Why Today’s Market Strength Isn’t a Bubble (Ep 109)
Transcript - The following transcript was generated with AI technology, so please excuse any typos or inaccuracies.
Brian Doe 0:00
Lately, markets have been dominated by a few big winners, but this isn't the.com bubble. Productivity is up. Profits are real, and if we're near a top it might be time to shore up cash and eye some dividend stocks. We'll hit interest rates, housing, gold and why the trade war Doomers have got it all wrong. You
Speaker 1 0:24
Walter, it's time to make the dough rise. The financial podcast with Brian doe
Walter Storholt 0:33
back on make the dough rise. I'm Walter Storholt alongside Brian doe, of course, Certified Financial Planner since 2013 and more than two decades of planning experience and helping people manage their finances and retire successfully. You can find us [email protected] Brian, great to be with you once again on the show today, and I hear you are now officially scuba certified.
Brian Doe 0:56
So I am certified under open water. I think next stop is navy master diver, right?
Walter Storholt 1:02
Oh, you never know. Do they still use the big helmets that you see in like the old movies, you know? Or is it something
Brian Doe 1:09
different nowadays? No, no. We just had some snorkel masks and
Walter Storholt 1:14
nice no no for when you go to be the master diver, you've got to wear that big like Cuba Gooding Jr, type, you know, type big.
Brian Doe 1:19
I think if I start like an underwater welding business or something like that, there you go, we'll gear up a little more heavily.
Walter Storholt 1:26
Yeah, I like that. I like that idea. Yeah, submarine welding, that sounds like a really good niche business. No, it
Brian Doe 1:31
was, it was really fun. I took Natalie, and she's the one that had the major back surgery back in March, and talk about recovered. She was fully suited up tank on our back we and you got to hike down to we went to some of these fresh water springs in the Florida Panhandle and Central Florida area, just to the west of Gainesville. Cool, cool environment, and great spot to do this stuff, because you've got a very contained spot. But we went down to 65 feet deep to where some of these springs were were bubbling out. So you got a real legitimate dive experience. But it was so fun to watch her, you know, come out. She's carrying all this stuff around and clearly healed from the the surgery, but the look of excitement on her face after we came up from that first dive, it was, it was just so fun to see your kids grow and do new stuff and get excited about things, yeah,
Walter Storholt 2:25
all of that on top of the recovery. Pretty remarkable trip and amazing experience for you all. So I love it, and great to hear that it was such a good time. Well, keep us updated when you go for your first kind of like, you know, deep water ocean dive, or maybe not deep water, like the Navy master divers. But you know, the first time you said, shark, give us
Brian Doe 2:43
another The problem is I have now added yet another expensive hobby. Because, all right, the cool dives are in exotic locations. So yeah, my my travel plans have and budget have increased dramatically.
Walter Storholt 2:55
That's right. Well, if you had all boys, you would be into golf and all sorts of, you know, skydiving or something like that at this point. So it's probably a little bit of doesn't matter, doesn't matter who you're working with. There you're going to be you guys are adventurous, so it's just going to be what
Brian Doe 3:09
it is. Yeah, we'll find it. And if nothing else, we can just stay on the Redneck Riviera and hit the little there's tons of springs and places to do stuff. So it doesn't have to be DG and all these and the Great Barrier Reef,
Walter Storholt 3:22
Yep, absolutely, tons of options out there. And we'll keep us updated on all of those adventures, and I'm sure you'll have more fun updates for us in the fall. As you teased Brian, we're talking about the markets today, which is a little bit of you would think that that's a normal thing for us, but it's kind of a little bit different, isn't
Brian Doe 3:38
it? Yeah, normally we don't just dive into the markets, because the markets are generally what they are. And I'm not a market forecaster. I don't have big predictions about what the market's going to do this week, this month, or even this year. That's for traders and people who are trying to capture some short term movements. And really, that's not what we're about. It's about good, long, sensible risk mitigation. You never eliminate risk, but you can definitely mitigate and manage it, but with what I've seen in the markets and some of the numbers and what's happened with tariffs, I just thought it'd be a good, good time to do a lap around all that.
