David B. Armstrong, CFA [00:00:17] Well, welcome to the Monument Wealth Management Quarterly Review podcast. We do this every quarter and we’re recording in April. So the first quarter is already behind us. And we’re going to review that a little bit. But we also have a special guest that I want to introduce everybody too. We’re going to have some Q&A with Jordan Jackson, who’s a Vice President and Global Market Strategist with JP Morgan Asset Management’s Global Market Insight strategy team. And part of his role is that Jordan conducts research on the global economy and capital markets and contributes to publications such as JP Morgan’s guide to the markets and, other weekly blog posts. And speaking of guides to the market, Jordan, along with Doctor David Kelly, just released their first quarter version of this comprehensive chart book, so we’ll have some links in the show notes to not only some of Jordan’s previous writings and blog posts, but also to that guide to the market. Erin and Nate and I talk about that all the time is just chock full of really great charts, really interesting stuff. It is. It is well used by practitioners in the industry and a great resource for everybody. And we’re really excited to have Jordan. All right. But first, before we get to some Q&A with Jordan, Erin, and Nate and I are going to take a few minutes here to just do do a little bit of a riff that we do every single quarter on, on what we think. And the one thing I wanted to kind of surface was that, and I know we’re going to have a question for Jordan on interest rates, but there is a lot of talk over the past week or so about rate cuts and as expectation as expectations change. You know, volatility is obviously going to change along with it. But here’s an interesting stat to keep in mind. So if you go back to 1994, which is back when the the fed decisions were made public in real time. The fed has been more likely to stay on hold during a presidential election year like now, especially as Election Day gets closer. So if you look at election years, the fed has hiked rates height in an election year during the months of May through November. Just 16% of the time. And that’s compared to 21% of the time for all the other years. Now that’s height. But let’s talk about cuts, because that’s really what everybody’s got their eye on right now. They’ve only cut rates 3% of the time compared to 14% of the time in other election years. I’m sorry, outside of election year. So 3% of the time in an election year and 14% of the time in other years, and the only time that the fed cut rates in May or later during an election year was in October of 2008, which was basically when the economy was in a freefall. And interestingly, neither candidate that was running for election was up for reelection because it was Obama and McCain, and neither one of them had held office. So just kind of an interesting tidbit there to keep in mind if you look historically. If you look at nothing other than historical precedent, the chances of cutting rates are pretty low. And, you know, we’re kind of in a 2 or 3 rate cut expectation environment right now. So, Erin, what do you think? You got any, anything to riff on here with the first quarter before we get going?
Erin Hay, CFA [00:03:36] Yeah, I don’t have a ton of nitty gritty stuff to go into. I think it’s pretty helpful to see maybe where we’re at in a potential equity market cycle. Of course, that’s usually always backwards looking, but if you use history as a guide, we’ve been at least for the S&P 500. We’ve been in a bull market for about 17 months now and and a return of about 45% or so. And if you look at median bull markets across history for the S&P 500. The medium bull market has lasted right around 30 months, with a median cumulative return of about 90%. So using history as a guide as we just close the first quarter, could argue that we’re about halfway through the current, the current cycle. So that’s all I’ve got. Just a little recap of where we might sit with, with the equity markets right now.
Nate Tonsager, CIPM [00:04:25] You know, we’ve talked about stocks. We talk about bonds. We’ll talk about more of that later kind of when we get into it with Jordan. But some an interesting, maybe fun kind of statistic that I saw for first quarter was one of the best performing assets was actually cocoa beans or, you know, chocolate. You know, year to date chocolate prices are cocoa beans. The input that goes into it all is up 130%. And really, what that would have been is the second best performing stock in the S&P 500 for the first quarter with, you know, beating Nvidia all of the other Magnificent Seven. So the only name it was behind is a monument model holding which is Super Micro conductors. But again, I think a stream in extreme spike in cocoa prices is not only interesting just because it is a big return. And, you know, we could have made a lot of money if we just bought cocoa beans and held them. But really, I think what it shows is a spike in commodity prices, and you’re seeing that kind of in the past couple of weeks as we ended Q1. As as commodity prices go up, what that means is more volatility with inflation. And yes, as you know, food prices or even oil prices go up and down that’s going to impact the headline inflation number. But I think it’s a good opportunity to remind investors and remind our clients that the fed is really looking at core prices, trying to strip out some of that volatility when it’s making these kind of rate decisions. And we’ll get into a deeper dive there. But I thought it was kind of funny and interesting to see that one of the best performing assets of all things was cocoa beans. You know, it’s one of those interesting things that not everyone’s talking about. But again, I think you can take away something from it about what is going to happen, maybe with inflation moving forward.
David B. Armstrong, CFA [00:06:00] Don’t go out and buy cocoa beans.
Nate Tonsager, CIPM [00:06:03] I know you have to store them. You have to transport them like with any physical commodity. It sounds great to go buy it in theory, much more difficult in actuality.
