For a more in-depth look into our market thoughts, please review our Quarterly Chartbook. Our 3 pointer video will cover the market backdrop and spend a few minutes on each of the following:
- Stocks and Bonds in Q1
- Valuations and Up/Down Catalysts
- Historical Context of Stocks vs. Bonds
Hope you enjoy, and please send a note to [email protected] if there’s a particular chart/topic you’d like to see covered next month. Time to swing it around!
For those who prefer to read, the transcript:
Derek
Good morning. Aptus crew here, we are in various locations. Dave is going through a thunderstorm there, I am actually in the county of Florida on spring break and John Luke looks like he’s in his study. We’re going to go through a combination of talking about both our traditional monthly here’s a couple of charts that came through that I thought were interesting that the guys could go into more detail but also we just wrapped a quarter and so thinking through some of the stuff that has gone on in the quarter and how that fits into the bigger picture of allocation is also a worthwhile discussion.
So, I’ll read a quick disclaimer. 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 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.
So, we’ve got no introduction needed but, in case this is one of your first times tuning in, John Luke Tyner runs our fixed income group, CFA, Dave Wagner runs our equity side, another CFA, two of the, I guess, 10 or 11 CFAs on the team and each of them have the additional … They’re managing funds, but also have the additional role of specifically targeting fixed income for John Luke and equities for Dave. So, we’ll cover a handful of chart throughout the month and it’s been an interesting one. Thanks for hopping on, guys.
John Luke
Thanks.
David
I’ll start off-
Derek
A three-pointer is especially relevant coming out of March Madness though.
John Luke
It is awful timely except for Dave and the cats.
Derek
Yeah.
John Luke
Yeah.
David
Yeah, thanks for the-
John Luke
Cash of sorrow.
David
… bullet to my jugular there after we got beat by the one guy with 10 three-pointers so, yeah, this is very pertinent. But thanks for saying that I’m in a tornado watch D Hern because, even though I may be in a tornado watch here in Cincinnati, Ohio, the market saw anything but a tornado watch through the first quarter of this year. The S&P 500 rallied about 10.6% and obviously a lot of that return was very concentrated in let’s just call them the fabulous four stocks. So, your Microsoft’s, your Nvidias, your AVGOs, names like that that basically the narrative of AI continued to drive the market as a whole, especially on the large cap side.
But we did see some breadth start to increase in small caps, small caps were up about 5% which is a half the return for the quarter of the S&P 500. But even within small caps, there was a substantial amount of concentration. If you look at Supermicro or MSTR, they basically drove almost 60% of the return for the Russell 2000 for the quarter. But I would say the market has started to really broaden more so than what those statistics that I really just named there, it was basically more of a rally of everything but bonds. Even if you look at the RSP, which is more of the equal weighted S&P 500, it’s actually been outperforming the S&P 500 since the recent market bottom on 1027.
But what I’m really focusing on right now, because this was, obviously, it was just an awesome quarter and how I’ve been starting to frame it to a lot of our clients and our partners is it’s a market like who would’ve thought. Who would’ve thought that the market would have a top one percentile return over the last five months because the S&P 500 just saw five straight months of appreciation right now? Who would’ve thought that the market would be up 28% over the last five months? It’s incredible.
And that’s coming off of, if you go back to July, August, September, into the early part of October, a lot of the conversations that you all were having with your clients or we were having with our partners, a lot of people just wanted to T-bill and chill just because over, if you rewind back to that timeframe, the middle of 2023, the S&P 500 was basically flat for almost two years. And on the bond side, which John Luke will talk to here very shortly, you’re getting yields of 5% so a lot of people just wanted to T-bill and chill. So, that’s why I’d call it a who would’ve thought market because everyone’s sentiment was very negative against equities, very positive for fixed income so who would’ve thought that the market would be up 28, 29% over the last five months.
And a crazy market statistic that I just saw and sent out to the CFA crew this morning was that, in the first quarter of this year, the S&P 500 had a smaller year-to-date drawdown than treasuries. Let me say that again. The S&P 500 had a smaller drawdown year-to-date here so far in 2024 than treasuries. That’s crazy. But the big thing, before I pass it off to John Luke, the big thing I’m really focusing on right now because, yeah, I am a fundamental bottoms up analysis type of guy instead of more of a macroeconomic top down type of mentality, the one big thing I’m focusing on is growth for equities.