Walter Storholt 4:16
Yeah, that sounds like a good plan to me, because it's fun to look at the moving forces kind of all around us, but sometimes it's best to just dig right in. Speaking of make the dough rise. I mean, ultimately, that's what the markets are doing, right? That's what's
Brian Doe 4:30
making it rise and fall, much to the contradiction of all the prognosticators who were calling for doom and gloom and the tariffs were going to tank the economy and throw us into a recession, and the trade war was going to be disastrous, and they referenced previous times when when presidents undertook tariff policies, and what we've had happen is, so far, quite the opposite the markets have done well. Inflation generally seems to be under control, and in the tolerances. Or the Fed. There's a lot of drama back and forth between Trump and Powell trying to put pressure on the Fed. I'm not a big fan of trying to politicize the Federal Reserve. They're meant to be an independent body, and they need to maintain that independence from political persuasion, but it'll be interesting to see what happens. But so far, the market again up, and my only concern these days is valuations.
Walter Storholt 5:23
Well, let's look a little bit more deeply into that then, because we've got this juxtaposition of everyone expecting the downfall, and yet it has not occurred, at least not yet. And so up we go, and there's a lot of different factors at play making this happen in the markets, right?
Brian Doe 5:38
Yeah, and what we have seen Walter is just this overwhelming dominance of a small group of companies you're in videos, Google, Microsoft, Apple, Amazon, Palantir has entered the chat, you know, the list, and we have had some comparisons. You see a lot of charts where people talk about how this the valuations now are as almost as high as they were during the.com era. They're in range of where they were before the 2022 sell off that we had and so that that does look a little bit dicey, but it's very, very different environment today. And if you go back to the.com everybody was banking on the capital markets just continuing to go up, up, up. That was their profitability strategy. They did not have cash flow profits, profit margins. They were just going to let the equity markets float all the boats. And when the market didn't cooperate, it was truly a disaster. Well, you, you know, fast forward today, and all of these dominant companies are just absolute forces in in their own industry or in their own sector, and so they have massive, what I would call winner take all type of dynamic and if, if you've got the best. Everyone wants it. And a good example is in video, they have a four year backlog demand for their chips. So you know, when people think map in videos, chart to Cisco or a Sun Microsystems or something back in 1999 it's so different because they they have tremendous scale and profitability for each incremental unit they sell some of the the tech companies also that are selling software, once you build the basic foundation and product, I'll take you back to a accounting, managerial accounting concept we called contribution margin, the cost to sell one more unit of software is really low. It's not like you have to go procure raw materials and craft them into something or process and move physically move the products around like a traditional industrial economy. You sign up one more subscriber, you basically have full margin going to the bottom line, and so the overhead does not go up incrementally as these as the sales of these companies go up. So we're seeing huge, huge profit margins. And it'll take some time maybe to see if any of the tariffs and things that are happening within the market dynamics and trade war going on that will some of those things factor in. But in the last round of profit reports, we just saw fantastic numbers again. So I think I don't want to say this time is different, because that's that's when you always get into trouble. It's different because this, that or the other. But truly, if you look at those, those few companies, it really is different this time. And so the dilemma becomes, if you're not in this small handful of companies, you really missed out on the gains and the movement of the market recently, but if you're only in those companies, I think now is a good time to assess. Is this the right place to be? Do we need to mitigate some of that risk? If something were to come off the track?
Walter Storholt 9:16
I'll definitely say from kind of a lay person understanding it makes me nervous when you hear those stats about just a handful of companies driving what feels like the entire economy, right? Like that. Would, I think, cause the normal person some anxiety viewing it through that lens?
Brian Doe 9:32
Yeah, and that's where you have to back up and really do some analysis and say, How long can they keep up this competitive advantage? And in the case of something like Apple, I'm not giving up my iPhone. They've got me signed up for all their services and cloud storage and subscriptions, and maybe I'm not replacing my actual iphone and computers every 18 months to three years, whatever the typical sales cycle is, but they're generating a tremendous amount of revenue from. A installed base that's not going to just pick up and ditch the operating system and products that they've gotten used to. Nvidia, maybe is an example where, if somebody were to come along with a big innovation in a chip that market moves so quickly, there could be some risk. You could argue that a real innovator or another company could come up with a product that is better than theirs, and things could be a little more material in that environment, you know, but, but your Microsofts and palantirs, they're going to just continue to scale up because they are Salesforce, I guess is another good example. They'll just continue to dominate the space.
