David B. Armstrong, CFA [00:00:52] Welcome to the monument Wealth Management. Second quarter review of the markets. Quick aside, Jessica, welcome back to the pod.
Jessica Gibbs, CFP® [00:01:02] Thank you. I’m back. For those of you who don’t know, I had a baby. So that’s why you haven’t heard my voice? In a few episodes. But, I did want to do a really big thank you to my monument teammates who stepped up in Castro said for me while I was away, including Dean, Caetano, who did a great episode talking about instincts and Emily Harper and having Goodwin, who did an episode about retirement planning with Michael Conrad from J.P. Morgan. That was a really great one. So thank you to you guys. And if you’re listening to this, you haven’t heard those episodes yet, go back and check them out. The last two before this one in our. Yeah.
David B. Armstrong, CFA [00:01:39] Somehow Erin and Nate and I were able to pull off some podcasts together without you. But we are very happy to have you back because it’s more fun when you’re here.
Jessica Gibbs, CFP® [00:01:47] So thank you. Thank you. So I do want to kick things off. I know there’s a lot to talk about in the market. And, and I want to start with you. I want to do a high level recap, as we typically do, of what happened in the second quarter. And, you know, the first half of the year in general in the markets.
David B. Armstrong, CFA [00:02:05] Yes. So just high level. There was some there’s some interesting statistics. I, I kind of wanted to focus on, not only for the second quarter, but just the first half of the year. So there were only 14 days in the first half of the year with trading days that had over a plus 1% or more gain. And there were only two this in the S&P, and there were only seven of those days with losses of greater than 1%. So, you know, not not a whole lot of crazy volatility going on. And according to JP morgan’s guide to the market, which we all love, and I know Erin likes to talk about too. But you know, it really is a great, great guide. I was looking through that the other day and the number of stocks in the S&P 500 that and, and the year down 5% or more from averages, are about 151 per year going back to 1994. So I’ll say that backwards. On average, there are 151 stocks in the S&P 500 that will end the year down 5% or more. And that data goes all the way back to 1994. So interestingly, in 2020, there were 163 stocks that met that criteria of down 5%. Right. So kind of in line. And then in 2021. There were 48. And then in 2022, which everybody knows, 2022 is a, you know, a bad year in the market. There were 327.
David B. Armstrong, CFA [00:03:42] Stocks.
David B. Armstrong, CFA [00:03:43] That were down maybe about 5%.
Jessica Gibbs, CFP® [00:03:46] Down 5%, right. Okay.
David B. Armstrong, CFA [00:03:47] Now in 2023 there were 126. Okay. So even in the good years. There’s still a lot of stocks that are down over 5%. So a recent example in 2023, with 126 stocks out of the 500 that were down over 5%, I mean, that’s 25% ish. Of all the stocks in the S&P 500 are down, were down over 5% in a year where the S&P 500 was up around 25%. So it’s just to let people know that, you know, there is still some benefit to some good stocks in some good processes. Because even in an upmarket, you can end up with stocks that are down a lot, which is one of the things that kind of makes our trio, our text harvesting strategy, really kind of interesting. So, but, let’s chat just a little bit longer on the S&P 500 because, you know, it’s it’s that thing that everyone tracks right. Had it every single day. Had the market to the S&P okay or the Dow. But we’re going to talk about the S&P. So the top five contributors in the first half of the year. For the returns for the performance returns in the S&P 500 are Microsoft, Nvidia, Apple, Amazon, and Meta. Basically, Facebook now Meta and Google are really kind of close. And they, you know, they they switch back and forth. But I’m just going to focus on on meta here. So those five stocks account for 60% of the 2024 year to date return on the S&P 500 through the end of the second quarter or the end of the first half. Okay, now the losers and I and you remember these because I’m going to come back to them. The losers were, in other words, the bottom contributors, the ones that, pulled the market down, pulled the overall performance down. Tesla, Intel, Boeing, Lululemon, McDonald’s and Salesforce. Now the S&P 500. Just for some context, because we’re going to talk about returns year to date through the end of the second quarter or the end of the first half. The S&P 500 total return, which includes dividends up 15.3%. Okay, so up 15.3. The S&P 500 just price return. Just looking at the index up down was up 14.5%. So here’s what I’m going to do I’m going to just split it down. Then we’re just going to say the S&P 500 is up 15% year to date okay. Just for general conversation from rounding by comparison. The S&P 500 equal weight, which you can track very easily by just looking at the ETF, RSP. Romeo Sierra Papa was only up 4.1% over the same period of time. So you know, big spread 15% versus 4.1%. And inside the S&P 500. There are 406 companies that have a market cap below 100 billion, which means that 25 companies in the S&P 500 are worth the same as the rest of the entire index combined. I mean, that’s what I’m what I’m getting at here is we’re going to be we’re going to be talking about how the large cap and the mega mega cap stocks are really driving this market. So setting the stage for that kind of conversation. But, you know, there’s it’s important to know what you own within the S&P 500 when you’re looking at a portfolio. So for example, inside the S&P 500 there’s a company called Amcor ticker M. It’s up 80% year to date. And it’s in the industrial sector. And there’s 11 sectors in the S&P 500. And then