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INTRODUCTION AND 4TH OF JULY
Noah Brooks: Welcome back to another installment. Not just another installment, the 4th of July installment of the Market Enthusiast. Thank you so much for joining us today. You were going to wear something patriotic?
Chris Needs: Well, you’re criticizing me saying my shirt’s not red enough but there’s some red on there.
Noah Brooks: Well, when you said you were going to wear something patriotic I was like … I looked through my closet this morning and I had, I don’t know, something from … That looked like I was at a tennis match. It didn’t seem patriotic it seemed really … I don’t know, really stuck up. And I was like I don’t think I should wear that. I just figured I’d do my regular white shirt.
Chris Needs: There you go.
Noah Brooks: Well, next year-
Chris Needs: Next year.
Noah Brooks: But you’re not supposed to do the American flag, right? If I remember from social studies in fifth grade, you’re not supposed to have anything of the American flag-wise except the flag itself.
Chris Needs: My understanding is it goes against convention if it’s actually made from a flag rather than clothes designed as a flag.
Noah Brooks: Okay.
Chris Needs: That’s just what I go with because I wear flag stuff sometimes.
Noah Brooks: Are you a big 4th of July guy?
Chris Needs: Of course. Who isn’t?
Noah Brooks: What do you do for 4th of July? Are you a big fireworks guy?
Chris Needs: Fireworks, golf, barbecues, parties.
Noah Brooks: Yeah, barbecues. Is golf a fire … A 4th of July thing? I don’t know.
Chris Needs: For me it is.
Noah Brooks: I’m not sure that our founding fathers were golfing on the 4th of July-
Chris Needs: Probably not.
MARKET PERFORMANCE AND ANTI-MARKET SENTIMENT
Noah Brooks: Even after the founding of our nation. All right, well welcome anyway. Thank you so much for joining us today. It is the 4th of July edition, 4th of July this week. We just finished the first half of the year. I’m telling you, everybody is unsatisfied, everybody’s waiting for the market to tank but here we are S&P 500 up 15% and people don’t like it. I just cannot figure it out why everybody’s anti-market at the moment.
Chris Needs: Because it’s top-heavy, I guess. It’s a lot of the large caps doing well. S&P 500, NASDAQ 100 doing very well. Dow even hit an all-time new high. Besides that, smalls and mids aren’t really working, bonds not really working.
Noah Brooks: Collecting a coupon but overall not working so much. Year-to-date, what did you say on mid-caps, up about five? Small caps, depending on what you’re looking at, Russell 2000 or the S&P 600 … S&P 600 actually down for the year. Russell 2000 up about a percent. That’s a pretty big delta or difference between flat and the S&P being up 15.
Chris Needs: I had small caps down 1% year-to-date and S&P 500 up 15%. That is the largest outperformance of large versus small back to 1998.
Noah Brooks: Wow. That’s a long time ago.
Chris Needs: Then you have growth versus value, also big disparity there. At the end of the quarter it was 20.5% for Russell 1000 growth versus 6.5% for value.
Noah Brooks: Are these value stocks ever going to come back?
Chris Needs: I’m sure they’ll have their time but tech is running with it right now.
Noah Brooks: It’s not that it’s just value stocks. When you look at the different sectors out there, really technology has led the way, I don’t want to say for the last 10 years but the 10-year return on tech is great. COVID killed some real estate, COVID killed some industrials with the exception of a few individual companies. But when you look at the names not so great. But technology has just been on fire. During COVID, it was the profitless, tech like the Zoom’s. Then after that I mean, it was the Apple’s, Amazon’s, Google’s. Obviously NVIDIA’s of the world.
Chris Needs: This is despite all the regulatory scrutiny they’re under too. It seems like every week the EU is finding or investigating one of our mega-cap tech stocks for something. It doesn’t end.
Noah Brooks: Well, I mean, antitrust violations are significant, right? When you hear about companies that are conspiring with other companies to keep prices high, or as these larger companies are acquiring smaller competitors and then raising prices, or limiting access for consumers to other services I mean, I think that there’s … I don’t think that’s great, right? I don’t think that’s great. I think capitalism has grown on competition. The EU guys have a much easier time pointing it out, and then finding them, and telling them they can’t do it.
