Transcript:
Tom Vaughan:
So what I want to start off with is just a summary of what’s happened to the market, as far as I can see, as far as that goes. I’m really excited about what has happened this week. And, this is a historic timeframe that I think is really interesting. Now, the last time we had a reopening from the pandemic was over 100 years ago. And so, what’s going to work and what’s not going to work. For people like myself who are kind of fascinated by the markets, this is an incredible timeframe. Very challenging, but really very, very interesting.
So, this week, really, we had some main catalysts that I think we’re important. Number one, is what happened with the Federal Reserve and the Treasury and the kind of the comments that were coming out from that. And then number two, what is going on in terms of the market rotation: So, different segments of the market and how fast things are rotating from one area to another; really at an unprecedented rate.
So, first of all on Monday, the Federal Reserve Chairman here in San Francisco, Mary Daly, made some comments that the Federal Reserve might be cutting back on their bond purchases. So, the Fed is currently purchasing $120 billion worth of treasury bonds every month, in an effort to stimulate the economy. Well, she said they might have to cut back on that the end of this year / beginning of next year, after we saw kind of these inflationary numbers come out last week. Well, this was earlier than the market thought, and so the market dropped. And then the Federal Reserve Chairman, Chairman Powell, was testifying in front of Congress for two days this week. And he was actually much more positive: Talking about inflation being temporary and very much repeating the same phrase over and over again, “the Federal Reserve is going to be there to try to get this economy going again, and get back to a full employment situation”. This is different than what the Fed has done in the past. This will be very fascinating, see how this works out.
And then, of course, today, Janet Yellen, who is our current treasury secretary, talked about the possibility of higher inflation, and the market fell. And so I think very important to understand that these people are in positions when they make comments of billions of dollars worth of money is going to change in the stock and bond market. So these comments are not made just off the cuff: These are planned out. And I have no problem with this whatsoever, but this is a show, right? What you’re watching right now is a show by the Federal Reserve and the Treasury, I would assume it’s probably coordinated, but the whole concept behind the show is to get us as investors ready for the fact that they’re going to increase interest rates at some points in the future, and that they’re going to be cutting back on these bonds.
Now again, bottom line: We had 19 increases in the interest rates prior to the 2000 downturn, and 21 increases in the interest rates, prior to the 2008 downturn. So the fact that they’re talking about interest rate increases starting in 2023, it’s going to make some volatility for the market, but it shouldn’t scare you. We haven’t seen big drops in the stock market come off of a situation that we’re in now, where interest rates are nearly zero.
So, that was the whole story behind what’s happening, I think it’s important to understand what’s going on there. The other area that’s very fascinating, is the rotation that’s happening amongst different pieces of the market. So last year, I give you an example, I could go in and find something that was running really well for three or six or nine months basis. We could buy it, and it would run for another three, six or nine months. So, clean energy’s a great example: We bought that in May and June, and it ran all the way through to February, of this year. So really fascinating, great timeframe. This year, the trends are more like three, six and nine days, and the rotation. I’ve read lots of articles about this: The rotation is very, very fast.
And so, what that means is that you really need to kind of backup or in our case, we need to backup, and you need to own the whole stock market. I use a version of that called the Vanguard Total Stock Market Index, it owns most of the market. The ETF symbol is VTI: It’s one of my favorite holdings. And, for example on Monday, I showed a little demonstration, I have a spreadsheet that I pull out of Morningstar with 2443 different Exchange Traded Funds. And so what I’m looking for there, I’m just looking for what’s trending and what’s working. But I wanted to see those Exchange Traded Funds that had consistently outperformed the Vanguard Total Stock Market Index. And so I wanted to see ones that have outperformed in every time period I had on that spreadsheet which is 12 months, nine months, six months, three months, and one month. Well, when you apply that screen, there’s only eight that make it through that screen. So, only eight ETFs have beaten VTI, in all of those time periods; over the last 12 months. Now, when I was doing this last year, there were hundreds of different ETFs that were beating VTI in that timeframe.
So, it just kind of emphasizes the fact that you need to be broad market. So, we’re now 75% Broad Market Indexes: S&P 500 would fit into that category, with our portfolio and the other 25% are in these Targeted Indexes. So with the Targeted Indexes, what we’re doing now is we’re shortening up the timeframe, for how long they have to be running before we buy them, and then maybe getting out of them a little sooner, if we have to. If you’re going to play that particular game, you got to kind of play what’s being allowed at that time.
So right now, what’s really working with real estate: That’s the big winner. That’s worked really well for us this week. And then large growth stocks, specifically large tech stocks, that’s doing pretty well. A little bit of waning here at the end of the week, so we’ll see what happens there with those. And then ESG, which is a really great concept. They’re taking Exchange Traded Funds, for example like Vanguard, will take the Total Stock Market Index, and then they apply an ESG screen. So there are companies out there that rate individual companies on how they do with the environment, how they do socially, and how they do with governance, how they treat their community, how they treat their employees: Then they give them a number. And so then what Vanguard can do is take the Total Stock Market Index, and just buy those pieces that have a particular number or higher: An ESG number, that’s a certain level or higher. The ticker symbol for that is ESGV, which we also own quite a bit of.
That’s kind of what’s happening is those three categories should be broad, massive movement is happening much faster than normal, in terms of that rotation; maybe that changes. Matter of fact, it usually changes that’s what’s fun about this is it constantly different things are happening in the stock market. But that’s what was going on this week: Really the Federal Reserve, The Broad Market pieces, and which targeted pieces were working and I think really look forward to seeing what’s going to happen next week. And we’ll we’ll obviously I’ll talk to you then when that comes up.