Lance Roberts

Lance Roberts is the Chief Investment Strategist for RIA Advisors and Lead Editor of the Real Investment Report, a weekly subscriber-based newsletter to over 100,000 people nationwide. 

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The bulls are still squarely in control of the stock market. With such momentum on their side, how bullish should investors be right now?

Portfolio manager Lance Roberts & Wealthion’s host Adam Taggart discuss that in this week’s Market Recap, along with:

  1. how the market performed over the past week
  2. the latest inflation (CPI) data
  3. how to trade a FOMO-driven market
  4. rising government debt interest expense + falling tax revenues
  5. how possible is deflation over the coming year?
  6. Lance’s trades for the week


Adam Taggart 0:04
Welcome to Wealthion. I’m Wealthion founder Adam Taggart here at the end of the week, welcome you back for another weekly market recap, with my extremely good friend upgraded again this week. Lance Roberts Portfolio Manager from real investment advice, Lance, how’re you doing, buddy?

Lance Roberts 0:20
I’m doing good. I don’t know where to go from there. So we’ll just have to keep

Adam Taggart 0:26
all right, well, folks, you might notice I’m in a different background here, Lance, telling me section of my Wi Fi is not so great. Just quick backstory, I’m back in New England, for my mother’s memorial service. We’re also cleaning out her house literally as I speak. So I told Lance, I had to sort of sneak away and find a place to record today’s weekly market recap, found a hotel down the street, and begged them to let me basically book this room for an hour and a half. And as I was slipping them the cash to do that, I began thinking, wow, they must really be thinking I’m, I might be doing this for some sort of, you know, sketchy purpose. And I said, Oh, don’t worry, I just need good Wi Fi. And of course, and I thought, Oh, God, maybe they probably think I’m doing only fans by the hour here. So anyways, let’s, you know, feel free to make a tip here. Who knows? Let’s see what else could go.

Lance Roberts 1:20
Exactly. Yeah, yeah. But the hotel been not, you know, surprised you actually made your bed afterwards. So you know.

Adam Taggart 1:30
All right. Well, look, I, we’ve got definitely some things to catch up on here. And the markets both still seem to be in control. s&p is up about 100 points for for the week so far. So I’ll let you upon on on the general market action for the week, I’ll just color from a purchasing perspective standpoint. I’m definitely seeing a lot of people in the comments here. You know, let the market bulls come out and kind of crow about, hey, you know, you guys have been too negative on this channel, the markets unstoppable. And look, the market is what the market is you and I talked about this every week, Lance, we’re not necessarily rooting against the market or necessarily waiting for it. We’re just trying to look at the data and figure out where it’s going. But certainly the folks that are excited to see the market go up, are getting increasingly confident that this thing’s unstoppable. Maybe that by itself is a sign of sentiment.

Lance Roberts 2:28
Well, look, there’s no doubt first. So you know, we turned bullish back in October of last year. started looking at the market, you know, kind of turn you and I have talked about this every week is that, you know, a lot of the bullet you know, a lot of the bearish sentiment was just falling away. And that’s recovered a lot. And if we take a look at bullish sentiment in terms of both positioning as well as just general attitude of investors, yeah, it’s you know, we’re back to kind of FOMO territory that we’ve seen previously and the important thing about that is that can last a while just because we’re getting very aggressive in the markets and people are getting very excited to markets and absolutely right you know, all the bulls are definitely coming out of the woodwork now and kind of coming out of the bunker going, okay, it’s fine. You know, but this can last and sentiment and, and, you know, kind of momentum in the markets can carry this market a lot further than you think. And this is why you have to be really careful about being negative bull markets last a lot longer than bear markets when you get a bear market and a real one. And I’ll explain the difference by last year was a correction than not a bear market. But when you get a real real bear market, those tend to last 18 to 24 months, and then they’re over. You know, bull markets tend to last 34567 years. So once you kind of get that bullish turn in the markets, they can last a fairly long period of time. Now, there’s a few caveats to this, that go back that we can discuss, but right now anyway, you know, analysts are coming out. We’re now looking at all time highs by the end of the year, according to Wall Street analysts. That’s that momentum kicking back in here in terms of that bullish sentiment just kicked off earnings really. We had a couple of earnings yesterday, but earnings started officially today. With JP Morgan, Bank of America, Wells Fargo all reporting much better than expected earnings. Not surprising now, because we had downgraded quarter two estimates a lot from last year. So they’re beating a very much lowered hurdle in terms of earnings, and we left estimates where they were in quarter two of last year when we first started reporting these back in February. Every company would missed that because we lower that bar so much to have a nice earning season. UNH just beat their earnings. Of course UnitedHealthcare just took a big whack a couple of weeks ago because they said hey, our earnings are going to get hurt. because old people are now electing to have a lot more elective surgery they’re having hips, knees done and hips done and those type of things, we’re seeing a lot of those coming in, which is impacting our margins. And even today, it stocks up to two and a half percent of the open this morning because they beat earnings, right, but all that was getting priced in ahead of earnings. So this is always why we call this millennial earnings season, everybody gets a trophy, and that helps markets lift in the short term. And that’s what’s going on right now. All right.

Adam Taggart 5:28
So there have been, there have been some predictors out there, that have had not too many people are doing this, but a few are predicting, have been predicting extreme growth in the s&p almost more as like a, like a last hurrah, not to maybe this current bull market cycle, but but the big secular bull market cycle is measured, like over the past 40 years, right? And there’s one or two out there that have made pretty, pretty extreme predictions like 6000, on the s&p. And I’ve seen more people come out and say, hey, you know, those guys now might be onto something, right? And maybe, right, I mean, we were in the Battle of control range between 30 840 200, we broke it out, we’re now above 4500. And that’s material. And there’s momentum claim, just like you’re saying, but it’s a pretty big jump from 4500 to 6000. On the s&p. In terms of sort of where you see this kind of going from here, do you see us? I know this can go higher for longer than most people? Imagine? We’ve talked about the disconnect between the macro data and and where prices are. But in your mind, do you do you see a run to some height like 6000, as likely here? Or would you expect a lot more road to be heard before we end up in that temperature victory?

Lance Roberts 7:02
Well, so that’s a that’s kind of a really big, interesting question. And microwave with my partner wrote a really great article on Tuesday or Wednesday of this week, it’s on the website, real investment, where he was analyzing a recent fed paper talking about the end of an era. And so there’s a couple of things that are going on, that may suggest that we have lower rates of returns in the future, and again, over a longer period now in the short term, you know, could the market melt up and go running off to 6000? Sure, if the Fed came out cut rates to zero tomorrow and started doing quantitative easing versus quantitative tightening, and we saw liquidity increase in the markets. Absolutely. In the short term, this market could certainly have some legs here and go higher. But when we start talking about what was driving returns in earnings over the last 40 years, and and this is important, I’ve got an article out today on the website, real investment, shameless plug, but talking about long term stock market cycles and talking about full market cycles. And if you go back and look at the current market cycle that we’re in, it started in 1980. And yes, we had a couple of periods there where we had zero rates of return for, you know, 15 years. That’s normal and a full market cycle. But we’ve never violate we’ve done never done two things. We’ve never violated the long term uptrend since 1980. And B, we never reverted valuations. So that’s something that occurs during a true honest bear market, you have a valuation mean reverting event that is that is very protracted, we saw it back in the 70s. We saw it back in the 20s. And those were the end of full market cycles. And so we’re clearly still in that full market cycle. Now, what was driving that full market cycle, and this is this is the important part is that we’ve had continued expansion of earnings for 40 years. And that was driven by a 40 year period of contraction of interest rates and tax rates. You know, back in 1980, the corporate tax rate was the what we call the realized tax rate or what the tax rate that companies actually think, you know, the tax rate people quote, say, oh, we need to raise the corporate tax rate to 35%. Nobody pays that, right. There’s a real tax rate that everybody pays, which is always substantially lower than that amount. So back in the 80s, the statutory tax rate was much higher, but the real tax rate that companies paid were about 35%. Today, it’s closer to 10. Yes, I know, the corporate tax rate is 21. It’s 10. That’s what companies actually pay. And so when you have this contraction of interest rates, which allows companies to generate higher profit margins from lower expenses on into you know, lower interest expenses. As you’re paying less out in taxes, then that’s going to give you a big boost in earnings. So what the Fed paper discovered and what Michael Leibowitz did a good job of analyzing, and he looks at companies like Coke, Clorox, Pepsi, as good examples, because these are these are, these are your mature kind of growing blue chip companies that have the biggest benefit from kind of earnings manipulation, so to speak. What the Fed paper stated was, is about 40% of profitability came solely from lower interest and lower tax rates. And that’s exactly what’s happened with Coke, Pepsi and Clorox, if you take a look at their earnings over the last period of time, about 40% of their earnings came from lower interest rates and tax rates alone. And we’re talking about net income here. This has nothing to do with stock buybacks. So this is all about net income. And so the question you have to ask yourself, now going forward, if we’re going to maintain a valuation level of 30 times earnings, which is where we are right now, what is going to be the driver of stronger earnings over the next 1020 30 years, because interest rates, yes, there are 4%, and they may go back down to 2%. But that’s a far cry from going to 8% to zero, right? There’s also a big difference when you’re when your actual tax rate is 35% to 10, versus 10 to zero, and the tax rate isn’t going to zero for companies, you’re probably at the lower end of that tax rate. Now, I mean, it’s just there is a function, that there still have to pay some taxes, even though companies can get around it to some degree, but it’s gonna be very hard to compress 10% to zero, to get some type of negligible benefit to earnings and profits. So this is going to be a challenge for the markets going forward, certainly doesn’t mean that we can’t have spikes in the market where you get the market taking off, because you have, you know, the Fed cutting rates to zero, we’re doing some type of liquidity intervention. But that seems to be a much harder case to justify that that is sustainable, long term. And so eventually valuations as is always the case, are going to start to revert back to a mean. And if you take a look at the that the rally this year, it’s entirely driven by valuation expansion, there is no earnings expansion at all, earnings are still contracting, they’re just not as bad as people thought they were. So when you’re running a market entirely valuation expansion, you’re really putting a lot of risk on the ability for companies to generate much higher rates of return. In an economic environment with higher interest rates that we have now. And a constriction of bank lending and other on consumers, they’re gonna make it harder for them to spend at elevated levels. Remember, at the end of the day, corporate profits and earnings have to follow GDP because that’s where they come from, they come from economic activity. So if GDP is slowing, which it is, then economic growth, the economic growth rate of earnings is also going to slow down, even though we may be recovering, they’re still going to be much lower, they can justify current valuations, if that makes sense.

