Good Life’s Investment team keeps you up-to-date with timely market insights and updates to help you navigate the investment landscape.
Noah Brooks:
Welcome back everybody to the newest installment of the Market Enthusiast. I’m Noah Brooks and with me today’s Chris Needs. We’re going to talk about everything today, right?
Chris Needs:
Yeah.
Noah Brooks:
We got a lot on the agenda.
Q1 RECAP
Noah Brooks:
Let’s start with some of the performance data from the first quarter. Big, big up quarter, right?
Chris Needs:
Yeah. We kept momentum from that big run up in Q4. Got some good returns on the indices. S&P 500 up 10.6%, NASDAQ up 9.3, Dow Jones up 6.1, Russell 2000 up 5.2. I know we have mid caps at all time highs, so we’re starting to see a little bit of breath expansion.
Noah Brooks:
Yeah, we were sitting here in January, the beginning of January talking about the massive rally off October lows. I mean, I don’t know what the exact number was. It was up 17 or something like that off the October lows and here we are, SP 500, up another 10 in the first quarter. Is it sustainable? Can we continue to move forward? We’re going to dive into that. We can talk a little bit about some economic data that came out. That would be a good start. Before we do that, how was your Easter?
Chris Needs:
It was good. A couple dinners with the family. We stayed home. No traveling, so that was kind of nice.
Noah Brooks:
Yeah, we didn’t go anywhere. We were local. Just a few people. Well, few like 15 had a nice invite, but no traveling this time. Good Friday came and went, but Good Friday, they had some economic data that got released. It’s not normal.
Chris Needs:
We had personal consumption expenditure come out on a day the market was closed, so that was a little odd. So we got those numbers largely in line.
Noah Brooks:
Okay. So PCE, the Federal Reserves preferred inflation gauge, you said at personal consumption expenditure. Really there’s CPI, which is the consumer price index, which is a basket of goods and services that the Federal Reserve and as well as most economists look at as well for inflation data.
But the Federal Reserve has told us that their preferred inflation gauge is actually the spending, not the basket. So us spending, so personal consumption expenditure. Let’s talk about that for a little bit on our first economic data.
Chris Needs:
Yeah, so headline PCE was up 2.5% year over year. Core was up 2.8%. Both were largely in line, so we have seen a slowdown in the disinflation trend. Seems like we’ve hit a little bit of a sticky point, but nothing that would’ve shocked markets. We are getting the reaction this week now that the markets are open and is digesting that information, but not hot, not cold.
Noah Brooks:
But you say sticky, but I mean we were at eight and 9% a year and a half ago and now I think the year over year, you just said it’s 2.8.
Chris Needs:
Yeah.
DISINFLATION SLOW DOWN
Noah Brooks:
I mean, is it sticky or are we just anxious about it?
Chris Needs:
We might be anxious about it. If you look at CPI, that does sort of look like it’s hit a sticky point, a little bit of a short-term floor. But PCE still has been slightly trending down a little bit. Again, the disinflation trend is slowing just a tad, but we’re getting there.
We’ve been talking about how it’ll take time to go when we get to this last stretch of knocking down inflation, how it’ll take a little bit longer. There’s a number of factors at work. Obviously, the Fed has communicated cuts are next rather than any other hikes which may be slowing the disinflation trend.
Things might be ratcheting back up and getting a little hotter on expectation of financial conditions loosening a little bit, but you also have this new trend we have for Inshoring and Nearshoring where we saw what happened during COVID with the supply chains and we were overexposed to Eastern Asia and we’re trying to make-
Noah Brooks:
Eastern Asia.
Chris Needs:
Well, China.
Noah Brooks:
I like the way you say that. That’s very [inaudible 00:04:25], Eastern Asia. Pacific Rim, yes.
Chris Needs:
Yeah.
Noah Brooks:
So what other economic data that we see coming out here?
WHY EASTER CHOCOLATES WERE PRICIER THIS YEAR
Chris Needs:
Well, touching base on Easter, again, I know last month we talked about Valentine’s Day and what cocoa prices we’re doing. We talked about how it might be a little bit longer issue on cocoa prices. So obviously Easter is another big chocolate holiday.
Noah Brooks:
It is for me.
Chris Needs:
Yeah. I mean we’re talking about a month and a half ago cocoa prices were skyrocketing. They were up 40% year to date just in six weeks approximately by Valentine’s Day. And now we’re seeing they’re up 140% year to date. So they are really shooting through the roof there. So again, if your chocolates were a bit more expensive, that might be why.
Noah Brooks:
And they’re going to get more expensive. Now that trend really hasn’t been through all commodities. That’s more of just a cocoa trend based on some weather issues, right?
Chris Needs:
Yes.
Noah Brooks:
I don’t think we’re going to see that. Although gas has been up, oil is certainly ticking up. I think as the situation in the Middle East gets more dire, if you will, and more players enter the game, I think you’re going to see oil continue to rally up and maybe it’s just a trader’s haven at the moment, but it does feel like oil’s going to continue to go up.
Chris Needs:
We did have the IMF also up their global GDP forecasts, which generally affects oil. And then we also have the EIA who increase their price target for year-end as well. So some traders, like you said, probably adjusting their price targets and their exposure a little bit to be a little bit more exposed to oil.
THE LATEST JOLTS REPORT
Noah Brooks:
Yeah, yeah. So one of the other things that we got this week, I think it was on Monday, was the Jolts, right?
Chris Needs:
Yes. Yes. So the job openings portion of the jolt report was fairly in line. Still a lot of jobs out there, job openings being posted by employers, which would indicate a strong economy. We can’t get enough people to fill these jobs, but it wasn’t super hot like some of the numbers we’ve seen previously.
It was largely in line with what was expected. I think there was 8.76 approximately million jobs, so a lot of jobs out there to be had, a lot of strength in the labor market.
Noah Brooks:
That’s down considerably and that helps with the inflation standpoint. The job openings were at high March of 2022. Which was kind of marked the high of the inflation portion or right in that general area. So they were I think 12 and a half million job openings.
And what that does, is it makes employers have to raise the starting salary of those job openings to attract new employees. And, so now, we’re down what, 4 million jobs from that 12 and a half million, 8.8 million or 8.5 million openings. And so it doesn’t mean that they don’t have to raise wages, I have a stat here. But it’s not near as bad as it was.
Chris Needs:
Yeah, it’s not a wage price spiral we were really worried about and that’s largely a theory. I don’t know how much it’s been truly actually done in reality, but everybody fears… Well, no wage price spiral of a never ending cycle. But yeah, I don’t think we have fears of that at this point. Despite the market remaining-
Noah Brooks:
Interesting stat that came out from the jolts, I imagine everybody listening has been in this scenario at some point in their life, whether they’re a financial advisor or an individual investor, but the stat that came out was, for job stayers, the annual increase was an average of somewhere around 5% in pay and job changers, it was 10 and a half.
So there are still companies out there offering significantly higher wages to try to entice people, which is playing into the whole wage inflation. I don’t know about the spiral situation you were talking about, but there’s still wage inflation intact and I would imagine that until those numbers come down, until the job seekers, the Jolts comes down a little bit more, maybe another million or two, you’re still going to see those job changers have the leg up on the job stairs.
And that affects everybody.
CALIFORNIA FAST FOOD WORKER MINIMUM WAGE
Noah Brooks:
Speaking of that, we just saw this week they came out in California. Did you see the minimum wage for fast food?
Chris Needs:
Up to $20.
Noah Brooks:
Yeah.
