year treasury, which in the mid 90s was just shy of 8% and sequentially decade after decade, sequentially getting lower. And we’re seeing these steps downward where you’re almost seeing one of these new highs serving as a cap. So here’s the thing, Joe. I acknowledge the fact that we had a difficult quarter, but looking at this step chart, I’m starting to believe that we’re setting and I’m really actively trying to figure out did we set to high on the ten year treasury? How much higher will it get? Because I’m expecting to see this continued step down in what the new high on the ten year treasury will be, which would also give us more stability within which we we can invest in bonds with greater certainty.
A couple of things. One, the left chart, which has the maturities on the horizontal axis and interest rates on the vertical, that’s exhibiting the steepness you said steepness and the steepening of your curve. All that means is longer term rates are rising more than short term rates. Short term rates are anchored by the Fed right now, and they thrive. Short rate policy. What the bond market is telling you by steepening like that is it is forecasting increasing growth, higher interest rate, potentially higher inflation over that three 5, 7, 10 beyond year time period. So steepening is a pro growth indicator or a constructive forward growth view from the bond market. That’s one thing on the absolute level of yields on the right chart. Yeah, the longer term. I love long term charts like this. This goes back to 95. If you stretch this back to 1980 it looks even more. So lower ceilings progressively. It’s something that you have to go back to 2011ish to see a high 3% yield. And beyond that, it’s just been progressively lower and lower. The all time low ten year bond yield was early August of 2020 at 0.52. So we come up from there not a ton, but a good amount. And it seems like the ten years kind of stalled around this 175 range. I don’t think, we don’t think our research resources don’t think we’d hit the ceiling. There’s a lot of reasons to think that the bond market sold off a little bit too much in the first order, so probably exhausted that upward drive in yields. But predicting movements in interest rates is really difficult. There’s hundreds and hundreds of firms that have thousands and thousands of really smart people that try to handicap where interest rates are going and they all go out of business. It is a very difficult task, but you can make some intelligent at the margin moves and that’s kind of the area that we try to stay within.
So I think that the way that I would encapsulate what you said, Joe, is that we are looking for where this upper band eventually settles so that we do gain the confidence that we can invest more meaningfully in longer dated, conservative based assets once we feel like that top has been put in. But again, this long term chart and you’re right. If it went back to the 80s, this stairstep has been going on for some 40 years. We’ll have to wait and see exactly where it goes again, Joe, just as he said, these are the ten year treasury moves going back to 90 where you’re seeing two and a half percent. This is the move higher in the ten year treasury when it has moved. Here’s to your point, the 50 basis point, ten year treasury. Is it going to be a 1.7 move percent off the bottom, which would put us at a 2.2%? Is it going to be a 2.5% move higher, which would put us at a 3% ten year treasury? But what’s interesting is that where we are at a 1.6. Let’s call it on the ten year treasury this morning because again, we’re recording this live versus the absolute bottom. So we’re 90 basis points higher. So if we’re 90 basis points higher and looking at all of these historical data points, it would seem to be that maybe we’re half a point away from that ten year trip. Now, again, that’s a generalization we don’t know for sure. But using historical context, it would be wise to assume that maybe we got another 50 basis points of roll to go.
Yeah, I think the step up probably another 50 basis points. And question two is, what does this mean for stocks?
But before we leave interest rates, we’ll just put this point right here. And that is that when again, Joe indicated correctly. So here’s the short term, the one month, three months, six months. Again, the part that the Fed controls down here, the short term part of the yield curve Fed not controlling down here. So when is the Fed going to seek to move higher? If you look right now, the handicap is somewhere, the research indicates maybe one rate hike. The expectation is sometime towards the back part of 2022 and then 2023 end of 23, beginning of 24. Now, I’ve never seen these be incredibly accurate, but it is really good to know what the market’s thinking. Is there more that you get from what the Fed is going to do on the shore part of the yield curve. Is there more that you interpret from this chart?
