Transcript:
Tom Vaughan:
Hello, everybody, welcome to Monday, the S&P 500 was down .08% today, really kind of a slow day altogether, the NASDAQ was up about a half percent, I was good. I saw the Russell 1000 actually was up, 2000, sorry, the small cap index was up over 1% today also. So those were the kind of the big areas. But I’m going to share with you a report that I read about today from Goldman Sachs.
So what they did is they looked back to 1962. And they looked at inflationary timeframes and how the market did. So during what they consider an upward inflationary environment, the market average 9%. In a downward inflationary environment, the market made 15% average. When inflation was already above average, and then continuing to rise, the market made only 2% per year during those timeframes. So what you’re looking at really is this battle between kind of inflation, and not inflation. The Federal Reserve is running around talking about how inflation is only gonna be temporary, that we’ll see some big jumps this year, and it’ll come back. Reading lots of articles saying that they basically don’t agree with the Federal Reserve that the stimulus that’s coming from American’s Job Plan, American Family Plan, is going to overdo it, and the Fed will have a hard time getting it back under control.
So that’s the one big thing and you can see why the market is concerned with that. Yet, at the same time, you know, since March, the the 10 year Treasury has basically gone sideways in terms of the yield, which is a really good representation of what the market feels about inflation. So you’re looking at the expectations for inflation, at least since the middle of March to be moderate. So, maybe what the Federal Reserve is is saying is true. And really what you’re doing that is you’re getting a scenario where you know, those growth type stocks would do better, as far as that goes, the tech stocks and what have you, if inflation truly is temporary.
And so here’s the big battle that’s playing out. And here’s my solution to it, I would be super focused, and this is what we’ve done with the portfolio on those things that theoretically could do bad or do well in either scenario. So for example, first of all, the broad market is not a bad place to be, because especially when there’s a battle going on between two different sides, we own ’em both. And so we do, we have the broad market, total stock market index, the S&P 500. And then the other things that you’re going to focus on is things that might do well, the irregardless. So for example, I really think that with this reopening, you’re going to see retail, you’re going to see travel, you’re going to see financials. Banks do a better, in this environment where they can do more loans, and those types of things. And what we’ve already had, in terms of increasing interest rates, has given a bank some room to make some more profits.
For example, you probably see a lot of energy usage in terms of people starting to move around more, and what have you to, and obviously, there’s an awful lot of money on the sidelines that are coming into these things. Infrastructure, I know, it’s been in the news a lot lately, but it’s probably going to happen. And so we’ve got both kind of the traditional infrastructure side and the technology infrastructure side. And so really kind of continuing to take a look at those things that are going to do better. And one of the areas that I am seeing start to pop right now a lot is the real estate side. And I think what’s happened is that real estate got sold off so hard. And now there’s some realization that probably not everybody’s going to be working from home. There’s some companies that are trying to get people back in and such too.
So, there’s some high dividend paying there that which is great. And a low interest rate environment, you know, there’s, there’s a whole bunch of different things that I think do well, just a basically focusing on the reopening itself, and those areas that might do well in that reopening. Clean energy, which has sold off pretty dramatically, and there’s a couple of them that seems to have found a bottom and they’re coming back around. So it’s another thing to look at, because again, that’s part of that infrastructure program, that they’re probably going to get through at some point also. So really fascinating to see, how all of this is going to play out.
And but I think, the focus should probably not be so much on, are we going to have inflation, are we not going to have inflation, because that’s not very clear. You can see where the risks are and where the rewards are in both of those arguments. But in terms of where the markets going to go, I don’t know. We were supposed to have hyperinflation after the all the stimulus that happened from the 2008 downturn, and they had more trouble actually keeping inflation up, even close to the 2% target. So we almost had deflation in an environment where we’re supposed to have hyperinflation. So just because somebody says it’s gonna happen, doesn’t mean it’s gonna happen. It’s the same thing we talked about last year, during the downturn, really, at this time, everybody else is gonna go farther, everything’s gonna fall apart, Great Depression and all this out. They were wrong, right. So a little bit careful. And so you kind of hedge your bets.
But I would say that the thing that really appeals to me about this situation is that we’ve all been cooped up in our homes, and now we’re going be able to get out, and I’m not just here, but around the world. And it’s just starting really, I mean, it’s really just starting, we still don’t have international travel, all these different things that are going to happen over the next 12 to 24 months. I think this could be an explosive environment for that type of spending. And even if it creates some inflation, I still think it drives earnings. And I think that’s what can allow things to really go here so.
Take some patience, as we watch all this stuff play out, we’ve got this back and forth, tug of war going on. But I think it is important, I can see what’s happening. But I think, we’re in the right spot, just keep focusing on that reopening, and how that’s going to work. I mean, one of the interesting examples would be healthcare. So, I see my doctor on a video call, and I hadn’t, wanted to go do my labs, because I was being careful. And so I did that, and, and she’s just booked up, she said, Man, I couldn’t get anybody to meet with me, even on a video. Now, I’m booked out through September, right? So everybody’s running around now, trying to get their stuff done, that they didn’t get done, you know, whether it’s a dentist or whatever it is. So all of that is an economic stimulus, it’s all going to come in, and your dentist is going to make some more money than they were making last year because they couldn’t meet with as many people and they’re going to go off and buy a new Tesla or something.
So anyway, that that’s, that’s the object of this whole thing. And that’s what I don’t think that thesis is going to change here, regardless of whether we have inflation or not. It’ll be interesting to see how you have to play that and how that works for the bond market, for example. So anyway, that’s my outlook for today, looking forward to really being able to see how this plays out and we’ll talk to you tomorrow. Thank you.