The Recession of 2023: Answers to Your Burning Questions with Andrew Opdyke — EP 024

Matthew Peck: Well, welcome, everyone, again to SHP Financial’s Retirement Roadmap Podcast. I’ll be your host today, Matthew Peck. And I’m joined by Andrew Opdyke. He is A Senior Economist with First Trust. He’s now a recurring guest. So, Andrew, I mean, now the reputation is going to precede you for our millions and millions of listeners. Really, it’s going to be a big deal. You might have difficulty walking down the street after this. So, I do want to fairly warn you. What I’ll do, as I said, Andrew is again a Senior Economist with First Trust and we want to welcome him on to talk about there in his market outlook for 2023. We’ve been joking around call it like Recession Watch 2023. I mean everyone’s talking about, is there a recession? When will there be a recession? How bad will there be a recession? So, really glad you can come on and help provide some insight for all of our listeners.

Andrew Opdyke: Oh, Matthew, I love joining you. I’m happy to be here.

Matthew Peck: So, I guess when people ask you about market outlook, I mean, what’s the first thing that you go to that sort of can help, again, provide some type of reading the tea leaves? I mean, what’s the first thing that pops off your mind?

Andrew Opdyke: Yeah. So, I mean, in any given year, what you’re looking at are, what are the major moving factors? There’s going to be volatility, there’s going to be corporate announcements, there’s going to be mergers, there’s going to be bankruptcies, there’s going to be some unexpected events but what you’re looking for are what are the big issues. What are the major lever points on the markets that could push interest rates higher or lower? What could push earnings higher or lower? What pushes consumer spending power? And really now, for the last few years, the central theme has been don’t fight the Fed. You’ve had the Federal Reserve who came in, cut interest rate to zero. You add in that the U.S. government added $5 trillion of stimulus. You weren’t going to play that in the second half of 2020 into 2021 and then when the checks stopped. And when we think about last year, the major impacting factor on the markets last year was the shift in interest rates. It was this Federal Reserve who had gone from, okay, back in December 2021, as we were entering last year, the Fed said, “Eh, maybe we’re going to have to have like three rate hikes next year. We’re going to have to raise rates by a total of three-quarters of 1%.”

And I’ll tell you, if that had held true, if the Fed had held the path they said they were going to follow, I think the markets would have done much better. I think they would have been up last year. But as the year progressed, we get the unexpected events, we get Russia-Ukraine, we got more notable numbers on the inflation side. It completely changed their path. Instead of going 75 basis points, three-quarters of 1%, they ended up going by more than 4%. They went far more aggressive than they anticipated. And as we stand here in the early parts of 2023, all eyes, in my opinion, are still on the Fed. How much more do they have to do? How long are they going to stay there? When are they going to cut? I guess the key question for this year is where’s the finish line? When is the Fed’s job done? Because once they’re done, we get back to fundamentals, once they’re done but we also know the Fed can cause a recession. They can cause a slowdown in business investment. They can spook consumers as it gets more expensive to borrow and buy a house, borrow and buy a car, borrow and invest in a business. So, that, I believe, is going to be the critical theme, the most important tea leaves to be watching.

Matthew Peck: Okay. Well, let me pick up on two things you mentioned. The first I always wonder about historical comparisons and just how helpful they are because certainly as we talk about fighting the Fed and whatnot, I bring up Volcker a lot about what Volcker did back in the early 80s and how he was able to raise interest rates and really crush inflation for pretty much close to 40 years. And obviously, those circumstances were different. Coming off of the 70s, the oil embargo, labor unions were obviously a lot stronger, but yet, okay, here is a Fed raising interest rates to get inflation under control. Okay. So, how about now? Because now we’re talking about a pandemic. We’re talking about a monetary stimulus and fiscal stimulus of unprecedented proportions. So, is historical comparisons helpful or not really?

