Jason Jacobi, CFP® (00:01.122)
Happy Friday everyone, Jason Jacobi here, your favorite podcast host and financial expert. I’m totally kidding. But hopefully if you’re watching on YouTube or listening on one of the podcasting networks, welcome, we love having you here. We appreciate you listening or watching. And hopefully we can be entertaining, insightful and give you kind of the tools to have great intellectual conversations.
with others to help manage your portfolios or if you’re clients of ours, which again, we always love our clients. You can kind of see the data that we look at in terms of market news and economic updates that come out on a weekly basis. Just to see like kind of take a peek under the hood of how we do and what we do. So let’s dive in. Markets riproar this week up over 2%. All the major indexes. Dow.
hidden at all time high this week. S&P 500 is flirting with all time highs. NASDAQ’s up again. It’s been an incredible year, up over 41%. Small caps led the way this week, up over 5%. So it’s been a really good week for the markets. Jason, why? What happened this week? Well, this is our main topic that I want to talk about this week. It was the Fed share, Jay Powell’s big press conference that he gave on Wednesday, midday, Western time.
or Pacific time, excuse me. What he said really surprised not only me, but the market. And again, I have to watch these Fed meetings closely. They’re usually doom and gloom. They usually hold their cards really close to their chest. That was not the case this week, which is insane. Like basically Jay Powell said, here’s my cards. We’re playing poker. I’m gonna play boom, all out on the table.
And what he said was, we are now forecasting, based off of our dot plot, three, three rate cuts in 2024 because of the data that’s been coming out, the economy is slowing, we don’t want to break anything. Well, Mr. Fed Chair, J-PAL, the Fed does not have a great track record overall, right? Usually the Fed breaks something. It’s just what the history has told us. Again, it’s not like we want them to fail or, you know.
Jason Jacobi, CFP® (02:24.29)
We don’t want to give them too much power of controlling our economy. Again, there’s different economic ideologies that we could talk about and debate. But, but again, I think there are multiple reasons why he did that. Um, again, I think partly because he’s been slammed the last year and a half for raising rates at the pace they were. And he basically was taking a victory lab saying, Hey, look, you know where it looks like we’re going to achieve a soft landing at this point again,
We don’t have a crystal ball, but based off of the data at this point, unemployment fell again this past month, uh, inflation, consumer, and producer inflation is coming down. Uh, you know, we, so we, why not? And employment’s still strong, right? We still have a good labor participation rate. It’s not great. Again, that’s a whole nother topic, but it’s, it’s decent. Um, at over 62, 63%, I believe might be upwards of 66 now. Um,
But overall, it seems like they kind of won the battle on not sending us into a recession at this point. Can we get a mild recession at this point next year? Absolutely, absolutely we can. And again, contractionary periods of markets and economic cycles are normal. You look at China, they’re technically going into a recession potentially. They’re really late stage in their economic cycle. The Eurozone, the UK.
Those Germany, they’ve all been in a recessionary period at this point. So could we get there potentially? Can we achieve a soft landing? Absolutely. I’m not here to debate that. But I think Jay Powell is just trying to take a little victory lab saying, hey, look at all you idiots out there. Not necessarily idiots, right? I’m only kidding. Just providing a little zest to the podcast. But he’s basically coming out and saying, hey, like the feds done his job. We’ve done it well. It looks like we’ll skate a recession.
and, and could have get back to a more pro growth environment. Again, GDP numbers are looking positive, moving forward earnings recession, we think is over. Um, and that’s what it’s looking like, obviously with earnings season, uh, the most recent one. So things are looking healthy. Again, you gotta go back to looking at how, what, what capex. So that means capital expenditures for companies. Uh, how much cash do they have on time? Were they?
Jason Jacobi, CFP® (04:47.346)
on hand, excuse me, where have they been spending their money, employment, hirings, firings, you look at all out across the economy. So this was supposed to be the most anticipated recession we’ve ever had. Right. Most anticipated recession we’ve ever had. The recession technically never came. Again, up for debate, we had negative GDP growth. So we were in a downdraft period for GDP, which technically is an indicator for recession. But.
