The stock market continues reaching new all-time highs, but the headlines don’t always tell the full story of what’s driving returns.
With stocks once again reaching all-time highs, it can be tempting for investors to wonder whether the market has climbed too far, too fast.
Chris and Noah put those concerns into perspective by comparing recent S&P 500 performance. At the time of their discussion, the index’s three-year and five-year returns were both approximately 75%. That means investors who earned the five-year return also had to experience the significant market decline of 2022 along the way.
Chris describes that volatility as the “cost of admission” for long-term market returns. If markets only moved higher, there would be little risk involved. Instead, declines and periods of uncertainty are an unavoidable part of participating in the potential long-term growth of equities.
All-time highs themselves also aren’t unusual. Once markets reach new highs, they can continue setting additional records as earnings and the economy grow. Rather than treating a new high as an automatic signal to sell, Chris and Noah emphasize the importance of remaining invested and looking for opportunities through periods of volatility.
One of the strongest arguments supporting current market levels is corporate earnings.
Chris and Noah highlight exceptionally strong year-over-year earnings growth among S&P 500 companies reporting second-quarter results. They also point to record profit margins, which reached 16.7% in their discussion.
Those fundamentals matter when evaluating whether rising stock prices are simply the result of investor enthusiasm or are being supported by actual business performance.
The distinction becomes especially important when comparing today’s enthusiasm around artificial intelligence with previous speculative periods. Chris and Noah note that forward price-to-earnings multiples rose significantly during the dot-com era. In the current environment, strong earnings growth has helped keep valuations from following the same trajectory.
For investors concerned about whether markets are in a valuation bubble, earnings remain a critical part of the conversation.
Artificial intelligence may have started primarily as a technology and stock market story, but its influence is increasingly reaching the broader economy.
Chris and Noah discuss estimates suggesting AI-related data center investment could represent roughly 2% of U.S. GDP. Building and operating that infrastructure requires far more than semiconductor chips. It also involves electricity generation and consumption, cooling systems, land, transmission infrastructure, financing, construction, and specialized workers.
Those investments can create economic activity well beyond the technology companies most directly associated with AI.
The hosts also discuss the challenge of intentionally avoiding technology exposure within an investment portfolio. While portfolios can be constructed with lower technology weightings, doing so may also mean missing some of the earnings growth associated with technological advancement.
As Noah points out, completely eliminating technology exposure is itself a significant investment decision. Technology is unlikely to become less important to businesses and the economy in the decades ahead.
Inflation and interest rates remain important pieces of the market outlook.
Chris and Noah discuss recent Consumer Price Index data, with headline inflation running at 3.4% year over year and core inflation, which excludes food and energy, at 2.5% at the time of recording.
Recent economic data may also be giving the Federal Reserve additional flexibility. Weaker employment figures and softer GDP estimates could reduce some of the pressure policymakers have faced when balancing inflation risks against economic growth.
The next round of data will be particularly important because there is no Federal Reserve meeting in August. Investors will have another set of inflation, employment, and economic readings to consider before policymakers meet again in September.
Borrowing costs, however, remain elevated. Chris and Noah point to mortgage rates around 6.7% and continued pressure in the Treasury market as reminders that higher interest rates are still affecting consumers, businesses, and investors.
Despite higher borrowing costs, inflation, and geopolitical uncertainty, the American consumer continues to spend.
Chris and Noah jokingly describe the current environment as “keep calm and continue shopping.” While savings rates remain under pressure, consumer spending has continued helping support economic activity.
Energy prices could become an important variable in determining how long that resilience lasts. Higher oil and gasoline prices leave households with less money available for other purchases, particularly for consumers whose budgets are already stretched.
That makes oil prices important beyond the energy markets themselves. A meaningful increase could affect inflation while simultaneously reducing consumers’ discretionary spending power.
For now, however, spending remains one of the factors keeping the broader economy moving forward.
While stocks have continued reaching new highs, traditional bond investors have faced a very different experience.
Chris and Noah note that the U.S. Aggregate Bond Index has remained in a drawdown for roughly six years, significantly longer than previous periods of weakness. The environment represents a major change from the decades when generally declining interest rates provided a favorable backdrop for fixed income.
For much of the 40 years leading into 2022, yields generally trended lower. More recently, rates moved sharply higher and have remained elevated.
That shift raises questions about how traditional stock-and-bond portfolio assumptions may perform if higher rates persist. Chris and Noah contrast the long-term performance of equities and fixed income, while emphasizing the earnings growth that stocks can provide and traditional bonds cannot.
The discussion doesn’t eliminate the role of fixed income, but it highlights why investors may need to understand how a different interest-rate environment can affect traditional portfolio construction.
Geopolitical events can dominate the news without necessarily dominating financial markets.
Chris and Noah discuss the ongoing conflict with Iran and the potential effects on oil prices, inflation, and consumer spending. Yet the stock market’s reaction has remained relatively contained.
The reason comes back to earnings.
As Chris explains, the market is not a moral barometer. Investors may have strong opinions about political events, wars, elections, or other developments, but markets ultimately evaluate whether those events are likely to affect corporate earnings and future cash flows.
If an event is unlikely to materially change those fundamentals, its market impact may be limited even when the event itself is significant.
That distinction can be particularly valuable during periods when negative headlines make investors feel as though markets should be falling. Separating the emotional impact of the news from its potential financial impact can help investors maintain perspective.
Markets are once again at all-time highs, but strong fundamentals remain an important part of the story.
Corporate earnings and profit margins have been exceptionally strong, AI investment is spreading into the broader economy, consumers continue spending, and market participation has extended well beyond a single investment theme. At the same time, inflation, elevated interest rates, energy prices, geopolitical uncertainty, and a difficult bond market give investors plenty of reasons to remain attentive.
Episode 67 reinforces why investing based solely on headlines can be misleading. Markets ultimately respond to earnings, economic growth, and expectations for future cash flows.
Volatility will remain part of the experience. As Chris and Noah discuss, that volatility is also part of the “cost of admission” investors accept in pursuit of long-term market returns.
Hey, welcome back to another installment of the Market Enthusiast.
Noah Brooks (00:23)
I’m Noah Brooks, and obviously this is Chris Needs. Hello, hello. All right. Here we are, beginning of August. We are super close. I mean, we’re gonna end the day at all time highs today, right? Another one. Another one. It’s been a lot of that this year. We had a little gap, I think, going back to early June, but now we’re right back and having a few in a row. It’s easy when you’re an all time high to get another all time high. Is it?
It is just yeah. That momentum just you could be one cent positive. Keeps chugging chugging away. Yeah. Well, we were down about five percent in early June, and people were worried, and maybe another three percent in the beginning of July, and then it’s just been off to the races. It has been. Yeah. Hey, before we get into that, speaking of all time highs, what’s that? just worth mentioning, we’ve had a little bit of a milestone here, we’ll say.
we don’t just come on here and talk and everything. My hair didn’t grow back. It didn’t grow back. It didn’t grow back. But we manage money here too. We trade, we run models, we run portfolios, and we passed three billion dollars in assets under management. Yeah. That’s a big checkpoint. How does it feel? Did you did you see this when you started this program 10, 12 years ago that it would get to three billion? When we started portfolio solutions.
You know, the the founders asked me to come up with something that we could help advisors and investors you know, run run models essentially for. And we started with almost nothing. It was like $30 million. and it just over over the years, as advisors joined Good Life and more investors joined Good Life, it just grew and grew and grew. it doesn’t hurt that the last 13 years in the stock market has been
Pretty good as well. But I mean, we obviously, you know, went from you know, a few hundred accounts in our portfolio solutions models to, you know, twelve, fourteen thousand. and the advisor count grew from three, the two founders and myself, to, you know, 70 advisors are using using the models in our in our trading service. So yeah, no, it’s it’s been phenomenal. And I’m just we’re super fortunate to have been able to be
in the middle of it and you know we put a lot of work into it. Everybody here and and you you too. I mean I know you weren’t there with me 13 years ago, but you’ve been a solid ride or die over the last last five or so. So and everybody else here at Good Life, the investment team and the traders and things like that. It’s just been it’s been phenomenal. Really proud of this moment. Ever since it got in our crosshairs, it’s been like, all when are we gonna get it? When are we going to tick that number? Yeah. Three billion. It’s a it’s a lot of money. I mean the firm
runs or has a lot more than that, but in terms of what we’re managing, directly managing. Yeah, that’s we have our hands in the pie. We are literally trading those accounts. So it’s it’s I I love putting fun to see. Yeah. But it doesn’t hurt that we’re at all time highs. so I did a little bit of just fun with numbers earlier. And do you know what the three year number, three year return on the SP 500 is?