Chris Needs:
It’s a big jump. Yeah. I saw this comparison. It was some fast food we’ll say in and out or something like that in California, minimum wage, $20 being offered to take that job and then right next to it on this Indeed or job seekers website was a Montessori school teacher also $20. So we’re paying-
Noah Brooks:
That is tough, right? 20 bucks an hour to flip burgers or 20 bucks an hour to teach your kids. Which one is-
Chris Needs:
Something’s skewed here.
Noah Brooks:
Yeah, man, that’s tough. I don’t know. Anyway, what other economic data, anything else?
ISM DATA
Chris Needs:
So we went through a long period of the ISM data being very poor in contraction territory, which is below 50 as they say. But we’re starting to see a slight uptick there, which would be in line with a stronger economy, which certainly we’ve seen in the other stats, but both services and manufacturing ISM data over the last week has come out over 50.
So maybe I know there’s the conference boards leading economic indicator index, which is 10 different things that they monitor to sort of predict what the economy’s going to do, if there’s going to be slower growth or quicker growth. It’s been negative for a long time sort of predicting a recession.
It’s still way negative, but it’s curling back up. And if you just look historically at those indicators, when it starts curling back up, generally it gets back to positive.
Noah Brooks:
I hear somebody saying no landing.
Chris Needs:
It’s-
Noah Brooks:
Soft landing, no landing.
Chris Needs:
The market’s certainly pricing in at least a very soft landing or no landing it seems like right now. Which will we get caught off guard maybe?
IS THE ECONOMY ACCELERATING?
Noah Brooks:
Yeah. Is it possible that the economy is actually accelerating?
Chris Needs:
It’s possible. We do see some trends saying there could be weakness which would belie the Fed slowing down could keep them at 75 basis points and cuts predicted because I was very surprised when they came out in December with 75 basis points predicted for 2024. That was aggressive in my mind and especially with the data we’ve seen lately, it seems aggressive and the market has been pushing out rate cuts accordingly.
Noah Brooks:
This sounds like a little bit of cognitive dissidence, but you have two things working against each other. You have the higher for longer, which we are definitely now in a higher for longer camp. But you have the possibility of the economy actually, I don’t want to say reigniting, but continuing to be strong and getting even stronger.
And so that’s where I say there’s this cognitive dissonance involved. This is because you would think if we were going to be higher for longer that the markets and the economy, different beasts if you will, you would think higher for longer would mean that the economy’s going to be slowing down.
That’s definitely not the case. I think I said this to you last week, I don’t really know why the Fed is going to lower as much as the expectations are. If we don’t go into a landing, if we have a soft landing and certainly no hard landing, the Federal Reserve isn’t required to lower rates to go back to where they were.
If they find that it’s a neutral standpoint or even if they lower by 25 or 50 basis points and we don’t get 150 basis points, which the market’s pricing in, there’s nothing that says that they have to lower rates.
Chris Needs:
Mm-hmm. Yeah, I think they’re worried about real yields getting too high. I think they’re approximately around maybe 2.6 right now. They don’t want that to be at three or three and a half as inflation continues coming down. And additionally to your point, I mean they don’t want to make an Arthur Burns mistake where they cut too early and were off to the races again.
That’s why I feel like they did a little bit of a disservice to all the work that they did by saying the 75 basis points in that December meeting because it sort of took away their optionality a little bit. And now they’re likely going to get towards pushing for later cuts.
You’ve seen some Fed FOMC members coming out and walking back that a little bit saying they need more data before they’ll cut rates, which would seem reasonable as you were sort of alluding to.
But in the latest March meeting, they released their dot plot again, updated their dot plot. It still reiterated 75 basis points and cuts this year, but we were one singular little dot from it being 50 basis points. And I don’t think the market would’ve taken that final again, just one dot away would’ve taken that as well as the 75, even though it was just the slimmest of margins.
Noah Brooks:
Well, we’re certainly going to see, we’ll keep everybody updated on it obviously, but I’m going to put it out there. I don’t know why they have to lower by so much. I don’t know why those expect, I know why the expectations are there. They’ve forecasted, right?
You said you thought they might’ve done themselves a disservice by it, and I would tell you that I’m in that camp 100%. So we talked about the markets being up in the first quarter, S&P 500 up over 10% for the first quarter. What about bonds? Yeah, they’re still down.
Chris Needs:
Yeah, part of the conversation we’re just on, so these rate cuts are being pushed out by all the strong data. The strong economy that we’re seeing here and the US AG was down in Q1 0.8% as yields just very slightly creeped up in the quarter sort of accounting for those rates being pushed out a little bit.
I remember coming into the year, they expected cuts in March and now we’re holding on to a slight higher odds of a June cut, but each day it seems like they’re taking down a little bit. I’m going to stick to my July cut expectation because I just think June’s too early. I think they’ll try one and then they’ll put it on pause.
But in largely fixed income sort of been struggling as these have been pushed out. They move very quickly at the end in Q4 and now they’re coming back in just a little bit after that overreaction, we’ll say.
Noah Brooks:
Yeah, collecting a coupon if you will. So very little appreciation in bonds at the moment, but collecting a coupon, which I guess is reasonable, nothing wrong with that. Money market mutual fund yields are still above 5%.
It kind of depends on what you’re looking at, but you can still get CDs above 5%, I saw a 5.2 the other day for 18 months. I think you can still get a 5.1 for two years. So not bad, but there is going to be a point where we invert. So yield curve is inverted, meaning the short end of the curve, the one month or the one week is much higher than the 10 year.
And there’s going to be a point when that inverts. It’s just a question of when. I think it’ll certainly be when the Fed starts to lower later in the year. We don’t know right? July, August, September. But I mean that’ll be noteworthy, It’ll be newsworthy that the inversion has ended. I think…I’m pretty sure.
RECORD INVERSION
Chris Needs:
Yeah. We’re at a record inversion right now going back to the US AG, it’s been in a drawdown for 44 months. It’s been a tough time for bonds and the aggregate, which is just usually used as the largest index I guess that we look at. So it’s been a long drawdown, but eventually it’ll come to an end just like the inversion.
Noah Brooks:
Eventually. But I mean I know that investors are, I don’t know if the word is fed up, but they’re irritated. They’re irritated with the returns on bonds because bonds tend to be, well, we haven’t really seen a lot of negative returns in bonds over the last 20 or 30 years. It doesn’t happen that often.
And we saw two back-to-back years. 2021 and 2022 last year they were up five, five and a half percent, but people are still underwater in some of those positions that they hold and waiting to break even. I hope it’s going to come later this year.
Chris Needs:
Speaking of disappointing returns, so on the quarter we also had international underperforming the US again, which obviously has been a larger trend. We’ve discussed previously.
The MSCI developed XUS was up 5.2. Obviously, half of the return of the S&P and emerging markets were only up 2.1. So we certainly have some points we can discuss there, whether it be what China is doing or I had a stat on Japan.
INTERNATIONAL DIVERSIFICATION
Chris Needs:
Maybe if we want to jump into that on international diversification.
Noah Brooks:
What’s your stat on Japan?
Chris Needs:
So, in March, Japan finally broke out to a new all-time high. It had been a long 34 years since December of 1989 that the Nikkei 225, their index had been at an all time high. So during that time, those 34 long years, the S&P 500 was up 2800%.
So, sometimes, there is a time to be diversified, certainly, and that’s why we practice our portfolio management style as we do is, if you were a domestic Japanese investor and you were far overweighted, obviously their stock market, the Nikkei 225, you’d be in a world of hurt, lagging.
So I wonder, I wish I had the stats to back up. I would like to know what international investors maybe in each country, sort of what the average allocation looks like if they are as overweighted to the US as we are at this point.