Walter Storholt 10:40
So what I'm gathering from you so far, Brian, is that this is not pets.com we're not built on a house of cards. Even though there's still just a handful of things driving us here, there's solid foundation under these companies. It's not just about this great new idea that doesn't really have this foundation built underneath
Brian Doe 10:57
of it. Yeah. And it's not just the nuts and bolts, like I said, like the industrial economy of more workers equals more output, which is more overhead and making small margins on volume. If you look at the impact of technology being applied to the overall economy, individual companies, the worker productivity margins have increased dramatically over the years. I don't have the exact numbers in front of me, but I did see a chart that did an inflation adjusted profit generated per employee or per hour of work, whatever the metric was exactly. And we're seeing huge increases where companies are more profitable today, and I suspect a large portion of that is the increase of technology and computerization and zoom and all of these things that we've done that have decreased overhead. The flip side is, I have some concerns about commercial office space and real estate. There's definitely some bubbles out there, people are changing their work habits more more work from home, maybe work from the Starbucks or the coffee shop, whatever it is. So you're seeing people operate and function a little differently. So you definitely want to take those considerations into into fact, but there has been a huge increase in work productivity on earnings.
Walter Storholt 12:19
Earnings is is good, interesting to hear you talk a little bit about productivity in this age of AI, where it feels like the worker is, you know, on the way out, if you kind of listen to the news and worry about the prognostications, but you're kind of seeing evidence a little bit to the contrary of that of workers being, you know, productive and helpful in driving these companies to success. Yeah. And
Brian Doe 12:41
I think, I think, I think you sort of want to be mindful, especially if your career is dependent on something that AI can truly replace, there are going to be pockets of, you know, quote, unquote, disaster or doom for for some people, but that same loss for somebody that maybe was particularly good at coding, And now AI can write that code a lot faster. That may be a specific example of somebody needing to re school, retool, relearn and find another place to be. But at the same time, anything that is dependent on relationships, problem solving, physical I'm hearing a tremendous growth opportunities in some of the traditional trades. There's a lot of private equity that are going out and buying HVAC companies and plumbing companies and some of these things that I'm sorry AI just can't come install your plumbing or your electrical wiring, and and maybe they create a robot that does that. But then, you know, robotics becomes the the investment opportunity. So you have to, you have to be smart. You have to think about it and analyze who are the winners and losers going to be. And I guess that maybe is the, the key to just being careful and being cautious in this market.
Walter Storholt 13:59
Yeah, all great points. And I think it's interesting to continue to look at how you know markets, maybe they they rhyme to the past, right? We can look to the past for maybe some guidance on what they're going to do in the future, but we can also look at where they differ from prior markets and prior situations that we've been in, even if that Rhyming is making you think it's going to go one way or the other well.
Brian Doe 14:18
And if you want to go way back. Remember the Luddites? They were the ones who were protesting or actually damaging harvesting machines because they thought they were going to be out, the people who manually cut the wheat. That is way back, but you're right. This is way back, but it enabled people to move from very labor intensive to other types of jobs and opportunities. You can look at the same thing with horses to automobiles and so maybe we're going to see a similar shift from brain power to AI, or from human powered to robotics. But somebody's going to have to create and develop that stuff, some of that. Have to be maintained. It could be a very structural shift, and happening at a faster rate than some of these past shifts. But I don't think it's necessarily the end of the world. I don't think all of a sudden we're all just going to be sitting around like the Jetsons, letting the machines do all of literally everything for
Walter Storholt 15:19
us. That's a great point, though, whenever we try to stand in the way of progress, usually the ones standing in the way get run over, because it's going to happen, whether we want it to or not. Right?