It is probably three year number, maybe 80, 90 percent. It’s 75%. Okay. Do you know what the five year number on the SP 500 is? So we have 2022 in there. we’ll we’ll call it 80%. it is 75%. It is the exact same return on the three year number versus the five year number. And that means, you know, i there’s a lot of different ways to slice this up and to think about it.
But realistically, you know, the the re and if you just said, hey, we have a 75% return, you’d be like, that’s amazing. And I don’t mean us, I mean the the the stock market. But you had a a two years in there that your return was negative. Yeah. Right. In in order to have a five year return and a three year return be the exact same thing. You had to take that ride down. And I just it’s one of these things that I always go back to with with investors and and advisors is like,
The cost of admission in that 75% return is a down 20% year in 2022. It it has to happen. if it was only up, you know, there there would be no risk and everybody would just be doing it. It’s it’s there has to be a downside in order for those long term returns to happen. So, you know, stay invested. I I say that we’re we’re at all time highs. We could have had this conversation at any point really over the last 10 years and just said,
we’re at all time highs and people get a little bit you know, caution or it it seems like a cautionary tale not to invest at all time highs. But the fact of the matter is we just keep making more all-time highs. Yeah. Everybody in the industry knows all those charts. I’m sure many retail clients also have seen those charts where it’s the reasons to sell. But you know, if you check, like you said, you know, since the great financial crisis, you know, 2010 on, there’s lots of reasons on that chart.
But I’ll tell you what the stock market still did. Yeah. In the end, the indexes still went up. Yeah. A absolutely. you know, we talk to advisors and investors almost every day, and we constantly are giving reasons why we are not in a let’s say valuation bubble and people should stay invested. But it’s it’s really easy when you’re listening to the financial news or God forbid you’re listening to the regular, you know, nightly news and it’s just one negative thing after another.
and at the very end they put a nice little sweetener in there for you. Like, that’s so cute. But you know, it’s just okay. Yeah, it it’s just negative, negative, negative. And so it’s really easy for investors to get burnt out on it and just say, I want to, you know, take it off the table. But I encourage people not to do that and try to be opportunistic. you know, this year when we had started the Iran what do we call it? Kinetic action. Kinetic action. Yeah, the kinetic action in Iran. if you know from the bottom there.
which was in mid-March to where we are today, it’s up 23%. so for the year, the S P five hundred is up thirteen percent, mid caps up about eighteen, small caps up over twenty-three percent, emerging markets are up twenty-four. I mean, it’s just, you know, it’s it’s been a tremendous year. Not everything is moving in in that same you know, they’re not moving parallel with those returns. I mean, large growth.
As as a asset class is only up about five large value, we’re trending upwards of twenty-four percent. I mean, the earnings have been phenomenal across the board in the SP five hundred. Q two S P five hundred earnings forty seven so far on pace, forty-seven percent year over year. That’s phenomenal. Why are so people so bearish or so scared in the stock market right now? That’s phenomenal. That’s you know, numbers we don’t see outside of post recession or post-crash.
levels. Yeah. last time was I think it was Q2 of 2021 or maybe Q one of yeah, Q two of 2021. Covid rebound. Yeah. obviously that is a quote unquote post-recessionary. We literally shut the country, the whole world down. So that makes sense. But in the middle of a bull market like we are now, super impressive. And then obviously, you know, on to piggyback on that, you have, you know, profit margins at record highs, highest they’ve ever been.
16.7% on the S P five hundred. Rare air. Rare air. Yeah. the first thing that I think when I hear that 47% is okay, we’re not at at I I don’t think we’re in a valuation bubble. Are we in an earnings bubble? You you you know, that’s definitely something you can debate. certainly. And the guidance keeps going up. I was talking to you about a chart.
That basically shows, you know, for all those concerned about bubble, the dot com bubble versus right now, the AI run. I’m not calling it a bubble because it’s not a bubble. But you see the forward price to earnings multiples going up through the whole dot com run, going up farther and farther higher, obviously more expensive when the PE goes up right now, because of how amazing these earnings are.
The P the forward Ps are actually going downwards. Yeah. So markedly different than back then. You know, earnings continue to get better and better and better. And obviously we’ve talked about the Mag Seven turning into the lag seven. We’ve talked about AI. AI is kind of trending from, let’s say, a a stock market thing to more of an economic thing. estimates are saying that about two percent of GDP are gonna be through AI data centers.
And when you think about some of those jobs out there and how it trickles through the the rest of the economy, I mean in terms of GDP, you know, electricity consumption, the chips, the cooling, the land, transmission infrastructure in and out of those places, even some of the debt financing goes into the GDP, and then obviously skilled workers that you need to to run these things, even though we’ve talked about it here.
You don’t per dollar, there’s not many workers in a data center, but there is still highly specialized people. The tertiary benefits and jobs around the data center really do add up after a while. So two percent of GDP. I mean, if I’m doing my math correct, I may not be, but residential housing is only five percent of GDP approximately. I mean, for a an entirely new
I don’t want to say phenomenon, but an entirely new industry that really wasn’t here ten years ago to be now worth two percent of of gross domestic product, that’s a pretty big move. And and obviously that’s why the market has gone up or or these companies have gone up, the the data centers and the hyperscalers and all that stuff and all of the connected investments around them. so you know, I don’t know what ten years from now looks like. I don’t even know what two years from now from looks like. I think we can all can
kind of try to figure it out. But the reality is is that this stuff isn’t going to go away. And continued investment in artificial intelligence is really going to be driving efficiencies across the board at companies and and driving productivity in the end for the for the aggregate results. I just there’s there’s no way that you can avoid it. I’ve had people ask me, well, well, can we invest with let’s say low tech exposure?
And you mentioned that the other day that earnings in Europe has very low tech exposure compared to let’s say emerging markets and and to us here in the United States. And you so you can make those portfolios work, but you just miss the earnings growth. Right. And yeah, you can be in low vol. That will have very low tech exposure. They have portfolios and factor tracking securities out there that you can do. But
I feel like it’s such a especially for what we do, where of course, being professionals, we are gauged against the benchmark, you know. It’d be tough. It’s like I was saying, you know, years ago, is like you have to have exposure to NVIDIA because if you don’t and it goes to the moon as one of the top components, you look like a dummy. So it’s just one of those things where it’s like looking like you can have right. You can have measured exposure, certainly, but trying to eliminate it altogether, that’s also in its own.
way a very bold bet. Yeah. Because you think we’re that’s essentially betting that we’re going to be less technologically advanced in the future than we are now, which seems like a very easy answer to most people on earth. Are we going to have more or less technology in 2050? Less. Nope. Nope. Not happening. all right. So moving on a few other things. we are still facing
Higher energy prices that has come through in some of the reporting. CPI consumer price index was out a few days ago. we had the year over year up three point four percent. When you strip out food and energy and get to the core, it’s up two and a half percent. So inflation is not that’s not too bad. That’s a good number. The market kind of liked that. Yeah, it’s not too bad. But more importantly, I think the thing that was really came out of this is that the Federal Reserve was.
Almost feeling like it was backed into a corner here. And you know, then we had some weak job numbers, right? Negative twenty-three thousand, and we can have that conversation as well. GDP estimates a little light as well. There’s some things letting air out on the Fed, letting them out of that corner. Yeah, they’re not boxed in. And you know, we sort of joked about how it seems like the market tests new Fed chairman. So
His first two meetings, Wars, did not go that well. We we always joke about the sweet voice, calming voice of Jay Pal. And it doesn’t seem like the market’s giving him the benefit of the benefit of the doubt yet, because every time he talks, these first two meetings, it’s gone down. Now, this data we’ve gotten over the last two weeks is beneficial for the lowering yields, lowering pressure on them.
But we need another set of data points because there is no Fed meeting in August. The next Fed meeting is in September after we get another set. So this is a one of two data set we’re dealing with right now. Well, you you mentioned lowering yields though. what I was looking at earlier was some of the highest mortgage rates. I need someone to buy my house, Noah. We don’t need this negativity. Well it’s six seven. The average thirty now is up to six seven. Now it had been closer to seven. you know.
in in the last few years, but we were down almost, I think maybe one day it started with a five or something like that. But six seven now. I got quoted in December in five at five eight. Yeah. Yeah. And and now I think it got up to like six seven five or higher. That says the average two weeks in 30 years is six point seven. That’s not great. Yeah. and then I think today’s yesterday’s or today’s bond market sales on the on the 10 year
were four point six seven percent, some of the highest that we’ve seen in over a decade. Not just the yield, but the the government selling those bonds. so it feels like the market forty trillion is right around the corner. Like we’re talking in we did? I think there was a a number today. Forty forty trillion in national debt. Yeah. We were last stat I saw we were at like thirty nine point eight and that was like a week or two. It’s just cranking away. It’s just right. Those numbers. I mean we’re at
was it th I don’t I don’t wanna misstate it. Was it three billion a day or three billion a week in interest? I’m not sure. It was it was some cra crazy number. Trying to do the math on the fly in my head, but I don’t wanna do that. Don’t do that one. but I mean things could be worse, right? The economy seems like it’s on cruise control, everything is chugging along, unemployment is reasonable. I mean, it keeps coming down, and we can debate, you know, the
labor force partition participation rate, things like that. energy prices, I’m gonna say are relatively stable, right? So obviously they’re up year over year. But since the Iran war started, you know, they were as high as over, I think, 120 one day. We’re around 86 today. When we were in here two weeks ago, they were at 86 or 87. relatively stable. And the main driver of all this cruise control is that the consumer
continues to spend. You know, during World War II, Britain had the keep calm and carry on. We are now, and I’m not saying we’re at war, well, even though we are at war with Iran, but we’re kind of in this you know, keep calm and continue shopping phase of everything. It’s just, you know, people are spending what they have. the savings rate is not particularly well. Retail therapy is a real thing.
