All That Matters: A Holiday Special

The Appetizer

Mike: In my family, we’re big on appetizers. We like spinach dip, we like cheese boards, we like shrimp with cocktail sauce that’s super spicy. I mean it has to make your eyes water.  Honestly, we graze all day with appetizers.  

Ross: We do something similar as we try to keep our hands out of the sides and main course for the actual meal. Though I have to tell you, it feels like every year we’re eating earlier and earlier. It’s like a 2:30 p.m. dinner now. I do like your idea for spinach dip – it’s not healthy, but there’s enough green in there that you can maybe feel good about yourself before you indulge.

Mike: I’ve got a market appetizer before we get onto the main section. There’s been 217 trading days this year; of those, 115 days the market has been up and 102 days the market has been down. You might think that the market hasn’t really gone anywhere. But the S&P 500 index is up 16% this year. A basic 60/40 portfolio is up about 9.5% this year. So just nine trading days explain all the returns that I just mentioned, and there are three themes among them that we’ll kick around:

1. Tech Earnings
2. Yields Dropping
3. Policy Intervention

Ross: It’s surprising on face: you basically have a coin flip for the number of trading days and you’re still up 16% on the year. But that’s the story of the market going back a hundred years. It’s really hard to time around these big and particularly volatile events – this spring’s banking crisis, unexpected tech earnings – that surprise the market and when big moves happen. But that’s why you and I are both big believers in owning all the days, right?

Mike: I imagine some people came into this year thinking they would time their entrances and exits in the market. But you miss one of those nine days, and your returns get demolished. On the other hand, some may want to miss the nine worst days. And it’s true that your returns would be amazing. But those best and worst days tend to cluster together, and instead of worrying about all of that, why not just own all the days and get the returns?

Ross: And we don’t have to get into the details, but the more you’re in and out of the market, the more drag there is on the return when you factor in trading costs, taxes and more. In the last century, the markets have turned 100 bucks into 12 million. If you own all the days, you’ll be in good shape.

The Main Course

Mike:  I assume most of us eat turkey for the main course, so let’s talk about sides. Some of my takes may land me in some hot water – I know Ross is going to get me. My number one take: stuffing is the single greatest side. I don’t know why we don’t eat it more times of the year. I also kind of love a gooey sweet potato-y type thing that feels like a dessert. But my hottest take is that green bean casserole is the absolute worst thing ever. It’s this gray, green mash of mushroom with some onion on it.

Ross: It’s not just some onion. It’s fried onion. If we’re deep frying a big part of it, I’m pro. But it’s not taking up a big portion of my plate, I’ll be honest with you. But stuffing? I’m with you. It’s number one. It’s top tier, not just as far as Thanksgiving sides go. All year we should be eating more stuffing. Summer, we should be eating more stuffing. We should have stuffing at cookouts. It is an elite side.

Mike: I mean come on, it’s bread. Who doesn’t want more bread on your plate? But, let’s focus now on the main course as in, what really matters to our clients. Two episodes ago, we talked about rates and how it matters. And that’s still the case. Remember, I mentioned just one of the reasons the stock market did so well in those nine trading days was because yields were dropping. Yields are this big topic; the market embraces when yields come down and hates it when yields go up.

Ross: What we said in the summer is still the case. Higher rates and higher yields weigh on consumer spending. They weigh on corporate profitability. They provide an alternative to stocks, so you might be willing to pay less for a share of corporate earnings. Across the board, rates are a headwind to stocks. When rates fall, stocks are just coiled and ready to pop. We’ve seen that a couple of times just in the last few weeks. And it all comes down to whether or not the Fed can stick the soft landing. In October we got a weaker jobs report, and yields plummeted because it was a signal that the Fed may be done hiking. The market really likes that sort of talk, so long as we’re not in a recession. So, rates are still the number one thing.

Mike: We’re also coming into a good time to own stocks. It’s not a guarantee, but stocks traditionally do the best towards the end of the year. You hear the phrase “Santa Claus Rally” every now and then. And then next year we’ve got a presidential election. Election years are traditionally pretty strong, right?

Ross: Yes, the average market performance is around 11-12% in an election. So even though you may expect a lot of headline noise, you don’t need to worry about it too much as far as returns. The other thing I’d point out that I think matters is that we’re at the tail end of earnings season. This earnings season has been really good, with 80% of companies beating their earnings estimates. We’ve had three straight quarters of negative growth and we’re flipping to positive growth. Companies are back on the upswing. There was a minor earnings recession and we’re on the way out of that, which is a huge positive and tailwind for stocks.

Mike: As much as you think headlines are what drives the market, when it comes to the long-term, it’s earnings. What are companies making? That’s ultimately what drives the stock market higher and your investments higher.

The Dessert

Mike: I will say, I’m not a huge dessert guy. The liquid dessert is more appealing – some sort of after-dinner cocktail. But if I had to give a take here, I would say that my favorite pie is maybe French silk. But the pumpkin pie is terrible. It’s trash.

Ross: Well I think you’re wrong and it’s a bad take. At the end of the day, pumpkin pie is a whipped cream delivery vehicle. It’s excellent and it’s classic for a reason. It’s not too sweet, it settles right in and it feels like fall. But I’m not going to complain about most desserts. I’m not going to complain about your liquid dessert idea, but you need to put some respect on Pumpkin Pie’s name.

Mike: It’s just something I can’t get behind. Anyways, let’s give folks a couple sweet things to think about to end this episode. Despite rising interest rates, the economy’s doing pretty good. It may not feel like it – there are sentiment surveys that report people feel the economy’s doing poorly – but all the data suggests we’re doing fine.

I think the disconnect is related to inflation. People hate paying for things and the fact that prices have just risen so dramatically is a reason why people seem unhappy. When it comes to the economy, we’ve seen strong GDP growth, we have a great jobs market, and the housing market is hanging in there. We’ve seen a nice uptick in productivity this year, and that’s huge because an economy is just the number of people working times what they produce.

Ross: We’ve also seen these great wage gains in the employment market; the Fed worries because they think it drives price inflation. But if those workers are being more productive and producing more with less or the same amount, it’s kind of the secret sauce to a soft landing – what we all want.

I also want to highlight the labor market. It’s cooling in some ways, which is good if you’re worried about the Fed, but in some ways it’s accelerating. The teen labor force participation rate is at a 14-year high. The job market is strong, wage growth is strong, and it’s bringing people off the sidelines into the labor market. Teens don’t have mortgages, so what they earn, they spend. That’s great for our economy: it’s so strong that we’re bringing people off the sidelines to interact with it.

Mike: I saw this quote recently, “The windshield is bigger than the rearview for a reason.” I’m a pragmatic optimist. I believe the future’s brighter than the past. That’s why the rearview is smaller. I love the notion that we should be looking forward right now, not looking to the past.

Ross: We have a propensity to focus on what’s not going well in the world. The media has a negativity bias, but a lot is going right and we’re making big strides on important fronts. We’re both optimists, and sometimes we get labeled as perma-bullish. But the history of the market over time is that it grows… earnings grow, people become more productive, things get better and people innovate. And that’s just the best way to think about the market and investing.