David Nelson:
Well, welcome, everyone. This is David Nelson coming to you from NelsonCorp Wealth Management. On behalf of everybody at NelsonCorp, NelsonCorp Wealth Management, as well as NelsonCorp Tax Solutions, want to thank you for joining us today. I appreciate you tuning in. I’m joined today by Jake Woodcock. Jake is regular, as far as on these podcasts that we do. He’s going to be spend a little time with us talking about the markets. Jake, most of you probably know, but Jake is the portfolio manager here at NelsonCorp Wealth Management. Today’s date is 7/14. I always throw it in here because I want people to be able to go back and look and listen to the prior ones and see basically what we’re chatting about, and where things were, and where things are, in our opinion, headed.
David Nelson:
Before I go any further, I got to put up this disclosure, leave it up here for a few seconds, make sure we please all the compliance folks, et cetera. Anyway, Jake, appreciate you joining me today. I thought we’d start off talking about the dollar. I’m amazed on the number of clients that I’ve had in over the last couple weeks. And that they’re aware that the dollar is gone up as much as it has, and it’s getting a lot of just general attention, not in the business publications, but also on the nightly news type stuff. We’ve had this big rise. What does it mean as far as from your standpoint? Is this good news, is it bad news?
Jake Woodcock:
Yeah. That’s always interesting, the dollar. We talk about a lot of times, how the bond market is way more confusing than the stock market. There’s just a lot more variables that impact it. And probably, the dollar even more so because the bond market is a major force of the price of the dollar. And what’s different about it is the price of the dollar, when we talk about that, it’s always relative, it’s relative to other currencies out there. Not only are the factors that affect the bond market impacting the dollar, but really, it’s also all the factors that are impacting the bond markets everywhere else in the world. If the dollar is strong, that means other currencies are weak. And it’s really an interesting time, as you’ve said. We’ve really seen a really strong rise in the dollar. And actually, compared to a basket of our normal trading partners, the dollar’s at a 20-year high and has seen 7% year-to-date gain from the bottoms in 2020. It’s up about 13%.
Jake Woodcock:
And the other weird thing about this cycle is usually, a strong dollar is disinflationary. And we know that’s obviously not the environment that we’re in. So, like I said, there’s just a lot of drivers. And right now, the drivers are really just central bank policy in the various countries. And as the US has embarked on this tightening cycle, whereas other countries are not tightening their monetary policy quite as much. That’s why we’ve seen this big rise in the dollar recently.
Jake Woodcock:
And why it’s really important now, we’ve talked a little bit in the past two shows that even though the stock market’s down, earnings and profit of companies are still quite high. And I think we got earning cycle starting this week. And I think we’re going to start hearing a lot more about the dollar. I think you’re going to start hearing companies talk about their foreign profits, which for big companies, the S&P 500, that’s about probably 40% of their profits come from overseas. And a strong dollar just makes those profits worth less in dollar terms. I think this is going to be a big factor this earning season. You’ll start hearing people say on the earnings calls that the strong dollar is starting to hurt them.
David Nelson:
Bloomberg came on the set, as far as my TV at 4:30 again this morning, like normal, and looking around the globe as far as the number of countries yesterday that increased interest rates, again, trying to anticipate as far as what’s going to take place as far as in the states here. Very interesting. And the dollar, a big, big political issue as well. You hear politicians like to jump onboard too, is this good news, a strong dollar, or do we want a weak dollar as far as to allow exports to increase… But the conclusion of all of it, I guess, folks, as far as for today’s topic is it is a big variable, and it’s coming into play. And as Jake brought up, generally speaking, again, we are not in an inflationary period of time, usually, when this is taking place. This time, the rules are different, pretty much across the board.
David Nelson:
The next slide, Jake, I thought we would talk about corporate bond yields. I know I’ve brought up to every single client, anybody that’ll listen to me as far as how dramatic things have been, as far as this space, I’ve used the 20-year government bond, US government bond as a proxy, as far as for some of the discussions, as far as trying to explain to people that it’s just not stocks that have really suffered this last go around, the bonds have as well. The 20-year government bond, if you didn’t join us the last time was down about 6% last year, which again, in itself is quite unusual. But as we speak again on 7/14, we’re talking about that 20-year government bond year-to-date, just year-to-date is down about 20%, a little over 20%. And today, it’s down a little bit more. Interest rates again are starting to creep up. And that weighs on the government bond. That was government bonds. Jake, why don’t you talk about the corporate bond yields and the impact as far as there, and potentially, the impact this has on portfolios?
Jake Woodcock:
Sure. And no question about it. Bonds of all types, the yields have just gone up dramatically. And we do tend to focus more on the government treasuries in particular, whether it be the shorter term, two years, five years, more intermediate term, seven years, 10 years, or the longer term, 20-years plus that you’re talking about. Those tend to be the ones that set the pace for everything else. Corporate bonds are a little bit different because whereas treasuries, we know the US government’s going to pay their bills, corporate bonds, there’s what we call credit risk. There’s a higher chance that companies maybe can’t pay their bills because that does happen occasionally. So, with corporate bonds, you get not only that the interest rate sensitivity that will rise when government bonds yields are going up, but they also have that credit risk component.
Jake Woodcock:
And that’s what we tend to see in times of financial stress is the credit spread, the difference between the yields on safe bonds and riskier bonds going up. And we’ve seen both here recently is the safe bonds, the yields have gone up. At the same time, we’re seeing some economic slowdown. So, the credit risk component is also increasing. The effect that’s had on corporate bonds is pretty dramatic in terms of we look at it that the chart here, the gold line on the bottom shows the 26-week change. Basically, the six month, we looked six months ago, where were yields compared to today? And for the full history that we have on this corporate bond series, we’ve never seen bond rates rise as fast as these have.
