Matt’s Markets on the Move with Laura Russo – Ep 60

Matthew Peck: Welcome, everyone, to another edition of SHP Financials Retirement Roadmap podcast. I’m your host today joined by Laura Russo.

Laura Russo: Hello.

Matthew Peck: And so, my name is Matthew Peck. And actually, today we’re going to be doing our version of Matt’s Markets on the Move. So, for all of our listeners, what we do is that on a quarterly basis, we go through what’s happening in the markets, what’s happened in the past, what does SHP look for right now, and then also what’s going to be looking at in the future, along with some questions and answers that we’d like to take in from the clients. So, we like to do this on a regular basis.

Laura Russo: Hey, Matt, not to interrupt you but I had a fun idea.

Matthew Peck: All right. Go ahead.

Laura Russo: So, for those of you who don’t know, we actually do this call for all of our clients, a separate video version.

Matthew Peck: Oh, yeah. That’s the longer one that has all the graphs. It’s obviously much more visual but I’m not sure if it would work here.

Laura Russo: What if, Matt, we have Christmas in July and we give it to everybody as a freebie this time around, just to show everyone a little bit of what it looks like for all of our clients who get the actual video version of it?

Matthew Peck: Oh, so that’ll be interesting. Okay. So, we use the exact same version that we do on our YouTube channel that we promote to our clients. Again, that’s the one with all the graphs. I mean, that one has a lot more…

Laura Russo: That’s the fancy version.

Matthew Peck: It is a fancy version. And frankly, it has a lot more information because it has all the graphs specifically. Now, it’s tough obviously on the audio but that could work.

Laura Russo: Yeah. We can just link the YouTube video and provide all the information in the subheading for you, guys. We just thought it’d be fun to really provide you with a little bit of a peek under the hood of what we do as SHP advisors over to our actual clients. So, we wanted to share that with you guys this time around.

Matthew Peck: Excellent. Okay. So, for all of our listeners, what we’re going to do is in a moment, we’re going to break and we’re going to come back with the full audio and visual version, but really let us know how it goes. I mean, send back any feedback whatsoever. Did you like that version? Did you prefer what we did in the past or whatever that may be? And obviously, we just want to be as engaged as possible. So, enjoy.

[EPISODE]

Laura Russo: All right. Hello, everyone, and welcome to this quarter’s episode of Matt’s Markets on the Move. I’m here with the famous Matthew C. Peck.

Matthew Peck: The one and only.

Laura Russo: The one and only. Thank God for that. I don’t think we could handle any more Matt. I’m just kidding. But, hey, we have an awesome show for you today. It’s going to be jam-packed. But I always love to start off with something a little bit fun, Matt. So, I have a question for you. You know, I’d love to keep you on your toes. My question for you is it’s summertime, right? We’re going to the beach. We live near the Cape. So, what is your book that you’re bringing to the beach with you? What are you going to read on the beach?

Matthew Peck: All right. I would have to have an umbrella, though. I definitely need a sun umbrella. Is that in this image?

Laura Russo: Yes. That’s in the image. You can also have one of those white sunblock noses. Maybe one of those safari hats.

Matthew Peck: Yeah, right.

Laura Russo: Go full sun protection.

Matthew Peck: Yeah, because I’m a big fan of shade.

Laura Russo: Oh, I might ask that question, is his first train of thought is, “I’m Irish. I need to protect myself from the sun”?

Matthew Peck: Glide sunblock in this scenario, you know.

Laura Russo: Just tell us the book.

Matthew Peck: We had to hold, right? It was funny. The only thing that pops in mind initially because there’s obviously so many good books out there is that funny story, Laura, is that on my honeymoon, here we are, my wife and I, newlyweds down in Aruba. Beautiful. You know, turquoise waters, wonderful beaches, sand on your toes. And I bring with me a hardcover book on the French and Indian War.

Laura Russo: Oh my gosh, Matt.

Matthew Peck: That just shows you how nerdy like the lovable nerdy man.

Laura Russo: How romantic he is.

Matthew Peck: Yeah, exactly. It’s not like love poetry.

Laura Russo: I know. It is.

Matthew Peck: It is. It is a history in the French and Indian War, which was fascinating.

Laura Russo: I’m sure. Yeah.

Matthew Peck: Book called The Cousins War. Check it out if you are a history geek like I am.

Laura Russo: That’s awesome. And for those of you who don’t know, we actually have a separate group chat in the office from all of us readers. It’s called We Read SHP and you can always get some good references there for what to read. Matt always has some really nice history.

Matthew Peck: Yeah. And I always do like a nerd alert.

Laura Russo: Yes, he does a nerd alert for us.

Matthew Peck: Prior to posting any books on that chat, I just warn people that it’s coming. There’s a massive history book on its way.

Laura Russo: And I have a dork alert because I’m all about fantasies. I love a good story. So, yeah, it’s a fun time. But let’s get serious now. Okay. Enough joking around that. So, we’re going to jump in. And as a reminder of how we love to break this down because we want to make it easy, we want to make it understandable is we’re going to do three segments for you. So, we’re going to do the past quarter. How did we do the historicals if you will? And we’re going to go through piece by piece of what our takeaways have been. And then we’re going to look at how does that impact us now. What are we looking at as we are in the present moment of the big ticket items?

And then we’re going to launch off into the future quarter, what we expect, what we anticipate, and as we get closer and closer to some big ticket items coming down the track for us. So, we’ve got a lot to go off of. So, Matt, let’s just jump right in. How did we do last quarter? It’s been a full quarter since we last sat here. What did we go through?

