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PERFORMANCE DISPARITY BETWEEN GROWTH AND VALUE STOCKS
Intro: Exploring the investment landscape with a guru’s wisdom and a strategist’s insight. Good Life Companies presents the Market Enthusiast with Noah Brooks and Chris Needs.
Noah Brooks: Welcome back to this week’s installment of the Market Enthusiast. I’m Noah Brooks, and with me today, Chris Needs. Thanks so much for joining us.
Here we are, middle of June. We have the Juneteenth holiday, which is a relatively new holiday for us. Right? A new stock market holiday. So, only four days this week.
We have the market making new all-time highs. I feel like I’m on repeat when I’m saying that. So new all-time highs, again, but pretty big disparity between the mega caps and some of the small-caps.
Now, last week or two weeks ago, we were here. We were talking about it and talking about breadth. We talked a little bit about Nvidia hitting $3 trillion.
Chris Needs: Mm-hmm.
Noah Brooks: Since then, it’s up another $200 billion.
Chris Needs: Up 30% since the stock split. And Apple has finally started moving on that OpenAI partnership. They’re not doing it themselves. So I’m surprised it moved the stock so much, but glad to see the largest component moving again.
Noah Brooks: I mean, I wrote a little bit about it this week, that the enthusiasm for AI is pretty much the only enthusiasm that the market has.
Chris Needs: Hasn’t waned. Yeah.
Noah Brooks: It hasn’t waned.
Chris Needs: It just keeps going.
Noah Brooks: I don’t want to liken it to the pre-internet era. But I was telling somebody the other day, there used to be a local bank, Sovereign Bank Regional here in Pennsylvania. They were eventually bought out by Santander.
But in ’97 when I was at Prudential Securities, they added a dot-com. They actually added a website. They didn’t have a website, so they added dot-com. They added a website, and the stock doubled overnight. And, I kind of liken it to that.
So Apple says they’re in this partnership with OpenAI, the makers of ChatGPT, and the stock gains $300 billion in market cap in a week. Kind of similar, although Sovereign wasn’t the $300 billion at that time, and they never were. But, yeah. So, kind of crazy stuff happening there.
So here we are, like I said, middle of June, we have Juneteenth coming up this week, S&P 500 up about 15 and a half percent, and the mega caps are the winner, obviously, with Nvidia rising above 3 billion.
It’s a very unique class of stock. There’s only two other companies that are over 3 billion, 3 trillion, excuse me, 3 trillion, not billion, not billion.
Microsoft is the largest company in the world, and I think most people are aware of that. That’s about 3.3 trillion. Apple, second largest, also just shy, 3.23 trillion. And, Nvidia is down about 100 trillion on that, 3.2 trillion. So all of them together, they represent a giant portion of the total capitalization of the overall market.
Chris Needs: Mm-hmm.
Noah Brooks: And, it doesn’t seem to be getting… I don’t want to say better or worse. It doesn’t seem to be changing. It seems to be that the trend is still intact for that.
There was an article on X a week or two ago, from Ian McMillan. He was talking a little bit about the history of the market capitalization of some companies. I thought it was worthwhile bringing it up today.
The first million dollar market cap. Do you know what year it was? Million dollars, a single million.
Chris Needs: 1920. Is that-
Noah Brooks: No.
Chris Needs: … close to it?
Noah Brooks: It was 1781.
Chris Needs: Oh.
Noah Brooks: 1781. First $100 million market cap, 1878. I don’t know which company it was. I would imagine it was Pennsylvania Railroad.
Chris Needs: M or X Steel, who knows?
Noah Brooks: Yeah.
Chris Needs: One of those. Yeah.
Noah Brooks: Yup. Something like that. A steel company or a railroad.
Chris Needs: It wasn’t X back then.
Noah Brooks: No. It wasn’t, it wasn’t. Was it Bethlehem Steel?
Chris Needs: Yeah.
Noah Brooks: Probably. Okay. First billion dollar market cap.
Chris Needs: Apple.
Noah Brooks: No. Get out of here. Billion, single billion. 1924.
Chris Needs: Oh.
Noah Brooks: Yeah. No. I don’t know what it is. First 100-
Chris Needs: I was going trillion there. Yeah. Apple was first trillion.
Noah Brooks: I believe you’re right. Yeah. I believe you’re right. I’m going to come back with what the companies were. First 100 billion market cap was 1995. And then, the first trillion market cap was 2018. And I think it was one of those two, Apple or Microsoft.
And so his question, and I think it’s worth repeating out here, was, “How long until we have the first $100 trillion market cap company?”
So if you’re a young person, you’re going to see it in your lifetime. I suspect you and I will. Well, you are a young person. I suspect that I’m going to see it in my lifetime.
I mean, now those three companies are up there. Amazon is the fourth-largest company, but it is trailing by a trillion three. So, it’s not neck and neck with it. And behind that is Facebook Meta, also trailing pretty dramatically. Total market cap there is 1.3 trillion.
I mean, you take those five companies together, man, you’re well over 10 trillion, closer to 15 trillion on those five companies.
CONCENTRATION OF MARKET CAPITALIZATION IN MEGA-CAP COMPANIES
Chris Needs: Yeah.
Noah Brooks: It’s kind of nutty.
Chris Needs: High concentration again, which was something we were lamenting last year, where they were making up the top 10 of the S&P, or over 30% of the index. And we’re right back to that, it seems like.
That could go on for a long time, but I wouldn’t say it heralds a super healthy scenario. But where the earnings are at right now, where the growth is at, where the excitement is at, it makes sense why we have that concentration.
Noah Brooks: Yeah. Well, I printed out for my own reference here, on my notes, quarter to date. We’re near the end of the quarter here, two and a half months in the quarter. Quarter to date, Russell 1000 Growth up almost 9%. Russell 1000 Value, -2.65, -2.65. That’s tough. Small-caps are negative for the quarter, as well.
Chris Needs: The large cap tech, is that now looked as a defensive sector just because of how certain it seems like their earnings are right now?
Noah Brooks: Arh. I mean, certainly the excitement and the enthusiasm is around technology and AI. And, the big keep getting bigger. Someone said to me the other day, “If small-caps didn’t break out during low interest rates, well, they’re certainly not going to break out now.”
And, that might be a little bit of a oversimplification. I think you hear analysts talking about rates coming down, small-caps rallying, but we’ve really been waiting for that to happen for a while. And, it’s nothing doing-
Chris Needs: Yeah.
Noah Brooks: … nothing doing. I do have people ask me, “Well, why do we invest in small-caps? Why are we investing in EM? Why do we not just have…” You know? I don’t know if anybody said only large cap growth, but, “Why do we have these other things?”
Doing some research, I mean, we’ve talked about different returns over different market cycles. The lost decade, we know S&P 500 was negative over that timeframe.
Chris Needs: Mm-hmm.
ENTHUSIASM FOR AI IN THE MARKET
Noah Brooks: Even with reinvesting dividends, S&P 500 was down 9% for 2000 to 2009. On the other hand, small-caps were positive, up almost 70% in that time period. EM stocks were positive over that period. I think about 140% over that timeframe. I’m not saying you own them because the rest of the market is going to tank, and we’re going to have a lost decade.
They’re a great diversifier, but they were certainly not working for this year. They’re underperforming over the last year, two years, three years. The expectation is that they’ll come back. But right at the moment, the enthusiasm is for AI and for those large companies
Chris Needs: Who can afford it and have the power on the suppliers to get those chips.
Noah Brooks: Rates shmates. Right? What do they care? I mean, they have the money. They have the free cash flow.
Chris Needs: Gigantic. Yeah. Great cash flow and cash piles sitting at 5%. With those cash piles, they’re happy to just accumulate that interest while they’re looking for investment opportunities.
Noah Brooks: Yeah. How much free cash does Apple have? Weren’t you batting that stat around the other day?