there’s industry groups. There’s 24 of them. So it is in the industrial sector and the industry is construction and engineering. It’s up 80% year to date. I mean that’s with the S&P 500 up 15. Here’s another one Decker outdoor. The ticker is Deke. It’s up 50% year to date. And it’s in the consumer discretionary sector and in the textiles industry group textile apparel and luxury goods industry group I mean up 50%. So there’s a lot more going out. There’s a lot more going on out there than just Nvidia. Okay. Just so it’s really important for people to know what they’re owning inside their portfolio, because there’s a lot of stocks out there that are doing really, really well. And while this is not a prediction, it this is what’s going on right now in the market is very reminiscent of what I remember back in March of 2000. And so I went back and I looked at the top five market cap stocks. In the S&P 500 back in 2000. And here they are Microsoft. ExxonMobil. Cisco. Walmart. GE. Okay. Of those five, there’s only one that remains in the top five market cap. And that’s Microsoft. So these things change around a lot. And I thought it was really instructive to go back and look at look at 2000. I want to talk about an interesting report that came out from Goldman Sachs at the beginning of 2024 by David Kostin, where he set his year end target for the S&P 500, the year at the 2024 year end target of 5200 for the S&P. And by the way, as of today, the 9th of July 2024, we’re at 5587. So already you know well in excess of what his year at target was at the beginning of the year. Now, a couple of things are really important about some of the things we’re going to talk about here. But it’s it’s earnings that drive share prices. And when prices get get ahead of earnings the probability of disappointment really increases with each earnings report. Right. So if these stocks that these big mega-cap stocks are already expensive on an earnings per share basis, what what’s what’s likely to happen if the gaps shrink. Okay. So in 2023 the actual earnings growth on the top five stocks. Versus the median stocks was 57% growth for the top five and 4% growth for the median for the rest of them. So that’s a gap of 53 points in earnings per share then estimated for 2024. The gap is 31. In 2025, the gap is eight. In 2026, the gap is four, right. So the gap is shrinking and the gap is shrinking. Not because the median earnings per share growth and the other not top five stocks is going up. It’s because the earnings projections for those top five stocks is coming down right. So that’s what’s causing that gap to decrease. So if these stocks are already really expensive on an earnings per share basis, what’s likely to happen as those gaps shrink as expected okay. Of course the gaps could widen but I just I don’t that is more likely than not. So. Now, Goldman came out with a report. A couple weeks ago, where they revised some of their year end estimates for the S&P 500. So here here are the scenarios. They say that the S&P 500 could reach 6300 if the mega caps continue to perform in an exceptional manner. So that is an increase of about 12.75% from where we are right now at 5587 on the S&P 500. They have what they’re calling their catch up scenario, which would be the S&P 500 ending the year at 5900, which would be an increase of 5.6% from today. They have a new baseline forecast of 5600, which is only 23 basis points higher than where we are right now. And they have a recession risk of 4800 on the S&P 500, which would be a decline of about 14.1% from the 5587 where we are today, July 9th. So one of my point is that if they can’t guess it right in the beginning of the year, what good is the prediction now? Right. And I’m not I’m not calling them out. But I’ll answer the question, which is it’s really valuable to see what other people think and why they think it because it provides good context. But it’s absolutely not something that you should build your portfolio around. So two quick thoughts and then I’ll get off my box here at Guy. I can see I can see that you want me to get off this. But here’s the thing. Two thoughts. It doesn’t matter how you look at it. Weekly. Monthly. Quarterly. Year to date. This is a market of large cap and mega cap and everything else. That’s just what’s going on right now. And so my question to listeners is how are you going to feel when those top five stocks. Correct like they did in 2022. So if you go back to that earnings per share, that earnings per share drives growth and that gap is shrinking and the gap isn’t shrinking because the rest of the other, not the top five stocks aren’t increasing their earnings per share growth. It’s the other ones are coming down. So how are you going to fill in those top five stock. Correct. Like they did in 2022. Versus how are you going to feel if you have a really well-diversified portfolio. And the S&P 500 corrects like it did in 2022. So in January of 2022, at the January of 2022, high in the S&P 500 to the October of 2022 low, Microsoft went down 27.3%. Nvidia went down 59.3% over that time. Apple went down 20.6%. Amazon went down 35%. Meta went down 61%. Google went down 30%. And the S&P 500 over that same time is down 22.8%. So. Let me give you an unfiltered answer, okay. To that question of how are you going to feel if you’re heavily concentrated in those five stocks? And we see a bear market correction of 20%, down 20%. You are going to have a panic fed when those are down 40, 50 and 60%. And then you’re going to sell them and you’re going to go to cash and you’re going to freeze there and you’re going to be scared to get back in the market, and you’re going to miss the huge part of the next rally back up. Just like most people missed who were in cash from October through December of 2022. So that’s why unfiltered answer with a little bit of R-rated language.