Matthew Peck: So, is everyone in front of everyone’s screen what we lovingly call the Skittles chart? So, we always like to start with what sectors have done the best and really start off on a macro level because we’ll talk about certain areas in the future like growth versus value and certain opportunities and pockets of opportunities that we look for. But as I mentioned, it’s first to take a look at what has done well, what cream is rising to the top of 2024, which is amazing too is the fact that, yes, we’re on the back half of 2024, which takes some time get your mind wrapped around that how quickly time passes. But yet again, leading the charge for the second year or at least for 18 months in, from 2023 into 2024, is large cap.

We’ll talk a little bit about the future, but the Magnificent Seven and the AI revolution is continuing to power the large-cap positions as you move forward. Then you have emerging market equity. So, think terms of like Indonesia and Mexico and India as well as certain countries. Developed markets coming in third. Think Europe and Rome and England and France and whatnot. And then right below there is our diversified portfolio. For all of our listeners and watchers out there, diversified portfolio represents 60% stocks and 40% bonds. Okay. And what we love about it, as you can see, is that that sort of light gray or whitish box is always right in the middle. Okay. And that’s kind of what you expect.

I mean, when you have a nice blend of stocks and bonds, you’re going to always end up in the middle. You’re never going to be leading. You’re never going to be on the top, but you’re also never going to be on the bottom. And that’s the beauty of diversification is being able to ride out whatever the markets may be, positive or negative. You’re kind of stabilized and you’re running through there. As we continue on commodities, high-yield cash is still there as we’re getting some pretty good rates of return on money markets. And then towards the bottom, I did want to point out, small cap, which I’ll get to in the future, but also fixed income. Laura, I’m sure as an advisor here at SHP, how many questions do you get about fixed-income bonds?

Laura Russo: Oh my gosh. All day long. Yeah. All day.

Matthew Peck: I don’t blame anyone for having those questions and we get them too, you know, Team Matt and other advisors here and teams here at SHP. It’s because people are always wondering like, “Why am I holding this asset? They always seem to be dragging me down.” And especially in recent history, too, I mean, even if you took a look at 2023, it was on the lower end of things. If you take a look at 2022, it had lost value. So, now we’re talking two years or even three years if you go further back that it has sort of been losing value. A couple of things to remind everyone as to why we own bonds and what the power of them are. First off is that what’s not necessarily represented here is the fact that bonds will pay interest and they’ll pay income.

Laura Russo: The favorite word: yield.

Matthew Peck: Yes. Right. Yield, dividend, interest. The income in the fixed income space is a crucial part of that answer because now we’re in the 4% to 5% range where we are receiving those coupons, getting that yield on a consistent basis. So, now we’re getting the income portion of it. The other factor on bonds is the fact that if interest rates are cut, then it serves as a capital appreciation. Then we’ll get a boost to that particular sector. Okay. Now, most folks and analysts are expecting at least one rate cut going into the future from the Federal Reserve. It is an economic shock, okay? And the Fed has to cut rates aggressively. Well, not only would we receive that income that we talked about but now we would get a significant capital appreciation, a big boost to that portion of the portfolio, right?

Okay. So, you can see it as almost like insurance in the sense that, all right, I’m going to get paid anywhere from 4% to 5% to have that in my portfolio. And in the meantime, if the economy shifts and shifts in a bad way quickly because we all know black swan events can happen, they can be rushes to safety at any point in time. If the Federal Reserve either cuts rates slowly or aggressively, then we have our income plus we have our capital appreciation. Okay. It hasn’t happened in recent history, but we try to just advocate patience, long-term views, and that’s why we own fixed income, even though it’s sort of had some rough patches recently.

Laura Russo: Exactly. And the easy way to remember it too is the teeter-totter. I know it’s kind of like 101, but basically when it comes to the fixed income, it’s going to be adjusted well with the rates. It’s the opposite.

Matthew Peck: Yes. Correct.

Laura Russo: That’s the typical fashion of it. So, just think of that teeter-totter. And if the rates are still up, your bonds are still going to be down. But if the rates start going down, we’re going to have that inverse. And that’s where we want to see it.

Matthew Peck: Yeah. So, you saw it did happen.

Laura Russo: But the yield is a huge piece. I think a lot of people forget about that is that it’s paying you out. You’re getting money out of it. And although the performance might be down on it, you’re still getting money out of this item.

Matthew Peck: Sorry to drop those. And specifically, because when people look on their statements or if they look online, they’ll see the negative and they don’t necessarily see that yield coming in.

Laura Russo: Right, exactly.

Matthew Peck: Again, why I don’t actually blame anyone for asking.

Laura Russo: Of course not.

Matthew Peck: Or repeatedly asking that question.

Laura Russo: And we want people to ask that question. We really do. Yeah, because we like to explain it because we’re nerds.

Matthew Peck: So, going forward, all right, so let me ask about, okay, so why or how did the… Let me click on this. Why? You know, we talked a little bit about AI but why also did large cap do well going forward? Well, let me take a look at both global as well as the United States when it comes to just the business and the macro environment and the economic environment. What you’re seeing here is the PMI, the purchasing managers index quarterly. And what it looks like, it looks at global, manufacturing, services, developed markets, emerging markets, U.S., etcetera. And if you look all the way down, Laura, you’re going to see a lot of green, right?