Chris Needs: I think they were one 160 to 180. I think Google has an even larger cash flow. I think they’re over 200 billion.
Noah Brooks: In cash?
Chris Needs: Yeah.
Noah Brooks: Yeah. Do you think they keep that in an online checking account?
Chris Needs: Direct treasury. I don’t…
Noah Brooks: Okay. So since the last time we were sitting here, we had the jobs report come out.
Chris Needs: Mm-hmm.
Noah Brooks: Right? Economy-
Chris Needs: Another strong one-
Noah Brooks: Yeah. By-
Chris Needs: … by the top line number.
Noah Brooks: The top line number. We’ll get to that in a second. The Department of Labor reported last week, 265,000 new jobs created, unemployment rate actually ticked up slightly to 4%, labor participation rate kind of holding steady. It came down one 10th of a percent. So labor participation rate, working age people, I think it’s 18 to 65. What’s the percentage of people working? It was 62.5%, and I think it came down to 62.4%.
For reference, prior to COVID, we were up in the 65s. I think it was 65 and a half. During COVID, came down to about 60. And it’s rebounded, but it has not come back to pre COVID levels, yet.
Chris Needs: Mm-hmm.
Noah Brooks: I don’t know if it’s going to.
Chris Needs: Some early retirement-
Noah Brooks: Yeah.
Chris Needs: … with how the markets have been. Obviously, 2022 was rough. Besides that, the market’s been performing very well. People feel comfortable maybe retiring a little early. And then maybe, some difficulty in the younger cohort of people, maybe 18 to 25, struggling maybe with unemployment and maybe pulling that number down-
Noah Brooks: Yeah.
Chris Needs: … for them, well, intermediate term.
Noah Brooks: If you left the workforce, let’s say you retired early meaning pre 65, you’re going to be counted as not working in that labor participation rate. So, that kind of pulls the number down. I don’t know off the top of my head if there was an estimate of the number of people that retired early because of COVID.
Anecdotally, I personally have heard a lot of that, especially people that didn’t need to be working.
Chris Needs: Mm-hmm.
ANALYSIS OF THE RECENT JOBS REPORT
Noah Brooks: They’re just like, “I didn’t need it.” Now, they might be coming back into the workforce. But I suspect that those 265,000 people, there are people included in there that left the workforce during COVID. They said the heck with it, they didn’t need it. They didn’t want to deal with it, and they’re coming back.
So they were included in the job destruction, and now they’re being included in, I would say, the job creation. But, I don’t know if the net net is any change.
Chris Needs: Mm-hmm.
Noah Brooks: But that labor participation rate, certainly we could get back up another percentage point there.
Chris Needs: Yeah. That would be ideal.
Noah Brooks: It’d be great, it’d be great. I mean, that’s another 3 million people, if I’m not mistaken.
Chris Needs: GDP numbers would like that-
Noah Brooks: Yeah.
Chris Needs: … rather than a stagflation scenario. Not that we’re in that, but I mean, that would get us through that, certainly if we could get the workforce participation up.
Noah Brooks: Yup. Absolutely. So, you were on vacation this week. You weren’t last week. You weren’t working too much. But, you told me a little story about listening to some of those job numbers-
Chris Needs: Oh, yeah.
Noah Brooks: … on the beach.
Chris Needs: I took a little break. Sat in a tent with the kids, and listened to J. Powell and his press conference, so-
Noah Brooks: Yeah. What caught your attention?
Chris Needs: The one line item that made me sit up and be like, “What?”, was his comment on the jobs report, where he sort of insinuated that the jobs report may not be indicative or insinuated, sort of may not be fully accurate. And I think what he was getting at was, sure, there was, I think you said 265 or 272,000, whatever the number of jobs was, added. But, a lot of those might’ve been part-time or people taking second jobs.
So while that headline number is what’s looked at, there’s more to dig into than just that top line number. And, that’s where you can sort of blend in unemployment rate and the workforce participation to get more comprehensive view on the market. And it seemed like he was insinuating that, “”Yeah. That’s a big number,” but there’s more things at play here that we’re looking into than just that top number.
Noah Brooks: So, he came out and he said that the job numbers were completely made up. Is that what he said?
Chris Needs: My initial thought was like, “What? What did he say?” I’ve never heard that before from a Fed-
Noah Brooks: No. For note, he did not say that.
Chris Needs: He didn’t say those exact words, certainly.
Noah Brooks: When you think about it, though, there’s a few different ways that they calculate the jobs. One of the things regarding the BLS survey is that one person can be counted on there more than once. If they take a second job or if they get two part-time jobs, that doesn’t count as one, counts as two.
I’m not a part-time guy. But I know there’s certainly a lot of people out there, and they work in the gig economy, whether that’s driving. I mean, there’s-
Chris Needs: There’s DoorDash, Uber Eats-
Noah Brooks: Yeah.
Chris Needs: Yeah.
Noah Brooks: And, that came through in some of the numbers. They said, I think, 250,000 less servers in the restaurant industry than pre COVID.
But, the majority of those numbers came through in the gig economy as drivers, whether it’s Uber, whether it’s DoorDash, whatever it happens to be.
And when you think about it, I don’t know for the people listening out there, I don’t know if anybody’s in the same camp that I am. I suspect a lot of people are. But we, not sacrifice. We’ve kind of switched it up a little bit.
It’s almost like the movies. In the ’80s and ’90s, you went to the movies. And, we started getting better systems, higher quality televisions, distribution of higher quality content. And at some point you go, “Well, I’m not going to go to the movies. I’m just going to sit at home and watch it on my,” I don’t know, “my new plasma, my new LED television,” back in the late ’90s or early 2000s.
And now you have these 65 inch televisions, and so that industry has changed. It’s not that you’re not watching movies, you’re just doing it at home.
Okay. Well, so after COVID, maybe you don’t go out as much, but you still want the restaurant meal at home.
Chris Needs: Mm-hmm.
Noah Brooks: Right? So, our spending habits have changed to some degree, where instead of being out, we’re just ordering at home-
Chris Needs: Mm-hmm.
Noah Brooks: … probably more expensive. But, you don’t drink alcohol. You’re not ordering drinks.
Chris Needs: Mm-hmm.
Noah Brooks: And so maybe, it’s less expensive. Maybe, I’m saving money by ordering on DoorDash. Is that possible?
Chris Needs: Well, they charge more for the food. There’s a service fee, tipping the driver. The way I would think of it is, “Well, I don’t have to tip or buy alcohol, so I’m saving money.” But then when I really look at, “Am, I? I don’t know.” It’s hard to tell.
Noah Brooks: In my mind, I’m going to say, “I’m-
Chris Needs: Tally it up.
Noah Brooks: … saving money.”
Chris Needs: Yeah.
Noah Brooks: That’s a way to save some. Yeah. Probably not, probably not. Yeah. So, I mentioned the holiday coming up. A few weeks ago, I said that my wife and I were out. We did some traveling. We saw some shows. And then, since the last time I was here, we saw another show.
We are continuing the Tom Petty tour. For everybody out there, I said that Tom Petty had passed away. And it was somebody that we wanted to go see, and we just never did. And then there was kind of this impetus to be like, “Hey, these guys, they’re not going to be around forever, certainly the Grateful Dead.”
And then last week, on Tuesday, we went and we saw the Rolling Stones in Philadelphia. Now, these guys are just as old as Grateful Dead. Right? Different kind of music. But Ronnie Wood, I think he’s 81. He’s up there jamming on the guitar. Mick Jagger, he’s a rock star.
Chris Needs: Is he still alive?
Noah Brooks: I have no idea.
Chris Needs: Living his life.
Noah Brooks: That was at Philly, at The Link, where the Eagles play. It was packed, sold out. I mean, it was a great show. I’m sure it wasn’t like a show in the ’80s. They were a little bit slower. But it was sold out, and people are excited to see them.