And I would say that inflation, because we have seen about two higher inflation prints over the last two months, inflation around 3%, to me, it’s not a threat to the market or the economy itself because it’s really what I’m focused on is the Fed’s response to that sticky inflation that could keep rates higher for longer and then the impact that it will have on increased chances for some type of economic slowdown because that’s what, in my mind, remains the key risk to this 28% rally is slowing in economic growth or slowing in fundamental growth.
So, that’s my focus. My focus is on growth because I think the one biggest thing that could be the killer to this rally is slowing growth. But that’s the market recap on the stock side so I’ll pass it to John Luke to really talk more about the fixed income.
John Luke
Yeah, no, I think you teed me up well there, Dave. You talk about growth and, hey, it looks like, for the first quarter, the economy’s going to print somewhere around two and a half to 2.8% real growth, inflation’s obviously around three so you’re still in an environment of 6% nominal growth. It’s awful hard to see a whole lot of choppiness in stocks when you’ve got that type of environment going and, like Dave said, I think 3% inflation is pretty much a Goldilocks scenario as long as you don’t have the Fed really clenching the clamp on growth. And so, I think the main point that I would take is, yeah, the 5% rate sounds great on T-bills until you take into consideration that nominal growth is at six so you’re getting left behind in the dust.
But all in all for the quarter, pretty choppy as far as what the results look like coming into the year versus where they’re sitting now. You’ve had a slew of rate cuts that have gotten priced out of the market, you’ve got an agg that continues to drift a little bit lower, it’s down 80 bips or so, 90 bips on the quarter. Most of the return was just from the income piece cutting into the impact of rates rising. You saw credit perform really well which has continued to be a bit of a surprise, we put out a number of charts just showing how tight credit spreads are.
But our biggest point I think continues to be going back to the end of last year where it was a brutal time for advisors, it was a brutal time for clients, a lot of them were questioning their positioning and then, bam, you get hit with this market run up that just really speaks to the philosophy that we exhibit at Aptus of owning more stocks and less bonds. So, all in all, bonds were the drag. You continue to see correlation between stocks and bonds be positive which obviously doesn’t help allocations whenever markets are choppy because your bonds maybe aren’t the hedge for portfolios or they certainly haven’t been of recent.
And so, I think, as we look forward, we’re just really going to continue to lean into the asset allocation that we have in place because it’s not really an environment that I think bodes well to large drawdowns or any real concerns with the economy. Everything’s really humming along pretty nicely even with rates at the level that they’re at.
Derek
Man, this isn’t the place that thought taxes but I’m looking at that graphic, I no matter the timeframe, one, three, five, 10-year, the drag from bond, which doesn’t even include the fact that you’re paying short-term income, a lot of the return or negative return, it’s pretty striking in comparison to stocks. It’s pretty wild and you can see why … We actually, I think, we have a graphic up later about the longer-term impact but, even over these past few years, it’s been pretty distinct.
John Luke
So, it started-
David
John Luke, I want to-
Derek
Yeah, go ahead.
David
John Luke, I want to expand on a point that you just made there and the genesis of my stock question for you that we were just speaking about before we went on record here when we were just jumping back and forth. You were talking about how the iShares BlackRock allocations right now, I’ve started to see a substantial amount of drift which could definitely put them at risk if there is some type of pullback because they don’t have the levers and mechanisms in place to really hedge out volatility.
So, the question I’m asking, John Luke, is, given the 28% rally in stocks and there’s been basically a non-existent return for fixed income, a lot of those BlackRock iShares models, the 64 models, 60/40 models are closer to 65/35 right now because of that drift that’s occurred. Can you speak towards that a bit and some of the thoughts you had there regarding that?