Chris Needs: Especially because all of their tech companies aren’t on the scale of ours. They really don’t have a major tech competitor to our guys.
Noah Brooks: Not at the moment. I’m sure it’ll come at some point. We hadn’t talked about this, but do you think that’s an innovation situation? Do you think it’s just we had a head start on technology?
Chris Needs: I’m sure they’d have a lighter touch with companies founded in the EU whether they’d admit it or not. I mean, if you’re a tech innovator and you understand the regulatory environment there, there’s an arbitrage to be had by just moving your headquarters over to the US.
Noah Brooks: I don’t know how many companies have done that. I know some certainly have listed on exchanges here in the United States but I don’t know about moving headquarters.
Chris Needs: Yeah, they’ll just found here. They won’t even start over there and bring it over they’ll just come right here.
INFLATION AND JOB OPENINGS
Noah Brooks: That’s nutty. So first half of the year big news, obviously, everybody’s talking about inflation. It seems like inflation is really cooling off. Now we had some information last week … Personal consumption expenditures, what the Federal Reserve says is their preferred gauge of inflation, under three coming in at 2.6. That seems to be good. We’re a few market days beyond that data point and we … If we close today, where we are right at the moment, the S&P would be closing at an all-time high, just shy … When we came in here just shy of 5,500.
Chris Needs: PCE was in line, 2.6 on both headline and core. That core is at the lowest level since March of 2021, sort of before this whole thing blew up on us. So it’s nice to return those levels certainly.
Noah Brooks: We always talk about the difference between inflation coming down, disinflation, and actual deflation. I’ve looked at a fair number of commodities before we came in here and one of the stats that I’ve seen today, and certainly it’s not just today … But one of the stats that I’ve seen is used car prices. So the CPI for used car prices is actually negative and it’s been negative for over a year. It’s one of the few things where you actually see the consumer price coming down. But I did pull some other stuff, some of the things that went crazy during COVID. You remember lumber. A 2X4 used to be 1.50. Or the prime was maybe 1.88 at Home Depot and they were up to 10 bucks. Lumber contracts were over $2,000 a share back in 2021. Today they’re under 500, almost under $450 a contract. I mean, that’s great for the builders. Corn is at four years lows today. Wheat back in 2022 was up to $1,300 a contract, now we’re sitting under 600.
I mentioned the used car prices. We know Brent Crude, when Russia invaded Ukraine, it was upwards of 140. West Texas Intermediate was upwards of 130. Both in mid-80s today, 83 and 86 respectively. I mean, if nothing changes, right … And this is a big if. If those commodities don’t start to go back up, or even if they go up a little bit and don’t return to their highs or near their highs, I feel like we’re set up for inflation under 3% and maybe getting close to the Federal Reserve’s target of 2%.
Chris Needs: I definitely agree. The Fed isn’t … I think they’re not trying to run a lap waving a flag saying they beat inflation now that PC’s is at 2.6 and CPI is at a good number too. What was CPI? 3.3 I think on headline. Because the last time they sort of ran that victory lap people just came out and started blowing the market back up, blowing prices back up. I think they’re tentative to say they beat it because it’ll change expectations and make people think cuts are coming quicker. I think otherwise they would say something more to that style but they learned their lesson a little bit in December.
DIVERSIFICATION IN INVESTING
Noah Brooks: I mean, the facts of the matter though is that cuts are coming. We had a long conversation about it last week. We don’t know how many cuts. The market is priced in 100 to 150 basis points in cuts. Obviously, there’s an election coming up. I don’t think anybody really thinks they’re going to cut before the election, although it’s possible. I don’t know that I’d put high probability on it.
Chris Needs: The market does have odds for a September cut. How many times has the CME FedWatch, which is market expectations, been completely wrong over the last two years?
Noah Brooks: I mean, a lot. Absolutely a lot. I’m not saying that it couldn’t happen before the election, it’s just the closer you get to the election the less likely it is. I think they definitely want to be apolitical. Although they keep telling us that they’re data-dependent, right? We come into July, we get a reasonable CPI number. I think if you go out of decimal it was 3.26.