The economy overall has been very strong. Again, you would think higher unemployment, again, that’s kind of like an indicator of a recessionary period. There’s other lines that we look at based off of purchasing managers index, all sorts of things, right? We could get into the nitty gritty, but basically, in a lot of people’s opinions, there has not been a recession. I think…
something to think about and notice, which we were on a call with one of the top asset managers in the world. They managed trillions of dollars. They’ve got over 200 offices around the world. They did over 21,000 meetings with companies last year or this year, excuse me, 2023. So they kind of got a heartbeat on, on the world. And what’s going on out there. And they were just saying, Oh, if you look at different sectors or industry, right around the world, whether it’s industrials or, uh, you know,
telecommunications or real estate. I’m just giving you examples of different industry, potentially semiconductors. There were certain industries that had contractionary or recessionary periods. So their thought was maybe we had a rolling recession. And if you’ve listened to our podcasts, we’ve talked about that. So that as a potential rolling recession where we’re not gonna get a broad recession across all industries or all parts of the economy, it might be different things at different times.
So you wouldn’t necessarily see unemployment skyrocket, but you’ve had in tech, if you remember this earlier this year, or even last year, 2022, you had Salesforce, Microsoft, you had these big tech companies actually laying off quite a bit of employees. So again, you’ve had kind of contractionary trends in specific sectors. And again, a lot of these big companies, again, because of the Fed’s pace at which they raised rates, they basically kept…
Jason Jacobi, CFP® (07:10.666)
cash on hand, they cut spending, which is what we talked about CapEx. They laid off employees that trim the fat, we like to say, to make sure that their business is run effectively and well. And a lot of them happen. So again, that’s also playing into, as you see, where they’re putting money into now in growth and innovation or paying dividends or raising dividends, which we really like to see. So that’s one of the reasons I think that J-Pal is…
did this was he got to take a victory lap. So getting back on topic here, another reason could be he wants to kind of weed out the conspiracy theorists or be conspiratorial, um, in nature with, we’re going into an election year. Um, and he doesn’t want to be all of a sudden start cutting rates left and right, uh, you know, at a frantic pace or at least three times, maybe even more. We’ll see again, it’s all data dependent. If things slow down all of a sudden at a breakneck pace,
Maybe they’ll cut more. Again, we don’t have a crystal ball, but it’s just worth noting that he’s just saying, Hey, you know, I’m just telling you what we’re planning on doing now, what we’re forecasting now, so you don’t think we’re doing it to help a political party or, uh, try to make the markets rip roar, you know, next year, again, making a political party look better than maybe they’re supposed to, whatever the thought process is again, I don’t think that’s conspiratorial. I think it’s just, Hey, like, here’s, here’s what we’re seeing, but it just, it’s
I’ve never seen that type of meeting before. So obviously with rate cuts, let’s talk about equities and bonds. Obviously equities have rallied. When rates are going down like they’re forecasting in 2024, that supports growth companies, right? Because cheaper to borrow against assets or cheaper, lower interest rates to raise capital, especially small caps. Small caps tend to perform the best coming out of.
Kind of a higher rate environment when they start cutting rates and rates get lower. So these small companies, I always like to say like Amazon and the gra in, uh, in Bezos’ garage back in the day. Uh, that, that always comes to mind like, Oh, I need, you know, I need some capital. Hi, I gotta raise it, or I gotta go to the bank or private lenders and, and raise some capital so I can put some growth and innovation because I think, I mean, I can, I was very young, but I mean, he started, it was like a book sale.
Jason Jacobi, CFP® (09:36.622)
Uh, online service. That’s how it started. And now look at it. It’s a massive, massive company, um, that is at the forefront of even AI and innovation and kind of changing the game, um, with, with delivery and of product and ease of use, it’s wild. It’s crazy. So obviously I don’t need to tell you about Amazon. You’re very well aware of it, but so what equities, uh, that’s going to favor growth.
So again, I think Magnificent Seven, again, those are great companies, uh, incredible companies. I have no problem with them. A lot of them are actually dividend growers as well. You look at Apple and Microsoft, uh, Microsoft, my overall favorite company for a multitude of reasons. Um, but that’s besides the point is these companies are wonderful. Again, I personally am not just going to go by the SPY, the S and P 500 because of, uh, how much,
of those seven companies are so heavily weighted in that index. So again, I would just stay away from just buying the index because it’s so heavily weighted for those seven companies and those other 493 companies have really lagged those magnificent seven and most of the market has, right? But I would be very selective of the companies that I buy with where we’re at in the rally we’ve seen this year in the market. Again, Dow all time high, it’s up over 12%.