Brian Doe 15:29
Exactly, exactly. Yeah. So bottom line, unlike the 2000s bubble today's top companies, they have very sustainable earnings. They have great profit margins. And this is not purely hype. I mean, the fundamentals are truly strong. And I guess my advice would be focus on profitability. If you have speculative companies or companies with a large amount of debt, you should put some screens on the investments that you're making. Well, this is one of the reasons I am a fan of the dimensional funds. They do have some good screens that look for excessive debt. They do have a profitability filter, and so they will weed out some of those names that might end up in an index fund, and they'll have it's not an actively managed strategy, but it is definitely put some screens on there that'll help you avoid where the problems could rise.
Walter Storholt 16:23
I'm sure that's the kind of question you're getting from a lot of people right now, is, how can I take advantage of current highs? Is there some wiggle room? Is there should I be doing anything right now? Is that kind of the usual question you get whenever there's an extreme, you know, run of good fortune in the market, or we start seeing those downturns or those quick changes in direction?
Brian Doe 16:42
Yeah, no, I've seen a lot of charts that show you know, when markets hit all time highs. Was that a particularly good time to sell? We've had some great runs in the past where markets just can continue to hit new highs and continue to progress, even though it feels like we're, you know, at tops or at all time highs. But that said, you do need to recognize, hey, we're in a market high. This is a good place to be. Most portfolios. If you're an accumulator, you know, don't stop dollar cost averaging into your 401, K, can you just keep making the investments? These are going to be long term investments, and you don't want to try to get tactical or or short term with those investments. But on the other hand, if you are in distribution mode, if you're reliant on your portfolio as a completion fund for your your income and spending, then use this as an opportunity to fortify your cash reserves, or maybe play it safe by shifting some of the growth investments that have done so well into quality, high dividend paying stocks, you know, as a category that is a group that has really underperformed price wise for a couple of years now. But if you if you back up and look at it over a five year time period, the returns are still very good. So that may be an opportunity to move from a more highly valued segment of the market to a more fairly valued segment of the market get some good quality dividends. Maybe those have preferential tax treatments. It's a multi variable equation, obviously, but just go look for things that offer more attractive valuations, provide income stability and just shore up the cash that you need for the intermediate term. Let's say,
Walter Storholt 18:32
Yeah, that's a great point, too. I know that we can't talk about the market, even though we wanted to make that the main focus today without still zooming out and looking at some of the bigger indicators and the bigger things happening kind of swirling around the market. So as we usually do, what about some of the macro things that are happening right now?
Brian Doe 18:50
Let me add one thing to the to my last comment. I'm actually considering adding some longer term bond exposure to the market, because, as you said, macro wise, we are looking at a likelihood of interest rate cuts. We've been talking about it for a long time. And again, everybody's been running around recession, recession, recession and tariffs and all that. And as I mentioned, the little feud between Trump and Powell regarding rates. But if you look at market futures and some of the comments coming from other fed governors, we could have a couple of rate cuts. Then maybe, maybe two to three, I think, is the prognosticators or betting markets are saying. And then if you look at forward CD rates, the short term rates are actually a little bit higher than the longer term rates are coming down. Well, if we do get into a falling interest rate environment, longer term bonds could could benefit very nicely from that. You could lock in decent income today and maybe see some some price appreciation out of those. So playing it safe doesn't necessarily necessarily mean missing out on return. Now the. Yeah, two interesting areas that I've I've seen, and I don't know how to interpret and read, what's really going on there. One is the housing market. I feel like we're way overvalued or overpriced. There's something going on in the housing market since covid, where there everybody was buying houses. I don't know if they're buying two houses or because rates were so low, everybody locked in those three, three and a half percent interest rates, and now they just can't sell. I mean, there's any number of things going on there, and with rates higher, it's making it prohibitive for people to buy new houses, so I have seen a big expansion of inventory relative to the number of buyers out there. So that would certainly be a concern if you have if you're banking on the net worth or equity that you've built up in your house, maybe don't go too crazy getting a home equity line of credit to, you know, go, go spend and do things, be a little bit cautious about that. Or if you do have some real estate investments that are riding high, that are investment properties, may be a good, good time to look at selling those. And then the other one that really astounds me is gold prices. And, you know, the gold bugs are always out there with doom and gloom and no interest rates and the massive amount of debt and the devaluation of the dollar and inflation. Well, this year has been phenomenal for gold prices, and you have to be a little bit careful about commodities, and particularly gold, because it will have a tremendous year or two every once in a while, and then it can go long periods where it just does nothing or sells off, and you could be sitting on losses, but a number, I see everybody touting. And be careful if you're watching TV and you're seeing advertisements for gold. From 2000 to today, gold prices have actually outperformed the broad markets. But if you go back to 2000 that was actually a super low point for gold, like everybody was bailing out of gold. Everybody was piling into the.com stocks. Gold was for, you know, the old economy. This time it was different. We were going to have the new economy. Switzerland was even unloading their their gold reserves, and nobody wanted it. Now, the gold bug is real and prices are very high, so if you had put gold in your portfolio, in any kind of a hedge or allocation. I'd actually look at that as housing and gold is the two places to go take some profits today.