Chris Needs: Oh, there we go.
Noah Brooks: Right?
Chris Needs: That’s the detail we wanted.
Noah Brooks: I mean, you get a three one or something like that, I mean … Because they have to cut before we get down there otherwise-
Chris Needs: You’ll overshoot.
Noah Brooks: Yeah. You’ll overshoot, you’ll over … Keep it tight for too long.
Chris Needs: I’m not saying they’re taking their eye off the ball, but Powell had comments this morning talking about how they’re very focused now on the labor market and keeping an eye there. So we did have the JOLTS report come out which was-
Noah Brooks: Job Opening Labor Turnover Survey.
Chris Needs: Yes. It was a little bit higher than expected, not majorly. Expectation was for 7.9 million jobs and it was at, I think it was 8.14 million jobs. So a few more jobs out there than expected.
Noah Brooks: Right. So job openings. And maybe it’s just the crowd that I run around with these days, but I haven’t heard anybody say lately that they couldn’t get a job. I mean, there’s eight million job openings. Obviously, some of those job openings are jobs that people don’t want to do. Have you heard anybody say, “Oh my god, I can’t find a job?”
Chris Needs: No. I mean, that’s all we heard right after everything went haywire after COVID was “We can’t get enough people.” Haven’t seen much of that lately.
Noah Brooks: And we have unemployment numbers about 240,000. Well, conventional wisdom is, if it’s under 400,000 that you’re going to have wage inflation, right? What did you say earlier about the 5%?
Chris Needs: I mean, historically you’ll just look at a line in the sand. Generally below 5% unemployment you’ll see wage inflation. Now, things have been different for the past several years but we’re still well below 5% at 4% flat on unemployment.
Noah Brooks: All in all, I mean, the economy looks good, it feels good. I know that not everybody … To everybody, it doesn’t look and feel good, but to a large majority of the population we’ve been able to roll with the punches. Inflation has certainly affected people’s discretionary spending to some degree. But the fact of the matter is that personal disposable income is the highest that it’s ever been since COVID when you look at it on aggregate. Wage inflation has actually helped the US wage earner. We’ve had wages accelerate faster than inflation.
Chris Needs: And they’re holding more stable as CPI and PC are down at the 3.3 and 2.6 levels. I think I saw last week it’s at still 4.1% annualized on wages so it’s a good number. One other thing we’re seeing that will contribute towards CPI maybe catching up to PC a little bit is housing. We’re starting to see a lot of houses finally come on the market and be available for sale. Right now, year over year, active listings are up 16% year over year. That’s the highest in two years. Obviously, we’ve been in a tough spot between prices and rates but they’re finally coming back on the market. Homes without a mortgage is actually at a very, very high level. So 39% of people in the US don’t have a mortgage.
Noah Brooks: Wow.
Chris Needs: That’s the mortgage rate.
Noah Brooks: Do you a mortgage?
Chris Needs: I do.
Noah Brooks: I do too.
Chris Needs: Unfortunately.
Noah Brooks: Did you say 38, 39%?
Chris Needs: 39, yep.
Noah Brooks: Do you think that those are all retired people?
Chris Needs: Most are, yeah. Most are probably boomers.
EFFICIENCY OF AMERICAN CAPITAL MARKETS
Noah Brooks: Boomers, okay. I mean, the reality is it’s tough for a regular person to own a home without a mortgage unless they were given it by their parents. Which is great, I know people that that’s happened to. The reality is people get mortgages.
Chris Needs: And the people who make a boatload of money and could get by without a mortgage they’ll just buy a more expensive home anyway and get the mortgage.
Noah Brooks: Yeah, yeah, absolutely. One of the other things that we look at is disposable income and people, what they’re doing with their money. We see a lot of people traveling, right? I was going to bring this up earlier we were talking about fireworks. When we were little kids we would do this exodus down to Florida to visit my grandmother so down I-95. One of the things that I always remember about this drive with my parents was you would see these signs on I-95 for South of the Border. South of the Border 278 miles. And then 20 miles later you’d see it, 258 miles and it was always for Pedro. At some point in my life, I think with my wife, we made that exodus driving, I don’t do that drive anymore. But we made that drive down to Florida and we stopped there. Have you ever been there?