Jessica Gibbs, CFP® [00:14:37] But I was going to say, I believe that panic fit is a CFA, investment term. Correct?
David B. Armstrong, CFA [00:14:43] Well, well, I think it I don’t know if it’s in the modern curriculum, but it was definitely in mind, my curriculum and, and I can assure you I got that answer correct. So. But anyway, by the way, remember when I mentioned back at the beginning of this, the top and bottom contributors to the S&P 500 for the first half of 2024? Well, let’s review them for all of 2022. Just for some context, those top five stocks that contributed the most to the performance of the S&P 500 in 2022, which was a crappy year. Here they were Exxon Mobil, Chevron, Merck, Lilly, and ConocoPhillips. You know what the bottom five contributors were the ones that pulled the most performance down in the S&P 500 for 2022. Tell me if you recognize these names. Apple, Amazon, Microsoft, Google and Tesla. Okay. So just remember that earnings drive share prices. And when prices get ahead of earnings the probability of disappointment increases with each new earnings report. And you need to start thinking about how are you going to feel if there is. Disappointment in earnings or a bear market correction or anything like that, and you are heavily concentrated in those stocks. So that’s the end of my rant ended. Rant over.
Jessica Gibbs, CFP® [00:16:04] Lots of good info there. Dave. Anthony, I do want to get you guys into this conversation. And just did anything stand out to you guys? Or put another way, if you have a fun fact or a stat from, the second quarter or even the first half of year, I’d love to hear those two.
Erin Hay, CFA, CMT [00:16:21] Yeah, I’ve got some stuff to point out. I want to go outside the US for a second, but before we do that, I did want to come back to the equal weighted S&P. Dave, you pointed out how through the first half of the year, you basically got about 10 or 11 percentage points of underperformance for the equal weight S&P versus market cap weight S&P. And then you so eloquently went through the case during 2022. What was going on when this year’s top contributors were at the bottom? Well, just looking at full year 2022, the S&P ended the year down 18%. At some points, it was down closer to 2,530%. You actually got really good relative outperformance from equal weight S&P during that year. It actually ended down only about 11% or so. I know you can’t necessarily eat relative underperformance, but that is a notable statistic right there. So and going back to full history of cap weight S&P versus equal weight S&P up until very recently, the long term track record is actually favored for outperformance. equal weighted S&P. So just something to keep in mind. These regimes come and go and they can last a lot longer than people appreciate. And that’s actually when people start making stupid decisions. So if you already have an existing plan or process don’t deviate from it just because you get, you know, the inkling to do it because you read an article or someone you know mentioned what they’re doing with their portfolio. I did want, though, to talk a couple of things outside the US, and I like pulling statistics and graphics from the J.P. Morgan Guide to the markets. We’ve done some podcasts with with various experts over there, and they put out some really good content. But I want to point out so through the second quarter and the US and this is measured by the MSCI, like the inclusive MSCI USA index, it’s up 15% MSCI EFA which is developed international. So think of it as S&P 500 type stocks. But internationally it’s up only 5.8%. So right now as we sit through the second quarter we’re currently just over a year. Into a cycle of U.S. equity outperformance. Now I sit there and I I’m thinking this. I’m thinking, wait a minute. We’re only a year into U.S. outperformance and only about 20%. That seems like it’s way longer or way more than that. But you actually go back and look at the data and talking about that same time frame day that you spent so much time talking about here. Just prior to that, going through 2022, we actually had just over a year a very small cycle of international or ether outperformance to the tune of only about 8%. But international stocks did, in fact work when US stocks weren’t working. So we looked at some of the the information that JP morgan’s put out here. And I just think this is an interesting stat. So if you go back to 1970, which is a pretty lengthy data series, we’ve actually had six periods of international outperformance with the time frame through these windows, these cycles ranging anywhere from 1.3 years to just over seven years. So the longest period was in the early 2000, at just over seven years. The strongest period was in the mid to late 80s when the outperformance versus the U.S. so not just the S&P, but US stocks in general was 300%, which is pretty eye opening. And if you go back here to the strongest and longest time period for U.S. outperformance versus international stocks, it was that 14 year period ending in 2021 when we got the major markets up here in the U.S., and that was just over 277%. So I sit here and I think we then just so spoiled, you know, not only by, the performance of large cap and mega-cap stocks here more recently, but we’ve been really spoiled by domestic outperformance versus the rest of the world. I think people forget that there are other places in the world to invest. And I guess this is just sort of a gentle, gentle, friendly reminder that, you know, if and when those trends do end up reversing and we get some periods of outperformance, I wouldn’t shock me. It’s not going to surprise me if we’re sitting here on one of these podcasts talking about a quarterly update or one of our model updates, where we’re potentially talking about something outside of the U.S. so that’s just our way of saying, hey, if a trend reestablishes itself, we’ll find an appropriate way to participate.