Jake Woodcock:
They’ve basically gone from the beginning of this year, corporate bonds, we’re paying three and a half percent. Today, they’re paying five and a half percent. That is quite an increase. And we tend to talk about these yields and they’re big picture macro effects on the markets, but corporate bonds, there’s a very real-world effect in keeping with the theme we were talking about with a dollar. This is another one that makes sense to feature as we go into earning season because this is the cost that companies pay to finance their operation, so that they have to borrow… And that’s what these bonds are. That’s companies borrowing this money to fund their operations. And this is that the cost that they had to pay to borrow this money. For the past 10 years, companies have been able to borrow money dirt cheap, and now, that’s changing.
Jake Woodcock:
I think this is another thing that’s been fairly quiet on this front. But again, these next few earnings seasons, I think we see this playing a bigger and bigger role that the company’s cost of capital is going up. And somewhat, maybe purposefully, we’re not talking a ton about inflation on this call, even though we saw another massive print here this week. But to date, we’ve talked about earnings being holding up and margins remaining quite strong, pretty much at all time highs because the inflation increase, companies have largely been able to pass on to consumers, for better or worse. I think it’s better for the companies and their earnings, worse for us as consumers because prices are going up. But the impacts of the dollar and the higher operating costs from these increasing bond yields, those I think are going to be a lot harder to pass through, and they’re definitely going to start impacting company earnings. So, that’s I think why we’re featuring these two coming into this earning season and watching them so closely.
David Nelson:
Well, interest rates, as we all know, for those savers out there, they’re looking at this saying, “Maybe this is a reprieve,” as far as from these low interest rates that they’ve been receiving the last several years, for those that are borrowers. They’ve seen mortgage rates go from low threes to mid fives, quite an increase in a very short period of time. And again, we’ll keep our eyes on this. We’ll keep people, everybody out there informed, but this is an important variable. Moving on to the next slide, Jake, we’re talking about consumer sentiment, fancy way of saying, how do people feel about this? And this is looking at the consumer. There’s various ways to measure these type of pull together these polls. This particular one, we find extremely intriguing as far as from the standpoint of, again, the investing public. Is this a good time, as far as to be looking at investing money? Is it at a bad time?
David Nelson:
And as we hear from people periodically, “Good grief. I’m going to wait for things to calm down, and then, maybe we’ll do something,” et cetera, et cetera. And we’re saying, “That’s not the time that you want to be thinking about it because things are probably already rallying.” This is illustrating that concept as far as going through and talking about things are almost… The psychology of it is almost so bad, it’s actually could, and maybe a time as far as to buy. We’re not advocating that by any means, folks, out here. It’s just a chart we thought would be important and valuable as far as to illustrate this point. So, Jake, if you want to expand a little on that, feel free.
Jake Woodcock:
Sure. As we take a look at… We talk a lot about the weight of the evidence, that there’s a lot of components that go into our assessment of the markets. And a lot of what we’ve been sharing recently, it sounds doom and gloom. And yeah, things are certainly not rosy out there, but the big challenge is just trying to figure out what is priced in. So, we like to look at things from a contrarian perspective, as far as, hey, at what point do things start looking like they’re bad enough that we tend to see a bottom? We call that, a lot of times, the market will be capitulation, when everyone’s given up, and that’s when we tend to see those turnarounds.
Jake Woodcock:
This is one of those things that we use as a contrarian indicator. Once sentiment, whether it’s consumer sentiment or just various measures in the market, once it gets really bad, there’s an expression in the industry, too late to sell, too early to buy. That might be the area we’re in. Like I said, we’ve reduced our risk based on a lot of the things we’ve talked about. But now is the time to start figuring out that, at what point do we start adding that risk back in?
Jake Woodcock:
We start looking at some of these things like this in particular is the Langer Consumer Comfort Index. And we look at a 16-week rate of change on this. And once we see it get to an extreme in the very bottom of the chart where you see that the numbers, it shows when things are really bad, that’s tends to be when stocks perform the best. And the converse of that is when things are really good and everyone thinks things are rosy, that tends to be when stocks perform the worst. So, we definitely, looking at things like this, are suggesting that maybe things are starting to get, at least temporarily, to an extreme where we might see some kind of a relief rally is what the message that this would be sending.
David Nelson:
Nice explanation. Thank you, Jake. I appreciate that one. Last one that we have here is talking about basically getting back to stocks and stock markets. And again, as far as positioning, fancy way of saying, am I in, am I out? Do I like the conditions, et cetera, et cetera? And what we’re looking at here is essentially again, stocks and the various indicators, as far as trying to help us identify maybe entry points. I’m really cautious to… Well, cautious person by nature. But at the end of the day, I share with clients all the time, as far as the periods of time like now, we don’t want to be that individual that tries to catch a falling knife. When we talk about the weight of the evidence, we’re looking at many, many different things. And there’s certain things that need to take place before you feel comfortable, as far as trying to get back in because that falling knife could really cut you up. This particular chart, Jake, is in that same vein, trying to, again, dissect things and give us a little different viewpoint. Could you expand on this one?