Adam Taggart 13:01
Great answer, Lance. And look, you know, as you look ahead for the next couple of decades, and we see that, but profit growth is going to be challenged to be as much as it’s been in the past, and that taxes aren’t going to be able to come down as much as they have in the past. You briefly mentioned just there at the end, higher interest rates, do we do we suspect that interest rates will, you know, over the past couple of decades, we hit a big declination and interest rates as well, right, whether we’ll have higher interest rates from here or not? TBD. Economists can do that out. But we’re not going to have the same type of multi decade, you know, declines from you know, high teens. Cost of capital down to basically zero, right. So that’s one more thing that’s not going to be helping the markets, right. Yeah.

Lance Roberts 13:48
Yeah. No, it look interest rates on the longer end of the curve, right. So so again, you know, we talked about this before, the Federal Reserve only controls basically two years and in so the one month, three month bills, the one year bills, the two year treasuries, that’s what the Fed controls. And there’s, you can look at a chart of the two year Treasury rate and the Fed funds rate and they are perfectly 100% correlated. So that’s what the Fed controls. That’s your credit cards. You know, that’s why interest payments on credit cards are now 22%. They’ve had a sharp spike right in correlation with course higher Fed funds rate on the long end anything longer than 10 years. That’s all controlled by economic growth and inflation, economic growth and inflation are falling economic growth nominal was about 12%. With that $5 trillion worth of liquidity that’s coming back down to two on a nominal basis. You know, the inflation rate as we saw this past week, of course, a big driver for the market this week. Inflation is falling sharply CPI headline was at 3% PPI is falling rapidly, the spread between ppi and CPI is negative 10%. Now, so you know, that’s, you know, that disinflation that we were talking about last year is real coming home to roost now. So interest rates as a function will turn go back to 2% or less, and it’ll equate with long term economic growth. So as real GDP drops down towards one and a half to 2% growth on a more normalized stabilized basis, that’s where interest rates will be. So yes, 4% of the senior Treasury back there, too. That’s not going to be a again, to your point when you go from eight to four. That’s a big difference in fortitude. Yes, it’s 100% decline in both cases. But, you know, you know, it’s it’s sorry, I said, back that up? Yes, it’s a 50% decline in both cases that my math isn’t working well, today, apparently. But, you know, that is, you know, not the same in terms of, you know, in terms of impact to the bottom line of corporate profits and earnings. And so yes, these things are going to fall, we’re not going to we cannot sustain higher levels of interest, you know, over time, because we just had simply too much debt in the economy. You know, the government right now is dealing with what is going to be roughly a trillion dollars in interest payments alone from higher interest rates. So that’s, that’s all going to be forced down to a lower denominator in order to sustain and support what economic growth we can actually generate. But that’s, that doesn’t bode well, for corporate earnings and profitability and sustaining multiples of 3035 times earnings, you know, in the future, if we get to 6000 on the s&p, and just let’s just say that happens, and is it possible, certainly anything is possible. But now you’re talking about valuations back to 40 times earnings, simply not sustainable in this environment.

Adam Taggart 16:44
Okay, um, yeah. And you mentioned right, where I was going to head next, which is, this isn’t an issue, at least in the short term here, you know, we’re heading into an environment where, because of the higher cost of capital, the US debt payments, the interest on the debt is becoming crazy. Right. Now, as you said, we’re almost about to 1 trillion, right, just some quick stats on that. So we are still deficit spending pretty aggressively, our deficit spending surged in June to almost 650 billion, that’s 100 billion higher than just a year ago, right? Our fiscal year to date deficit of 1.4 trillion is up 170% versus the same period last year, right. So we’re still kind of spending like a drunken sailor to a certain extent on the Fed side, but the cost of that debt is really beginning to bite. And while the interest payments are going up, fast, federal tax receipts are falling. So in the past trailing 12 months period, they are down 7.3%. So you know, basically, we’re spending a lot more on servicing our debt, we’re taking on more debt at a fast clip, and yet the income that’s coming in to to pay all that is declining. You know, you look at that, if household, were doing that, you know, that household would be going into declaring bankruptcy pretty quickly, right? Governments don’t necessarily have to do that, especially if they have printing press for the world’s reserve currency. But it’s still not good. Right.

Lance Roberts 18:20
And the important thing is like, you know, we talked about recession indicators, by the way. And if you didn’t get the leading economic indicators have been talking about a recession, the National Federation of Independent Business, though, that says a recession is coming, inverted yield curves, one of the other kind of leading indicators of a recession in the economy is a contraction in tax payments. And that makes complete sense, right? If, if the economy is slowing down, and I’m not earning as much money, then I’m going to pay less in taxes. And that is typically where recessions come from. So listen to Texas, right? And so when you have the type of decrease, in fact, I’m gonna write an article on this here shortly, probably the next week or so. But when you have this contraction and tax revenue, that is typically and again, you know, there’s no previous precedent history where that didn’t correlate to a recession. But hey, you know, anything’s possible, right?

