Tom’s Thoughts on Investing During Market Volatility
Transcript:
Easan Arulanantham:
So as you saw today, it’s been a bit of a rough red day today. And the markets falling. Yeah. What do you recommend we do or so to do this kind of market?
Tom Vaughan:
Okay, so first of all, the two things that happen number one is, every time there’s a downturn, there is more information given in my opinion by the market than when we have up turns. Because one of the things that I watch for very, very closely is what falls less. And you can really see what people are interested in. Sometimes an upturn is, you know, you can look at as Oh, these things are going up faster. And that’s exciting. But they don’t have as much staying power as things that I generally find that are holding up better and down market. So I actually kind of take these times, and I put way more focus into all of the different options that are out there, during downturns, because I really feel like that that’s a time that you can learn something. And we have, if you check on our channel, there, we have kind of a four step process for dealing with downturns. And so the first step is really all you’d want to deal with right now, because this market isn’t down that much. And that is to figure out, you know, what’s holding up, I like to say to myself constantly when I’m going through charts or looking at investments, is where is the money going? Where’s the money going. And so, let me share my screen. And I can kind of show you, you know, an example of what I would look at as far as that goes.
Okay, this is a program called White charts. It’s a really great program, actually. And what I’m showing here is just the last week, and so, you know, obviously, as Ethan said, it’s been a rough week, this is VTI. Okay, so VTIis the vanguard total stock market index, this is my base, I use this constantly. And what this is, is the, essentially, the entire US stock market incorporates almost every stock except for some of the very, very, very small stocks. And so I use this as a benchmark constantly, I want to see how things are going, cuz to me, everything’s relative, and relative, in this case, to VTI. And so you can see here on this chart over the last week, you know, we’re down 1.86%, as, as of right now, last few minutes here. And so you know, what’s happening out there. So I go through a series, and I’ll actually, I’m going to give you a very simplified version of what I normally do here, I go through hundreds of these different exchange traded funds to kind of see what’s going to happen. But one of the things I always like to do, and I’ll click this here, we can see kind of a side by side comparison. So now we’re looking at VTI, which is the purple, and VX us. Okay, so this is a Vanguard index. That is the total international stock index. So again, this is a vast majority of the stocks that are out there on the international stock markets. And you can see it’s done worse, right? So it’s down 2.76% versus VTI. And so, you know, again, I’m just trying to see, you know, where is the money going? Well, it’s not going into international investing, which actually makes sense to me. Because right now, you know, since the Federal Reserve started talking about raising interest rates, towards the end of 2023, we started to see some strength in the dollar. And so when the dollar goes up, you’re converting back this foreign currency back to $1. Back to the dollar, and you could actually do worse than that.
So if you’re, if you buy a stock or an ETF that’s International, and it’s up 5%, but the dollar goes up 10%, you actually lose money in that situation. So that makes sense to me, but I always like to check. And then the next thing I’d like to do is, you know, how is the large cap doing versus small cap, so I’ve just clicked the VOO, which is the vanguard S&P 500. So this is a pretty good replication of the index that we talk about all the time on our daily videos, which is the S&P 500 you can see it’s down one and a half percent versus 1.71 for VTI for the total stock market. So that does tell me that some of the money or is going towards larger stocks or at least not leaving there quite as fast so people are hanging in there and some of their bigger stocks and and I can kind of confirm that by looking at this next index. And so this VXF is every other stock on the stock market that isn’t included in the S&P 500 that is in this VTI so again, it still doesn’t include some of these really small micro cap type stocks but it includes most of them and again, you can see that fell even farther so right now we’re seeing large cap do a little bit better, small cap doing worse, and internationals not doing that well. So you know, we’re kind of narrowing it down.
Next thing I’d look at is kind of value versus growth. So here is VTV. And this again, Vanguard, I like using Vanguard for these because they have very broad indexes, they have very low internal costs, so I can kind of get a really good sense is exactly what’s going on in that particular category. And you can see value is, is the worst one we’ve looked at so far. It’s down 3.76%. And so that’s pretty fascinating to me, because, theoretically, when in higher inflationary environment, values should do better. But what’s happening right now is because the Federal Reserve, and you can see actually a Fed reserve mat right here. And, and came out and spoke, Chairman Powell, and I talked about raising interest rates, what happened was that that took some of the heat off of the off of the thought of inflation. Because if the Federal Reserve does start to raise rates, that generally keeps inflation under control. And I think there was a period of time where the market was concerned about what the Federal Reserve is going to do. So value is a place where money is actually leaving, because that’s another thing I look at also is where’s the money leaving from. And so you know, in a short period of time, here, we’re seeing some motion out of value. And let’s see if it’s going to the growth side.