Jake Woodcock:
Sure. Here on this chart, that top green line is just the S&P 500 Index that we compare most of our metrics to. The orange on the bottom, what that’s looking at is there’s instruments out there, ETFs that let people bet against the market. They call them inverse ETFs. If I buy this thing, I’m betting that the market goes down, and I’ll make money if the market goes down. Investors as a whole, you tend to chase performance. Things are doing well, they start to pile in the bullish bets. Things are looking bad, they tend to pile into the bearish bets. And once those reach extremes, again, this is another one of those contrarian measures that once we see an extreme, it’s suggested to us that maybe we’re near something of a near term bottom.
Jake Woodcock:
And as David mentioned, that doesn’t mean it’s time to pile in, but it’s time to consider the possibility that maybe, that we want to come off our really defensive stance some. But if you look at this, on that orange line, and there’s a few notable ones. The biggest one in 2020, the peak right there in the middle of the chart, when that the orange line is at its highest, that means the market is making its biggest bets against the market. And you can see that big one in the middle. There’s another one at the end of 2018, a little bit to the left of that, a smaller peak. But those peaks tend to coincide with bottoms in the market. Just once we’ve seen that everyone’s pile into the same bet, which is against the market, that tends to be when it turns around. There’s no one left to bet against the market, is kind of the thinking.
Jake Woodcock:
And if we look at the right-hand side of the chart, we’re starting to see some pretty big bearish bets against this market. And again, I’m not saying it won’t keep going down, but this, to me, suggest that maybe things could get a little bit better in the near term, just from the perspective of people… That the crowd tends to be wrong at the extreme.
David Nelson:
Thank you, Jake. Appreciate your time today. Appreciate you folks tuning in today. Just to recap here a little bit, and maybe I want to share just one other thought with you. I think this last slide is essentially trying to illustrate to you that a lot of the damage has probably been done. Again, we haven’t gone back in any way whatsoever yet. But at some point here, there’s going to be a buying opportunity. I don’t want to sound too hokey here, but I, like most of the folks that I work with, I believe in this country. And the bottom line is we’re going to come back. It’s just a question of make good rational decisions pertaining to your money. And that’s what you’ve hired us to do. And the bottom line is we’re going to protect it as if it’s ours, and we want to grow it, obviously. But we certainly want to in periods of time like now, do the best we can, as far as to protect it, while still giving us that upside potential, as far as going forward.
David Nelson:
I had mentioned on the last call, and I brought it up on several of the TV spots that we’ve done in recent times, is one also, I think bit of good news as far as out there. And you probably have seen it a little bit, but listening this morning to Bloomberg, again, looking at the price of commodities, they’re starting to roll over. Now, this isn’t great news necessarily for farmers. And I’m talking pretty generically right now. But oil itself is down 30 bucks a barrel. We said that this, in our opinion, was going to take place, that energy is going to buckle here, every recession, and we’re close to recession, if we’re not in a recession, all likelihood are going into it if we’re not in it. But every recession, you’ve seen energy drop and drop quite dramatically. The average being a drop of 60%, six, zero, 60%.
David Nelson:
So, I think we’re moving in that direction. If that takes place as this go around, that translates into $55 a barrel. Not saying we’re going to get there, but we are in the arena of believing that trend is probably going to continue. No guarantees, but we certainly think so. Anyway, so again, when you go to the pump, hopefully, you’re saving a few bucks in comparison to what you were as far as just a couple weeks ago. With that, I’m going to wrap it up. I appreciate everybody join us today. Hopefully, you found some value to this. Again, it’s not all gloom and doom. We want to make sure that people are aware that we’re Johnny on the spot and we’re paying attention. And we’ll make moves proportionally. We’ll communicate with you and at every means that we have in the past. Don’t hesitate to give us a call if something comes up, you have a question. We’re here as far as to serve you. And we’re happy to do it. Thanks for joining me, Jake. Folks, thank you for joining me. And I will talk to you, give or take, 30 days.
David Nelson:
Well, welcome, everyone. This is David Nelson coming to you from NelsonCorp Wealth Management. On behalf of everybody at NelsonCorp, NelsonCorp Wealth Management, as well as NelsonCorp Tax Solutions, want to thank you for joining us today. I appreciate you tuning in. I’m joined today by Jake Woodcock. Jake is regular, as far as on these podcasts that we do. He’s going to be spend a little time with us talking about the markets. Jake, most of you probably know, but Jake is the portfolio manager here at NelsonCorp Wealth Management. Today’s date is 7/14. I always throw it in here because I want people to be able to go back and look and listen to the prior ones and see basically what we’re chatting about, and where things were, and where things are, in our opinion, headed.
David Nelson:
Before I go any further, I got to put up this disclosure, leave it up here for a few seconds, make sure we please all the compliance folks, et cetera. Anyway, Jake, appreciate you joining me today. I thought we’d start off talking about the dollar. I’m amazed on the number of clients that I’ve had in over the last couple weeks. And that they’re aware that the dollar is gone up as much as it has, and it’s getting a lot of just general attention, not in the business publications, but also on the nightly news type stuff. We’ve had this big rise. What does it mean as far as from your standpoint? Is this good news, is it bad news?
Jake Woodcock:
Yeah. That’s always interesting, the dollar. We talk about a lot of times, how the bond market is way more confusing than the stock market. There’s just a lot more variables that impact it. And probably, the dollar even more so because the bond market is a major force of the price of the dollar. And what’s different about it is the price of the dollar, when we talk about that, it’s always relative, it’s relative to other currencies out there. Not only are the factors that affect the bond market impacting the dollar, but really, it’s also all the factors that are impacting the bond markets everywhere else in the world. If the dollar is strong, that means other currencies are weak. And it’s really an interesting time, as you’ve said. We’ve really seen a really strong rise in the dollar. And actually, compared to a basket of our normal trading partners, the dollar’s at a 20-year high and has seen 7% year-to-date gain from the bottoms in 2020. It’s up about 13%.