Jessica Gibbs, CFP® [00:20:54] And how about you?
Nate Tonsager, CIPM [00:20:56] I mean, they’ve laid out a lot of great stats, and he actually stole my main one. So I’ll piggyback and expand on it. You know, I think, oh, dude.
Erin Hay, CFA, CMT [00:21:02] I’m sorry.
Nate Tonsager, CIPM [00:21:03] No, it’s all right. That’s part of the unscripted ness.
Erin Hay, CFA, CMT [00:21:05] Right? Well, that’s the thing. I get to go. I get to go first, right? You know, you do.
Nate Tonsager, CIPM [00:21:10] Dave kind of laid out that through the first half of the year, we’ve seen, let’s call it 21 total extreme days in the S&P 500. And that’s characterized by a move up or down of 1%. So 21 days in the first half of the year. Well, if you go all the way back to 1987, the average is 33. So the data really does support that. While it has been a strong market, there really hasn’t been a lot of volatility to get there. And, you know, Erin said we’re spoiled by the US outperformance are also spoiled a little bit with the low volatility. And I think a lot of investors forget that volatility is part of investing and kind of the price of admission to the long term nature that we really want to drive in portfolios. What’s interesting, I guess the second piece of it that I want to expound on is while we might be due for some increased volatility, I don’t think we necessarily have to catch up to average. And the reason I say that is when you look at that same data series. So going back 37 years, there’s only been 12 times in the past 37 years where the second half has seen more extreme volatility or more plus or -1% days than the first half. And I can already hear some people tell me, well, there’s an election coming. Volatility is going to come. Well of those 12 instances, only two occurred in an election year over the past 37. So really, if what you’re seeing kind of the trend that’s developed in the first half, the data kind of shows that we may be in for a lower volatility than average historically, but that doesn’t mean we should get complacent. Let’s say I think it gets back to kind of what we always continually talk about is make sure you have a plan in place that’s systematic and helps you remove emotion. When we get to those volatile times, because they are going to come, whether you like it or not. It’s just again, the price of investing.
Jessica Gibbs, CFP® [00:22:48] Okay, so I want to circle back to, talking about tech because I think people know Nvidia and tech have been strong this year. You know, Dave, you highlighted this when you talked about, the top five contributors to S&P 500 return unity. But other parts of the market have not been as strong. So what do you guys think about market breadth right now? Sorry. Breadth is a very hard word to say, but I think you know what I mean.
Erin Hay, CFA, CMT [00:23:17] I stumble on on that word all the time. So I thank you for for saying the word. And I’m going to avoid it because this is a topic that it seems like we discuss in every update, in every podcast, and my limited Twitter usage, it seems to be filled. The timeline seems to be filled with people discussing what market breadth is doing. So we’re not the only ones, you know, sitting here thinking about this. And there’s a million different ways to slice and dice how you want to look at market breadth. I’d say right now I’ll give you a good stat on market breadth. So the NYSE New York Stock Exchange, like their composite advanced decline metrics, are basically looks at a measure of the percentage of stocks that are advancing versus declining. So that metric is currently at just over 52 or a 50%, 52% to be exact. So that’s good because it bottomed out at around 40% in April and it’s trending up. I can give you a bad metric here for breadth. If you look at the percentage of S&P 500 stocks above their 50 day moving average, it bottomed out at 30% in April, is at 40%. But it’s actually trending down now. And then you can look at another way of looking at it. The percentage of stocks up above the 200 day moving average, that’s at 64%. It’s actually below the April reading. Remember we hit a market low in April. It’s actually below the April reading at 66%. So I said the bottom line when you’re looking at breadth is there’s no singular or magic indicator here. I can pretty much paint you any picture of breadth that I want to. Just give me enough time, give me enough data series and all. I’ll find whatever narrative you want me to craft. Let’s just not lose the forest for the trees here. I think the the headline must not bury the lead here. The S&P 500. Which is what everyone looks at. And let’s be honest, like this is the 600 pound gorilla in the room continues to make new all time highs. It’s above its major moving averages. Oh, by the way, those moving averages are pointing up and we’re making higher highs on another pretty important momentum indicator called the RSI which looks at shorter term momentum. So I look at that and I see I yeah I get it that it’s sort of a narrow market. However you want to slice and dice it if you’re looking at moving averages and other participation metrics. But from what I’ve, I’ve seen in my eye, it’s over ten years now. So it’s not completely it’s not a small sample set, but stocks tend to do what people least expect. And we aren’t the only ones shaking our fists at participation in a narrow market. So that kind of looks me or leads me to look at sentiment. And this is more of an art than a science there. There are some quantitative measures of sentiment out there. You’ve got the I, I investor sentiment index or there’s many of these indices out there, but when I see everyone shaking their fists at participation in breadth, I look at other headlines and investor behaviors that would otherwise lead me to think, hey, is this an overheated market and are we in for trouble? And I just don’t see a tremendous amount of anecdotal evidence that suggests we’re in some sort of a blow off top that we’re due for a major correction. I just don’t see it right now.
