Transcript:
Tom Vaughan:
All right. So I like to start off every show, really here just talking about a summary of what I saw happen this week in the market, as a whole. So, I put out a piece every single day about what I saw happen in the market, I’ve been doing that since the 22nd of March last year. And then we do these summaries on Fridays. And so about once every quarter though, I do want to call Positive Friday: I think today is a great day to do that. The market’s down, it’s been down for a few weeks here. And really one of the things that I try to do with these is just to point out all of the positive things that are happening in the market or the economy, and trying to offset the negative. So one of the challenges to being an investor in the stock market is really fighting the fear. Especially since most of the information that’s out there is negative. Negative sells, it works. If I did “Negative Fridays”, instead of Positive Fridays, I get a lot more people watching this video. But I do think it’s very important to have some resource that points out all the good things that are happening to just offset. Now, this doesn’t mean I’m ignoring the negative. It doesn’t mean I think the market’s going to go skyrocketing.
I’m a reactionary investor, which means I don’t work on predictions. I don’t predict where it’s going to go and then try to invest that way. I watch the price, and I react to what happens to the price; and so that’s basically it. But, in order for me to feel confident about my exposure to the stock market, I need to know the positive pieces. So, I’ll start with just some history about big downturns. And just kind of get you into the concept of what the odds are of having a big downturn. So, if we go back to 1929, there have been 26 bear markets. So a bear market is defined, by a market that falls 20% or more, okay? So 26 of them since 1929: That comes out to an average of every 3.6 years, alright? So let’s think about that for a minute: We just had one last year. The average is every 3.6 years. Back to back is pretty rare, so again, look at the odds. The odds are that we’re looking at a market here that could continue without a 20% downturn. The other thing we have to look at, is just the amount of time that the market goes down versus up. So for example, in those bear markets, it was 9.6 months on average before it recovered and got back to where it was before it fell. If you look at the bull markets, or the up markets that happened in between those bear markets, they lasted for 2.7 years.
So think about that: The market goes up for a lot more days, than it goes down. Again, probabilities would say that we are looking at a continuation of the upturn, okay, again. And then if we look at data in a different way, if we look at it since World War Two, things are actually better. There been 14 bear markets, but they actually have been 5.4 years in between those. So… I would call that the modern market. It has been 5.4 years in between, big downturns instead of 3.6, which we saw from 1929 to now. So again, look at the overall statistical concept of how we might end up in another big downturn, and it’s not that common to happen. So that’s one thing to always keep in mind. The next thing is to actually take a look at what’s happening right now in the price movement of the market, right? So a few things are going on, I think are very important. Number one is we have incredibly strong momentum, okay? So it’s like a big giant battleship that’s just steaming along. It’s very difficult for that battleship to turn around tomorrow and start to go down or this month or even this year. Usually, there’s a lot more deterioration that happens before we start to see these bigger bear markets. And right now, we don’t really have any of that deterioration… the market’s down a few percent, so far this month, but we’re still sitting at…. 50 day moving average’s up. The 100 day moving average’s up. The 200 day moving average’s up. These are all things that just show the momentum is still very strong. So right now you have to kind of lean towards that momentum, and assume that we’re still in an upward market, until proven otherwise.
The other part that happens when you have these types of great runs, it spends time at different areas. And when it spends time there, there’s a lot of shares accumulated at those prices, and then that becomes support. So, I’ll give you an example: If somebody buys something at $10 a share, and it goes up to $13 per share, they’re really excited. They made great money; but let’s say it drops back down to $10 a share for some reason. That person might say, “Hey, I bought it at $10 it went up. I’d like to buy it again. So if it gets there, I’m going to buy it again”: That’s support. We have a huge amount of support under the current prices, all the way down. So it makes it difficult for the market to really fall super hard, super fast, because people keep coming in and buying at these prices as far as that goes. And one of the great pieces is the individual investor, the rise of the individual investor, which has been phenomenal last year, millions of new investors have come in. And one of the things seems to be “buying the dip.” And they keep coming in and buying the dip and buying the dip, and that is that support that’s coming in as far as that goes. So, we have that going on. Here’s probably the most important thing and that rates are low, okay? And I’ve talked about this almost every single day, because it is the most important component, and it’s the big issue for, looking at what might happen to the market, especially in some of these bigger bear markets, especially in more recent times. So what does that mean, though? So when rates are low, that means that the rates that you might get inside the bank are low. So on a regular basis, I have a client calling me saying, “hey, look I have a CD. It’s coming due. They’re only offering me a half a percent on the new CD. I want to pull it out of the bank and put it into my account with you… I think you can probably make more than a half percent in the stock and bond market.” Well think about that. It’s happening all over the world, actually, as rates are low. And so money continues to pour in. So, when rates are low, that’s a big deal.