Andrew Opdyke: I think they’re helpful but I think you need to be really careful about what comparisons you’re using. A lot of people and I’ll say we look at the Fed, too, in terms of the 1970s, what Volcker did and this is the, you know, a lot of people are asking this year, Jerome Powell, the Chair of the Fed. Is he going to be the next Paul Volcker or is he going to be the next Arthur Burns, who was the other Fed chairman during the 1970s, who blinked, who stepped back when inflation was still running high, when they were trying to tamp it down, but economic pain came, they defaulted. They went towards the economic side. Inflation took off. However, when I’m looking at the economic fundamentals and I think about what happened, how the money entered the system, what the ramifications look like, I would say that the best reference period for what the big fiscal stimulus impacts are is back in 1942, 1943. It’s when we fought the war. I mean, think about this. In the 1970s, as you mentioned, the oil embargo. We had the labor unions. It was the Great Society, right? LBJ. There were entitlement reforms, which meant there was more money coming in and it continued to come in higher and higher over a number of years.

What we saw in 2020 and 2021 was a quick spike and then a quick drop off in spending, which is exactly what we saw around World War II. And just like with World War II, think about this for a moment. When we fought the war, we changed factories over. We shut down some of the businesses because we needed to make tanks, planes, ammunitions, and that impacted output from the economy on a lot of other goods and services. In 2020, we shifted to the good side of the economy. We moved away from services. As we got out of World War II, people came home, soldiers had money to spend, but we still needed a transition time to get the businesses back up and running, to get the workers back up and running. So, we ran through a period of higher inflation as essentially we absorbed that money that had entered the system. I think that is a decent reference period for what we’re going through today. However, there’s another critical change, and that’s how the central bank operates. If you go back any time really in central bank history prior to the financial crisis, the central bank worked with the banks, the JPMorgans, the Bank of America, Wells Fargo.

The way they tried to control lending activity and the money entering the system is that these banks didn’t really hold reserves. They hold just enough money to make the loans that they were extending. If they wanted to extend the loans, they borrowed from the central bank. So, the central bank could choose, add more money, add less money, and that was how they influenced rates. That’s how they influence lending activity. That’s what Volcker used. He jacked up that borrowing rate, made it restrictive for banks to access money to make new loans, and that money creation stopped. When we did the QE program back in the financial crisis and we added to it in COVID, we added so many reserves to the system that that old methodology of managing finances for the central bank changed. And the tools they have, they have tools. Now, instead of charging them in order to borrow money, we pay them not to lend the money. And that it does have some influence but it’s less precise. It’s gotten less precise. It’s more blunt force impact. And so, quite honestly they can try to follow the Volcker method, but it’s going to work with a bit of a numbing effect.

Matthew Peck: Well, all right. So, two questions. I may kind of go back to the history part in that shift because that was Bernanke, right? My understanding of that sort of paradigm shift was after studying the Great Depression and I think he was at Princeton and got a Ph.D. and that was his thesis was the Great Depression about the lack of action that the Federal Reserve did, the central banks did in the 30s. And then, okay, we’re now going to have the exact opposite response. Is that kind of where that paradigm shift really happened?

Andrew Opdyke: Yeah. So, here was the thinking behind it. And so, if you go back to the 1930s now remember the 1930s we did not have the FDIC insurance. So, one of the big issues they had was bank runs, right? Banks were worried, consumers were worried because there was new rules coming in, there was new taxation coming in. We started to see a pullback in consumer activity. We started to see businesses fail. Consumers started to worry about the money in the system. So, they started making runs on the banks and the banks were running out of money. Basically, it started this spiral, and only certain groups back in the 1930s, only certain types of banks could access the Fed as a lender of last resort. So, what we learned is if you take money out of the system, if we call loans and that’s what businesses, that’s what banks started to do, they said, “Hey, look, bakery, I know we extended you this loan a year ago. We need the money back because we have demand from our depositors. We got to call this loan early.” When you start taking money out of the system, you start reducing loans, right? That baker had taken the money and put it into equipment and into inventory and into the workers.

So, as soon as you call that, he’s got to sell it probably at a discounted price. He’s got to let go of employees who now don’t have the revenues to go buy from the shoemaker, who don’t have the money to buy from whatever else, whatever other businesses they were going to go to. It starts this downturn in the economy. Bernanke and the Fed back then said, “Look, we learned from history. We cannot let the money supply contract sharply. We cannot allow for…” and this is their concern during the financial crisis is that you are starting to see defaults. And we had the home loan crisis. Banks were worried about other banks’ profitability. So, they said, “Look, we’re going to inject money into the system. What we’re going to do is not allow it to contract,” the major cause of the Great Depression in their minds. “We’re going to counteract that and we’re going to go the opposite direction. We’re going to inject a lot of money.” But here was the problem. When they did quantitative easing, what quantitative easing was, was the Federal Reserve coming in and buying Treasuries and mortgage-backed securities from banks and giving them reserves. And that does provide liquidity in the system but the banks didn’t lend that money. It did not lead to a pickup in lending to consumers, to businesses. So, the vast majority of all the QE, it was non-inflationary. It sat on bank balance sheets and, again, the banks got paid to hold it.