Nate Tonsager, CIPM [00:26:41] Yeah. I mean, I’m kind of the same way when I look at the market. I think we all agree it’s a narrow market of have and have nots. I mean, I think they’ve laid it out greatly at the start. There’s some stocks in various sectors and industries outside of tech that have been doing well. Other pieces have lagged in the market. But I think Erin hit on. The key point there is while the breadth might be narrow, there is some kind of healthy data or healthy underlying actions going on in the market. And the one that really jumped out to me happened in the last two weeks of the quarter. So I think it was June 17th through the 30th, you know, so to kind of set up the picture here is year to date going up until June 14th. So middle of June, tech was up over 18% as a sector 18.5, while the energy sector up 5.9%, and real estate was actually -3%. Well around quarterly. And it’s it’s kind of hard to avoid just the natural rebalancing cadence that a lot of institutional, major hedge fund pension investors seem to always do. So what I’m looking there for is in the last two weeks, what kind of happened with the sectors that were leading and what were happening with the sectors that were lagging? Well from 617 to the end of the quarter or the last two weeks, their tech was actually down 1.9%, so -1.9% after being up 18 leading up into those two weeks. Energy up 4.1% and real estate up 1.2. So really what it kind of appeared like and look like is very a lot of prudent risk management. Tech had done really well. People’s portfolios were probably overweight towards those really strong winners and underweight towards those relative losers. So what is a natural kind of healthy thing to look for? General rebalancing, selling some of those winners and putting and pushing those funds into the relative laggards. You know, if we were in an overheated market, you wouldn’t be seeing people kind of, you know, making those little rotations. And it was only two weeks of data. I’ll be very interested to see if these trends kind of continue to see. Was this just quarterly rebalancing over the past two weeks, or is this maybe the broadening out of the market that so many people have been talking about? Because again, we do want to see a broad market with all sectors doing well. It normally doesn’t happen that way, which is when you see those rotations and those movements, but really just healthy little actions like those two weeks where you see people taking prudent risk management portfolio actions. Gives me just a little bit of confidence, helped me sleep a little bit better, that the market is very aware of what is going on and what is a possible, maybe risk of a very narrow, focused market.
Jessica Gibbs, CFP® [00:29:16] Moving on from tech now, I want to talk politics, you know, which is always fun.
Erin Hay, CFA, CMT [00:29:20] Oh hang on, say in service at the door. I got to go.
Erin Hay, CFA, CMT [00:29:24] Yeah.
Jessica Gibbs, CFP® [00:29:26] That was a joke. Yes, it was a joke. We’re listening to this, I think. Yeah Nate said it earlier. It’s impossible to miss that we’re having a presidential election in November. Parties are rolling out their official platforms. So question for all of you is how should investors be thinking about investment decisions in light of the election?
Erin Hay, CFA, CMT [00:29:50] I think they should think about it exactly the way they were thinking about a year ago, two years ago, three years ago, and four years ago. Which is I don’t think that anybody should ever be adjusting their portfolio strategy or their portfolio allocations based on what may or may not or will or will not happen in an election.