Well, this is really important because this is the market butting heads with the Fed. The Fed is saying we’re not doing anything until 2024, not paying. The futures market does price in expected rate hikes. And it’s seeing as you can see three to four rate hikes before 2024, even again, three or four in that neighborhood. The market is saying one thing, which is it’s seeing growth exceeding expectations in market forces, ie inflationary forces. I’m not talking about 8% inflation. I’m talking about persistent 3.5-4 potentially forcing the Fed’s hand to begin to remove the combination and actually implement some rate hikes. So something we are watching very closely those incongruent views right now.
Yeah, it is interesting. And because again, in the stock markets reflecting that growth, those increased growth expectations as well, which is part of the reason why it’s gone up so much. Okay, Joe, I promised it would be. I had the data on it. So here it is. Bianco’s research. Again, you were kind enough to share this one with us. So we haven’t seen rising rates, which again, a lot of people fear. But we haven’t seen rising rates be a negative necessarily. Now, there was an instance where the Fed really didn’t do a great job sharing or publicly discussing what they were going to end up doing. And there was a little bit of a surprise in the early 90s about what the Fed was doing and how the market reacted negatively. But here’s what I look at it. Look at the rate of change in the S&P 500 as rates are rising here on the right. And you’ve got different markets from 2020 to 2021 or 1612. You got a number of different markets where you can go back. And as rates are rising, the market has tended to do fairly well because, again, interest rates are rising because expectations are increasing of economic activity. So, Joe, you wanted to break it down. So here you go.
Well. Okay. And I’ll add a little fine line to that. Yes, interest rates rising generally means growth is increasing, which generally means stock should be doing pretty well if growth is increasing. This chart really makes a lot of sense within the stock market. You have what we call long duration stocks, stocks that are attractive due to their long term earnings growth power. And then you have shorter duration stocks, more value oriented stocks. The long duration stocks is another way of seeing Google, Facebook, Netflix, longer duration growth technology specifically. And that’s where you really saw market internals behave as expected from our perspective, which is those technology stocks starting really middle September last year through the first quarter really lagged meaningfully the value oriented stocks because the headwind of rising interest rates is more penalizing on the growth stocks than it is in the value stocks.
I think that’s well stated. I think it’s really well stated. We’re going to keep things moving. I could go add more data to that. But the point is, Joe, I’m in full agreement and I do want to share a little bit about the total amount of debt and indebtedness that we have right now. Listen, I say this a lot. I say this often in our market outlooks. We could do an hour just on this chart alone. We won’t. But I’m just going to try to breeze through. There are two charts. It says a couple of different things to me very similarly. One, if you like long dated charts. Joe, come on. This one goes back to 1900. I’m not going to get you any one better than this. And this is showing you the amount of total US debt as a percentage of GDP ramping up to World War II and then subsequently coming down, moving higher up through the Clinton administration coming down and then the financial crisis a pretty significant ramp up here. Again, the amount of debt and indebtedness ramping up, which is another way it’s reflected here in this kind of they call the US debt super cycle, the amount of increase in our US debt and indebtedness. Many people would expect if we were to have shown someone this chart two years ago, three years ago, five years ago. If I said this is what our debt to GDP would look like, we were going to be issuing that much new debt, the expectation would be our US dollar would drop, inflation would be running high, interest rates would be surging, and none of those things have happened. So I want to talk about that number. One, that’s my first point that I want to make sure we spend some time on. And then two, a lot of people get excited when they think about, wow, what an amazing accomplishment for the total US indebtedness. The debt to GDP numbers improving substantially. The economy exploded after World War two in a good way, and the debt levels remain relatively stable. So hopefully what we’ll see here is that all the trillions of dollars of investment that are happening. Hopefully that meaningfully adds to our economic growth. We see our total economy explode higher, and then our debt to GDP numbers can improve because the GDP number hopefully will be significantly larger. We’ll have to see how that handicaps itself. So, Joe, getting back to point one and what your take is on these charts? What do you think?