Walter Storholt 22:50
That one is interesting to me, the housing market, in addition to your gold comments. But I keep an eye on, you know, houses all the time, just for fun. I think we've talked about this before, right? It's always fun to kind of get your alerts on Zillow, places that you looked at moving in the past, and keeping track of old houses that you've lived in, just some of that kind of thing. I don't know it's a weird hobby, but I've got several homes that I've just been watching for weeks and weeks now. Big price correction, big price correction, big price correction, big price correction. And I kid you not, yesterday, I got sold notices on like 10 different homes that were on that, on that interesting and so I thought that was really interesting, that it like all of these seem to have hit the right layer to finally get the buyer. And so it tells me I'm this is, again, just very anecdotal, but it just tells me that even if interest rates come down a little bit, I don't know if it's going to impact housing prices a lot. I think there's going to be another wave of people clamoring and lots of bids and bidding very high to try and get houses. Because of those, I would agree people have been on the sidelines
Brian Doe 23:53
for so long. There's a lot of pent up demand for people who want to move from renting to buying, first time home buyers. There's definitely some different segments to the market. And if you want to go with a really hyper local anecdotal observation, my little cul de sac that I live on, which probably has 1012, houses on it, I just continue to be astounded by the prices that people are putting on and getting their houses. And on one hand, I'm like, Yeah, pump up those comps. Get get those numbers on up there. That's if they can get that price for that house, that would be good for me. But I, you know, I'm not really looking to sell, so I don't, I don't know if that really benefits me in a big way. If everything else is going up in price, you know, if, even if I sold, where would I go? What would I do? You know, I'm not giving up my three and a half percent mortgage to go lock in a 7% so I don't know how to read that market. That's not my area of specialty, but there's first time home buyers, there's vacation homes, there's specialty areas like the community that I'm in. So it's really, really hard to say I would, I would. Consult a experienced real estate person in your area if you're looking at doing some buying,
Walter Storholt 25:06
yeah, for sure. Well, then we have the I guess the final piece of this whole puzzle, Brian is, as always, kind of the global forces, the things we really can't control. And there's a few moving parts happening right now, with some lingering wars and the trade comments that you kind of began the show with today as well. And we've at the time of this taping, we've got kind of the, you know, the Putin Trump meeting coming up later in the week. So it's a lot of things to navigate on this side of the equation as always
Brian Doe 25:32
well, the so let's do tariff and trade war overlaps a little bit with the actual wars going on, because Trump has not only used tariffs as a trade policy and a trade negotiation tool, but he's also using it to try and conduct foreign policy, which gives me a little bit of concern, because India is buying a lot of oil from Russia, and so Trump, even though he had worked out a Good arrangement with India, he's now talking about slapping huge tariffs on petroleum based products that India makes using Russian oil. Obviously, that for the attempting to put some further pressure on Putin to end the war in Ukraine. And I don't know that I'm a particularly big fan of trying to use economic policy to drive foreign policy, but everything else about what Trump has done with the tariffs has worked phenomenally and and again, like I said, in spite of all these negative forecasts, we did see a big drop in the market earlier in the earlier in the year, when he came out with his very high initial tariffs kind of spooked the market. I think it kind of spooked a lot of trade partners too, to say, hey, he actually means this. And I don't care how you slice it, America is still the dominant growing economy in the world. You're just not seeing growth in other places like you are here in the US, Trump has managed to negotiate or put pressure on different companies, countries and even the Euro zone, to invest heavily in the US. I think the last time I was like 12 or $14 trillion of investment has been pledged, you know, and so now the big factor is was, will these pledges actually materialize? And that's got to actually happen. But if that kind of investment is happening in the US, when you look at what's happening