France and Germany, halfway down there they’re having a little bit of issues, obviously, for reasons we all know, on the news, Ukraine, and some of the elections recently in France threw that country into turmoil, political turmoil at least. But in general, you see a lot of green, shades of yellow. You don’t see a lot of red. Red is recession. Red is significant difficulty, which means that on a global level, if the global economy is doing well and large-cap companies are global companies, right, then you have a very good economic or a global economic backdrop.

Okay. If looking further, you take a look at the United States and right now you’ll see the GDP, which is for Q3, I’m sorry, Q2 2023, third quarter ’23, fourth quarter ’23, first quarter ’24, and you’ll see that growth sort of peaked and now is coming down. But that’s okay. I mean we’re literally on our trend growth line, which is where we should be. And I’ll also point out the fact that this is what the Federal Reserve wants. The inflation and the economy cannot burn so hot that we continue to get that 9%, 10%, 11% inflation that we had. So, slowing growth is not necessarily a bad thing at all. Now, stopping growth recessions…

Laura Russo: Don’t want that.

Matthew Peck: Don’t want that. Don’t want negatives. However, slowing growth is not a bad thing at all. And you’re starting to see that. So, in other words, it’s growth. It’s still healthy. It’s still moving forward. It might not be as well as it was in the past, but if the economy’s growing, profits are there, companies are doing well in large cap. Large-cap stocks are doing well as well. So, we talked about the slowing aspect. All right. Well, let’s talk about why. Well, certainly with the rising of the higher interest rates have been there. That’s a part too, just to jump back to the fixed income. You know, there was anticipated of anywhere from 3 to 4 rate cuts this year. It’s more like looking it’s like going to be about one rate cut at most this year as sort of like the futures markets telling us.

So, here we have anywhere from two years, let’s say, of high interest rates. It eventually is going to bite. It is eventually going to slow down the economy, which we have seen, as well as things like when it comes to consumer finances, on the bottom right corner, you see delinquencies are coming back up, which makes sense. People who have auto loans, who try to continue to spend or took out a loan with a high interest rate, they’re starting to go delinquent a little bit. Credit cards, thankfully, they’re nowhere near where they were back in ’08. You can see some of those higher levels in the past. But consumer finance is slowing down a little bit or they’re having a tougher time maintaining their standard of living, which means they’re going to pull back.

Laura Russo: Yeah. Budgets are getting tighter.

Matthew Peck: Budgets are getting tighter. Exactly. So, you’re going to see a lot less but just leads to less growth. That’s okay. You know, some growth is still good. And this type of thing is anticipated. And you’re also seeing slowing. Sorry. Next slide. You’re seeing slowing in labor, the labor market. On the left-hand side, you’ll see jolts, and that’s kind of job openings, and you’ll see it peaked at sort of an enormous level. And so, that just means like how many help wanted signs. But what the jolts opening is, you know, sort of how many people are hanging the shingle to say, “Hey, we’re looking for jobs. We can’t fill jobs, etcetera. How many openings are there?”

Well, look how high it was in March of 2022 and look at where it is now. It’s now kind of coming back to sort of almost like a normal trend, trend line if you will, but that’s healthy. Again, that’s what the Federal Reserve wants. That’s what all those high interest rates are doing to the job market but they want that type of softening. Because that means that inflation’s going down. You know, it’s funny, it’s like we all want to have our cake and eat it too. It’s like, “Oh, I want the economy to do great no matter what happens but I don’t want higher prices over here.” Right? It’s like, well, we have to kind of find that balance.

And that’s what the Federal Reserve is charged with doing is finding that balance between high interest rates, what they call the normal rates, right? What’s the normal rate for the economy to grow slowly? Not inflate too much or not grow too hot or inflation runs too wild. And so, they knew obviously they had to do something with where inflation was. And so, this is music to the Federal Reserve’s ears in regards to the direction of the market and labor market. And you’ll see like the quits, I love all the data points, obviously. Again, nerd alert, right? But they talk about like the quit level. They measure how many people quit their job because they think that, okay, I can get a better job with higher pay elsewhere and quits is coming down to normal trendlines.

So, again, all of this data is exactly what the Federal Reserve is looking for but it’s not soft, on off a cliff, which means that that’s where, again, recessions would strike. Although, it would be good for fixed income. They would cut rates more aggressively. So, all those bond haters out there that you want to root for a recession.

Laura Russo: Wait a minute.

Matthew Peck: Yeah. Right. Right. That’s where it comes.

Laura Russo: Please don’t do that.

Matthew Peck: Yeah. But on the same time, back to the, you know, back to the labor market, wages are still growing at a good consistent pace. On the bottom right corner there, Laura, you see that May 2024, and some new data is coming out soon, the wage growth is about 4.2%. And so, unemployment’s kind of coming up a little bit there which that’s the black line which is coming up, coming up, and wage growth is coming down but it’s still at a very healthy level. It’s still a level that’s above its 50-year average. And so, on one hand, we have inflation. I’m sorry.

On one hand, we have wages growing at 4%. And then when you look at CPI, look at inflation, even headline CPI if you take a look on the right-hand side, all of the numbers from May, a 3.3, 3.4 food 2.1, energy 3.5, headline PCE, and there are so many different indexes that they track for inflation. But all of them are underneath 4% or even 3.5% for that matter. So, that means that a majority of the workers out there, Laura, are getting 4% raises while their bills are only going up 3%, let’s say, and their salary or whatnot is going up 4. So, they feel a little bit more comfortable and that’s a great position to be in for that slow growth.