David B. Armstrong, CFA [00:06:12] Yeah. Jordan, I see you laughing. You have anything on any of those three little tidbits you want to jump in on or.
Jordan Jackson [00:06:18] No, I think, very astute observations. You know, certainly, obviously with a physical commodity, a big piece of the run up in price, has been supply constraints. And so production capacity, particularly coming out of the continent of Africa, has, has contributed to this surge in cocoa prices. And so, I was wondering why my, my wife’s hot chocolate was significantly more, more expensive. So, so thank you for, for, for pointing that out. But I think generally speaking, I, I, I’m in the more bullish camp, you know, in the, we talked about a lot of statistics around, the median bull market and how far we’ve, we’ve already come along. But, I think we’re still in an environment in which you’ve got micro dynamics, i.e. earnings and fundamentals that are supportive for higher equity prices. And we’ve also talked about a Federal Reserve that has, in pretty explicit bias to begin to gradually start easing up, on monetary policy, even in an election year. And I think those are two, both micro and macro, kind of supportive dynamics for for, for the equity markets at least over the next 12 to 24 months.
David B. Armstrong, CFA [00:07:35] It’s one of those things where just because it hasn’t happened in the past doesn’t mean it’s not going to happen this year. And I’m certainly not I’m not in the camp of saying, hey, we’re going to go from three, 2 or 3 rate cuts to absolutely zero just because it’s an election year, because it’s never happened before. But, it would it would be an interesting and never before other than 2008 season thing. But, Nate, I know you wanted to jump into some, some monetary policy stuff, so.
Nate Tonsager, CIPM [00:08:02] Well, I it’s something I’ve been posting about a lot on a lot about recently on LinkedIn is not only US monetary policy. And I think, Jordan, you kind of touched on it briefly, and I know you’ve written about it at the end of the last fed meeting here, but really, to start the year, it was the expectations for rate cuts. I think the markets were very different from the fed. And I think, Dave, you really pointed out a great, a great item to start out the podcast here is volatility is really tied to what does the market expect and how does that relate to the fed. If there’s a difference between what the market expects and what the fed is saying, there’s higher potential for volatility. Well, what happened over the first quarter is we saw a kind of a convergence of their two theories. Is the markets to begin the year repricing in significantly more cuts than the fed had. And now we’ve seen that number come back in line. Both the markets and the fed seem to be pricing in about 2 to 3 cuts. So Jordan I kind of wanted to get your kind of perspective on it is, I guess, is that the correct way to think about kind of the interest rate cuts in the future? And I guess how do what does it impact with the markets? You know, do we really need interest rate cuts to see successful equity markets or economic growth?
Jordan Jackson [00:09:11] You know, that’s a fantastic question. And if you maybe would have asked me that question when the fed, started hiking initially back in the 2018 and 2019 or when they started hiking before the global financial crisis, I might have had a different answer for you. But this time around, what we’ve observed is that not just the economy, but what markets have been able to stomach, higher interest rates and not just higher interest rates, but rapidly increasing interest rates. I mean, you could argue the Federal Reserve, took the elevator up over the course of 2022 and 2023, raising rates by 75 basis points. And historically, and this is one of the reasons why you could argue the rallying cry from the asset management community was for recession in 2023 because of how aggressively the Federal Reserve was tightening monetary policy. And of course, 2022 was a really tough year for bonds and stocks. But we continue to see the economy continue to trudge along here, both consumers and businesses. And so I think I can succinctly answer that question in that. Yes, the equity market can continue to move higher, even in the backdrop of higher interest rates. And maybe what we’re getting at here is an economy that can now withstand a higher neutral and neutral rate of interest. You’ve had a, you’ve had decades of, of near-zero interest rates. So there’s been a lot of reconstructing of both corporate and consumer balance sheets. You think about the, you know, the average effective mortgage rate for those homeowners that have a mortgage is that about 3.8, 3.9%? Big difference if you’re going to step into a new jumbo mortgage in the high sixes, low sevens. And keep in mind these are a lot of these mortgages were locked in for 15 and 30 year fixed mortgages. So those payments aren’t going anywhere for the average consumer. And they’ve also benefited from a significant windfall a fiscal stimulus helping to support pockets. And now it almost seems sort of, a lot of things happening. All right, going up at the right time. But now you’ve got strong labor markets. And so while consumers benefited from fiscal stimulus over 2021 and 2022, they’re now benefiting from higher wages that are now outpacing the rate of inflation. So they feel like they’ve got a little bit more coming out of their paychecks. And so when you’ve got healthy, when you’ve got corporations that are still earning, when you’ve got inflation that’s coming down but still running a little bit hot, I’ve always thought of kind of, if you’re a consumer, inflation’s your foe. If you’re a business, inflation’s your friend. It’s a reflection of pricing power. And you know consumers still willing to spend tight labor markets. You all this suggests that the economy can stay afloat and you can have earnings that’ll be supportive of higher stock prices. So, I’m hoping I’m painting a bit more of a, of an optimistic picture than what some of the financial news outlets would, would suggest.
