Aptus Quarterly Market Update: Q3 2026

Full Transcript

Derek

Hello all. I don’t think we could be any quicker after the end of the quarter than we are. Basically as the S&P rings its quarter closed. But thanks for coming on. We’ve got JD Gardner here, founder of the firm, chief investment officer. We’ve got Dave Wagner, who’s head of equities. John Luke Tyner’s a little camera shy with good reason, but he is our head of fixed income. And it’s actually, it’s a technology issue for him, but he’s had a fun week.

John Luke

Yeah, thanks Derek. Welcomed my first daughter into this world. So it’s been an eventful about two days on the dot.

Derek

And here you are.

JD

Yep.

Derek

Congrats on that. That’s big stuff.

JD

We’ll allow you to be off camera for the call, JL.

Derek

Yeah, big celebration across Aptus for that. I mean, obviously there’s a lot to talk about between rates and AI and all the rest of this stuff. I’ll do the quick disclosures and let the smart guys run with it. The opinions expressed during this call are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and the techniques based on changing market dynamics or client needs. More information about Aptus’ investment advisory services can be found in its form ADV Part 2, which is available upon request.

Dave and team as usual are just on the ball with getting this quarterly market update together. Probably a couple data points to go in, but it’s ready to roll, looks great. You’ll get a sneak preview by being here today. So I’ll let you guys fire away.

JD

Thanks, D Hern. I’ll kick us off, Dave and JL, then I’ll pass it to y’all. JL, you stole my thunder. I was going to welcome Lola now, but congrats again on that. That’s huge, huge deal. Give Morgan a hug for us. I’m sure you’ve got a delivery headed your way, so be on the lookout for that.

But the other thing I wanted to mention-

JD

The other thing to mention before we start is we appreciate everybody being here. I think this call will be fun to update things. There’s a lot of stuff happening in the market. I think rates are up from what I’m reading. So we’ll talk a lot about that. But as you can see, the Aptus logo has a little different look to it. This is the first that we’ve exposed the new look outside of the company walls. We have a ton of updates that are going to come to you here shortly. We have been working, there’s new faces, there’s new looks, there’s new services, there’s new abilities, there’s new all types of stuff that we’re rolling out.

As you all know, we feel like the products that we have, the suite that we have, the services that we have, it’s all in an effort to impact asset allocation to improve compounded returns. And we feel like the services in the middle of all that is what really drives our relationships, which we’re incredibly grateful for. And we feel like what we are doing in terms of new people, new services, new tools, new all of that is only going to amplify that. And there is meaning behind the new A in Aptus, and we can’t wait to talk… We won’t bore you with some of those details today, but I think the way that we view options and volatility as an asset class is going to be directly tied into the logo. So we’re not quite ready to talk more about that because we’re trying to get a few things pushed through the channels we have to push everything through. So wanted to mention that.

So, thank you again for the time. Thanks for being here. We’re trying not to keep you very long. We’ll try to be 30 minutes and then we’ll answer questions as they come in. But Dave, take it over.

Dave

Yeah, thanks JD. We’re absolutely jacked for this entire rebrand here at Aptus. The cool thing is we’re still going to be our exact sales. We’re still going to bring the Aptus personality. We’re just going to look even cooler. Because everyone knows one of our main ethoses here is that we want to take our work very seriously, but not ourselves serious. And I think that type of persona really comes out with whether it’s John Luke talking about markets on the fixed income side, myself on the equity side, and obviously I get hyped whenever JD talks, and he’s going to keep that same exact personality really moving forward.

But for the first time in three years, this market was not about equities. It was all about fixed income. So I’m going to be quick here, but JD hit the nail on the head right there. You have a 10-year treasury trading at 5.3%, the highest level since 2007. But while rates went up a ton, stocks really didn’t care whatsoever. I mean, as of end of day yesterday, the market was up just under 3%. But if you do look underneath the hood, rates did matter in some context within certain corners of the market.

