Transcript:
Tom Vaughan:
I do like to start with my weekly summary of just kind of what I saw happening in the market this week. And of course, we’re just in this incredible timeframe, there’s
more crosscurrents going on than I’ve really seen in my entire career, it’s a great time to be looking to learn what’s happening, and to watch and such, too. And so if you look at kind of the stock market, here’s the S&P 500 year to date. If you look at that fairly closely, really, we’re kind of going sideways. If you take out that kind of first big drop, at the beginning of the year, we’ve been going kind of up and down in a range, the highest point to the lowest point there is 14.6%. Down. And you know, this last week, we kind of went back down and challenged those lows that we hit back in March. And so that’s, you know, not unusual in this scenario. And it’s because we have these kind of battling forces, some of the things that are happening are really good, some of the things that are happening are not and so you’ve got people, you know, buying it other people selling and of course, that creates a sideways motion.
So what I’d like to do is just kind of cover some of these major forces really quickly, all of them had a play this week, that’s for sure. And just kind of see what was going on with those kind of what’s good about them, and what’s bad about them, at least from a financial standpoint.
So, you know, first is really the China lock downs. So they have a zero COVID policy. And so they’re locking down large portions of China, you know, 100, and 80 million people supposedly are under lockdown right now. And so this credit crisis problems in the sense of the supply chain, because China is essentially the world’s supply chain. And so if they aren’t making some of these products, the demand is still there, you know, to buy them, and they can’t get them to the market because of what’s happening here in China. And we’ve got companies that are giving forward guidance that softer than what was expected, because they’re not able to get the things out of China are not expecting in the next quarter to get those out of China, and also exaggerates inflation. Because if the demand stays the same, and the supply is still lower, then you know, people are going to end up paying more for those things. But on the positive side, interestingly enough, we’ve seen energy prices come down, even material prices come down here in the short term because of these lock downs. Because obviously, if these factories aren’t running, they’re not using these materials, not using this energy. And that has been a big piece of inflationary pressures come from those areas. So very fascinating. You know, it’s going to be interesting to see how this works, you know, are they going to continue to do it, will they eventually find some other middle ground, you know, these are the things we’ll have to see how they play out. And all together, when we look at these major forces, now we don’t need all of them to get better for the market to start to move, maybe even just one of them to get better, and the market could start to go forward. So a lot of these negative pieces already factored into the price. And so if any of them turned slightly positive, we could see some movement upward.
Kind of the next big thing that’s obviously having an impact is Ukraine. And so this is a humanitarian disaster, really, talking about financials sometimes makes me a little bit uncomfortable, to be honest. But from a financial standpoint, you know, we have a situation where really energy is one of the big pieces here, where, you know, Russia is providing so much energy, especially to Europe. And so does that get cut off, does Europe, you know, end up trying to go someplace else. When they do that they’re looking for other sources of energy, or other places to get it, that markets already pretty tight, can drive up price, we certainly saw that, although we still have seen again, energy come down. And one of the things I’ve been reading is there’s still an awful lot of oil, gas and coal flowing out of Russia, it hasn’t slowed down as much as anticipated originally, but that’s still an ongoing issue. And we’ll have to see how that goes. Russia starting to use that as a as a weapon and cutting off some of their energy to certain countries. And so you know, we’ll see how that plays out. It’s obviously also causing some issues, very softie economy, economies, the in Europe. And of course, Europe is a huge, you know, economy as a group. And then, you know, it’s one of our customers, for example. So, you know, if Europe slows down, you know, we could see some impact from that. Also, having said that, you know, anything can happen in this and it could get better fairly quickly. So we’ll have to wait and see how Ukraine plays out.
And, of course, we’ve got inflation as a big issue here in the US, right, we had eight and a half percent inflation in March. We’ll get the numbers here, you know, eventually for April and see what happens and inflation really keys in on the Federal Reserve. So the Federal Reserve has been doing massive job of trying to power on the market down, whenever it kind of pops up, sort of like Whack a Mole. I mean, it’s, it’s amazing. And when you watch, the market runs for a bit, and all of a sudden they come out and have multiple interviews, and they’re talking really aggressively even some of the people on the Federal Reserve Board, who normally talk fairly, you know, calmly about raising rates trying to, you know, moderate what might happen to the market, they’re not doing that, I believe that the Federal Reserve as part of their strategy is trying to slow down household wealth accumulation. Because that’s one of the big problems from the bottom of the pandemic, all the way until the end of last year, for example, we had a tremendous increase in household wealth, specifically, because of stock market gains and housing pricing gains. So now mortgage rates are back to where they were 11 years ago, up substantially, you know, the average mortgage price cost might be 50%, more than it was, you know, in the middle of last year. So that’s going to slow down housing. And of course, you know, that they come out with their rough talk, and it’s continues to hammer the market down. So we need to see some improvements, inflation, we are seeing some interesting things that seem to show some peaking of inflation, especially in March, and now in April, especially because we’ve had energy prices and material prices come down in in that last report in March, even though the inflation was eight and a half percent, we still saw used car sales prices were down, you know, weren’t growing as fast those types of things. So I think we’re gonna see some effects of what the Federal Reserve is doing. And these higher interest rates and higher mortgage costs. And so that should slow down demand. And we’ll see what happens here.
