Transcript:
Tom Vaughan:
I want to cover what I see is the important components of the stock market for this week. And as as normal, you know, this is another one of these weeks where things are quite interesting altogether, and quite a few different things have happened. And so let me share my screen. And I’ll kind of take you through what’s going on. Can’t really summarize what’s happening in the market right now without spending a little bit of time talking about what’s going on with the, you know, the virus itself. And so this is a chart here for the United States going back from the beginning. And you can see, you know, this delta variant is quite proficient and moving out and affecting a lot of people a lot like what we saw here at the end of last year, also. So we’ll have to see where this goes. There’s quite a few projections that I’ve read that say the thing might peak out if it follows India, and the UK is pattern might peak out, you know, first part is September. So we’ll see what happens as far as that goes. I will say one thing interesting in terms of this particular virus right now, when you look at it, and you look at what’s happening with the stock market, the stock market is essentially ignoring for the most part, especially when you look at the overall market, this virus, even the Delta variant, which is you know, obviously quite contagious, is being ignored. And part of the reason is, because we’ve kind of figured out some ways to continue to operate the economy. This is impacting certain areas, there’s no doubt, matter of fact, we just had the numbers come out from retail sales, they were 2.3%, lower in July than they were in June.
Lots of reports from airlines talking about some cancellations. And, you know, the last minute scheduling of flights has dropped down, you know, those types of things, those are probably directly attributable to what’s going on with this particular, you know, surge and what have you. So, now, it is something to take a look at. Having said that, if you look at what’s going on with the market, at least so far, this is the vanguard total stock market index. Okay, so VTI, it’s a it’s a, this is an exchange traded fund, and ETF, this is the last five days, each one of these bars is a 10 minute bar. And this line here shows the average for the previous 210 minute bars. And you can see in the last five days pretty decent upward market, even though we’ve seen this big surge in you know, cases, the market continues to march on even though we’re seeing airlines have problems and retail sales problems, the market continues to merge on. And that part of that is because a lot of these stocks that are affected are smaller in size, and they don’t have as much impact. This particular index has every stock in it, it’s essentially about 98% of the stocks here in the US are in this index, but they it revolves around the size, so Apple is going to have a much bigger impact on say, that index, then some smaller company would so and that’s partly why we’re seeing this kind of you know, motion is because these big companies in general, are still doing pretty well.
If we look at what’s happened in the same index VTI for the last 12 months, you can see just you know, we had a September downturn in October downturn. And these bars are now one day age. And you can see it’s really just a fairly smooth movement. I mean, if you look at the 200 day moving average here, it’s pretty much straight up. I would say. And I’ve been saying for a while continue to say this, I wouldn’t be surprised to see some type of a downturn, you know, we get from, you know, two to 20% downturns on a pretty regular basis. I mean, this was a 10% downturn. But it’s been a while since we’ve had one. And so I just want to get people kind of set up for that. I feel personally, these smaller downturns that happen, are what allow us to get to the next level of bargain shopping comes in people buy and it creates that turnaround and momentum, and then a bunch of people jump in and we start to see some motion. So that’s really important. But don’t worry about it too much. Just be prepared for it and look at it maybe from a positive standpoint, like hey, that might work to get us to the next level as far as that goes. Because if you look at and I’ve shared this chart before, this is the fed fund rate for all the way from 1955. So this is the what the Federal Reserve charges, banks. And if you look at these gray columns, these are recessions And oftentimes, recessions are associated with big market downturns. Here’s the 2000 downturn recession and the 2008. But I pointed this out many times we haven’t had a really large more than 20% downturn happen
unless interest rates are coming up. And so you see here, you know, rates are all the way down to zero. And you don’t see every time you see one of these gray bars, you see rates have been coming up, rates have been coming up rates have been coming up, etc. So what happens is the Federal Reserve just raises rates too far. And eventually that kind of slows the academy down and Then the stock market can take a hit from that. And then eventually it recovers. And often though lower rates after, which is exactly what happened here during the pandemic, they lowered rates, and back down to zero.
So, again, great market right now, super smooth, things are going, Okay. And one of the things that’s really kind of supporting things is inflation as a whole. And so this is a chart of the 10 year Treasury yield. And going back to the last two years, and so you can see here, you know, it was up and then it came down during the pandemic Federal Reserve was trying to stimulate the economy and lowering rates. And now we’re on this trend upward here. And that’s not a bad thing. What that means is that the bond market sees future growth in the economy, which is exactly what we want to see. But one thing interesting about this is that you can see this movement really strongly up is a bad thing for the market, the market kind of struggles in these environments. And the fear at that time, this was February, March, this is when they were releasing the COVID relief package was that they were going to overstimulate the economy is going to open too fast. And you can see that that’s now come back down really to this trend as a whole, I would have had a little bounce, just since last Friday’s jobs report where the reopening looks a little bit more possible because of that. But what you really want to see and one of the reasons to follow this is you don’t want to see this falling substantially, that means the economy might be having trouble. And lo and behold, it did there. Of course, during the pandemic, you also want don’t want to seem to be going up too fast, because that can create inflationary pressure that creates problems, you want this kind of slow growth. And this is a good example of that. And we’re on that path.
And if you look again, back at the stock market, you can see what’s going on there during the same time pretty smooth motion. And again, it’s it has a lot to do with what’s going on, you know, in the overall inflationary environment right now. And you can see some of what’s happening there by looking at the 10 year Treasury yield. So I’d encourage you to follow that like I do. Okay. And then just the last thing that’s kind of interesting having to do with the rotation that’s happening, this is the nine box view that Morningstar puts out and basically put the companies in one of these nine boxes. So large growth, you know, be like Apple, Microsoft, and you know, large value, usually, as a banking system like JP Morgan might be in that category. And so they’ve got these nine pieces. If you look, last week, the winner was growth. So that whole column, both, you know, large, mid, and small all the way across, that was the winner last week. Well, this week, it’s exactly the opposite. The value component has been the big winner. And that growth is the actually the red side as far as that goes. And, you know, my look at this at the moment is that there’s just this heavy rotation that’s happening. And it’s again, it’s just because there’s very unclear what’s going to happen, we’re going to open we’re going to open too fast, okay, we’re not going to open too fast, maybe we’re even gonna open too slow. And the Delta variants here, and that’s going to cause some problems.
And so there’s just, there’s no real trend, because there’s no known situation. And again, none of us have been through a pandemic, there’s no playbook for pandemic. It’s certainly in the modern stock market. And so you’re getting this motion. So my thought process is, and I’ve talked about this before, but own all nine boxes. So that VTI that I just showed you that Vanguard total stock market index is all nine boxes, they basically are buying all of it. Because I think that’s going to continue eventually a trend might come out of this, just in the sense that, you know, there might be something that finally happens that, you know, reopening really establishes itself or what have you, and we might be able to find some of those trends that last more than a week. But at the moment, I would highly recommend doing what we’ve done here, which is just you know, this broad market exposure. I think that’s the best way to go as far as that goes. So, really exciting, very interesting week. This is a historic timeframe, really.