If you look at small caps, small caps were down about 7%. The more rate sensitive areas of this market like utilities, real estate, they were down a crap ton in financial technical terms. And obviously, what John Luke’s going to talk about in regards to bonds, bonds were down over 3%. Investment grade was down almost about 5%. So the market was all about rates, but stocks didn’t care because while rates matter, so do profits. I mean, think of what our messaging has been really this entire year in regards to equities. When times get crazy, when times get volatile, when things don’t make sense in this market, the best thing that someone can do is to get back to the basics of this market, and that’s earnings growth and profitability.

I mean, you have 2026 earnings growth expected for the S&P 500 to be at 23% and profitability on its own is really off the charts. And so, I think that has definitely subsidized a lot of the performance in regards to the headwinds that we’ve seen in this market, whether it’s the conflict with Iran, what’s going on with oil prices, and obviously rates. And that’s why it shouldn’t surprise people that returns so far this year, it’s been all about earnings because we all know the simple message we have here at Aptus on what drives total returns. It’s going to be three things. It’s going to be yield, growth and valuation expansion or contraction. And earnings growth has counted for about 23% of returns this year, meaning that plug figure of valuation, it’s actually started to trade more at a discount relative to where we started this year.

The market started this year about 23 times forward earnings. We’re down to about 19 times right now. Well, I think that the scapegoat excuse of why you’ve seen valuation come down, it could be all those aforementioned things like Iran, the Fed, rates, oil, whatever it is. I actually don’t think that’s the case at all that has driven multiples down. I think that the investors need to see the forest through the trees on that. Heading into this year, the market was really pricing in an index as measured by the S&P 500 to be very free cash flow generative, or at least that some of the CapEx spending from the hyperscalers would start to slow down. And that definitely wasn’t this case with the hyperscalers now expecting CapEx spend about 760 billion dollars this year. So that’s just the market re-rating that we’re more of an asset heavier indices than what we were just a year or two ago, and that may continue for some time moving forward.

But earnings, they’ve been great. I would say that earnings tend to presage actually returns from a multiple standpoint. And I think that actually gives me a lot of reason to be optimistic in this market right now. Because if we do get some return on profitability from this CapEx spend, I think you can continue to see earnings go higher, but also I think you can see valuation go higher. But the biggest risk I think out there in the market that I’m hearing from people right now is like, “What if earnings come down, David?” Because we know that CapEx, one man’s CapEx is another man’s revenue. And if CapEx slows, we’re going to see earnings come down and the market is going to be quite volatile.

Well, I think it could be volatile from that type of situation. I think given my aforementioned comments on valuation, if CapEx spend comes down, well, that probably likely goes straight to free cash flow and you can have your valuation go higher, but that doesn’t mean that we haven’t seen a lot of volatility underneath the hood. Right now, the average stock in the S&P 500 is about 20% off. It’s peak to trough right now, so it’s having a drawdown of about 20%.

Yet there’s been a lot of resiliency at the market level in the face of rates given the hyperscalers. The hyperscalers kicked butt this quarter. I think a lot of the AI area kicked butt this quarter. I think that helped to really insulate the indices return on the top level. So while things may seem pretty bearish on this mark right now, I think there’s a lot of reasons to be optimistic, but definitely one of the more reasons to be bearish or skeptical right now is on the fixed income side. So with that, I’ll pass it off to you, John Luke.

John Luke

Perfect. Yeah, thanks, Dave. And again, apologies for the camera debacle. No, I think it’s been one of those quarters that you’ll remember. AI tells me that it was the fourth worst quarter for the ag since 2003 with the other three of the top four coming in 2022. I think it was the ninth worst or twelfth worst for TLT since 2002. So no surprise there that really bonds and just treasuries in general have traded more like the risk assets than stocks. And I think that can be clearly seen by the move index, which is basically just the VIX for treasury bonds, which over the past two weeks is up about 40% and that’s while the VIX is flat.