Nate Tonsager, CIPM [00:30:10] Yeah. I mean, not only if you’re going to change your allocation right now, you’re predicting, first off, who’s going to be the candidate who’s going to win the election. But I think then most importantly, what a lot of people forget is then you have to predict how the market’s going to react to the election results. And I think a lot of people think it is very simple, straightforward, when really it’s a lot more nuanced than that, you know. So let’s play a game. You know, for example, if a Republican wins the House, it’s easy for people to say that energy sector in the financial sector will be relative winners thanks to lower possible regulation, lower taxes, all the other pro-business kind of narrative that comes historically with those kind of candidates. Well, if you look at the data and especially going back, let’s say, to let’s look at every presidential election going back to 1976. Well, if you look at that, in those presidential years, the energy sector has outperformed the S&P 508 times, going all the way through each of those presidential election year. So just looking at the individual election years, well, they weren’t all Republican. Three out of those eight times, or 37.5% of the times happened when a Democrat was elected in that presidential year. Looking at that same data series, but now for the financial sector that’s outperforming the S&P 507 times in election years. And three of those, again, were for the Democrat, which is 43% of the time. So even if you could predict the election outcome, you would still have to predict how the market’s going to react. And it’s not just always as simple, I think, as looking at, you know, the generic sectors. Again I’ll say one last one. But say if a Democrat wins the election, you know, it could be really easy to say that health care sector would be a relative winner in that situation, thanks to maybe increased government spending in the space, or just even the general stance of the Democratic Party of health care being the right, not a privilege of the American people. So let’s look back at that same data series I’ve been referencing. So every presidential election year, going back to 1976. Well, the healthcare sector has underperformed the S&P 509 times in election years. And four of those years was when a Democrat was elected. So 44% of the time, health care had lagged the S&P 500 when a Democrat had won. You know, there’s three examples right there where it’s not so much cut and dry that if one party wins, this sector is going to win. So if you can’t predict that with certainty, I think what’s more important is trying to see kind of where the trends evolve. And I think that’s why monument, we like kind of the trend-based investing. It’s not the perfect solution, but what it allows us to do is regardless of who wins and how the market reacts, to identify the market trends and latch on to them. And that’s really what we’re trying to encourage clients to do, is don’t make predictions around the election. But that doesn’t necessarily mean you won’t have to make changes to your allocations or holdings based on what trends unfold and how the market reacts. And again, over the long term, it’s more about time in the market and timing the market. So it’s staying invested in identifying those trends around the election versus trying to predict them. For me.
Erin Hay, CFA, CMT [00:33:13] This is going to be my my fourth presidential election cycle, since having started working in this industry and this next, it’s kind of thought it’s not completely original, and I don’t know exactly where I got it or where it came from, but it’s it’s interesting nonetheless. It’s a good thought experiment. And I, I routinely tell, tell people who ask me about the election, whether it’s presidential or midterms or anything that’s got a political bent to it. And I asked them to do this thought experiment. I say if you had complete clairvoyance about the outcome of every single election this upcoming November, like how would you invest your money? Like, just think about it like you, you had the inside track on not just the inside track, but you had the genie. You’re the genie here. Like you know exactly how everything is going to pan out. Like, how would you invest your money? And I think the end of that thought experiment is it ends up being impossible. This isn’t to negate anyone’s thoughts or feelings around the election. You need to acknowledge that, you know, people do feel antsy about, these major, major elections, okay? Because, you know, trends often can’t get started or, or break down in the aftermath of an election. I mean, there are potentially some things to do around an election. Let’s just say you come into, you know, a large sum of cash, you have a liquidity event. Like there are things you can do if you don’t have an existing portfolio, like what’s my what are my next steps around the election? Do I want to start investing all at once or I can, you know, so, so exercises in the realm of, you know, dollar cost averaging or lump sum investing. Like it just depends on the investor. So there are some potential things you can do, but if you have an existing portfolio, I do. I go back to that thought experiment and hit it on the head, which is, you know, we don’t know how the elections are going to pan out. We’re not going to sit here, pretend to be, you know, political experts or we’re going to try and, you know, handicap, various election results. But what we are going to do is we’re going to continue, at least in our individual stock models, we’re going to continue to find stocks at the intersection of trend, as Nate mentioned, profitability and valuation. And you know, that’s not going to change or we’re going to do that in election years and non-election years and presidential cycles and midterm cycles just all of the time. So yeah there’s not a whole lot to really be doing to change portfolios at this point.
Jessica Gibbs, CFP® [00:35:41] That’s great. So let’s wrap up with a speed round. So for the remainder of the year, what are you most optimistic about and what are you most pessimistic about? And I don’t mean necessarily just capital markets wise, though. That’s interesting enough. So optimistic and pessimistic about when it comes to capital markets, the economy, pop culture, sports, your personal life, whatever you want to share, go ahead.
Erin Hay, CFA, CMT [00:36:11] Okay, so I’ll start this out by just saying, like July is usually a really strong month for the year. So I’m optimistic about the rest of July just based on statistics. Okay. But so there’s that. I am optimistic on my beginning of the 2024 year predictions that we made of the S&P 500 being up at least 12% by year-end. So I’m optimistic I’m going to be right on that prediction. Okay. I’m also optimistic that no one took my predictions seriously and created a portfolio adjustment around them either, because anyway, I had some I had some crazy. But this is where I get pessimistic, right? So I’m pessimistic that my beginning of the year 2024 inflation deflation prediction predictions. I’m likely going to get crushed on those predictions. So, my and my prediction of the first interest rate cut being in March and with fed funds being in the three ish range by year end, those are also going to be crushed. So is my prediction that the performance of the equal weight S&P 500 will kind of be in line with the S&P 500, market cap weighted index? Okay, so that’s getting crushed. And my prediction that the, economy would boost Biden’s chances of winning, the chance of that being right seem to be waning. But for reasons having absolutely nothing to do with the economy, actually. But still, I’m going to get crushed on that one. I’m also really pessimistic on, my future interest in college football going forward. Just this whole thing with paying the players and everything. I just it’s, it’s it’s already destroyed my interest in the game. And it’s going to be really interesting to see what this season is like for football and going forward. But, I’m just pessimistic about it being a personal interest.