We were in Vegas. We saw The Sphere. And I just saw that The Eagles are going to do a residency now at The Sphere.
Chris Needs: Wow.
Noah Brooks: You do know who The Eagles are?
Chris Needs: I do know who the Eagles are. Speaking of The Sphere, I saw HP’s having a major conference there, and Jensen Wong is going to speak, so-
Noah Brooks: Oh, no way.
Chris Needs: He’s going to keep the Nvidia train rolling and keep the-
Noah Brooks: I didn’t think about a conference at The Sphere. But in terms of the technology-
Chris Needs: It’s there.
Noah Brooks: I mean, you don’t need a little PowerPoint with a screen anymore. You have these thousands of square feet of screen. I don’t even know how many thousands of square feet it is. Kind of crazy. Yeah. Kind of crazy.
The one thing I didn’t mention, when we were coming back from Las Vegas two weeks ago, the flight home. It was a few days before D-Day. I think it was like June 2nd or something like that. And when we got to the gate, there was some, I guess it was TSA officials that had the… I don’t know if officials is the right word. TSA employees that had these big flags.
Some of them were American flags, some of them were POW/MIA flags. And, we asked the person at the gate what was going on. They said, “Oh, we have a D-Day…” I think she said, “A D-Day hero that’s on the plane.” And, it turns out we sat right next to the person. I’m not going to mess up his first name, but-
Chris Needs: Onofrio, was it?
Noah Brooks: Yeah. Ono Zicari. I think he was 98, 97, and American had paid for him to fly back to Normandy. So, he was on his leg to Philly. And then he was going to do, I guess, Philly to Paris on American.
I was listening to him talk. He was amazing. He was just an incredible, interesting character. So a few days after that, during D-Day, sure enough. We turn on ABC, I’m sure everybody’s talking about it, and there is this guy that we just were on the plane with, Mr. Zicari, who was being interviewed on the beaches of Normandy, about his time there. The men, I’m going to assume women, but the people from D-Day, there are very few left.
Chris Needs: Yeah.
Noah Brooks: I mean, I think it’s less than 1,000, if I’m not mistaken. Dying off left and right. But, I didn’t mention it last time. I thought it was interesting. It left a little mark on me just hearing him talk, personally, obviously on the news. But just, yeah.
Chris Needs: Imagine his emotions going back there after being there almost a whole life ago, the feelings that must’ve come back to him.
Noah Brooks: Uh. Crazy. I mean, I got choked up when I realized what was going on and listening to him talk. But, yeah. It was interesting, let’s put it that way. Something, I probably won’t forget.
Chris Needs: Yeah.
Noah Brooks: Okay. So, get back to finance. What else do you have for us today, Mr. Needs?
Chris Needs: Oh, just sort of going back to when I was listening to Jay Powell. I thought in the last meeting, which was April 30th to May 1st, I think, they had some hot data where they could have been, I would’ve argued if they’re data dependent, moderately hawkish. And, they were anything but hawkish. They were super dovish in that press conference from that May 1st meeting, which sort of led to the strong May a little bit.
And then in this one, I felt like we got some data points that were in their favor towards maybe, a dovish side of things. And I felt like the verbiage he was putting out there was, I would say, slightly to moderately hawkish. So, I was sort of surprised by that.
I mean, there’s a huge hurdle for them to be full hawks and get off of this rate cut train that we’re kind of on. They’re still on the higher for longer, but leaning towards a cut this year based on the numbers they’re putting out there. But I was surprised by that to hear the change despite the data that was coming out.
I mean, we had CPI come at 3.3 versus 3.4. Expectation on headline core came in at 3.4 versus 3.5, expected good data points. PPI came in cool, 2.2 versus 2.5. And the only strong point was that jobs number, which he seemed to, we’ll say, poo-poo a little bit-
Noah Brooks: Yeah.
Chris Needs: And, he-
Noah Brooks: So-
Chris Needs: … came out moderately hawkish is how I took it.
Noah Brooks: I think it’s worth noting here that the Federal Reserve is in this really weird predicament, where I think technically they would like to see job losses in the economy before they started to lower. And so at the same time, they also want to be ahead of it. They don’t want to wait too long.
But, you have an election coming up. They don’t want to be seen as being political. They want to be apolitical. We had said, I think a few weeks ago, three or four podcasts ago, that we didn’t think they were going to do anything before the election.
And so with June coming and going, and essentially they’re kicking the can down the road, I think it’s almost impossible that they do anything before it. Now, if I’m not mistaken, there’s a fed meeting the day after the election.
Chris Needs: There is. Yup. So, will be closely watched.
Noah Brooks: Yeah, yeah. It wouldn’t surprise me if they made a change the day after.
Chris Needs: The odds are currently straddling September and that November meeting, if I’m correct. So, yeah. There’s going to be lots of ramifications.
Noah Brooks: Yeah. Now just keep in mind, they don’t have to make a change on a Fed meeting day.
Chris Needs: That’s true.
Noah Brooks: They could make a change at any time. They have complete power and discretion to do that. Do they normally do it on a Fed meeting day?
Chris Needs: That’s what-
Noah Brooks: Yeah.
Chris Needs: … they did on and off, in October.
Noah Brooks: Yeah.
Chris Needs: That would be surprising.
Noah Brooks: I don’t think so. I don’t think they’re going to do it before the election.
Chris Needs: I don’t think so, either.
Noah Brooks: Yeah. I don’t know. But let’s go back to the CPI a little bit. So the year-over-year number, obviously is coming down pretty dramatically. It’s 3.4%. But, the month over month was 0.2. It was actually, if you go out another decimal, it was 1.6%. Now, we can go out as many decimals as we want. But the fact of the matter is, the way they’re measuring it, it is coming down.
Chris Needs: Yeah. I mean, if you annualize that number in a vacuum, that gets them a lot closer to that 2%. You’d be just a shade above it, which would be welcome. So, why was he hawkish? I don’t-
Noah Brooks: Well, he doesn’t want to drive the market up.
Chris Needs: No.
Noah Brooks: Right?
Chris Needs: That didn’t stop him before, but.
Noah Brooks: Well, has something changed?
Chris Needs: I don’t know.
Noah Brooks: So, you mentioned PPI. PPI is still coming down. Right? Pretty significantly. That’s the producer price index, which is wholesale goods and services, that’s coming down. Do you think that if there wasn’t an election that we’d be on a different rate course?
Chris Needs: I think they feel that pressure. And, yes. It’s weighing into it, but I think they don’t want to be reactive again. We talked about that.
Sure. He doesn’t want to be Arthur Burns and cut too early, but he doesn’t want to be reactive. He doesn’t want to be blamed as the Fed causing another recession, which is the overarching narrative out there. Over the years, they caused the boom and bust cycles themselves, which-
Noah Brooks: Yeah.
Chris Needs: … isn’t entirely true, but it sure seems that way sometimes, and-
Noah Brooks: Well, they have an impact.
Chris Needs: Definitely do. They essentially control a lot of the business decisions out there.
Noah Brooks: Yeah, yeah. No question about it. So they take a business cycle, and they not necessarily leverage it. They’ll make it better or worse, and a lot of times they don’t help.
Chris Needs: Yeah. They seem to speed things up a little bit.
Noah Brooks: Yeah. I mean, listen. This time we have a situation where in modern history, nothing like this has ever happened. The pandemic, people out of work, emergency relief, this has not happened in modern times, with the speed of the industries, everybody being out of work, everybody coming back to work, the supply chain issues. This is really a new frontier for the Federal Reserve. And-
Chris Needs: Many case studies will be done on this-
Noah Brooks: Oh.
Chris Needs: … for sure.
Noah Brooks: I can only imagine what B-School is going to be like in 10 years looking back on COVID. I mean, 20 years, with certainly the hindsight being 20/20 and all that. I mean, you’ll probably get degrees simply on pandemic finance.