So stocks have been pretty resilient and not too much response to much higher yields. But when you pull back a couple pieces of the curtain, 2010 through 2020 was an anomaly of ZIRP policy and artificially low rates, and many market participants haven’t really experienced rising interest rate environments. And so I think us getting used to, or the market getting used to that environment has been spoiling to a market pricing money where it should be priced. And frankly, that’s what interest rates are, the price of money.

And when you think about an economy that nominal GDP is growing over 8% as of some of the most recent data, there’s room to consider that the 10-year treasury should yield about what the nominal economy is growing at because you’re foregoing participating in that nominal growth through equities. And so, it’s really just a righting of the ship. And we’ve seen that since the Iran conflict started at the end of February, but I don’t think that the spike in oil prices is the only thing that we can contribute to the moving rates that we’ve seen.

But just a few numbers, the two year’s up 151 basis points since February 27th, the five year’s up 159, and the 10 year’s up 135. And then obviously the 10 year’s at the highest rate we’ve seen since ’07, the 30 year at the highest rate since ’02, I believe. So it’s been a parallel move higher in rates. And the reaction function is really geared towards nominal GDP growth, which I think is healthy and that’s how things should move.

But if you look at the key ingredients, the economy has remained incredibly strong. Consumer and CapEx spending has continued to do a lot of heavy lifting. Corporate profits, like Dave said, have been very resilient, not just at the S&P level, but also even looking at private businesses as well. And of course, inflation’s been sticky. But I think it’s a different backdrop than 2022, even though maybe the result was kind of familiar.

But when you think about what drives interest rates, and we’ve tried to put a number of different explanations out, but it really comes down to these three things, growth expectations. So I think about that as where is the Fed’s policy rate? Where’s the neutral rate? And obviously, that’s moved way higher. If you think about, as I spouted off the number of basis points higher, 150 plus basis points higher of the front end of the yield curve, really all of that is because growth expectations for the economy are high, much higher than they have been and inflecting higher. So in my opinion, even without the Iran conflict, I think we would be running into some similar issues.

But what’s been the key difference in this environment versus maybe others, especially coming out of COVID, is the market hasn’t expected inflation, or better said, inflation break-evens, what the market is assessing inflation to be in the future have been very flat. So you’re not seeing rates up because markets think that inflation’s going to run away.

And then I think some of it has come from term premiums, which is a number of things, but the yield curve needs to be steep, so that’s part of it. You need to be compensated for going longer duration. But the other key piece is, we’re not making any dents in the fiscal issues. And I think we’ll have a few more comments on that with some of the frequently asked questions, as Dave has labeled Jolene’s, to go in with our Dolly Parton’s quarterly theme.

But the question from here I think is, is this the start of a new Fed hiking cycle or is this more of just a policy readjustment? If you remember last year, we did three rate cuts last fall for a total of 75 basis points. And I think that as the market continues to look through oil supply issues, we’re getting a lot of updated data on that front. But this in my mind is more of just a policy readjustment to a strong economy. It’s not a runaway of the Fed losing control, the Treasury losing control, et cetera.

And when you think about the math of bonds, to reiterate, this isn’t 2022. The starting point for yields… I’ll start on this right graphic because I think it’s a little bit more fun to talk about. But we’ve seen a huge shift in bearishness of people with bonds. Obviously we’ve been bearish on bonds for a long time, basically the inception of Aptus. But at this point, it’s just harder from a nominal return perspective to lose money on bonds.

So just to put some numbers on it, and this graphic on the bottom gives some rate scenarios over a one-year period of what happens with rates up or down 25 to 100 basis points per tenor on the Treasury. And so, there’s so much nominal yield, a five-year duration, which is about what the ag is is kind of easy to think about, but there’s so much nominal yield on a five-year. The Treasury yield from here would need to go up about 138 basis points over the next year to post a negative one-year total return. So that would put the five-year treasury at 6.47 from where we closed today. So I think just with the backdrop of more nominal yield is going to help influence bonds to maybe not be as bad from a nominal base case perspective.