Noah Brooks:
You mean home country bias.
Chris Needs:
Yeah. Home country bias.
Noah Brooks:
Right. So home country bias is, yeah, I might want to invest in international companies or invest internationally, but the majority of my portfolio is going to be domestic, US.
Chris Needs:
Companies and interact with on daily basis.
Noah Brooks:
So you think, or do you have a hypothesis on this for internationals?
Chris Needs:
Well, when it comes to Japan, obviously that was a scarring wound what the market did to them. And I mean they were in a huge bubble territory. Their CAPE ratio back in 1989 was at 87 CAPE ratio being the cyclically adjusted price to earnings ratio.
So they were in a huge bubble. I think people sort of understood that, but it is been 34 years to get back on a non-total return basis back to where they were in 1989. So-
Noah Brooks:
So do you think everybody in Japan held, do you think they have a home country bias and they just held on the entire time?
Chris Needs:
I’m not going to guess on that front if they do, but I know generally Japanese citizens have a lower exposure to stock markets than we do here in the US. So maybe they’ve turned away. I know if you think about China, it seems like their assistance is more exposed to real estate. They look at real estate, maybe the way we look at gold or equity, things like that. So I’m sure they shifted somewhat and that’s why they have less equity exposure than we do generally.
Noah Brooks:
I’d be curious to know a British citizen and what they have in terms of domestic for versus their version of international. We should come back to this. We should make a note of that one. I don’t have any good research topic. I don’t have any data on that. I don’t even Yeah, we’d have to-
Chris Needs:
We’ll check it out for you.
Noah Brooks:
We’d have to come back to that.
SELF CHECKOUT ETIQUETTE
Noah Brooks:
So a few things happened to me over the Easter holidays. One I thought was awesome, I needed something and I went out to the store and they were closed. That was just a quick thing that happened on Sunday afternoon. They were closed, which I thought was awesome. This trend of businesses being open on holidays like Thanksgiving, I know Target a few years made a decision to close on Thanksgiving after being open for so long, and I think that’s great.
The few days prior to that though, I went into the same store and we had a boatload of stuff that we were getting. So we weren’t hosting Easter, but we were bringing some stuff for Easter and we got to get all the fixings and all these little things that you buy.
And my wife, she decided she was going to use that self-checkout thing. And you go in, if you only have five or 10 items, self-checkout, no problem. But here we are, we have a full cart of big, not a mini cart, a regular size card, a big old cart, and we’re using the self-checkout. And I’m telling you, it is one of my biggest pet peeves. Those things are horrendous for me. I feel I just-
Chris Needs:
Please place the item in the bag [inaudible 00:22:47].
Noah Brooks:
I keep yelling to myself. People have got to be going, this guy, he’s an idiot. I get so angry and I don’t know why. And I know that they’re trying to stop theft, so you can’t put the bag down and then take it off, but you’re like, I already scanned it.
And so one of the things that happened out there, there’s no end to that story. I really despise those things for large shops.
But one of the things that I saw this past week was a bunch of companies are getting hit on their earnings calls for increased shrinkage, which is theft.
One in particular, Five Below – a dollar store type of place. Not something that I go to a lot, but apparently they have a lot of these self checks.
And they noted in their earnings report that people are just stealing. And the total shrinkage was dramatic and really cut into their earnings per share. And they’ve talked about – specifically Five Below has talked about – reducing the number of self-checkouts.
And then yesterday I read that Amazon is doing away with their, is it no checkout where you can just walk out in the whole stores and things like that?
So I would love it if they just added more cashiers and I didn’t have to do my own checkout. I feel like they should be giving me some type of rebate or payback.
Chris Needs:
Yeah, that would make sense. That’d be a good idea, like a 1% off for bagging your own stuff. I mean, yeah, it’s tough if you’re there during non-peak hours, it’s like there’s only one or two cashiers at the grocery store or what have you. And it’s like there’s a massive line for people like you said, who have full large orders and it’s like, gosh, get in line. [inaudible 00:24:41] people to go.
25-YEAR ANNIVERSARY OF DOW JONES CLOSING ABOVE 10K
Noah Brooks:
Talking about pet peeves, talking about pet peeves. So Friday was Good Friday it was March. It was also the 25 year anniversary of the first time the Dow Jones closed above 10,000. Now I don’t know where you were in March 29th of 1999, I was working at a company called Prudential Securities, and I was studying for my series seven at that time, I was a wire operator.
Back in the day, they used to give you paper tickets to buy and sell things, and it was like a free-for-all in the office. Now, I don’t remember exactly, I don’t think the manager had hats made up.
Chris Needs:
I love seeing that on the floor when they’re passing out the hats.
Noah Brooks:
Right, passing out the, yeah, so they were definitely passing out Dow 10,000 hats at that time. I don’t think we had them in the office, but it was a big deal. I’m pretty sure that the manager might have brought in some alcohol or beverages or some lunch or something like that and people made a big deal about it.
So that was March of ’99. And then we topped out, we got almost up to 12,000 before the tech bubble collapsed, if you will. And then during that time period, 2000, 2001, 2002, it was three bad years in a row back to back-to-back.
Dow wound up well under 9,000 at that time, not including the global financial crisis. We got down to 6,666 during that time period. But if you look at the total return now, going back 25 years, March 29th to the end of business on the Easter holiday, the total return, not including dividends.
So I guess it wouldn’t be total return, the price return for the Dow Jones is up over 300%. When you put dividends, when you add those and you reinvest those dividends and you let them compound, the total return is over 500% for the Dow Jones. And that included a lost decade.
The 2000s were essentially a lost decade from January 1st, 2000 to December 31st to 2009. The total return on the Dow Jones, not including dividends, it was negative, I think 10%, nine or 10%. So compounding, putting those dividends back in, not pulling the trigger and selling out total returns still over 300% in 25 years. I mean, is it great? That’s not the worst thing ever. We have 300%,
Chris Needs:
But the power of compounding, has that been-
Noah Brooks:
Power of compounding.
Chris Needs:
Well, while we’re on that point, we did have some change in the components that we haven’t covered or talked about. So we had, Amazon actually went into the Dow Jones.
Obviously, it is a price-weighted index rather than cap-weighted. So they went in as the 17th largest position and they replaced Walgreens Boots Alliance, who was having a bit of a tough go of it. But Walgreens Boots Alliance, they decreased 58% since they became a component within the Dow.
Noah Brooks:
Well, that’s always the story, right?
Chris Needs:
Well, Dow does have this issue with the performance when things come in. It seems like that happens time and time again that they struggle. And on that same point, it was down 58% during its tenure in the Dow. It had replaced General Electric, which is since up 86%.
Noah Brooks:
Right, right. And so Salesforce was added a few years ago. As soon as it was added, it had a really rough year. I think it’s positive since it’s been added at the moment. But it does seem to be… So is that the people at Dow Jones being late to the game or is that them…
Chris Needs:
It sounds like it. So how does it work when they decide? They do have sort of a committee that decides on that and yeah, it seems like they’re late. They’re not the best investment pickers we’ll say, at least in the short term.
But on the S&P 500, we did also have SMCI super microcomputers, one of the storied stocks from this year, which has really gone crazy over the last year. And Decker Outdoors came on, they replaced Whirlpool and Zion Bank Corp, and that was on March 18th that they went into the index.
Noah Brooks:
So based on that idea of companies outperforming after they’ve been removed, do you buy Whirlpool now?
Chris Needs:
Possibly. I’m not sure if S&P 500 has that same issue that the Dow kind of has, but potentially.