Chris Needs: Yeah.
Noah Brooks: Right? If they don’t have it, it’s coming.
Chris Needs: Yeah.
Noah Brooks: They don’t have it, it’s coming. One of the things that I talk about with some people is, “Are we through COVID?” I mean, “Is COVID done?”
One of the things that I saw this week related to travel, was one of the long haul carriers, Cathay Pacific, based in Hong Kong. They fly to Asia. They fly, some, to Europe, but a lot of Asia from the USA and Europe.
So during COVID, all the big airlines, they put most of their planes away, or at least some of their planes away. Cathay Pacific put, I think, 85 planes into long-term storage, which was roughly 80% of their total capacity.
They came out this week, and they said that they have taken their last plane out of storage. And so it makes me think like, “Okay. Are we officially done with COVID?” But in addition to their last plane coming out of storage, they also said that they have orders for 80 new planes. And, some of those are replacements for their older planes, but they seem to be implying that long haul international travel is really coming back. And, they’re at the point where they have all the seat [inaudible 00:29:16] filled, from where it was pre COVID.
Chris Needs: Mm-hmm.
Noah Brooks: In my mind, that’s amazing. I mean, people were talking that it’d be years and years and years. And, yeah. I guess, technically, it is years and years and years.
Chris Needs: Yeah.
Noah Brooks: We’re four years into it. But it seems that any remnants from a business standpoint of COVID, certainly in the travel industry, are flying out the door.
Chris Needs: Yeah.
Noah Brooks: Right?
Chris Needs: I haven’t seen a COVID post in forever. So, yeah. I think we’re totally-
Noah Brooks: One of our advisors has COVID, right now.
Chris Needs: Really?
Noah Brooks: Yeah, yeah. I got to bounce back on his email just yesterday. I reached out to him and he said, “No.” He’s really sick.
Chris Needs: Wow.
Noah Brooks: Yeah. Kind of nutty, but you don’t hear about it.
Chris Needs: No.
Noah Brooks: You don’t hear about it. We were in New York on Friday night. We went to see the Michael Jackson musical, which was great. It was great fun. New York City’s always a great time. There were some masks going on there.
Chris Needs: Oh.
Noah Brooks: Not tons, but there were still people masking up. I did see people walking in Central Park with a mask on.
Chris Needs: Oh, boy. Outside with a mask.
Noah Brooks: You know?
Chris Needs: Yup.
Noah Brooks: Right? I mean, it could be spread lots of different ways. They could have been wearing a mask pre COVID. I don’t know.
Chris Needs: Maybe.
Noah Brooks: Maybe. Okay. What else do we have?
Chris Needs: Just a random point on the VIX, the Volatility Index. So, we had that spike up a little bit in April. It got up to 19.2 from average of 13.7 in Q1. Obviously, no volatility in Q1 based on that average VIX number. But that 19.2, it felt rough in the moment. April felt difficult, but that’s below the historical average of 19.5.
So, volatility has been really suppressed. And it’s very interesting, it slammed right back down. And, I don’t know.
I keep that as a tiny red flag on my radar. We were joking about, was it 2022 or early 2023? We’re like, “If the VIX is below this number-
Noah Brooks: Yeah.
Chris Needs: … buy.”
Noah Brooks: Yeah.
Chris Needs: Or, “sell.” “If it’s above this number, buy.” You could track the market based on that, it seemed like.
So something I’m keeping an eye on, especially with this concentration and quick move up in the megacaps, where there hasn’t been as much participation, as you already mentioned, mid-caps, small-caps or those bottom 400 of the S&P 500, or bottom 490, even.
Noah Brooks: Shew. Kind of nutty.
Chris Needs: Yeah.
Noah Brooks: Kind of nutty. I just want to bring up one thing here. I don’t know if our listeners out there know Ben White. He was a finance journalist, been around for a long, long time. I think he started as a career at Politico and had been reporting on CNBC, Journal, New York Times, things like that. He passed away last week. His wife came on X and announced it.
Just a shout-out to him. I’ve been paying attention to his articles and his reporting since the global financial crisis. He had some great stuff on that back then. So, just a shout-out to him and his family.
Chris Needs: I have a quick call out, I guess. So we had the US Open this past weekend and went down to the wire. Rory McIlroy and Bryson DeChambeau, a little bit of fireworks there. If you don’t know the history, if you’re not into the golf game, obviously there’s been this LIV golf tour, which Bryson DeChambeau was a defector to, took a big payday. Rory McIlroy, one of the biggest outspoken critics about it.
And, they were going mano y mano. It came down to the last couple holes. And unfortunately for Rory, he kind of choked it away, missing two very short putts on 16 and 18. But, our area has a little connection-
Noah Brooks: Our area?
Chris Needs: … to US Open. Yeah.
Noah Brooks: Okay.
Chris Needs: So Pinehurst No. 2, where US Open was played at, was designed by one of the masterclass architects in terms of golf courses, Donald Ross. And our local, the club I belong to actually, was redesigned by Donald Ross, who I call the infamous Donald Ross.
He’s famous for his false front greens. So if you land in the front third or maybe even a little more in the middle third of the green, it’s an illusion. And, that ball will come rolling 10, 15 yards back into the fairway.
And if you watched the tournament at all, you saw a couple of them. I think Rory even got hit with one, hit it to the middle of the green and it rolled 15 yards off. And then, he had to chip it right back up on there. So, I call him the infamous Donald Ross-
Noah Brooks: Okay.
Chris Needs: … because we have at least four or five false fronts up at Schuylkill. I’m not as good as them, and I fall victim-
Noah Brooks: Yeah.
Chris Needs: … to it many times.
Noah Brooks: I’m still waiting for that invite, though.
Chris Needs: Oh. It’s an open invite.
Noah Brooks: Oh, you know what? I don’t really like open invites.
Chris Needs: All right. I’ll give you a formal invite.
Noah Brooks: Everybody says, “Oh, it’s an open invite. Just let me know when you want to go.” Whether that’s dinner or out on the boat, no one ever does that. It’s like you need a specific invite.
Chris Needs: All right. We’ll get you a formal invite.
THE AMERICAN ECONOMY AT ALL-TIME HIGHS
Noah Brooks: Formal invite. Okay. Listen, everybody, thank you so much for joining us today. We really appreciate it. I guess in closing, I’m going to say the market’s up.
Chris Needs: All time highs.
Noah Brooks: All time highs, again, Right? 34. No. 5,460, if I’m not mistaken, on the S&P 500. NASDAQ at all time highs. Dow, not so much. Mid-caps, not so much. Small-caps, not so much.
I guess there’s an expectation that they’re going to come alive at some point. Maybe after the Fed lowers, which isn’t necessarily guaranteed, but it’s coming at some point. Hopefully, after the election. Maybe, even before the election, but probably not. Day after, maybe.
So, keep that in your sites. But stock market overall, S&P 500, all time highs once again. And, there has been a lot of naysayers out there over whether it’s this year, whether it’s last year, people have remnants of 2022 in their brains. It has not happened.
I’ve been saying this for a while, but I’ve been saying it a lot in the last week or two. You sound smart, telling people not to invest. I mean, you do. You list these reasons and everybody just agrees. Right? And, they start shaking their heads.
Chris Needs: People love fear, that’s why.
Noah Brooks: Yeah. They love it. “Oh, okay. This is a reason not to.” But the fact of the matter is, we’re at all time highs once again. So, I’m going to leave you with this. Don’t bet against the American economy, just don’t do it. There’s times the market’s going to be down, but it’s not most of the time.
All right. For the Market Enthusiast, I’m Noah Brooks with Chris needs. Thank you so much for listening.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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Table of Contents
PERFORMANCE DISPARITY BETWEEN GROWTH AND VALUE STOCKS
Intro: Exploring the investment landscape with a guru’s wisdom and a strategist’s insight. Good Life Companies presents the Market Enthusiast with Noah Brooks and Chris Needs.