John Luke
Yeah. So, obviously they don’t have any type of hedging that’s deployed on that equity side so it is becoming overweight. Most of that, I think, is just a matter of performance of stocks has been obviously better than bonds but I think that the two downsides that some of these typical models could face is, number one, if they’re overweight stocks and we see some type of correction, that could be painful. But the other side of the coin is, if you continue to see bonds act the way they have the past couple of years, it’s just going to be very difficult for those bonds to really serve as that protection for the portfolios where market is to be volatile.
And I think it puts you in a spot where you’ve really got to focus on, hey, this environment looking forward is probably going to be different than what we’ve seen the last 10, 15 years where you’re in a cycle of rates being higher and choppy instead of just perpetually falling lower. And I think it gives us just a huge advantage on our portfolios with both the active management, with the overweight to stocks, with the incorporation of volatility as an asset class especially now because it’s so cheap to hedge portfolios. So, that’s what I would focus on there.
David
That’s such a great point, John Luke, because I think that’s something that not many people think about. That’s just an unintended risk and an unknown risk in a lot of those allocations, those antiquated 60/40 allocations right now.
John Luke
Yeah. I could definitely take it a step further and we’re probably going into a period of significant monetary debasement or inflation. And what that means is you just have got to own in your portfolio more assets that can grow in real terms and that’s stocks. Whereas the bonds, again, if GDP is at six and your tenure year bond is at four and a quarter, you’re losing in real terms and, over the long run, that’s not a good investment.
David
I think I saw a tweet, John Luke, and it was from Charlie Balala showing, I think, over the last 30 years, the purchasing power of your US dollar has been cut in half.
John Luke
Yup, yeah, yeah. It’s monetary debasement, that’s the way out. Fiscal deficits are massive, stimulus is massive. There’s a lot of factors that we could talk all day about but I think it just bodes the importance of rethinking your allocation to own more real assets looking forward because the way out of this is probably just inflation continues to run at above the Fed’s clip and, what they’ve given us, the inclination is that they’re going to live with it.
David
I think that’s a great dovetail though that the monetary debasement and one of the best ways to organically grow out of debt is just through Inflation itself. And I think there’s a misnomer out there in the market right now because we have the slide up keeping an open mind, let’s bring something different to the table that maybe not a whole lot of people are thinking about, something that could go right for equities. And I think the common conception right now is that, hey, inflation remains sticky, inflation remains stubbornly high, all right, so that’s probably going to put a floor on rates or rates are going to have to go higher or the Fed isn’t going to be able to cut now in June, they weren’t able to cut in March like the expectation.
So, rates are going to stay higher which should, obviously, increase the discount rate for equities bringing their valuation down. So, this should hurt equities, the sticky inflation should hurt equity. I actually mean to take the other side of that argument and it’s a point that you continue to make now for almost over a year, John Luke, 3% inflation, yeah, that’s a percent above the Fed’s 2% target but 3% inflation isn’t going to crush this market whatsoever. I think a 3% inflationary period is actually very, very strong for just equities as a whole because they’re going to be able to have a lot of pricing in elasticity and that’s something that we’ve seen for over the last three, four years since inflation has really started and that’s a beneficial to growth.
Over longer periods of time, valuations are going to be somewhat mean reverting but, equities, over longer periods of time, they’re going to trade on their growth. And John Luke, you had a great piece come out after the recent Fed meeting showing the change in the SOMC forecast whether it was for core PC, real GDP, unemployment and a Fed forecast on the Fed funds rate. If you look at the real GDP forecast, that was my big thing, the market is going to trade on growth moving forward. Their expectations for growth at the GDP level, real GDP increase from 1.8% to 2% in 2025, they increase from 1.9% to 2% in 2026.
So, even the Fed, given that inflation rates are, yes, higher and they have more restrictive policy in place from a federal funds rate, from an interest rate perspective which people think should hurt equities, they’re still continuing to increase their expectations for real growth which should benefit stocks over longer periods of time. So, this current bout with inflation that we’re seeing right now, it’s not worrisome to me one bit actually, it just makes me even more bullish on being overweight stocks.
John Luke
Yeah. To take it one step further, think back to, what was it, the September or August Jackson Hole meeting in ’22 where Powell-
David
August.