Jake Woodcock:
And the other weird thing about this cycle is usually, a strong dollar is disinflationary. And we know that’s obviously not the environment that we’re in. So, like I said, there’s just a lot of drivers. And right now, the drivers are really just central bank policy in the various countries. And as the US has embarked on this tightening cycle, whereas other countries are not tightening their monetary policy quite as much. That’s why we’ve seen this big rise in the dollar recently.
Jake Woodcock:
And why it’s really important now, we’ve talked a little bit in the past two shows that even though the stock market’s down, earnings and profit of companies are still quite high. And I think we got earning cycle starting this week. And I think we’re going to start hearing a lot more about the dollar. I think you’re going to start hearing companies talk about their foreign profits, which for big companies, the S&P 500, that’s about probably 40% of their profits come from overseas. And a strong dollar just makes those profits worth less in dollar terms. I think this is going to be a big factor this earning season. You’ll start hearing people say on the earnings calls that the strong dollar is starting to hurt them.
David Nelson:
Bloomberg came on the set, as far as my TV at 4:30 again this morning, like normal, and looking around the globe as far as the number of countries yesterday that increased interest rates, again, trying to anticipate as far as what’s going to take place as far as in the states here. Very interesting. And the dollar, a big, big political issue as well. You hear politicians like to jump onboard too, is this good news, a strong dollar, or do we want a weak dollar as far as to allow exports to increase… But the conclusion of all of it, I guess, folks, as far as for today’s topic is it is a big variable, and it’s coming into play. And as Jake brought up, generally speaking, again, we are not in an inflationary period of time, usually, when this is taking place. This time, the rules are different, pretty much across the board.
David Nelson:
The next slide, Jake, I thought we would talk about corporate bond yields. I know I’ve brought up to every single client, anybody that’ll listen to me as far as how dramatic things have been, as far as this space, I’ve used the 20-year government bond, US government bond as a proxy, as far as for some of the discussions, as far as trying to explain to people that it’s just not stocks that have really suffered this last go around, the bonds have as well. The 20-year government bond, if you didn’t join us the last time was down about 6% last year, which again, in itself is quite unusual. But as we speak again on 7/14, we’re talking about that 20-year government bond year-to-date, just year-to-date is down about 20%, a little over 20%. And today, it’s down a little bit more. Interest rates again are starting to creep up. And that weighs on the government bond. That was government bonds. Jake, why don’t you talk about the corporate bond yields and the impact as far as there, and potentially, the impact this has on portfolios?
Jake Woodcock:
Sure. And no question about it. Bonds of all types, the yields have just gone up dramatically. And we do tend to focus more on the government treasuries in particular, whether it be the shorter term, two years, five years, more intermediate term, seven years, 10 years, or the longer term, 20-years plus that you’re talking about. Those tend to be the ones that set the pace for everything else. Corporate bonds are a little bit different because whereas treasuries, we know the US government’s going to pay their bills, corporate bonds, there’s what we call credit risk. There’s a higher chance that companies maybe can’t pay their bills because that does happen occasionally. So, with corporate bonds, you get not only that the interest rate sensitivity that will rise when government bonds yields are going up, but they also have that credit risk component.
Jake Woodcock:
And that’s what we tend to see in times of financial stress is the credit spread, the difference between the yields on safe bonds and riskier bonds going up. And we’ve seen both here recently is the safe bonds, the yields have gone up. At the same time, we’re seeing some economic slowdown. So, the credit risk component is also increasing. The effect that’s had on corporate bonds is pretty dramatic in terms of we look at it that the chart here, the gold line on the bottom shows the 26-week change. Basically, the six month, we looked six months ago, where were yields compared to today? And for the full history that we have on this corporate bond series, we’ve never seen bond rates rise as fast as these have.
Jake Woodcock:
They’ve basically gone from the beginning of this year, corporate bonds, we’re paying three and a half percent. Today, they’re paying five and a half percent. That is quite an increase. And we tend to talk about these yields and they’re big picture macro effects on the markets, but corporate bonds, there’s a very real-world effect in keeping with the theme we were talking about with a dollar. This is another one that makes sense to feature as we go into earning season because this is the cost that companies pay to finance their operation, so that they have to borrow… And that’s what these bonds are. That’s companies borrowing this money to fund their operations. And this is that the cost that they had to pay to borrow this money. For the past 10 years, companies have been able to borrow money dirt cheap, and now, that’s changing.
Jake Woodcock:
I think this is another thing that’s been fairly quiet on this front. But again, these next few earnings seasons, I think we see this playing a bigger and bigger role that the company’s cost of capital is going up. And somewhat, maybe purposefully, we’re not talking a ton about inflation on this call, even though we saw another massive print here this week. But to date, we’ve talked about earnings being holding up and margins remaining quite strong, pretty much at all time highs because the inflation increase, companies have largely been able to pass on to consumers, for better or worse. I think it’s better for the companies and their earnings, worse for us as consumers because prices are going up. But the impacts of the dollar and the higher operating costs from these increasing bond yields, those I think are going to be a lot harder to pass through, and they’re definitely going to start impacting company earnings. So, that’s I think why we’re featuring these two coming into this earning season and watching them so closely.