Laura Russo: Right.

Matthew Peck: You know, that slow and steady wins the race is sort of what’s happening or where the economy is sort of settled down into. Okay. And I think for all of these, oh, sorry, before we get to all those reasons. And then last but not least, besides just a good economic backdrop, besides a good labor market, softening labor market, but not weak labor market, we can’t do a – I don’t even know how many quarterly market updates the Market’s on the Move are going to do without talking about AI.

Laura Russo: We have to. Yeah.

Matthew Peck: I mean, it’s going to be for the next five years, maybe even longer.

Laura Russo: We’re in for the long haul. Yeah.

Matthew Peck: Right. Right. And so, here are the major reasons for it. The first to talk about how many billions on the left-hand side, $183 billion are anticipated to be spent on AI. As you can see, that grew from last year and only anticipated to grow more. And specifically on the right-hand side too they talk about what’s called AI adopters, right, where it’s like, okay, who’s currently using it? And so, I’ll just pull up health care, right? Health care, they’re currently using it only 5%. That’s a long runway to use about all the different healthcare providers that will eventually adopt some form of AI as the technology gets better and as it becomes more specific to each of these industries. It has a long runway.

Laura Russo: Not even settled in yet.

Matthew Peck: Oh, absolutely not. And that’s why there was a great article in Barron’s that they talked about how Philippe Laffont, who manages the Coatue, if I didn’t pronounce that correctly, forgive me, during a Bloomberg investing. Laffont noted that when the PC was invented, over $100 trillion in today’s dollars was invested in CPU infrastructure. You know, so think about all your towers and all the computers that are out there, laptops that we’re on right now. Well, he found that they’ll all need to be replaced with GPU focus, which is sort of like AI. So, it’s like an AI laptop or an AI desktop, whatever that may be.

And so, in his opinion, there are trillions in spending to come. If AI is just like the PC revolution of the mid-90s, early mid-90s, then there’s still a long runway of this to go, which is again, it’s all just helping to keep the markets afloat and steady. Because the other interesting part too is that this last slide shows the amount of days that the markets moved more than 1%.

Laura Russo: Yeah. That one’s good. Yeah.

Matthew Peck: And so, it’s been a very boring market too, right, which is very uncommon because even on good years, we’ll talk about, let’s see if I can see if I can find 2013, which was 38 days. I mean, I’ll go a couple of years, 122 days. I mean, this just shows that certainty the markets are moving more than 1%. And then here we are.

Laura Russo: Those are big swings. You know, those are the big swings. Yeah.

Matthew Peck: Those are scary swings. Those are numbers that any swing over above 1% will get the headlines, right? And we’ve only had ten in the first half of this year. So, it just shows how calm things have been because of all of those reasonings. The labor market is softening, just like the Federal Reserve wants. Inflation is coming down just like the Federal Reserve wants. The global economy is in pretty good shape. And AI, we’re still in the early innings of AI, which is helping to drive all of these profits. So, that’s why leading to recently at least just a very calm market as to where we are right now.

Laura Russo: Yeah, that’s a great segue for us. So, let’s talk about how things are looking right now, how things are going to impact us. Based off of all the information that we just took in from the last quarter, how is that going to impact us now?

Matthew Peck: Okay. So, here’s where we stand right now, Laura. A lot of questions that we also get is about the price of the market. And the market is pricey. What you’re looking at right there in front of you is that the 30-year average of the PE ratio is about, well, 16.69%, or sorry, times earnings and then there is one standard deviation above. And then we’re now above the one standard deviation. So, it’s okay to be within averages but we are now above, above average when it comes to an overpriced or overvalued stock market according to these metrics. Okay. So, what does that mean? Or why I should ask? Sorry. The concentration that’s happened is off the charts. And concentration, just to kind of really more define that better, is the Mag Seven or the Magnificent Seven.

Laura Russo: And that’s going to be like Microsoft, Google, and Nvidia, all the big ones.

Matthew Peck: Absolutely. I mean, literally on the top right corner, I talk about the weight of the top ten stocks in the S&P 500. Okay. Right now, 37% of the S&P 500 are in top ten stocks. So, it’s almost like we have the S&P 490 and then you have the S&P 10, which is as you said, Microsoft, Google, all of the AI guys we just talked about, Amazon, the ones that either are making the chips or have all the data to run the chips, run the processes that drive those AI models or those LLM models. 37% of the S&P 500 are these top ten companies. And then on the left-hand side, it just shows about how above average those companies have.

So, when we say things about concentration and you see these types of charts, what does it mean? It just means the S&P 500 could be very dependent on how these companies move because now close to 40%, which has never happened in at least since 1996, you have this high level of concentration. So, it’s worrisome. So, now it’s pricey on one hand, in general. And then you say, “Look, like, oh my goodness. It’s also being driven by these 10 companies,” again, for reasons that we talked about, AI and different things along those lines. So, it’s like, okay, what does SHP do? How do we read information like this? What type of action would we take?

Well, on one hand, we’re looking, well, actually, honestly, on one hand, but the biggest thing that we look at is pockets of opportunity. All right. So, if we can start to sort of look into the S&P 500 a little bit better, we know what’s doing really, really well as we just talked about. But what’s not doing really well? What’s dragging down the other 490? And is that going to change? You know, will that start to improve? Are they below average? So, let’s first talk about value versus growth.