Noah Brooks: Welcome back to this week’s installment of the Market Enthusiast. I’m Noah Brooks, and with me today, Chris Needs. Thanks so much for joining us.
Here we are, middle of June. We have the Juneteenth holiday, which is a relatively new holiday for us. Right? A new stock market holiday. So, only four days this week.
We have the market making new all-time highs. I feel like I’m on repeat when I’m saying that. So new all-time highs, again, but pretty big disparity between the mega caps and some of the small-caps.
Now, last week or two weeks ago, we were here. We were talking about it and talking about breadth. We talked a little bit about Nvidia hitting $3 trillion.
Chris Needs: Mm-hmm.
Noah Brooks: Since then, it’s up another $200 billion.
Chris Needs: Up 30% since the stock split. And Apple has finally started moving on that OpenAI partnership. They’re not doing it themselves. So I’m surprised it moved the stock so much, but glad to see the largest component moving again.
Noah Brooks: I mean, I wrote a little bit about it this week, that the enthusiasm for AI is pretty much the only enthusiasm that the market has.
Chris Needs: Hasn’t waned. Yeah.
Noah Brooks: It hasn’t waned.
Chris Needs: It just keeps going.
Noah Brooks: I don’t want to liken it to the pre-internet era. But I was telling somebody the other day, there used to be a local bank, Sovereign Bank Regional here in Pennsylvania. They were eventually bought out by Santander.
But in ’97 when I was at Prudential Securities, they added a dot-com. They actually added a website. They didn’t have a website, so they added dot-com. They added a website, and the stock doubled overnight. And, I kind of liken it to that.
So Apple says they’re in this partnership with OpenAI, the makers of ChatGPT, and the stock gains $300 billion in market cap in a week. Kind of similar, although Sovereign wasn’t the $300 billion at that time, and they never were. But, yeah. So, kind of crazy stuff happening there.
So here we are, like I said, middle of June, we have Juneteenth coming up this week, S&P 500 up about 15 and a half percent, and the mega caps are the winner, obviously, with Nvidia rising above 3 billion.
It’s a very unique class of stock. There’s only two other companies that are over 3 billion, 3 trillion, excuse me, 3 trillion, not billion, not billion.
Microsoft is the largest company in the world, and I think most people are aware of that. That’s about 3.3 trillion. Apple, second largest, also just shy, 3.23 trillion. And, Nvidia is down about 100 trillion on that, 3.2 trillion. So all of them together, they represent a giant portion of the total capitalization of the overall market.
Chris Needs: Mm-hmm.
Noah Brooks: And, it doesn’t seem to be getting… I don’t want to say better or worse. It doesn’t seem to be changing. It seems to be that the trend is still intact for that.
There was an article on X a week or two ago, from Ian McMillan. He was talking a little bit about the history of the market capitalization of some companies. I thought it was worthwhile bringing it up today.
The first million dollar market cap. Do you know what year it was? Million dollars, a single million.
Chris Needs: 1920. Is that-
Noah Brooks: No.
Chris Needs: … close to it?
Noah Brooks: It was 1781.
Chris Needs: Oh.
Noah Brooks: 1781. First $100 million market cap, 1878. I don’t know which company it was. I would imagine it was Pennsylvania Railroad.
Chris Needs: M or X Steel, who knows?
Noah Brooks: Yeah.
Chris Needs: One of those. Yeah.
Noah Brooks: Yup. Something like that. A steel company or a railroad.
Chris Needs: It wasn’t X back then.
Noah Brooks: No. It wasn’t, it wasn’t. Was it Bethlehem Steel?
Chris Needs: Yeah.
Noah Brooks: Probably. Okay. First billion dollar market cap.
Chris Needs: Apple.
Noah Brooks: No. Get out of here. Billion, single billion. 1924.
Chris Needs: Oh.
Noah Brooks: Yeah. No. I don’t know what it is. First 100-
Chris Needs: I was going trillion there. Yeah. Apple was first trillion.
Noah Brooks: I believe you’re right. Yeah. I believe you’re right. I’m going to come back with what the companies were. First 100 billion market cap was 1995. And then, the first trillion market cap was 2018. And I think it was one of those two, Apple or Microsoft.
And so his question, and I think it’s worth repeating out here, was, “How long until we have the first $100 trillion market cap company?”
So if you’re a young person, you’re going to see it in your lifetime. I suspect you and I will. Well, you are a young person. I suspect that I’m going to see it in my lifetime.
I mean, now those three companies are up there. Amazon is the fourth-largest company, but it is trailing by a trillion three. So, it’s not neck and neck with it. And behind that is Facebook Meta, also trailing pretty dramatically. Total market cap there is 1.3 trillion.
I mean, you take those five companies together, man, you’re well over 10 trillion, closer to 15 trillion on those five companies.
CONCENTRATION OF MARKET CAPITALIZATION IN MEGA-CAP COMPANIES
Chris Needs: Yeah.
Noah Brooks: It’s kind of nutty.
Chris Needs: High concentration again, which was something we were lamenting last year, where they were making up the top 10 of the S&P, or over 30% of the index. And we’re right back to that, it seems like.
That could go on for a long time, but I wouldn’t say it heralds a super healthy scenario. But where the earnings are at right now, where the growth is at, where the excitement is at, it makes sense why we have that concentration.
Noah Brooks: Yeah. Well, I printed out for my own reference here, on my notes, quarter to date. We’re near the end of the quarter here, two and a half months in the quarter. Quarter to date, Russell 1000 Growth up almost 9%. Russell 1000 Value, -2.65, -2.65. That’s tough. Small-caps are negative for the quarter, as well.
Chris Needs: The large cap tech, is that now looked as a defensive sector just because of how certain it seems like their earnings are right now?
Noah Brooks: Arh. I mean, certainly the excitement and the enthusiasm is around technology and AI. And, the big keep getting bigger. Someone said to me the other day, “If small-caps didn’t break out during low interest rates, well, they’re certainly not going to break out now.”
And, that might be a little bit of a oversimplification. I think you hear analysts talking about rates coming down, small-caps rallying, but we’ve really been waiting for that to happen for a while. And, it’s nothing doing-
Chris Needs: Yeah.
Noah Brooks: … nothing doing. I do have people ask me, “Well, why do we invest in small-caps? Why are we investing in EM? Why do we not just have…” You know? I don’t know if anybody said only large cap growth, but, “Why do we have these other things?”
Doing some research, I mean, we’ve talked about different returns over different market cycles. The lost decade, we know S&P 500 was negative over that timeframe.
Chris Needs: Mm-hmm.
ENTHUSIASM FOR AI IN THE MARKET
Noah Brooks: Even with reinvesting dividends, S&P 500 was down 9% for 2000 to 2009. On the other hand, small-caps were positive, up almost 70% in that time period. EM stocks were positive over that period. I think about 140% over that timeframe. I’m not saying you own them because the rest of the market is going to tank, and we’re going to have a lost decade.
They’re a great diversifier, but they were certainly not working for this year. They’re underperforming over the last year, two years, three years. The expectation is that they’ll come back. But right at the moment, the enthusiasm is for AI and for those large companies
Chris Needs: Who can afford it and have the power on the suppliers to get those chips.
Noah Brooks: Rates shmates. Right? What do they care? I mean, they have the money. They have the free cash flow.
Chris Needs: Gigantic. Yeah. Great cash flow and cash piles sitting at 5%. With those cash piles, they’re happy to just accumulate that interest while they’re looking for investment opportunities.
Noah Brooks: Yeah. How much free cash does Apple have? Weren’t you batting that stat around the other day?
Chris Needs: I think they were one 160 to 180. I think Google has an even larger cash flow. I think they’re over 200 billion.