I’m when I’m feeling bad, buying something surely helps. My retail therapy is vacation, right? Buying flights somewhere. That’s that’s my retail therapy. you can tell because I look like a slob most of the time. I don’t need to go out and buy clothes, but I should. I probably should. My wife would probably appreciate if I bought some clothes here or there. yeah, but retail therapy is great. And the American consumer is playing retail therapy ever every day. you know, if we saw
an increase in prices and and crude prices you know to a hundred or a hundred and ten, I think that would sap some of the the spending out of the market. I mean there’s a tranche of people out there that don’t care whether gas is four dollars, five dollars, seven dollars. It doesn’t make any difference. but then there’s well yeah yeah I know your electric car. I okay, I get it. And I want it to go down so yields can sort of come down. They are kind of tied. And just a quick call out.
Very unhappy anniversary right now here in August. Six years in a drawdown for the US bond ag six years. That’s four and a half times longer than the next closest, which was back in Volcker’s campaign back in eighty to eighty one, which was sixteen months. Yeah. The the traditional bond market, you know, the ag itself is just not been tremendous. Even clipping that coupon clip
clipping those those interest payments has not really resulted in that’s been your return essentially yeah yeah it it is it has been tough. I mean we had rates come down I think in nineteen eighty one the tenure yield was like fifteen point four percent. anybody out there listening that bought a house in the early eighties knows what their what their rates were and they laugh at six point seven percent. Ha I had I someone told me they had like a 17% mortgage or something. but essentially yields were
were falling, you know, with some ebb and flows over the years. And in nineteen ninety-four, they bounced up. but overall for the last forty years, up until really up until 2022, yields were just falling. And that doesn’t seem to be the case. And we can debate whether they’re going to raise or not raise, but overall, yields were falling for 40 years. And now they’re they’re basically they went up and they’ve stayed elevated significantly higher than they were.
you know, five years ago. that has been hard for fixed income investors. And it really shows why, you know, equity markets have been leading those returns over the last, well, not only six years, but over the decade and over the last twenty years. I think the the total return or aggregate or excuse me, annualized return of the SP five hundred is now over eleven percent for the last twenty years, where the fixed income benchmark that we follow
Is is really about three and a quarter percent over the last twenty years. And those are big, big differences. Yeah. Dramatic differences. But it goes back to those earnings. Yeah. Right. It I mean, here we are, you’re talking about a forty percent year over year earnings growth.
You’re not gonna get any earnings growth in the fixed income market. No. No. It’s basically you’re betting on rates that go down or if we’re in a higher rate regime going forward based on where debt levels are at, if we’re talking about treasuries, you there’s gonna be some academic research coming on. There already is, but more academic research and more attention to is the old like static risk portfolio matched with a risk-free
Treasury portfolio, is that really how we should proceed forward in allocating stuff? Obviously, what we do is a little more technical than that, but in essence, you have like the market portfolio and you have the bond portfolio and you match up your risk with that level. Are you trying to imply that traditional finance is outdated? Modern monetary theory is is has some credence to it? I think there’s a little bit of room to look at in a rising rate regime.
Yeah, I mean a sixty forty portfolio when rates going up are is going to be significantly different return than a sixty port sixty forty portfolio when rates are trending down. Yeah. No, let’s let’s let’s not do that. Let’s not do that. but you know, all in all, markets are having a fabulous year. You know, we we have a we we don’t put out a specific price level to our advisors or investors, but we said, you know.
Up ten to fifteen percent. We’re there now. we could certainly get higher. It could get lower. W this whole situation in Iran. We’re not we’re in not in the business of changing our predictions as quickly as some of these other analysts out there. So you see different price targets thrown out like every month, it seems like. And it’s like, what’s the point then? No, you you s you start with one in the beginning of the year. This is my opinion. You and you can change your how you’re talking about and your expectations, but can’t just keep chang changing your price target. That’s cheating.
Well, we do not cheat around here, right? we don’t cheat. But the one thing that I keep coming back to is this Iran thing. And and obviously we have midterms coming up in you know, eighty-five days, eighty-four days, something like that. there was a note out from Fordham Global Insight, Tina Fordham, put this piece out talking about the possibility of Iran and Oman coming up with a deal. Trump would complain about it loudly.
the rest of the Middle East would probably just kind of comply quietly. And she made reference to the salami approach, which I’m not familiar with. You what the salami approach is? Chipping away at something. Yeah, chipping away, right? Slicing a little bit off the salami at a time. And that’s what it seems like Iran is doing. they just keep moving forward a little bit and you know, getting a little bit of advantage, knowing that Trump doesn’t really want to sell to escalate into midterms.
Now, I don’t think they can go in and they can they can’t cut off a giant piece of the salami because that would really force his force the administration’s hand and they go in whether that’s capturing the island, Karg Island or something like that. I don’t I don’t think they can do that, but I think the calculation here is that he doesn’t want to ramp things up in the next eighty days, mm-hmm, you know, and drive oil prices even higher. And the data that that is shared with me says that
There’s still a fair amount of oil coming out of the Strait of Horn moves. I don’t know any specifics on who’s getting it out, but in terms of the number of barrels a day, it’s it’s not, you know, it’s it’s not closed. Yeah, it’s not zero. Yeah, it’s it’s definitely not zero. It’s far from zero. We have inflicted a lot of economic pain. Inflation is going up pretty quickly in Iran.
I thought it was real rich their one demand of you pay us war reparations. I’m like, I don’t think you understand how war works. Like, this isn’t World War One and World War Two where everybody’s in agreement. It was Germany. This is like this is not like that at all. So I just think it’s real rich. And then I think Trump came back. He was like, Well, then we’re gonna charge you reparations for the last fifty years of terrorist proxy activity. It was just I just had a good little chuckle on that. So you mentioned proxy activity, terrorism.
I don’t have you watched Pan Am one three. I have not. No. Have you seen it? I I mean I know about Pan Am, everything that happens. Lockerby, yeah, Scotland. so there’s it it’s actually not brand new, but it I think it just came on one of the streamers, Apple or it doesn’t. Netflix, Acman Ackman’s new purchase. he did purchase some of Netflix, right? yeah. Okay, hold hold hold on that thought. So the the reason I bring it up is ’cause you mentioned terrorist proxies.
In the end, it was found that the Libyan government was behind the bombing, not that Qaddafi had put the bomb on the plane or something, but that you know theirs their secret service bundled money and facilitated in a way. Yeah, absolutely. The the people that actually delivered the plane delivered the bomb onto the plane were part of and being funded by the security outfit in Libya. And and I think in two thousand, two thousand one.
They wound up admitting to it and Libya paid some extraordinary number to the families of of the bombing. It it’s an interesting show to watch. You know, it’s a limited series. I think it’s five or s or six series. I definitely would recommend it to to people out there. but you know, we live here in the United States, we live generally speaking, far away from those types of things. I mean, we’ve had obviously nine eleven happen and there are seems like there are
you know, mass shootings pr pretty frequently, but w we’re removed. You know, we’re not being bombed by Iran. And so we can kind of go about our business, go about our work. And the stock market has not really cared about it. They care about oil prices. But I think we could go in and we could, you know, continue to bomb them and the stock market isn’t gonna move. Relatively sanguine, as Jim Kramer would say. Yeah. Sanguine. Well, it’s about earnings. Yeah. Right. I mean, that’s that’s really what it is about.
Noah Brooks (26:06)
And you say it all the time, you know, will this impact earnings here? And right now it obviously it looks like the market’s voting. No, this won’t really come over to us and impact our business. I tell investors all the time, the market is not a moral barometer. It’s an earnings gauge, right? That’s that’s it. You know, so no matter how you feel about what’s going on in the world, good, bad, indifferent, the market just simply says, Is this gonna impact earnings or free cash flow in the future? Yes or no?