So, I think the Fed coming into COVID said, “Look, we can do this again. It won’t be inflationary because, look, we had this already happened back in ’08, ‘09 and really it wasn’t that stimulative but it helped balance out what was happening in the banking sector.” The problem was that this time around, at the same time, the Fed was doing QE, we did the PPP loans, we did the direct stimulus checks, and we did the additional unemployment benefit. So, what we ultimately were doing is the Fed was monetizing the debt that the government was creating to do new spending, and that new spending, those programs put money into the hands directly into the hands of the consumers. So, yes, this paradigm shift took place because they were trying to learn from history but it’s an imprecise science. And so, when Bernanke and company did it, they thought they were doing it for all the right reasons, trying to avoid another Great Depression, but because that too had been untested, it has had knock-on effects. And to be honest, I don’t know if we’ll ever go back to the old system. The Fed would have to go a long way. They would have to get rid of a lot of assets on their balance sheet to get back to the scarce reserve system that they had operated on for 60, 70, 80 years.

Matthew Peck: Okay. So, then, as you said before, so now the Fed is trying to unwind that to a certain extent. Maybe not going all the way back to the scarce reserve system I think with the T.O.D., I forget some of the laws that were passed with the reserves for the bank that’s not going to get repealed either. But point being, so then as the Fed tries to unwind this and you were talking about tea leaves of just say like for how high and for how long so I guess, A, what’s your own opinion on that? And then, B, how and for what you’re seeing, how resilient is the consumer? How resilient is the economy? And again, we’ve already seen obviously housing prices and mortgage rates jack up and whatnot. So, I guess can we take it or is there going to be a break and how big of a break will there be in the economy?

Andrew Opdyke: Yeah. That’s a critical question. If the Fed knew exactly the answer, it would put them at ease. They’re watching the employment picture. I think the employment picture for them, you know, right now the unemployment rate is at 3.5%. It’s about the lowest level we’ve seen since the 1960s. We’re still seeing gains in terms of the wages, the average hourly earnings, but we are seeing some takedowns in some of the other areas, the banks, the Fed. And remember, the Fed is the regulator of the commercial banks. So, they know what JPMorgan is saying. They know Bank of America, Wells Fargo, Citibank. And those banks are saying, “Look, we have the bank accounts. We can see the inflows, we can see the outflows, we can see how much they’ve saved, what they have in checking, what they have in savings.” And what we can see is a number of it’s called the financial obligations ratio. This number is tracking what percentage of after-tax income, how much of the money that hits consumer bank accounts is currently being spent to pay for the house, the car, the credit cards, the student loans, your big revolving obligations. These are the ones when this number starts to rise is where you see the consumers are getting a little stretched. We saw this going into the financial crisis.

The good news is that this number right now is at one of the lowest levels we’ve seen in decades. It’s on the low end of really what we’ve seen since 1980, which is when the Fed started recording it. People said, “Well, how is that?” Interest rates have now gone back up. You know, the mortgage rate went from 2%, 2.75%, 3%, up to 6%, 7%. And the bank said, “Well, yeah, the interest rates have gone up, but how many people bought new homes?” How many people refinanced back in 2020 and 2021 and are still sitting on their 2%, 2.75%, 3%, 3.5%? And that’s the majority of people. One of the big issues that housing has right now is that people don’t want to give up their mortgage. They don’t want to sell and then have to go out and buy something at a mortgage rate that’s twice as much, which means their cost, it’s straight interest. You’re not gaining. You’re not gaining value. You’re not getting into your home. People are not really engaging with that. So, they said, “Look, our consumers actually right now are in a pretty healthy position. This is not the Great Recession. This is not an ’08, ‘09 all over again. We do not have that stretching. And we also largely don’t see it on the corporate side.”