Nate Tonsager, CIPM [00:38:00] Just to have one. That’s not my pessimism, but they also kind of got rid of conferences like I’m a Big Ten person. I came up and now we have Oregon, UCLA. I don’t know, the historic is you’re losing relevance to me. So I’m right there with you, Dave.
Erin Hay, CFA, CMT [00:38:11] Well, Erin, welcome to the SEC, by the way. July 1st, you know, you’re finally in the big leagues here with Oklahoma.
Erin Hay, CFA, CMT [00:38:18] But welcome to Norman, Oklahoma. And I didn’t I didn’t I didn’t have this. But I my most optimistic prediction is I think Oklahoma Sooners. My Oklahoma Sooners are going to crush Dave South Carolina Gamecocks on October 19th. So circle your calendars.
Erin Hay, CFA, CMT [00:38:33] You mean you’re going to crush us in the actual game or you’re going to crush us? And how much you’re paying your players to play there versus how much we pay our players to play there?
Erin Hay, CFA, CMT [00:38:40] All the all of the above.
Jessica Gibbs, CFP® [00:38:41] Okay. Is this our new sandwich?
Erin Hay, CFA, CMT [00:38:43] Bet we could be. No way. There’s no way I’m taking that bet. No way I’m taking that bet.
Erin Hay, CFA, CMT [00:38:50] Dave might need odds on that. Going over to capital markets, I’d say I’m, most optimistic. And, Dave and I, we actually. We talked about this a little bit before we hopped on the podcast, and so I wanna be sure to, to frame this appropriately. I’m most optimistic about the fact that small caps. So smaller companies by market capitalization haven’t completely diverged. Or I should probably frame it this way, haven’t haven’t gone negative for the year and aren’t necessarily exhibiting a strong downtrend. They are absolutely getting crushed, relatively relative speaking to large caps. But the fact that small caps haven’t gone negative year to date makes me more optimistic about the prospects of our individual stock models, which tend to be skewed towards the lower market cap. Part of the spectrum, I’m not going to go as far as calling our model small cap, but there’s definitely a small and mid-cap bias that permeates both the monument dividend and the monument growth models. By the way, these models performed very well even in the absence of some of these trillion dollar companies Microsoft, Nvidia and Apple. So that’s what I’m optimistic on. On pessimistic, I’m going to I need to frame this a little too. I’m not necessarily pessimistic, but I’m slightly less optimistic on a recovery in the relative strength race between cap weighted S&P and equal weighted S&P, because I continue to look at the large cap growth space. And if you’re keeping score out there and you want to check out an ETF that does this is the ticker. That’s what I use when I look at this in data. But when I look at that ETF through the lens of a of an RG or a relative or relative rotation graph, excuse me. The the trends that you see there traversing through the various quadrants of improving, outperforming, lagging and I’m sorry, weakening and lagging. When you look at the style box. So you’ve got, you know, you’re large mid small and you’ve got value core and growth. Basically everything that isn’t large cap growth is residing in the lagging quadrant. When you look at it via the S&P 500. And that kicker or large cap growth that continues to traverse up into that outperforming quadrant, and quite frankly, based off the the behaviors and empirically how we’ve how people have looked at these RGS going through the quadrants, it doesn’t show any signs of slowing down. So I’m less optimistic, but not I’m not going to completely abandon the prediction that RSP is going to end up outperforming SPI by the end of the year, but I am slightly less optimistic on that.
Jessica Gibbs, CFP® [00:41:32] Great. And Nate.
Nate Tonsager, CIPM [00:41:34] Well, I’ll say, Mike, we’ll end on a happy notes. I’ll start with my pessimistic.
Jessica Gibbs, CFP® [00:41:37] Yeah.