But again, as we always talked about at Aptus, it’s all about the real after tax return. And in an environment where there’s still some doubt and lack of trust in the Fed’s ability to get inflation back to target after the years we’ve seen above, that there just continues to be hesitancy of investors to catch the knife. It’s kind of been a knife-like move in bond yields. I just don’t see people jumping out in front of it. But I think at least when you look at the duration of the ag, it’s at least comforting to know that we’re probably not going to see another full year of what we saw in 2022.

JD

Yeah. And JL, I think just to reiterate from the Aptus viewpoint, he’s saying bonds are less bad, not bonds are good. So I know we’ll probably field a question or two because we do quite… Dave, that’s a good-looking hat you got there. We get the question a lot is what would make us change our more stocks, less bonds, risk neutral mindset? And it’s not the environment, JL. It’s good because bonds fit in portfolios for certain reasons, but if the goal is purchasing power protection, real after tax, compounded returns, we still think bonds are an issue.

Because one of the things JL said a couple times is 2022 looks different than today. And I would just remind everybody that today looks significantly different than the ’70s when you talk about rate hikes and what do rates mean to the financial markets in general? We are in a completely different… I’m sure I’ll talk more, but we’re in a completely different spot from the Fed being trapped and this whole idea of fiscal dominance and what that probably means for asset classes, specifically risk assets. I’ll go on record for the millionth time. You can’t think of bonds as being safe. You need to think of bonds as you’re being robbed. I think it’s going to be hard for us to change that perspective given 100 plus percent debt to GDP, and I’m sure I’ll go on as questions pop in on some of that stuff.

Dave

Yeah. I mean, JD, you bring up a great point. Go ahead, new dad.

John Luke

I’d just say, yeah, I mean, unless bonds are substantially higher than nominal GDP growth and they’re putting a dent in the deficit, it’s very difficult to think highly of bonds, and that ain’t happening.

JD

Yeah. And we’ve given the slide to a bunch of… When you start talking about the backdrop that we have, you either grow your way out or you either inflate your way out. And hopefully, the productivity, and JL mentioned the economy and things like that, hopefully real productivity is great and we get this massive AI boom and all the things that we’re hopeful for in terms of, like Dave mentioned, all the earnings, the positivity around the earnings. But the question we always ask is, “Okay, if there is an issue with… If we hiccup in the economy and productivity’s not what it needs, do you think that they protect the bond market or the value of your currency first?”

And that answer is very clear. Just a reminder, the US Treasury market is a very critical market to a functioning economy. And so that’s our point is we have a whole lot of debt that needs to be rolled, a whole lot of debt that’s outstanding. And again, they’re going to protect that market before they protect currency valuation.

Dave

No, I mean, so we’re taking this call kind of a different way than what we have historically, and we’re going to answer a lot of our most frequently asked questions that we’ve gotten over the past quarter. But I think that’s the number one question that we’ve received over the last quarter. Given the high velocity raise in rates, when do bonds become investible? And I probably should add a slide on that one here, JD, but I’m glad we just hit on it there. I mean, I think the best point I could talk to about that is if you look at nominal GDP, less the 10-year yield, over the last few decades, the average spread is like 71 basis points. Meaning to John Luke’s point, for bonds to look appealing, they’ve kind of got to be trading close to nominal GDP levels, and that’s at 8% right now.

Again, the historical spread between that 71 basis points, and we’re close to 300 basis points still right now. So could we see relief in rates or could the pain trade continue higher from here? And luckily, when you look at our allocation, just us being unshackled from fixed income, we don’t have to make that call simply because we have the ability to own more stocks, less bonds, but most importantly, remain risk neutral.

But John Luke, we just got a question that came on in, and I’m going to pass the rock to you for this one. And it’s, “What is the main thing, reason, in your opinion, that we’d immediately start seeing meaningful relief in treasury yields?”