So, the Fed’s watching that and they said, “Okay. That gives us a little leeway. It gives us a little more confidence that we can go a little bit harder in terms of chasing inflation.” So, my viewpoint is, if you look at the Fed’s numbers, they put out a forecast, the dot plots. This is my Super Bowl. I love the dot plots. I pop popcorn, I grab a Diet Coke. While I do that, I watch the Fed…

Matthew Peck: And you might get a new hobby. I don’t know.

Andrew Opdyke: I’m a super exciting guy. I get invited to lots of cocktail parties. So, their dot plots, what their dot plot showed is that their base case is three rate hikes this next year, 25 basis point hikes, 325 basis point hikes. However, not everybody on the FOMC, the group that votes on this, is at that three rate hikes. There’s two that are below and there are seven that are above. They say, “We think we need to go even further than that.” The Fed is tilted towards the, “We probably have to go a little bit higher.” But here’s the thing. I think the more important question today is not, “Do they do two rate hikes, three rate hikes, four rate hikes?” It’s how long do they keep it there? How long do they keep rates restrictive? And I think they’re going to do that throughout the entirety of this year. I do not think we’re going to see a rate cut before the end of 2023. I do think we will see a recession, but because the consumers are in a stronger position, because businesses are in a stronger position, because of the fundamentals that we have in place today, I think this is a recession that’s going to look more like a 1991-type recession than an ’08, ’09 or a COVID recession. Our base case right now is that GDP, inflation-adjusted output from the US economy, will decline by about 0.5% this year.

Matthew Peck: Okay. So, in real terms. I’m sorry. And just all our listeners know, there is talk in terms of real and nominal. Nominal is total GDP and then you have real which is what that is and minus whatever inflation may be.

Andrew Opdyke: Yeah. So, think about it like you go to the grocery store, right? You go to, let’s say Walmart and you go buy groceries. If you go out to Walmart today and you pay 5% more than you did a year ago. Okay. Your total bill last year was $100. Now, it’s $105. This year at $105, your products are getting fewer things. Right? Because at the end of the day, the cost of the milk went up, the eggs went up, the meat went up. And because of that inflation, you’re paying more. That’s the nominal number. The real number is what are you getting? How many things are you getting, the quantities? Because over time, if you had an economy, if you had a nation that was growing strictly because you were paying more and more and more and more every year, but you were getting the exact same thing or fewer things, you’re not progressing. So, when we evaluate economies domestically, internationally, what we care about is, are you producing more? Are you generating more value? Because that’s the wealth created over time. So, this year is going to be an odd year. We will probably see less things produced, but because of inflation, we will see more money spent.

So, that overall spending in the U.S. economy will be higher but that output number, the most important number for the health check on the U.S. economy, we expect is going to be down about a half of a percent. And some people say, hey, is that enough for the Fed to pull back? I don’t think it is. I don’t think it is. And quite honestly, I think the market’s kind of mispricing that here as we start the year.

Matthew Peck: And so, so let me pick that up, because one thing that we have talked about in your past podcast is, okay, well, what is the impact of a recession on earnings? And one thing you’re always telling clients about and our listeners about is that about the all-important PE ratio, which is sort of like, okay, how stocks and how the markets are measured. And it’s like, okay, what’s the price of an individual market or a stock or index? And then what’s the underlying earnings or the E in that PE ratio? And so, I’ve been telling folks that there’s a lot of focus now on earnings and, okay, how have companies, how are they going to do emerging from either a slow Q4 or now coming into Q3? I’m sorry, Q1? So, it’s like a couple of questions. So, first broadly, if a recession were to strike and again, in your base case, what does that do to earnings?

Andrew Opdyke: Yeah. I do think it pushes earnings down. I think that earnings our base case right now is that we’ll see earnings decline this year by 5% to 10%. And some of that’s going to come from reduced sales. Some of it’s going to come from pressures that I do think we’re going to start seeing the employment numbers start to shift. And again, we’re already starting to see this. If you look at the numbers and we watched that employment report that came out last week, people were celebrating it. But what did we see in it? One, temp workers have been getting reduced month after month after month, and temp workers are usually the first group to go as companies start to downshift on activity. The second thing we saw is that consumers are, I’m sorry, workers were working fewer hours on average. This is typically signs of an economic slowdown, of an output slowdown, is that they’ll let people work a little bit less before they start cutting workers. And this is a major question for this year. How willing are companies to let go of employees after the last two years where they had a heck of a time trying to get them? They may be sticky or they may hold onto people for longer, even when they’re doing less work.