Laura Russo: Yeah. And I think a good point, and I joked with Matt, part of my job is to deglaze people but also if you’re starting to glaze over, this is what we’re…

Matthew Peck: Yeah. This is… I have that…

Laura Russo: And we’re going to do a real quick little digression to explain what he’s talking about because now he speaks another language. So, we’re looking at value stock versus growth and PE ratio. So, PE ratio is your price-to-earnings ratio, right? So, when we’re looking at these two segments of stocks that have a little bit of different treatment when it comes to the PE ratio. So, when it comes to a growth, think of growth, there’s a lot of earnings potential so they have high PE ratios. And then with a value, those tend to have lower earning potential but their value because they’re usually well established and they’re good buys. They are pocket buys that we can get them kind of lower because they’re good value. So, that’s our deglazing moment. Okay. Matt, jump back in.

Matthew Peck: Well, and to kind of build on that, right, Laura, is that the idea of like think of value where there’s less growth but it’s a little bit steadier like at a more mature company. And people always joke around about some of the value companies because, hey, even if a recession strikes, you’re still going to drink orange juice, right? You’re still going to…

Laura Russo: We’re going to have our cereals so Kellogg’s is still going to be doing great.

Matthew Peck: Correct. And the banks are going to be there and you’re still going to need lights and utilities and whatnot, right? But their earnings are expected to go up like something like Nvidia that is who knows how much they’re going to earn with all the AI information. So, that’s what we’re looking at is, okay, how does value compare to growth on average? And then also on the right-hand side, it talks about how,  on the bottom right corner, sorry, the bottom axis or whatever, it talks about the ten-year treasury rates, what the range is, and then how does growth and value perform in those ranges when it comes to annualized total return.

And it just says, okay, on the left-hand side, it’s saying that value is cheap. And on the right-hand side it’s saying, okay, if interest rates stay in this range, well, value should do just as well historically speaking…

Laura Russo: Exactly, which is pretty interesting.

Matthew Peck: Than growth would do, right? And then furthermore, we saw this great article from BlackRock, it talked about how the other companies, the 493, when it comes to their expectations for earnings growth. Going forward, BlackRock anticipates the other 493 kind of more value pockets to have just as much earning growth as the Mag 7 or the Magnificent 7. This wasn’t the case in 2023. This wasn’t the case in early Q1. This wasn’t the case of the past three months. And it’s not expected to really start to flip until the back half of this year.

But these are the types of trends that we want to get ahead of, right? We don’t want to wait until the earnings, because once, I mean, the market’s very forecast driven, very future driven, so we sort of want to see if we can rotate some of the portfolios to take advantage of some of these pockets before the pockets close. And then you have to look elsewhere. Okay? Now, this is also true when it comes to international. I mean, if you look on the left-hand side, look at the international when it comes to the– there’s two standard deviations. So, again, same idea, the P/E ratio here of the S&P 500 and how it compares to the All Country World Index, the ACWI, what happens here, and so, international is also two standard deviations or the significant opportunity in the international space.

Now, we have to be careful with what we do. I mean, how much– sometimes value equivalent, what’s called value traps, which I’m going to explain a little bit here, but it’s more about, even though the market might be pricey, not all areas of the markets are pricey. There might be some advantages that you can take. That being said, what I was mentioning about the value trap is that there are areas and I saw this in the Skittles chart where the small cap had outperformed. Well, there’s kind of a reason why a small cap, every once in a while, if things are very domestically driven and there’s a significant broadening out, you might see small cap do better.

But it still has a reputation for having a lot of unprofitable companies in there. Like, look at current, 44% of the small cap index, close to 50% of it. In the COVID-19, it was up to as high as 53% are unprofitable companies, like literally, don’t make any money at all. Now, their whole thing to grow and to sort of really hit profitability in the future. But still, it’s a coin flip when it comes to investing in that space.

And so, this is what we’ll sort of define as a value trap, where it’s like, ooh, there might be value there. And then you look under the hood, and it’s like, well, oh, that’s because there’s 50% of them are unprofitable companies, right? So, that’s sort of the give and take. You look for opportunities, but then you have to dive a little bit deeper before SHP or any sort of portfolio management will start to take advantage of that.

Laura Russo: Yeah, and I think that’s a good place to also add in when it comes to how we do things at SHP is we do quarterly rebalances. So, we’re not doing day trading. We’re not trading stocks every single day to try and get a couple bucks here and there. We’re doing these deep dive evaluations of all of the trades that we make. We’re looking under the hood, just like you said. And a lot of that comes from looking at the actual balance sheets of the company, the income statements, all of that. And it’s a big thing to do. So, that’s why it takes us the quarter to research all them equality, choices in what we’re doing.

Matthew Peck: Well, and I think to that point, I mean, we’re not making these quick snap decisions, right? Because trends will take some time to shift, I mean, we’re not just sort of getting on one next hot stock tip or whatever that may be. Trends take time to emerge and trends take time to really manifest themselves before we can take advantage of.

Laura Russo: Exactly. And a lot of the people who don’t look at this day in and day out, they see the big ticket items that pop up on their Bloomberg app and all of their financial news tracking. And they say, “Well, why aren’t we investing in this? Why aren’t we doing that?” And that’s more of that behavioral kind of herd mentality where you’re just kind of going with what you’re seeing in the moment rather than looking deep down and diving into everything.

Matthew Peck: FOMO is very strong.

Laura Russo: FOMO is strong. That’s fear of missing out. People, that is not a financial term, not a thing. I think that’s a millennial term.