It makes me worry a little bit about my grandkids, I guess maybe just because this is an invoice that’s going to come due at some point. And really that means a couple of things. It means that we’re really, and it’s so different than an individual levering up on a credit card. What that individual is really doing is spending a lot today, but he or she’s really pulling tomorrow’s growth forward to today. So what debt super cycles or excessive indebtedness really does, it reduces growth on the forward horizon. Okay, longer term horizon, that’s one. And the more, I guess practical takeaways, you just highlight it really well, Michael, it’s higher interest rate expectations, because if there’s more of something out there, it should be cheaper. If there’s more debt out there, the price of that debt should be cheaper. Therefore, the interest rate moves in the other direction. So interest rates, the US dollar is the other thing. And that’s something that the market definitely started to really sink its teeth into, the success of indebtedness of the US economy last year, and we’ve had over $5 trillion of fiscal stimulus between 2020 and the most recent package here this year. That ought to very much be a dollar weakener in the first quarter. We’re looking at the three month rally as more of a counter trend rally in the dollar. But longer term view is certainly to the downside, I think, given that backdrop.
And that’s a factor and a part of our international thesis as well, which we’ll talk about here in a bit. And if you don’t know what I mean by that, don’t worry. Thank you for the question. By the way, we’ll get to what that is. We got to change gears on the impact of potential tax increases. Now, this is potential. This is an asterisk. This is what the Biden administration has floated out there, and it’s important to note that it’s far from being final. Biden seems very conciliatory in his tone, meaning that he doesn’t seem hard and fast set on the number he proposed. So we’ll have to wait and see where we settle in. You’re already starting to see CEOs come out and kind of dig in against corporate tax increases. I think I know why, I’ve got a slide on it, but here’s the salient point to me, Joe. As you look forward again as the stock market does as you look forward to future earnings, the 2022 consensus earnings per share growth earnings per share number for the S & P 500 is $201 per share. But with the proposed tax increases, we’re going to lose $11.82 of that, which takes our potential 2022 projected earnings per share total number down from 201 to potentially down as low as 190. And what that means is that if you’re looking for the consent, we were expecting massive continued corporate growth in 2022 again, as we see here in 2021. But we could take that down from a 15.2 to an 8.5. And I’m going to look for your feedback as I get through this one real quick in terms of when do you actually see the market react? We got to look back historically to see when the market would react. So if you look back to when the Trump administration announced tax cuts here and when the earnings estimates changed, it was when he signed the Tax Cuts and Jobs Act because the market knows that when you’re making a sausage, there’s a lot that goes into it, and we don’t exactly know what the final details of the bill are going to look like, and the markets can tend to wait to see it. So we haven’t yet seen the market react negatively to the Biden administration’s discussion about what tax rates are going to be. So, Joe, opening the floor to you, what do you think about Biden administration proposed tax cuts? What that means for the market?
Well, I think there’s more time for the sausage to be made. Really? You’re right. It looks like right now it’s proposed about 6 to 8% cut to earnings in that neighborhood, which should translate into nothing more than a routine regular way 6% to 8% correction in the stock market. So not too substantial right now, only because it’s still so far from being finalized. The centrist Democrats in particular, I know there’s some real pushback on the corporate tax increase. I highly doubt at least the political geopolitical research houses that we do subscribe to. It’s not likely going to be exactly as proposed. There’s going to have to be some compromise. Not so much with the other side of the aisle, but internally within the Democratic Party is the hope of the market, certainly. So that’s one thing and earnings estimates definitely are looking pretty robust for the first quarter. We’re looking at 25% year over year earnings growth projected at this point for Q1.
