Curb Your Enthusiasm, Video Version

by | Dec 30, 2021 | Market Updates, Media

Dave wrote a fun piece summarizing our team’s 2022 Outlook, seen here as It’s Time to Curb Your Enthusiasm in 2022. He and John Luke decided to give it extra life with a discussion about the piece and outlook. See below for the video and transcript:

 

 

Dave Wagner:

Hey everyone. This is Dave Wagner from Aptus Capital Management in one of our final blasts of 2021. As we enter 2022 and no, do not expect next year to be 2022, but don’t bump, though we do believe that the markets could have some significant hiccup up over the next 12 months, as we do not believe the emergence of the new Omicron variant to really create any type of repeatable landscapes, much like what we witnessed in 2020. But we have a slew of both exogenous in Washington, DC and within the market where we do expect that the market will see some volatility next year. I’m joined with John Luke Tyner, a portfolio manager here at Aptus and over the course of this video, we’d like to give you guys some thoughts and some insights into what we expect next year. First though, I want to say that we very much appreciate your support and your friendship.

Every one of you provides the basis for almost 20 jobs down here in Fairhope, Alabama. So we’ve had a lot of growth over the past year, a lot of new additions, and we owe it all to you, our partners, and ever since the beginning of Aptus back in 2013, culture is very important to us, both professionally and personally. That’s why we’re very excited to continue to increase the ethos between us here internally, but more importantly with all of you guys, as we begin traveling again out to see many of you guys next year. So we can’t wait to see many of you guys in person.

Secondly, we’ve hired, as I said, we’ve been continuing to grow but we’ve hired a few new people over the past year. Joseph Sykora, James Yahoudy, and more recently, Christopher Neill, our new institutional sales partner. We also added Brett Wickmann this year as CCO so I’d like to dedicate this next part to him, me reading the disclosures, because I have to.

Disclosures…the opinions expressed during this call are those of 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 form ADV, part two, which is available upon request.

All right, there you go, Brett. Disclosures out of the way. So now we can get to the fun stuff. We’re going to start having a conversation on the introduction of our Aptus’ 2022 forecast. And if you haven’t seen it, reach out to Derek Hernquist. He could get it for you, or you can find it in the content hub because we released it last week.

And as you know here at Aptus, we’re very thematic on everything we do. So this year’s outlook has the theme of Larry David’s Curb Year Enthusiasm and outside being a great title for this piece, given our thoughts next year that you need to curb your enthusiasm, we found it really fitting given Larry David’s Seinfeld tie, as that show itself was a show about nothing and much like that, this forecasting piece that we just released actually gives no forecast. It’s a forecast about nothing. So in fact, this is a theme within a theme. So why do we decide to not give you guys a forecast? And it’s very simple. Forecast rarely come to fruition. Entering 2021 most economic Wall Street analysts put out their forecast for 2021. On the high end, you had someone come in at 3,400, meaning that the market would be up say, 19%.

The average was of about up 10% and the low was up about 2%. And as of today, December 30th, the market is up to close to 30%. So 12% higher than the high estimate on Wall Street entering this year. So that’s why we’re throwing forecasts out the window. We’re not a fan of them. If we knew what the market was going to be doing next year, no offense, we’d probably be running a hedge fund with only our money and being more wealthy than Jeff Bezos, but we’d love [inaudible 00:04:20] your money so that’s why we’re here.

But now moving forward to our forecast, we’re going to focus on the two major asset classes in this conversation. Obviously that’s fixed income and equity and JD would probably get mad at me for saying that because it feels somewhat like a venial sin that we won’t talk about our third asset class, which we always state is volatility. And I think all of us here listening to this call that entering 2022, giving the possibility for more Fed tightening, slowing growth, elevated valuations, and more importantly from a political standpoint, a midterm election that we’re going to see some type of volatility, at least more volatility than what we’ve seen over the last 12 months. So with that, I’ll pass it off to portfolio manager, John Luke Tyner, who specializes in fixed income to give a lot of his thoughts regarding the bond market moving forward.

John Luke Tyner:

Yeah. Perfect. Thanks Dave. And always a great intro there. Nice going. So, as we have one day left in 2021, the Barclays AGG for the year is down almost 2% total return. And that will really be the first negative return on bonds that we’ve seen in quite a while. And so how does that pose for what we can look forward to next year and the environment for fixed income is obviously pretty bleak. Yields are very low, credit spreads are actually very tight. They tightened throughout most of 2021 and we’ve seen a drastic tightening, especially in high yield credits the last month or so. But more than anything, the biggest thing has been real yield. And as investors have realized that when you have an inflationary environment where you’re sitting at a CPI that’s printing year over year, near 7%, and you’ve got a 10 year treasury at 1.5%, that math just doesn’t make a whole lot of sense.