John Luke

Yeah, it’s a great question, and obviously one that people are thinking a ton about. I think that the quickest answer would be some type of meaningful policy driven by Scott Bessent and the Treasury where we start to increase the size of the buybacks on the long end to something much higher than the 4 billion we’re doing now. Or you completely stop issuing long duration bonds. I think that could be one thing.

But I think the maybe more probable response is when you see rate of change moves in treasury yields at the extent we’ve seen the last month or so, that when you get those types of moves, it tends to create some pass through issues to other parts of the economy. So whether it’s credit risk where we’ve seen very stable credit spreads given the spike in rates or any type of pass through impact on the economy.

Now, the thing of hiking rates in the current environment where we’re reshoring and there’s AI spend, there’s just so many pieces of the economy that aren’t that rate sensitive to the Fed’s actions. And so, that’s the other side of the equation is how much does raising rates really even do anything? Because remember, any investor that is getting income off of bonds now is just watching their monthly income go up even more. So there’s two sides of the income statement.

JD

Yeah, and to add to that, JL, that was my point that I made before we jumped on here is you think about hiking rates to slow down, because inflation’s not running lower than target. I won’t get on a soapbox of why we have an inflation target in the first place, but if you think… The two sides of it is, the difference between now and back in the day when you think about, “Well, we hiked rates and it solved all the inflation problems,” well, that was at 30, 35% debt to GDP. That was when private lending was larger than government issuance. Now both of those are completely different. Private lending is smaller than government issuance plus debt to GDP is 100 plus percent.

So to JL’s point, you hike rates and it’s not going to slow private… Maybe it slows private lending down to some extent, but you also just give a whole bunch of the population this whole K-shaped economy thing. You give a lot of folks that have assets sitting on the sidelines, you just gave them a raise to go spend. And you’re giving probably a larger part of the population than you think that have maybe a 3%, 30-year mortgage locked in. You just gave them a bump on their assets. That’s a more stimulative thing to the economy than it is. So that’s kind of the whole idea of fiscal dominance. That is what’s driving things at this point.

Dave

And that’s why we’ve continued to say the bond market historically has focused on monetary policy. But I think over the last five years it’s changed its focus more towards fiscal policy for those exact same issues. And that’s why you’re getting that term premium that John Luke was speaking about before. That’s continuing to increase. I mean, we’re at the highest level in the term premium, John Luke, probably for the last 10, 12 years, probably since before QE was really brought to the market.

But to your point, JD, that is just so stimulative for the economy. Because I think everyone is worried about the consumer given the affordability and given inflation. But coming out on our top three this month, we’re going to show you how strong the consumer is. Actually, I think I got a slide deck in here, how strong the consumer is, but also the consumer’s balance sheet has never looked better even from a leverage standpoint.

And this wasn’t a slide we were expecting to put on in here, but it’s in our appendix. But it’s just showing you that even the lower end of this cohort market is materially richer than where it was pre-COVID, and households have unwound about 60 years of leveraging up. So if you get more of that income, that’s going to be stimulative and that’s going to be an inflationary force for sure.

JD

Yeah. And I guess one point, not to keep chiming in, but one point to make is at some point… The 10 year’s at what, 5.3 today, 5.2 something?

John Luke

Yeah.

JD

At some point, that’s going to be a problem. We get that question, “What is the tipping point?” 10 year north of five, we might have argued a few months ago that that might be an issue.

At some point, it will be an issue, but our overwhelming point is they will step in. Buybacks, QE, they will step in. And what does step in mean to… It means your bonds will be… This is our opinion, but it means your bonds will be debased and it means risk assets probably go higher. And it’s really the only outcome unless Dave’s going to vote in some politician to get us running a balanced budget, which good luck finding him or her.

Dave

Yeah, I mean, that’s what we always talk about.

John Luke

And I think I’d just say, Dave, on that point, talking about the VIX and the move index, the benefit for us is that equity markets are pricing in just calm markets. So the cost to hedge our portfolios is very inexpensive, really as inexpensive as it’s been in quite some time. And so yeah, we can think that, “Hey, rates at some point could create some pressure for the economy,” but even if it does, the portfolios are well-positioned from a hedge perspective.