Alright, so again, this is the G. And this is, Vanguards growth, hey, it’s up. That’s pretty spectacular, actually. So you got a market that’s down, everything we’ve looked at so far has been down, large cap was down less, but it’s still down. This is actually positive point seven 2%. So we’re seeing, you know, some motion here, into the growth side. So that’s where I would start to really focus, you know, I’d go through hundreds and hundreds of different growth ETFs, and try to see how they’re comparing to each other, and how they compare to VTI. And so this is the first step that you would be looking at, in terms of a downturn and dealing with that. And it tells me that there’s some interest there. And so I’d have to figure out what I want to get rid of if I’m because I’m usually fully invested, I believe in being in the market, except except in extreme situations. So what am I going to get rid of, you know, to buy these, that’s sort of another story.
But essentially, what’s happening here is I’m seeing that growth is doing quite well. And I’ll give you a couple examples. We just purchased these over the last couple of days, using this process. One is basically an innovative technology ETF through SPDR spider, and that is XITK. And again, we just bought this, and we’ve actually we’ve had this for quite some time, but we added it back into our model again. And that is up 1.4%. So you know, even better than the overall growth, there is a motion towards innovative technology companies again, you can actually see that it was kind of falling off. And then at the same time we saw value fall, we saw this run up. And that’s because the Federal Reserve met and had their meeting with reporters right at this time. And when they started talking about raising rates again. And that meant that inflation could be under control, which meant that growth stocks could do better and a lot of money started flooding back into things like innovative technology.
And then the other one that we bought, we bought this yesterday is a cybersecurity ETF global X, and it’s called bug. And so that’s up even more about 1.6%. And again, you can see the same inflection point, when things you know, started to turn around for growth, that’s when this started to go also. Now, of course, cybersecurity has a huge, you know, theme behind it, which is, you know, these ransomware is that are happening, my effect on that same Wednesday potent and Biden were meeting and one of the subjects was these, you know, hacking events and ransomware and those types of things. So, this is really pushing, you know, money towards cybersecurity type companies, I have about four of the cybersecurity ETFs that I follow on a regular basis. And all four of them are doing better than the market it right now as well as even in the last month. So that’s, that’s, that’s what I would say, you know, you that you need to do right now or that I’m doing right now, or what have you is just being able to kind of look at where the money’s going, what is still doing well, I think you get better information out of a downturn than you do out of an upturn, in my opinion, in my experience, actually. So I think it’s a really interesting time to be looking at investments.
Easan Arulanantham:
So do you think there’s ever a time there, this could be just a fake out, you know, people deemed super reactionary and like it’s gonna stabilize next week, like, how do you know it’s a trend versus you’re jumping the gun?
Tom Vaughan:
You don’t obviously and so You know, one of the things that I always try to do is try not to fall in love with the thing. So we just bought these two pieces, and I hope they do well. And I’ve done a lot of research, you know, and there seems to be, you know, some momentum behind them, there seems to be, you know, they’re going up when the markets going down, those are really important things to me. But you’re exactly right. I mean, that could turn around next week and turn into something else. And so one of the other things that we have done and we continue to do is we continue to build up our broad market exposure. And so buying the S&P 500, for example, just under, you know, one of the things if you’re not sure where everything’s going to go by the whole market, because over a longer period of time, the market goes up. And so you don’t have to know like, hey, it’s going to be cybersecurity, or it’s going to be growth versus value when you buy the whole market. So we are right now, because we’re seeing so much rotation between growth and value that’s happening, you know, on such a rapid basis, which is actually a normal market, that’s what’s been happening for years prior to the pandemic, then you want to have more broad market exposure, so you kind of own everything. So if it runs to cybersecurity, well, you own that, if it runs to growth, you own that.
And so that would, that’s one of the other pieces that we’re doing right now is we’re building out and continuing to build out our broad market indexes, like VTI, for example, here too, but because I think it’s not a bad time to be accumulating those things when they do come down, because one of the reason the markets coming down predominant is because they’re talking about raising interest rates. But the reason they’re talking about raising interest rates, is because the economy’s doing well. And so a lot of times when I see them start to talk about raising interest rates, the market goes down, and then it finally realizes that, hey, you know, these companies are making a lot of money. And especially as earnings are going to come out here, you know, over the next three weeks or so. And so we’ll start to see probably some really good earnings, and the market will turn around. So owning that broad market right now, I think is a really good way to go. And historically, prior to the pandemic, we’ve had most of our money in broad market indexes, and the minority of the money and things like this, like the innovative technology and the cybersecurity. And, and that’s worked out really, really well. But the pandemic changed things pretty dramatically, because an entire section, the economy just closed down. And the broad market really really underperformed in that environment. And we had to get a lot more targeted. But I think what’s happening right now is we’re starting to get more back to where we were in 2019.