John Luke
… basically said, “Hey, the pathway forward is probably going to be some pain.” Fast forward to 2024, Karen Powell says, “The pathway forward, it’s just going to take time.” So, I think it’s just bleeding right into that story of, hey, we’re going to not kill the economy or crush it to slaughter inflation and we think, long-term, it’ll come down. Maybe it will, maybe it won’t but I think what that just means in my mind is they’re not going to put the fire extinguisher on this economy.
David
Why would they right now? It does seem like they are navigating this shortened runaway quite well. And, John Luke, I think you disagree with my phrase that I’ve used maybe four or five times with you in regards to inflation, it’s the last mile of inflation isn’t the hardest, it’s just the longest. And in the world we live with instant gratification and the inflation numbers that we saw in ’22, how fast they came down from 10% down to 3%, came down 7% in the span of one year. But this last mile of inflation, I’m a firm believer it’s not hard, it just takes time. And that’s a period that we’re in right now and it’s just very difficult for investors to assimilate that because they want that instant gratification.
And as portfolio managers, I say this a lot, sometimes your best trade is no trade and just utilizing time to your advantage is the best thing to do but sometimes it’s also the hardest thing to do. But you do disagree with that comment there, John Luke, the last mile isn’t the hardest, it’s just the longest.
John Luke
Yeah. Well, I think-
David
Contradict me.
John Luke
You could put those hand in hand as an analogy and I think it’s hardest because people have run out of patience because people hate inflation and they’re tired of it. And I think you can see that in consumer sentiment in some ways where the government’s level of inflation is X but … Strategas puts out the common man CPI, it’s substantially higher than what the government’s saying because it’s actually looking at the actual goods and services and shelter prices and gas and food that we all have to buy to live and food prices are, what, 30 plus percent higher now than they were a couple of years ago.
David
You may not know this answer, John Luke, actually, 10 bucks, you do. What is the difference? Because I love the thing, the Strategas common man CPI, what is their CPI number relative to the number that the government puts out? What’s the difference there? How much higher is this common man CPI that we’re reading relative to the government data, you think?
John Luke
Yeah. Don’t quote me on the exact number but I think it’s about a full point higher than the core number so over four.
David
But do that on a compounded aspect over the last three years.
John Luke
Yeah, it’s big. It’s big. And you saw some people come out, Larry Summers came out with a modified inflation calculation saying that, “Hey, if we calculated inflation today like we did back in the ’70s, that inflation actually would’ve been 18% at the highs instead of nine.”
Derek
Good news is-
David
This argument is awesome, John Luke, because … Go for it, D Hern.
Derek
No, I was just going to say the good news is, in your world, Dave, earnings are nominal.
John Luke
Yup.
Derek
So, inflation, inflation means earnings.
John Luke
Exactly. And if we get some productivity booms, you get just continually improving supply chains and reshoring and things like that and what that means is, not only can companies grow the top line from a nominal perspective, but they can also boost margins and you’re seeing both of that happen.
David
But everyone keeps saying that the productivity boom that we’re having right now is just based off the narrative of AI. We know that we’ve seen the S&P 500 margin profile go from, in the last year, year and a half, from 15% to 16 and a half percent which is pretty substantial because people expected margin to come down. That pricing elasticity that was set foot in 2021 from inflation has been very sticky, not just for that single year period, but for multiple year periods. But everyone’s assimilating this productivity boom to the narrative driven market of AI but we’ve seen no productivity benefit from AI in the S&P 500 yet, in my opinion, outside of maybe a little bit of Nvidia, a little bit of AVGO but all the productivity receipt is actually a lot coming from the remaining 493, you’re seeing their profit margins really start to expand.
So, it’s actually just a simple unit labor cost productivity rally that we’re seeing in the margin profile. But I think that’s also why the market can peg a 21 times forward earnings valuation on this market and say, yeah, you’re getting this awesome productivity boost right now from unit labor production with the expectation of even more productivity boom from AI moving four, five, six, seven, 10, 20 years down the road. But what I’m trying to say here is this part that we have up here right now is a great picture of what’s going on in the market. There’s so much good going on right now but there’s also so much possibility for bad to go on right now. There’s such a huge wall of worry for people to always climb up.
