Tom’s Week in Review June 20-24, 2022

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

The opinions voiced in these presentations are for general information only and are not intended to provide specific advice or recommendations for any individual(s). The information provided herein is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Statements and opinions are subject to change without notice. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Accordingly, you should not rely solely on the information contained in these materials in making any investment decision as the material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned in this presentation. Before acting on information discussed in this presentation, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment advisor. Prospectuses, investment objectives, risks, charges and expenses of any investment product should be reviewed carefully before investing. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Retirement Capital Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Tom Vaughan or Retirement Capital Strategies unless a client service agreement is in place. “Likes” are not intended to be endorsements of our firm, our advisors or our services. Please be aware that while we monitor comments and “likes” left on this page, we do not endorse or necessarily share the same opinions expressed by site users. While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Please honor our request to limit your posts to industry-related educational information, comments and questions. Third-party rankings and recognitions are no guarantee of future investment success and do not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Investment positions mentioned in these videos may be held in some of our existing portfolios. Tom Vaughan and Retirement Capital Strategies are unaffiliated and separate from those companies whose investment positions are mentioned and is not liable for their products or services.

By participating in any of these live streams, you agree that any questions submitted by you might be used by us in the future on this YouTube channel. We will not share your personal information.

If you have questions, please write to us at: asktom@talkmoneywithtom.com.

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Transcript:

Tom Vaughan:

I’d like to start with a summary of what I saw happening in the market this week. So this is the S&P 500 chart for the year so far, we can see obviously, we’ve had, you know, a downward motion going on lots of little run ups in there, that blue line is the 200, day moving average, that’s coming down a bit. But if you look what’s happened right over my shoulder here, these green boxes, that’s this week, it’s been a very good week, all together. Good day, today, we’re kind of having a bounce off of that low that we hit last week. And so that that’s a really good sign. Now, one of the things I’m gonna talk about today is very different, this is not something that I’ve talked about before. And that is the fact that we’re actually reducing our stock market exposure into this upturn. So the markets going up right now. And we’re taking that, you know, taking money off the table, so to speak, we’re trying to get a bit more conservative, and I’ll show you why here. And kind of what I see.

So first of all, it’s important to understand, in my opinion, the different types of markets on the downturn that we deal with. And when you want to get defensive, and when you just want to stay in there. And so if we look here, for five to 10% downturns have happened at four times since World War Two. So basically, more than once a year, that’s pretty common, average return time to get back to the high again, is one month, not a big problem. 10 To 20% has happened 29 times roughly every three years, takes about four months to get back. Okay, so I kind of draw a line there. And basically the way that I’ve handled investing with the clients, and something that everybody should probably think about, is extremely difficult to kind of get in and out of the markets and try to get defensive, when the average recovery time is only four months. Because it’s very easy to then get out and get back in at some higher point. And so from that kind of, you know, zero to negative 20%, what we really want to do is focus on how much stock you have. So 100%, stock portfolio 10% 60%, you know, what is it and essentially, then we just take, and so let’s say it’s 60%, we’ll leave it at 60. And we’ll move around a little bit within that 60 to try to find different trends. If the market is kind of going sideways, like it has been or down, then we’ll rebalance. And we’ll use those strategies until we get over 20% down. Now we’re looking at nine times between 20 and 40%, a 14 month recovery, which isn’t terrible, but obviously a lot longer.

And of course, the big 2008 2000, sorry, didn’t get my work, but over 40% Down 58 month recovery. And so those are the ones we have to be careful with, in my opinion, if you’re going to focus on anything about getting defensive, I would be really looking at those bigger downturns. And that’s always been my mantra, I rather stay in all the way through. So that’s essentially what’s happened so far, we’re just past, at the low point here, we got just past that 20% down. And we’re really in this category where there’s nine of them since World War Two. And let’s, you know, look at now, the difference between kind of that negative 20. And that negative 40. And negative 40. Plus is recession. So if there is a recession, that’s going to happen, we’re probably going down a lot farther. And so then we want to look at all the indicators that are kind of showing us recession. So of course, one of the main ones that I follow is the leading economic index, I’ve presented this multiple times, probably tired of seeing this chart, the blue line is the leading index, the gray line in there is the coincident index, that just means that it’s basically the current economy.

