Transcript:
Tom Vaughan:
Tom Vaughan: I always like to start the show off with a summary of what I see happening with the stock market. This week has been interesting in that basically, every day, it looks like including today, the market has been down, so this will be five days, including last Friday that we’ve had a downturn in the market, which is pretty unusual. In this marketplace that we’ve had for, at this point in time: All pretty small down days, so nothing too dramatic. But one of the questions that has come up is, “Why? Why is the market coming down? What is causing this weakness at this point in time?” And so I’ll kind of start with that thought process, and I’ll really start with another question that came in, which was just… last time, last week, I showed how many job openings there are. And so this goes back to 2000, and it shows how many job openings there’s been over time. You can see a drop during the recession here in 2008. It certainly dropped here during the pandemic. But look at this skyrocketing motion here. So now we’re at almost 11 million jobs that are open, unfilled jobs right now: Highest ever. So the question was, look at the trend. So if we look back here, we should be at it maybe, 9 million open jobs just based on that trend, and the question was, “Why are we at 11?” And it’s really fascinating, and this is so unusual. This is a definitely a different environment than anything else we’d seen in this trending time, in the fact that although we have all of these open jobs, people aren’t taking the jobs.
And so what we saw again last week, only 235,000 jobs were created, out of these 11 million openings, with over 9 million people unemployed. Only 235,000 people took jobs, and so there’s a variety of reasons for that, where we have a scenario where people are afraid to come back to work because of the virus. And so the Delta Variant is probably having an impact there. Or they have childcare at home, and they don’t have a solution for that, and they’ve got, up until this week, last week they were getting an extra $300 a month to be employed… sorry, a week to be unemployed, that has now expired. So we’ll see what happens there. Schools have reopened for the most part, so we’ll see what happens there in terms of the childcare and what have you. But what you have is this scenario where, we’re currently at 5.2% unemployment. We were at nearly 15%, so we’ve come down quite a bit. But if you look here, prior to the pandemic, we were at about 3.2%, and so we still have an awful lot of unemployed people, and a lot of jobs open. That is one of the problems that is causing some of the weakness in the market. And so there are other things that are happening, as far as that goes. We’ve got a Federal Reserve Chairman, who people seem to like, who is now up for either re-nomination or replacement, Chairman Powell. So that makes the market kind of get a little sideways. We have a situation with this debt ceiling that has to be approved to increase the debt ceiling for the country. It’s a political process: There’ll be a lot of probably negative talk. The market won’t like that either, and that’s probably coming at us. Those two things will resolve themselves, okay? We’re going to have a Federal Reserve Chairman, that’s going to work out, okay. That will happen, we will have a new debt ceiling at some point in time. But in the interim, we’re going to see some weakness most likely. And I actually think it’s an opportunity, and I’ll show you why here as far as that goes. But one of the things that has happened. And I think the thing to focus on, probably the most, because it’s the hardest thing to solve, is this unemployment situation. So we have a lot of unemployed, but if you can’t get him to come out to work, that means you have a tight labor market, which has never happened before.
If you have 11 million jobs open, you’re going to fill a lot of them pretty quickly, usually. But what’s happened here is that we’ve basically had to pay more. So, where we were paying maybe 3.6% increase in pay, it’s now growing at 4.3%. That probably continues to go up. The companies are continuing to get more customers coming in the door, and they need employees to basically service those customers and fulfill their revenue. And so we’re seeing this scenario where they’re paying more to try to both keep their existing people, or hire new people. And so theoretically, that can have an impact on the earnings, correct? I mean, if a company has to pay more in dollars, than they used to for the same labor, then you got a scenario where there could be a drop in earnings, and again, that’s something that the market would look at. But I’ll tell you what’s happening and I’ll show you that that’s not selling much of a concern right now. So first of all, this is a chart of the Gross Domestic Product, going back to, roughly 2000. And you can see, it dropped down during the 2008 downturn, it dropped down here during the pandemic. And the Gross Domestic Product is essentially the total production of the whole country; all the companies in our country. But look at what it’s done now. So it’s, it’s higher than it was, and even if you draw a trend line on here, you can see we’re right back on trend. So if you think about that for a minute, it’s kind of an amazing component is that we are producing as much as we used to produce at 5.2% unemployment, and we were at 3.6% unemployment prior to the pandemic: So, we’re making more with less people. So, that’s an increase in productivity.