Nate Tonsager, CIPM [00:12:19] Yeah, I think you bring up a lot of good points. And the big one for me is around the GDP is, you know, you look at what is productivity growth. You know, there’s two elements in GDP growth long term. To me it’s population growth or productivity growth in 2023 was a banner year for productivity growth with I think GDP was just revised for the final time for 2024 to a 3.4% annualized rate. That’s above trend growth. And even if you look at what are we projecting for Q1 in 2020 for the Atlanta Fed, I think just came out at around a two, two and a half. So again, you’re right along the historical average. And that’s in the face of, I think, as you said, Jordan, the elevator rise. That was interest rates.
Jordan Jackson [00:12:57] That’s a great summary. Right. And you know, so so we have to remember the feed through to higher interest rates and how that historically weighed on economic activity. Right. So higher interest rates raises the cost of capital. That means it costs more to spend money on your credit cards. If you have a balance. You know, you think about new car purchases which surge coming out of the pandemic. Keep in mind, a lot of those leases are either three and five year leases. So, I just had to step out of the lease on my car, and I, was very surprised at just how how much higher, lease rates and insurance rates are. So, you know, you could argue we will start the the everyday consumer will start to feel it, on on bigger ticket item purchases, durable good purchases. But again, this is also an environment in which labor demand is strong. Wages are still rising at, around 4 to 4.5%. And this has been a pretty constructive environment for for the everyday consumer.
Nate Tonsager, CIPM [00:13:56] Yeah, I think kind of at a macro level to kind of book in the macro discussion is people can plan around a higher level of interest rates as long as there isn’t the volatility or changes in interest rates. I think that’s kind of what the market is grappling with, starting to understand. So I think it kind of is a great segue into kind of what- yes, we talked about what interest rates, but what does it mean for equities. And I know, Erin, you had a couple themes with specifically for equities that we wanted to touch on as well.
Erin Hay, CFA [00:14:22] Yeah, I’ve actually got a couple of themes that, you all put in the Quarterly guide to the markets piece, which as they said, we’ll be sure to link to these in the show notes. But there’s two slides in particular as it pertains to equity themes that I wanted to touch on and and Jordan get your opinion on. The first of which is via slide ten in the guide to the markets, which pertains to S&P 500, constituent concentration. So this has been a big topic you know, going back for as long as I can remember, you know, having, FANG/ FANGMAG, The Magnificent Seven, whatever the latest iteration were of, right now. But when you look at the way that the top ten constituents of the, the S&P 500, that’s at an all time high right now at about 34%, but sort of a dichotomy or I’m seeing here, the the actual valuation, if you look at price to earnings multiples of that group, it’s lower than the post Covid high and then certainly much lower than we saw back during the dotcom era. So I’m just kind of wondering, you know, what’s your take on this is, I guess more broadly, is it sustainable for us to continue to have this, this high of a level of concentration, you know, in the S&P 500 with the top ten holdings, holding at just over 34%.
Jordan Jackson [00:15:38] I think index market concentration is going to continue to be, a theme, for for the next few years. The bigger names continue to get bigger. Right now, the top ten names of the S&P 500 account for about a third of the index. And and if I’m bullish. So the reality is I kind of need those top names to do pretty well in order for the market to continue to grind higher. So, a couple of points that I’d want to make, you know. One. Yes. Index, market concentration. And has historically suggested that the durability of an equity market rally is on is on shaky ground. But when you look at the underlying fundamentals, these are companies that have particularly strong balance sheets, and they’re investing in their businesses in a pretty massive way. So, you know, when you look at consumer discretionary or information technology, you know, where a lot of these bigger companies exist in a sector. They’re sitting on about 35 to 40% of cash as a percent of current assets. And that’s just a reflection of kind of balance sheet health. Oh, and by the way, their cash is kicking off about four and a half 5%. So I think that’s a really important kind of dynamic and supportive of these big companies just given the fundamentals. This is very different from the early 2000, late 90s and early 2000, where either you put www at the front of your name or .com at the end, and whether you were profitable or not, folks were willing to pay a significant premium. You know, these companies are actually are actually delivering on earnings. And then the second point that I would make is they’re investing in their businesses, in a really, really big way. And so when you actually look at information technology, consumer discretionary spending on things like research and development and CapEx, they’re spending more on intellectual property rights R&D than they have on average over the last decade. And so what are they spending on? Well, it’s blockchain technology. It is artificial intelligence. It’s AI. It is productivity enhancing technologies and margin improving business models that they’re investing in. And so if you actually were to adjust, not just look at earnings growth over the next 12 months, but actually adjust these big companies earnings growth over the next 3 to 5 years, they actually don’t look all that expensive. And so I think that’s a really, really important important dynamic to highlight. Another thing I know we talk about market concentration but we’re actually starting to see breadth. You know, a lot of what we’ve been talking about is wanting to see other parts of the market beginning to play a little bit of catch up. And we’re starting to see that about 75% of stocks in the S&P 500 are now trading above their 50 day moving average. Right. So you’re getting that participation, that broadening out. And we’re also seeing that in earnings expectations as well.