Yeah, it’s amazing. They’re easy compares to beat 2020, but still numbers are impressive. And I think part of the rub, and I mentioned we had a chart on it, is that if you look at the total tax, the integrated tax rate, which includes dividends, here’s where the US stands. Currently, this is the data, and there’s a lot to be made about, if you say, oh, corporations pay no taxes. But when you factor in all the taxes paid both dividend and on the corporate rates, you add them all together, here’s where we stand. And under the Biden’s proposed plan, we would go to the worst literally overnight. And I don’t think there’s anyone that’s in a rush to get back here, but I think this is part of the rub in terms of what the CEOs of these publicly traded companies are thinking and seeing and feeling.
One of the things there, actually, which I think is really interesting. I don’t know where we were prior to the Trump tax cuts, but we had to have been higher, much higher, actually, than 62.7% on this chart only because going to 28% is only going halfway back where it was FYI yes.
It had to be monstrous, agreement. And I would just highlight this. We don’t have to spend time on this one, Joe, but I wanted to make sure we’re clear. And that is that sometimes you can make money when there’s a change in sentiment. And the change in sentiment is obviously in 2020, the economic world is not over. We’ve seen the worst of it. And as the sentiment changed, the market was rallying significantly, and you kind of complete the leg of that market move higher. That’s one way to make money in the stock market. Then there’s a reversion where the market really looks towards earnings to realize. Okay, great. We got it. Everyone’s feeling a little bit better, but now we really need to see it. We got to see the money being made. And we’re seeing that a real focus being put on forecasted earnings per share for publicly traded companies. And as we’ve been alluding to throughout this call, it appears to be very favorable what we’re seeing right now, but this is something we had a very close eye on.
Yeah. No question. I mean, earnings, earnings per share or price to earnings. I should say, I think what you mean when you say sentiment how the market is pricing stocks. Yeah. So there’s not much room to expand that the PE multiple at the end of March is at a record high right now.
And you’re seeing that trail down a little bit from higher record highs.
Yes. Yeah. So this is trailing. It’s something that there’s not a lot of room for multiple expansion. Multiple expansion, which means the baton needs to be picked up by actual tangible earnings growth. Returns in the stock market come from three places dividend, earnings growth and multiple expansion. Yes, that’s it. There’s no other way.
Yeah. And that rate of increase is slowing down. The rate of improvement is speeding up on earnings. By the way, they got years on the bottom. And these are the year over year percentage change. So we’re looking at the trend and it’s interesting, kind of the cyclicality of the trend. It’s not lost on me. It’s not lost on me. The cyclicality of this. And I hopefully we’ll continue to see improvement there throughout 2021 and 2022.
International stocks. Joe, we’ve got a few different ways that we’re looking at it. We’ve got four different charts. You can pick your favorite. You can introduce a fifth, but I think this pretty much encapsulates it. What I find interesting is that industrials and financials make up more of these European markets, these international markets, than it does here in the United States and technology and communication stocks the hotter parts of the market, certainly where we were. They’re more US based companies. It’s just interesting to me that there’s still kind of this major difference between the two markets, because what we’re trying to identify is do we like the international markets? And if so, why? And with a steepening yield curve? Yes. Financial banks, things like that. We’ve got to tilt towards it. They look pretty good. Industrials again, more of the same. You’re looking overseas. If you look at kind of the PE again, the price to earnings ratio, things overvalued the valuation is less expensive there than it is here. Maybe not where we were a couple of years ago, which is a good thing. This is a favorable thing. We’ve seen a little bit of improvement in the German ten year. And if you look at the 2021 forecasted earnings growth. We’re excited for the S & P 500 to potentially post a 25% increase. This is pre tax increases. But internationally, you’re expecting even more earnings growth, and we’re hoping for 15 in 2022, but we’re likely to have some kind of tax increase. So the US numbers may look worse. And here you are with the international numbers and you’re like, Jeez, it starts to look a heck of a lot more favorable. Whether you’re looking at the type of industries that existed overseas, which are the kind of things that we may want to invest in in this cycle, economic reopening. If you’re looking at multiples and valuations and future earnings growth, I don’t even have the dollar on here, but it looks like there’s some major tailwinds favoring International, which we’re leaning a little more heavily towards right now.