Noah Brooks: In cash?
Chris Needs: Yeah.
Noah Brooks: Yeah. Do you think they keep that in an online checking account?
Chris Needs: Direct treasury. I don’t…
Noah Brooks: Okay. So since the last time we were sitting here, we had the jobs report come out.
Chris Needs: Mm-hmm.
Noah Brooks: Right? Economy-
Chris Needs: Another strong one-
Noah Brooks: Yeah. By-
Chris Needs: … by the top line number.
Noah Brooks: The top line number. We’ll get to that in a second. The Department of Labor reported last week, 265,000 new jobs created, unemployment rate actually ticked up slightly to 4%, labor participation rate kind of holding steady. It came down one 10th of a percent. So labor participation rate, working age people, I think it’s 18 to 65. What’s the percentage of people working? It was 62.5%, and I think it came down to 62.4%.
For reference, prior to COVID, we were up in the 65s. I think it was 65 and a half. During COVID, came down to about 60. And it’s rebounded, but it has not come back to pre COVID levels, yet.
Chris Needs: Mm-hmm.
Noah Brooks: I don’t know if it’s going to.
Chris Needs: Some early retirement-
Noah Brooks: Yeah.
Chris Needs: … with how the markets have been. Obviously, 2022 was rough. Besides that, the market’s been performing very well. People feel comfortable maybe retiring a little early. And then maybe, some difficulty in the younger cohort of people, maybe 18 to 25, struggling maybe with unemployment and maybe pulling that number down-
Noah Brooks: Yeah.
Chris Needs: … for them, well, intermediate term.
Noah Brooks: If you left the workforce, let’s say you retired early meaning pre 65, you’re going to be counted as not working in that labor participation rate. So, that kind of pulls the number down. I don’t know off the top of my head if there was an estimate of the number of people that retired early because of COVID.
Anecdotally, I personally have heard a lot of that, especially people that didn’t need to be working.
Chris Needs: Mm-hmm.
ANALYSIS OF THE RECENT JOBS REPORT
Noah Brooks: They’re just like, “I didn’t need it.” Now, they might be coming back into the workforce. But I suspect that those 265,000 people, there are people included in there that left the workforce during COVID. They said the heck with it, they didn’t need it. They didn’t want to deal with it, and they’re coming back.
So they were included in the job destruction, and now they’re being included in, I would say, the job creation. But, I don’t know if the net net is any change.
Chris Needs: Mm-hmm.
Noah Brooks: But that labor participation rate, certainly we could get back up another percentage point there.
Chris Needs: Yeah. That would be ideal.
Noah Brooks: It’d be great, it’d be great. I mean, that’s another 3 million people, if I’m not mistaken.
Chris Needs: GDP numbers would like that-
Noah Brooks: Yeah.
Chris Needs: … rather than a stagflation scenario. Not that we’re in that, but I mean, that would get us through that, certainly if we could get the workforce participation up.
Noah Brooks: Yup. Absolutely. So, you were on vacation this week. You weren’t last week. You weren’t working too much. But, you told me a little story about listening to some of those job numbers-
Chris Needs: Oh, yeah.
Noah Brooks: … on the beach.
Chris Needs: I took a little break. Sat in a tent with the kids, and listened to J. Powell and his press conference, so-
Noah Brooks: Yeah. What caught your attention?
Chris Needs: The one line item that made me sit up and be like, “What?”, was his comment on the jobs report, where he sort of insinuated that the jobs report may not be indicative or insinuated, sort of may not be fully accurate. And I think what he was getting at was, sure, there was, I think you said 265 or 272,000, whatever the number of jobs was, added. But, a lot of those might’ve been part-time or people taking second jobs.
So while that headline number is what’s looked at, there’s more to dig into than just that top line number. And, that’s where you can sort of blend in unemployment rate and the workforce participation to get more comprehensive view on the market. And it seemed like he was insinuating that, “”Yeah. That’s a big number,” but there’s more things at play here that we’re looking into than just that top number.
Noah Brooks: So, he came out and he said that the job numbers were completely made up. Is that what he said?
Chris Needs: My initial thought was like, “What? What did he say?” I’ve never heard that before from a Fed-
Noah Brooks: No. For note, he did not say that.
Chris Needs: He didn’t say those exact words, certainly.
Noah Brooks: When you think about it, though, there’s a few different ways that they calculate the jobs. One of the things regarding the BLS survey is that one person can be counted on there more than once. If they take a second job or if they get two part-time jobs, that doesn’t count as one, counts as two.
I’m not a part-time guy. But I know there’s certainly a lot of people out there, and they work in the gig economy, whether that’s driving. I mean, there’s-
Chris Needs: There’s DoorDash, Uber Eats-
Noah Brooks: Yeah.
Chris Needs: Yeah.
Noah Brooks: And, that came through in some of the numbers. They said, I think, 250,000 less servers in the restaurant industry than pre COVID.
But, the majority of those numbers came through in the gig economy as drivers, whether it’s Uber, whether it’s DoorDash, whatever it happens to be.
And when you think about it, I don’t know for the people listening out there, I don’t know if anybody’s in the same camp that I am. I suspect a lot of people are. But we, not sacrifice. We’ve kind of switched it up a little bit.
It’s almost like the movies. In the ’80s and ’90s, you went to the movies. And, we started getting better systems, higher quality televisions, distribution of higher quality content. And at some point you go, “Well, I’m not going to go to the movies. I’m just going to sit at home and watch it on my,” I don’t know, “my new plasma, my new LED television,” back in the late ’90s or early 2000s.
And now you have these 65 inch televisions, and so that industry has changed. It’s not that you’re not watching movies, you’re just doing it at home.
Okay. Well, so after COVID, maybe you don’t go out as much, but you still want the restaurant meal at home.
Chris Needs: Mm-hmm.
Noah Brooks: Right? So, our spending habits have changed to some degree, where instead of being out, we’re just ordering at home-
Chris Needs: Mm-hmm.
Noah Brooks: … probably more expensive. But, you don’t drink alcohol. You’re not ordering drinks.
Chris Needs: Mm-hmm.
Noah Brooks: And so maybe, it’s less expensive. Maybe, I’m saving money by ordering on DoorDash. Is that possible?
Chris Needs: Well, they charge more for the food. There’s a service fee, tipping the driver. The way I would think of it is, “Well, I don’t have to tip or buy alcohol, so I’m saving money.” But then when I really look at, “Am, I? I don’t know.” It’s hard to tell.
Noah Brooks: In my mind, I’m going to say, “I’m-
Chris Needs: Tally it up.
Noah Brooks: … saving money.”
Chris Needs: Yeah.
Noah Brooks: That’s a way to save some. Yeah. Probably not, probably not. Yeah. So, I mentioned the holiday coming up. A few weeks ago, I said that my wife and I were out. We did some traveling. We saw some shows. And then, since the last time I was here, we saw another show.
We are continuing the Tom Petty tour. For everybody out there, I said that Tom Petty had passed away. And it was somebody that we wanted to go see, and we just never did. And then there was kind of this impetus to be like, “Hey, these guys, they’re not going to be around forever, certainly the Grateful Dead.”
And then last week, on Tuesday, we went and we saw the Rolling Stones in Philadelphia. Now, these guys are just as old as Grateful Dead. Right? Different kind of music. But Ronnie Wood, I think he’s 81. He’s up there jamming on the guitar. Mick Jagger, he’s a rock star.
Chris Needs: Is he still alive?
Noah Brooks: I have no idea.
Chris Needs: Living his life.
Noah Brooks: That was at Philly, at The Link, where the Eagles play. It was packed, sold out. I mean, it was a great show. I’m sure it wasn’t like a show in the ’80s. They were a little bit slower. But it was sold out, and people are excited to see them.
We were in Vegas. We saw The Sphere. And I just saw that The Eagles are going to do a residency now at The Sphere.