PERFORMANCE BY SECTOR
Noah Brooks:
Okay. Let’s talk about performance a little bit with some of the different sectors. So obviously technology has been leading the way for a number of years. Is it possible that it’s slowing down?
Chris Needs:
I think it’s definitely going, it’s digesting gains where we’re at here. So in Q1 Energy was actually the leader of 13.5%, followed by financials who were up I think 12.4% and industrials up 11%. So it did seem like a slight changing of the guard or a sector rotation, which is something that would be a positive development. I think we want to see that.
Again, we’ve always talked about the breadth expanding and sector rotations within bull markets are very healthy and sort of help sustain the rally. So I think rather than tech going off a cliff, they’re taking some time off of doing all the legwork for the indices.
Noah Brooks:
Yeah. I don’t know if they’re competing stats, but I have some shorter-term stats, some one-month stats.
Best performing sector for a month, energy of 12 and a half. Worst performing sector, consumer discretionary, second-worst technology down 1.7% on a month.
Now that doesn’t, I don’t know that you can extrapolate that throughout the remainder of the year or anything, but certainly interesting to note. Second, best performer for the month, utilities.
Chris Needs:
There’s a shock we haven’t seen in a while.
Noah Brooks:
Nobody wants to own utilities and all of a sudden they’re really moving. So maybe just hypothesizing here, if investors think yields are going to go down and fixed income, obviously lots of companies benefit from that, but if you’re looking for a dividend and rates are going to go down, then utilities might be the place to find those dividends.
Chris Needs:
It looks like they’re moving a little bit before any fed cuts to make up for maybe they see that’s where people are going to go when people eventually maybe move out of some money markets or out of some of these other positions. Getting back into a nice dividend-paying U.
Noah Brooks:
Yeah,
Chris Needs:
Stable U.
Noah Brooks:
Yeah, something we haven’t talked about in a long time.
FRANCIS SCOTT KEY BRIDGE COLLAPSE + INFLATION
Noah Brooks:
Now this isn’t really a utility, but I want to just bring up the Francis Scott Key Bridge for a second. It’s not a utility, it’s not an industrial, but it’s a major harbor for commercial shipping.
Obviously, you look at those pictures on television and when you see it from a helicopter, you think, well, that’s not really, it’s not a giant bridge, but when you get closer to the pictures, you realize how big this bridge actually is.
Chris Needs:
1.6 miles. I think it’s a huge bridge.
Noah Brooks:
Now, they just opened up a very small lane for smaller boats, not big commercial boats, but for smaller boats to get through. And it looks like it’s going to take a long time.
Now, I know some people in the industry and they’re telling me that a lot of the shipments are going to be diverted to Norfolk, Philadelphia, even I guess Boston to some degree.
How much do you think that impacts? So we know about supply chain issues from COVID. In terms of getting things from China to California or China to New York, whatever it happens to be.
How much of an impact is it going to have? Is it really going to make a difference?
Chris Needs:
I’m sure we probably are able to shift around the logistics to make it so it’s not a huge penalty. I mean, the biggest imports were vehicles I think, farm equipment, sugar and salt.
And then the major exports out there were I think coal, LNG and other metals and minerals. I think we have the ability to shift it around to Philadelphia and New York, down to Norfolk. I think it will have a small impact.
But those logistics people, they’re very good. They have lots of computers and things that can optimize the trips and reroute things. I think it’ll be okay. I don’t think you’ll have a major impact.
Noah Brooks:
I guess what I was going for is, is it enough to be inflationary? I hope not.
Chris Needs:
I hope not as well.
Noah Brooks:
I don’t think it is because of the availability of other ports locally. So I don’t think it’s going to be inflationary. And if it is, it might be more regional. So if new cars take a little bit longer to get to the Baltimore area, that could raise the price a little bit because now you have this intermodal transport you have to get it from, whether it’s Philadelphia to Baltimore or from Norfolk to Baltimore, maybe a little bit, but not on a national level.
Chris Needs:
Especially some of that farm equipment is pretty sizable. So there will probably be a slight hiccup, like you said, regionally, but I doubt it’ll flow so far through to CPI and PCE.
Noah Brooks:
Yeah.
WARREN BUFFET + RETIREMENT INVESTING
Noah Brooks:
As we starting to wrap up here, you talked about compounding for a little bit and I think it’s really important. I came up with a stat all by myself. No, I didn’t. I actually saw it, someone else posted it that I am going to take it.
But the stat was on Berkshire Hathaway and Warren Buffett. And Mr. Buffett. Right now he’s 93 years of age, everybody know he’s Oracle of Omaha. His net worth is a $138 billion at the moment. And the stat was that 98% of that net worth came after he turned 65.
Which I just thought was amazing because we get a lot of people that as they age and as they start their journey of retirement that they think, “Hey, all of a sudden I’ve been a 70/30 investor for the last 10, 20, 30 years, or I’ve been a hundred percent stock investor for the last 20 years.”
As they get closer to retirement, they think, “Oh, now I have to make this massive change from what I’ve been doing because people say I should be more conservative as I get older.” And I just want to put this out there, dividends and compounding.
And you look at Buffett, it’s very possible that normal investors shouldn’t have to make that change. And the last 10 years of Berkshire in their compounding, the last 10 years of his net worth has been exponential. I mean, it’s just been straight up.
And it’s not that Berkshire has had this tremendous return that all other equities or all other indexes haven’t had. It’s been okay. So I just want people to start thinking about that. The power and the effects of compounding.
Chris Needs:
Compounding is why we use log charts, not linear charts.
Noah Brooks:
We’ll save that one for another day. All right, anything else here we wrap up?
DOES COMMUNISM WORK?
Chris Needs:
I think it’s worth noting, China where we’re at there. So China has been having a tough go of it. Obviously they’ve had some real issues in real estate. Their market’s been getting hit as well. It looks like in Q1, it might’ve stabilized a bit.
That would be helpful as well, if we’re just talking about globally keeping the rally going, it’d be nice if they could participate and help out because to get a soft landing, you really would’ve thought that China would’ve had to do decent or at least balance out and we’re starting to see them balance out a little bit.
And they’ve signaled that they’re more open for business now that they’ve been in struggles, they want to stem the bleeding per se. The Chinese number two is meeting with American CEOs again, sort of opening a dialogue. I assume that they’re open for business.
They fired their equivalent to our SEC regulator, head of the SEC on their end, sort of at the market bottom. And I think that was another signal to Chinese markets that they’re going to have a lighter regulatory touch.
So Yellen’s meeting with them this week, I believe. There’s a lot of things seems like they’re going to maybe take a step back and fighting us just a tad in the meantime to benefit their markets.
Noah Brooks:
So you’re saying communism doesn’t work.
Chris Needs:
I’m saying, yeah. What they were doing before is certainly tough on businesses there. As we know, some people have said they had become uninvestable. Just due to sort of the bipolar nature of how they would regulate.
If they just decide you made too much money last year, they’re going to come down hard on you and that’s not good for businesses and innovation.
Noah Brooks:
Yeah. You heard it here first. Everybody. Communism doesn’t work in the stock markets.
Okay, that’s what I’ll leave it as.
So, to summarize, I mean I’m going to go back to the market is volatile, but compounding of returns is like the golden ticket. Don’t stop compounding, keep it going. Reinvest everything you can.
And in the short term, there’s always a reason to sell or not to invest, but in the long term, do not bet against the American economy.
Thanks everybody for listening. We’ll see you next time on the Market Enthusiast.