The other thing that’s really important about low rates has to do with housing. Because actually the average person has more money in their house, than they have in the stock market. And so when rates drop, people buy more homes. That increases the value of homes. It allows people to buy bigger homes. Homes are a huge piece of the economy, so many different industries are involved in the construction and sale of homes. And so the more that happens, the more you get that this rotation of money, and then you have… the average rate of mortgage right now, according to Bankrate of a 30 year mortgage at around 3%, which allows a lot of people to buy homes, and then some people refinance. And when they refinance, maybe they’re at five, now they’re at three… that’s extra money. And they’re permanently locking in these low rates. And theoretically, we’ll have this excess cash flow to spend on the economy or the stock market for the rest of the term of that loan. And so housing wealth effect is a huge component of what’s going on in the economy and what have you. And again, that is caused by lower rates. We’ve also seen some higher retail sales. So the American consumer is unbelievable.
Retail sales are supposed to drop last month. We got the Delta Variant, and all this, and it actually went up, okay? So again, never discount the American consumer. We are unbelievable. We lead the world really in consumption, and it really does help the economy here. Now, one of the big threats that has been coming along all year has been the threat of inflation. So ironically, we’ve had some problem areas, like labor shortages, supply chain disruptions and the Delta Variant, that have actually slowed the threat of inflation. And all of those are all problems, in and of themselves, it has taken off the table, some of this big threat of high inflation. High inflation is is tough on company earnings, because at some point, it becomes difficult to pass that inflation along to the consumer, and company earnings tend to drop in those scenarios. So that has been somewhat mitigated by what’s happened here. There is some potential for government money coming in, again. They’re working on this Reconciliation Package; which would be a stimulative environment for the stock market. They’re working on this Infrastructure Package now. Who knows what gets passed, when it gets passed, how it gets passed, but both of those are sitting there. If they did get passed, it would be a positive to the market. And so, the virus itself has been a counteracting measure right now. And so we are seeing a topping. If you look at the charts, nationally, if you look at the charts, in a lot of the different states, you’ll see that the rate of increase is slowing down, and we’re starting to see a little bit of topping there. If you look at what happened in the UK, what happened in India during their big spikes, we did see a topping and it came back down.
So maybe, you know, we’ll see what happens; we’ll see some topping in the Delta Variant, which would be a positive for the market. Company earnings are unbelievable. Really, really unbelievable. And you know, the reason the market is up so much since March of last year, is because there was an expectation that company earnings would be doing quite well, and that has been true. There’s lots of reasons they’re up. Some of them are you know, from money that’s coming from the government. Some of it is this because you can’t discount the US consumer. But nonetheless, they’re up and the expectation is that for the third quarter, earnings will be up another 28%. And so, again, phenomenal growth. Part of that growth is because of the virus, causing companies to invest dramatically into technology, which has increased their productivity. And we are seeing, unbelievable productivity rates come out of companies. That probably won’t go away. That could be a generational movement for the stock market, because of those productivity gains. Last thing, and let’s just not discount the American stock market, really.
I mean, if you look worldwide: China’s is this big, emerging country with all kinds of potential and what have you. Their stock market is falling apart right now, because the regulators are walking in and doing things that are probably seen as not capitalistic and what have you, so there’s all kinds of problems happening there; it just makes our market look that much better. If you look around the world as a whole, the US market is an amazing place. And money keeps flooding into this market, from all around the world, because this has a really good rate of return. The S&P 500 is super popular. We all live here. We can kind of see things that we don’t like or what have you. But if you look… on a competitive basis around the globe, the US stock market is incredible. And so I’d be really cautious to constantly be selling that, just because there’s a lot of negative articles out there. So again, all I’m trying to do here is give you something positive to think about as these things happen. So if the market continues down, which it very may likely hear for a little while, keep remembering some of these positive things to go with all the negative stuff that you’ll hear, because more negative articles come out now. I mean, it’s amazing, but as a flood of them that I’ve seen on all the people that are out there that have been calling for downturns, even though it hasn’t been going down, are now getting highlighted as far as that goes. So, I just tried to provide a place where you can see something positive. So thank you for listening for this week’s summary in the Positive Friday and I look forward to talking about what’s going to happen next week.