Adam Taggart 19:18
Yeah. Well, so let’s, let’s see, if we can let’s firmly grasp that, that chest beating that the bulls are doing right now. You know, I, what I’m trying to do is I’m trying to, you know, remain open minded, right to any and all possibilities. You and I do a good job of doing the back and forth and I’m usually more a little bearish and usually when we’re a little bullish, but we always kind of come around to the fact that hey, if you’re looking at the macro data, it’s really hard to come up with a, like a credible long term or sustainable bullish argument. here. And I do want to flag an interview that I just did just released on this channel two days ago with Eric, best Meijin, who is a younger guy, but very sharp analyst, actually a little bit of a protege of Lacey hunt, they actually communicate, it’s impressive, that guy, this age has gotten Lacey’s attention. And we walk through a number of his charts, he tracks economic cycles. And what’s really interesting about his work is when he looks at something like say, the employment market, he breaks it down into its leading indicators, its cyclical indicators, its non cyclical indicators, it’s lagging indicators. And, you know, basically shows that in most cases, there is a progression of how these these indicators flow, right, obviously, leading goes first and then that goes into the cyclical, and that goes into the lagging. And when you look at things like the employment market, leading indicators very clearly have rolled over big time. Right? You can see it begin to start infecting the cyclical numbers, they aren’t they aren’t negative yet, but the trajectory is down very clear that they are weakening right, as you would expect, you’d see leading first then it would get into more cyclical. Same thing with the aggregate numbers, which kind of throws everything together. And of course, the lagging ones are the ones that have least to move the most yet, but that’s because they’re lagging right there, by definition, right. But you can kind of see, but what I’m saying is, is in his chart, you can see the progression of what certainly looks like the arrival of recession. And when I gave him the chance to say, you know, what do you think you said, yeah, I really don’t see how we, I don’t see how we avoid recession. So specifically, because as I’m looking in my charts, this is exactly what you see, when you go into recession, right? We just, we just haven’t gotten to the point yet, where it’s hit enough of a lagging indicators where everybody can see it visibly all around them yet, but certainly, you know, the data is bad, and lots of increasing anecdotal evidence. But that said, don’t want to be the guy saying there’s definitely a recession coming. And definitely, we got to be bearish all the time. So, you know, there is the Hey, markets can be irrational more than you think. And we’ll just sort of watch this market continue to rise until it doesn’t. But, you know, is there more to that? Is there more of a bullish argument than we can make? You’re beyond just simply momentum and excessively optimistic sentiment right now?

Lance Roberts 22:36
No, no, not really, it’s very hard to, to suggest that there’s a stronger underlying, you know, factor to the rally in the markets. You know, as I said earlier, there’s a difference between a correction in a market in a bear market. And so what is the difference between a correction and a bear market? So a bear market is really defined by a change in the price trend of the market now know, the market runs around, they say, Oh, it’s 20% decline in the market says it’s a bear market, that is really not true anymore. That was an arbitrary number that was kind of picked by Wall Street, you know, about four decades ago, when, you know, back then the market was not so deviated from its long term trends that a 20% decline would break that prevailing bullish trend of the markets. The problem today is because of all the liquidity since 2009, the deviation between the long term growth trend of the markets and the price of the market is so elevated, that it would take nearly a 40% decline just to get back to the long term trend. So it’s so the definition of a bear market is simply this, the previous prevailing trend of higher prices is now broken, and the precision and the current trend of prices is now lower. So the trend of prices is now falling, any broken that previous, you know, trending of higher prices in the markets previously, we’ve never did that and 2022. The second real caveat for a bear market is a reversion in valuations, at least back to their long term growth trend, if not normally a reversion below that we didn’t even budge valuations really to any degree at all in 2022. Okay, a correction is a little different. A correction in the markets and I’m going to leave this up to you I’m not going to answer the question. I’m going to I’m just defining what a bear market is and what a correction is, and I’ll let you decide what you think we’re in right now. But a correction has several facets to it. One, it never breaks the previous long term prevailing trend of the market and B it quickly recovers back to all time highs. So we’re now within you know basically about 6% of the market reaching all time highs. So if we recover back to all time Highs by the end of this year. And we never actually corrected valuations and we never actually even got close to the previous long term bullish trend of the market. You tell me was this a bear market last year? Or was it a correction within a prevailing uptrend? And the reason this is an important situation is is because if we don’t have a mean reverting event that corrects valuations, it’s very hard to create that long term exponential growth trend going forward that you need to create much higher prices relative to what the market can actually generate, or the economy can actually generate.

Adam Taggart 25:37
Yeah, and you you, if you don’t have one of those corrective, ie those corrective periods, or really kind of a cycle of those corrective periods taking the steam out, you know, periodically, you run the risk of what I think John Hussman warns of right, where the market gets so far ahead of itself, that you can kind of end up with a lost decade, right? Where you’ve just pulled too many future games into today, that the market has to just churn through them over a very prolonged period of time, before you begin to hit new highs again, right, yeah.

Lance Roberts 26:10
And that goes back to our previous conversation, talking about tax rates and talking about, you know, interest rates, you know, the differential between what the market, you know, when you take a look at the market over the last 40 years, they’ve been generating about 7% growth rates and net income, versus what the economy can generate, which has been roughly around four. So if we’re dropping to about 2% growth on the economy, then and interest rates and tax rates really can drop a whole lot from there, it’s going to be very challenging for earnings to keep growing at 7%. And net income to keep growing at 7%. In an environment that is generating too. So it’s, it’s that spread between, you know, the reality and what’s going on. But look, in the short term, you know, this is, you know, what’s happening in the market right now. It’s FOMO, it’s, you know, we talked about this in October of last year, it was, you know, on the decline, it was the fear of missing out on the decline, and nobody wants to be in the markets. And then I said, look, as soon as this market bottoms, there’s gonna be the fear of missing out on the gains, because everybody was emailing me telling me last, just tell me when the bottom is, so I can buy, right? That’s, and that’s the case. And everybody that was, you know, we had a lot of clients come on last year. And they were like, oh, you know, I don’t want any risk. I want to be all I want to be in the bond sleeve. I don’t want, you know, now they’re like, why aren’t we, you know, why aren’t we all invested in tech stocks? Because, and I told you this would be the psychology of the market is that as soon as the market started running, everybody would forget about, you know, what was going on last year. And that’s where we are. And so this is what’s driving the markets near term. But again, we have to go back to the fact that the markets running really on hope, which is a they’re hoping that the July FOMC meeting is going to be the one and done rate hike for the Fed, and no more rate hikes. And if they’re in the Fed seven hiking rates, the hope is then that the Fed is going to start cutting rates and reintroducing liquidity back to the markets. The problem that the market is really setting yourself up for is that there’s no reason if the markets are running up, the economy’s doing okay, we’re not in a recession. There’s no reason for the Fed to cut rates now, you know, eventually, yes, I think there’s a very high potential that we’re going to have a recession next year, all the indicators are telling us that the lag effect is still, you know, clearly, you know, being pushed out because of all that liquidity that’s been supporting on the markets. Whether or not the Biden administration can do a workaround for the student loan payments, we’ll find out but as of right now, those student loan payments restarting are kind of that trigger, I wrote an article about this last Friday, that that student loan payment is kind of the trigger potentially for a big contraction, consumer spending, which is 70% of GDP. So you know, if there is a setup or recession in 2024, there’s certainly some triggers out there that suggest that that could be the case. And, you know, that’s certainly gonna lead to lower earnings and some disappointment, because the markets getting way ahead of what reality potentially looks like next year.

Adam Taggart 29:16
Yeah. And I just want to reiterate to that, in part of the markets assumptions that you said the markets hope, right, is that the Fed cuts interest rates. As you said, it’s probably unlikely to cut them anytime soon, given the current environment. But if we get into that recession, maybe now it’s looking like later this year, probably next year. The Fed may cut rates, the market is hoping that Oh, rate cut means asset prices go up. But we we’ve we’ve we’ve talked about many times. Almost every time we’ve gotten into a recession when the Fed has been hiking into a recession the way we are right now. You have quarters of rate cuts before the market bottoms. Yeah, right. So it isn’t like a light switch where oh, gosh, Okay, the Fed, you know, cut rates, great happy times, again, usually it means sell when the Fed starts cutting rates.

Lance Roberts 30:06
And I think that’s still the case. You know, we had a bit of a conundrum last year, I shouldn’t say it’s conundrum and we had a bit of a family, that’s a better word last year, because normally when the Fed is cutting rates, sorry, normally what that is hiking rates, which is what they were last year, normally, the market is going higher, because there’s a lot of momentum in the market and a feds, you know, hiking rates. And, you know, we’re just, you know, we’re hiking rates here, because we want to make sure the economy slows down a little bit. So the market tends to be okay with that. And then the Fed pauses their rate hikes, and then the market declines, because all of a sudden, now you’re in the recession. You know, the anomaly last year was the Fed was starting to hike rates fairly aggressively, and the market was selling off because everybody was going Oh, my God, a recession is coming. And you know, we talked about this last year is that if we had a recession, it would be the most well forecasted recession ever in history. And so because that everybody was expecting a recession, we said, it’s probably not going to happen when you think it’s going to happen. Now, the good news is, if you’re really bearish and you’re looking for, you know, that event to come, we’re now getting to where everybody’s going, Oh, no recession is going to happen. A recession is done, grab a soft landing or a no landing scenario. And earnings are going to start growing again, and the economy is going to take off, it’s going to be great. It’s all you know, sun, sunshine, and roses and, and waterfalls. But now the and but the issue is now is that if that lag effect does show up, you’ve now got the psychological environment to allow that surprise impact to occur that creates that that waterfall event in the markets where people start going, Okay, I need to sell stocks, because there’s no way in a recessionary environment that NVIDIA is going to be able to grow at 50% A quarter, you know, that type of thing. And the Fed will be cutting rates because of recession setting in and you will have that correction markets. Now, let me be clear, that does not mean you’re going to have a catastrophic 50% sell off in the markets, that’s probably not going to happen. But you know, you know, 15 20% decline, certainly well within the cards of of a recessionary environment.