Erin Hay, CFA [00:18:45] I think that some really those are some really good stats. Nate, did you have something you want to chime in here on.
Nate Tonsager, CIPM [00:18:50] Well, so it’s kind of interesting because I think you bring up a good point, Jordan with The Magnificent Seven and thinking about the in the concentration, you know, they’ve all been going up together. I would say those seven stock names. And you’re familiar with them all the big tech names. They’ve been going up together for the past year. But recently I feel like in 2024 you’re starting to see some divergence. You’re seeing some names that have had really strong 2020 fours, Nvidia. And I think, you know, Amazon is another one that’s been up there. But Apple has been one of the more kind of surprising names that has been near the bottom. I think what that just shows is yes, there may have been concentration, but as breadth widens outdoor and you just said there there’s opportunities to be more active with your selection. It’s maybe not owning the whole basket. Maybe it’s looking at it, identifying which of those quality companies are the strongest and do we want to own. You know, I think that’s what we’re seeing is kind of opportunities now with interest rates no longer being at 0% and having nominal interest rates, I think there’s maybe more dispersion in the returns of individual companies opening up doors to being maybe more active with some of your approaches. So it was just kind of interesting to hear you comment on the concentration there.
Erin Hay, CFA [00:19:55] Yeah, those are some some good points there Nate too. And Jordan you brought up some some profitability trends some some earnings growth trends. Or I kind of want to take the opposite, angle of that or the lack of earnings growth trends with the small caps and specifically touch on small cap profitability, which is actually, again highlighted in the show notes guide 13 of I’m sorry, slide 13 of the guide to the markets. And the reason I’m bringing up small and this is also pertains to mid cap, by the way, and this is a little sidebar for Monument clients. Just a reminder of our individual stock models. The the Monument individual dividend model has a weighted average market cap of about $40 billion. And the Monument growth model has a weighted average market cap of just over 130 billion. And of course, the medians are going to be are going to skew lower there. Reason I bring that up is of course, those, market cap statistics all skew way lower than, than the mega cap portion of the S&P 500. And so going back to that small cap profitability trend on slide 13 of the guy to the markets, Jordan. You guys highlight that right now just over 40% of companies in the in the small cap space, which is proxy by the Russell 2000. 40% are unprofitable. Contrasting that if we want to look at other parts of the market cap spectrum, you’ve got 20% of Mid-caps are unprofitable and only 10% of large caps are currently, unprofitable. So, with those stats in mind, you know, what’s your, your take on, JP morgan’s take on, you know, small cap currently. And if you’re, if you’re going to be investing there, do you guys have any advice for people looking to invest in that space.
Jordan Jackson [00:21:33] Yeah. You know generally speaking a small caps certainly from a valuation standpoint look pretty attractive. From performance, over the course of the tail end of 2023. They’ve severely lagged their large cap peers. And so as a result, relative valuations do look attractive. And that may entice investors to want to begin dabbling in the small cap space, particularly given it’s generally understood that small caps are more cyclical and in a more leveraged play on the economy. So we just had a conversation around strong economic growth. Nate mentioned above trend, trend growth. And if you believe that backdrop will continue then that might suggest an allocation towards towards towards small cap. Right. I’ll say that for us though, we still continue to lean, more larger cap, more defensive within our positioning. You know, as Erin highlighted, right. You know, about 40% of the Russell 2000 is unprofitable, but also about 38% of small cap debt is floating rate. So we’ve talked a lot about interest rates, and the fact that a lot of their debt is resetting as the fed has raised interest rates as quickly and as aggressively as they have, that might suggest continuing to feed through into that, profitability and profitability picture. So, you know, at the very least, you know, we’d argue that if you’re going to play in the small cap state space, you certainly want to be active, right? You want a manager that’s going to be able to identify companies, that can continue to deliver on earnings in a higher rate environment. That’s good balance sheet management. Probably better interest coverage in terms of their profitability, being able to cover the interest expense than, than the broader index. So, I will say, also, you know, when we look historically and I know we’ve talked, kind of anecdotally about about AI. Over the next decade, the next, the top ten companies are going to look a lot different than the top ten companies of today. And we’ve seen that dynamic shift decade after decade after decade. And so, you know, you could argue that over the next ten years, that the, the maybe three of the top ten companies over the next decade are in the small cap or VC space. So for for alpha generation, for our clients, imagine an all cap approach in which you have a good active manager that’s able to find a company, in the small cap space, they can own it all the way up until it becomes a large cap company. They think about owning Amazon, in 2000. And what that would have done for your portfolio if you would have held it today. Certainly a lot of capital gains taxes, but they would have done great. Right. For, for for your overall wealth building. So those are just a couple of things that I, that I’d highlight around, small small caps and how we’re kind of positioned currently.