Mm-hmm. And if it’s no, it doesn’t make a shit of difference. Not not even a little bit. Not even a little bit. so yeah, but I mean those there’s a lot of things that do impact us that the market doesn’t care about. And then there’s a lot of things that impact the market that that we don’t care about, right? You know, that’s why the inflation inflationary tail that we’re seeing is seems to be a little bit cautionary because at some point you question whether or not
There is going to be a slowdown in consumer spending. Obviously, there has not been at the moment. but I’d love to see oil, you know, less than 85. You know, even 80, 75 would be great. Where we are, it doesn’t have to go back to down to where it was pre-Iran, but seeing it at, you know, 65 would be really nice. Give everybody a little bit more spending in their pocket, or excuse me, a little bit more money in their pocket so they could spend on other things.
Speaking of spending on other things, I grew up with a with a grandmother who watched QVC all the time. Do you know what QVC is? I do. Okay. Well, they were for for the uninitiated out there, it’s the home it used to be the home shopping. Well, I think they bought the home shopping. It was the quality, value, and convenience. I think they they named it originally. And
In the mid eighties. It’s a hoarder’s dream. A hoarder’s dream. You could just call up online and and order it. Well, now today, I mean, that’s you know a thing of the past. QVC went bankrupt. They just emerged from bankruptcy. I don’t think we’re ever gonna get more live television stuff, but a lot of the spending has gone to TikTok and YouTube. I don’t even see as seen on TV ads anymore. Well, you don’t they used to be great. They don’t have those on the streamers.
Right. true. No, but when you’re on when you’re on Prime and they go into a commercial for something, there’s a little buy it now. Yeah. Connected right to your credit card. Right there. Just hit the button. Hit the button. I mean your kids could be on meanwhile taping away. We’ve deleted many purchases on Amazon because they on their tablets, the fire tablets and stuff, these kids can click on anything. really?
You don’t know no one finds out the passwords and he just how does he find out the passwords, Chris? He watches me put it in right in front of him. he even found out how to change it one time so I couldn’t get into it. What? He just changed it to all ones. And it’s like eight ones. I’m like, How would I ever guess that? Like Okay. Well, speaking of things that kids do, there was a report this week that a seven year old and a four year old
stole their parents’ car in Oakland, California, and were joyriding around. It didn’t last too long. If they crashed a few blocks away from from the house, but they were flying. They’re doing like 70 miles an hour on a you know, twenty-five mile an hour road, thirty-five mile an hour road, eventually crashed cruising in mile six four. They really, really hurt somebody. I don’t know if they got hurt, but all the airbags went off. They they very much injured a woman. And I’m just thinking to myself, like, to be seven years old.
And your four year old brother, and you’re taking your your parents’ car for a joyride. Holy crap. Kids grow up so fast these days. I mean, it’s what’s worse, though you know, ordering ordering food by accident on your phone or or joy riding, right? Like yeah, I don’t know, man. Love a little grand theft auto before you reach the age of ten. Holy cow, what do you do with those kids? Uh-huh. Nothing. What nothing’s gonna happen to them.
Something should happen to the parents? I don’t know. I I don’t know if that’s a thing. I don’t know. I’m just gonna keep the keys away from Nolan. But he already has your passwords, bro. What are you what are you gonna when he when you’re That’s kind of the scary thing. If you if it you’re making a great point because I have like the phone key for my Tesla, and technically if my phone is in the car or Nolan takes my phone and is watching a video, so I’m not like actively watching him, and he goes out to my car, he just zooms away. I won’t even hear it. It’ll be silent.
What?
Did you ever take your parents’ car for a joyride? No. No. I was a good boy. Get out of here. I was a good boy. Are you still a good boy? Okay. So you never you never joy rode. Well, hopefully Did you? you go for some cruises? Heck yeah. All right.
I I thought it was cool just to back like the vehicles out of the way so I could shoot basketball. I’m like, yeah, I could drive this thing if I needed to. my dad put me on his lap when I was like nine and ten years old and would let me steer. I couldn’t reach the pedals, but yeah, anyway, it doesn’t matter. You were you were shifting? no, I don’t think so. I don’t think so. We had a nineteen eighty one grind the gearbox. Yeah, we had a nineteen eighty Toyota Tresell, a little five speed.
I did learn how to drive stick on that car. Surprisingly, I don’t think there’s a lot of people out there that know how to drive stick anymore. Mm-hmm. I agree. I don’t think so. D do you drive? Do you not have I have driven stick before. I know how to. I’m not I don’t wanna be starting on a hill. I don’t wanna like immediately have to get it in gear and start it on a hill. So I was behind a big truck on the hill, behind a big truck on a hill the other day.
And I probably got too close to the truck, not just you know, not paying attention. And he rolled backward when he started out. And I was I mean, it came really close to my car. And I just thought, wow, I have to remember because he was probably watching and he’s like, I’m gonna scare this guy. He could be. He could be squash this car. Yeah, squash it. all right. So here we are about to wrap up. What what else do you have for the good of the order here, Chris?
I mean, in our area outside of Philly, we know the big news LeBron James coming to the Sixers along with Jalen Brown. We have a star studded cast. If we can Joel Embiid looks healthy, looks light right now, that’s good for his longevity this season, hopefully. Maybe we can get lucky and get one to two good years out of Braun. But how about the Lakers? The Lakers just got sold again, second time in three years.
They were bought by Mark Walter from was it Oppenheimer or Guggenheim Guggenheim in 2023 for 10 billion. They just got sold again for 12 and a half billion. Any any names we know? Some some good names, certainly. former CEO, two time CEO of Disney, Bob Iger, and Josh Kushner. Yes, that Kushner family, very connected and such. And it was under interesting circumstances. So
I have a conspiracy. Okay. You hear for Yeah, yeah. gonna hear it. So there was pressure on Walter and Guggenheim being pressure from the FBI. And he was under a little bit of a liquidity crunch and sort of had a fire sale per se and had to sell off this enormous asset. He made a good cool two and a half billion off of it. I don’t know what the taxes look like in California on that, but I’m sure they’re not good and they’re very large. Yeah.
But very interesting that such a connected person would be on the other side of that pressure. It’s not so hard. What are you implying? There may have been some communication in in my conspiratorial view that hey, let’s apply a little pressure. I really want that pretty asset there, the the lake the Lakers. And little pressure, a few emails or no, no, no emails. A few conversations to apply some pressure, and then boom, suddenly he’s on the winning end of this bid. Normally I am
Spiritual.
Pretty much across the board I’m not. But the interesting thing the interesting thing on on this one is that it was an unsolicited bid at the perfect time. At the perfect time. Now, when you say unsolicited, like you don’t know what the relationship I certainly don’t know what the relationship with these people is. the two of them were in talks with the NBA. So they were in the NBA circle of, you know, the potential of an expansion team in the NBA, which there’s been a lot of talk of and they were sort of in the mix for that, but buying the most valuable team, I don’t think
know, that was in the cards that anybody else was aware of. So I’m just curious how I and Kushner got together. Yeah. Yeah, it does. I agree. Do you know do you know the relationship? I do not. No. I mean, I know a little bit beyond obviously no Iger. Everybody knows Iger. so all I know about Kushner is, you know, he’s made some good investments. He has Thrive Capital, which is essentially, I guess, like a maybe not a hedge fund, but maybe we’ll say venture capital, investment firm, and then
He was a co-founder of Oscar Health, which is like a pretty notable telehealth type future technology health company. But I don’t know how the two of them got roped up. They seem you would think they’re on different sides. You never know politically. But they came together for a great win on this deal. I mean, if if your w what does it make it? Is if your brother’s father-in-law
Is the president. Does that make you have to be loyal to one party or another? No. I don’t know anything about him politically, I should say. But yeah, I drew the ire of Mr. Donald Trump, President Donald Trump, you know, when he was at Disney. So in this culture wars thing. So you would think he would at the very least not want to be with him and it’s such a big deal. That’s just my opinion.
Well, we will see. They bid it looks like it’s gonna happen. and we got Braun. Got Braun. Right? We’re the winners. All right, everybody. Thank you so much for listening. We will see you next time on the Market Enthusiast.
Have questions about how this impacts your investment strategy? Reach out to your advisor or email us at marketenthusiast@goodlifefa.com.
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a decision. Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Beyond the Headlines: Why Earnings Still Matter Most to Markets
The stock market continues reaching new all-time highs, but the headlines don’t always tell the full story of what’s driving returns.
In Episode 67 of The Market Enthusiast, Noah Brooks and Chris Needs look at the fundamentals supporting today’s market, including strong corporate earnings, record profit margins, artificial intelligence investment, consumer spending, inflation, and interest rates. They also discuss why market volatility is part of long-term investing, the challenges facing bond investors, and why geopolitical events don’t always have the market impact investors might expect.