David Nelson:
Well, interest rates, as we all know, for those savers out there, they’re looking at this saying, “Maybe this is a reprieve,” as far as from these low interest rates that they’ve been receiving the last several years, for those that are borrowers. They’ve seen mortgage rates go from low threes to mid fives, quite an increase in a very short period of time. And again, we’ll keep our eyes on this. We’ll keep people, everybody out there informed, but this is an important variable. Moving on to the next slide, Jake, we’re talking about consumer sentiment, fancy way of saying, how do people feel about this? And this is looking at the consumer. There’s various ways to measure these type of pull together these polls. This particular one, we find extremely intriguing as far as from the standpoint of, again, the investing public. Is this a good time, as far as to be looking at investing money? Is it at a bad time?
David Nelson:
And as we hear from people periodically, “Good grief. I’m going to wait for things to calm down, and then, maybe we’ll do something,” et cetera, et cetera. And we’re saying, “That’s not the time that you want to be thinking about it because things are probably already rallying.” This is illustrating that concept as far as going through and talking about things are almost… The psychology of it is almost so bad, it’s actually could, and maybe a time as far as to buy. We’re not advocating that by any means, folks, out here. It’s just a chart we thought would be important and valuable as far as to illustrate this point. So, Jake, if you want to expand a little on that, feel free.
Jake Woodcock:
Sure. As we take a look at… We talk a lot about the weight of the evidence, that there’s a lot of components that go into our assessment of the markets. And a lot of what we’ve been sharing recently, it sounds doom and gloom. And yeah, things are certainly not rosy out there, but the big challenge is just trying to figure out what is priced in. So, we like to look at things from a contrarian perspective, as far as, hey, at what point do things start looking like they’re bad enough that we tend to see a bottom? We call that, a lot of times, the market will be capitulation, when everyone’s given up, and that’s when we tend to see those turnarounds.
Jake Woodcock:
This is one of those things that we use as a contrarian indicator. Once sentiment, whether it’s consumer sentiment or just various measures in the market, once it gets really bad, there’s an expression in the industry, too late to sell, too early to buy. That might be the area we’re in. Like I said, we’ve reduced our risk based on a lot of the things we’ve talked about. But now is the time to start figuring out that, at what point do we start adding that risk back in?
Jake Woodcock:
We start looking at some of these things like this in particular is the Langer Consumer Comfort Index. And we look at a 16-week rate of change on this. And once we see it get to an extreme in the very bottom of the chart where you see that the numbers, it shows when things are really bad, that’s tends to be when stocks perform the best. And the converse of that is when things are really good and everyone thinks things are rosy, that tends to be when stocks perform the worst. So, we definitely, looking at things like this, are suggesting that maybe things are starting to get, at least temporarily, to an extreme where we might see some kind of a relief rally is what the message that this would be sending.
David Nelson:
Nice explanation. Thank you, Jake. I appreciate that one. Last one that we have here is talking about basically getting back to stocks and stock markets. And again, as far as positioning, fancy way of saying, am I in, am I out? Do I like the conditions, et cetera, et cetera? And what we’re looking at here is essentially again, stocks and the various indicators, as far as trying to help us identify maybe entry points. I’m really cautious to… Well, cautious person by nature. But at the end of the day, I share with clients all the time, as far as the periods of time like now, we don’t want to be that individual that tries to catch a falling knife. When we talk about the weight of the evidence, we’re looking at many, many different things. And there’s certain things that need to take place before you feel comfortable, as far as trying to get back in because that falling knife could really cut you up. This particular chart, Jake, is in that same vein, trying to, again, dissect things and give us a little different viewpoint. Could you expand on this one?
Jake Woodcock:
Sure. Here on this chart, that top green line is just the S&P 500 Index that we compare most of our metrics to. The orange on the bottom, what that’s looking at is there’s instruments out there, ETFs that let people bet against the market. They call them inverse ETFs. If I buy this thing, I’m betting that the market goes down, and I’ll make money if the market goes down. Investors as a whole, you tend to chase performance. Things are doing well, they start to pile in the bullish bets. Things are looking bad, they tend to pile into the bearish bets. And once those reach extremes, again, this is another one of those contrarian measures that once we see an extreme, it’s suggested to us that maybe we’re near something of a near term bottom.
Jake Woodcock:
And as David mentioned, that doesn’t mean it’s time to pile in, but it’s time to consider the possibility that maybe, that we want to come off our really defensive stance some. But if you look at this, on that orange line, and there’s a few notable ones. The biggest one in 2020, the peak right there in the middle of the chart, when that the orange line is at its highest, that means the market is making its biggest bets against the market. And you can see that big one in the middle. There’s another one at the end of 2018, a little bit to the left of that, a smaller peak. But those peaks tend to coincide with bottoms in the market. Just once we’ve seen that everyone’s pile into the same bet, which is against the market, that tends to be when it turns around. There’s no one left to bet against the market, is kind of the thinking.
Jake Woodcock:
And if we look at the right-hand side of the chart, we’re starting to see some pretty big bearish bets against this market. And again, I’m not saying it won’t keep going down, but this, to me, suggest that maybe things could get a little bit better in the near term, just from the perspective of people… That the crowd tends to be wrong at the extreme.
David Nelson:
Thank you, Jake. Appreciate your time today. Appreciate you folks tuning in today. Just to recap here a little bit, and maybe I want to share just one other thought with you. I think this last slide is essentially trying to illustrate to you that a lot of the damage has probably been done. Again, we haven’t gone back in any way whatsoever yet. But at some point here, there’s going to be a buying opportunity. I don’t want to sound too hokey here, but I, like most of the folks that I work with, I believe in this country. And the bottom line is we’re going to come back. It’s just a question of make good rational decisions pertaining to your money. And that’s what you’ve hired us to do. And the bottom line is we’re going to protect it as if it’s ours, and we want to grow it, obviously. But we certainly want to in periods of time like now, do the best we can, as far as to protect it, while still giving us that upside potential, as far as going forward.