Adam Taggart 32:17
Okay. Yeah. All right. Great. It’s, it’s, it’s gonna be interesting. You know, there’s an old saying, a bull market climbs a wall of worry, right. And that’s sort of what the market did the first half of this year, right. Everyone still had the same worries. They had it all last year. And in the bull market said, You know what, we think you guys are too, too worried. We’re going to start hold my beer, we’re gonna start taking the entire what’s the equivalent saying on the bear side if a bull market claims a while the worry was a bear market? Dude, is it it shreds a wall of hubris?

Lance Roberts 32:54
Yeah, I guess, you know, there’s really not a saying for that. You know, what’s going

Adam Taggart 32:58
on? Let’s come up with. Yeah. But basically, what you’re saying is, is this optimism or this potentially hubris, you know, is now setting the market up for the negative surprise, just like an overly negative market lets the bulls take control.

Lance Roberts 33:13
Exactly. Look in again, in the short term. And again, this is the important thing, right? Where do investors make all their mistakes? The where do I make my where do I make the most of my mistakes? I let my family on this program? Yes, coming on this program. But no, I make when I make investing mistakes, and I made one this year, I’m to underweight equity from the beginning of this year, and I’m being penalized on performance for that. I’m also being penalized on performance this year, because I run a more of an equal weighted portfolio. And if you take a look at the, the s&p 500, equal weight index, versus the s&p 500, there’s a massive performance gap between that because of the top 710 stocks that are driving the s&p 500. So I’m getting penalized on two fronts. I can live with that, right, because I’m still, you know, very conservative, and I want to protect my clients capital. But what was driving that equal weighting analysis and the allocation of portfolio was concerns about these recessions? And again, looking at these longer term trends and economic stats of the markets, it was saying, hey, look, we’re you know, there’s the risks that are out there, we want to try to avoid some of that risks. Where we got caught was this immediate exuberance in the markets, it just came flooding back retail investors can jumping back into the markets with both feet, you know, throwing parties and all that type of stuff. And that happens. And this is why in the short term, as investors, we have to focus on sentiment, positioning and technicals, because that’s what that’s the only things that drive the markets over a one year period is sentiment positioning and tech, that’s it liquidity. That’s that’s all there is. Fundamentals matter over the long term. So we’ve got to make sure that we can have a long term view and a long term Focus, that’s fine. But if we’re trying to trade the markets and make money near term, we have to set some of that stuff. Sometimes we have to set it on the side of there and go, Yeah, I realize that’s the situation. But right now, this is what technical sentiment and funding and liquidity is telling us and, and that’s where we have to kind of focus near term if we’re going to navigate markets, but it doesn’t, it doesn’t discount these long term fundamentals that are going to matter. They just don’t matter in the short term. You know, this is why valuations are terrible technical indicator for the markets, you should never trade your portfolio based on valuations. In the short term valuations tell you everything about long term returns, they tell you absolutely zero about returns over a one to two year period. So okay, that’s where you got it, you have to balance these things very carefully.

Adam Taggart 35:47
That’s a great point. And this was, this is why I really want to sort of roll up our sleeves and just tackle this. You know, just cheerleading right now going going, that the archer Archer bowls are going on, which is like, Hey, you guys just missed the train. You know, it’s all about making money and, you know, easy to make money in today’s market, and you guys are missing the train. And look, I’m happy to take any criticism into account here and for us to try to figure it out. But you just said couple really important things there. One is that valuations tell you everything about the long run. Right? So if you consider yourself a long term investor, which I think most people watching this channel are right, I think we’ve got few traders watching this channel, some but but I think they’re in the minority. Right? So if you’re deploying your money based upon valuations, then you know, lean back, you know, like, as long as you’ve got good position sizing, good diversification, ideally, a good advisor who was watching all this stuff for you. Don’t worry about the day to day or month to month or even necessarily quarter to quarter. If the fundamental reasons for why you placed the valuation trade are still true. Right? It’s gonna be noisy. Good. Yeah.

Lance Roberts 37:01
No, no, no, no, that is, I think that right, there is the most important message that you can deliver. First of all, you know, all the people that are that are tagging you now by Oh, this markets easy to make money. Yeah, they said that in 2021. Two, and this was the same group of people that basically lost 50 to 70% of the portfolios. And that’s what the retail data tells us. We need 22. So yeah, they’re making some money now, but all they’re trying to do is lick their wounds and get some money back. They’re not making more money. And they’re

Adam Taggart 37:30
cherry picking their time horizon, like, yeah, easy to make money from January to now. But if you go to the previous January to now, you’re still down a lot. Yeah.

Lance Roberts 37:38
Which is the point. And that’s, and we said this on the channel before, and I can’t reiterate this enough, because look, I’m having the same experience with clients right now. And like I said, my mistake this year, too cautious, underweight, equity exposure, you know, let fundamentals and economic data, you know, kind of cloud the view of of being much more aggressive in the market as I should have been. And look, we’ve been increasing equity, don’t don’t think I’m just sitting on my hands. We’ve been increasing equity exposure all year. And we’re now up over 50% equity exposure, but we’re still underweight to 60, that we should be in our 6040 model. Again, it’s just we’ve not had a good entry. Point two go to full target waiting, and we will if we get a correction now. But here’s the point, the same people that last year, we’re going oh, you know, I don’t want to lose any money. And I want to be super conservative in the markets, our portfolios vastly outperformed the markets in 2022. Yes, we’re underperforming this year. But we are making money. And you know, that’s the problem that the media does in general is they say, Well, how are you doing this year? The markets up, you know, 13% this year? How’s your portfolio doing? Well, how’s your portfolio doing from two years ago, or three years ago? Because if we’re truly investing long term, what happens in the six month period means nothing. What matters over a three to five year period? Is what you’re looking for. Are your assets growing? Are you beating your hurdle rate? Are you doing the things that you need to do to grow your wealth? Or are you spending a big chunk of your time just trying to get back to even that’s the the See, these are the important things to think about? Yeah, we get all tied up in the hype of the market this year. And look, I’m guilty, like everybody else, you know, I look at things, you know, how’s the market doing this year? Where am I I’ve got to figure out how to close that gap. Some and that’s my job as a portfolio manager. But it’s a terrible way to manage your investments and manage your wealth building process because you are going to wind up taking on too much risk at the wrong time. You’re going to wind up losing a bunch of money, just like we saw happened to retail investors last year is a good example. They got all balled up in 2020 2021. Completely good reasons to do so. Forgot to sell in 2022 thinking that oh, it’s all going to be fine. You know, this is going to happen repeatedly over time. And this is why I’ve got a just an art trickle called stock risk doesn’t decline over time. But I’ve got another article coming out talking about long term bull market cycles. And why, you know, we just spent 40 years in our rip and bull market cycle from 1980 to present. And if the investing work like the media tells it tells you it does, why is it that 80% of Americans don’t have $500 to spend? Right, right, then? And why is it that even people that are invested have less than one year salary saved up? You know, yes, it’s a function of too much spending and bad financial planning, all those type of things. But if the market was doing what everybody says it does, oh, you just put money in it generates 8% a year, we should have a lot of really wealthy people in the US Not, not the breakdown of the 1% versus the 99.

