Transcript:
Tom Vaughan:
I’d like to start off the show every week with a summary about what I saw happening in the market. This is a pretty incredible timeframe for the market this week, we’ve had all kinds of different things happen. And, you know, at the beginning of the year, I remember thinking to myself that 2022 was a year where there was more crosscurrents and possibilities for what could happen with the market than I’d ever seen in my 35 year career. You know, we had a pandemic, which obviously, we don’t have very often, but it’s causing, you know, all kinds of different issues with supply chain, disruptions. Labor, you know, was very tight and people weren’t coming out of out of the out of the home to take jobs or retiring early, you know, because of the pandemic. And we had this scenario where really demand jumped dramatically, especially for goods, and not so much for services of people that used to spend money on travel and such were spending money on goods. And that exaggerated this inflationary environment that we were in, combined with people were, you know, saving more just in general plus the stimulus is coming out, get this high inflation, end of the year, the Federal Reserve pivots, starts getting very aggressive in their conversations about how they’re going to fight inflation, market struggles in that environment, usually, and then throw in the fact that it’s a midterm year, which is always an interesting year, actually, you know, the average trade return in the first half of the year is much lower on long term than the average return in the second half of the year. So all of these things going on. And then this week, of course, we had some really big movement from that Russia Ukraine situation, most of what we’ve seen in the stock market happened this week was because of that. And we had one day where they were talking about they were pulling back troops, the market jumped quite nicely. And then right thereafter, we heard that really, you know, that wait, maybe wasn’t true, that the attacks are more imminent, and the market has been pulling back. And so, you know, I suspect that that situation in Russia, Ukraine won’t resolve itself immediately, we’ll continue to see, you know, tensions there, if there is an invasion, there, the market probably drops, just looking historically at what happened. You know, with the two desert storms and Afghanistan and those types of things, the market drops right away, oil prices probably come up because of the worry about Russia’s, you know, oil production, being cut off or cut down. And you know, all these different things that happen. However, at least at the moment, my outlook on that is that that could be a buying opportunity. Just because what we’ve seen in the past, as the market jumps back pretty quickly.
Even if oil goes up, there are other producers out there that might want to produce at a higher rate, and bring down the price of oil. And I do think it’s very interesting that this week, the price of oil came down, which has not happened very often, even in the face of all these tensions. I suppose that’s partly because there might be some other producers that are getting ready to produce more oil in case there is an invasion in a cut off. So all kinds of these are just the wild currents that are going on. And I think what’s very fascinating though, after all of this stuff that’s happening, the S&P 500, as we sit right now is down about 9% for the year, which isn’t great. But that’s actually a fairly normal dip in almost any environment, outside of what we’re doing with even today. And we’ve had 84, five to 10% drops in the market on the S&P 500 Going back to World War Two. So that’s more than one a year. So these are fairly common. This is what happens now, I suspect this is going to get worse, especially if there is an invasion, as far as that goes. And so then we have to take a look at really, you know, is this a downturn that we should be super concerned about or not. And one of the key dividers for me is whether or not we’re having recession combined with this downturn or not, because the average rate of return dropped for the stock market without a recession on the S&P is negative 15%. And the average drop on the S&P 500 with a recession is negative 36%. And the recovery time is a lot longer when there’s a recession. So at the moment, what I’m not seeing recessionary issues happen.
And we’re watching and I think one of the reasons the markets only down 9% so far is because of the fact that we’re seeing this, you know, earnings come through that are fantastic seven quarters in a row where these companies have outdone the expectations for earnings. And so essentially what that means is right now as we sit Wall Street is probably under estimating yet again, the earnings potential for the companies that are out there that will be reporting for the next quarter. And so that’s the that’s the part that’s driving things up. You got Ukraine and this inflationary situation that are kind of driving things down, and we’re down 9% You know, and probably rightfully so. We’ve had a heck of a run Coming into this. So it’s not to be unexpected. So having said that one of the key issues I follow is the leading economic indicators. So that report just came out today for the January month, and it was down point 3%. And so, in my studies historically, looking back, I have found that it needs to be down at least 1%. Before we should really be worrying, and at the same time, we need to see the 200 day moving average, on the S&P 500 also coming down. So it’s down point three. And the last time it was down was February, and probably don’t recall this, but, um, the markets up a fair amount since last February. This was last February, February 2021. So at the moment, I’m not too concerned about that. And actually, if you dig into the report, there’s 10 pieces of leading economic indicator, six of them were up and four of them were down. And the four that were down, were kind of interesting, the first one that dragged down the indicator the most was first time unemployment claims. So they use an inverse of that. So basically, what they’re saying is that when first time Unemployment Claims drop a lot, we’re towards the end of a cycle. And that’s why they use that as a leading indicator. But we’re in the middle of a pandemic. And so they’ve got this tight job market right now with all these job openings and all this demand coming. And so people aren’t laying people off as much. And I don’t know that this is the end of a cycle as far as that goes. So that’s a little suspicious. Then the second biggest drag on the leading indicator index was the surveys, the sentiment surveys from consumers, you know, what do they feel about the business environment right now? We’re in a hyper partisan environment right now. So I’d be a little suspicious of those surveys anyway, especially if we consider what they’re doing with their actual money.