And so as we’ve dictated in our portfolios and really strive to avoid some of these fixed income exposures that we’ve talked about negatively all year long, it seems like we’ve beat a dead horse on that. And I think that moving forward, how we’re positioned across our portfolios just couldn’t be better for this type of environment. And I would say for 2021, the market in general basically just went up just like Dave quoted, we’re up about 30% on the year. And really the only test of draw down we saw was back in September where the market was down about 5% and interestingly, bonds were down about 1%. And so that leads me into my last point. Here is when you look at the fixed income dynamic moving forward, that teeter totter that bonds have played with stocks negatively correlated during ugly stock markets.

It didn’t work in 2021. I mean, not only are bonds negative, but also the one quick ish draw down that we saw, bonds were unaffected in hedging portfolios. And I think that as we look forward to next year, that we’re going to expect to see more of that and then I think it will be even more important because of the increase in volatility. The more chop we see in the market and the less effective that bonds are, the more important on these long volatility positions in the portfolio. And so, with fixed income being pretty ugly, Dave, what do you think about stocks for 2022?

Dave Wagner:

No, a great intro there. Great job on fixed income. I can tell you our outlook on equities moving forward over the next year are not as bad as what they are for fixed income. And this is the number that we always quote. If the bond market had a PE it’d be trading closer to about 72 times. The S&P 500 is trading closer to about 20.5 times forward earnings. So a very much more palatable number, but that’s still a historically top 5% reading going back to 1926. So as we do with every type of equity exposure we talk about here at Aptus, whether it’s an asset class or whether it’s an individual security, we love viewing the market through our yield plus growth framework and moving into next year… Well, pardon, let me take a step, it’s yield plus growth plus or minus multiple expansion or contraction.

And from an asset class perspective this year, we are putting that third portion into this formula because we do believe that as the Fed tightens that has historically been a good indicator, that multiples are going to start to compress. And right now the market is expecting from the large cap perspective to see earnings growth of about 9%. And if you look at that teeter totter that John Luke just used before so I’m going to copy him in here is if we get two turns changed to the downside on the S&P 500 PE multiple, so down to 18.5 times, that negates all of the 9% growth from an earnings perspective in the market, meaning that we basically just have a return of that first component dividend yield.

So the wild card moving into next year, because we know that we’re going to have slowing growth, we probably know that multiples are going to come down. The wild card next year is going to be earnings growth itself. Is it going to be above that 9% or below 9%? And we know that Americans are sitting on a stockpile of cash right now, more money than what they’ve ever had in fact, to the tune of 30% higher than where they were pre COVID. So as long as there’s a propensity for the U.S. consumer to spend that we could maybe get some type of return or some type of earnings growth above that 9%, I think that the market becomes a little bit more palatable from a return standpoint. And by no means from a return standpoint of what we’ve seen over the last three years when the market is up 25% on an annualized basis.

So that brings the theme together, that both from an equity standpoint and from a fixed income standpoint, we need to curb your enthusiasm moving into next year. So from an asset class standpoint, that’s our rundown. There are some idiosyncratic factors that we like to look at, different things that could potentially exogenously move the market that we always keep an eye on. So we have about four or five of them that we’ll walk through and I’ll pass it off to John Luke to talk about our first one.

John Luke Tyner:

Yeah. And again, this is the topic that we’ve talked about for all of 2021 and really at the end of 2020 as well, but just inflatious. And it’s been an interesting dynamic because if you had the forecast right on inflation, and you bought say gold or something like that at the beginning of when you thought inflation would really take off, you’ve absolutely gotten crushed. And so I think the important thing to remember here is, is how pragmatic you have to be with what’s going on in the market. It’s very forward looking. And what we’ve seen is the market has clearly looked through a lot of the inflation that we’ve seen the last year. Again, we’ve had some of the highest prem in 30 or 40 years, and yet the market is maintaining these multiples that are extremely high and yields, they are remaining very low.

And so the importance of all of that has meant very little. And what I think that we can look through is in 2022, will we start to see the inflation print subside? Will we start to see the supply chain issues work themselves out and capitalism prevail? And the answer’s probably yes. And so I think from that perspective, while inflation is interesting and important, and I’m not quite willing to call it peak inflation here yet, I think that we’re getting closer and closer, and I know Dave will laugh at me for that, but the bottom line is, is as long as the consumer is willing to spend that the market can generally accept. It’s not some of these types of multiples and then when you look at it from an interest rate perspective, as long as you’ve got the Fed buying the amount of bonds that they’ve been buying since the peak of the crisis back in March 2020, with, with the QE bond purchases, you haven’t really seen an environment yet.