Erin Hay, CFA [00:24:24] That’s all really good commentary. I think what you’re hitting on there towards the end is we’ve we spoken about this first in a podcast or one of our blogs or model portfolio updates, but you’re talking about sort of the law of large numbers. If you’re going to be looking 5, 10, 15, 20 years out, you know, what’s more likely? Are you going to get a ten X in a company like an Amazon, a Microsoft, something residing in the top ten now, or is it going to be more likely that you’re going to be able to find names that will have ten x potential further down the market cap spectrum? Again, anything is possible as the last few years have shown us, but I think we would tend to side with you in that likely some, bigger long term opportunities residing further down the market cap spectrum. So that’s great. Thank you for that. So, Nate, we’ve we’ve hit on macro themes, with you, you know, we just went over some, some equity themes here. Dave I know you had some, some things to maybe pull this all together or some investing concepts, topics that we wanted to talk to to Jordan about today.
David B. Armstrong, CFA [00:25:22] Yeah. Jordan, one of the things that I’ve, I’ve made some commentary on in some recent posts on LinkedIn. And by the way, if you’re listening to this as a client, you’re not following us on LinkedIn and you’re a LinkedIn user. Go find Monument Wealth Management and follow us, because then you’ll get a lot of this commentary that we’ve been putting out that we’re all talking about. But there’s there just seems okay, maybe this is just me, but I feel like there’s just a lot of anxiety. People have a lot of anxiety over investing when markets are hitting an all time high. Right. And and like I said in a recent video, like I get it, I understand that emotion and that fear, right? Because like, oh my gosh, it’s at an all time high. It’s it’s probably going to sell off. Why would I invest now? So what are some of the reasons that investors and listeners should be optimistic about investing now and some facts to support that?
Jordan Jackson [00:26:14]It’s kind of aligning with FOMO, right? It’s that the fear of missing out. And, our wealth management arm has actually done a lot of work on the behavioral finance side. And what we’ve observed is that, really that trigger in which investors want to make a decision is when the market sells off in 5% increments. So every time the market’s down 5%. Investors want to make a decision. And in most cases, it’s it’s a bad decision. But but what we’ve seen historically is that markets spend more time rising than they do falling. Right. And all time highs tend to be, clustered together over, over prolonged periods, prolonged periods of time. And so, yes, I believe we’re now at around 22, 20, 21 to 22 all time highs, over the course of 2024. And I think it’ll it will continue, I think will continue to reach all time highs. But based off of the micro, dynamics earnings that we talked about as well as, well, some of the macro, macro backdrop. And so, we have some data that also would suggest that even historically, whether you invest at all time highs on days or days when the markets reach an all time high, or you invest in any other day outside of an all time high, you’re for three, six, 12 and 24 month return are not really all that much different. They’re actually almost almost equal. In terms of, your chances of making more money. So we have to remember that, yes, volatility is the price that we pay as investors this year may feel a little bit abnormal. The average intra year peak to trough decline on the S&P 500 is at 14%. And we’ve only had a 2% correction in the market so far in 2024. So you could very much argue we’re about due. But I’d always remind investors, even with that level of volatility, 75% of the time, going back to 1980, the equity market has been positive by calendar year. So I think that’s really important. Yes, volatility is a price we pay as investors. but as long term investors yeah. Investing in equities. That’s that’s how you grow your money. Your money and that’s how you grow your wealth.
David B. Armstrong, CFA [00:28:34] I was just commenting the other day on a video that I have a very I have a 50/50 chance of being right, guessing which direction the next 20 point move will be. And let’s just say the S&P 500. I have a super high chance. And I’m saying super high because for compliance purposes I can’t say 100%. So I’m going to say super okay. Watch this. Ready. Super duper high chance of being right. On knowing which direction the next 100 point, 100% move will be. Right. So the 20% moves are going to happen in either direction, I get that, but the next 100% move probably isn’t going to be down. Super duper duper chance of being right on that.
Jordan Jackson [00:29:19] I can also tell you, going back to 1930. There has never been a rolling 20 year period in which the equity market is now. So I. So I very much like the, super duper and add another duper.
David B. Armstrong, CFA [00:29:35] It was like I triple dog dare you, sticking your tongue on the flagpole. Right. So there’s a huge fear. There’s a huge FOMO, I get it, but, you know, there’s a an over 90% to 90% of the time the market is trading within 5% of an all time high. So it’s another way of saying your 75% is positive. But yeah. And look, I’m going out and I’m going to speak at a Barron’s conference coming up here in Las Vegas. So I am going to do my traditional bet, you know, a couple hundred bucks on the craps table. I’m going to lose it all because there’s a less than 50% chance I’m going to make money. And then I’m going to come back and I’m going to talk about how people are scared to invest. And something’s got a 75% chance of being up.