Chris Needs: Yeah.
Noah Brooks: I think the technical term is a crap hole. It is the worst. I don’t know where they got all the money for the signage but it’s all … The signs are great.
Chris Needs: I think most people who are on the East Coast here are sort of aware of it through travels and whatnot. They’ve done a good job of marketing at least.
Noah Brooks: Oh, absolutely. No internet needed, right? I don’t make that drive down to Florida or south of the border anymore but I did drive for fireworks last week. So my neighbor Bo he does a fireworks show every year. We’ve seen it, we’ve been invited to it, but last year we went and it was awesome. It’s my neighbor in the cul-de-sac and he spends a fair amount of money. This year he’s actually got an electronic … An app that’s going to light them all off. I thought to my-
Chris Needs: Save some fingers.
Noah Brooks: Yeah, save some fingers. I thought to myself, this guy’s putting a lot of money out there and it’s for the neighborhood, I’m going to go and get some fireworks. Here in Pennsylvania fireworks are, I guess, legal, right? Well, not I guess I mean, they are.
Chris Needs: Not the good ones, not the good ones.
Noah Brooks: No, the good ones are. I went to Easton which is right on the border of, as you know, Pennsylvania, New Jersey, and there’s all these fireworks stores, and you have to go in and give your ID. And I picked up a few hundred dollars worth of fireworks to help this guy out and I brought them back. When I was younger I messed around with fireworks but I always felt like I was a novice. I mean, it was cool and we had fun. But this guy’s actually going to do it electronically with the app and I think that’s great. Are you a fireworks guy?
Chris Needs: Yeah. Alexis family they do fireworks every year. We go to our local fireworks in town and whatnot. I’m a big fan. Nolan’s a big fan too.
Noah Brooks: Yeah, the little guy. How could you have a little boy that wouldn’t like them, right?
Chris Needs: We had a guy in Orwigsburg the other day at 7:00, totally daylight out, and they went from 7:00 to 10:30 just constant fireworks. I’m thinking, what did they drop like 100 grand on this?
Noah Brooks: Yeah, that’s an expense. The fireworks that I bought, they were not cheap. I mean, a few hundred bucks does not equate to a lot of fireworks, absolutely not. We’re talking 4th of July, we’re talking fireworks, we’re talking travel, right? People are traveling. AAA is estimated that it’s … 52.5 million people are going to travel more than 50 miles away for the holiday. And what we’ve seen over the last month or so is on the 27th and 28th, which was essentially … Was that last weekend something like that? I’m pretty sure. 2.92 and 2.93 million TSA travelers every day. So we are well above 2023, we’re well above 2019. People just want to get out. You had a stat that you shared with me earlier.
Chris Needs: Americans are traveling internationally. Specifically to Europe, travel is up 8% year over year so it’s a boost right now to the southern European economies right now, all the Americans are going over there blowing money on their vacations.
Noah Brooks: I’m down with that, I’m ready. I mean, we stopped in 2020, we didn’t go anywhere in ’21, we didn’t go anywhere in ’22. It took us until October of ’23 or November of ’23 to actually get out of the country to go back to Europe. I mean, I’m ready to go back though. Absolutely.
Chris Needs: It’s getting the itch.
Noah Brooks: Getting the itch. We have some other things to talk about. You and I were talking sports earlier. We have some big contracts coming up. I’m not a sports guy per se, but we have the Olympics coming up. The Olympic trials are going on right now, the Olympics are coming over to Paris.
Chris Needs: Just to segue on that. Nike just got killed on their last earnings report. You’d think they’d be getting a boost right before the Olympics because you know that swish is going to be plastered everywhere, everyone’s going to be wearing it. They’re down 56% from their all-time high in November of 2021.
Noah Brooks: Wow.
Chris Needs: Had a rough go of it. And there was a real scathing analyst note that basically said, “The current management team is incompetent or too inexperienced and don’t” … “Doesn’t have the skill of the former team.”
Noah Brooks: Well, didn’t you tell us that you were buying your shoes on Temu for like $9 or something? You said that.