Chris Needs: Wow.
Noah Brooks: You do know who The Eagles are?
Chris Needs: I do know who the Eagles are. Speaking of The Sphere, I saw HP’s having a major conference there, and Jensen Wong is going to speak, so-
Noah Brooks: Oh, no way.
Chris Needs: He’s going to keep the Nvidia train rolling and keep the-
Noah Brooks: I didn’t think about a conference at The Sphere. But in terms of the technology-
Chris Needs: It’s there.
Noah Brooks: I mean, you don’t need a little PowerPoint with a screen anymore. You have these thousands of square feet of screen. I don’t even know how many thousands of square feet it is. Kind of crazy. Yeah. Kind of crazy.
The one thing I didn’t mention, when we were coming back from Las Vegas two weeks ago, the flight home. It was a few days before D-Day. I think it was like June 2nd or something like that. And when we got to the gate, there was some, I guess it was TSA officials that had the… I don’t know if officials is the right word. TSA employees that had these big flags.
Some of them were American flags, some of them were POW/MIA flags. And, we asked the person at the gate what was going on. They said, “Oh, we have a D-Day…” I think she said, “A D-Day hero that’s on the plane.” And, it turns out we sat right next to the person. I’m not going to mess up his first name, but-
Chris Needs: Onofrio, was it?
Noah Brooks: Yeah. Ono Zicari. I think he was 98, 97, and American had paid for him to fly back to Normandy. So, he was on his leg to Philly. And then he was going to do, I guess, Philly to Paris on American.
I was listening to him talk. He was amazing. He was just an incredible, interesting character. So a few days after that, during D-Day, sure enough. We turn on ABC, I’m sure everybody’s talking about it, and there is this guy that we just were on the plane with, Mr. Zicari, who was being interviewed on the beaches of Normandy, about his time there. The men, I’m going to assume women, but the people from D-Day, there are very few left.
Chris Needs: Yeah.
Noah Brooks: I mean, I think it’s less than 1,000, if I’m not mistaken. Dying off left and right. But, I didn’t mention it last time. I thought it was interesting. It left a little mark on me just hearing him talk, personally, obviously on the news. But just, yeah.
Chris Needs: Imagine his emotions going back there after being there almost a whole life ago, the feelings that must’ve come back to him.
Noah Brooks: Uh. Crazy. I mean, I got choked up when I realized what was going on and listening to him talk. But, yeah. It was interesting, let’s put it that way. Something, I probably won’t forget.
Chris Needs: Yeah.
Noah Brooks: Okay. So, get back to finance. What else do you have for us today, Mr. Needs?
Chris Needs: Oh, just sort of going back to when I was listening to Jay Powell. I thought in the last meeting, which was April 30th to May 1st, I think, they had some hot data where they could have been, I would’ve argued if they’re data dependent, moderately hawkish. And, they were anything but hawkish. They were super dovish in that press conference from that May 1st meeting, which sort of led to the strong May a little bit.
And then in this one, I felt like we got some data points that were in their favor towards maybe, a dovish side of things. And I felt like the verbiage he was putting out there was, I would say, slightly to moderately hawkish. So, I was sort of surprised by that.
I mean, there’s a huge hurdle for them to be full hawks and get off of this rate cut train that we’re kind of on. They’re still on the higher for longer, but leaning towards a cut this year based on the numbers they’re putting out there. But I was surprised by that to hear the change despite the data that was coming out.
I mean, we had CPI come at 3.3 versus 3.4. Expectation on headline core came in at 3.4 versus 3.5, expected good data points. PPI came in cool, 2.2 versus 2.5. And the only strong point was that jobs number, which he seemed to, we’ll say, poo-poo a little bit-
Noah Brooks: Yeah.
Chris Needs: And, he-
Noah Brooks: So-
Chris Needs: … came out moderately hawkish is how I took it.
Noah Brooks: I think it’s worth noting here that the Federal Reserve is in this really weird predicament, where I think technically they would like to see job losses in the economy before they started to lower. And so at the same time, they also want to be ahead of it. They don’t want to wait too long.
But, you have an election coming up. They don’t want to be seen as being political. They want to be apolitical. We had said, I think a few weeks ago, three or four podcasts ago, that we didn’t think they were going to do anything before the election.
And so with June coming and going, and essentially they’re kicking the can down the road, I think it’s almost impossible that they do anything before it. Now, if I’m not mistaken, there’s a fed meeting the day after the election.
Chris Needs: There is. Yup. So, will be closely watched.
Noah Brooks: Yeah, yeah. It wouldn’t surprise me if they made a change the day after.
Chris Needs: The odds are currently straddling September and that November meeting, if I’m correct. So, yeah. There’s going to be lots of ramifications.
Noah Brooks: Yeah. Now just keep in mind, they don’t have to make a change on a Fed meeting day.
Chris Needs: That’s true.
Noah Brooks: They could make a change at any time. They have complete power and discretion to do that. Do they normally do it on a Fed meeting day?
Chris Needs: That’s what-
Noah Brooks: Yeah.
Chris Needs: … they did on and off, in October.
Noah Brooks: Yeah.
Chris Needs: That would be surprising.
Noah Brooks: I don’t think so. I don’t think they’re going to do it before the election.
Chris Needs: I don’t think so, either.
Noah Brooks: Yeah. I don’t know. But let’s go back to the CPI a little bit. So the year-over-year number, obviously is coming down pretty dramatically. It’s 3.4%. But, the month over month was 0.2. It was actually, if you go out another decimal, it was 1.6%. Now, we can go out as many decimals as we want. But the fact of the matter is, the way they’re measuring it, it is coming down.
Chris Needs: Yeah. I mean, if you annualize that number in a vacuum, that gets them a lot closer to that 2%. You’d be just a shade above it, which would be welcome. So, why was he hawkish? I don’t-
Noah Brooks: Well, he doesn’t want to drive the market up.
Chris Needs: No.
Noah Brooks: Right?
Chris Needs: That didn’t stop him before, but.
Noah Brooks: Well, has something changed?
Chris Needs: I don’t know.
Noah Brooks: So, you mentioned PPI. PPI is still coming down. Right? Pretty significantly. That’s the producer price index, which is wholesale goods and services, that’s coming down. Do you think that if there wasn’t an election that we’d be on a different rate course?
Chris Needs: I think they feel that pressure. And, yes. It’s weighing into it, but I think they don’t want to be reactive again. We talked about that.
Sure. He doesn’t want to be Arthur Burns and cut too early, but he doesn’t want to be reactive. He doesn’t want to be blamed as the Fed causing another recession, which is the overarching narrative out there. Over the years, they caused the boom and bust cycles themselves, which-
Noah Brooks: Yeah.
Chris Needs: … isn’t entirely true, but it sure seems that way sometimes, and-
Noah Brooks: Well, they have an impact.
Chris Needs: Definitely do. They essentially control a lot of the business decisions out there.
Noah Brooks: Yeah, yeah. No question about it. So they take a business cycle, and they not necessarily leverage it. They’ll make it better or worse, and a lot of times they don’t help.
Chris Needs: Yeah. They seem to speed things up a little bit.
Noah Brooks: Yeah. I mean, listen. This time we have a situation where in modern history, nothing like this has ever happened. The pandemic, people out of work, emergency relief, this has not happened in modern times, with the speed of the industries, everybody being out of work, everybody coming back to work, the supply chain issues. This is really a new frontier for the Federal Reserve. And-
Chris Needs: Many case studies will be done on this-
Noah Brooks: Oh.
Chris Needs: … for sure.
Noah Brooks: I can only imagine what B-School is going to be like in 10 years looking back on COVID. I mean, 20 years, with certainly the hindsight being 20/20 and all that. I mean, you’ll probably get degrees simply on pandemic finance.
Chris Needs: Yeah.
Noah Brooks: Right? If they don’t have it, it’s coming.