Nate Tonsager, CIPM [00:30:18] So we hear so much, right is when should I invest money. And it’s kind of it is a personal decision. There are people that emotionally cannot handle putting large sums of money in at market highs. And that’s fine. There’s strategies out there like dollar cost averaging where putting a little bit in until you’re waiting for the sell off. But again, I think based on the data that, you know, JP Morgan, Jordan, you’ve shown there’s not a real benefit to waiting. It’s more about being invested in the markets. And a lot of what we do is momentum investing, which means if markets are going up, we are believing that the trend will continue and they will keep going up. So all time highs are nothing we are afraid of. I would say at Monument, you know, it’s, you know, investing around them appropriately for each client of course. But again it’s not a bad problem to have when you’re having all time highs like you were saying, 22 year to date, 22 new all time high highs. Excuse me.
Jordan Jackson [00:31:15] I’ll make another point. It’s so interesting because I have so many clients that I speak with. And there’s they still talk about how their cash outperformed in 2022, and they’re still sitting on a lot of that cash. And then I and then I kind of remind them and again, there’s still a lot of bearish and expecting a sell off. And then I’ll say, well, your cash returned about 5% in 2023, which is great. Fine return. But the markets were up over 20 already so far year to date. Your cash is still up probably about a percent, maybe a little bit more. But the market’s also up ten. So you’ve spent, the last 14, 15 months, on the sidelines, really missing out on, on some pretty nice gains, coming out of the market. And, and if you’re again, if you’re worried about investing at all time highs, I think, again, a strategy like Nate mentioned a dollar cost averaging in or, investing in a, in a strategy that can provide kind of guardrails in terms of downside protection while still participating in some upside gradually. And I think I think it makes a lot of sense, but at the very least for, for for our investors, whether you have a medium to longer term time horizon, you’ve got to get off the sidelines and get invested in the market.
David B. Armstrong, CFA [00:32:31] Well said. So so we’re we’re about 30 minutes right now. I’m wondering let’s just do a little bit of a speed round maybe. Let’s talk about let’s talk about what everyone is most optimistic about. And what everybody’s most pessimistic about. And, Jordan, I’ll let you go first or last. Your choice.
Jordan Jackson [00:32:50] How would this I’ll tackle my pessimistic first and then I can finish with my my optimistic last, how about that? I guess what sort of keeps me up at night.? In fact, we actually got some better information, coming out of the Middle East in terms of a potential ceasefire over over the course of the weekend. But I’m growing a little bit more, and and I’ve still and I’ve been, pretty concerned around geopolitical risks in the Middle East, and how that potentially filters in through, higher commodity prices, higher core goods prices, as Nate sort of mentioned in the outset, and how that could really complicate, the trajectory for domestic inflation, and monetary policy going forward. Right. The narrative continues to shift away from aggressive rate cuts to to to lesser, less aggressive rate cuts. And and my worry is if the conversation will start to shift further in the other direction. And now we’re talking about hikes getting back on the table. I think we’re a bit of a ways from there, but I certainly would not be surprised if we continue to see, at least on, on, on core, CPI continue to run in the mid to high threes over the next couple of prints on a year, year on year basis. And again, that would, that would probably take off a June rate cut for the fed. And maybe they have to wait until, July or September. Which which again, I don’t think the market is fully, as fully prepared for it. So, I’m most pessimistic about the geopolitical risk and, and the defeat or feedback on, on inflation and the impact that has on, on monetary policy.
Nate Tonsager, CIPM [00:34:33] So I’ll stick to kind of one of my most pessimistic about is it’s geopolitical, but it’s not necessarily the Middle East. I’ll say it’s China really. And the reason I say China is their debt crisis. And there seem there seems to be a possible debt crisis in the real estate sector, and there is an economic slowdown occurring there. I think the bigger thing is China data is always opaque at best, is you’re trying to sort through to trying to figure out what is the true meaning in the underlying factors. And really, some of the data you’re seeing hasn’t been great with the default of one of the bigger property developers in the world of Evergrande, where there is, I think they are the most indebted property developer in the world. So a lot of exposure to global financial markets. The other piece too, is recently near the end of the month. There’s five major banks in China that are rough, that are reported on or used. And if you look at all five of them, in aggregate, there was an increase in what is called non-performing loan balances and a special increase in real estate specifically. So it’s again, it’s battling the real estate development and possible maybe over leveraging in China. You know, it’s the shadow banking that we don’t know a lot about and that will have effects you know. China is the second largest global economy. So while you’re not seeing maybe a ton of weakness currently, there’s little cracks showing that we may need to be prepared for a kind of a slowdown on a global level, at least from an engine of growth. That’s what I’m pessimistic about. So let’s be happy now. Enough pessimism, right? Like, moving on, at least partially. What I’m most optimistic about is I think I said at the end of Q4 or, or wrap up there is housing means that really kind of an optimistic bright spot for me personally. Now, I acknowledge the housing market is totally stuck and we need to get it unstuck, but it’s not collapsing. And I think there’s a couple reasons for that is, first off, people current owners are locked in. Inventory remains low, keeping kind of a floor on existing home prices. What that does is yes, it prices are buyers for buying existing homes. But then what we need then is housing starts or new homes. And you’re seeing really positive data on new starts of housing. I think they were up 10% last month and have been positive five consecutive months roughly. So again, there’s hope in the pipeline that housing will get better. And if we do get interest rates, cuts, even small amounts or marginal ones that should unlock demand. So again, I think there’s reasons to be optimistic about housing, even though it is a pretty stuck market right now.