Table of Contents
Table of Contents
All-Time Highs and the Cost of Staying Invested
With stocks once again reaching all-time highs, it can be tempting for investors to wonder whether the market has climbed too far, too fast.
Chris and Noah put those concerns into perspective by comparing recent S&P 500 performance. At the time of their discussion, the index’s three-year and five-year returns were both approximately 75%. That means investors who earned the five-year return also had to experience the significant market decline of 2022 along the way.
Chris describes that volatility as the “cost of admission” for long-term market returns. If markets only moved higher, there would be little risk involved. Instead, declines and periods of uncertainty are an unavoidable part of participating in the potential long-term growth of equities.
All-time highs themselves also aren’t unusual. Once markets reach new highs, they can continue setting additional records as earnings and the economy grow. Rather than treating a new high as an automatic signal to sell, Chris and Noah emphasize the importance of remaining invested and looking for opportunities through periods of volatility.
Strong Earnings Continue to Support the Market
One of the strongest arguments supporting current market levels is corporate earnings.
Chris and Noah highlight exceptionally strong year-over-year earnings growth among S&P 500 companies reporting second-quarter results. They also point to record profit margins, which reached 16.7% in their discussion.
Those fundamentals matter when evaluating whether rising stock prices are simply the result of investor enthusiasm or are being supported by actual business performance.
The distinction becomes especially important when comparing today’s enthusiasm around artificial intelligence with previous speculative periods. Chris and Noah note that forward price-to-earnings multiples rose significantly during the dot-com era. In the current environment, strong earnings growth has helped keep valuations from following the same trajectory.
For investors concerned about whether markets are in a valuation bubble, earnings remain a critical part of the conversation.
AI Is Becoming an Economic Story
Artificial intelligence may have started primarily as a technology and stock market story, but its influence is increasingly reaching the broader economy.
Chris and Noah discuss estimates suggesting AI-related data center investment could represent roughly 2% of U.S. GDP. Building and operating that infrastructure requires far more than semiconductor chips. It also involves electricity generation and consumption, cooling systems, land, transmission infrastructure, financing, construction, and specialized workers.
Those investments can create economic activity well beyond the technology companies most directly associated with AI.
The hosts also discuss the challenge of intentionally avoiding technology exposure within an investment portfolio. While portfolios can be constructed with lower technology weightings, doing so may also mean missing some of the earnings growth associated with technological advancement.
As Noah points out, completely eliminating technology exposure is itself a significant investment decision. Technology is unlikely to become less important to businesses and the economy in the decades ahead.
Inflation, Interest Rates, and the Fed
Inflation and interest rates remain important pieces of the market outlook.
Chris and Noah discuss recent Consumer Price Index data, with headline inflation running at 3.4% year over year and core inflation, which excludes food and energy, at 2.5% at the time of recording.
Recent economic data may also be giving the Federal Reserve additional flexibility. Weaker employment figures and softer GDP estimates could reduce some of the pressure policymakers have faced when balancing inflation risks against economic growth.
The next round of data will be particularly important because there is no Federal Reserve meeting in August. Investors will have another set of inflation, employment, and economic readings to consider before policymakers meet again in September.
Borrowing costs, however, remain elevated. Chris and Noah point to mortgage rates around 6.7% and continued pressure in the Treasury market as reminders that higher interest rates are still affecting consumers, businesses, and investors.
The Consumer Keeps Spending
Despite higher borrowing costs, inflation, and geopolitical uncertainty, the American consumer continues to spend.
Chris and Noah jokingly describe the current environment as “keep calm and continue shopping.” While savings rates remain under pressure, consumer spending has continued helping support economic activity.
Energy prices could become an important variable in determining how long that resilience lasts. Higher oil and gasoline prices leave households with less money available for other purchases, particularly for consumers whose budgets are already stretched.
That makes oil prices important beyond the energy markets themselves. A meaningful increase could affect inflation while simultaneously reducing consumers’ discretionary spending power.
For now, however, spending remains one of the factors keeping the broader economy moving forward.
A Challenging Environment for Bond Investors
While stocks have continued reaching new highs, traditional bond investors have faced a very different experience.
Chris and Noah note that the U.S. Aggregate Bond Index has remained in a drawdown for roughly six years, significantly longer than previous periods of weakness. The environment represents a major change from the decades when generally declining interest rates provided a favorable backdrop for fixed income.
For much of the 40 years leading into 2022, yields generally trended lower. More recently, rates moved sharply higher and have remained elevated.
That shift raises questions about how traditional stock-and-bond portfolio assumptions may perform if higher rates persist. Chris and Noah contrast the long-term performance of equities and fixed income, while emphasizing the earnings growth that stocks can provide and traditional bonds cannot.
The discussion doesn’t eliminate the role of fixed income, but it highlights why investors may need to understand how a different interest-rate environment can affect traditional portfolio construction.
Why Markets Look Beyond the Headlines
Geopolitical events can dominate the news without necessarily dominating financial markets.
Chris and Noah discuss the ongoing conflict with Iran and the potential effects on oil prices, inflation, and consumer spending. Yet the stock market’s reaction has remained relatively contained.
The reason comes back to earnings.
As Chris explains, the market is not a moral barometer. Investors may have strong opinions about political events, wars, elections, or other developments, but markets ultimately evaluate whether those events are likely to affect corporate earnings and future cash flows.
If an event is unlikely to materially change those fundamentals, its market impact may be limited even when the event itself is significant.
That distinction can be particularly valuable during periods when negative headlines make investors feel as though markets should be falling. Separating the emotional impact of the news from its potential financial impact can help investors maintain perspective.
The Bottom Line
Markets are once again at all-time highs, but strong fundamentals remain an important part of the story.
Corporate earnings and profit margins have been exceptionally strong, AI investment is spreading into the broader economy, consumers continue spending, and market participation has extended well beyond a single investment theme. At the same time, inflation, elevated interest rates, energy prices, geopolitical uncertainty, and a difficult bond market give investors plenty of reasons to remain attentive.
Episode 67 reinforces why investing based solely on headlines can be misleading. Markets ultimately respond to earnings, economic growth, and expectations for future cash flows.
Volatility will remain part of the experience. As Chris and Noah discuss, that volatility is also part of the “cost of admission” investors accept in pursuit of long-term market returns.
Listen to the Full Episode
Full Episode Transcript
Hey, welcome back to another installment of the Market Enthusiast.
Noah Brooks (00:23)
I’m Noah Brooks, and obviously this is Chris Needs. Hello, hello. All right. Here we are, beginning of August. We are super close. I mean, we’re gonna end the day at all time highs today, right? Another one. Another one. It’s been a lot of that this year. We had a little gap, I think, going back to early June, but now we’re right back and having a few in a row. It’s easy when you’re an all time high to get another all time high. Is it?
It is just yeah. That momentum just you could be one cent positive. Keeps chugging chugging away. Yeah. Well, we were down about five percent in early June, and people were worried, and maybe another three percent in the beginning of July, and then it’s just been off to the races. It has been. Yeah. Hey, before we get into that, speaking of all time highs, what’s that? just worth mentioning, we’ve had a little bit of a milestone here, we’ll say.
we don’t just come on here and talk and everything. My hair didn’t grow back. It didn’t grow back. It didn’t grow back. But we manage money here too. We trade, we run models, we run portfolios, and we passed three billion dollars in assets under management. Yeah. That’s a big checkpoint. How does it feel? Did you did you see this when you started this program 10, 12 years ago that it would get to three billion? When we started portfolio solutions.
You know, the the founders asked me to come up with something that we could help advisors and investors you know, run run models essentially for. And we started with almost nothing. It was like $30 million. and it just over over the years, as advisors joined Good Life and more investors joined Good Life, it just grew and grew and grew. it doesn’t hurt that the last 13 years in the stock market has been
Pretty good as well. But I mean, we obviously, you know, went from you know, a few hundred accounts in our portfolio solutions models to, you know, twelve, fourteen thousand. and the advisor count grew from three, the two founders and myself, to, you know, 70 advisors are using using the models in our in our trading service. So yeah, no, it’s it’s been phenomenal. And I’m just we’re super fortunate to have been able to be
in the middle of it and you know we put a lot of work into it. Everybody here and and you you too. I mean I know you weren’t there with me 13 years ago, but you’ve been a solid ride or die over the last last five or so. So and everybody else here at Good Life, the investment team and the traders and things like that. It’s just been it’s been phenomenal. Really proud of this moment. Ever since it got in our crosshairs, it’s been like, all when are we gonna get it? When are we going to tick that number? Yeah. Three billion. It’s a it’s a lot of money. I mean the firm
runs or has a lot more than that, but in terms of what we’re managing, directly managing. Yeah, that’s we have our hands in the pie. We are literally trading those accounts. So it’s it’s I I love putting fun to see. Yeah. But it doesn’t hurt that we’re at all time highs. so I did a little bit of just fun with numbers earlier. And do you know what the three year number, three year return on the SP 500 is?