Chris Needs: Yeah.
Noah Brooks: They don’t have it, it’s coming. One of the things that I talk about with some people is, “Are we through COVID?” I mean, “Is COVID done?”
One of the things that I saw this week related to travel, was one of the long haul carriers, Cathay Pacific, based in Hong Kong. They fly to Asia. They fly, some, to Europe, but a lot of Asia from the USA and Europe.
So during COVID, all the big airlines, they put most of their planes away, or at least some of their planes away. Cathay Pacific put, I think, 85 planes into long-term storage, which was roughly 80% of their total capacity.
They came out this week, and they said that they have taken their last plane out of storage. And so it makes me think like, “Okay. Are we officially done with COVID?” But in addition to their last plane coming out of storage, they also said that they have orders for 80 new planes. And, some of those are replacements for their older planes, but they seem to be implying that long haul international travel is really coming back. And, they’re at the point where they have all the seat [inaudible 00:29:16] filled, from where it was pre COVID.
Chris Needs: Mm-hmm.
Noah Brooks: In my mind, that’s amazing. I mean, people were talking that it’d be years and years and years. And, yeah. I guess, technically, it is years and years and years.
Chris Needs: Yeah.
Noah Brooks: We’re four years into it. But it seems that any remnants from a business standpoint of COVID, certainly in the travel industry, are flying out the door.
Chris Needs: Yeah.
Noah Brooks: Right?
Chris Needs: I haven’t seen a COVID post in forever. So, yeah. I think we’re totally-
Noah Brooks: One of our advisors has COVID, right now.
Chris Needs: Really?
Noah Brooks: Yeah, yeah. I got to bounce back on his email just yesterday. I reached out to him and he said, “No.” He’s really sick.
Chris Needs: Wow.
Noah Brooks: Yeah. Kind of nutty, but you don’t hear about it.
Chris Needs: No.
Noah Brooks: You don’t hear about it. We were in New York on Friday night. We went to see the Michael Jackson musical, which was great. It was great fun. New York City’s always a great time. There were some masks going on there.
Chris Needs: Oh.
Noah Brooks: Not tons, but there were still people masking up. I did see people walking in Central Park with a mask on.
Chris Needs: Oh, boy. Outside with a mask.
Noah Brooks: You know?
Chris Needs: Yup.
Noah Brooks: Right? I mean, it could be spread lots of different ways. They could have been wearing a mask pre COVID. I don’t know.
Chris Needs: Maybe.
Noah Brooks: Maybe. Okay. What else do we have?
Chris Needs: Just a random point on the VIX, the Volatility Index. So, we had that spike up a little bit in April. It got up to 19.2 from average of 13.7 in Q1. Obviously, no volatility in Q1 based on that average VIX number. But that 19.2, it felt rough in the moment. April felt difficult, but that’s below the historical average of 19.5.
So, volatility has been really suppressed. And it’s very interesting, it slammed right back down. And, I don’t know.
I keep that as a tiny red flag on my radar. We were joking about, was it 2022 or early 2023? We’re like, “If the VIX is below this number-
Noah Brooks: Yeah.
Chris Needs: … buy.”
Noah Brooks: Yeah.
Chris Needs: Or, “sell.” “If it’s above this number, buy.” You could track the market based on that, it seemed like.
So something I’m keeping an eye on, especially with this concentration and quick move up in the megacaps, where there hasn’t been as much participation, as you already mentioned, mid-caps, small-caps or those bottom 400 of the S&P 500, or bottom 490, even.
Noah Brooks: Shew. Kind of nutty.
Chris Needs: Yeah.
Noah Brooks: Kind of nutty. I just want to bring up one thing here. I don’t know if our listeners out there know Ben White. He was a finance journalist, been around for a long, long time. I think he started as a career at Politico and had been reporting on CNBC, Journal, New York Times, things like that. He passed away last week. His wife came on X and announced it.
Just a shout-out to him. I’ve been paying attention to his articles and his reporting since the global financial crisis. He had some great stuff on that back then. So, just a shout-out to him and his family.
Chris Needs: I have a quick call out, I guess. So we had the US Open this past weekend and went down to the wire. Rory McIlroy and Bryson DeChambeau, a little bit of fireworks there. If you don’t know the history, if you’re not into the golf game, obviously there’s been this LIV golf tour, which Bryson DeChambeau was a defector to, took a big payday. Rory McIlroy, one of the biggest outspoken critics about it.
And, they were going mano y mano. It came down to the last couple holes. And unfortunately for Rory, he kind of choked it away, missing two very short putts on 16 and 18. But, our area has a little connection-
Noah Brooks: Our area?
Chris Needs: … to US Open. Yeah.
Noah Brooks: Okay.
Chris Needs: So Pinehurst No. 2, where US Open was played at, was designed by one of the masterclass architects in terms of golf courses, Donald Ross. And our local, the club I belong to actually, was redesigned by Donald Ross, who I call the infamous Donald Ross.
He’s famous for his false front greens. So if you land in the front third or maybe even a little more in the middle third of the green, it’s an illusion. And, that ball will come rolling 10, 15 yards back into the fairway.
And if you watched the tournament at all, you saw a couple of them. I think Rory even got hit with one, hit it to the middle of the green and it rolled 15 yards off. And then, he had to chip it right back up on there. So, I call him the infamous Donald Ross-
Noah Brooks: Okay.
Chris Needs: … because we have at least four or five false fronts up at Schuylkill. I’m not as good as them, and I fall victim-
Noah Brooks: Yeah.
Chris Needs: … to it many times.
Noah Brooks: I’m still waiting for that invite, though.
Chris Needs: Oh. It’s an open invite.
Noah Brooks: Oh, you know what? I don’t really like open invites.
Chris Needs: All right. I’ll give you a formal invite.
Noah Brooks: Everybody says, “Oh, it’s an open invite. Just let me know when you want to go.” Whether that’s dinner or out on the boat, no one ever does that. It’s like you need a specific invite.
Chris Needs: All right. We’ll get you a formal invite.
THE AMERICAN ECONOMY AT ALL-TIME HIGHS
Noah Brooks: Formal invite. Okay. Listen, everybody, thank you so much for joining us today. We really appreciate it. I guess in closing, I’m going to say the market’s up.
Chris Needs: All time highs.
Noah Brooks: All time highs, again, Right? 34. No. 5,460, if I’m not mistaken, on the S&P 500. NASDAQ at all time highs. Dow, not so much. Mid-caps, not so much. Small-caps, not so much.
I guess there’s an expectation that they’re going to come alive at some point. Maybe after the Fed lowers, which isn’t necessarily guaranteed, but it’s coming at some point. Hopefully, after the election. Maybe, even before the election, but probably not. Day after, maybe.
So, keep that in your sites. But stock market overall, S&P 500, all time highs once again. And, there has been a lot of naysayers out there over whether it’s this year, whether it’s last year, people have remnants of 2022 in their brains. It has not happened.
I’ve been saying this for a while, but I’ve been saying it a lot in the last week or two. You sound smart, telling people not to invest. I mean, you do. You list these reasons and everybody just agrees. Right? And, they start shaking their heads.
Chris Needs: People love fear, that’s why.
Noah Brooks: Yeah. They love it. “Oh, okay. This is a reason not to.” But the fact of the matter is, we’re at all time highs once again. So, I’m going to leave you with this. Don’t bet against the American economy, just don’t do it. There’s times the market’s going to be down, but it’s not most of the time.
All right. For the Market Enthusiast, I’m Noah Brooks with Chris needs. Thank you so much for listening.
Disclaimer
The opinions voiced in this podcast are for general information only and are not intended to provide specific advice or recommendations for any individual to determine which strategies or investments may be suitable for you. Consult the appropriate qualified professional prior to making a decision. The economic forecast set forth may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful. All performance referenced as historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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