S and P is up over 22 and a half. NASDAQ’s up over 41 and small cap. Russ 2000 is up over 12.2. So we’ve had a great year and markets again, don’t go straight up. Everyone tends to know this. Hopefully knows this. There are pullbacks, there are down drafts and markets to, uh, alleviate the kind of pressure, the upwards pressure that’s been built up and the run that this magnificent seven has been on and long-term these magnificent seven.
I again, and I actually heard an acronym yesterday called Batman. I think it’s B A T M A N. So there’s a bunch of companies, even more so than the seven that again, are I kind of at the forefront of AI cloud computing, uh, software, things of that nature, which you’re going to see their revenue, uh, really explode, especially over the next few years. So again, I’m not saying don’t own those great to own those.
Jason Jacobi, CFP® (11:58.786)
but just being very selective on the companies that you’re buying right now in equities. And again, we always say, I have a core portfolio of dividend growers, which again, Microsoft and Amazon or Microsoft and Apple, excuse me, do fall into that category. But again, just having a core portfolio of companies that consistently raise and grow their dividends. And then you can kind of build it out again, every client’s different. We have a portfolio kind of model.
builder that we follow is called Project X-Ray, just basically taking a deep dive into each individual client’s needs. And I can talk about that real quick. We basically look at it from, again, having a cornerstone of dividend equities, dividend growers, and then, you know, a growth sleeve, a growth enhancement sleeve, an income enhancement sleeve, an alternatives sleeve, a fixed income sleeve. So we have different sleeves based off of the client’s goals and objectives. And we build out a portfolio that way. So
A younger investor might not need, you know, income at this point, right? They’re not retired. They still have a job. They’re doing great. They got cashflow coming in from elsewhere. Um, they might have a lower percentage of, of dividend equities in their portfolio, which is fine. Again, each individual client is different. So that’s how we do it. Uh, again, there’s, there’s no, there’s no, uh, one way to do it, but, uh, we just, you know, looking at, at historical.
figures and dividend growers and how well they’ve done over the long term. It’s quite obvious that they’re a key essential part of a portfolio. So getting back to it, fixed income. So ladies and gentlemen, if you take one thing from this podcast today, it’s talking about fixed income. And this is something I really want people to listen to. And right, there’s bond math, it can get boring. We call them boring bonds because a lot of it’s just math.
Jason Jacobi, CFP® (13:54.89)
When rates go up, right? And the treasury releases new T-bills, notes, bonds, whatever it may be, or new CDs are issued by banks, whoever it is that is issuing the debt. When rates are going up, obviously the coupon on those are higher, right? Well.
When rates start coming down or the Fed pauses, which we’re at a pause right now, right? Even as of Wednesday, we’re still at a pause.
Jason Jacobi, CFP® (14:30.791)
You got to get in. You got to move cash in before it’s too late. What do you mean, Jason? Like cash, my money market’s paying me five, 6% right now. As soon as that Fed starts cutting rates, those short-term lending rates are gonna drop. They’re gonna drop overnight, okay? So, and we’ve been talking about this extending duration in your bond portfolio. So if you have near-term cash needs,
and you’re just looking for a place to park cash because you’re gonna need it in the near term, different story, okay? But if you’re just, again, for a portfolio diversification play, for a total return play, to take advantage of the higher rate environment that we’re in now, if you’re owning an intermediate bond fund or a longer term bond, when those rates fall, you still have those higher coupons in your portfolio, four, five, 6% or even more, depending on their high yield, investment grade.
whatever it may be, whatever class of debt it may be. Obviously high yield pays a higher interest because it’s more risky, right? That’s the whole thing behind it. But my point is, if you don’t have any near-term cash needs, then think about extending duration in a portfolio. And that’s what we’ve been doing as well. So you can own short duration bonds, short duration bond funds, which we still do own because they might have one or two year
T bills or T notes, that might be the case. And we do own that, but what’s called a barbell strategy. So taking advantage of near-term rates while they’re high and then starting to extend duration. So going out three, four, five, six years and beyond to really get those higher rates for longer. So higher coupon payments paid semi-annually or whenever the bond pays interest. Or
You could look at it from a total return aspect because again, when rates and yields start coming down, which they already have exponentially since J-Pal’s speech on Wednesday, or even the past few weeks, because we’re starting to see in price in these rate cuts, that’s when intermediate terms bonds really shine. So you look out and you look at core bond funds, which again, are intermediate longer term bonds or our notes.