Matthew Peck: It is confused with the market. You guys go to the beach. They’re pretty simple. Like, fear of missing out, FOMO.

Laura Russo: The man’s cool. He’s so hip and with it.

Matthew Peck: So, yeah, well, to say so. So, that’s where we are. So, now, I think it’d be good to talk about where we want to go.

Laura Russo: I love that, yeah. So, we’ve got the past, we’ve got the current, the looking ahead. This is where people are starting to get pretty antsy because there’s some big ticket items coming down the pipeline. I can let you jump right into that.

Matthew Peck: Well, yeah. So, I mean, I kind of want to break it up to be, because the question that we have is, well, on top of FOMO, right? If we get about sort of individual stocks, it is more the idea of, okay, the market’s pricey. Should I invest in the market now? Should I wait for a downturn? What should I do? So, we wanted to pull up some slides, I kind of spoke to that, about okay, investing at all-time highs because even myself, I think it’s just natural. Like, I want to buy low. I don’t want to buy high.

Laura Russo: Right, right.

Matthew Peck: I mean, you sell high, you don’t buy high, right? That’s one of the adages that we all should live by when it comes to the markets. Okay? Well, another adage that we need to live by and to remind ourselves by is the long-term view that you need to have with the markets. And I pulled up this slide because I love this. There’s a lot going on here on this slide. But what it talks about is where we are. So, in that little kind of diamond there, square, or whatever you want to call it, shows where we are when it comes to the P/E ratio in the valuation of the overall market.

And then all the other small little diamonds on the gray diamonds there show what the next year brought, the next one year brought. And you can see it’s all over the map, right? Next year was as high as 55%. And then another year, it could have been below, is 42% loss. So, in other words, over that one year, the rate of return could be all over if you invested right now, historically speaking, based on where the market might end up in the year from now. Okay? But then look over five years, it starts to become a much easier trend line. And most of those little dots and scattered plots, as they’re called, are all generally positive, over five years.

Okay, now, some are still negative. Some are still flat. So, it’s never perfect. No guarantees. Future results are not guaranteed and past results are not guaranteed, future, whatever that is. But just shows that over time, things generally end up positive. And here’s the other one, too, that we talked about that, where it’s like on the right-hand side, it talks about the S&P total returns. This is over the past roughly about 40 years, talks about investing on any day versus investing in a new high.

And over three months, it makes a difference. Over six months, a little bit of a difference, but over five years, it’s actually if you invest in a new high, it actually beats any day based on the S&P 500 over those five years. And so, again, it just repeats that if you’re investing in the market, you need to have that long-term time horizon. If you don’t have that long-term time horizon or if you can’t sort of handle the ups and downs and we’re looking at it on a daily basis. You just need to get to your advisor and say, “Okay, what could I have that doesn’t make me watch this daily?”

Laura Russo: And I think a good piece of this too, and I love that chart with the diamonds because it really does show you the impact of looking too narrow. You’re looking too closely in one specific time frame, but when you zoom out and we say it all the time, when you take that 10,000-foot view, you’re going to see that it’s not as scattered. It’s going to be a lot more concentrated. And it’s a really great picture for us to be able to kind of keep that in the back of our minds. And a lot of this for those who are listening, it’s also coming up a lot because many people went into cash when everything happened with the market. And I think a lot of people are unfortunately still in cash. And that’s why it’s like, when do I go in? Because the market’s still going up and some of you have a fear of going in. So, this is important.

Matthew Peck: Well, it’s when you say that too, and I’m glad you brought that up because that goes back to a point we’re making about okay, how come the market’s not volatile? How come it’s been so calm? How come the markets have been so elevated? And a lot of that is because the cash on the sidelines. A lot of people are just saying, “Hey, at some point in time that cash is going to get put back to work or it’s always going to serve as a backstop, or if the market goes down a little bit, all that cash is going to start to come in.” So, that’s another reason why it’s a great point, but it’s another reason why the market’s as pricey as it is because everyone’s aware that the market, there’s still a lot of cash on the sidelines.

And even it’s actually a perfect segue into the next slide because this talks about where, and folks have seen this slide before, any of our previous watchers, we talked about comparing, okay, when the peak six-month CD rate, when interest rates peaked, what happened over the next 6 to 12 months total return? And it compares things like a 60/40 portfolio, the blue S&P 500, pure bond, and cash itself. And it looked back in ‘84, ‘85, ‘90, ‘94. And ‘01 is one of the big outliers. And that was the Nasdaq bubble crash.

But in all the other situations, you can see that bonds, S&P 500 or blend beat, bonds, S&P 500 beat. Except for 2001, so forth, it didn’t beat there, but all the other ones. And, oh, by the way, the most recent one to ‘23 or ‘24, it beat. So, outside of the 60/40 portfolio, the S&P 500 beat, even the bonds themselves, which we talked about, beat a six-month CD in that same time horizon. So, we updated the slide to show, okay, what about this? If CD rates have peaked, which, according to our records, did in September, October 23. Let’s apply the same test we did in the past. And history did repeat itself here.

Laura Russo: Exactly. And this is huge because there are so many people out there that were realizing, it’s almost like the CDs have replaced their investment portfolio, and that’s a little bit of a dangerous game to play and all this. And look at the numbers, like look at that, that’s wild. And yes, CD rates are good. We’re not saying, don’t have CDs, but don’t have all of your money in CDs. And that’s where we also find there’s a big outlier, which is the reinvestment risk that you’re taking is what if the feds come in and do a big rate drop? And your CDs, let’s say you have 500,000 in CD’s coming due, and now the rates are at half a percent, 1%, whatever it is.