It could be coming later in 2022, but yet where the market has had to absorb these bonds and create the pressure to really see horizon in interest rates. And we all know from a high level and a big picture that an interest rate environment of 3, 4, 5% doesn’t suit well for a government that has a debt to GDP at 125%. And so the bond trade, while it’s easy to look at it and say, bond yields are only going to go up from here, that’s been a terrible trade for a long time to be betting on rates are rising. And so we’re not quite in that camp yet, although we do think that there could be a lot of pressures with the end of QE and some of the tapering, and as we look forward to potential hike of interest rates, and I think that’s the second point there, Dave, [crosstalk 00:13:54] talk a little on that.

Dave Wagner:

That’s a great run down on the first two points of inflation and the Fed tightening and the facts around that. So if we take that one step further with the Fed tightening, what does that actually mean, because we know that the Fed has prognosticated quite well already. Hey, what are we going to be doing? Much like you said, John, we’re going to increase our tapering here to a faster cadence here, starting in January 2022. And then we may, after that, once that’s finished, given some time can increase rates and official takeoff. So obviously talking about some type of Fed tightening definitely brings you back home to a recent memory of 2013, that there’s a bad connotation to this next phrase within the market. And it’s some type of taper tantrum. And that’s when the market during a Fed tightening system tends to see a little bit more volatility.

So we went back to 2013 because we do expect some type of Fed tightening over the next 12 months. It’s already started two months ago. How does the market react? Well, the market is actually a pretty simple beast in its own. And during 2013, during the Fed tightening, while the market’s still getting tons of liquidity but it continued to go up. All right. So there’s no need to worry to try to get out of the market at any point because there’s going to be some type of taper tantrum, and you can get back into the market at a better price. We don’t believe that to be effect. We still continue the path of least resistance can be up just with a little bit more volatility due to where we stand out from a cycle perspective and what the Fed has been doing, so. Markets still go up during a Fed tightening is the rule thumb here. So John Luke, would you like to take us to our fourth point?

John Luke Tyner:

Yep. And I think that this has been one that we saw being largely pressed at the beginning of the year, and that was being long China and long em, and it was a very highly talked about by analysts and market pundits of you need to be long China. They were the first to recover off of the COVID bottom. They have the most potential growth going on. And really a lot of that was thrown on its face with some of the real estate debacle, as well as the tightening by their government on a lot of these different private sectors and private pieces of their economy. And the question I think is, is China investible? And what we would generally say is that when you look at the more communist regime that they run and some of the also ESG pieces of that puzzle, it doesn’t look really pretty, right.

There’s just a lot of unknowns with what the government can do, obviously with all of the regulations that they put through in 2021. If that was proven, you’ve seen the ever grand fiasco slightly roll out with… I think that they’ve come out and actually defaulted on some of the debt. We haven’t seen how that spilled over to the rest of the market. I know that back in the midsummer, we were talking about some layman types of spillover effects, like we saw here in the U.S. with Lehman Brothers in ’08 and we haven’t really seen that. But from a high level, China’s been a very difficult space. I was actually looking at KWEB, the technology fund this morning, down 50% on the year in 2021. Pretty ugly from that side. And then when you look at the ESG attributes of China, they’re 0 for 3 when you keep score from that front, so.

From the environmental side, obviously they’re polluting more than anywhere else. From the social side, there’s a lot of issues there. Just ask LeBron James. And from the government side, we’ve seen a whole lot of big issues this year with just regulations crammed down, different proprietary faces as far as entrepreneurs in China and it just doesn’t look pretty. So it’s an area that we’re not really intellectually prudent to make a great call on there, but it doesn’t look great.

Dave Wagner:

Great run down there and to the fifth one, here’s an area where we believe that we are intellectually prudent and it’s staying away from the highly valued high flying stocks, i.e., cough, cough, that’s probably a bad representation of something, but it’s the ARK funds themselves. We’re still staying away from the highly valued companies. We know that when interest rates rise, the value of their cash flows substantially go down due to the discount rate. So that is one of the areas we completely stay away from. We’re not here to chase. Valuations are going to normalize next year across the entire market and it’s going to normalize more for those with the quintile one valuations from a PE standpoint or from an EBITDA standpoint. So we’ll stay away from that.

So those are our big items for 2022 and these are 20 minutes that you’re probably going to never get back in your life for listening to, but I will pass it off to John Luke to give us some closing comments.

John Luke Tyner:

Yes, no, thanks, Dave and on that last point, you’re assuming that those companies actually have earnings or EBITDA.

Dave Wagner:

Yes, touche on that one. Majority do not.

John Luke Tyner:

But we wanted to thank you guys for your time for the great year that we’ve had in 2021. Hope to get out and be in front of you guys more often as the new year comes and again, Happy Holidays and Happy New Year to you guys. Enjoy some great time with your families and we’ll be thinking about you and we appreciate you guys’ friendships and business and just getting to be around you guys all the time is great. So, thanks guys.

Thanks everyone. Cheers.

 

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