Adam Taggart 40:45
That’s a great point. As a great point. All right. Well, look, I want to I want to continue to grab this tightly for a moment. The question I’m getting to is, you know, how do you what are the benefits of having you on this channel every week, right, let’s is giving people a view inside the mind of a capital manager, right? A guy that just can’t have an opinion, he’s actually going to marshal client assets, you know, based upon his best view of the world. So the question I’m getting to is, how does a guy like you navigate a FOMO? Market, right, a market where the stocks are, are moving, and you don’t want to you want to participate? But you’re also nervous because you don’t trust the fundamentals of this right. But real quick, before we get there, I want to underscore something that you said, which was, you are underperforming the market this year. But first off, you are making money for your clients, right? So however, you are in a position right now, it’s such that your clients are getting a positive return this year, right? So first step, want to make sure it’s really clear. You are self flagellating here, oh, the markets doing better than I am this year, but you’re still making money for your clients. So let’s be clear, you’re not you’re not losing money for them. And secondly, it’s a it’s I don’t want to say it’s unfair, because we’re professionals, we just got to take, you know, the comments as they come. But for someone to point and say, Hey, you, you missed the boat, you know, markets on fire, you’re underperforming the market. I can’t think of any credible capital manager, who at the end of last year would have said, you know, what, the smart thing to do is to put 100% of my portfolio in the fang stocks right now, right? Because that’s what’s driven this market, right? It’s literally 78 stocks that are responsible for pretty much all of the market’s performance so far this year. So that’s just reckless. I mean, nobody has that kind of crystal ball, that would have been a highly, you know, just it, it would have been called for it would have literally been too reckless that decision. Right? So I just want to say, yes, you and probably every other capital manager out there is underperforming the market right now, but it’s for valid reasons, which is, hey, we have to abide by the the tight time honored principles of good wealth stewardship, we have to have position sizing, we have to have diversification, you know, coming out of a year like that, to all of a sudden go 100% long in some of the most speculative stocks. That’s just not something a credible, responsible manager does. So anyways, I want to give you a chance to opine on that, because I do think that comparison, it’s a pretty unfair comparison, in the sense of like, it’s like comparing the guy who goes into the casino and just puts it all on red. Right? It’s like, Yeah, I had an amazing night that night, but like, that’s, you shouldn’t expect that every time you go into a casino. Well, right.

Lance Roberts 43:41
And look, and this is what I was saying earlier, you know, like, with a lot of retail investors, yeah, they’re absolutely going in there chasing all the, you know, kind of the hot stocks right now, and they’re doing fine. And that’s great. But they have forgotten the pain they went to last year where those same stocks are chasing today lost 7080 90% of their value. And so it’s a big difference when a stock goes from 100 to 10. Right, you lose 90% of your money. And then you buy the stock at 10. And it goes to 20. Yo, I made 100% return, you’re still way underwater. And this is this is where most investors are still living that that case right now. But look, you know, the reality is, is I have a job to make money for my clients. And so I have to navigate the market for what it is and but I have to do it in a way to try to manage risk the same time because the one the one conversation I’ve never had to have with the client is saying, Mr. Mrs. Client, I’m sorry, I lost 50% of your money last year, but this is how we’re gonna get back. Never had that conversation. In the markets that were down last year. You know, we were down in less than half of the market last year. Yes, we were down because the markets were down. We still had some assets in the markets. In October when we started talking about the death of the fang stocks. We started adding to our Fang stock exposure but I’m not gonna put 100% of my clients money into Microsoft, Apple and Google, we own them, we’ve owned them this year, we’ve added to them this year, they’re helping the portfolio perform for sure. But they don’t make up 70, they don’t make up 30% of the portfolio like they do in the index, because again, it’s just not prudent to have that much money of a client’s involved in just a very few number of stocks that, you know, one morning, you could wake up and apples down 40% because of some reason that we can’t even fathom. And that can happen, and

Adam Taggart 45:34
just including a video in that mix, you know, yeah, I’m gonna put you 20% And a stock that’s trading at 40 times sales, right? It’s just, it’s, there’s so much that could go wrong with that. And if it did, you would justifiably be, you know, subject to severe criticism, maybe censure from the industry for that. Yeah. Oh, absolutely.

Lance Roberts 45:54
If I did that, and we got a look, there’s, you know, the thing about being an advisor, it’s fine and dandy. And here, and here’s, here’s an important thing, right? Always consider where you’re getting your investment advice from. And the reason I say that is, is there’s a ton of people on YouTube right now on tick tock, everybody else, throwing out investment advice, oh, just, you know, get on this app and buy this stock. And I see, I see guys all the time that, you know, on YouTube, people send me videos of, hey, here’s a guy that day trades on tick tock, or YouTube or whatever. He tells you all about how to technically trade stocks. And it’s all great information. But these guys are not registered. They are not they do not have any oversight from the SEC. So for me, as an advisor, I’m regulated by the industry, I have a fiduciary responsibility. And so if I don’t take care of my clients on from this fiduciary front, I’m subject to censure fines, etc, from the SEC. But more importantly, I’m also open to lawsuits from clients, because they sue their advisor, oh, the market was down 20% last year, and I was down 40%. And so they file a lawsuit. These lawsuits never go to court, they always wind up in arbitration, they’re always settled in arbitration because the insurance companies go just a the people moving on. But that’s how, you know, these things get done. And this is, but this is what happens. And so, you know, people that are in the industry that are regulated, that are fiduciaries, they have a responsibility to take care of their clients may not be what the clients want, the clients may be, hey, put me all into invidious stock, because it’s just killing it right now. And we’ve got to take the responsibility saying, No, that’s not prudent, that’s not good for you. That’s not That’s not risk management. And if you insist on doing that, you can’t be a client, you’ve got to move on to somewhere else. And that’s got to be your choice. Because if we did, even if we did it, the client wrote a letter that said, Put me 100%, in video, sign it, I will not hold you responsible, as soon as that stock lose 50%, we’re in court, and he’s gonna get his money back, because the courts gonna say your job was to keep him from doing that against his best interest. So that’s the big difference about making sure the guy on YouTube, he doesn’t have that liability. So if he tells you to do something, and it fails, you lose all your money that’s on you, that’s not on him. And that’s why, you know, make sure that you’re getting your advice from, you know, somebody that has not only skin in the game, so to speak. In other words, they eat their own cooking, my money is all invested in my own portfolios. So, you know, I eat my own cooking, and that’s what you want to make sure your advisor does. But also you will make sure they have a legal responsibility to look out for your best interest, even if you don’t think it is in your best interest. They have a job to do that.

Adam Taggart 48:40
Yeah, no great point, you made a good point, a good advisor who’s smart and taking all the right things into consideration, but also who has the incentive to make sure that you do well and are protected and not even just in an incentive to gain but an incentive that, hey, if you don’t do it that way, you know, if you’re too reckless or imprudent, there’s going to be real penalties for you. Alright, so. So the last question around this, but the this has been an important discussion, because I really hoping that people see what a capital manager has to go through, right? It’s one thing just to sort of look at how the top eight stocks are doing. It’s another to really just look at, okay, how do you play in that world, while abiding by the time honored principles of wealth management, right? I mean, again, you know, when Gamestop was shooting the moon, yeah, you could have gone all in on gamestop calls, and made a lot of money for a short period of time, but then you would have lost absolutely everything right. So I’m trying to make sure that the bulls who were graved dancing on the bears right now, I’m not telling you not to be bullish, I’m just telling you to be carefully prudent about how you operate from here. But last point on this Lance, which is so it has been a FOMO market, particularly over the past quarter or so. How do you play that? Well,

Lance Roberts 49:58
so you know, we been just slowly trying to find opportunities to add exposure to our portfolios in areas that, you know, just this week as an example, you know, early this week, we added, you know, Google has had a decent little pullback to support recently. So we added some more money to our Google position, Apple had a bit of a correction, we add a little bit of money to Apple position, we were already kind of in a good position with Microsoft that we’ve added to earlier this year, we added to our AMD position recently, on a pullback that it had. So we’ve just been kind of looking for these individual areas of the markets to try to use opportunistic entry points to add some exposure, but we’re still doing it very small bites, because what we’re hoping for is looking in any given year, you’re gonna have a three to 5% correction. And we’re gonna have a three to 5% correction, maybe in August, maybe in September, maybe in October, we’ll have a correction. And the bears are gonna come running all back, as I see, I told you, it was a bull bull trap, and now the bear markets back now it’s just gonna be a correction, probably pull us back to the 50 day, maybe even the 200 day moving average, which would be fantastic. But that’d be closer to a 10%. Decline. That’s even normal within any given year, the market, but that will give you a much better entry point. And when we have that type of a correction will pretty much go to full target wait at that point. And it will selectively pick areas that we want to add into. You know, we talked about sector rotation earlier. You know, over the last couple of months, we were expecting the sector rotation we had, you know, on one end of the spectrum, we had technology, communications, and discretionary, all super overbought. And everything else was super oversold. Now that’s completely rotated. Technology is now moving into oversold. And all the stuff that was out of favor is now coming into favor. So the breadth of the market has certainly improved recently. And that’s a good sign, right? That gives the bulls a little bit more support here that we’re broadening out the advance of the markets. But again, everything’s getting a little bit ahead of itself. So we need a correction at some point to provide a better opportunity to put money to work. And we’ll see if that happens.