Part of that was caused by the pandemic itself: It pushed the entire world into a kind of a digital world. With things like what we’re doing here, this show, and zoom and video conferencing and all of this robotic pieces that are coming in. And so the very robust, that’s what’s happening right now. There’s a huge increase in productivity, and look at what’s happened to earnings. So this is the corporate profits, after tax. And so you can see, it was kind of actually sitting around from 2012 to 2020, before the pandemic: Looks pretty flat. And then look at this growth: Unbelievable corporate profit growth. Well, that’s why the market’s doing so well. On the projections, I’ve heard some projections that will be up 30% higher even over the next 12 months. A big piece of that is that people are continuing to come out for the kind of the reopening and spend some money. There’s a lot of money that was saved last year, that’s being done now, but they are having trouble getting people in, so they’re having to sell what they can with the people that they have; and so that is creating a higher profits. And that’s why higher wage for those people that are coming out, probably won’t knock down profits that much. Again, if the expectations is 30% profit growth, and the wages are going to go up more than expected, then there is some adjustments that the market will make, because maybe it’s only 28% profit growth, because the wages go up. And so that’s really what’s happening right now, is we’re just kind of adjusting. And all of this started this five days in a row of down… last week, last Friday, when they released the report for the number of people that started new jobs for August, at only 235,000, which was much less than expected. So again, it’s not because there aren’t jobs: It’s because people aren’t taking the jobs, as far as that goes. I think that works its way out at some point in time, but it is going to be a bit persistent.
The virus is there, and it’s scary to people, and a lot of these jobs are for client facing, and so there’s some fear that catch that virus. And so that type of thing is going to be the most interesting piece to figure out how we get out of that scenario, as far as that goes. I do think that companies will get more and more efficient. I believe robotics, for example, will start to get more and more interesting to companies at all levels. Even fast food, just because they need to get some way to produce, because the people are still coming in trying to buy their products. And so if they don’t have employees to do that, then they’re going to lose out on what they could make so. And so you can see, really what’s gone on here. Now, combine this really high profit scenario that we’re in right now, right? Unbelievable. This is unbelievable, really, really amazing, and this is why the stock market keeps going up. But combine that with really low interest rates. So this is the Federal Funds Rate. So the Fed sets rates for banks, and that’s what this is. And it really translates all the way through to all the other rates that are out there: Loan rates, the Treasury yields, those types of things. Now, this is going back to 1955, which I just find kind of fascinating. We had this hugely inflationary time period, in the late 70s and early 80s, where the Fed funds rate was 18%. Really, really amazing. Look at what happened: So 2008, we had this big recession, that’s what this gray part is here, and they lowered rates basically down to zero, and kept him there for a long time. And the market just went bananas. Really good market during that timeframe. And then they started raising rates and we had a pandemic, and now it’s down to zero.
So I’ve shown this chart multiple times. But you combine a zero interest rate where the banks are paying nothing. I mean, I just had a client tell me that they were being offered, less than a half a percent on a one year CD, and they wanted to look at possibly investing that: That’s happening everywhere. So money’s coming in, because of that low rate. And stocks and real estate are the two areas that do really well in low rate environments. And then you combine that with this spectacular growth in earnings. It’s a fantastic time to be a stock market investor. And so when the market comes down, like it has been coming down, that’s opportunity. And that’s why you keep seeing the “Buying the Dip” group come in. And eventually come in here and buy this dip, also; most likely. Because this hasn’t changed, I mean, they will eventually start to raise these rates. And the Federal Reserve is also buying bonds as a as a stimulative portion of this of the stock market; they’ll eventually start cutting those back. And that will create some problem for the market, but it’s not happening now. And so this is a pretty incredible timeframe for to be a stock market investor, in my opinion. Even with this weakness we’ve had over the last five days. It could get worse, but the worse it gets, the more opportunity will be there and then eventually, you’ll see the Buy the Dip people kind of sweep in. So, that’s my summary for the week. Very fascinating timeframe. This is an unbelievable timeframe to be really paying attention and learning from this and see how this plays out. So look forward to talking to you again about this next week.