It is probably three year number, maybe 80, 90 percent. It’s 75%. Okay. Do you know what the five year number on the SP 500 is? So we have 2022 in there. we’ll we’ll call it 80%. it is 75%. It is the exact same return on the three year number versus the five year number. And that means, you know, i there’s a lot of different ways to slice this up and to think about it.
But realistically, you know, the the re and if you just said, hey, we have a 75% return, you’d be like, that’s amazing. And I don’t mean us, I mean the the the stock market. But you had a a two years in there that your return was negative. Yeah. Right. In in order to have a five year return and a three year return be the exact same thing. You had to take that ride down. And I just it’s one of these things that I always go back to with with investors and and advisors is like,
The cost of admission in that 75% return is a down 20% year in 2022. It it has to happen. if it was only up, you know, there there would be no risk and everybody would just be doing it. It’s it’s there has to be a downside in order for those long term returns to happen. So, you know, stay invested. I I say that we’re we’re at all time highs. We could have had this conversation at any point really over the last 10 years and just said,
we’re at all time highs and people get a little bit you know, caution or it it seems like a cautionary tale not to invest at all time highs. But the fact of the matter is we just keep making more all-time highs. Yeah. Everybody in the industry knows all those charts. I’m sure many retail clients also have seen those charts where it’s the reasons to sell. But you know, if you check, like you said, you know, since the great financial crisis, you know, 2010 on, there’s lots of reasons on that chart.
But I’ll tell you what the stock market still did. Yeah. In the end, the indexes still went up. Yeah. A absolutely. you know, we talk to advisors and investors almost every day, and we constantly are giving reasons why we are not in a let’s say valuation bubble and people should stay invested. But it’s it’s really easy when you’re listening to the financial news or God forbid you’re listening to the regular, you know, nightly news and it’s just one negative thing after another.
and at the very end they put a nice little sweetener in there for you. Like, that’s so cute. But you know, it’s just okay. Yeah, it it’s just negative, negative, negative. And so it’s really easy for investors to get burnt out on it and just say, I want to, you know, take it off the table. But I encourage people not to do that and try to be opportunistic. you know, this year when we had started the Iran what do we call it? Kinetic action. Kinetic action. Yeah, the kinetic action in Iran. if you know from the bottom there.
which was in mid-March to where we are today, it’s up 23%. so for the year, the S P five hundred is up thirteen percent, mid caps up about eighteen, small caps up over twenty-three percent, emerging markets are up twenty-four. I mean, it’s just, you know, it’s it’s been a tremendous year. Not everything is moving in in that same you know, they’re not moving parallel with those returns. I mean, large growth.
As as a asset class is only up about five large value, we’re trending upwards of twenty-four percent. I mean, the earnings have been phenomenal across the board in the SP five hundred. Q two S P five hundred earnings forty seven so far on pace, forty-seven percent year over year. That’s phenomenal. Why are so people so bearish or so scared in the stock market right now? That’s phenomenal. That’s you know, numbers we don’t see outside of post recession or post-crash.
levels. Yeah. last time was I think it was Q2 of 2021 or maybe Q one of yeah, Q two of 2021. Covid rebound. Yeah. obviously that is a quote unquote post-recessionary. We literally shut the country, the whole world down. So that makes sense. But in the middle of a bull market like we are now, super impressive. And then obviously, you know, on to piggyback on that, you have, you know, profit margins at record highs, highest they’ve ever been.
16.7% on the S P five hundred. Rare air. Rare air. Yeah. the first thing that I think when I hear that 47% is okay, we’re not at at I I don’t think we’re in a valuation bubble. Are we in an earnings bubble? You you you know, that’s definitely something you can debate. certainly. And the guidance keeps going up. I was talking to you about a chart.
That basically shows, you know, for all those concerned about bubble, the dot com bubble versus right now, the AI run. I’m not calling it a bubble because it’s not a bubble. But you see the forward price to earnings multiples going up through the whole dot com run, going up farther and farther higher, obviously more expensive when the PE goes up right now, because of how amazing these earnings are.
The P the forward Ps are actually going downwards. Yeah. So markedly different than back then. You know, earnings continue to get better and better and better. And obviously we’ve talked about the Mag Seven turning into the lag seven. We’ve talked about AI. AI is kind of trending from, let’s say, a a stock market thing to more of an economic thing. estimates are saying that about two percent of GDP are gonna be through AI data centers.
And when you think about some of those jobs out there and how it trickles through the the rest of the economy, I mean in terms of GDP, you know, electricity consumption, the chips, the cooling, the land, transmission infrastructure in and out of those places, even some of the debt financing goes into the GDP, and then obviously skilled workers that you need to to run these things, even though we’ve talked about it here.
You don’t per dollar, there’s not many workers in a data center, but there is still highly specialized people. The tertiary benefits and jobs around the data center really do add up after a while. So two percent of GDP. I mean, if I’m doing my math correct, I may not be, but residential housing is only five percent of GDP approximately. I mean, for a an entirely new
I don’t want to say phenomenon, but an entirely new industry that really wasn’t here ten years ago to be now worth two percent of of gross domestic product, that’s a pretty big move. And and obviously that’s why the market has gone up or or these companies have gone up, the the data centers and the hyperscalers and all that stuff and all of the connected investments around them. so you know, I don’t know what ten years from now looks like. I don’t even know what two years from now from looks like. I think we can all can
kind of try to figure it out. But the reality is is that this stuff isn’t going to go away. And continued investment in artificial intelligence is really going to be driving efficiencies across the board at companies and and driving productivity in the end for the for the aggregate results. I just there’s there’s no way that you can avoid it. I’ve had people ask me, well, well, can we invest with let’s say low tech exposure?
And you mentioned that the other day that earnings in Europe has very low tech exposure compared to let’s say emerging markets and and to us here in the United States. And you so you can make those portfolios work, but you just miss the earnings growth. Right. And yeah, you can be in low vol. That will have very low tech exposure. They have portfolios and factor tracking securities out there that you can do. But
I feel like it’s such a especially for what we do, where of course, being professionals, we are gauged against the benchmark, you know. It’d be tough. It’s like I was saying, you know, years ago, is like you have to have exposure to NVIDIA because if you don’t and it goes to the moon as one of the top components, you look like a dummy. So it’s just one of those things where it’s like looking like you can have right. You can have measured exposure, certainly, but trying to eliminate it altogether, that’s also in its own.
way a very bold bet. Yeah. Because you think we’re that’s essentially betting that we’re going to be less technologically advanced in the future than we are now, which seems like a very easy answer to most people on earth. Are we going to have more or less technology in 2050? Less. Nope. Nope. Not happening. all right. So moving on a few other things. we are still facing
Higher energy prices that has come through in some of the reporting. CPI consumer price index was out a few days ago. we had the year over year up three point four percent. When you strip out food and energy and get to the core, it’s up two and a half percent. So inflation is not that’s not too bad. That’s a good number. The market kind of liked that. Yeah, it’s not too bad. But more importantly, I think the thing that was really came out of this is that the Federal Reserve was.
Almost feeling like it was backed into a corner here. And you know, then we had some weak job numbers, right? Negative twenty-three thousand, and we can have that conversation as well. GDP estimates a little light as well. There’s some things letting air out on the Fed, letting them out of that corner. Yeah, they’re not boxed in. And you know, we sort of joked about how it seems like the market tests new Fed chairman. So
His first two meetings, Wars, did not go that well. We we always joke about the sweet voice, calming voice of Jay Pal. And it doesn’t seem like the market’s giving him the benefit of the benefit of the doubt yet, because every time he talks, these first two meetings, it’s gone down. Now, this data we’ve gotten over the last two weeks is beneficial for the lowering yields, lowering pressure on them.