Adam Taggart 52:04
So in a FOMO market, while the FOMO is still raging, I’m going to summarize to correct this anyway, like, you’re basically saying, so you want to ride the trend. But you want to look for pullbacks, or even better corrections to add to your positions in the leaders here. Because if I understand correctly, you don’t trust this in the long run. You’ll be you’ll be executing that game plan in the short term, what are you going to look for to begin to say, You know what this thing looks like it might turn fundamentals may be looking like they’re going to start mattering again. How are you? How are you going to be positioning yourself near the edge of the dance floor to get out when the time is right. And what you’re going to look for.

Lance Roberts 52:46
Says just it’s kind of everything in reverse, so to speak. So you know, as you know, right now we’re in a market where we’re buying dips. And so as markets are going up, we get a pullback to the 20 day moving average, the 50 day, whatever it is, we’re buying that dip, we’re putting that money to work when we begin to have a correction. So just let’s just again, let’s just use a real basic example, let’s just use the 50 day moving average. So everybody can go home and kind of pull up a chart of the 50 day moving average on the air. Let’s see, what do we get, let me borrow a screen real quick. Go for it. So this is a chart of the s&p 500. And overlaid on this in red is the 50 day moving average, the blue is the 200 day moving average. This is just a very basic, simple, you know, technical chart of the market. So right now you can see that these we’ve been in this very nice rising bullish trend ever since really the October lows. And so every time you come down to the bottom of this trend or come down to some level of support, that’s been a great opportunity to add into positions in your portfolio. We’re now fairly deviated above these long term moving averages. So the first thing that I would look for is I would look for a pullback to say this 50 day moving average this red line. And if the market holds there, that’s I would probably add some exposure to the portfolio. But let’s say for instance, and all of a sudden the market breaks that there’s still nothing to worry about. But now we go we flip our script from buying dips to potentially selling rallies. And what we would be looking for at that point as the market rallies back up to the 50 day moving average and then turns back lower. In other words, it fails at that support level. So we would probably take some money off the table at that point say okay, let’s wait and see if we what happens next, then the market declines to the 200 day moving average. It was a Okay, everything’s still fine. We’re still in a bullish trend. Nothing has changed, but we certainly have some weakness in the market. We’re still going to sell any rally that goes back towards that 50 day moving average. So now the market rallies back towards the 50 maybe doesn’t get there but we’re going to sell into that rally a bit Raizel bit of cash, reposition the portfolio a little bit more defensively, then We take out the tuner day moving average, still not a confirmed downturn yet. Right the markets as you see back here, in you know, earlier this year in March, we violated the 20 day moving average after getting above it. And so all the bears came out said Aussie, you have to pay time to get out of the market. Again, that was a bull trap be back in but you see here very quickly got back above the 200 day so that that break was non confirmed because it was never confirmed by a lower low from that initial break. So what we’d be looking for is a rally back to the 200 day moving average. And if this was going to be a resumption of the bear market, the market would rally back to the 200 day failed, and then broke the low before it rallied. And so when it took out that bottom of support, right around 3800, that’s where you’re short the market, you start taking off a lot more exposure. So in other words, exactly the opposite strategy of when markets are rising or buying give, you just keep selling rallies when the when it looks like the next bear market, you’re not going to get it out at the top. That’s not the goal of investing. It’s also not the goal than investing to buy, try to buy at the exact bottom either. That’s how you get hurt. That’s what happened to a lot of people back in June of last year, they tried to buy that bottom, we got monkey hammered. But the goal is to slowly work yourself out over time. So you can ensure that you’re on the right side of whatever the trend of the market is.

Adam Taggart 56:26
All right, that’s super useful explanation. Obviously, you’re telling us what you’re going to be looking for here to determine a change in your portfolio strategy here in terms of playing for the plane to the bowler cycle right now. Let’s I’m thinking we should maybe bring that chart up more frequently in programs going forward even just for a minute or two, whatever. But just to sort of mark where we are for folks on that. Because I think that is really it’s really useful. It’s just sort of a sense of like, Hey, if you’re, if you’re if you’re a market bear right now, you know, you would say is, is that’s fine, but just look where we are, it doesn’t look like this is something that’s going to like waterfall, you know, tomorrow, right? Because it has to go through those individual milestones that you talked about, right?

Lance Roberts 57:14
Yeah, and just just for your subscribers, if you go to real investment, you can subscribe to our daily market commentary. And every day, we send out a very quick read, it takes about three minutes as basically gives you the earnings of the day, the economic data of the day. And we provide a market trading update every day, just to tell you exactly this, what the markets doing, we change the charts up every now and then. But we just kind of tell you this is where the market is we broke out, you know, this is bullish, or this is you know, this is a warning, but we give you a market trading update, and it comes out at 730 Central time. So it’s an hour before the market opens, I’ll give you time to get set up to the market.

Adam Taggart 57:53
Alright, great. So we go to real investment And where do they sign up for this thing?

Lance Roberts 57:56
It’s right on the homepage, there’s a link for the daily market commentary. It says subscribe. So okay,

Adam Taggart 58:02
awesome. Everybody should do that. But Lance, I’ll try to remember to ask you to just pull that up more frequently going forward on this program, just to give us a quick little heartbeat check of where we are. All right, I want to get your trades in just a second. Real quick. We mentioned this super briefly earlier, but we didn’t really dive into it at all. We got the new CPI numbers this week. As expected, it came down pretty substantially ended up at 3.0 for the headline CPI and core stole a bit stickier but still coming out of it. And, you know, I think a lot of people who don’t track the macro data the way that we do as closely as we do probably look at that and think oh, okay, look, hey, inflation is really getting under control for the three big drop just one more percent until we’re at the Feds 2% target like, hey, what inflation we’re we don’t need to worry about anymore, right? A couple of things. One, we’ve talked about the base effects and how it is, it is probable that the CPI will start ticking up over the rest of the summer, or at least for many months, a couple of months in the next couple of months, we’ll say at least. And that’s just from the math of the year over year comparisons here. So folks watching Don’t be surprised if that happens, right? We want to make sure that you’re not freaking out. If you see CPI start going up here a bit. You know, the Fed clearly still doesn’t think it’s on Easy Street. Right? It is still saying it’s going to hike most likely twice. And it’s not going to be cutting rates this year. So they’re not taking their foot off the gas necessarily. They’re gonna continue QT. So the Fed isn’t like super sanguine yet that the inflation battle is won. Anything else come out this week around the CPI number you think is worth discussing?

Lance Roberts 59:51
Well, no, I think two things. One is that, you know, CPI and PPI both came in a little bit weaker than expected, so clearly, disinflation. Shin is, you know, in the economy and when you and I talked about this in June of last year, when inflation rates were raging, we said, hey, disinflation is coming, you’re gonna have to give it time. So we’re there. Yeah, there’s certainly a case on the mathematical basis that we may see inflation tick up by late. And that may be the one catalyst that maybe take some of the wind out of the market, if they if the market sees CPI click up a little bit, maybe they get concerned that the Fed is going for being more aggressive, maybe that pulls some of the wind out of the market. The one caveat to that statement, though, is to pay attention to the housing and homeowners are rent equivalent, which is what drives a big chunk of CPI, that’s running a big lag effect, there’s about a three month lag to that data. So there’s about to be a very big downward impulse of homeowners equivalent rent coming down, that’s gonna start to potentially weigh on CPI, as well. We’ll see, we’ll see how that base effect works out, as that homeowners equivalent rent decline starts to catch up with CPI. But again, I think there’s, you know, just from math, like you said, from a mathematical standpoint, if we’re just clipping off point 2.3% inflation over the course, and this is really kind of be starting in August, September, we could see inflation start to tick up just a little bit simply because of that mathematical comparison.

