Transcript:
Tom Vaughan:
I do like to start off the show every week, with a summary of what I saw happen in the market. This week, I’m going to do something a little bit different this week, what I call positive Friday, there’s something I do about every three months, where I talk about the things that I see that are happening in the stock market in the economy that are positive. And the reason I do this is because the news is mostly negative, it’s what sells that grabs, clicks and eyeballs, you know, those types of things. And so if I can, you know, try to present the other side, at least, we may be getting a balanced idea of what’s going on, I think this is a good time to do it, because we just had this big run up. And then we spent the last you know about week and a half kind of going sideways and down. Not to be unexpected, since we did have a big run up, but good time to reinforce why the market might go up from here. I’m not saying it will. But I am saying it’s super important as an investor to have a balanced outlook as far as that goes. So let me share some things with you. So I can show you. So first of all, this is a chart of the S&P 500 for the year so far. And so you can see we actually hit our peak right away, first portion of the year. And then we hit the bottom and February 24, when Ukraine was invaded the differential between that very high point and that very low point was 14.6% on the summit significant to understand and if you look at downturns in the stock market, and you look at the S&P 500, the average downturn is 15%. If there’s no recession, the average downturn is 36%. If there is a recession, so we just had her 15%, basically. And so now, it’s a matter of seeing, you know, are we having a recession?
Are we heading into recession? Is there one imminent? Will the stock market come down further because of that or not? Right, so we’ve had this nice run up that you can see, and does that continue into a further run up and to new all time highs or not? A lot of it has to do with what’s happening with the economy. So let’s take a look at some pieces that I look at for the economy, that at least on the positive side as far as that goes. So first of all, this is called the leading economic index. And this is from the Conference Board. I’ve talked about this in the past before. And what we’re doing here is looking at this basket of 10 indexes combined into this one leading economic index. If you look closely, here, you can see the index is blue. And the recessions are these gray bars across the chart. Every one of those recessions was preceded by the index curling over and starting to come back down. And none of these scenarios are happening right now, if you look very closely, the leading economic index is still going upward, it was up last month, certainly not curling over and coming back down at this point in time. And so again, that’s one of the key things I look for is basically this concept of having, you know, some idea of a recession coming or not. So leading indicators say not yet, okay.
And then we look at, you know, consumer spending makes up two thirds of the economy. And so you can see this kind of crazy chart here, the consumer space going up very nicely. And then of course, the pandemic hit dropped dramatically during the pandemic, has come back up and is now continuing forward and continuing to go. So again, something to watch for that can change. But at the moment, consumer spending is on a pretty good tear, actually. And then the next chart really just shows maybe part of the reason why is there’s a lot of jobs open, over 11 million jobs. It’s a horrible, it’s an all time high for job openings. And really, what that means is that obviously, businesses start to get desperate to hire people, they’re going to pay more and more for those jobs, that can create some inflationary problems. But in terms of consumer spending, that gives more and more income to people to be able to keep up with some of those inflationary things and to spend more on other things. So that’s another good thing, in my opinion, in terms of recessionary issues, core CapX orders, essentially, this is business spending, and business spending, not including defense spending, and not including airline spending. But this shows a really nice pattern also. So core CapX orders are up. That’s another great sign for the economy, again, can change, but looking very good at the moment.
All right, and then earnings are up. So this particular chart here, the blue line is the S&P 500. And the black line that’s right on top of it is the earnings. And if you look at the earnings from the bottom of the pandemic, to now, they’re going up very strongly and very, very quickly, actually. And we’re quite a bit higher on earnings per share on the S&P 500 than we were prior to the pandemic. That trend still looks to be intact to me still looks to be continuing to go forward. So that’s important. And then we look at the estimates for earnings. So this bottom line on this chart are the analysts at Some estimates for earnings per share for the S&P 500 for 2022. So very nice upward motion estimates for 2023. Also even higher, right, nice upward motion, they’re also throughout the year. And basically, one of the things to keep in mind is the last seven quarters in a row, the earnings, actual earnings have exceeded expectations, the estimated earnings by a significant amount, seven quarters in a row. So these are the estimates. And if we keep beating these, it’s going to continue to pull that stock market forward. Right. So earnings are incredibly important component of this motion.
The federal funds rate is what they’re always talking about when they talk about the Fed raising rates. This is they’re raising the federal funds rates. And this is a chart going back to 1955. You can see how high rates were back in the 70s, and 80s, and different things that we are all familiar with. But one of the things to note is again, you have these gray bars that show the recessions that are happening at any point in time. If you look prior to those recessionary time periods, almost every single one of them had an increasing interest rate first, before you had that recession. If you look all the way, at the very end of the chart, you’ll notice that the line is flat. That’s because the current interest rate is only point two 5%. And so really, it doesn’t even show up. And so without significant increases in interest rates. We haven’t had that happen, where there’s a quarter point situation where a recession starts tomorrow type of thing. And there’s a lot of talk about recession right now. So that’s what I’m responding to. But again, very important to understand, it usually takes quite a few rate increases, and we’ve only had one so far, right? The average recession starts three years after the first rate increase. So first rate increase was last month. So if we take three years from that, it’d be March of 2025, that seems much more reasonable for me to look for recession. Anything’s possible.