Disclaimer
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. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Good Life’s Investment team keeps you up-to-date with timely market insights and updates to help you navigate the investment landscape.
Noah Brooks:
Welcome back everybody to the newest installment of the Market Enthusiast. I’m Noah Brooks and with me today’s Chris Needs. We’re going to talk about everything today, right?
Chris Needs:
Yeah.
Noah Brooks:
We got a lot on the agenda.
Table of Contents
Q1 RECAP
Noah Brooks:
Let’s start with some of the performance data from the first quarter. Big, big up quarter, right?
Chris Needs:
Yeah. We kept momentum from that big run up in Q4. Got some good returns on the indices. S&P 500 up 10.6%, NASDAQ up 9.3, Dow Jones up 6.1, Russell 2000 up 5.2. I know we have mid caps at all time highs, so we’re starting to see a little bit of breath expansion.
Noah Brooks:
Yeah, we were sitting here in January, the beginning of January talking about the massive rally off October lows. I mean, I don’t know what the exact number was. It was up 17 or something like that off the October lows and here we are, SP 500, up another 10 in the first quarter. Is it sustainable? Can we continue to move forward? We’re going to dive into that. We can talk a little bit about some economic data that came out. That would be a good start. Before we do that, how was your Easter?
Chris Needs:
It was good. A couple dinners with the family. We stayed home. No traveling, so that was kind of nice.
Noah Brooks:
Yeah, we didn’t go anywhere. We were local. Just a few people. Well, few like 15 had a nice invite, but no traveling this time. Good Friday came and went, but Good Friday, they had some economic data that got released. It’s not normal.
Chris Needs:
We had personal consumption expenditure come out on a day the market was closed, so that was a little odd. So we got those numbers largely in line.
Noah Brooks:
Okay. So PCE, the Federal Reserves preferred inflation gauge, you said at personal consumption expenditure. Really there’s CPI, which is the consumer price index, which is a basket of goods and services that the Federal Reserve and as well as most economists look at as well for inflation data.
But the Federal Reserve has told us that their preferred inflation gauge is actually the spending, not the basket. So us spending, so personal consumption expenditure. Let’s talk about that for a little bit on our first economic data.
Chris Needs:
Yeah, so headline PCE was up 2.5% year over year. Core was up 2.8%. Both were largely in line, so we have seen a slowdown in the disinflation trend. Seems like we’ve hit a little bit of a sticky point, but nothing that would’ve shocked markets. We are getting the reaction this week now that the markets are open and is digesting that information, but not hot, not cold.
Noah Brooks:
But you say sticky, but I mean we were at eight and 9% a year and a half ago and now I think the year over year, you just said it’s 2.8.
Chris Needs:
Yeah.
DISINFLATION SLOW DOWN
Noah Brooks:
I mean, is it sticky or are we just anxious about it?
Chris Needs:
We might be anxious about it. If you look at CPI, that does sort of look like it’s hit a sticky point, a little bit of a short-term floor. But PCE still has been slightly trending down a little bit. Again, the disinflation trend is slowing just a tad, but we’re getting there.
We’ve been talking about how it’ll take time to go when we get to this last stretch of knocking down inflation, how it’ll take a little bit longer. There’s a number of factors at work. Obviously, the Fed has communicated cuts are next rather than any other hikes which may be slowing the disinflation trend.
Things might be ratcheting back up and getting a little hotter on expectation of financial conditions loosening a little bit, but you also have this new trend we have for Inshoring and Nearshoring where we saw what happened during COVID with the supply chains and we were overexposed to Eastern Asia and we’re trying to make-
Noah Brooks:
Eastern Asia.
Chris Needs:
Well, China.
Noah Brooks:
I like the way you say that. That’s very [inaudible 00:04:25], Eastern Asia. Pacific Rim, yes.
Chris Needs:
Yeah.
Noah Brooks:
So what other economic data that we see coming out here?
WHY EASTER CHOCOLATES WERE PRICIER THIS YEAR
Chris Needs:
Well, touching base on Easter, again, I know last month we talked about Valentine’s Day and what cocoa prices we’re doing. We talked about how it might be a little bit longer issue on cocoa prices. So obviously Easter is another big chocolate holiday.
Noah Brooks:
It is for me.
Chris Needs:
Yeah. I mean we’re talking about a month and a half ago cocoa prices were skyrocketing. They were up 40% year to date just in six weeks approximately by Valentine’s Day. And now we’re seeing they’re up 140% year to date. So they are really shooting through the roof there. So again, if your chocolates were a bit more expensive, that might be why.
Noah Brooks:
And they’re going to get more expensive. Now that trend really hasn’t been through all commodities. That’s more of just a cocoa trend based on some weather issues, right?
Chris Needs:
Yes.
Noah Brooks:
I don’t think we’re going to see that. Although gas has been up, oil is certainly ticking up. I think as the situation in the Middle East gets more dire, if you will, and more players enter the game, I think you’re going to see oil continue to rally up and maybe it’s just a trader’s haven at the moment, but it does feel like oil’s going to continue to go up.
Chris Needs:
We did have the IMF also up their global GDP forecasts, which generally affects oil. And then we also have the EIA who increase their price target for year-end as well. So some traders, like you said, probably adjusting their price targets and their exposure a little bit to be a little bit more exposed to oil.
THE LATEST JOLTS REPORT
Noah Brooks:
Yeah, yeah. So one of the other things that we got this week, I think it was on Monday, was the Jolts, right?
Chris Needs:
Yes. Yes. So the job openings portion of the jolt report was fairly in line. Still a lot of jobs out there, job openings being posted by employers, which would indicate a strong economy. We can’t get enough people to fill these jobs, but it wasn’t super hot like some of the numbers we’ve seen previously.
It was largely in line with what was expected. I think there was 8.76 approximately million jobs, so a lot of jobs out there to be had, a lot of strength in the labor market.
Noah Brooks:
That’s down considerably and that helps with the inflation standpoint. The job openings were at high March of 2022. Which was kind of marked the high of the inflation portion or right in that general area. So they were I think 12 and a half million job openings.
And what that does, is it makes employers have to raise the starting salary of those job openings to attract new employees. And, so now, we’re down what, 4 million jobs from that 12 and a half million, 8.8 million or 8.5 million openings. And so it doesn’t mean that they don’t have to raise wages, I have a stat here. But it’s not near as bad as it was.
Chris Needs:
Yeah, it’s not a wage price spiral we were really worried about and that’s largely a theory. I don’t know how much it’s been truly actually done in reality, but everybody fears… Well, no wage price spiral of a never ending cycle. But yeah, I don’t think we have fears of that at this point. Despite the market remaining-
Noah Brooks:
Interesting stat that came out from the jolts, I imagine everybody listening has been in this scenario at some point in their life, whether they’re a financial advisor or an individual investor, but the stat that came out was, for job stayers, the annual increase was an average of somewhere around 5% in pay and job changers, it was 10 and a half.
So there are still companies out there offering significantly higher wages to try to entice people, which is playing into the whole wage inflation. I don’t know about the spiral situation you were talking about, but there’s still wage inflation intact and I would imagine that until those numbers come down, until the job seekers, the Jolts comes down a little bit more, maybe another million or two, you’re still going to see those job changers have the leg up on the job stairs.
And that affects everybody.
CALIFORNIA FAST FOOD WORKER MINIMUM WAGE
Noah Brooks:
Speaking of that, we just saw this week they came out in California. Did you see the minimum wage for fast food?
Chris Needs:
Up to $20.
Noah Brooks:
Yeah.