Adam Taggart 1:01:20
All right, and there’s a chart I’m going to try to find here. I’ve put it up in the past couple of videos. It’s a chart that shows the change in mtwo, right, the change in money supply, which has gone negative this year, right for the first time in forever, decades and decades, decades. It’s not a metric that generally shrinks. And it shows that it has a very tight correlation with the change in CPI. Core inflation, PCE you know, the inflation metrics that the Fed looks at, but it leads them by about 16 months. And look, that makes total sense, right? you issue a bunch of money. And then soon after in the economy, you see inflation begin to rise, right? So what it’s what that graph is showing right now is now that mtwo has gone negative. If this correlation continues to hold, it shows that we could be in not just continued disinflation, but outright deflation in a year and a half if this tight correlation continues, and I don’t think there’s a reason to expect that it’s not going to continue, but I’d love to hear your thoughts to the opposite if folks haven’t. But I just love to get your thoughts on that. I mean, yeah. Do you think we actually couldn’t be in deflation? You know, in a year from now, a year and a half?

Lance Roberts 1:02:46
Yeah, not sure. It’s, it’s talking about real quick, we gotta go back. It’s all about math. Right. So, you know, think about money supply, like an allowance, so to speak. So you know, if I give you $1, and allowance, you know, today, and then next week, I give you $2, you’ve had 100% increase in your rate of change in your allowance, right. And that’s what we didn’t see. And that’s what we did with money supply. We did this, we had this anomaly come along in the data that wasn’t normal. And that was that $5 trillion worth of liquidity that created this massive spike in in two as a function. Well, now a year later, we’re obviously not doing that. So the $2, and allowance now goes to 50 cents, and you’ve had a big negative decline, you know, in your allowance, right. So that looks terrible. Obviously, you’re spending less of it certainly has an impact on the economy. And you’re certainly have you are currently experiencing deflation in your allowance, right? So no, no doubt about that. But what what is happening is that we’re returning back to normal in terms of the rate of change in monetary increases, or m two in the economy. But m two as a percentage of GDP is still extremely elevated, which is what is creating this problem to where all these, you know, ideas about a recession occurring within six months or nine months hasn’t occurred, because there’s still so much liquidity sitting out there. Don’t forget, not only did we didn’t do the 5 trillion stimulus, but when Joe Biden took office, they did $1.7 trillion in the inflation Reduction Act that’s still coming in. That’s why industrials have been performing so well. Because all that money pouring in. That’s Yes, keeping inflation always keeping economic activity going.

Adam Taggart 1:04:38
Wrong. We talked about the pig in the Python, it’s like the pig is still in the Python, but they’re shoving additional pork chops into the mouth.

Lance Roberts 1:04:46
Exactly. So that’s one of the frustrating points. So I want I just want everybody to be careful is that you’re absolutely right. And what you’re saying I run this chart all the time, you know, the 16 month lag between m two and GDP. You know, it’s the correlation is extremely high, you had a big spike in money supply, you had a big spike in GDP growth, that’s all going to work itself out over time. That’s why we are going to have this inflation. And probably ultimately, deflation, we will probably get some quarters coming up to where we have negative inflation, that is deflation. And that’s also going to be problematic, ultimately for the markets. Because remember, corporate earnings and profits, which are coming down, are a function of inflation. And so if you have deflation, or more severe levels of disinflation, that is going to continue to weigh on profit margins and earnings, which is going to make it very difficult to support, you know, a market at 5000 6000 Wherever the analysts think we’re getting there.

Adam Taggart 1:05:42
Okay. All right. Well, look, I want to get your trades in just a sec, real quick. Potential detour through the consumer. There’s been? Well, there’s different data that’s been coming out. But I’ve also been hearing increasing number of anecdotal evidence from a number of the experts I’ve had on this channel here, when I was interviewing Eric buss major. And he said, he literally just gotten off a phone call before he hopped on the interview with me with a trucking company owner, who basically said, they’re now laying off people biggest layoff have ever had to do a huge reversal from where they were just a year plus ago. So it does seem like especially in the the leading parts of the economy, the highly cyclical parts of the economy. You know, we’re beginning to see some pretty dramatic slowing down there some stories online this week about like Disneyland in mid July seeing, you know, way fewer crowds than they expected. I’ve seen, you’ll appreciate this, I’ve seen some data that shows that consumer spending is falling pretty dramatically year over year, in terms of units purchased, right, so you and I have talked about, if you look at like retail sales, it can be a little bit deceptive, because it’s priced in dollars to transaction, it’s measuring the total dollars of transactions, which are being influenced by the inflation, the price inflation that’s gone on. But if you just look in terms of units purchased, those are down fairly substantially. Right, which is showing that consumers are just able to buy or that they are buying fewer things. Right. So anyways, we don’t have to spend a lot of time on this. But I’m just curious if you have any sort of update from your world have a consumers bearing right now.

Lance Roberts 1:07:35
You know, I know that we see that. And some of the data, I mean, consumer sentiment is improving, not surprising, because you’re seeing a big rise in the stock market, the wealth effect is feeding into that. But you’ll take a look at take a look at stocks. I mean, FedEx is an all time highs, UPS has had a huge rally over the last several months. Norfolk Southern Union Pacific big rallies in those stocks. You know, so it’s certainly, you know, despite the data saying, hey, trucking companies are shipping less and, you know, we’re laying off workers, the stock market is going yeah, whatever, you know, everything’s fine. So let’s buy those stocks. Kind of like homebuilders, right, Home Builders trading and all time highs, too. You know, it’s just, you know, all these things that and this is the important thing to remember is that you got to be careful between the data and what the markets doing short term. Does this mean, the data doesn’t matter. The data is wrong. Now the data is absolutely right. But right now, investors are chasing stocks and expectations that the worst is now behind us. And it’s about to get better going forward. And the question is going to be, is the market right? Or is the economic data right? And remember, the market can sullied the economic data by six to nine months. So the market is saying that six to nine months all that data that you’re talking about is about start getting better, we’ll see. But that’s what that’s what the data says.

Adam Taggart 1:08:55
All right. Okay. Well look, wrapping things up here starting to wrap things up. Trades, what trades have you guys made over the past week?

Lance Roberts 1:09:03
Well, so we talked about it earlier, and we added to Apple we added to Google we added to our position and Amazon here, of course, we’re going to earnings as well. So you know, they’re starting to see a lot of positive bias, make corrections, kind of pull backs, you know, to an entry point, we could add a little bit more exposure. We already know these weren’t new ads, new buys, these were positions that we’ve owned for a long time we just increasing the position size in the portfolio. Previously, you know, we had added to AMD and companies like some of the smaller cap names. We bought regional banks previous this year like truist and PNC. We’ve also bought companies like Stanley Black and Decker those have been performing a lot better lately because small cap and mid cap stocks have been really kind of picking up the pace here. So we’re starting to see that kind of a shift now from some of the large cap names into some of the smaller mid cap names. In yesterday. We just started nibbling a little bit on IWM, which is Russell 2000 index. So we’re just kind of getting started, we start building a position, if small cap mid caps are going to continue to pick up the pace here a bit. They’re pretty overbought, short term. So we’re kind of just want a little bitty holding position right now. And then we’ll add to that position on pullbacks to support that don’t fail. And so we’re kind of watching that very carefully.

Adam Taggart 1:10:20
Okay, and these positions outside of the big seven, is that playing a rotation of capital out of the big tech names into them? Or is it a instead of an or is it an end is that you expect kind of the rising tide to begin to rise everything and now the unloved parts of the market are starting to get capital, but it’s not necessarily stealing away from the big caps.

Lance Roberts 1:10:44
That was kind of our position earlier this year. And again, one of the reasons that we underperformed is that we said, Yeah, tanks running, we’ve got exposure, that’s fine. But we talked, I talked with you several times, so do the charts, from simple visor about the rotation of the market, etc. And, you know, we’re clearly seeing that, in fact out here, I’ll just, I’ll just show you. I’ve got them right here. We talked about previously that, you know, technology communication discretionary, they were extremely overbought, that’s still the case. But all those other sectors that are now red and gray were all green, they were all bright green, say they were really oversold. So we’ve seen this rotation in the markets now over the course of the last, you know, several weeks in particular. And that’s kind of what you would expect to occur. And, and that’s one of the things can I need to move this thing you know, and the same thing here, this is the relative and absolute analysis of sectors. So this is just how our sectors of the market position absolute relative basis to the s&p 500. Before they were all in the left hand quadrant down at the bottom. Now you can see they’re all kind of moving up towards that aside. So that rotation in the markets in both the sectors as well as, you know, kind of absolute factors of the market, whether it’s small cap, mid cap, large cap, buyback, achievers, whatever it is equal weight, all that that was crammed over that lower left quadrant relative to the s&p has now been moving up and you see even RT now is trading well up into overbought territory. So you know, arc, which is those definite mean, stocks have had a huge run as of late, as money’s now starting to say, Okay, I missed the boat, on Apple, Microsoft, and Vidya. So now I’m going to buy everything else. And those are starting to come up into the market. So that rotation is occurring. And that’s we positioned for that earlier this year. And now it’s finally starting to pay some dividends, so to speak.