Easan Arulanantham:
Cool. So we’re these questions came in that’s related on inflation is expected. Is it a good time to invest in the market if I have cash line on the sidelines?
Tom Vaughan:
Yeah. That’s a really good question. Because one of the things that’s changed, is, if you look at what’s happening right now, inflation is not as expected as it was. And I know that sounds crazy, because everybody is talking about inflation. But if you look at the 10 year Treasury, from the bond market, right now, let’s see if I can pull up that chart really quickly. If you look at the 10 year Treasury, you basically have the situation where the market as a whole is starting to not think inflation is going to be as strong. Here’s the bank, you know, Yahoo Finance, and this is the 10 year yield on the 10 year Treasury. And you can see, you know, we had this big run up, and that was the expectation for inflation. But now what’s happened, we kind of have been falling, that’s a lower peak, lower peak, lower peak, lower peak, and we’re hitting lower lows also. So the trend is down. So what what the bond market is telling us right now is that inflation is mitigating itself. And what happens then, is that you start to see some of the areas of investment, I think it’s a great opportunity to buy in that environment. So I guess my first thing would be to challenge the fact that inflation is expected, yes, within the general population and what have you, but the bond market is a much better predictor than the general public, right?
And so the bond market is lowering rates, it lowers rates because it feels that the inflationary pressure is going to be less. And the reason that it feels it’s going to be less is because now the Federal Reserve is talking about taking action at some point in the future, to start to tighten things up, which will maybe keep inflation at bay. I do think it’s a it’s a challenging time to invest because we’re not sure what’s going to happen. We haven’t had a pandemic for 100 years. And so you know, what do we do here and then again, that is what Why we are broadening the portfolio into more of the broad market and a little bit more away from the, from the growth versus value components that we’ve had, you know, in the recent past. So, I do think it’s a good point, I think there’s some good opportunities to buy here. You know, you might want to to kind of dollar cost averages, things come through here. But I do I think that inflation expectations might sort of start to mitigate here. And that could be even better for the market.
So you’re saying like, a good healthy economy has some inflation, it’s only when inflation goes wildly out of control that is, drives them or kind of makes their fear in the market?
Yeah, I’ve said this forever with my clients, which is just, you know, the, the, the stock market reacts so negatively to increases in interest rates. And really, the only reason they’re raising interest rates on the Federal Reserve level is because of the expectation or the reality of an economy that’s doing well. And that’s exactly what you want. You want an economy to do well, but yeah, there is that Goldilocks piece, right? If the economy does too well, and you get that higher inflationary scenario, and then the Fed has to chase that down very aggressively. That causes problems, because now all of a sudden, you start to see this, you know, reversing because Whoa, inflation is out of control. And so that’s been and the reason we’ve seen, you know, this movement, you know, from August to through here, is the fear that inflation could get out of control in this reopening, especially because the government keeps pushing out so much money, right, between these stimulus pieces of what have you. So, yeah, you need some inflation. And Matter of fact, over the last 12 years, inflation has been too low, it’s been below the Fed target. And for the first time, this summer, the Fed has changed what they’re trying to do, they were trying to, you know, get 2%. But what they would do is, every time they got near 2%, they would start to increase rates. And they weren’t averaging 2%, I think it was one and a half to one and three quarter percent on core inflation. And so now they’re talking about letting it render three to try to get an average of two. That’s a big difference. And it could be very healthy for both the economy and the stock market.
I’m super excited about that. We’ll see how that works out. But that that I think, is a really big difference. Because most of the big crashes 2000 2008 and even end of 2019 were periods where the Fed was really in hindsight, there were over raising rates, they were getting too aggressive. And when they did that it brought that down. And what they talked about this summer is that they kind of realize that as I oops, you know, we have caused some massive global downturns by being too aggressive on raising rates. And now, you know, we need to cut back on that. And so that’s what they’re, you know what they’re talking about now, which again, I think could be a really, really good thing for the stock market. We’ll see how that plays out.