So, the number of hours worked fell and, yes, we added about 250,000 workers in December. But when you think about the fact that we had 155 million workers that were already there, if everybody works a tenth of an hour less, that’s the equivalent of close to 500,000 full-time jobs. So, despite the fact that we added workers, we did less. This is an early sign and this is going to flow through. If they’re working less hours, if we’re putting less production, it’s going to mean fewer things to sell, and consumers are going to pull back on some of that activity. Now, the earnings numbers is something that everybody’s trying to track. And you go to the analysts. But one of the problems that you have, when you’re watching the analysts, is analysts do not like to downgrade the numbers. They do not like to cut forecast for earnings until the companies kind of give them a good reason to. Their concern is that if I’m an analyst and I’m watching I’m picking on Walmart, I was just in Bentonville, Arkansas. I think Walmart’s an incredible thing. When you stop and think about what it did to the availability of products to consumers, it is an unbelievable thing that has happened, benefiting immensely millions upon millions upon millions of people.

But I’m going to pick on them here. I don’t know what their numbers look like. I’m not an analyst for Walmart. I just want to use them as an example. If an analyst says, “Oh, I think Walmart’s going to have a tougher time because let’s say we hit a recession, fewer people are working and they’re just not going to go out and buy as much.” And the analysts could say, “I think that means that Walmart’s earnings are going to come down.” But there’s always a little fear from the analyst that if I cut those numbers, if I downgrade my estimate for Walmart, that the people over at Walmart might get upset and maybe I don’t get invited into some of those meetings where you get to talk with management. It’s something that you shouldn’t have to worry about, but it’s something that analysts do consider. And they might work at a bank, right? That analyst might work at an investment bank and if Walmart’s coming out and they want to issue new bonds, they want to be able to come to the table and say, “Yeah, we’d like to do that.” And they worry if they downgraded them that Walmart’s not going to look at them as favorably.

So, what analysts look for is for the companies to make the first move. And as we stand here in the first quarter, we’re getting Q4 results. We’re getting the results from the end of last year and there’s going to be question after question after question in all these earnings calls on, “What’s your outlook for 2023?” And I think you’re going to see the companies in the first quarter lowering their guidance, and that gives the analysts that clear signal. “We have already told you it’s going to be lower,” and then the analysts feel comfortable marking some of those numbers down. So, I think you’re going to see those earnings revisions. I think you’re going to see those earnings downgrades because I think the companies themselves, to a degree, are going to open the floodgates. Should the system work that way? No, but it’s the reality of how things operate.

Matthew Peck: Interesting. Okay. So, I might then come back to that because I always love the human element. You know, it’s similar. I mean, I would tell clients about the human element when it comes to the Federal Reserve in the sense that they’ve basically got pants, right? I mean, they go, you know, it’s like, “Oh, it’s transitory. Don’t worry, Andrew. It’s transitory. Don’t you worry.” And then it’s like, “Oh, wait, wait a second. No, it’s not. Forget all that stuff.”

Andrew Opdyke: Not even close.

Matthew Peck: Yeah, right. So, you’re automatically going to have, “Not on my watch,” like fool me once, shame on you. Fool me twice, shame on me. Right? So, I almost see them… I mean, we’ll see. I like to think that they’re more data-driven and less emotional than your average bear. But the same point, I do see that human element be like, “Nope. We’re going to keep it higher for longer just because, again, not on our watch.” Right? That’s really fascinating, too. But the analyst aspect and some of the politics might be the best way of putting it. But let me go back to that in regards to the revenue and estimates and whatnot. If in fact, a 5% to 10% decline in earnings does occur, is that priced in currently or no? You know, at its current valuation the market’s not pricing in that and are maybe too optimistic?