Matthew Peck: That’s half of what you were getting.

Laura Russo: Exactly. That’s a big risk that you’re taking. So, make sure that if you don’t have an advisor, get one that knows what they’re talking about. And number two, listen to your advisor. When all this happened, a lot of people, I want to go double cash and we get it. We totally get it. And we don’t always have a crystal ball. It’s easy for us to look back and say, “Oh, yeah, look, the market did great.” But in that time, we also didn’t know how the market was going to do, and COVID happened. But for the people that stayed in cash, it took a big hit on their portfolios.

Matthew Peck: Well, and also, too, I think, that’s why I’m tough about the geeky history books and all that stuff. I mean, as you’re saying, past performance is no guarantee of future results. We don’t know what the future holds. But that’s why I rely on history and I rely on this data as much as I can because, okay, it’s going to rhyme. It might not be exactly. History’s not going to repeat itself, but it’s going to rhyme. And if this is what history shows time and time again, we have to rely on that because we can’t predict the future, but that’s what we’re just trying to learn from, so that we give that quality advice and manage the portfolios the proper way.

Laura Russo: Exactly. Okay, so now, we have talked about the CD rates are great, market’s at all-time high. Good news, good news. You got to have some bad news for us.

Matthew Peck: Yeah. So, we brought up this slide here. And that’s just the slow-moving car crash that is our federal debt and deficit. And what you’re seeing here too is actually updated with the potential for the Trump tax cuts, the TCGA, that’s the red on hand side. So, for everyone that’s following along on screen, you’ll see the red hand side on the top, and the bottom shows if there is an extension to those tax cuts.

So, the first hand side, it talks about the federal deficit and net interest outlays. So, you see about the forecast for our deficit, and the direction that it’s going in is up. And depending on how, if those tax cuts do get extended and there’s no offsetting spending cuts, that’s what’s going to happen going into the future. And this is specifically when it talks about the net interest outlays, think about that. I mean, why this is sort of an insidious thing that’s going to get worse and worse when it comes to our debt deficit is that, well, if our debt grows, then the interest on that grows, which means that we have to now pay more towards the interest to then cover our debts from before. Do you see what I mean?

So, it’s like it just grows and grows because we’re not paying off our principal. And now, for adding to it, it just continues to add fuel to the fire. Now, the debt and the deficit, it’s not like an immediate crisis, but it’s like the slow-moving crisis. And unfortunately, red or blue, we are not as of yet electing officials that will address this and speak to this because even if it on the below, we see the net debt. I mean, we’re at debt levels that haven’t been seen since World War II.

Now, I get it, if we’re fighting a war right now, if we’re fighting against Nazi Germany, yeah, we need to spend as much money as we can to win that war. But we’re not at war. The economy, like everything you talked about, is in really good shape, actually. So, it’s just this is the type of stuff that I wouldn’t say keeps me up at night, every night, but…

Laura Russo: Some nights.

Matthew Peck: It does. It worries me because we just need to address it and like anything in life, it’s a compromise. It’s going to be maybe potentially higher taxes here or lower Social Security benefits or whatever it may be. I don’t have all those answers, clearly, but more so that this is going to eventually rear its head and higher interest rates on bonds because they’re going to want to, if the United States government isn’t fiscally responsible, well, if I’m lending to somebody that’s not fiscally responsible, I’m going to charge a higher interest rate because you’ve proven in the past you can’t handle your stuff, right? So, this is the type of stuff that I really worry about. And then, furthermore, let’s talk about, really– so that’s long down there.

Laura Russo: So, these are the things that keep them up once in a while. Let’s talk about every night.

Matthew Peck: Every night, especially over the next six months or where every five months is just the election and the fact that people will have a tendency to vote or to invest as they vote. Okay? I love this slide because it just talks about how during the different administrations, just the impact on who holds the presidency and how people feel about the economy. So, it talks about President Bush, about how Democrats, “Oh, the economy was so stinky, it’s awful.” Republicans are like, “No, this is great. I love this.” All right, well, if you were a Democrat and pulled all your money during that time span, I mean, S&P actually did not do that well because that was the ‘08 great financial crisis.

But you get the idea that, now the flip happened, and now, Obama’s in there and the Democrats like, “Yeah, this is great. Best economy ever.” And the Republicans didn’t. And if they invested the way that they voted or felt about politics, they would have missed out. Flip happened again during the Trump presidency. And the same thing happened again during the Biden presidency. Okay? It’s just don’t invest the way you vote. Vote the way you want to vote. I mean, I don’t care what you vote. I do want you to vote.

Laura Russo: I’m voting for Matt for president.

Matthew Peck: Oh, that’d be great. Hey, I think the one thing we might all agree on is right-in candidates might actually have a chance in any year. And then I just want to show you here’s a reason why because it talks about real GDP change over different administrations, with gray being divided, blue obviously, and red. And look at the S&P 500. You can see blue years. You can see red years. You can see gray years. You can see down, there are going to be some reds and some blues and some grays. And so, really, what this chart’s telling you is that, of course, it matters who is in the presidency, but the economy finds a way. The economy is filled with the 250 million Americans who make choices every day to better their lives, to better their careers, to better their families, to better their communities. And that’s what drives us as a country. Not necessarily who’s sitting in the Oval Office.

Laura Russo: Yeah, that’s so good. I love that you say, vote how are you going to vote, but don’t invest with your vote.