Erin Hay, CFA [00:37:05] So I’ve got, before I go on to my optimistic and pessimistic prognostications here, I have two comments for Nate, you’re China bit. First off, I take a little bit of an issue with your pronunciation of China. It’s not China, it’s China. So a little humor there for you. And the second thing is pertains to, to China, in particular Chinese equities. I’ve had, some, sidebar conversations with some friends, who are, you know, also advisors, investors, Dave, compliance, not any clients. And some of the sidebars have revolved around, you know, when might be the time to take a look at Chinese equities, as we know here, at Monument, we tend to, you know, be momentum, type investor. So we like to see a trend established before we would get in. But there’s also the case to be made for long term money that, you know, buying the proverbial dip in. A Bi-Lo so high. And I’m going to be on the lookout here. I’m not making a call on this. It’s going to happen anytime soon. But this is what I will be looking for, is some sort of economist cover that proclaims the death of China, or the death of Chinese equities. That tends to be a pretty good long term signal and a pretty good long term entry point. So that’s what I’ll be looking at there. So onto my optimistic and pessimistic points. I guess I’ll start with my my pessimistic side. This kind of goes back to, I guess a derivation, Jordan, of some stuff that you talked about with inflation and geopolitical risk and commodities. I’m pretty pessimistic on rates, to be honest from here. If you look at, you know, price action to some of these, these larger, you know, indices which, which are basically a compilation of the bond market. So you look at something like AGG, which you think of it like the S&P 500 ETF or bonds, and looking at what that that ETFs doing on a price basis, it’s continuing to make lower highs and lower lows. And it’s also in what we call a lower RSI regime which basically looks at the strength of price movements being up or down. So it’s not a great technical picture right now in bonds. And so I think a lot of that probably has to do Jordan with some of the stuff that you’re pessimistic about. But that’s what I’m most, pessimistic about for the remainder of the year is definitely bonds and interest rates. And then optimistic this is going to go back to some of the, the index concentration topic that we talked about earlier. I’m actually most optimistic on the performance of equal weight S&P 500 versus cap weight S&P 500. So said a bit more explicitly if you look at ETF tickers and this is not, a solicitation to go buy these specific tickers. But if you wanted to point out some specifics on this. I actually think that throughout the remainder of the year, the ticker RSP, which is equal weighted S&P 500, is going to outperform SPY, which is everyone’s, you know, favorite representation of the S&P 500, the largest ETF here in the world. A reason for that is you definitely are starting to see a slowdown in the tech sector from a relative strength perspective, and you’re starting to see some of these other sectors, namely energy, which we talked about on the latest monthly podcast, financials, industrials, materials and utilities picking up on a relative strength standpoint. And for long time listeners and readers of our updates, this is starting to really manifest itself in that relative rotation graph or RRG framework that we will frequently cite on podcasts and in our writing. This doesn’t say that I think that equal weight S&P 500 is going to necessarily be positive for the remainder of the year. Again, this is a relative conversation we’re having here. So that’s my optimistic take. I think equal weight as some of these sectors start to diverge a bit. Equal weight S&P is going to outperform cap weight. So Dave I’ll turn it back over to you.