But this is one area where I feel like there’s the most hope for improvement, especially by the end of the year, because I still believe that supply chain will continue to increase and improve, and the demand will continue to moderate as the Federal Reserve comes in. And to hopefully, that will help the market quite a bit. Again, we just need one area to really improve. And, you know, we might see a much better number, for example, and inflation coming out of April than we saw in March, especially year over year comparisons. So this will be a really big area, because the Federal Reserve is it really involved in this and see what they’re able to do.
And so then, of course, everything goes back to earnings, everything we talked about inflation, China, Ukraine, you name it, energy materials, all of it, it all comes back to earnings, and how it’s gonna impact earnings. So we’re in the middle of earnings season right now, we had a phenomenal run up yesterday, based on some great earnings from Facebook and Microsoft and what have you. And then we’ve had a big downturn so far today, based on some, you know, subpar earnings from Amazon, Apple had decent earnings, but then they gave poor guidance going forward, because they feel like they’re going to have a softer quarter because of what’s happening in China. And so all of this is revolving around earnings. As far as that goes. I think this is another bright spot altogether. Because as the market goes sideways, if earnings continued to grow, which is they have altogether, the ratio of price to earnings continues to get more favorable. And we’re seeing stocks that were at 90 times earnings now 40 times earnings, we’ve seen stocks that were already times are now 20 times. And so we’re seeing much better price multiples. And that kind of creates that floor, where we can see some gains coming out just on a pure fundamental basis. Because as earnings continue to grow, and obviously this will be the big area, our earnings going to be impacted by all these other factors that these other factors cause a recession, which can make earnings drop, you know, those types of things.
So, altogether, we’re doing okay, honestly, this is sort of a normal scenario, a 14.6% drop is actually the average yearly drop when you look at these things. And so it’s not too unusual. It’s not fun to watch or what have you. I do think we’re in for a bit more of the churning motion that we’re seeing right now. Because we don’t have resolution for some of these big things. But I do think by the second half of this year, we’ll start to see resolution, at least some of them. So that’s what’s happening so far, a very interesting timeframes. I do think this is a great time to focus on high quality companies. I’ll put a shout out here to Microsoft, it’s one of the we bought Microsoft in our model on the 24th of January. I’m really happy with that purchase. But of all the companies I can think of Microsoft is one company that’s probably the best position to be able to handle this. They have fantastic cashflow, great cash positions, great market penetration, huge name recognition, they’re able to control their pricing quite well because they have essentially some monopolies in some of these areas. And they’re so that’s, you know, inflation doesn’t have as big an impact. They also have have an awful lot of things that they deliver that do not require, say manufacture in China, or supply chain issues and of the Russia, Ukraine, European area. energy usage is not a big big component of what they’re dealing with, you know, Amazon’s got to deliver things too often, energy is a problem for them. For example, that’s not so much true for for Microsoft. So very interesting company had good reason report, and a big run yesterday, coming down some today.
But I think if you pick and choose, and you look very carefully, you know, where you want to put your money, that’s important. Other than that, you really want to be careful about getting too narrow, because, again, what I just mentioned, energy is great. And energy is not great materials, great. It’s not great. You know, Apple’s doing fantastic. And then it has one soft thing because of China, you want to have this broad spectrum spread, and that we have most of our portfolio in that. Because you’d never know where this money is going to be going in this environment. There’s more crosscurrents than I’ve ever seen in my career. So just something to keep in mind. I do think there’s opportunity here. This is a great time to rebound three rebalanced yesterday, just before that big run up, and that was kind of fun. And I think, you know, you just continue to look for those opportunities to accumulate. Eventually some of these things dissipate and the market comes back. So and you’ll make some money on some of those accumulations that you made at these lower points. So look forward to seeing what’s going to happen next week. And we’ll definitely be talking to you then. Thank you