Chris Needs: Literally a steal, that’s how I look at it.
Noah Brooks: Olympics are coming up in Paris. I don’t know anybody that’s traveling over there per se but we’re spending a lot of time watching the Olympic trials on television. Is that something you do?
Chris Needs: I definitely do, yeah. I’m looking forward to the basketball, that’s my favorite thing to watch. And the track and field, the sprinting, I like the sprinters.
Noah Brooks: Oh, yeah.
Chris Needs: Swimming sometimes you can get excited over. Apparently, we have an amazing swimming team. We’re pretty awesome every year but we’ve got some … We’ve got a squad.
Noah Brooks: We watched gymnastics last night and the last two nights, actually, and a bunch of our women’s crew gymnasts have hurt themselves so we have some more senior gymnasts that are coming back into the fold. And I’ll tell you what, for 26, 27 years old, Simone Biles-
Chris Needs: Yeah, right.
Noah Brooks: She kills it.
Chris Needs: She’s amazing.
Noah Brooks: I look over at Alish every once in a while and I go, “I could probably do about 70% of the stuff that they’re doing,” and she just starts laughing at me.
Chris Needs: I would’ve laughed at you too.
Noah Brooks: I always think I could probably do that. You don’t think that when you see it?
Chris Needs: No.
Noah Brooks: You don’t, okay? I don’t know.
Chris Needs: They do triple flips, somersault twists. I’m just like how?
FEDERAL RESERVE AND INTEREST RATES
Noah Brooks: If you gave me a week or two. No. Yeah, probably not, probably not. We have an election coming up. We have a Federal Reserve that … Are they dying to lower interest rates?
Chris Needs: I think they want to, I don’t think they’re dying to. Like you said, they haven’t taken that quote-unquote victory lap on where inflation’s at but it seems like they’re shifting their focus a little bit over to the jobs market. Now they may be looking at two things rather than purely focusing on inflation.
Noah Brooks: What I’m hearing there is, they want to see jobs decrease. I mean, we know that their mandate is full employment and price stability, right, which is code for low inflation. Are we going to need to see jobs numbers come in negative?
Chris Needs: I don’t think they’ll have to go negative but I think they would like to see some low triple … Maybe 150 down to 75 would be their sweet spot for things to stabilize.
Noah Brooks: I think they want to see negative.
Chris Needs: That will be tough.
Noah Brooks: That would not be great. I mean, the first time we get a negative print in the jobs numbers I think it’ll really solidify people to say, “Okay, that” … “This was the top.” Depending on who you talk to, depending on the analyst that you listen to … If we close right now we’re going to be at 5,500 or just a few points shy of that on the S&P 500. It seems like every time we get a new high, which we’ve had many of them this year, maybe 31 or so, you have … The bears come out pounding say, “That was it, that’s the end.” And then we consolidate for a few days and then move higher. It’s one of these things where that once the market climbs the wall of worry-
Chris Needs: Yes.
MARKET EXPECTATIONS AND PRICE TARGETS
Noah Brooks: There’s nothing really out there that’s negative. I mean, we know inflation is coming down so that’s a positive. Jobs are still being created that’s a positive. There’s a lot of unknowns but we don’t have any really negative data. It seems like the market is going to go higher. You had a stat earlier today, that we were talking about, where we were versus analysts last year’s expectations for the market.
Chris Needs: So at the midpoint of the year S&P was at 5460 and that was above … At the beginning of the year, obviously, analysts always adjust their price targets up as the year goes on. But based on the beginning of the year price targets, 5460 exceeded all of the Wall Street analysts price targets for end of the year.
Noah Brooks: Halfway through. So here we are we’re beginning of July and we’re already above every single price target.
Chris Needs: Well, now they’ve moved them up.
Noah Brooks: Well, yeah, now they moved them up. We have an informal price target thing that we do with the team here at Good Life.
Chris Needs: Your price hasn’t been eclipsed yet.
Noah Brooks: No, I still-
Chris Needs: Mine has.
Noah Brooks: What was your number?
Chris Needs: 4975. Why are you trying to embarrass me here?