Yeah. And in the process, as you know, with your investment committee in the process of leaning even more to over the past couple of days. So looking at the EFA, which is really Europe and Japan, there’s more cyclicality. A weaker dollar environment should favor it pretty well. It is cheaper expected earnings growth as well. Definitely bolstering the case for developed market international. You’re really clear about that. What I mean by that is mostly primarily Europe and Japan. Emerging markets is a bit of a different flavor. And that’s, as you know, Michael, something we’re starting to rotate away from right now, given our view on China. So our view on China is a little less constructive right now just because they’re beginning to remove accommodation, monetary and increasing some regulations. So we’re in the process right now of pivoting away from some emerging market complexes, China specifically and more towards develop market international that gives you these flavors.
Right. I think that’s going to be the right place for these data points plus others. So goodness, I got a couple more charts. I’ll fly through this one pretty quick. But here’s what’s interesting to note is that there are parts of the market where we’ve left kind of this realm of natural. The market returned a heck of a lot more than real GDP growth. We’re aware of that, which was largely driven by the actions that the government has taken to help support the economy. And we get all those things. And again, you know that we’ve got these charts and I’m happy to send this out. Plus, there are exhibits at the end of this, because there are things that I already put that we weren’t going to be able to have time to go through, that you may want to go ahead and review. I’ve got some great charts on inflation. This, I think is important to note where we are in this economic cycle. We’re kind of in this Goldilocks, strong growth and easy fed market here, which is helpful. And if you’re trying to figure out how the second year of stock market Bull runs tend to go, you can go back to 1957 all the way to 2020. Here are the major market moves off of lows, and the average second year return is 12.7%. And it’s interesting because if you look at the first quarter results and kind of where we are right now through April, we appear to be headed towards this kind of this 12.7 number. And it’s not to say that there isn’t a potential for draw down at some point this year. We’re aware of it could be as much as 17 draw down, meaning a short term move down. We’re aware of it, but we might see a 10% move down. But the expectation with all these data points, considering, if you look at historical data, a 12% year potentially, which would be great.
Yeah. I think your last comment is really important. The first year off and low is always all gas, no brakes. It’s like that very often. Second year is a little trickier, usually has a good follow on year, but not without volatility. I would highly expect, particularly given evaluation in the market today. I think it’s vulnerable to any bad news, really. That could be geopolitical. That could be some Fed talking points. It could be a lot of different things, but it is vulnerable to one of those high, single digit, low, double digit, very normal and healthy type corrections.
It’s interesting. And it’s funny because all the data points that we’ve talked about kind of, I think, boiled down to that chart. What I’d like to do is there are two slides that I want to conclude with, and that is things that we need to be looking out for the bear market, things that we’re going to be looking out for the Bull market because we’re trying to forecast essentially the direction of where the market is going. And there’s a lot of things that we don’t know, but we’re going to give you the things that we’re looking at to give you an indication about how we are seeking to migrate and make changes to the portfolios, whether it be more conservative and/or more aggressive foot on the gas. Here is the bear case. The bear case is that this is number one, by the way, before the Johnson &Johnson situation in the market down this morning, will the vaccines continue to be effective? We need to see that continue to go forward in order to get a solid economic reopening. Will the stimulus continue to flow? Will there be a meaningful change there? Will the Biden administration not be able to get the infrastructure spending? We don’t know. Will the tax hike be more muted? Will it come in heavier? Is the Fed going to remain on the sideline, or are they going to make a change to their relative dovishness or supportiveness of the market? Will interest rates remain low, and will the debt load all of a sudden become unsustainable? So if we lose one of these six really key areas, then you should know that one of these six things will likely start to trigger in us some additional conservative stances. Any one of these things jump out at you, Joe? I know they all do well.