David B. Armstrong, CFA [00:40:55] Nice. I’ll start out with some of my pessimism. I’m pessimistic about some of the, things that I thought were going to happen in the beginning part of the year when we had our last quarterly review. I think my, my thoughts on interest rates coming down faster as fast as I thought they were going to be will prove to be incorrect. So I’m pessimistic about that. And, I’m pessimistic about my thought that inflation was going to be a lot lower this, at this point in the year. And so fortunately, we don’t use our outlooks to make investment decisions, but we do have some fun with them. So I’m pessimistic about those things. But, you know, here’s the other thing that I’m pessimistic about is, I’m just worried that election year general population sentiment and the media coverage of it is going could could throw a wet blanket on on the equity markets and people’s sentiment toward investor sentiment. I think there’s a ton of data out there that says it. You know, if you start taking your political views and implementing an investment strategy around them, it’s a recipe for disaster. But I fear people are going to do that. I think people are going to become fearful of one side or the other. And and I think that the media coverage of it is going to be, I’m pessimistic about the media coverage being pessimistic about the coverage. It was interesting the other day, there was this report that came out that talked about how the percentage of people who were taking on second jobs was like up, you know, 3.1 million additional people were taking on second jobs in order to make ends meet. And the first thing I thought was, well, okay, on a percentage of total population, okay. That’s a, that’s a, a number, but on on a percentage of total population, have the number of people working second jobs changed. And and the answer is no, it’s still around 5%, which by the way, was the same percentage of people who were taking on second jobs in 2008 and actually lower than the percentage of people who were taking on second jobs during the big tech boom of the late 90s and early 2000. So, you know, I, I just kind of look at it just just such a propensity to talk about the negative things or insinuate negative things in the press. I’m really I’m really kind of worried about that. However, optimism now, this is you got to give me a little artistic license here on this one. But like, I actually think that I have a lot of optimism about the equity market still. And here’s why. When we look back in time at all of the stimulus that was pumped into the system for Covid, people are going to make a comparison to the stimulus and the economic boom that happened in this country after World War II. And I just think that when we look at when we look back and see all the stimulus, everything, I think we are in the early stages of an economic boom that is similar to post-World War II. And the equity markets will, over the long term, reflect that stimulus and reflect that economic growth. That doesn’t mean that every that doesn’t mean trees are going to grow to the sky, and we won’t have 20% corrections. It just means over the long term, I think we’ll look back on this chunk of time and and see it being an economic boom. Now that I’ve said that. It’s not going to happen, right? Right right right. But anyway. All right, so Jordan, wrap us up with your with your, optimism. Take us home.
Jordan Jackson [00:44:22] Awesome. Well, I do want to, make a comment and say if you if you are a Monument client, you are in fantastic hands. I mean, you’ve got, Dave, who is a fantastic macro thinker. Erin, who was the resident technician. And Nate, who plays both sides. So, really, really. Thank you. Thank you all for for for having me on the call. And thank you for sharing your insights and opinion. You know, for me, I like to think of myself as sort of a second derivative investor. And this is where I grew optimistic. And what I mean by second derivative is, for example, I bought Clorox stock, shortly after the pandemic hit, one, because I recognized that people were going to want to be buy more cleaning supplies. Right. As a result of, social distancing. And they will continue to buy more. Given sort of the obsession now with cleanliness. Cleanliness, and that was sort of, a good, a good play there, you know, now, as I’m thinking about another second derivative sort of play, I’m getting very optimistic around electricity and electricity grid developers and infrastructure around that. You know, the reality is if if AI is real and we see that it is real, generative AI is real. We’ve already seen a significant run up in in semiconductors. A lot of these chips are going to need all these chips are going to need increased electricity consumption and usage. And you’ve already started to see a couple of power grid companies rally over 100% over the course of this year, not for compliance reasons. I’m on the asset management side. Our investment bank covered some of these names, so I can’t actually explicitly say which companies they are, but you’ve already seen some very significant price appreciation in a few of these companies, and particularly, some of these in the Southeast Asian parts of the world, I think have incredible, incredible upside potential from, from here. And so, I’m growing very optimistic again around power grid, and electricity, providers, both from an infrastructure standpoint and those who are transporting, electricity and maybe as a third derivative that nat gas. Right. So natural gas, about 30, 40% of net gas uses for electricity generation. And so those are, you know, kind of two sort of areas I would take a, I take a serious, look at and areas where I remain pretty optimistic.
David B. Armstrong, CFA [00:46:55] That’s awesome. Thanks for that and totally appreciate your, your need to not mention any names or we get it. But, thanks so much for that. Well, this this has been great. Really appreciate you taking the time to come on, Jordan. Hopefully this won’t be your last time on. And and for people listening, you know, Jordan is a DC, resident here, so hopefully Jordan will have you over here. And maybe we could do our next podcast live in our studio. So, we just moved into our new office here, so we’re still kind of getting set up and getting all the tech in place, but we’d love to have you come over and visit with us. So. But if anybody listening has any questions, interested in anything more? Some of the references that we talked about will be linked in the show notes. If there’s something specific that you wanted that we don’t have linked in the show notes, go ahead and give us a call, or email us or something and we’ll get it out to you. Make sure you’re following us on LinkedIn for some of the professional stuff. Our Instagram account is actually kind of fun. That’s where we post a lot of a little bit more humor, a little bit more personal in, insight into things, and the dogs play a major role in our Instagram account there as well. And subscribe to this podcast. It really appreciate it. We’re also we post a lot of stuff on YouTube too, so be sure to check that out. But again any questions? Please give us a call, hit us up, and we’ll do whatever we can to answer it. I can guarantee you that any answer you get will be full of unfiltered opinion and straightforward advice, which is sort of our mantra. So, Jordan, thanks again for your time and, and wanting to do this with us. Really appreciate it. And, we look forward to catching up with you soon.
