Transcript:
Tom Vaughan:
I’d like to start off the show just quickly talking with a summary of kind of what happened this week in the stock market. I’m going to do a little bit different though, because this is the last show of the year, I really want to talk about kind of what I see happening for 2022. This is a unbelievable time period right now, unprecedented. We have a virus, a variant right now, that is doubling in number of cases, every two and a half days here in the US, we have the Federal Reserve actually starting to do things cutting back on bonds and starting to talk about raising interest rates, we have a scenario where inflation is very high, we have high demand, we have supply chain issues. This is not anything normal about this particular timeframe, you know, because of the pandemic, this is not a recovery out of an economic downturn. This is a reopening, which is a completely different animal. So really fascinating, fascinating timeframe.
So here’s the first piece of information that I’d like to share with you: I read an article, the author had gone back and took a look at, you know, the S&P 500, year by year all the way from the end of World War II to now. And what he found was that in every year, where there was a 20% return or higher, which is what we should end up this year, the next year was up an average of 10.4%. So that’s pretty good, not 20. But 10.4 is right around the average for the S&P 500 long term. But more importantly, he found that the market was up in that next year 80% of the time. Okay, so that’s one base case situation, we have to think about here. If you think the market’s going up next year, you’re 8 out of 10 times, you’re going to be right at least looking at history. And I feel pretty good about that. Actually, at this point, when I’m looking at kind of what I weigh as the negatives and the positives, I still think the positives outweigh the negatives. And I wouldn’t be surprised at all to see a positive rate of return next year. So that will happen. And we’ll see what goes on. I don’t react to predictions as much as reaction kind of what see what happens.
But the next piece that I’d like to talk about is just kind of the way we manage money is interesting, I think in the sense that we will take the allocation that we have for stocks in somebody’s portfolio, and that can go from anywhere from 10% to 100%. And we have basically 10 models 10% differential between each one. And we’ll take a look at that. And we’ll say okay, 75% of the allocation that we have in stocks, we traditionally have in these very broad indexes. So we just want to participate in the market, especially if it’s going to go up like it, hopefully will next year. And so you know, the Vanguard Total Stock Market Index, the S&P 500, those types of things, just try to capture everything, as far as that goes. And when I have to guess there, if it’s Small Cap to do, well, we got it, if it’s tech that does well we have it, if it’s value that we have it, everything’s in there. Matter of fact, there’s 1,000s of stocks in those Exchange Traded Funds, which is really nice.
So then the next thing we have, though, is this the rest of the 25%, we have these little targeted indexes. And that’s where I’m trying to kind of find trends, where I’m going out looking for I look at it like waves, I’m sitting there looking, you know, for a wave to come, I want to ride that wave in for some period of time longer, the better. And so when we’re looking at trends, we’re thinking about the themes and what might change and why this might do well, and then I go out and see if it is moving. If it is I often jump on that trend. But here’s what I’m seeing right now: I like to kind of go through mentally and try to figure out different themes that might happen coming up here. And I can make up more themes right now than I ever could ever. I mean, just take the Omicron variant. So for example, we could look at next year and say, hey, it turns out that it’s pretty mild. Combine that with the Pfizer pill, the antiviral that currently just finished its final trial with an 89% effectiveness against keeping keeping people out of the hospital. Let’s say it is mild, and it affects more people give some some immunity, combine that with a Pfizer pill. Wow, that’s a totally different story for what could happen next year. And we might have even more demand coming out because obviously people would like to do more and then situation and travel and do all these things. And we could have a booming situation, which could cause some inflation, you know, and then how does the Federal Reserve deal with that situation?
On the other hand, you could have a scenario where this Omicron variant slows things down. So I just read an article this morning about London restaurants that are closing down for the holidays, where they make about 40% of their revenue, because they’re getting too many cancellations, the big Christmas parties are being canceled. And because people are afraid of the Omicron variant, and obviously right now it is spreading quickly, and we’re not positive what the end result is going to be. And so if you go through the year like that, and you have a bunch of slowdowns, well then you’re probably not going to have much inflation in that environment. The Federal Reserve would maybe not raise rates as much and might slowed down their bond purchases. So that’s happening, you can look at the bond market is kind of, they’re looking right now, when you look at the bond market, the yield is not coming up a lot. And what that generally signals is that they’re looking at an economy here in the future that isn’t that hot. So, again, those two scenarios are exactly the opposite of each other, there would be totally different things that you would invest in, most likely, in each one of those situations. And I can keep going.
And there’s just scenario after scenario. For example, there’s a big assumption right now that because the demand is so high, that the Federal Reserve is going to is behind the curve, they’re going to have to, you know, continue to raise rates and even raise them more than they’re already talking about. And so again, you would invest in one area for that particular scenario. And you can make a good argument that that’s a good scenario. At the same time, you could make a secondary argument, that would be just the opposite, where they’re not going to need to raise rates, because American businesses figure out how to fix the supply chain. And they figure out how to get people back to work. And then they over produce. And this is actually a normal scenario where there’s a big shortage of, let’s say, cars, and all of a sudden, boom, there’s too many cars. And we end up with a situation where there’s sales, and that’s anti inflationary, totally different situation than this scenario, I just played out where the where the inflation was still there. So again, there’s so many potential issues, and it’s not the normal. Normally, we have this kind of relatively standard scenario of a recovery coming out of a recession. And things are happening in a certain particular way. And that’s not happening at all here. And there’s a lot of surprises that certainly caught in the Federal Reserve off guard as far as that goes.
So here, bottom line, in this particular type of scenario, when you have so many different crosscurrents coming, I really think it’s still best to have a broad exposure, okay. And so even in our case, with these four targeted pieces that we use, two of them are in broad market pieces, S&P 500 and total stock market index, I have two more targeted pieces, I’m buying like Apple and Nvidia -companies that I really liked that have great product and good demand, good cash flow, etc. And so I do think that that hopefully will play out, we’ll see, you know, I’ll react to it if it doesn’t. And so really, the other part for our portfolio, just so you know, I mean, what I talked about within our models is generally inside of our IRAs, because we can make these changes. We have, you know, these trust accounts and individual accounts, taxable accounts, those are handled a little bit differently, we still have some pieces from last year, you know, that aren’t doing as well this year, but they made so much money, it’s hard to take the gains, and you know, those type of things. So I’d still be holding on to those gains as much as possible, especially since we’re right here at the end of the year. But altogether, I think a broad market approach is kind of the way to go here, when you get this many cross currents. This is what happened quite a few times this year. And it is really, really happening right now.
As we speak we’re having a lot of different issues with, you know, yesterday, the Dow is great today. I mean, there’s not so great the the NASDAQ three days, two days ago was fantastic. And then it was awful yesterday, and then small caps haven’t done anything. They’re doing great today. So I mean, you’re going to be chasing your tail if you’re trying to find these trends. Because this is just such choppy water right now. So better off just kind of participating in the whole thing and seeing how that goes. So anyway, that’s my outlook for kind of 2022 especially for the beginning of it. I’m planning on kind of coming into that year with this broadly diversified portfolio. And that’s why we’ll see what happens, you know, I do work on that constantly and try to see what trends might transpire. So, look forward to talking to you about again this at the beginning of January and we’ll see how things have transpired between now and then.