Chris Needs:
It’s a big jump. Yeah. I saw this comparison. It was some fast food we’ll say in and out or something like that in California, minimum wage, $20 being offered to take that job and then right next to it on this Indeed or job seekers website was a Montessori school teacher also $20. So we’re paying-
Noah Brooks:
That is tough, right? 20 bucks an hour to flip burgers or 20 bucks an hour to teach your kids. Which one is-
Chris Needs:
Something’s skewed here.
Noah Brooks:
Yeah, man, that’s tough. I don’t know. Anyway, what other economic data, anything else?
ISM DATA
Chris Needs:
So we went through a long period of the ISM data being very poor in contraction territory, which is below 50 as they say. But we’re starting to see a slight uptick there, which would be in line with a stronger economy, which certainly we’ve seen in the other stats, but both services and manufacturing ISM data over the last week has come out over 50.
So maybe I know there’s the conference boards leading economic indicator index, which is 10 different things that they monitor to sort of predict what the economy’s going to do, if there’s going to be slower growth or quicker growth. It’s been negative for a long time sort of predicting a recession.
It’s still way negative, but it’s curling back up. And if you just look historically at those indicators, when it starts curling back up, generally it gets back to positive.
Noah Brooks:
I hear somebody saying no landing.
Chris Needs:
It’s-
Noah Brooks:
Soft landing, no landing.
Chris Needs:
The market’s certainly pricing in at least a very soft landing or no landing it seems like right now. Which will we get caught off guard maybe?
IS THE ECONOMY ACCELERATING?
Noah Brooks:
Yeah. Is it possible that the economy is actually accelerating?
Chris Needs:
It’s possible. We do see some trends saying there could be weakness which would belie the Fed slowing down could keep them at 75 basis points and cuts predicted because I was very surprised when they came out in December with 75 basis points predicted for 2024. That was aggressive in my mind and especially with the data we’ve seen lately, it seems aggressive and the market has been pushing out rate cuts accordingly.
Noah Brooks:
This sounds like a little bit of cognitive dissidence, but you have two things working against each other. You have the higher for longer, which we are definitely now in a higher for longer camp. But you have the possibility of the economy actually, I don’t want to say reigniting, but continuing to be strong and getting even stronger.
And so that’s where I say there’s this cognitive dissonance involved. This is because you would think if we were going to be higher for longer that the markets and the economy, different beasts if you will, you would think higher for longer would mean that the economy’s going to be slowing down.
That’s definitely not the case. I think I said this to you last week, I don’t really know why the Fed is going to lower as much as the expectations are. If we don’t go into a landing, if we have a soft landing and certainly no hard landing, the Federal Reserve isn’t required to lower rates to go back to where they were.
If they find that it’s a neutral standpoint or even if they lower by 25 or 50 basis points and we don’t get 150 basis points, which the market’s pricing in, there’s nothing that says that they have to lower rates.
Chris Needs:
Mm-hmm. Yeah, I think they’re worried about real yields getting too high. I think they’re approximately around maybe 2.6 right now. They don’t want that to be at three or three and a half as inflation continues coming down. And additionally to your point, I mean they don’t want to make an Arthur Burns mistake where they cut too early and were off to the races again.
That’s why I feel like they did a little bit of a disservice to all the work that they did by saying the 75 basis points in that December meeting because it sort of took away their optionality a little bit. And now they’re likely going to get towards pushing for later cuts.
You’ve seen some Fed FOMC members coming out and walking back that a little bit saying they need more data before they’ll cut rates, which would seem reasonable as you were sort of alluding to.
But in the latest March meeting, they released their dot plot again, updated their dot plot. It still reiterated 75 basis points and cuts this year, but we were one singular little dot from it being 50 basis points. And I don’t think the market would’ve taken that final again, just one dot away would’ve taken that as well as the 75, even though it was just the slimmest of margins.
Noah Brooks:
Well, we’re certainly going to see, we’ll keep everybody updated on it obviously, but I’m going to put it out there. I don’t know why they have to lower by so much. I don’t know why those expect, I know why the expectations are there. They’ve forecasted, right?
You said you thought they might’ve done themselves a disservice by it, and I would tell you that I’m in that camp 100%. So we talked about the markets being up in the first quarter, S&P 500 up over 10% for the first quarter. What about bonds? Yeah, they’re still down.
Chris Needs:
Yeah, part of the conversation we’re just on, so these rate cuts are being pushed out by all the strong data. The strong economy that we’re seeing here and the US AG was down in Q1 0.8% as yields just very slightly creeped up in the quarter sort of accounting for those rates being pushed out a little bit.
I remember coming into the year, they expected cuts in March and now we’re holding on to a slight higher odds of a June cut, but each day it seems like they’re taking down a little bit. I’m going to stick to my July cut expectation because I just think June’s too early. I think they’ll try one and then they’ll put it on pause.
But in largely fixed income sort of been struggling as these have been pushed out. They move very quickly at the end in Q4 and now they’re coming back in just a little bit after that overreaction, we’ll say.
Noah Brooks:
Yeah, collecting a coupon if you will. So very little appreciation in bonds at the moment, but collecting a coupon, which I guess is reasonable, nothing wrong with that. Money market mutual fund yields are still above 5%.
It kind of depends on what you’re looking at, but you can still get CDs above 5%, I saw a 5.2 the other day for 18 months. I think you can still get a 5.1 for two years. So not bad, but there is going to be a point where we invert. So yield curve is inverted, meaning the short end of the curve, the one month or the one week is much higher than the 10 year.
And there’s going to be a point when that inverts. It’s just a question of when. I think it’ll certainly be when the Fed starts to lower later in the year. We don’t know right? July, August, September. But I mean that’ll be noteworthy, It’ll be newsworthy that the inversion has ended. I think…I’m pretty sure.
RECORD INVERSION
Chris Needs:
Yeah. We’re at a record inversion right now going back to the US AG, it’s been in a drawdown for 44 months. It’s been a tough time for bonds and the aggregate, which is just usually used as the largest index I guess that we look at. So it’s been a long drawdown, but eventually it’ll come to an end just like the inversion.
Noah Brooks:
Eventually. But I mean I know that investors are, I don’t know if the word is fed up, but they’re irritated. They’re irritated with the returns on bonds because bonds tend to be, well, we haven’t really seen a lot of negative returns in bonds over the last 20 or 30 years. It doesn’t happen that often.
And we saw two back-to-back years. 2021 and 2022 last year they were up five, five and a half percent, but people are still underwater in some of those positions that they hold and waiting to break even. I hope it’s going to come later this year.
Chris Needs:
Speaking of disappointing returns, so on the quarter we also had international underperforming the US again, which obviously has been a larger trend. We’ve discussed previously.
The MSCI developed XUS was up 5.2. Obviously, half of the return of the S&P and emerging markets were only up 2.1. So we certainly have some points we can discuss there, whether it be what China is doing or I had a stat on Japan.
INTERNATIONAL DIVERSIFICATION
Chris Needs:
Maybe if we want to jump into that on international diversification.
Noah Brooks:
What’s your stat on Japan?
Chris Needs:
So, in March, Japan finally broke out to a new all-time high. It had been a long 34 years since December of 1989 that the Nikkei 225, their index had been at an all time high. So during that time, those 34 long years, the S&P 500 was up 2800%.
So, sometimes, there is a time to be diversified, certainly, and that’s why we practice our portfolio management style as we do is, if you were a domestic Japanese investor and you were far overweighted, obviously their stock market, the Nikkei 225, you’d be in a world of hurt, lagging.