Andrew Opdyke: I think a good portion of it is being priced right. So, investors but especially institutional investors, the people who are dealing with the markets on a day-to-day basis, they kind of know this is how some of the analysts’ estimates work. So, what they’re doing is they’re watching things, Walmart, McDonald’s, we’re using an example on this one. Those companies release data on same-store sales. They say, “Okay. How is this store performed this month versus last month? This month versus the same month last year?” So, you start to see even before they release their earnings numbers, you can start to identify those trends. You start to look for where those movements are and people look out and say, “Hey, the analyst estimates, if you go on the Bloomberg terminal today and you look at average earnings estimates for growth in 2023, it’s like up 8% to 9% this year.” I don’t think there’s too many people, especially as I’m traveling and I’m talking to investors, I’m talking to companies, there’s very, very few that are in that space unless you’re in the energy sector and then you’re like, “Yeah, I think 8 to 10 might be reasonable.” But for the most part, these companies are saying, “No, that’s going to come down.”

And I do think the market’s priced in most of that. Does anybody know what the final exact number will be? The answer is no. And there’s always that air of uncertainty, right? How many people knew at December of 2021 that Russia was going to invade Ukraine? And even if you knew that was going to happen, think about how difficult it is to kind of tie all the events in. When Russia invaded Ukraine, I saw countless research reports that said it’s going to be hard for energy to stay under $150 per barrel. Oil is going to go 150, 200, end of year 225 plus, and there’s no way it’s coming back down. And what happened? It ran up and then it came back down to almost where it started. And so, those things are so hard to predict how not just the first knock-on effect. Russia invades Ukraine. It cuts off energy supply. You have to understand how people are going to react, how they’re going to find alternatives, how creative people are going to be. So, there’s a component there. I don’t think the markets are perfectly priced. I think that they’re a little optimistic on what the Fed’s going to do, and this is where it gets a little hard. How much of it they’re pricing it on earnings? How much are they pricing in on some of the other factors? I do believe that the market in general is pricing in that the overall analyst estimate is wrong, that that number is going to come in lower. The question now is going to be how much lower.

Matthew Peck: That’s Interesting. And so, I’ll kind of end with sort of a general question because you sort of bring it up. And so, I guess, I’m finding the right way to put this because I don’t want to be too disrespectful but it’s like you mentioned about how difficult it is to predict, right? And so, you follow all these macro trends, human elements are at play and whatnot. So, did you constantly every day wake up and just say, “Okay. I have to have a slice of humble pie and then I go to my job.” So, how do you compartmentalize the fact that “Okay, this is such a hard job to predict these trends but at the same time, that is my job?”

Andrew Opdyke: Yeah. No, absolutely. You have to have a large degree of humility and you have to have one of the biggest… So, we, our team, our team over at First Trust, we have been consistently ranked. We have to put in forecast, right? So, we’ve been consistent about 86 groups that submit forecast, we’ve consistently been in the top five and people have asked us like, “How have you consistently stayed up there? What are you doing differently with your estimates?” And we’re like, “We have to constantly go back to the board on anything that we missed.” We’re always looking for what’s wrong, not trying to look and say, “Hey, we got that right and we got that right and we think this looks good.” At the end of the day, we don’t care what another company thinks of us. It doesn’t matter what Walmart or McDonald’s thinks of First Trust because, at the end of the day, we’re not going to give them a look. We’re not doing any of that stuff. Our job is to dig into the data and try to be as accurate as possible. But even with that, we can have the best mathematical models, we can have all this information, there is going to be variability and there’s going to be kind of some stuff that comes up in the data that’s hard to predict.

So, what we do is we got to be really honest with this, that we cannot tell you exactly where the market is going to be, where the economy is going to be to the second decimal point. What we’re looking at over time is saying, “When do the big deviations occur? When does it show?” So, what we’re looking at, we have our model, for example, on market valuations and we’re looking and saying, is the market fairly valued, overvalued, undervalued? Is it a precise number? “At 39 26, the market is perfectly, fairly valued.” No. What we have to say is, “Is it within plus or minus 10% of that? Because if it is, then it’s probably roughly fairly valued.” When you see the deviations occur and they occur more frequently than you would expect because human emotion, fear is an incredibly powerful emotion. And you have periods. Remember 2018? Corporate tax cuts come through, earnings jumped that year, what? About 20%? Now, if you’d walked into anybody’s room at the beginning of 2018 and said, “The year is going to end with earnings up 20%,” where do you think the markets are going to be? How many of those people would have said the markets are down?