And so if you look here, right above my head, you can see the blue line has peaked out, right, it’s coming down a little bit, even though the gray line, the economy is still going up. And these big bars that are in here, these gray bars are recessions. And so if you look closely at this goes back all the way to 1960. That leading economic indicator peaks out prior to these recessions very regularly. And so great indicator of when a recession might be coming. And combined with what’s happening in the stock market. You can make some decisions here. So my basic decision making process is if the leading economic indicator is down more than 1% from a tie, it’s not right now but very close point 9%. If the S&P 500 price is trading below its 200 day moving average, which it definitely is, and the 200 day moving average is going down those three pieces. If you go back to 1960 and look at those three occurrences. Those are times to be careful. I look at it like you know we’re sitting On the edge of a cliff, things could work out, we might not fall off the cliff. But this is a time to dance around, this is a time to be more conservative. And I think pulling something off the table here makes sense to me, just in case, you know that this should fall off the cliff.

And so really, here’s some of the things that are part of the leading economic indicators is 10 of them, there’s two big ones that are pulling it down. Number one is consumer sentiment. This is a University of Michigan survey, where they go out and ask people what they feel about their finances and how they feel it might be in the next six months, it currently just got released today, it’s currently at 50.00. That’s the lowest it’s ever been going back into the 1950s. So consumers as a whole and households are healthy, they’re still buying, although we did see some decrease in retail sales in May. But their outlook is very, very negative right now. And and you can see why going to grocery store going to gas station paying more and more and more, and their incomes aren’t going up. Their stock balances are dropping their 401k ‘s are dropping, you know those types of things. And sort of, you know, a timeframe that feels a little bit miserable. And the reason that this particular indicator is one of the 10 indicators that the Conference Board chose for this leading economic indicator, is because we it’s, as people start to think more and more negative about their situation, they start to hunker down, and not spend as much money and what have you too. So that’s, that’s one thing I’m looking at that is somewhat concerning.

And then the other one is that’s drawing this leading indicator down quite a bit as building. And so this is us building permit. So this is sort of a leading indicator of building process, right? Gotta get the permits, it’s not the very beginning, but it’s before they’re sold, and all those types of things that peaked out in January. If you look at housing and new housing construction in the US, I think it’s the biggest, most impactful industry in the US. Technology is huge. It makes a lot of difference. Technology, those kind of white collar housing and building homes, is all callers. I mean, you’ve got bankers, you got mortgage brokers, you got real utters, you got trust officers for transfer property, all those types of things, you’ve got construction workers, you got contractors, you got interior designers, it’s unbelievable landscape architects, it just keeps going, it is out there, it’s really, really impactful. So if housing is coming down, and new homes are coming down, or what have you, and one of the main reasons is because mortgage rates, right, so mortgage rates have more than doubled, really just in the last six months. And so we’re seeing, you know, the cost of buying a new house is going up, because now we get a six, six and a quarter percent mortgage or something, instead of paying three like we were. And so between what the leading economic indicators showing the stock market’s, you know, motion, and what have you, this consumer sentiment, and then this, you know, the the housing market, those are areas that are starting to kind of creep in and create some some, you know, concerns for me that we might be heading towards recession.

Probably the biggest concern by far, and this isn’t as quantifiable, but it’s really the Federal Reserve. So if you look at what happened, I presented this last Friday, but it’s still worth noting, this is core inflation, the CPI Consumer Price Index was reported. And it came out. That’s everything includes food and energy core takes out food and energy. Core inflation is what the Federal Reserve always talks about. Because they don’t feel like they can control food and energy. Core inflation went down in the last report has been coming down since March. They feel that’s where they can make their control, they were going to raise rates a half a percent. And they raised it more, even though core inflation went down. And they’re reacting to what we call top line inflation, which is including food and energy. So what they’re trying to do here is raise interest rates to a point where they can get the cost of gas and food to come down. I think they could get lucky here. That could happen. But it probably takes a recession to really make it happen if they don’t get lucky. So that’s to me a dangerous position. They haven’t changed any of their rhetoric. Chairman Powell, two times this week was testifying in front of Congress and essentially said multiple times they’ll do anything to bring down a recession. Right? So what they’re what they’re looking at there. They don’t, you know, have full investment in employment. Their own report shows employment, going up unemployment going from 3.6 to 4.1. So they’re looking to create a scenario with higher unemployment. And obviously they’re looking in that sense they’re going to create a some area potentially, in my opinion, for a lower stock market, so you’re we’re fighting the Fed, the Fed is pushing and pushing and pushing on the economy to the downside, there is some potential for consumers to spend enough to offset. But the consumers are fighting the Fed also. And the more they spend, the more they push, the more the Fed will push down on it by raising rates, lowering the balance sheets that they’ve got, what have you. So an awful lot of things are playing in here. Again, these are side of the cliff issues that we’re sitting on right now as we speak. So it’s just something you know, I need to be a little bit careful with as far as that goes. Now, the other part that the last piece here that has kind of motivated me to get more conservative, is just literally the price action of what’s happening on the S&P 500, or the market in general. So if we look here, this is a an ETF. And it is one of the most highly traded ETFs. in existence. It’s a spider which is owned by State Street, S&P 500, they replicate, try to replicate the S&P 500. Here, the ticker symbols SPY.