David Nelson:
I had mentioned on the last call, and I brought it up on several of the TV spots that we’ve done in recent times, is one also, I think bit of good news as far as out there. And you probably have seen it a little bit, but listening this morning to Bloomberg, again, looking at the price of commodities, they’re starting to roll over. Now, this isn’t great news necessarily for farmers. And I’m talking pretty generically right now. But oil itself is down 30 bucks a barrel. We said that this, in our opinion, was going to take place, that energy is going to buckle here, every recession, and we’re close to recession, if we’re not in a recession, all likelihood are going into it if we’re not in it. But every recession, you’ve seen energy drop and drop quite dramatically. The average being a drop of 60%, six, zero, 60%.
David Nelson:
So, I think we’re moving in that direction. If that takes place as this go around, that translates into $55 a barrel. Not saying we’re going to get there, but we are in the arena of believing that trend is probably going to continue. No guarantees, but we certainly think so. Anyway, so again, when you go to the pump, hopefully, you’re saving a few bucks in comparison to what you were as far as just a couple weeks ago. With that, I’m going to wrap it up. I appreciate everybody join us today. Hopefully, you found some value to this. Again, it’s not all gloom and doom. We want to make sure that people are aware that we’re Johnny on the spot and we’re paying attention. And we’ll make moves proportionally. We’ll communicate with you and at every means that we have in the past. Don’t hesitate to give us a call if something comes up, you have a question. We’re here as far as to serve you. And we’re happy to do it. Thanks for joining me, Jake. Folks, thank you for joining me. And I will talk to you, give or take, 30 days.
David Nelson:
Well, welcome, everyone. This is David Nelson coming to you from NelsonCorp Wealth Management. On behalf of everybody at NelsonCorp, NelsonCorp Wealth Management, as well as NelsonCorp Tax Solutions, want to thank you for joining us today. I appreciate you tuning in. I’m joined today by Jake Woodcock. Jake is regular, as far as on these podcasts that we do. He’s going to be spend a little time with us talking about the markets. Jake, most of you probably know, but Jake is the portfolio manager here at NelsonCorp Wealth Management. Today’s date is 7/14. I always throw it in here because I want people to be able to go back and look and listen to the prior ones and see basically what we’re chatting about, and where things were, and where things are, in our opinion, headed.
David Nelson:
Before I go any further, I got to put up this disclosure, leave it up here for a few seconds, make sure we please all the compliance folks, et cetera. Anyway, Jake, appreciate you joining me today. I thought we’d start off talking about the dollar. I’m amazed on the number of clients that I’ve had in over the last couple weeks. And that they’re aware that the dollar is gone up as much as it has, and it’s getting a lot of just general attention, not in the business publications, but also on the nightly news type stuff. We’ve had this big rise. What does it mean as far as from your standpoint? Is this good news, is it bad news?
Jake Woodcock:
Yeah. That’s always interesting, the dollar. We talk about a lot of times, how the bond market is way more confusing than the stock market. There’s just a lot more variables that impact it. And probably, the dollar even more so because the bond market is a major force of the price of the dollar. And what’s different about it is the price of the dollar, when we talk about that, it’s always relative, it’s relative to other currencies out there. Not only are the factors that affect the bond market impacting the dollar, but really, it’s also all the factors that are impacting the bond markets everywhere else in the world. If the dollar is strong, that means other currencies are weak. And it’s really an interesting time, as you’ve said. We’ve really seen a really strong rise in the dollar. And actually, compared to a basket of our normal trading partners, the dollar’s at a 20-year high and has seen 7% year-to-date gain from the bottoms in 2020. It’s up about 13%.
Jake Woodcock:
And the other weird thing about this cycle is usually, a strong dollar is disinflationary. And we know that’s obviously not the environment that we’re in. So, like I said, there’s just a lot of drivers. And right now, the drivers are really just central bank policy in the various countries. And as the US has embarked on this tightening cycle, whereas other countries are not tightening their monetary policy quite as much. That’s why we’ve seen this big rise in the dollar recently.
Jake Woodcock:
And why it’s really important now, we’ve talked a little bit in the past two shows that even though the stock market’s down, earnings and profit of companies are still quite high. And I think we got earning cycle starting this week. And I think we’re going to start hearing a lot more about the dollar. I think you’re going to start hearing companies talk about their foreign profits, which for big companies, the S&P 500, that’s about probably 40% of their profits come from overseas. And a strong dollar just makes those profits worth less in dollar terms. I think this is going to be a big factor this earning season. You’ll start hearing people say on the earnings calls that the strong dollar is starting to hurt them.
David Nelson:
Bloomberg came on the set, as far as my TV at 4:30 again this morning, like normal, and looking around the globe as far as the number of countries yesterday that increased interest rates, again, trying to anticipate as far as what’s going to take place as far as in the states here. Very interesting. And the dollar, a big, big political issue as well. You hear politicians like to jump onboard too, is this good news, a strong dollar, or do we want a weak dollar as far as to allow exports to increase… But the conclusion of all of it, I guess, folks, as far as for today’s topic is it is a big variable, and it’s coming into play. And as Jake brought up, generally speaking, again, we are not in an inflationary period of time, usually, when this is taking place. This time, the rules are different, pretty much across the board.