It’s good to keep a very balanced approach and that’s why John Luke and I could probably go back and forth for hours because I tend to be a little bit more bullish while he tends to skew slightly less bullish than me.
Derek
Well, I think the interesting part of this graphic is all the points on the right are covered in the media day after day, everybody knows them. Some of the stuff on the left, what could go right really doesn’t get a lot of coverage. There’s certainly optimists out there but I do think it’s interesting to think through, just remind investors that any big period of growth in the economy, there was stuff on the what go right column that nobody was even talking about. And so, it’s important to stay balanced and just think about how do I want my allocation to look over the long haul and what tailwinds maybe can help me.
John Luke
Yeah. And the right side of that chart, literally all of them can be offset in some degree where the Fed do come in with rate cuts. The Fed put basically is alive and well now with where rates are, they’ve got facilities that they can deal with CRE. I think we saw that they were going to be quick to do that with the banking crisis, I imagine that … I’ve jokingly talked about the crap facility before, commercial real estate asset purchases. A lot of these things, I think, labor market weakness, well, the Fed said that they’re going to cut if we see deterioration in the labor market. Rates, 10-year rates above 5%, yeah, are probably problematic but at what point does the Fed stop doing QT and maybe resume some sort of QT or QE.
David
Well, just given that we just had Easter there, John Luke, you always say that somehow, whether it’s Janet yelling at the Fed or Jerome Powell, part of Janet yelling at the Treasury, Jerome Powell at the Fed, they always somehow find a way to pull the rabbit out of the hat to save the day.
John Luke
Yup.
Derek
Perfect. So, all right. So, that being said, what about valuations? You hear a lot in the media, people just basically multiplying a number times in earnings estimates and that we are expensive right now. So, I’m guessing you have some opinions here but pretty clear that expensive valuation can stick around for a while.
David
At its core, what is valuation? All right, we all know the price to equities valuation, it’s current price of the S&P 500 over the forward expectations of the S&P 500 which is unknown. But at its most core, valuation is basically an investor sentiment on the market. So, if you’re making any type of thesis on the market or this could be for an individual stock, if your thesis is totally based on valuation, that means you’re solely making a bet on trying to determine investor behavior moving forward because valuation is a mechanism of investor sentiment. And that’s just never something that I want to bet on because we know how emotional investors are, we know how emotional people are in general so I don’t want to bet on something that I can’t control and that tends to be very volatile.
And so, what I’ve always said to all the PMs here and all the analysts here is I never want to make an investment thesis solely based off of valuation being high or valuation being low because the valuation is high for a region and the valuation could be low for a region. You need some type of catalyst to accompany the valuation to create some type of mean reversion higher or mean reversion lower to have your thesis play out. And I’ve been on a big valuation kick here, it’s been the thorn in my side here and a lot of people have seen it on our dashboard on our top three talking points of the month. It’s I don’t think the S&P valuation is extraordinarily expensive, I think I’m about to write a [inaudible 00:26:03] I’ve already written in my head on valuation of the US versus international and how we need to be thinking about it from that perspective.
But right now, I don’t think valuation is horribly expensive for the S&P 500, it’s not a reason why I think we should be selling out of stocks right now because of the valuation and going into your T-bill and chill. Because that was your argument back in October, middle October, on October 27th, when the market started to jumpstart its 28% rally over the last five months and you would’ve been completely wrong and then a lot of people’s thesis was based off of, hey, valuation is extraordinarily high. If you look at the valuation of the S&P 500 relative, going back to 2008, its percentile valuation puts in the 81st percentile. All right, so, yeah, it might be expensive but it’s not totally expensive.
But if you go back in its most simplistic form, this is the analogy that I’ve been using. If you have stock A, all right, that does X, Y, Z business, it has a profitability margin of 8%, then you have stock B that does the exact same X, Y, Z industry as stock A but has an 18% profitability margin. Which stock, stock A or stock B, should yield a higher valuation? Everyone’s going to say stock B, which is correct, but that is a great analogy for the S&P 500. If you go back to 1980, it had a profit margin of 8%. If you go to today, it has it closer to 17%, substantially higher. Yet everyone thinks that the market’s overvalued when they’re comparing it to the composition of the index 40 years ago which is not a great way of looking at things.