Matthew Peck: Please.

Laura Russo: And it’s crazy. I mean we’re looking at it and I was talking to Matt about this earlier. It’s like, this is the most polarized we’ve really ever seen it. And it’s hostile. It’s a hostile environment out there. Even just the debates and with the fact that we have two candidates that don’t even shake their hands, it’s wild. Just that small gesture right there is very impactful. So, we want to encourage people to have a neutral investing mentality.

Matthew Peck: As hard as it is.

Laura Russo: As hard as it is, and listen to your advisors, because that’s what our job is. We always keep our own political ideas out of things, so that we’re investing in a way that is beneficial to the client. Now, I think is a good time to probably transition into maybe some Q and A’s. We’ve got a lot of great questions that came in. So, let’s go ahead and skip over to that.

We did cover some of this. So, we’ll probably kind of just take that point over again. But the first one that we came in, everybody’s talking about AI. So, one question that was interesting is are there any European AI companies that we should be on the watch for?

Matthew Peck: Yeah. So, I love the question just because it’s very specific. But there is a company called Mistral, M-I-S-T-R-A-L. It was founded by a former Meta and Google executive. It’s probably only two years old. It’s not publicly traded at all. It may eventually be in the future. But Mistral, M-I-S-T-R-A-L, is a French company that is generating some waves. And the other one I’d add, it’s not really in the AI space, but then Arm, A-R-M, they are publicly traded. They are sort of a semiconductor design company. So, those would be two that keep on your watch list if you are tracking European tech companies.

Laura Russo: In your fund accounts, that’s what…

Matthew Peck: Yes. You’re right. Yeah, right.

Laura Russo: Another great question we had and we talked about it was the bond outlook for second half of the year since the fed funds rate hasn’t really changed much.

Matthew Peck: Yeah. No, exactly. And so…

Laura Russo: Yeah. So, we did on that pretty well.

Matthew Peck: Yeah, I talked about just fixed income. I mean, eventually, rates will be cut. And that’s why that position, whether it’s slowly which is positive for bonds, or quickly, which is more positive for bonds, not necessarily for equities, because then it means that there is a significant shock. Economic shock.

Laura Russo: Yeah, exactly. Another question, again, you guys are really good. All these questions are exactly what we’re covering. So, this is perfect. They have the right mindset on how to approach this call. So, next question was, again, US budget deficit, not good.

Matthew Peck: Don’t get me going again.

Laura Russo: Exactly. We beat that one pretty good. And then we did have a few really great questions just regarding specific people situations, with HELOC, Social Security. Great questions there. We would encourage you to talk to your advisor on those because there’s a lot of different outliers that need to be taken into consideration. So, for those of you who might have had a little bit more of those specific questions, feel free to just email your advisor, call our main number, and we’ll get a hold of someone for you.

But those were the big ticket items is really, what we hit a lot of it was the rates, the election, the deficit. All of that is good stuff. So, Matt, that’s our quick Q&A. But I want to ask, what are some of your closing thoughts? What are we thinking for, as we prepare, and we’ll come back again in a quarter, but what are your closing thoughts for all of our listeners?

Matthew Peck: So, really, and just to kind of go back to the political season because we’re really getting into it is to, as I mentioned before, and I’ll just say it again, try as best you can to sort of disassociate yourself and not get caught up. I mean, it is so hard because you read, you’re an engaged citizen. And so, it’s understandable to get caught up into it. But as you were saying, Laura, it’s a highly polarized society. And it’s very sort of depressing at times. But just think about everyone, all the other Americans that are out there, they’re driving their cars, they are doing what they can do every day for themselves and for the community. And that’s where I take my solace every day.

Laura Russo: Perfect. I don’t know if you guys can see it, but we actually have an American flag waving behind him right now.

Matthew Peck: That’s true.

Laura Russo: Fireworks, the whole shebang.

Matthew Peck: It’s in my mind, right?

Laura Russo: Matt Peck for president, everyone. But, hey, listen, thank you so much for joining us today. We are so thankful to even have just a few moments of your time just to nerd out on you, get some good information. And we want to remind you that we’re here at any point. If you need anything, call SHP, call your advisor. And if you don’t work with us yet, then make sure you get on the line with us and set something up because this is what we do day in and day out. We love it. It’s what we’re passionate about. And we want to make sure that we’re provided the resources for everyone out there. So, thank you, everyone. Have a great summer season. Stay cool. And Matt, bring your history books over to the beach.

Matthew Peck: Will do. Well, I certainly hope everyone enjoyed it. I mean, Laura, what do you think?

Laura Russo: I think it’s pretty awesome.

Matthew Peck: I mean, I think it will work. We’ll see. But certainly, as we talked about throughout, if you ever have any questions, either about anything that we presented on or whether it was you’re looking for the slides themselves, whatever that may be, certainly don’t hesitate to reach out to us at www.SHPFinancial.com, but also, too, if you feel like you don’t have a good advisor, whether you are doing it yourself and trying to manage all of this information and world’s very complex markets, and the world’s only getting more complicated and polarized, Laura, as you were mentioning, or if you’re just looking for a second opinion, right? A second set of eyes to say, okay, maybe I’m not getting the type of advice clear and concise and that’s helping to steer me through those complex times, again, pick up the phone, reach out to us, go online, www.SHPFinancial.com. We’re always here for you. Be well, everybody.

Laura Russo: Thanks, guys. Have a good one.