Transcript:
Tom Vaughan:
Hello, everybody, welcome to Wednesday, the S&P 500 was down 4%. Today, really the big catalyst today was target, they reported their earnings, they missed by quite a bit to which of their profits were down essentially, even though their revenues, their sales were up 4% across the board year over year, and they cited inflationary pressures, basically, the cost of trucking and transportation cost of gas was a lot higher, and they weren’t able to pass that along to their consumers. Again, keep in mind that target is probably a lower cost place with a more price sensitive consumer, because Walmart report yesterday kind of the same thing, actually. But if you look at Home Depot, who also reported yesterday, their earnings or profits were actually higher than expected. And they talked about how they were able to increase their price and still had strong consumer demand. So I think it depends on what kind of company that you’re involved in. But it does point out the big worry for the stock market, which is just the fact that if if costs continue to go up at a really fast pace, because of high inflation, eventually, there’ll be lots of different companies that can’t raise the price, because of consumer demand issues and starts to fall off. And then that will compress the profits of these companies and profits could come down at a at a rate that’s, you know, less than expected. And so the market, you know, is down. And that’s kind of one of the things we’ve been dealing with, you know, all year as far as that goes. And one of the things to keep in mind here is that, you know, going forward, when you look at these types of downturns, there’s really two different types.
There’s the one that happens about every three years, where we get kind of that 10 to 20% drop, but there’s no recession, the economy hangs in there. And then those come back fairly quickly, right average of 15% downturn since World War Two for those scenarios. The other scenario is that one where there is a recession, and it does happen, and then that’s usually about a 36% drop on average. And so really, in my opinion, want to watch out for the big ones. Now, there aren’t very many of them, if you go back to 1929, we had the Great Depression, we had the oil shock of 1973, the tech bubble of 2000, the financial crisis of 2008, and the pandemic of 2020. So there’s five big downturn since 1929. And those are the ones that personally I don’t want to sit through and wait because the recovery time can be quite long. But you have to be very careful to make sure you know which one you’re in. Because the ones like that, like we’ve have on a normal three year basis was no recession that happens, they can come back very quickly, as a matter of fact, you know, within four months on average. And so if you get out there, it’s very easy, then to have the market run back up, and you’re actually getting back in at a higher point, and you would have been better off just staying in there. That’s where we’re at right now.
Because we’re looking at the economy, you look at the current economy, it’s doing great, but that doesn’t help you because you can’t wait for the economy to fall, the market already be down substantially, what you really want to do is look at these leading indicators. Look at the projections for earnings, which right now are great. The rest of the year expected nine 10% per quarter, expected to have higher earnings next year. But watch those which is what I do. And see if there’s any erosion of those projections at some point in time kind of signaling that earnings might not be doing as well as as we expected. So far, all the companies are beating their earnings expectations, you know, as a group, 77% of them beat expectations for the first quarter had a 9.1% growth, for example. So that is not happening so far. The other thing that I watch, and maybe one of the more important pieces is the Conference Board’s leading economic indicator, this is a basket of 10 indicators. It has a great track record of peeking out four to 24 months before a recession. It is currently at the all time high, it has not fallen at all so far. The report that came out last was from the end of March. So we’re still waiting for the end of April report should come out shortly. We’ll see what happens there. I’ll let you know.
But we’re looking for a decrease of some magnitude, at least a percent from that high historically. So if you go back to 2008, for example, that was a 57% stock market loss and it took you know, almost five years to come back. So sitting through that is just really difficult, especially for retirees which make up a large portion of my practice. And and so what happens then is that, you know, once the 200 day moving average starts to fall on the S&P 500 that signals to me that the stock market’s going down, so I need that. And then secondly, I need those leading indicators to come down 2006 late in that year, leading indicators started down nice early warning, and then 2007 the 200 day moving average started down. So if you got defensive at that point in time, and pulled some of your money out of the market or got into more defensive stocks that that fall less or whatever it might be you You would have been, you know, saved yourself some real pain there because you know, that would have been about 15 to 20% from the high. And again, the market ended up down 57%. It’s super, super hard to figure out when to get back in, it’s actually a lot easier to figure out when to get out than it is to get when to get back in. But if you are right, and it’s one of the really big downturns that happen, because the economy also falls, then it’s not that difficult to find a spot that’s lower than he got out because of market falls so far. And so anyway, that’s what we’re looking at right now. tuner day moving average is down.
Okay, so the market is definitely making that signal. But the economy earnings, the leading indicators, everything else I’m looking at, that looks forward to the economy, not just what’s happening today, but looks forward are still showing economic growth. All right, that can change. And when it does, we’ll change what we’re doing. But until it changes, you have to assume that this is one of those every three year downturns and you rebalance, you have a high quality portfolio with really good holdings in it very well diversified. And that’s the strategy for this type of market and you hang in there. Because that’s where you make your money, the object is to get the money back. If you look at what has happened on these updates, the portfolio has really popped up or really strongly. So we don’t want to miss out on those. We don’t want to get defensive yet. As far as that goes. We really want to see some of these economic things, you know, transpire. So, that’s, that’s what’s happening right now, kind of, you know, what the catalyst was today, what we’re looking at in terms of, you know, things that we might do, which is a question I get quite often, you know, when the market falls, you know, what should we do about it as far as that goes? So, anyway, that’s what’s going on right now. Want to thank you very much for listening. I look forward to talking to you tomorrow.