Matthew Peck: Yeah. Or flat. Not even.

Andrew Opdyke: Zero. Yeah. But what happened? People got nervous because we had the rising China-U.S. trade escalations, we had a government shutdown, and the Federal Reserve was raising interest rates. And because of that, emotion took over, fear took over the what if, the uncertainty took over. Our model said, “Look, the markets are undervalued,” and there’s fear. I understand why there is some fear. But even if some of that is realized, that buffer position you have on what the numbers could come down to and still be undervalued, it’s a clear buy opportunity for us. Then what do we have in 2019? The Russia-U.S. trade escalation didn’t turn into nearly what people thought it would. The government shutdown didn’t really have any impact on GDP, and ultimately the Fed reversed rates. 2019, we saw almost no earnings growth, but the markets jumped 20%. The motto that we live by is that emotions can win out in the short term, but the math wins over time. The math wins out. And so, I can’t tell you. We have crystal balls, right? We’ve won them for home price forecasting. These things, they don’t work. They don’t work. I don’t have a crystal ball.

So, our jobs are to say that where are the major moving pieces? Where are the major deviations? Where do we see opportunities? And we will be wrong at times. We know we will be wrong at times but we’re going to try to be right more often than we’re wrong. And if we can do that and quite honestly you have to have a pretty big momentum. You got to have a pretty strong signal to make significant changes. Emotions tell us, “Oh, get out. Get in. Do all this stuff.” Most of the time, your best bet is to make small changes, to make adjustments at the margin, because there are some incredible factors that don’t get the time of day. They don’t get the coverage on the news because the news is selling ads and they’re going to go through the negativity. There are incredible underlying momentum drivers that are moving us forward over time. And, Matthew, me and you were talking right before we started, right before last, last week, I was on a cruise with my family and I told you the story that we were going on a boat and we were going past the coast of Cuba and there was somebody in the water.

There was a 29-year-old who had gone 55 miles offshore in Cuba and was trying to escape, trying to make it to the U.S. He literally risked his life to get a better opportunity and he left with basically a little bag tied around his neck and he was floating on a mattress 55 miles offshore in order to get to America because he knows that this is the land of opportunity and the entrepreneurship, the innovation, the private property rights, that is not going away. Whether the Fed goes to 5%, 5.5%, 6%, they’re still going to be people creating new companies. There’s still going to be amazing inventions. And let me end with a stat that I’ve been thinking about a lot going into this year. Up until the late 1960s, early 1970s, at no point in human history had more than half of the world’s adult population been able to read. Never in the history of the world until the late 1960s. Right now, it’s at 89%, 90%. And you think about what that does, the unleashing of human potential, the capacity to read and learn from those who came before you. And we’ve got the Internet. We’ve got these smartphones in our pockets to give us access to information like never before. And yes, we can use them to watch YouTube videos and, yes, we can use them to check on what our old high school friends were doing and see their trips.

But these tools are having an impact. And when I think about what’s going to happen in the next 2 years, 5 years, 10 years, 15 years, we are going to progress because it’s what we do. Will it be a straight line? No, but I think understanding the momentum drivers over time are critical for understanding why we invest over time because we can’t time the market but you are certainly rewarded for time in the market. And that’s one of the things I’ve been thinking about a lot starting this year.

Matthew Peck: Well, that’s great, Andrew. I think there’s no better note than to end on that, only because I’m an optimist by nature and I love it’s just, you know, it’s a great reminder for anyone that is listening because and just one little anecdote, then I’ll wrap up. But I mean we take a look at the consumer sentiment and it’s just like scraping the bottom of the barrel. And I’m like, I don’t think it’s that bad. And maybe I have rose-colored glasses and I’m a bit of an optimist, but when you tell that type of story of someone that’s willing to risk their life, America still has more going for than any other country I can possibly think of, I don’t say ever. That might be too bold but, in my mind, at least, I feel that way. So, I’m glad that feeling is shared. So, Andrew Opdyke, Senior Economist at First Trust, thank you so much for coming on our show, and I’m sure you’ll be coming back.

Andrew Opdyke: Matthew, thank you so much for having me.

Matthew Peck: All right. Thank you all for our listeners. We will see you whenever the next recording is. Be well.