So, valuation should never be a reason to buy something, it should never be a reason to sell something, it should just be an understanding of where a consumer or investor’s behavior currently lays in regards to that asset.
Derek
Yup, yup. Probably leads into this, you probably have a pretty firm opinion on this, but it’s a good reminder, over that period that you had just mentioned, going back in the ’80s, but you’re getting zero protection of your purchasing power from owning T-bills and it felt like … We got lots of calls about just I want to buy some T-bills, I have clients that want to buy some T-bills, CDs, whatever it is, this is a pretty powerful graphic on what that does over the long haul and how that can impact … Really how that can impact really how that can impact someone’s retirement.
John Luke
Yeah. It just really proves the point of, number one, stocks for the long run. You could add in the caveat of having some guardrails in place to protect against the unexpected and then counter that with, well, real returns on bonds. And you can see that the graphic here makes it pretty obvious of which vehicle has the ability to compound and which has the ability to just flutter around and, in real terms, probably create real problems for financial plans and longevity and purchasing power and all those things that are scary.
Derek
Yup. And to bring it into a more … I know we all … Everyone thinks of 20 and 30 and 40-year time frames but everyone really operates in a one to three-year timeframe mentally, Dave was talking about emotions and sentiment and everything else. This is a really cool depiction, this was built internally by Brian but just to show, on a one-year basis, there’s a pretty good chance you’re going to be up. So, I don’t know if you guys want to dive into this at all and it does feed in a little bit to our strong engine better brakes approach.
John Luke
Yeah, I’ll start it off, Dave, and then you run with it. But you look at this chart and then you think about, hey, what’s the average return on the S&P for the long run and it’s eight-ish percent. But you look at these periods and there’s very few markets that actually deliver on that average return number, most of them are either substantially higher or you have the few years where it’s substantially worse. And I think what this shows, in my mind, is, whenever that you do get these really friendly markets which, look at the chart, they happen a lot more than what most people would expect or think, is that you’ve got to have the portfolio that can keep up in those periods where you’ve got that bigger engine and then it just goes into, well, the left-tail types of markets don’t happen a lot but, when they do, their really devastating.
And the point there is that you’ve got to have the convexity of payoff of hedging and the ability to have better brakes on a portfolio to help tolerate those types of profiles and give you dry powder to redeploy back when the market does give you those drawdowns. But for the most part, the market returns are in that right-tail type of environment and it just proves the point of positioning accordingly for what happens. And when you do get the big returns like you saw in ’23, like you saw in ’21 like you saw in ’19, you’ve got an opportunity to compound wealth tremendously if you position your asset allocation which is going to drive everything correctly.
David
I love this chart because a lot of you all on the call have now seen our new asset allocation presentation, how we’ve shown hypothetically on why we do more stocks, less bonds while being risk-neutral. Well, we wanted the slide to really bridge the gap between the hypothetical situation versus what actually happens because what actually happens matters more than just a hypothetical or a philosophy and that’s exactly what this chart is showing. We know, going back over longer periods of time, the S&P 500 had an average annualized return of 8.7% but we know that the market actually has an annual return that rarely occurs between 0% and 10%, they tend to occur outside of those bounds.
A statistic, I’m not sure if Derek likes this one, but it’s 58% of the annual returns for the S&P 500 have been greater than the average return going back to 1930 meaning that right tail happens much more often than what people would want or expect. They should want it, I hope they expect it because that’s, in practicality, what exactly happens and that’s why we want to own more stocks, less bonds. Yet everyone out there in the market, given their investment behavior, always climb that wall of worry that John Luke, myself and D Hern were just talking about before where they want to be pessimists.
But what we always say, and this in a lot of our presentations, is that we know that, one, that the market tends to go up more often, not that there’s positive skew, that there’s returns, much like what we’ve seen like the who would’ve thought market, how I started this conversation, the market being up 28% over the last five months, that it just pays to be a rational optimist. Utilizing time to your advantage, utilizing time on your side, don’t be too bare, don’t be too bold, be more neutral but always be a rational optimist because pessimism about the long-term does not align with any way with a historic worldview.