Nate Tonsager, CIPM [00:41:38] So pessimistic a little bit about the job market. Now that doesn’t mean that I think people are going to lose their jobs. But it definitely I do think it’s getting a lot more difficult to get a job. I think during Covid we saw a lot of people who were serial job quitters, and I think that sounds really poor of a really what they were doing is essentially it was really easy to find a new role. People needed workers, and they were bouncing around for pay raises that contributed significantly to inflation. Well, in the most recent employment report that came out on July 5th. So thank you, fed for giving us data on what could have been a holiday. But it wasn’t. You saw some of the not cracks but a slowdown in the job market that, while healthy, does make me kind of a little bit more pessimistic about what the future could hold in that space specifically. So when you look at the data, you know, unemployment rose to 4.1%, but that’s thanks to an increase in the participation rate. So people either who are currently employed or who are actively looking for jobs. But what really jumped out to me is that long term unemployment or people that have been unemployed 27 weeks or longer for the Bureau of Labor Statistics definition is now up to 22.2% versus 18.8 a year ago. So not only did the unemployment rate rise, but there’s also now a lengthening in that unemployment cycle. It’s taking people a little bit longer to find those new jobs. Now people are really hanging their hats, I think on the overall jobs number, which did come in above expectations for June, and it was 206,000 jobs in the month of June. Well, if you look at it, 119,000 of those, or 58%, came from two places government employment and health care. If you add in social assistance, which includes some, you know, family programs, other kind of state funded, I’ll call quote unquote, that percent jumped up to 74. And you did see declines in professional and business services. So while the economy might be creating jobs, it’s creating jobs in very specific parts of the market. It’s not broad based job growth that you saw. And now take all that. And we saw downward revisions to both the May and April report of 111,000. So over half the jobs we created in June essentially got revised out of previous data. So while you’re not seeing a collapse in the job market, it’s definitely slowing down and will seems to become more difficult. For people to switch jobs or find a new job if they are laid off. Enough pessimism. Let’s move to the optimist. So what am I optimistic about? Well, everyone. Should I hopefully cheer start clapping for me? Because I do think we’ve seen the last of the fed rate hikes. Why I say that is the fed in the markets seem aligned on this point. The market is telling the fed pretty openly that, hey, we don’t want rate hikes. And the fed whose data dependent, I think has enough economic data between inflation and of course, the job market to say, hey, we’re getting what we wanted. A soft landing was always meant a slowing economy and a slowing job market. We’re seeing that a soft landing was a slowdown in both, but not a collapse. So so far so good there, which is giving the fed, I think, enough breathing room to say, hey, we don’t need to hike rates. We can start looking at cuts right now. Even in Chairman Powell testimony this morning of July 9th, he mentioned that the rate hike is not the likely next movement going into more fed speak. If you look at the Chicago Fed chief who spoke overseas at a central banking event, and I’m going to read it directly because I think it’s a powerful quote. If you hold rates where they are, while inflation comes down over time, you are tightening and the decision to do and that should be by decision, not by default, mean the fed understands that it can be tight while continuing to hold rates. So even if inflation does start to creep up just a little bit, or we miss expectations by a little bit, the narrative at the fed is, is by holding rates where they are, they are technically tightening along this current path. It’s going to take what it seems like a significant re acceleration in inflation to get them to even consider rate hikes. So thankfully I think we’ve seen kind of the market adjust to the narrative of hey rate hikes aren’t going to happen. And they’ve even priced out some rate cuts during this year. While we’ve seen strength sort of the markets rallied 15% in the first half, took rate cuts out of the market. But still, because I think the key point there is they’re not seeing any signs of future rate hikes. So again, I think that’s a big thing that we as investors, as the economy wanted to see is stability and rates. Maybe rates move down a little bit from here, but at least it doesn’t seem like they’re going to be moving up much more.
Jessica Gibbs, CFP® [00:46:18] Great. Well, I’ll end on my optimistic, I’m optimistic that everyone who’s listening to this has cash on hand for any expenses they have coming up in the next year or so. And I don’t just mean this in terms of, you know, if you’ve got a big home project or coming up, or a big purchase or you’re retired and you’ve got living expenses, I also want to kind of put in the nugget of your head of like April 2025, taxes are due. You know, we’ve been talking this whole episode about how well the market’s been doing. Take a look at your realized gains here today. Get a check in on that number and talk to your accountant. Potentially you may have, really large gains and you need to plan for potentially a large tax bill, come April, on those gains. It’s not necessarily a bad thing. I think people always hear that tax bill and they think it’s a bad thing. You know, it’s a good thing your your investments have returned. But just be thinking ahead to, what that tax bill may be and carve out that money. Now, you know, before any sort of potential market volatility, so that you feel comfortable writing that check come April, as much as people can feel comfortable, I guess I should say. But so that’s mine. I guess I’m pessimistic about my ability to get a good night’s sleep any time soon. That’s my problem. So. Okay, well, thank you, everyone. For listening to this. We really encourage you to check out our new no nonsense Monument Unfiltered newsletter. So just like this podcast, it’s an escape from the usual fluff and blah blah blah that you get from most fourth advisors. So we’ll have a link to where you can sign up for it in our show notes. But you can also find it by going to Monument Wealth management.com and hovering over the resources tab at the top. So Dave, Erin and Nate thank you as always. You have the time. Thanks.
