Transcript
Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s days. But as Stu and I live our exciting lives traveling all over the world so people can hear us live, it's sometimes hard to get us connected on a Tuesday. So here we are on— what day is it today, Stu— Thursday?
It's Thursday, Dave.
Wow. That means I missed Valentine's Day. I know you're renowned as a romantic. Did you do anything special for Valentine's Day?
Yes, we had the heart-shaped pasta at our house, and finished up with a little chocolate fondue, and flowers all around for my wife and kids. A good day. I was all ready to do our podcast on Tuesday, Dave. I had some roses for you as well.
Oh, I'm sorry I missed that. Can you just send them to my wife? I was on a plane instead of with her. I'm sure she'd appreciate the roses. So, this is probably more for when I'm on with Scott Lysakowski, but here's one I did hear on Valentine's Day: when the S&P 500 is up at least 7.5% on the year by Valentine's Day, 90% of the time, the year finishes up. Not bad, eh? And generally, it goes up from there. So a lot of love for stock markets. I guess the thing that continues to be causing all the warm and fuzzies all around— because we love employment; everyone likes to have a job when they want it— is that we continue to see strong labor markets. The February reports with Canada and the US on the labor market front was super hot. We got the inflation report out of the US— the consumer’s and producer’s. The consumer one continued the trend down, but maybe not as fast as we'd like to see. The producer index this morning came in a little bit higher than expected. So as we talked about last week, all these different scenarios that can play out largely depend on the idea that inflation is going to be under control, which allows you to see somewhere down the road where rates are no longer going up, they're maybe going down. Based on our conversation last week, is this shifting your mindset or you're seeing it shift the market mindset in any way?
Yeah, well, you can have the same confidence in terms of where we're going to end up in 6 or 12 months from now, but at the same time, acknowledge and understand that market participants on a daily basis recalculate these odds. Money probabilities shift this way, shift that way. So you have a Federal Reserve and central banks who say they're resolute: we're going to leave interest rates higher, maybe for longer, to get inflation under control. And they say, well, the majority of the move upwards in interest rate has likely taken place. So markets get quite excited. Are we there? Will there be another 25, another 50? But in the grand scheme of things, the lion's share of the move has taken place and then the next phase is, okay, we get to this number and will we be there for three or six or nine months? In all cases, we're comfortable with where we'll end up, but the path between here and there is always subject to debate. And in some of the economic data, there's times when good news is good news and there's times when good news is bad news. In part due to inflation— so it's not entirely a real statistic of strength—, consumer spending is pretty strong still. In the month of January, some of the large US banks put out daily volume updates from what they see in their credit cards and things like that. We knew that January was a little bit strong. Unemployment has been strong. Wage pressures is coming off the boil a little bit, I would say, but still there. So we have this path, we have a reasonable degree of confidence on the end game, but if the markets bet 100% on the end game and you get one little piece of data that causes some disruption, you get volatility. And with markets up strongly— you mentioned the Valentine's Day statistic—some animal spirits have returned and you have people doing same day options now. You have all sorts of short-term activity that tends to accelerate once markets start to improve. And it's created some volatility. I think we still are thinking about three buckets of stocks. I've been calling them the three bowls of porridge recently, for the three bears. One bowl says there's going to be a recession. Earnings are going to drop and multiples will drop with it. That's how stocks are under pressure. The next bowl says things are pretty good, but in order to maintain this valuation, inflation needs to decline. So while we forecast that, it needs to hold that line. And then there's the third bowl of porridge that still has a lot of stocks that trade at below-average valuations, and if the economy is pretty good, they benefit from this broader economic activity. Even though markets have done well, it's not difficult to go and find a mundane business where you might say, well, in a year or two, that stock could be 15% or 20% higher.
You talked about the daily options trading. With all of this money on the sidelines that we're hearing about— and some of it's going to consumer spending, but some of this is long-term investment dollars that’s gone to very conservative cash or cash equivalents over much of the last year as interest rates have risen— and so, you can earn a little bit of money without really taking any risk on those dollars. That sense of more of a risk mentality, is that not going to just pull that money into the market? And is that money that pushes things higher in the near term only to be disappointed? Or is there enough there to continue to push it on further as long as we continue to get the expected news that comes out?
Yeah, it's a great point. On the one side, that money that sits in those accounts is earning an attractive return— more than it has in some time. So I don't know if you'll pull a ton of cash out of there. This morning I was looking at a company that trades sub-ten-times earnings. It has a dividend yield in the mid five percentage points, and grew their dividend by double digits. So from a long-term standpoint, you sit there and say, well, that's a pretty interesting investment proposition against cash at 5, but I don't know exactly where that share price will be 12 months from now. I don't know if you'll see the same type of movement that we saw in the past when cash was getting nothing. But if the economy continues to be a little bit stronger— it's not that much stronger in real terms, but as inflation comes down, if the economy stays stronger and you get half a percent more of real growth or 1% more real growth as things progress, that's not a bad environment for a lot of companies to make some money. And there's also lots of businesses that benefit when interest rates are higher as well, because they've got cash that they're investing and they're making higher returns as well.
Yeah. And as we continue to go through the big earnings season— we're at the tail end of it now—, you've made the comment overall that you're seeing decent earnings across a wide range of businesses, which is somewhat healthy.
Yeah, the revenue environment is not bad. The margins have been squeezed a little bit, but there's more businesses having interesting earnings reports than the middle of COVID when it was a very narrow range of businesses having interesting earnings reports.
Yeah, and we talk about money on the sidelines, Stu— that's the term we'll use— it's money that is typically sitting in bonds or stocks to generate a higher rate of return over the long term— a cash or cash equivalent, maybe earning 4.5%, 5%, maybe even 5.5%— and investors are looking to get that money into the market. Do you have an approach that you might suggest for people to take that money and prudently put it back to work in markets? Hopefully everyone has their cup of coffee or cup of something that warms them up because I think I know the answer that Stu is going to give here.
Well, of course it's dollar-cost averaging. I just put my cape on and I'm dollar-cost average boy. The great thing about dollar-cost averaging in this environment is twofold. First, it's a great way to put money into a more volatile environment, but also, the cash that is earning higher returns is generating even more money for dollar-cost averaging. So it's a great combination. Obviously, I'm a huge fan of it myself. I use the tool relentlessly in my own affairs. But you just think back in the last twelve months where we've had periods of time where people thought the economy was going to slow too much, then it was going to speed up, then it was going to slow down, then to be better, and the valuation looked good and then it didn't look so good. And in all likelihood, in this environment, that's going to persist, and dollar-cost averaging is a great way of negotiating that.
Yeah, I was hoping you'd come back to that today because it really has been a successful approach. I read a terrific article on it earlier this week, which is why it was top of mind with me, just showing how effective it can be in this type of environment where you got that push-pull all the time and you know that we're going to get to a point where on the longer-term, things are going to be better. But you've just got this back and forth right now and so it's just such a good approach. Now Stu, we talked a lot about it around this time last year or maybe a little bit later, and at that point you were talking more of a twelve-month period where you would ease money back into markets. Any change in your time frame around dollar-cost averaging right now? Is it longer or shorter in terms of the way that you would put that money to work?
No, not really. Consistency is the key for dollar-cost averaging, so I tend to use the same time frame over and over again.
Yeah, as I've always said, I like ten months because the math is easy. Dividing by twelve is harder than dividing by ten. But that's just me. Anyway, Stu, once again, great stuff and we'll check in with you again next week. And, hopefully you didn't use all that pasta. I think that would be lovely all year long.
100%, Dave. Okay, we'll talk to you next week. Thanks very much.