Noah Brooks: We have some people that put the numbers up there. I definitely had the highest target for the year-end, right? So year-end ’24 my target was 5900. We’re getting closer to it we’re 400 points away. Less than 10% away from that number. I think we could get there personally. I mean, it’s certainly possible that we don’t. But 400 points into 5500 it’s less than 10% it’s not like we could … It’s not like it would be that hard. If we start to actually see some continued earnings growth … In the first half of the year, earnings growth was upwards of 9% for the S&P 500. I mean, that’s considerable, right? Other than the COVID rebound, I think that’s the highest earnings growth that we’ve had in the last four years. It’s definitely possible that this market continues to climb higher. It’s possible that the NVIDIA’s of the world continue to climb higher. The Amazon’s, the Google’s, the Microsoft’s. I don’t know if the word is much better, but I would feel … I’d feel solid if we start to see some expansion from small caps and mid-caps.
Chris Needs: If we’re in a healthy bull market we would definitely see that. Not that we can’t stay in a bull market if we don’t get the breadth expansion. S&P 500, over 35% of the index is in the top 10 holdings. Russell 1000 growth, 55% are in the top 10 holdings.
Noah Brooks: Top 10.
Chris Needs: It’s a lot of concentration.
IMPORTANCE OF DIVERSIFICATION
Noah Brooks: It is. But I mean if it’s working, right? I figured I would talk a little bit about diversification because people are saying that, to your point, these stats they’re really driving the market, and they are and you should own them. If you don’t already you should probably own other things as well. Mid-caps, small caps, value, a little bit international. Asset allocation is how you invest when you don’t know the future. I think we talked about this a little bit last time. In the last decade, 2000 and … To 2009, the S&P was really flat. Mid-caps were up, small caps were up, international was up, emerging markets were up. I’m not saying that I don’t think that this is going to happen but people are calling for the end is near type of stuff. You have to own a little bit of everything and really be diversified.
As I always say on this program, don’t bet against America. I’m sure there’s going to be a time period where the market’s down market. The market was down in 2022. Who called for that? Hardly anybody, right? But here we are new all-time highs, just shy of 5500, and people seem to hate it, people seem to hate it. If everybody was saying “6000 on the S&P or 45000 on the Dow,” and everybody was into it I would be more concerned. But because everybody hates this rally it actually feels okay to me. All right. Well, here we are coming to the end of the show. Do you have anything for the good of the order, Chris?
Chris Needs: Just one random stat.
Noah Brooks: Okay.
HONG KONG’S HANG SENG INDEX
Chris Needs: It’s not a round number so pardon me. The Hong Kong thing. So 27 years ago Britain handed over Hong Kong to China with their agreement of two systems and that was sort of in place. Hong Kong was pretty independent until a little over four years ago now when they had that national security law go in. Essentially China went in and took over Hong Kong, took away sort of their freedom, independence a little bit, changed the rule of law. Sort of in that time, over the last five years, the Hang Seng Index is down 36%.
Noah Brooks: Wow.
Chris Needs: Interesting.
Noah Brooks: Just like the lost decade here and emerging markets doing significantly better, I’m sure there’s going to be a time, or I expect that there’s going to be a time where those markets do well it just has not been in the last few years, right? I mean, everybody knows the American market. For us, the domestic market has certainly been the place to be. It seems like, at least in the near future, it’s still going to continue to be the place to be.
Chris Needs: One of the reasons why I think we came out of COVID so … I’m not going to say unscathed but fairly better than the rest of the world I think is because of our capital markets, how efficiently capital is applied, how sort of liberal our financial system is in terms of open and free. Most of the world doesn’t have our quality of financial system.
Noah Brooks: And gosh darn it because we’re Americans, baby.
Chris Needs: Yes. And because of that.
Noah Brooks: Right? Come on now. Hey, listen, everybody, happy 4th of July. I hope you had a great time whether it’s at the beach, watching fireworks, spending time with family. Please send your questions, comments, or thoughts into us at the Market Enthusiast at goodlifefa.com. Hope to hear from you soon. Happy 4th of July, everybody, we’ll talk to you next time.
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. Economic forecast set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.