Dave

And that’s something we wish we spoke about in our last quarterly call here. John Luke and I did kind of a Monday morning quarterback, “What else could we talk about?”

And it’s our model performance right now. Our model performance, we’re so prideful of it, because we have that fourth lever of owning volatilities and asset class where we can over-own equities and lower our reliance on fixed income. So look at our portfolios year to date or off the most recent market bottom on 3-30 of this year, or go back farther to really when this bull market started on October 12th, 2022. You’ll see that you can group our model’s performance into two different categories, selection effects, that’s like did you choose the right manager or whatnot or allocation effects. And our allocations over longer periods of time, that effect is really what should be driving returns. And that’s simply owning more stocks, less bonds while remaining risk neutral.

So I think the overall economic, macroeconomic setup that we have in our future here, everything that JD just spoke about and John Luke just spoke about, it tends to presage what I think would be the absolute perfect environment for our style from an asset allocation perspective. Again, more stocks, less bonds, risk neutral.

JD

Yeah. And what that means for shareholders and for your clients that are allocating or exposed to how we express portfolio conviction is it’s a strategic thing. We are not trying to… Saw a question pop in. We’re not, “Hey, Q4, we expect equities to be better than bonds. Let’s make that trade.”

It’s not how we view the world. It’s not how we think you compound capital. There’s way too much timing risk into things like that. So everything Dave said, it translates to hopefully pretty boring monthly committee meetings where it’s like, “Hey, what do we need to do this month?”

“Nothing. We like where the allocation sits. Let’s sit tight.”

Now, it doesn’t mean we don’t make changes. Obviously, everybody on the call knows we do, but for us to make a change or to express a tilt in a portfolio, it’s going to be conviction on a long-term basis, not a, “Hey, we’re going to position for this earnings expectations this quarter or Fed decision,” or something like that.

It’s more of, “Hey, you as a long only constrained investor,” which most of us are, “for your public equity exposure and public market exposure, what are your options?”

It’s stocks, it’s bonds, it’s cash. You could slice those up a million ways, but that’s it. And we think the way to protect purchasing power is through risk assets. And so, how can we create the ability to hold more risk while being really comfortable with left-tail, with bad outcomes if they were to happen? Obviously, we view options-based strategies as a key to making that shift, free us up to own more risk because we know we’re protected in the environment. We need the protection most.

Derek

And Dave, last quarter you mentioned you were out in front, even the prior quarter, you touched on it, but in the midterms, you mentioned that one of the bigger risks in the middle of the year was going to be data centers and the politics around it. And you have this slide up about midterms. So obviously that’s been from day-to-day sometimes weighing on things. It’s funny, we always do this call during the time when there’s not a lot of earnings news, and then a week or two later as the quarter unfolds, earnings have always been… It’s always better to hear from CEOs than it is from politicians. So we’re kind of heading into your time of the quarter. So I figured maybe you want to touch on some of that. We’ve had a couple questions about AI too, so it fits that whole theme.

Dave

Yeah. Let’s keep on that FAQ. I agree with you there, D Hern. I think the only three questions we really have left on FAQ is midterms, oil, and then earnings moving forward in the face of AI. But you brought up midterms first. And somehow, I am the defacto DC analyst here at Aptus. I don’t think any of us like politics or speaking about politics whatsoever. I’m not here to call who’s going to win the Senate, who’s going to win the House. But I think we can look at historical data to try to figure out how this market could react or act in some type of midterm election year.

And I think while there’s more sentiment issues that could be framed as bearish, and I think it’s all around affordability, we’ve always had an affordability crisis forever. It’s just framed differently every single time. That’s exactly what JD was talking about there. But at the front and center of the affordability issue right now, it is data centers. I mean, obviously in the epicenter of where you have data centers in Virginia, around that area, obviously the politics on a state and city level probably aren’t the most bullish thing for data centers. But then you go over to Texas and look at Governor Abbott, and he’s even coming up with some stipulations for data centers in the more rural areas of that state.