Investors can choose to believe that right now is the beginning of the end for X, Y, Z reason but that’s really just a bet against all of human history and against its human history itself. Look at these returns that we’ve seen on the right tail of things that this has always been the case. Progress occurs against the inevitable backdrop of some type of catastrophe. Now, we’re coming off of catastrophe 14, 16 years ago but also four years ago but progress always is going to occur there, it always has, always will be. And invariably, you can always go looking for whatever your investment, whatever your worldview is and your investment results are probably going to mimic that worldview.
So, that’s why I say it pays to be a rational optimist because the market, as we see here, tends to go up more often than it goes down. But that doesn’t mean that the downside, to John Luke’s point, should be deminimized because we know the bad math of drawdowns. A 50% drawdown requires a 100% increase just to get back to even, that’s why it’s the tails that worry us, it’s the tails that matter. Attacking drawdown risk on the left side and attacking longevity risk by being overweight stocks, underweight fixed income for these amazing years. So, be a rational optimist.
Derek
And to your point, that’s where financial plans fail is in the tails. The worst thing you can commit as an advisor, it’s a myth, completely myth, it’s the go T-bill and chill and miss one of those tails out for the right because you’ve missed the opportunity for that client to participate in their plan. And then also on the other side, like you said, market goes down 50%, it’s 100% recovery, that’s if that’s someone’s first year of retirement and your allocation is off or you don’t have any protection in place, that’s devastating to a portfolio. So, I think it is pretty powerful.
I think the funny thing too, as I’m staring at this graphic, you mentioned 8.7%, it’s hilarious that there’s not a single year within a percentage point of 8.7%. So, that just tells you you’re never going to make 8.7%, that’s just never going to be the number. You’re going to be up high teens or 20s or 30 or you’re going to be down, that’s just the way it’s worked out over time. What else is on your minds? We’re just getting into Q1, it’ll be, what, another at least another week, maybe 10 days before retaining earnings, Dave?
John Luke
Yeah, you’ve got a jobs number on Friday that I think will continue to be important, you’ll have the inflation data in a couple weeks. So, I think market’s obviously hoping to see a rebound lower in the inflation data that we’ve seen to start the year, that obviously would help amplify or speed up any of the rate cuts that market’s been hoping for. But right now, it just continues to look like a Goldilocks environment for the economy where jobs, market’s resilient, wage growth is resilient, consumer net worths are strong, we’ve talked a lot about that.
We’ve seen a number of charts and I think we’re going to have it in our next econ dashboard that we put out on credit cards, I’ve seen a number of people talk about credit card debts but what they’re forgetting to look at is, in real terms, the credit card debts are pretty negligible compared to history, it’s not accounting for the significant inflation that we’ve had. So, there’s just a lot of positives that I think we can move into the next quarter and think about and it just goes back to, when the economy’s got this steam behind it, you’ve got the fiscal backdrop, you’ve got the election coming in, it’s just going to take time for this data to really roll over and maybe it doesn’t ever roll over, I don’t know. But I think that we’re just in a backdrop of it wouldn’t be surprising to me if we continue to see what we’ve seen the last couple months.
David
My last comment is that John Luke just broke up the no-hitter, we almost went this entire call of not talking about the election and we didn’t state that ahead of time. I don’t want to talk about the election yet, the market isn’t worrying about the election yet, no one talks about the market. We do have a slide around that at the allocation presentation talking about the market in election years but we almost went the whole call not talking about November. Thanks, John Luke.
Derek
In a future month, we will.
John Luke
Unfortunately, yes.
Derek
We’ve covered pretty good ground here. Awesome. Well, thanks for making the time, I think it’s good to always go through. You guys put out a ton of good charts every week and I know advisors appreciate just looking at things from a different angle and so, yeah, think this is helpful. We’ve had good feedback about just being able to go a little bit deeper into some of these graphics and see where some of the key points are that will resonate with clients. So, appreciate you all.
John Luke
Yeah, thanks Derek. Thanks, Dave. Thanks guys for listening.
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