David Nelson:
The next slide, Jake, I thought we would talk about corporate bond yields. I know I’ve brought up to every single client, anybody that’ll listen to me as far as how dramatic things have been, as far as this space, I’ve used the 20-year government bond, US government bond as a proxy, as far as for some of the discussions, as far as trying to explain to people that it’s just not stocks that have really suffered this last go around, the bonds have as well. The 20-year government bond, if you didn’t join us the last time was down about 6% last year, which again, in itself is quite unusual. But as we speak again on 7/14, we’re talking about that 20-year government bond year-to-date, just year-to-date is down about 20%, a little over 20%. And today, it’s down a little bit more. Interest rates again are starting to creep up. And that weighs on the government bond. That was government bonds. Jake, why don’t you talk about the corporate bond yields and the impact as far as there, and potentially, the impact this has on portfolios?
Jake Woodcock:
Sure. And no question about it. Bonds of all types, the yields have just gone up dramatically. And we do tend to focus more on the government treasuries in particular, whether it be the shorter term, two years, five years, more intermediate term, seven years, 10 years, or the longer term, 20-years plus that you’re talking about. Those tend to be the ones that set the pace for everything else. Corporate bonds are a little bit different because whereas treasuries, we know the US government’s going to pay their bills, corporate bonds, there’s what we call credit risk. There’s a higher chance that companies maybe can’t pay their bills because that does happen occasionally. So, with corporate bonds, you get not only that the interest rate sensitivity that will rise when government bonds yields are going up, but they also have that credit risk component.
Jake Woodcock:
And that’s what we tend to see in times of financial stress is the credit spread, the difference between the yields on safe bonds and riskier bonds going up. And we’ve seen both here recently is the safe bonds, the yields have gone up. At the same time, we’re seeing some economic slowdown. So, the credit risk component is also increasing. The effect that’s had on corporate bonds is pretty dramatic in terms of we look at it that the chart here, the gold line on the bottom shows the 26-week change. Basically, the six month, we looked six months ago, where were yields compared to today? And for the full history that we have on this corporate bond series, we’ve never seen bond rates rise as fast as these have.
Jake Woodcock:
They’ve basically gone from the beginning of this year, corporate bonds, we’re paying three and a half percent. Today, they’re paying five and a half percent. That is quite an increase. And we tend to talk about these yields and they’re big picture macro effects on the markets, but corporate bonds, there’s a very real-world effect in keeping with the theme we were talking about with a dollar. This is another one that makes sense to feature as we go into earning season because this is the cost that companies pay to finance their operation, so that they have to borrow… And that’s what these bonds are. That’s companies borrowing this money to fund their operations. And this is that the cost that they had to pay to borrow this money. For the past 10 years, companies have been able to borrow money dirt cheap, and now, that’s changing.
Jake Woodcock:
I think this is another thing that’s been fairly quiet on this front. But again, these next few earnings seasons, I think we see this playing a bigger and bigger role that the company’s cost of capital is going up. And somewhat, maybe purposefully, we’re not talking a ton about inflation on this call, even though we saw another massive print here this week. But to date, we’ve talked about earnings being holding up and margins remaining quite strong, pretty much at all time highs because the inflation increase, companies have largely been able to pass on to consumers, for better or worse. I think it’s better for the companies and their earnings, worse for us as consumers because prices are going up. But the impacts of the dollar and the higher operating costs from these increasing bond yields, those I think are going to be a lot harder to pass through, and they’re definitely going to start impacting company earnings. So, that’s I think why we’re featuring these two coming into this earning season and watching them so closely.
David Nelson:
Well, interest rates, as we all know, for those savers out there, they’re looking at this saying, “Maybe this is a reprieve,” as far as from these low interest rates that they’ve been receiving the last several years, for those that are borrowers. They’ve seen mortgage rates go from low threes to mid fives, quite an increase in a very short period of time. And again, we’ll keep our eyes on this. We’ll keep people, everybody out there informed, but this is an important variable. Moving on to the next slide, Jake, we’re talking about consumer sentiment, fancy way of saying, how do people feel about this? And this is looking at the consumer. There’s various ways to measure these type of pull together these polls. This particular one, we find extremely intriguing as far as from the standpoint of, again, the investing public. Is this a good time, as far as to be looking at investing money? Is it at a bad time?
David Nelson:
And as we hear from people periodically, “Good grief. I’m going to wait for things to calm down, and then, maybe we’ll do something,” et cetera, et cetera. And we’re saying, “That’s not the time that you want to be thinking about it because things are probably already rallying.” This is illustrating that concept as far as going through and talking about things are almost… The psychology of it is almost so bad, it’s actually could, and maybe a time as far as to buy. We’re not advocating that by any means, folks, out here. It’s just a chart we thought would be important and valuable as far as to illustrate this point. So, Jake, if you want to expand a little on that, feel free.
Jake Woodcock:
Sure. As we take a look at… We talk a lot about the weight of the evidence, that there’s a lot of components that go into our assessment of the markets. And a lot of what we’ve been sharing recently, it sounds doom and gloom. And yeah, things are certainly not rosy out there, but the big challenge is just trying to figure out what is priced in. So, we like to look at things from a contrarian perspective, as far as, hey, at what point do things start looking like they’re bad enough that we tend to see a bottom? We call that, a lot of times, the market will be capitulation, when everyone’s given up, and that’s when we tend to see those turnarounds.