So it seems like it’s kind of a bipartisan issue, but could that creep into markets? Maybe. Maybe from a sentiment aspect, if you believe that the politics could maybe hinder some of the data center growth in the future, that could create some type of sentiment reaction in the market. But remember pullbacks. We always say they’re normal, they’re healthy, they’re always going to occur, but I think you can bifurcate pullbacks in two different manners. You can talk about a sentiment pullback and a growth pullback. And sentiment pullbacks tend to on average have a peak to trough of about 8%, but the drawdown during growth scares is closer to 16 or 17%.

So maybe we see some type of pullback heading into midterms. I think you tend to see them in the last two weeks of September, which we are now past, at least from a seasonality perspective. I’d also mention that our max drawdown in a midterm election year is about half of what it normally is. So far, max drawdown this year is about 9%, but the average drawdown in a midterm election year is about 19%. But once we cut through the crap, because that’s what politics is, it’s crap, I think that the skies are pretty sunny moving forward for risk assets.

And that’s what this chart on the bottom right-hand side says here. It gives you the fourth quarter in a midterm election year is the best quarter to be invested. I forget how far this goes back in a chart perspective, but the average return in Q4 is about 6.6%, and earnings are great right now. We know that that tends to drive markets over longer periods of time. So I’m not too worried about midterms right now, but I know you guys will get a lot of questions from your clients probably over the next few weeks given all the commercials on it.

John Luke, I’ll bring you back in here, too, because I think one of the other most frequently asked questions we’ve got here, these Jolenes that I call them obviously because we do have a market theme of Dolly Parton for Q3, but it’s been on oil. When is oil, John Luke, going to really start to affect the market? Because it hasn’t so far. Do you mind talking on that?

John Luke

Yeah, I mean there’s definitely just the sticker impact. And when you start hearing about gas stations running out of places on their signs for the diesel, it causes concern. But I think you have to remember from a nominal perspective of what gas is pricing at after accounting for inflation. And so, to think back since ’08 when we had the last big spike of oil prices, and I know it’s a bad analogy and bad timing, but in order to be at the same level in nominal terms today, you’d need to be like $210.00 in oil prices. And from an inflation adjusted perspective, it’s much lower.

So in order for us to get really concerned, I think it’s more of seeing gas prices get back to that type of level. And I think that’s probably pretty unlikely. I’ve seen a number of new things that have come out about the Strait and the amount of oil that’s flowing through being much higher than what the transponders that are turned off has created some fear that oil’s not moving. But it looks like it is moving at a level that’s much closer to where it was pre-conflict. So I think that’s a positive.

I think the other positive as JD mentioned about comparing back to the ’70s is the US was an oil importer from the ’70s until 2015. And since 2015, the US has become one of the biggest oil exporters in the world. And so from a dependence and reliance perspective, to know that we have access to oil here and we’re not relying on someone from the Middle East giving it to us, then yes, there’s some caveats to that I think as an ensuring level.

Dave

Yeah, it’s like the-

John Luke

The last thing I think on that right side of the graphic here, which I think really puts a bow on it is when you look at the household disposable income that goes to energy prices, the estimate coming into this year was less than 2% versus over 5% in 2008 and about 2.5% the last call at 10 years. Obviously, gas is a little bit higher this year and Dave maybe has some final comments, but from a disposable income perspective for most Americans, oil prices are less impactful on their budget than one might expect.

Dave

The theme of last quarter was understanding and evolving with a changing market. And I think that’s a perfect situation for what we’re seeing on the oil side of things. The playbook of the ’70s, ’80s and ’90s in regards to oil, it’s not the playbook for today, but as analysts, as asset allocators and investors, I think we need to see the forest through the trees on how the oil market in regards to its effect here on our domestic economy has evolved.