So retail sales came out this week, up 3.8% In the month of January, that’s a fantastic number. So they’re answering the survey negative, right. And spending money. And generally speaking, personally, I’d rather follow the money, at least in that regard, at least somewhat. So the other thing that we found today, actually, the house sales, jumped to 6.7% in January, which again, is a big jump. So people that are super afraid about the business environment, are probably not spending money at retailers at that high level plus buying homes and things. So, you know, we’ll see what happens with that, since that leading economic indicators is very important to me. We’ll see what how that goes. But we’re still not, you know, at a point where I think we’re in a recessionary environment, there’s lots of possible things that can cause a recession, the Federal Reserve could over raise rates, the situation in Ukraine and Russia could cause some kind of a contagion and situation in Europe, that eventually causes a recession on a global basis. There’s lots of probabilities, there always is there’s always a possibility of recessions coming from all kinds of different situations. But investing is sort of a betting game. And when you’re when you’re betting, you’re really looking at probabilities. And so in my opinion, the probability of a recession happening here, even in the next couple of years, is quite low. Now that can change, it depends, really, to me, it depends more on what’s happens with the Federal Reserve and what they actually do. But I like what I’m hearing from them, they have one fed Governor turning around talking about raising rates, like mad, doing all kinds of things. But all the other fed governors seem to be taking a much more measured approach, which I think is necessary, especially with this Russia, Ukraine situation that we’re dealing with. And so, altogether, if we did not have a recession, these particular dips are buying opportunities, their chances to rebalance portfolios, and capture some of that low part, because they are just dips, and then the market comes back up, and you’re happy to did those. So that’s still the strategy until proven otherwise, I tend to invest in this in the market that ran rated up market, sideways market or down market, I define those differently than most, I’d find a sideways market when the when the, you know, 200 day moving average starts to flatten out which it has, and the leading indicators are still going up. That’s a sideways market and you kind of see that it’s turning up and down. And so that’s when you want to rebalance and do these different dip buying a down market for me is when that 200 day moving average starts down and the leading indicators are down 1% then you want to get defensive and you want to you know maybe pull stocks out of the out of the market or buy stocks that are more conservative that do generally better in downturns, those types of things. So, I want to stick with and I will stick with, you know what we’re what we’re dealing with now, here’s the pattern, here’s how we deal with it. Here’s how we go forward.
So I think there’s opportunity here, you know, again until told otherwise, I don’t get it Trade of all of these things, I look at this as opportunity chances to buy, you know, I happen to like semiconductors, I think they’re there, they’re coming, they’re in everything now they’re just going to be more and more need for him, pandemic has created a shortage, these companies are going to make great money on their, you know, on their product for I think a long time. And, you know, if you’re going to drop the price of the shares, on average by 14%, or something, I want to buy more, because I think at some point in time that will pay off, and I’ll make some money on that. So anyway, mostly, though, you want to stay very broad based here. Because, again, all of these different trends are coming at us. It’s hard to tell what’s going to do well, is energy going to do well, it’s not going to do well. Is it values that growth, is it tech stocks is it you know, Small Cap, Large Cap Mid Cap, I think it’s incredibly difficult in this environment to really tell what’s going to work. So keep basically exposure to everything. Don’t give up on the stock market until things really start to come in terms of recession, which again, I don’t see happening right now. So anyway, that’s what’s happening this week. Love to be able to kind of cover these things with you and hope that you gain something from this at least from some of my insight. And look forward to talking to you next week. I won’t be doing the show next week. But I will be doing the summary on Friday. So you know, we’ll cover that then. Thank you