This is kind of an unusual environment, certainly with the pandemic, the Re-opening inflation, and all these things. But historically, it doesn’t come that quickly, right, that takes several rate increases. And then here’s another interesting piece, stocks have still done well, even during rate increase cycles. So the cycle is considered the first rate increase, which was last month, till the last rate increase when they start to come back down again. And there’s 12 of them here, starting in 1954, you’ll notice that the rate of return is positive on 11 of those 12. So even though interest rates are going up, most of the times the market also goes up. And the average rate of return per year on this particular chart is 9.4%. So a pretty healthy rate of return for the S&P 500, even rates are going up. So again, important timeframe to take a look at. And back to the technical part. Most of what we talked about right now is we’ll call fundamental where you’re looking at earnings, you’re looking at interest rates, what’s happened in the economy, technical analysis is really looking at the charts. And there are an awful lot of people and organizations that use the charts is one of their key metrics for deciding on what to do. And so if you look at this chart, again of the S&P 500, so far this year, you’ll see this blue line that goes through there, that’s the 200 day moving average, every point on that line is an average for the 200 days prior. And so what they’ve done here is done some studies on what happens when it falls below the 200 day moving average, and then comes back.
Okay, so I’ll show you one of the studies that was done. Since World War Two, there’s been 31 times that the S&P 500 has fallen below the s the 200 day moving average by 6% or more in those 31 times 15 times that happened, that are recovered back through the upward back through the 20 day moving average, just like we did in March without a recession. So that’s that’s what’s happening right now. We’re not in a recession right now, obviously. And so in those 15 times, there was a positive rate of return on the s&p 512 months later, 15 times 15 out of 15 100% of the time, when that pattern has happened with no recession, there’s been a positive rate of return 12 months later, an average rate of return of 17% according to this study, so that’s really, really good. And what’s really interesting, too, is even if there was a recession happening right now, these 16 times this has happened, you know, since World War Two, still 11 of them ended up being positive for the S&P 500 You know, a year later with an 18% rate of return. So very pause very powerful motion cut fall below the 200 day moving average by more than 6% recover back Above that, and you have a fairly good chance of having a positive rate of return, especially historically. And it’s, again, one of those things that people look at that might have some impact on what happens here with the with the markets also.
Okay, Buy American, I’ve been saying this for a long time. Certainly, you know, I’ve always felt very strongly that you should have a globally diversified portfolio until the pandemic, and the pandemic happened, and it really hit the international investing a lot harder. And we stuck with American investing four out throughout the pandemic recovery here. And that worked out really well. For example, the Vanguard Total Stock Market Index, VTI, is the symbol for the ETF, since the beginning of 2020, basically has a 15% per year average rate of return. If you look at the Vanguard Total international stock market index, which is basically all the international stocks versus the other one, which was all US stocks, that’s only up 2.9% a year on average. So huge difference, just because of what’s been going on the pandemic, here’s my point, I think this is going to become even more powerful. Because of the situation in Ukraine, Europe is having more trouble, they have more exposure than more exposure to the oil, the gas and the coal, they’re going to try to wean themselves off, that’s going to be expensive, it’s going to affect earnings, their growth rates are going to fall. And we’re starting to see those markets do a lot worse than we are doing now, China was already having trouble prior to this, because of the regulatory situation that they’re dealing with. And they had some softness in the market due to that. And now I think they’re going to face even more because of the quasi alignment that they have really with Russia in this conflict. And the western democracies might start to look at that and create some more problems for their market that leaves America when the best place to invest anyway, I think we’ll see even more Global Allocation towards American stocks. And I wouldn’t be surprised to find out when we get to see the data here. If this big run up that we had in March wasn’t really precipitated by international money coming into the US market, I think that continues, we are the place to go right now. And I don’t see that changing for a while, you know, because of the situations that in Europe, and China are going to take quite a bit of time to work their way out. In the interim, we have a lot less exposure to those situations. And I think our market will benefit from that dramatically, in my opinion.
Okay, then we have a seasonal aspect of April is a good month. Matter of fact, if you look at the last 16, April’s 15 of them has been positive, it’s a really good ratio, the average rate of return was 3.1%. That’s the highest average rate of return of any month in the last 16 years. So April is a really good month on average. So we’ll see what happens this time, I do think this particular April, we’re going to scuffle around for the first half of it really, because we had such a huge run up, especially through the end of March, that you know, it’s going to take a little while to absorb that, if we are going to get a good April, it’s going to probably happen in the second half. But we’ll see what happens there. And then last but not least, Warren Buffett’s buying, I consider this that greatest investor, you know, on earth, and really has been talking about not being able to find things to buy for a long time sitting on a lot of cash, and has now over the last three weeks started to come in and buy, the best investors in the world walk in when everybody else is walking out. And Warren Buffett is finding things to buy in this market. So I think that’s something to consider also. So lots of negative things. And I’m not saying the positive outweighs the negative. But if you don’t get some kind of a balance of the information between those two categories, you will end up being more nervous than you need to be because the news is going to continue to push out that negative piece. And so that’s what I’m trying to do.
This show started on the 22nd of March 2020. And I started talking about positive things just to keep my clients from really being nervous about what’s happening with the market at that time. You know, we were in a full shutdown a pandemic. And I’ll tell you what the positive thinkers won the S&P 500 If you look at the Vanguard, VO, for example, if you bought that on the 22nd of March, you’ve more than doubled your money. And so all that negative information that’s been coming out all the way through all of this was really the wrong side to focus on. And so I’m not saying we’re gonna continue to double every couple of years or what have you. But I am saying that it’s super important to understand the positive side of the equation to be a better investor. And that’s something I think about all the time. So thank you. I really appreciate this week and look forward to talking to you again next week.