But we need another set of data points because there is no Fed meeting in August. The next Fed meeting is in September after we get another set. So this is a one of two data set we’re dealing with right now. Well, you you mentioned lowering yields though. what I was looking at earlier was some of the highest mortgage rates. I need someone to buy my house, Noah. We don’t need this negativity. Well it’s six seven. The average thirty now is up to six seven. Now it had been closer to seven. you know.
in in the last few years, but we were down almost, I think maybe one day it started with a five or something like that. But six seven now. I got quoted in December in five at five eight. Yeah. Yeah. And and now I think it got up to like six seven five or higher. That says the average two weeks in 30 years is six point seven. That’s not great. Yeah. and then I think today’s yesterday’s or today’s bond market sales on the on the 10 year
were four point six seven percent, some of the highest that we’ve seen in over a decade. Not just the yield, but the the government selling those bonds. so it feels like the market forty trillion is right around the corner. Like we’re talking in we did? I think there was a a number today. Forty forty trillion in national debt. Yeah. We were last stat I saw we were at like thirty nine point eight and that was like a week or two. It’s just cranking away. It’s just right. Those numbers. I mean we’re at
was it th I don’t I don’t wanna misstate it. Was it three billion a day or three billion a week in interest? I’m not sure. It was it was some cra crazy number. Trying to do the math on the fly in my head, but I don’t wanna do that. Don’t do that one. but I mean things could be worse, right? The economy seems like it’s on cruise control, everything is chugging along, unemployment is reasonable. I mean, it keeps coming down, and we can debate, you know, the
labor force partition participation rate, things like that. energy prices, I’m gonna say are relatively stable, right? So obviously they’re up year over year. But since the Iran war started, you know, they were as high as over, I think, 120 one day. We’re around 86 today. When we were in here two weeks ago, they were at 86 or 87. relatively stable. And the main driver of all this cruise control is that the consumer
continues to spend. You know, during World War II, Britain had the keep calm and carry on. We are now, and I’m not saying we’re at war, well, even though we are at war with Iran, but we’re kind of in this you know, keep calm and continue shopping phase of everything. It’s just, you know, people are spending what they have. the savings rate is not particularly well. Retail therapy is a real thing.
I’m when I’m feeling bad, buying something surely helps. My retail therapy is vacation, right? Buying flights somewhere. That’s that’s my retail therapy. you can tell because I look like a slob most of the time. I don’t need to go out and buy clothes, but I should. I probably should. My wife would probably appreciate if I bought some clothes here or there. yeah, but retail therapy is great. And the American consumer is playing retail therapy ever every day. you know, if we saw
an increase in prices and and crude prices you know to a hundred or a hundred and ten, I think that would sap some of the the spending out of the market. I mean there’s a tranche of people out there that don’t care whether gas is four dollars, five dollars, seven dollars. It doesn’t make any difference. but then there’s well yeah yeah I know your electric car. I okay, I get it. And I want it to go down so yields can sort of come down. They are kind of tied. And just a quick call out.
Very unhappy anniversary right now here in August. Six years in a drawdown for the US bond ag six years. That’s four and a half times longer than the next closest, which was back in Volcker’s campaign back in eighty to eighty one, which was sixteen months. Yeah. The the traditional bond market, you know, the ag itself is just not been tremendous. Even clipping that coupon clip
clipping those those interest payments has not really resulted in that’s been your return essentially yeah yeah it it is it has been tough. I mean we had rates come down I think in nineteen eighty one the tenure yield was like fifteen point four percent. anybody out there listening that bought a house in the early eighties knows what their what their rates were and they laugh at six point seven percent. Ha I had I someone told me they had like a 17% mortgage or something. but essentially yields were
were falling, you know, with some ebb and flows over the years. And in nineteen ninety-four, they bounced up. but overall for the last forty years, up until really up until 2022, yields were just falling. And that doesn’t seem to be the case. And we can debate whether they’re going to raise or not raise, but overall, yields were falling for 40 years. And now they’re they’re basically they went up and they’ve stayed elevated significantly higher than they were.
you know, five years ago. that has been hard for fixed income investors. And it really shows why, you know, equity markets have been leading those returns over the last, well, not only six years, but over the decade and over the last twenty years. I think the the total return or aggregate or excuse me, annualized return of the SP five hundred is now over eleven percent for the last twenty years, where the fixed income benchmark that we follow
Is is really about three and a quarter percent over the last twenty years. And those are big, big differences. Yeah. Dramatic differences. But it goes back to those earnings. Yeah. Right. It I mean, here we are, you’re talking about a forty percent year over year earnings growth.
You’re not gonna get any earnings growth in the fixed income market. No. No. It’s basically you’re betting on rates that go down or if we’re in a higher rate regime going forward based on where debt levels are at, if we’re talking about treasuries, you there’s gonna be some academic research coming on. There already is, but more academic research and more attention to is the old like static risk portfolio matched with a risk-free
Treasury portfolio, is that really how we should proceed forward in allocating stuff? Obviously, what we do is a little more technical than that, but in essence, you have like the market portfolio and you have the bond portfolio and you match up your risk with that level. Are you trying to imply that traditional finance is outdated? Modern monetary theory is is has some credence to it? I think there’s a little bit of room to look at in a rising rate regime.
Yeah, I mean a sixty forty portfolio when rates going up are is going to be significantly different return than a sixty port sixty forty portfolio when rates are trending down. Yeah. No, let’s let’s let’s not do that. Let’s not do that. but you know, all in all, markets are having a fabulous year. You know, we we have a we we don’t put out a specific price level to our advisors or investors, but we said, you know.
Up ten to fifteen percent. We’re there now. we could certainly get higher. It could get lower. W this whole situation in Iran. We’re not we’re in not in the business of changing our predictions as quickly as some of these other analysts out there. So you see different price targets thrown out like every month, it seems like. And it’s like, what’s the point then? No, you you s you start with one in the beginning of the year. This is my opinion. You and you can change your how you’re talking about and your expectations, but can’t just keep chang changing your price target. That’s cheating.
Well, we do not cheat around here, right? we don’t cheat. But the one thing that I keep coming back to is this Iran thing. And and obviously we have midterms coming up in you know, eighty-five days, eighty-four days, something like that. there was a note out from Fordham Global Insight, Tina Fordham, put this piece out talking about the possibility of Iran and Oman coming up with a deal. Trump would complain about it loudly.
the rest of the Middle East would probably just kind of comply quietly. And she made reference to the salami approach, which I’m not familiar with. You what the salami approach is? Chipping away at something. Yeah, chipping away, right? Slicing a little bit off the salami at a time. And that’s what it seems like Iran is doing. they just keep moving forward a little bit and you know, getting a little bit of advantage, knowing that Trump doesn’t really want to sell to escalate into midterms.
Now, I don’t think they can go in and they can they can’t cut off a giant piece of the salami because that would really force his force the administration’s hand and they go in whether that’s capturing the island, Karg Island or something like that. I don’t I don’t think they can do that, but I think the calculation here is that he doesn’t want to ramp things up in the next eighty days, mm-hmm, you know, and drive oil prices even higher. And the data that that is shared with me says that
There’s still a fair amount of oil coming out of the Strait of Horn moves. I don’t know any specifics on who’s getting it out, but in terms of the number of barrels a day, it’s it’s not, you know, it’s it’s not closed. Yeah, it’s not zero. Yeah, it’s it’s definitely not zero. It’s far from zero. We have inflicted a lot of economic pain. Inflation is going up pretty quickly in Iran.
I thought it was real rich their one demand of you pay us war reparations. I’m like, I don’t think you understand how war works. Like, this isn’t World War One and World War Two where everybody’s in agreement. It was Germany. This is like this is not like that at all. So I just think it’s real rich. And then I think Trump came back. He was like, Well, then we’re gonna charge you reparations for the last fifty years of terrorist proxy activity. It was just I just had a good little chuckle on that. So you mentioned proxy activity, terrorism.
I don’t have you watched Pan Am one three. I have not. No. Have you seen it? I I mean I know about Pan Am, everything that happens. Lockerby, yeah, Scotland. so there’s it it’s actually not brand new, but it I think it just came on one of the streamers, Apple or it doesn’t. Netflix, Acman Ackman’s new purchase. he did purchase some of Netflix, right? yeah. Okay, hold hold hold on that thought. So the the reason I bring it up is ’cause you mentioned terrorist proxies.
In the end, it was found that the Libyan government was behind the bombing, not that Qaddafi had put the bomb on the plane or something, but that you know theirs their secret service bundled money and facilitated in a way. Yeah, absolutely. The the people that actually delivered the plane delivered the bomb onto the plane were part of and being funded by the security outfit in Libya. And and I think in two thousand, two thousand one.
They wound up admitting to it and Libya paid some extraordinary number to the families of of the bombing. It it’s an interesting show to watch. You know, it’s a limited series. I think it’s five or s or six series. I definitely would recommend it to to people out there. but you know, we live here in the United States, we live generally speaking, far away from those types of things. I mean, we’ve had obviously nine eleven happen and there are seems like there are
you know, mass shootings pr pretty frequently, but w we’re removed. You know, we’re not being bombed by Iran. And so we can kind of go about our business, go about our work. And the stock market has not really cared about it. They care about oil prices. But I think we could go in and we could, you know, continue to bomb them and the stock market isn’t gonna move. Relatively sanguine, as Jim Kramer would say. Yeah. Sanguine. Well, it’s about earnings. Yeah. Right. I mean, that’s that’s really what it is about.
