Transcript:
Tom Vaughan:
Hello, everybody, welcome to Thursday, the S&P 500 was down point 1%. Today, I want to talk about what is going on in terms of this Federal Reserve tightening cycle. If you look back historically at what goes on, when the Federal Reserve starts to go the opposite direction, from stimulating the economy and trying to slow down the economy, at the beginning of that cycle, the stock market often does quite well still, again, mainly because interest rates are still pretty low. It is until the end of that cycle, like after 21 rate increases that we had, you know, prior to the 2008 downturn, where things really start to have problems as far as that goes. So when you have a down day, like we did yesterday, and we still have historically a chance to make money in these types of environments, I think that’s what’s going to be the key this year is kind of using those down days to your advantage. So we are looking at things that we have, you know, like there are now cheaper semiconductor stocks, for example, Apple would be another example. And so when the theory behind interest rate increases affecting stocks, is that as the interest rate increase comes up, borrowing costs for this companies goes up. And if a company has a high P/E ratio, when they discount back at a higher rate, the current value drops. And theoretically, the adjustment to the stock happened. So but when you look at a company, let’s say like Apple or Microsoft, or Google, all of which sold off yesterday, all of them don’t really need that to operate, they have huge free cash flow that they generate on a regular basis. And their P/E ratios, although they’re high are still actually quite low in comparison to some of the real high fliers out there. And so those are the types of things you really want to focus on.
In my opinion it during these dips that are going to happen this year, trying to find some opportunity, we did a thing another rebalance today. It’s called awkward journalistic rebalancing. When the market drops, you rebound back to the portfolio. And we ended up buying some S&P 500 and some semiconductor and some Apple, for example, which I think could be good purchases. And so one thing to watch out for, and this is where we’re starting to sell pieces. For 2020, we had a lot of money in innovative technology, Clean Energy, and genomics did fantastic. That all peaked out in the middle of February and March through May of last year, we sold all of that out of our retirement type accounts, because we didn’t have any capital gains issues. In a taxable accounts, we had huge gains in a lot of those positions. And so we’ve been slowly moving out of those got a little bit more aggressive this year, this week, so far, and kind of moving out of those, because what does happen, when rates go up those smaller, high growth companies that have really high multiples, you know, 100 times earnings and whatnot, those types of things, generally do take a beating in this environment. And we start that started really, you know, back in November, and it’s continued through yesterday. So continuing to move out of that direction and into the other areas. So and that’s what we’re doing right now, this is.
I think, downturns are opportunity, I think this year is going to be a lot like this, you know, the average rate of return again, after 20%. Up here is 10%. If we get 10%, it’s going to be a lot of ups and downs. And so this is the way you kind of take advantage of some of those ups and downs is by doing this opportunistic rebalancing, focusing on some of the things that you really like, semiconductors, as a group are selling at a fairly high multiples on the earnings basis, not all of them. But as a group, they’re fairly expensive. I think that that is still going to overcome, the interest rate increases, because there’s so much demand for semiconductors going forward. At some point in the future, probably too many semiconductors. That seems to be the way it always goes. Big shortages. Everybody ramps up and we end up with excess. But that could be quite a way from now, actually because it takes a long time for these things to really get rolling. So I think as the demand continues, even though interest rates are coming up, I think semiconductors can hang in there and do quite well. They were up a little bit more than the market today also. So that’s a good thing. So that’s what’s happening right now. Look forward to see what’s going to happen tomorrow. I do my show tomorrow. We’ll do some good summary of what’s happening this week. I do think it’s interesting week at the beginning of the show. Again, let’s Talk Money with Tom show from 12:15 to 1pm if you want to join me. Thank you very much.