So I wonder, I wish I had the stats to back up. I would like to know what international investors maybe in each country, sort of what the average allocation looks like if they are as overweighted to the US as we are at this point.
Noah Brooks:
You mean home country bias.
Chris Needs:
Yeah. Home country bias.
Noah Brooks:
Right. So home country bias is, yeah, I might want to invest in international companies or invest internationally, but the majority of my portfolio is going to be domestic, US.
Chris Needs:
Companies and interact with on daily basis.
Noah Brooks:
So you think, or do you have a hypothesis on this for internationals?
Chris Needs:
Well, when it comes to Japan, obviously that was a scarring wound what the market did to them. And I mean they were in a huge bubble territory. Their CAPE ratio back in 1989 was at 87 CAPE ratio being the cyclically adjusted price to earnings ratio.
So they were in a huge bubble. I think people sort of understood that, but it is been 34 years to get back on a non-total return basis back to where they were in 1989. So-
Noah Brooks:
So do you think everybody in Japan held, do you think they have a home country bias and they just held on the entire time?
Chris Needs:
I’m not going to guess on that front if they do, but I know generally Japanese citizens have a lower exposure to stock markets than we do here in the US. So maybe they’ve turned away. I know if you think about China, it seems like their assistance is more exposed to real estate. They look at real estate, maybe the way we look at gold or equity, things like that. So I’m sure they shifted somewhat and that’s why they have less equity exposure than we do generally.
Noah Brooks:
I’d be curious to know a British citizen and what they have in terms of domestic for versus their version of international. We should come back to this. We should make a note of that one. I don’t have any good research topic. I don’t have any data on that. I don’t even Yeah, we’d have to-
Chris Needs:
We’ll check it out for you.
Noah Brooks:
We’d have to come back to that.
SELF CHECKOUT ETIQUETTE
Noah Brooks:
So a few things happened to me over the Easter holidays. One I thought was awesome, I needed something and I went out to the store and they were closed. That was just a quick thing that happened on Sunday afternoon. They were closed, which I thought was awesome. This trend of businesses being open on holidays like Thanksgiving, I know Target a few years made a decision to close on Thanksgiving after being open for so long, and I think that’s great.
The few days prior to that though, I went into the same store and we had a boatload of stuff that we were getting. So we weren’t hosting Easter, but we were bringing some stuff for Easter and we got to get all the fixings and all these little things that you buy.
And my wife, she decided she was going to use that self-checkout thing. And you go in, if you only have five or 10 items, self-checkout, no problem. But here we are, we have a full cart of big, not a mini cart, a regular size card, a big old cart, and we’re using the self-checkout. And I’m telling you, it is one of my biggest pet peeves. Those things are horrendous for me. I feel I just-
Chris Needs:
Please place the item in the bag [inaudible 00:22:47].
Noah Brooks:
I keep yelling to myself. People have got to be going, this guy, he’s an idiot. I get so angry and I don’t know why. And I know that they’re trying to stop theft, so you can’t put the bag down and then take it off, but you’re like, I already scanned it.
And so one of the things that happened out there, there’s no end to that story. I really despise those things for large shops.
But one of the things that I saw this past week was a bunch of companies are getting hit on their earnings calls for increased shrinkage, which is theft.
One in particular, Five Below – a dollar store type of place. Not something that I go to a lot, but apparently they have a lot of these self checks.
And they noted in their earnings report that people are just stealing. And the total shrinkage was dramatic and really cut into their earnings per share. And they’ve talked about – specifically Five Below has talked about – reducing the number of self-checkouts.
And then yesterday I read that Amazon is doing away with their, is it no checkout where you can just walk out in the whole stores and things like that?
So I would love it if they just added more cashiers and I didn’t have to do my own checkout. I feel like they should be giving me some type of rebate or payback.
Chris Needs:
Yeah, that would make sense. That’d be a good idea, like a 1% off for bagging your own stuff. I mean, yeah, it’s tough if you’re there during non-peak hours, it’s like there’s only one or two cashiers at the grocery store or what have you. And it’s like there’s a massive line for people like you said, who have full large orders and it’s like, gosh, get in line. [inaudible 00:24:41] people to go.
25-YEAR ANNIVERSARY OF DOW JONES CLOSING ABOVE 10K
Noah Brooks:
Talking about pet peeves, talking about pet peeves. So Friday was Good Friday it was March. It was also the 25 year anniversary of the first time the Dow Jones closed above 10,000. Now I don’t know where you were in March 29th of 1999, I was working at a company called Prudential Securities, and I was studying for my series seven at that time, I was a wire operator.
Back in the day, they used to give you paper tickets to buy and sell things, and it was like a free-for-all in the office. Now, I don’t remember exactly, I don’t think the manager had hats made up.
Chris Needs:
I love seeing that on the floor when they’re passing out the hats.
Noah Brooks:
Right, passing out the, yeah, so they were definitely passing out Dow 10,000 hats at that time. I don’t think we had them in the office, but it was a big deal. I’m pretty sure that the manager might have brought in some alcohol or beverages or some lunch or something like that and people made a big deal about it.
So that was March of ’99. And then we topped out, we got almost up to 12,000 before the tech bubble collapsed, if you will. And then during that time period, 2000, 2001, 2002, it was three bad years in a row back to back-to-back.
Dow wound up well under 9,000 at that time, not including the global financial crisis. We got down to 6,666 during that time period. But if you look at the total return now, going back 25 years, March 29th to the end of business on the Easter holiday, the total return, not including dividends.
So I guess it wouldn’t be total return, the price return for the Dow Jones is up over 300%. When you put dividends, when you add those and you reinvest those dividends and you let them compound, the total return is over 500% for the Dow Jones. And that included a lost decade.
The 2000s were essentially a lost decade from January 1st, 2000 to December 31st to 2009. The total return on the Dow Jones, not including dividends, it was negative, I think 10%, nine or 10%. So compounding, putting those dividends back in, not pulling the trigger and selling out total returns still over 300% in 25 years. I mean, is it great? That’s not the worst thing ever. We have 300%,
Chris Needs:
But the power of compounding, has that been-
Noah Brooks:
Power of compounding.
Chris Needs:
Well, while we’re on that point, we did have some change in the components that we haven’t covered or talked about. So we had, Amazon actually went into the Dow Jones.
Obviously, it is a price-weighted index rather than cap-weighted. So they went in as the 17th largest position and they replaced Walgreens Boots Alliance, who was having a bit of a tough go of it. But Walgreens Boots Alliance, they decreased 58% since they became a component within the Dow.
Noah Brooks:
Well, that’s always the story, right?
Chris Needs:
Well, Dow does have this issue with the performance when things come in. It seems like that happens time and time again that they struggle. And on that same point, it was down 58% during its tenure in the Dow. It had replaced General Electric, which is since up 86%.
Noah Brooks:
Right, right. And so Salesforce was added a few years ago. As soon as it was added, it had a really rough year. I think it’s positive since it’s been added at the moment. But it does seem to be… So is that the people at Dow Jones being late to the game or is that them…
Chris Needs:
It sounds like it. So how does it work when they decide? They do have sort of a committee that decides on that and yeah, it seems like they’re late. They’re not the best investment pickers we’ll say, at least in the short term.
But on the S&P 500, we did also have SMCI super microcomputers, one of the storied stocks from this year, which has really gone crazy over the last year. And Decker Outdoors came on, they replaced Whirlpool and Zion Bank Corp, and that was on March 18th that they went into the index.
Noah Brooks:
So based on that idea of companies outperforming after they’ve been removed, do you buy Whirlpool now?
Chris Needs:
Possibly. I’m not sure if S&P 500 has that same issue that the Dow kind of has, but potentially.