Noah Brooks (26:06)
And you say it all the time, you know, will this impact earnings here? And right now it obviously it looks like the market’s voting. No, this won’t really come over to us and impact our business. I tell investors all the time, the market is not a moral barometer. It’s an earnings gauge, right? That’s that’s it. You know, so no matter how you feel about what’s going on in the world, good, bad, indifferent, the market just simply says, Is this gonna impact earnings or free cash flow in the future? Yes or no?
Mm-hmm. And if it’s no, it doesn’t make a shit of difference. Not not even a little bit. Not even a little bit. so yeah, but I mean those there’s a lot of things that do impact us that the market doesn’t care about. And then there’s a lot of things that impact the market that that we don’t care about, right? You know, that’s why the inflation inflationary tail that we’re seeing is seems to be a little bit cautionary because at some point you question whether or not
There is going to be a slowdown in consumer spending. Obviously, there has not been at the moment. but I’d love to see oil, you know, less than 85. You know, even 80, 75 would be great. Where we are, it doesn’t have to go back to down to where it was pre-Iran, but seeing it at, you know, 65 would be really nice. Give everybody a little bit more spending in their pocket, or excuse me, a little bit more money in their pocket so they could spend on other things.
Speaking of spending on other things, I grew up with a with a grandmother who watched QVC all the time. Do you know what QVC is? I do. Okay. Well, they were for for the uninitiated out there, it’s the home it used to be the home shopping. Well, I think they bought the home shopping. It was the quality, value, and convenience. I think they they named it originally. And
In the mid eighties. It’s a hoarder’s dream. A hoarder’s dream. You could just call up online and and order it. Well, now today, I mean, that’s you know a thing of the past. QVC went bankrupt. They just emerged from bankruptcy. I don’t think we’re ever gonna get more live television stuff, but a lot of the spending has gone to TikTok and YouTube. I don’t even see as seen on TV ads anymore. Well, you don’t they used to be great. They don’t have those on the streamers.
Right. true. No, but when you’re on when you’re on Prime and they go into a commercial for something, there’s a little buy it now. Yeah. Connected right to your credit card. Right there. Just hit the button. Hit the button. I mean your kids could be on meanwhile taping away. We’ve deleted many purchases on Amazon because they on their tablets, the fire tablets and stuff, these kids can click on anything. really?
You don’t know no one finds out the passwords and he just how does he find out the passwords, Chris? He watches me put it in right in front of him. he even found out how to change it one time so I couldn’t get into it. What? He just changed it to all ones. And it’s like eight ones. I’m like, How would I ever guess that? Like Okay. Well, speaking of things that kids do, there was a report this week that a seven year old and a four year old
stole their parents’ car in Oakland, California, and were joyriding around. It didn’t last too long. If they crashed a few blocks away from from the house, but they were flying. They’re doing like 70 miles an hour on a you know, twenty-five mile an hour road, thirty-five mile an hour road, eventually crashed cruising in mile six four. They really, really hurt somebody. I don’t know if they got hurt, but all the airbags went off. They they very much injured a woman. And I’m just thinking to myself, like, to be seven years old.
And your four year old brother, and you’re taking your your parents’ car for a joyride. Holy crap. Kids grow up so fast these days. I mean, it’s what’s worse, though you know, ordering ordering food by accident on your phone or or joy riding, right? Like yeah, I don’t know, man. Love a little grand theft auto before you reach the age of ten. Holy cow, what do you do with those kids? Uh-huh. Nothing. What nothing’s gonna happen to them.
Something should happen to the parents? I don’t know. I I don’t know if that’s a thing. I don’t know. I’m just gonna keep the keys away from Nolan. But he already has your passwords, bro. What are you what are you gonna when he when you’re That’s kind of the scary thing. If you if it you’re making a great point because I have like the phone key for my Tesla, and technically if my phone is in the car or Nolan takes my phone and is watching a video, so I’m not like actively watching him, and he goes out to my car, he just zooms away. I won’t even hear it. It’ll be silent.
What?
Did you ever take your parents’ car for a joyride? No. No. I was a good boy. Get out of here. I was a good boy. Are you still a good boy? Okay. So you never you never joy rode. Well, hopefully Did you? you go for some cruises? Heck yeah. All right.
I I thought it was cool just to back like the vehicles out of the way so I could shoot basketball. I’m like, yeah, I could drive this thing if I needed to. my dad put me on his lap when I was like nine and ten years old and would let me steer. I couldn’t reach the pedals, but yeah, anyway, it doesn’t matter. You were you were shifting? no, I don’t think so. I don’t think so. We had a nineteen eighty one grind the gearbox. Yeah, we had a nineteen eighty Toyota Tresell, a little five speed.
I did learn how to drive stick on that car. Surprisingly, I don’t think there’s a lot of people out there that know how to drive stick anymore. Mm-hmm. I agree. I don’t think so. D do you drive? Do you not have I have driven stick before. I know how to. I’m not I don’t wanna be starting on a hill. I don’t wanna like immediately have to get it in gear and start it on a hill. So I was behind a big truck on the hill, behind a big truck on a hill the other day.
And I probably got too close to the truck, not just you know, not paying attention. And he rolled backward when he started out. And I was I mean, it came really close to my car. And I just thought, wow, I have to remember because he was probably watching and he’s like, I’m gonna scare this guy. He could be. He could be squash this car. Yeah, squash it. all right. So here we are about to wrap up. What what else do you have for the good of the order here, Chris?
I mean, in our area outside of Philly, we know the big news LeBron James coming to the Sixers along with Jalen Brown. We have a star studded cast. If we can Joel Embiid looks healthy, looks light right now, that’s good for his longevity this season, hopefully. Maybe we can get lucky and get one to two good years out of Braun. But how about the Lakers? The Lakers just got sold again, second time in three years.
They were bought by Mark Walter from was it Oppenheimer or Guggenheim Guggenheim in 2023 for 10 billion. They just got sold again for 12 and a half billion. Any any names we know? Some some good names, certainly. former CEO, two time CEO of Disney, Bob Iger, and Josh Kushner. Yes, that Kushner family, very connected and such. And it was under interesting circumstances. So
I have a conspiracy. Okay. You hear for Yeah, yeah. gonna hear it. So there was pressure on Walter and Guggenheim being pressure from the FBI. And he was under a little bit of a liquidity crunch and sort of had a fire sale per se and had to sell off this enormous asset. He made a good cool two and a half billion off of it. I don’t know what the taxes look like in California on that, but I’m sure they’re not good and they’re very large. Yeah.
But very interesting that such a connected person would be on the other side of that pressure. It’s not so hard. What are you implying? There may have been some communication in in my conspiratorial view that hey, let’s apply a little pressure. I really want that pretty asset there, the the lake the Lakers. And little pressure, a few emails or no, no, no emails. A few conversations to apply some pressure, and then boom, suddenly he’s on the winning end of this bid. Normally I am
Spiritual.
Pretty much across the board I’m not. But the interesting thing the interesting thing on on this one is that it was an unsolicited bid at the perfect time. At the perfect time. Now, when you say unsolicited, like you don’t know what the relationship I certainly don’t know what the relationship with these people is. the two of them were in talks with the NBA. So they were in the NBA circle of, you know, the potential of an expansion team in the NBA, which there’s been a lot of talk of and they were sort of in the mix for that, but buying the most valuable team, I don’t think
know, that was in the cards that anybody else was aware of. So I’m just curious how I and Kushner got together. Yeah. Yeah, it does. I agree. Do you know do you know the relationship? I do not. No. I mean, I know a little bit beyond obviously no Iger. Everybody knows Iger. so all I know about Kushner is, you know, he’s made some good investments. He has Thrive Capital, which is essentially, I guess, like a maybe not a hedge fund, but maybe we’ll say venture capital, investment firm, and then
He was a co-founder of Oscar Health, which is like a pretty notable telehealth type future technology health company. But I don’t know how the two of them got roped up. They seem you would think they’re on different sides. You never know politically. But they came together for a great win on this deal. I mean, if if your w what does it make it? Is if your brother’s father-in-law
Is the president. Does that make you have to be loyal to one party or another? No. I don’t know anything about him politically, I should say. But yeah, I drew the ire of Mr. Donald Trump, President Donald Trump, you know, when he was at Disney. So in this culture wars thing. So you would think he would at the very least not want to be with him and it’s such a big deal. That’s just my opinion.
Well, we will see. They bid it looks like it’s gonna happen. and we got Braun. Got Braun. Right? We’re the winners. All right, everybody. Thank you so much for listening. We will see you next time on the Market Enthusiast.
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The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a decision. Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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