As Mark Twain once said, it’s not what we know. It’s what we think we know that just ain’t so that’s the danger here. So all of these things – vaccine, stimulus, tax hikes, the Fed, interest rates and debt. No, these are all I’d say consensus views. We don’t really push back or have a counter consensus view on any of these. The vaccines we feel are going to continue to find their way into people’s arms, which are going to normalize economic behavior. Stimulus is pretty much locked in for 21. 22 is likely to be more of a fiscal drag. We know that. So the likelihood of a fiscal drag in 22 we’re expecting. How big of a tax hike is something that we already touched on. The Fed until it starts to change its narrative, which ultimately it will. And we, of course, are monitoring very closely. We’re consensus there. Interest rates we’re watching, and we do feel like we’ve hit a nice pause here. Next leg is probably higher. But still, we’re not at a point where stock markets, we expect to be pressured because of rising rates. It’s one of your charts touched on really nicely. And then the debt load that number six. Honestly, that is very much a longer term or longer duration concern for our kids or our grandkids, at least at this point. So not an immediate concern in terms of risk, posture, portfolio.
These are the elements. These are the key elements that would make us better. Should we start to lose some of that momentum. And then, of course, the Bull case their number. Again, we’re seeing unprecedented support, not just here with the Fed, but the PBOC, the People’s Bank of China, the European Central Bank, the Bank of Japan. We’re seeing this kind of worldwide unified global liquidity that continues to be a bullish sign for the stock market and the economy is continuing to ramp. We’re seeing pent up demand. We haven’t seen any change there. Economic activity is gaining steam. We’re seeing that across many different sectors of the economy. We’re seeing China, which was a little bit slower in that first quarter of the year. We’re seeing them really start to accelerate, which is something that hopefully we’ll continue to see the support there on various aspects of the Chinese economy. We know that, yes, there has been this short term move higher, Joe, with respect to the amount of money that’s gone into the stock market lately, but we haven’t seen the amount of money that’s being plowed into the stock market. We haven’t seen that hit these incredibly record huge high numbers that make me believe that the rally is overdone because of the market moving because of too much money finding its way into stocks. So I’m looking at all those five key points right now, with the consensus being on the bear side and the Bull side, I look at the Bull cases. It seems more like business as usual.
Yes, I agree. Which is why you’re close to fully invested. But acknowledging what I think is a pretty high likelihood for a hiccup again, a routine regular wave volatility hiccup, which we’re in the process, as you know, of preparing for at the margin right now. So very bullish looking forward. Expect volatility per usual for sure. But yeah, I think the glass is definitely half full in terms of what kind of posture portfolios risk wise should be taking right now.
Joe, there’s good news. You know what the other good news is, Joe, is that if you did 53 minutes of this video, if you hung in for, you have no need to watch CNBC, Fox Business, Bloomberg for like a month or you can take time off. You have just squeezed in an economics master’s class in the stock market in 53 minutes, we covered everything. There’s no way it could have been more fun or enjoyable or informative. Joe, you hit home runs consistently, not even doubles. You hit home runs consistently again today. I appreciate it. Thank you for matching tones. It’s kind of this light. I got the light purple. You got the light blue. It’s very soothing. So thank you for that. I appreciate it.
Very welcome, Michael. And always a pleasure. Honestly. Great working with you guys. The clients as well, hopefully have a good grasp on what you’re doing so that they can understand how things are behaving and very much appreciate the time.
Yes. And after going through this, if you have questions, if you find yourself with questions, issues, thoughts, you need to know more. That’s what email is for. That’s what phones are for. Call us. Email us. Let us know. We’ll provide clarity. We’ll give you the slides if you want them again. I’m not going to get through the appendix because there’s a lot of things there, too. Thank you, guys. Take care. Have a great quarter let us know how we can help bye.
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