Jason Jacobi, CFP® (16:53.514)
You look at the total returns one year, three years, five years out, you’re looking at like seven to 11%, again, depending on the bond fund and the manager and duration and all that kind of stuff. But what I’m just trying to say is those bonds in your portfolio where they were extreme, we had the worst bond market we’ve ever seen in 2022, extreme laggard. But now the next few years, bonds are going to be really attractive, okay? Which is obviously why a lot of the just the dividend indexes or the dividend.
companies had lagged this year because it’s like, oh, well, if I’m getting a 4% of dividend in stock, but I’m taking more risk in that stock, why wouldn’t I just go and get a T bill or T note for the same interest payment, same dividend payment with less risk, which was a fair argument in terms of risk reward, right? The risk premium for stocks was at its smallest levels in quite a long time. So all I’m trying to say is, hey,
Be selective in the equity markets. Again, with this run up, look for attractive entry points. Again, nothing wrong with the Magnificent Seven, wonderful companies, very well run, gonna see revenues explode, especially with AI and innovation and growth. You’re gonna see that trickle through the whole economy. Dividends again, the market’s really broadened out too from the Magnificent Seven. Again, you’re seeing a small caps, you’re seeing the Dow Jones hit all the time highs. So you’re starting to see the market broaden out because the economic picture is getting better.
in terms of soft landing talk and rates coming down. So we’ve got equities, forecasting probably high single digits in terms of indexes, my indices return for next year for 2024. It’s election year, it’s always more volatile. But again, we’ll have some tailwinds led by the US. Global growth will be slow, but again, tailwinds in the US economy and the US equity markets.
Um, when, when these rates do come down, especially if we get a soft landing, we don’t get a major spike in unemployment or a major cut in, uh, and consumer spending, which again, consumer spending just came out, uh, it came out positive. It was actually up for forecasts for November. We’re actually negative. So consumers still spending money after the holidays in January. It’d be interesting to see what happens. People have been spending on credit. We’ve been talking about that. Also, if you’ve listened to our last podcast, but again, with, with kind of,
Jason Jacobi, CFP® (19:17.786)
what things are looking like right now that’s providing a tailwind to the equity market. So again, theme, be selective. Fixed income, look for total return, extend duration, have portion of your portfolio that’s longer term in terms of longer duration for fixed income. And really look at that. And there’s one chart I’m going to show here. So I’m going to share my screen. If you’re listening, I will try to talk about it here so you can get the gist of it.
Jason Jacobi, CFP® (19:45.802)
And it’s really important. So we’re kind of what I talked about extending duration and fixed incomes, but let’s look at what the Fed, what happens when the Fed pauses here.
Taking a second to upload. So I’ll just talk about it until it comes on the screen. But basically what the chart is showing, yep, here it is. So this is the average annual return one year following the final fed hike cash does about 4.7%. So I think money markets five years following the final fed hike, five years down the road, right from our last rate hike, 3.2%. So again, this is the average annual return.
over the following five years and one year. So 4.71 year, 3.2% for five years, year over year. Core bonds, this is what we talked about, core bonds. 10.1% year over year, the following year after the final Fed rate hike, 7.1% annual return, five years following the Fed rate hike. So again, this is the average annual returns. So those are really good returns for bonds. We haven’t seen that in quite a long time. Stocks one year following 16.2, five years, 9%.
and a 60-40 portfolio, so 60% of stocks, 40% bonds. It’s kind of the Warren Buffett portfolio. Again, very well balanced. 14.2% and then 8.4% over five years following the final Fed rate hike. And again, these are all annualized numbers, so year over year growth. So again, core bonds. One thing I wanna focus on, core bonds, your core bond holdings. You can have short duration money markets or short duration bonds that mature.
or bills and notes that mature in the next year or two, completely great. You’re still going to have potential for total return, albeit a little bit lower. But again, if you’re extending duration out a few years, it’s going to be great opportunity for total returns and these numbers just show it. So that is it for me, Jibber Jabberin. Your face off, your ears off for the last 22 minutes or so. But thank you so much for listening this week. We love you all. Merry Christmas. Happy holidays.
Jason Jacobi, CFP® (21:56.054)
And happy new year. Next week, we’re going to do our 2024 Outlook. So that’ll be a special, we’ll send it out to you. And hopefully you were able to take something from this today. But again, we really appreciate you and have a wonderful weekend. See you next week.