Obviously, we’re a net exporter right now. And John Luke, you just gave two amazing stats on why we’re so just not handcuffed to the oil market anymore here in the US. Obviously, if you account for inflation, the average barrel or the highest end of a barrel cost was like $212.00. And right now, the consumer is also feeling less from a cost of gas as a percentage of disposable income.

The playbook has changed and we need to see that. And I think that’s the market that sees it. Because I mean obviously $100.00 oil has not affected this market whatsoever, even from a S&P 500 profitability perspective. But that playbook that we have here for oil in the United States, I do think it’s differently than what the international playbook should be, because they tend to be more handcuffed to the energy and oil markets than here in the US. So I think that’s how we have to have this bifurcated conversation in regards to US’s exposure to oil versus really international.

As we come up on the hour, this slide has just been a staple of Aptus, I think going back to about 2017. It’s something we’ve always published on a quarterly basis to try to get some type of equilibrium between the wall of worry that we could have out there if you watch the TV at any time, but also a lot of the really good things going on in this economy. Because I do think Aptus likes to pride themselves as rational optimists and recognizing that while it’s so easy to focus on the bad, there’s a lot of good out there. Because remember at the end of the day, bears, they sound smart, but bulls are the ones that really make money. But we wanted to create some type of equilibrium between the bullish case and the bearish case.

And obviously, we’ve talked a lot about the bullish case here lately. We spoke how strong the consumer is. We’ve spoken about how great earnings is, but I do think that there are some hurdles that investors need to think about moving forward in the future, not just from a market perspective, but from an allocation perspective. Obviously, JD hit so beautifully on just bonds and rates as a whole from a hedging perspective and the recognition of what the government is going to do to basically debase your currency. And I think that’s why investors really need to recognize that the hurdle rate is much higher than many think. And that goes back to how our playbook of the yesteryears is very different than what it is today and that the market’s evolved. And we as allocators need to evolve our thinking to that also that the hurdle rate isn’t 2%, it’s much higher than that.

But outside that, I think the things that we’re probably… John Luke, JD and I had a conversation before. The things that really would pique our interest maybe to become a little bit more bearish is obviously rates staying elevated for a longer period of time. I think slowing AI growth, and just that the market really tries to push current Fed Chair Warsh into doing something that he doesn’t want to do. Obviously he’s not giving out any forward guidance right now, which I actually absolutely love. I know John Luke does, too. But that means that the market is really starting to price the risk out there from an interest rate perspective.

So I think between those few things, higher inflation, how the market deals with the new different Fed chair and slowing AI growth, I think that’s really what would maybe pique our interest to become a little less bullish on this market. But again, there’s a lot of really, really great things out this market from a bullish standpoint.

JD

D Hern, you want to wrap us up? We appreciate everybody being here. Obviously, if you’ve got questions, hit us. We’d love to answer them. And I would… One Aptus plug would be obviously we believe options-based strategies are an incredibly effective tool at shaping asset allocation towards the areas we think can actually protect purchasing power. But on the fixed income side, I do think if you’re not aware of the forms of fixed income exposure that we have and created, I think this year has been a perfect example of it’s not a great asset class in our opinion, but if you’re going to own it, we’ve created better ways to own it. And if you don’t know what I’m referring to, please reach out. We can dig in.

But thank you everybody for the time. We tried to get this out as… Technically this is before quarter ends. So D Hern, I’ll let you close us.

Derek

Yeah, thanks for making time. I know team’s been cranking on content. You’ll see a bunch of stuff coming from us in the coming days. And I know Dave’s counting down inside of two weeks to earning season, and that’s just when a lot of this stuff becomes noise, all this macro stuff, and you just get back to the growth stories kind of taking over. So yeah, good stuff. Thanks, guys.

Dave

Congrats, John Luke.

Derek

Congrats again.

JD

Welcome, Lola. Welcome, Lola.

Derek

Enjoy that baby.

John Luke

Thank you. Yeah, thanks everyone.

Dave

God bless America.