Jake Woodcock:
This is one of those things that we use as a contrarian indicator. Once sentiment, whether it’s consumer sentiment or just various measures in the market, once it gets really bad, there’s an expression in the industry, too late to sell, too early to buy. That might be the area we’re in. Like I said, we’ve reduced our risk based on a lot of the things we’ve talked about. But now is the time to start figuring out that, at what point do we start adding that risk back in?
Jake Woodcock:
We start looking at some of these things like this in particular is the Langer Consumer Comfort Index. And we look at a 16-week rate of change on this. And once we see it get to an extreme in the very bottom of the chart where you see that the numbers, it shows when things are really bad, that’s tends to be when stocks perform the best. And the converse of that is when things are really good and everyone thinks things are rosy, that tends to be when stocks perform the worst. So, we definitely, looking at things like this, are suggesting that maybe things are starting to get, at least temporarily, to an extreme where we might see some kind of a relief rally is what the message that this would be sending.
David Nelson:
Nice explanation. Thank you, Jake. I appreciate that one. Last one that we have here is talking about basically getting back to stocks and stock markets. And again, as far as positioning, fancy way of saying, am I in, am I out? Do I like the conditions, et cetera, et cetera? And what we’re looking at here is essentially again, stocks and the various indicators, as far as trying to help us identify maybe entry points. I’m really cautious to… Well, cautious person by nature. But at the end of the day, I share with clients all the time, as far as the periods of time like now, we don’t want to be that individual that tries to catch a falling knife. When we talk about the weight of the evidence, we’re looking at many, many different things. And there’s certain things that need to take place before you feel comfortable, as far as trying to get back in because that falling knife could really cut you up. This particular chart, Jake, is in that same vein, trying to, again, dissect things and give us a little different viewpoint. Could you expand on this one?
Jake Woodcock:
Sure. Here on this chart, that top green line is just the S&P 500 Index that we compare most of our metrics to. The orange on the bottom, what that’s looking at is there’s instruments out there, ETFs that let people bet against the market. They call them inverse ETFs. If I buy this thing, I’m betting that the market goes down, and I’ll make money if the market goes down. Investors as a whole, you tend to chase performance. Things are doing well, they start to pile in the bullish bets. Things are looking bad, they tend to pile into the bearish bets. And once those reach extremes, again, this is another one of those contrarian measures that once we see an extreme, it’s suggested to us that maybe we’re near something of a near term bottom.
Jake Woodcock:
And as David mentioned, that doesn’t mean it’s time to pile in, but it’s time to consider the possibility that maybe, that we want to come off our really defensive stance some. But if you look at this, on that orange line, and there’s a few notable ones. The biggest one in 2020, the peak right there in the middle of the chart, when that the orange line is at its highest, that means the market is making its biggest bets against the market. And you can see that big one in the middle. There’s another one at the end of 2018, a little bit to the left of that, a smaller peak. But those peaks tend to coincide with bottoms in the market. Just once we’ve seen that everyone’s pile into the same bet, which is against the market, that tends to be when it turns around. There’s no one left to bet against the market, is kind of the thinking.
Jake Woodcock:
And if we look at the right-hand side of the chart, we’re starting to see some pretty big bearish bets against this market. And again, I’m not saying it won’t keep going down, but this, to me, suggest that maybe things could get a little bit better in the near term, just from the perspective of people… That the crowd tends to be wrong at the extreme.
David Nelson:
Thank you, Jake. Appreciate your time today. Appreciate you folks tuning in today. Just to recap here a little bit, and maybe I want to share just one other thought with you. I think this last slide is essentially trying to illustrate to you that a lot of the damage has probably been done. Again, we haven’t gone back in any way whatsoever yet. But at some point here, there’s going to be a buying opportunity. I don’t want to sound too hokey here, but I, like most of the folks that I work with, I believe in this country. And the bottom line is we’re going to come back. It’s just a question of make good rational decisions pertaining to your money. And that’s what you’ve hired us to do. And the bottom line is we’re going to protect it as if it’s ours, and we want to grow it, obviously. But we certainly want to in periods of time like now, do the best we can, as far as to protect it, while still giving us that upside potential, as far as going forward.
David Nelson:
I had mentioned on the last call, and I brought it up on several of the TV spots that we’ve done in recent times, is one also, I think bit of good news as far as out there. And you probably have seen it a little bit, but listening this morning to Bloomberg, again, looking at the price of commodities, they’re starting to roll over. Now, this isn’t great news necessarily for farmers. And I’m talking pretty generically right now. But oil itself is down 30 bucks a barrel. We said that this, in our opinion, was going to take place, that energy is going to buckle here, every recession, and we’re close to recession, if we’re not in a recession, all likelihood are going into it if we’re not in it. But every recession, you’ve seen energy drop and drop quite dramatically. The average being a drop of 60%, six, zero, 60%.
David Nelson:
So, I think we’re moving in that direction. If that takes place as this go around, that translates into $55 a barrel. Not saying we’re going to get there, but we are in the arena of believing that trend is probably going to continue. No guarantees, but we certainly think so. Anyway, so again, when you go to the pump, hopefully, you’re saving a few bucks in comparison to what you were as far as just a couple weeks ago. With that, I’m going to wrap it up. I appreciate everybody join us today. Hopefully, you found some value to this. Again, it’s not all gloom and doom. We want to make sure that people are aware that we’re Johnny on the spot and we’re paying attention. And we’ll make moves proportionally. We’ll communicate with you and at every means that we have in the past. Don’t hesitate to give us a call if something comes up, you have a question. We’re here as far as to serve you. And we’re happy to do it. Thanks for joining me, Jake. Folks, thank you for joining me. And I will talk to you, give or take, 30 days.