So this charts a little bit different than the first one I shared because you have this big green blob above me. And you can see what that is, it’s called a volume profile. So every one of those bars on there shows how many shares were traded at those prices. And so you can use this to look at support and resistance levels. And one of the problems we have right now is where the price is right now, there’s a tremendous amount of green above us, which just means that there’s a lot of resistance. As the price gets back to that level. I’ll show you one here, for example, today, we are at a resistance level. Now that was support, you know, a few weeks ago, you can see the market was bouncing off of that and bouncing upward, once we fall through support becomes resistance. And so we’re right at resistance right now, which is again, one of the reasons I’m taking profits off the table with this particular run. As far as that goes because of that resistance that’s sitting right there. And the next resistance isn’t up, sorry. And then volume, which is right here, has also fallen this week, right. So we’ve got a nice run up on low volume. And so it’s a holiday week, so to speak for a week, maybe, you know, we sit see a situation where the volume picks up next week, but low volume, high resistance above all the other economic issues that are that we’re dealing with, and leading indicators down three months in a row. You know, I’m looking at that and thinking, okay, that’s, that’s a little bit disturbing. And the next resistance level above isn’t that far. And it’s bigger, right? More shares traded at that level.

So it’s hard for me to imagine the market taking off and running through all of that, with all these other things that are going on as far as that goes. So the last piece is that the next level of high support is 13%, below where we are today, right? So we got kind of a gap in the support level. And that support actually, that I’m showing right now goes back to October, September of 2020. We hit some lows there before the election, and kind of churned up a lot of shares. And so you know, if it falls lower, it could go to that level pretty easily. So again, sitting on the edge of the cliff, it’s time to be a little bit careful. You know, this is not my normal presentation. Because I normally feel very strongly about staying in especially prior to recession indicator. And you know, the market showing some of these deterioration signs, which we’ve had the market deterioration signs all year, we haven’t had the recession indicators at the level that I’m willing to act on, as far as that goes. So anyway, that’s that’s what’s happening so far. Hopefully, you know, that helps understand, you know, what I see in the economy, what I see in the stock market right now, and kind of what we need to do to kind of deal with this. You can take advantage. We did some of these things in 2002 1008, for example, of these down markets, and you can certainly try to protect yourself. So your recovery time isn’t so long. Yeah, it would be my main objective at this point is to kind of shorten up recovery time when the market does turn around, which I feel probably will be when the Fed turns around and starts to be more supportive, at least in their verbiage and their their rhetoric, if not actually easing, you know, on those rates and whatnot, too. So, those are things we’ll be watching for as far as that goes. So anyway, thank you for watching this week. Look forward to talking to you and see what’s going to happen next week. This is an exciting time to be paying attention.

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

The opinions voiced in these presentations are for general information only and are not intended to provide specific advice or recommendations for any individual(s). The information provided herein is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Statements and opinions are subject to change without notice. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Accordingly, you should not rely solely on the information contained in these materials in making any investment decision as the material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned in this presentation. Before acting on information discussed in this presentation, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment advisor. Prospectuses, investment objectives, risks, charges and expenses of any investment product should be reviewed carefully before investing. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Retirement Capital Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Tom Vaughan or Retirement Capital Strategies unless a client service agreement is in place. “Likes” are not intended to be endorsements of our firm, our advisors or our services. Please be aware that while we monitor comments and “likes” left on this page, we do not endorse or necessarily share the same opinions expressed by site users. While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Please honor our request to limit your posts to industry-related educational information, comments and questions. Third-party rankings and recognitions are no guarantee of future investment success and do not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Investment positions mentioned in these videos may be held in some of our existing portfolios. Tom Vaughan and Retirement Capital Strategies are unaffiliated and separate from those companies whose investment positions are mentioned and is not liable for their products or services.

By participating in any of these live streams, you agree that any questions submitted by you might be used by us in the future on this YouTube channel. We will not share your personal information.

If you have questions, please write to us at: asktom@talkmoneywithtom.com.

  • MoneyGuidePro®
  • Advent Software/Black Diamond Reporting
  • Riskalyze, Inc.
  • thinkpipes®
  • Right Capital
  • YCharts, Inc.