Adam Taggart 1:12:34
Okay, I’m really glad you shared all these charts, but particularly the scatterplot ones, because that was the question I was going to ask you, which is, it’s not so much that that money is rotating out of the big name stocks, and that they’re coming into being less overbought. It’s more, they’re staying in the overbought territory. Yeah. And yeah, and that was actually really pretty true. In the last like two charts you showed, I don’t know if there were any data points left on the oversold side of the market anymore,

Lance Roberts 1:13:05
right. There’s nothing is oversold now, we added, by the way, if you do, if you like our simple visor platform, we just added a new feature this week. And so when we place trades, you actually get a text message now.

Adam Taggart 1:13:19
Awesome. Hey, let’s talk about your platform for one second to so you know, every week, I recommend that folks set up a free consultation with our advisors, your firm included, your firm is the primary firm, what you you serve as client accounts all across the entire spectrum. But because of you have additional solutions, you’ve got a platform that really is offers the most to people with the lowest amounts of capital, right? If they’re just starting out, right, you’ve put together I don’t want to call it a robo advisor, but but basically a platform that lets you help those people and then eventually they graduate once they’ve amassed a certain amount of of assets, to be able to get to the full service from you guys. I know, there’s been kind of a curveball thrown into that industry. Because some of the players changed their API’s. I know you’re working with them to get that eventually fixed and have that service back up and running at full speed. So I just just for the people here that are watching that have saved below. I don’t know, you know, 100,000 and $150,000 worth of money to invest. If they come to you right now, what can you do for them? And then what would you be able to do for them once those technical issues are fixed?

Lance Roberts 1:14:40
Yeah. So so what happened was, is that we had our platform up running earlier this year, and the company that was providing the linkage between us and the custodian, went out of business. So we have now switched over to advisor engines and using fidelity as a custodian. So that’ll be turned on at the beginning of August. That’s the goal right now. So the thing is, is that, you know, when you have less than $150,000 Yeah, and advisor would love to take that from you, because they’re gonna charge you a fee on it and throw you into some buy and hold ETFs and, and not talk to you, right? Because that’s the only efficient way to do that the problem with that is, is that you’re not, it’s very hard to generate a return on a small amount of money, that fee is going to eat too much into your return that you’re going to have in your portfolio. Because again, just a small amount of money makes it even if you have $100,000 in the portfolio is up 10% In a year, you know, that’s 10 grand, right, it’s just, it’s really hard to to create, you know, growth every year $100,000. And just by paying a fee to an advisor, you’re much better off, you know, investing in the s&p 500 index, and just saving as much money as you can until you can get to a level to where you can actually start to diversify your portfolio, take advantage of other opportunities and do other things. And that’s about $250,000. That’s why a lot of advisors say, hey, you know, we only do 500,000 or more whatever it is, because it’s very, if it’s a good credible advisor, they’re not going to want to charge you a fee, for managing your money plus, providing you financial planning, all these other things, it’s just too costly to the firm, and to the individuals. And so there’s a cost relationship here, that does matter. And it matters a lot to you. And so, you know, if you’re just starting out, you know, save aggressively, that’s your briefing, pay off debt, save aggressively, get your emergency fund put together, and then start building an investment account. And for right there, I mean, you can just do an s&p Index Fund, you don’t have to get fancy, it’s all about saving money and letting it grow over time. And then you can graduate to a financial advisor where it’s worth paying a fee. Now the advantage of what we can provide with simple visor is we can provide a because it’s all automated, because this is when the API’s come back online in August, because it’s automated, because there’s not a direct manager managing your portfolio, we just make decisions at the top, the software automatically automates, we can provide a very cheap service to manage smaller amounts of money into Adams point, once it becomes large enough that we can justify applying full management to it and doing all the other stuff to financial planning. Everything else is required to help you get your retirement goals that we can justify you paying that fee. And it’s fair to you and fair to us, then we’ll call you and say it’s time to move you over to our Private Client Group. But we’ll have that tool available. But you know, you can do it yourself, as well. But you know, the what that service will provide is our risk management tactics at a much lower cost.

Adam Taggart 1:17:46
All right, excellent. So just wanted to make sure that we clarify that because I think you know, folks that are on just starting out or have a lower amount of assets, they obviously have the most to gain and most to lose in this process. And I want them to know that we’re working as hard as we can to help meet their needs. So when those API’s are fixed, and the whole service is back up and running, Lance, we’ll make sure that you let folks know on this channel too. All right, well, look, I’m gonna have to wrap things up here, because I just got a phone call while Lance was given that last answer there, my time is up at this in this rented room here. And I’m gonna go down and see if they’ve called the cops on me thinking I’m running some sort of, you know, crazy nefarious, morally dubious, only fans or whatever out of here. But real quick as we wrap up. You know, I’m out here taking care of my mom’s effects. We’re literally I’m gonna leave here to writing the eulogy for her service. But this whole experience for me has been, you know, again, just a massive refresher, in all of the issues that come up when dealing with an aging parent, perhaps being an aging senior yourself, preparing for all the end of life issues. As I said, you know, weeks ago when this happened, you know, the lesson here is there’s just so much that can be improved in so much chaos that can be avoided with a little bit of advanced planning, here amongst families before, you know, a key senior family member passes on. And so you and I have talked about doing a webinar for with your personal finance guys with Richard and Danny, about kind of end of life planning, Senior Living, planning, all that type of stuff. I think we’re zeroing in at a date, but we feel pretty confident last right? We’re thinking least it’s going to be in the first two weeks of August and we’ll have the exact date next time you come on the channel.

Lance Roberts 1:19:43
Yeah, absolutely. They’re just finishing up put together the whole presentation. And so we’ve got an economic so July the 24th. We’ve got an economic summit that we’re putting on and that’s where we’re gonna talk about the markets coming year. Then so As soon as once we get past that one, we’re trying to get all that put together right now. So once that summit is over, then we’ll get this one done. So I think probably in the first two weeks of August, we can get this put together for you.

Adam Taggart 1:20:10
All right, thanks. And like I said, Folks, as soon as we’ve got the hard date, which hopefully we’ll have next week, we’ll let you know. So you can get that on your calendars. All right, well, look, I was great with your Lance, everybody else if you can do me a favor, if you’re watching this this weekend, and just send a little good vibe out in the universe. For Priscilla, it would mean a lot to my family and I. And, look, I’ll just wrap things up by saying, as I do every week, if you’re trying to navigate these markets, whether you’re trying to manage the FOMO, or you’re trying to position for what the fundamental data thinks is coming ahead in terms of tougher times for the economy, and eventually the markets. I think we did a really good job. This week, Lance explaining what a good financial adviser can do for you in terms of taking through all this stuff. So if you’ve got a good advisor who’s doing that for you, great, stick with them, make sure they take into account all the macro issues that we talked about on this channel. But if you don’t have one, or you’d like a second opinion from a good one, perhaps even Lance and his team there and RIA then consider scheduling a free consultation with the financial advisors that Wealthion endorses to do so only takes a couple seconds, just fill out the short and we’ll help set you up with them totally free, no commitment to work with these guys just a free public service they offer. If you enjoy these weekly market recaps, no matter where in the world we hold them sometimes even from sketchy hotel rooms. Do internet favor and vote your support for this channel by hitting the like button and then clicking on the red subscribe button below as well as that little bell icon right next to it Lance as always you get the last word brother

Lance Roberts 1:21:47
make sure and subscribe to Adams only fans channel because most boring channel on the network but

Adam Taggart 1:21:55
hey, there’s lots of there’s lots of econ porn on there. Lots of macro porn on

Lance Roberts 1:22:00
there you go. That’s it. Have a great week and we’ll be back here next Friday.

Adam Taggart 1:22:05
All right. Thanks, buddy. Everyone else thanks so much for watching.


Lance Roberts

Lance Roberts is the Chief Investment Strategist for RIA Advisors and Lead Editor of the Real Investment Report, a weekly subscriber-based newsletter to over 100,000 people nationwide. 

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