PERFORMANCE BY SECTOR
Noah Brooks:
Okay. Let’s talk about performance a little bit with some of the different sectors. So obviously technology has been leading the way for a number of years. Is it possible that it’s slowing down?
Chris Needs:
I think it’s definitely going, it’s digesting gains where we’re at here. So in Q1 Energy was actually the leader of 13.5%, followed by financials who were up I think 12.4% and industrials up 11%. So it did seem like a slight changing of the guard or a sector rotation, which is something that would be a positive development. I think we want to see that.
Again, we’ve always talked about the breadth expanding and sector rotations within bull markets are very healthy and sort of help sustain the rally. So I think rather than tech going off a cliff, they’re taking some time off of doing all the legwork for the indices.
Noah Brooks:
Yeah. I don’t know if they’re competing stats, but I have some shorter-term stats, some one-month stats.
Best performing sector for a month, energy of 12 and a half. Worst performing sector, consumer discretionary, second-worst technology down 1.7% on a month.
Now that doesn’t, I don’t know that you can extrapolate that throughout the remainder of the year or anything, but certainly interesting to note. Second, best performer for the month, utilities.
Chris Needs:
There’s a shock we haven’t seen in a while.
Noah Brooks:
Nobody wants to own utilities and all of a sudden they’re really moving. So maybe just hypothesizing here, if investors think yields are going to go down and fixed income, obviously lots of companies benefit from that, but if you’re looking for a dividend and rates are going to go down, then utilities might be the place to find those dividends.
Chris Needs:
It looks like they’re moving a little bit before any fed cuts to make up for maybe they see that’s where people are going to go when people eventually maybe move out of some money markets or out of some of these other positions. Getting back into a nice dividend-paying U.
Noah Brooks:
Yeah,
Chris Needs:
Stable U.
Noah Brooks:
Yeah, something we haven’t talked about in a long time.
FRANCIS SCOTT KEY BRIDGE COLLAPSE + INFLATION
Noah Brooks:
Now this isn’t really a utility, but I want to just bring up the Francis Scott Key Bridge for a second. It’s not a utility, it’s not an industrial, but it’s a major harbor for commercial shipping.
Obviously, you look at those pictures on television and when you see it from a helicopter, you think, well, that’s not really, it’s not a giant bridge, but when you get closer to the pictures, you realize how big this bridge actually is.
Chris Needs:
1.6 miles. I think it’s a huge bridge.
Noah Brooks:
Now, they just opened up a very small lane for smaller boats, not big commercial boats, but for smaller boats to get through. And it looks like it’s going to take a long time.
Now, I know some people in the industry and they’re telling me that a lot of the shipments are going to be diverted to Norfolk, Philadelphia, even I guess Boston to some degree.
How much do you think that impacts? So we know about supply chain issues from COVID. In terms of getting things from China to California or China to New York, whatever it happens to be.
How much of an impact is it going to have? Is it really going to make a difference?
Chris Needs:
I’m sure we probably are able to shift around the logistics to make it so it’s not a huge penalty. I mean, the biggest imports were vehicles I think, farm equipment, sugar and salt.
And then the major exports out there were I think coal, LNG and other metals and minerals. I think we have the ability to shift it around to Philadelphia and New York, down to Norfolk. I think it will have a small impact.
But those logistics people, they’re very good. They have lots of computers and things that can optimize the trips and reroute things. I think it’ll be okay. I don’t think you’ll have a major impact.
Noah Brooks:
I guess what I was going for is, is it enough to be inflationary? I hope not.
Chris Needs:
I hope not as well.
Noah Brooks:
I don’t think it is because of the availability of other ports locally. So I don’t think it’s going to be inflationary. And if it is, it might be more regional. So if new cars take a little bit longer to get to the Baltimore area, that could raise the price a little bit because now you have this intermodal transport you have to get it from, whether it’s Philadelphia to Baltimore or from Norfolk to Baltimore, maybe a little bit, but not on a national level.
Chris Needs:
Especially some of that farm equipment is pretty sizable. So there will probably be a slight hiccup, like you said, regionally, but I doubt it’ll flow so far through to CPI and PCE.
Noah Brooks:
Yeah.
WARREN BUFFET + RETIREMENT INVESTING
Noah Brooks:
As we starting to wrap up here, you talked about compounding for a little bit and I think it’s really important. I came up with a stat all by myself. No, I didn’t. I actually saw it, someone else posted it that I am going to take it.
But the stat was on Berkshire Hathaway and Warren Buffett. And Mr. Buffett. Right now he’s 93 years of age, everybody know he’s Oracle of Omaha. His net worth is a $138 billion at the moment. And the stat was that 98% of that net worth came after he turned 65.
Which I just thought was amazing because we get a lot of people that as they age and as they start their journey of retirement that they think, “Hey, all of a sudden I’ve been a 70/30 investor for the last 10, 20, 30 years, or I’ve been a hundred percent stock investor for the last 20 years.”
As they get closer to retirement, they think, “Oh, now I have to make this massive change from what I’ve been doing because people say I should be more conservative as I get older.” And I just want to put this out there, dividends and compounding.
And you look at Buffett, it’s very possible that normal investors shouldn’t have to make that change. And the last 10 years of Berkshire in their compounding, the last 10 years of his net worth has been exponential. I mean, it’s just been straight up.
And it’s not that Berkshire has had this tremendous return that all other equities or all other indexes haven’t had. It’s been okay. So I just want people to start thinking about that. The power and the effects of compounding.
Chris Needs:
Compounding is why we use log charts, not linear charts.
Noah Brooks:
We’ll save that one for another day. All right, anything else here we wrap up?
DOES COMMUNISM WORK?
Chris Needs:
I think it’s worth noting, China where we’re at there. So China has been having a tough go of it. Obviously they’ve had some real issues in real estate. Their market’s been getting hit as well. It looks like in Q1, it might’ve stabilized a bit.
That would be helpful as well, if we’re just talking about globally keeping the rally going, it’d be nice if they could participate and help out because to get a soft landing, you really would’ve thought that China would’ve had to do decent or at least balance out and we’re starting to see them balance out a little bit.
And they’ve signaled that they’re more open for business now that they’ve been in struggles, they want to stem the bleeding per se. The Chinese number two is meeting with American CEOs again, sort of opening a dialogue. I assume that they’re open for business.
They fired their equivalent to our SEC regulator, head of the SEC on their end, sort of at the market bottom. And I think that was another signal to Chinese markets that they’re going to have a lighter regulatory touch.
So Yellen’s meeting with them this week, I believe. There’s a lot of things seems like they’re going to maybe take a step back and fighting us just a tad in the meantime to benefit their markets.
Noah Brooks:
So you’re saying communism doesn’t work.
Chris Needs:
I’m saying, yeah. What they were doing before is certainly tough on businesses there. As we know, some people have said they had become uninvestable. Just due to sort of the bipolar nature of how they would regulate.
If they just decide you made too much money last year, they’re going to come down hard on you and that’s not good for businesses and innovation.
Noah Brooks:
Yeah. You heard it here first. Everybody. Communism doesn’t work in the stock markets.
Okay, that’s what I’ll leave it as.
So, to summarize, I mean I’m going to go back to the market is volatile, but compounding of returns is like the golden ticket. Don’t stop compounding, keep it going. Reinvest everything you can.
And in the short term, there’s always a reason to sell or not to invest, but in the long term, do not bet against the American economy.
Thanks everybody for listening. We’ll see you next time on the Market Enthusiast.
Disclaimer
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. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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