with the tariff revenues that are coming in, we had the first Treasury surplus in ages, actually, this previous quarter, this this year, or, I think it was one particular month I misspoke there, and so that will help offset some of the deficit. I don't know that they're actually going to get any of the debt paid down. But if we're going to do like we did in the let's say the 80s, with Reagan's big run up of the of the debt, everybody was talking doom and gloom about that over we put this huge burden on our future generations. Well, we grew our way out of that. The policies put in place at that time produced a huge growth wave, and it eclipsed and put that debt in the rearview mirror in a significant way, and if we're not going to pay it off, we've got to outgrow it, and that's really our only option. So everything I'm seeing indicates that we're going to be we've not put such onerous tariffs on that it's going to be massive inflation or it's going to cripple international trade. People still want access to the US markets. We've been giving everybody a free ride, really, since World War Two. We can go back and listen to past podcasts where we've talked about some of those huge forces that have taken place, but getting Europe to pay more their share of NATO military expenses. It's billions of dollars getting them to buy I think the latest number was seven or $800 billion of natural oil and gas purchases that are going to go to Europe. There's going to be about 600 billion of investments from the eurozone into the US. And so everybody's been playing along and cooperating because they need to. They have to if they're going to continue to grow because a lot of the policies that have been adopted around the world just aren't working as well. So I'm really excited to see, I continue to think, 234, years out, we will continue to see a massive economic boom here could have hiccups on the way that. That's why the caution earlier about fortifying your cash and using the market top to do that, but I continue to just remain very optimistic about what's happening.
Walter Storholt 29:53
Well, great breakdown, as always, Brian of the market, the forces inside of it and also outside that influence it. And drive it and really appreciate your insight as always. And I know that we've got listeners who have worked with you for a long time, others who are maybe new to the program or haven't interacted with you one on one yet. So it's a great reminder to always think about if you're trying to take a little bit more control of your financial future, you're not exactly sure where to start. How do you begin that conversation. What does that process look like? Well, Brian doe, a tenured, Certified Financial Planner more than that. 20 years of experience of financial planning under his belt, can be your trusted partner through the planning process, and the way to begin is to book a 15 minute call with Brian. You get some clarity on your financial goals, find out a little bit about where you are right now, see if you're a good fit to work with one another, and then obviously, turn the page if everything's a go to see how you can prepare for a more secure tomorrow. It's a really easy way to engage and get started. So go to livingworth.com and click book a call, or you can dial 706451, 9800, and we've got that contact information in the description of today's show. As always, Brian, thanks for the breakdown today. Really appreciate
Brian Doe 31:05
it. Happy to provide it. I hope it all turns out to be true. Put
Walter Storholt 31:09
on the scuba tank and get back in the water one of these days. Okay, that's right, I'll do it, but cook a couple of pizzas in the meantime, for sure, we'll also make the dough rise. That's right, as always. Thanks, Brian, and we'll see everybody next time right back here on as Brian said, Make the dough rise.
Speaker 2 31:33
Make the dough rise is brought to you by living worth Wealth Advisors with a central office in Greensboro, Georgia, but serving the lake country and beyond. The podcast is available on Apple podcasts Spotify and all your favorite podcasting apps. Subscribe today and never miss an episode. Just search for make the dough rise. With Brian doe, you can also visit make the dough rise calm to listen to recent episodes. If you'd like to contact the show or schedule a complimentary financial review with Brian and the team, just go to make the dough rise, calm and get in touch through the website or call 706-451-9800, thanks for listening to make the dough rise. Investment
Ben George 32:12
advisory service is offered through Main Street financial solutions LLC. Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed.
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