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Webinar Transcripts

Q4 Investment Update October 2019 - Transcribed


Hi, this is Tron Welch with Welch Financial Planning and welcome to our fourth quarter investment update.

Tron Welch

00:10 - 00:14

This is a follow-up to our quarterly economic update, which we just did two days ago.

Tron Welch

00:15 - 00:17

You'll find that on our website in short order.

Tron Welch

00:17 - 00:26

If you want to catch up with that, I do see both of these being two halves of a whole and worthwhile to see both of them to get the entire pictures.

Tron Welch

00:26 - 00:34

So I hope to take 15 to 20 minutes go through a couple items and see where we are.

Tron Welch

00:34 - 00:57

You know as we sit today the market had another volatile day has it has through most of October trade war, impeachment, a lot of unsettlement on the short-term, creating high volatility, you know, once again short-term news is impacting the market more than it should we are going to spend some time talking about continuing to be long-term over time.

Tron Welch

00:57 - 01:02

So with that, where are we're going to look at the market.

Tron Welch

01:02 - 01:04

Here's the S&P 500.

Tron Welch

01:04 - 01:21

And going back to 1996 we do see some of the big market drop in 2008 that we've seen an increase of three hundred and forty percent during that time, you know the point that I want to make today.

Tron Welch

01:21 - 01:29

This is it, if we started from the high point in 2000 and we're able to just take a straight line to where we are today.

Tron Welch

01:30 - 01:34

We'd be all pretty excited and happy and we wouldn't be

Tron Welch

01:34 - 01:37

Looking at the market so hard and reflecting on everything that happens.

Tron Welch

01:38 - 01:49

That's not the way it works to get from point A to point B in the stock market, you’ve got to go through all the drama and with that if you're looking for short-term profits within the market, it doesn't work.

Tron Welch

01:49 - 01:49

It doesn't happen.

Tron Welch

01:49 - 02:03

It never will and never has so the stock market is for long-term investing only.  Don't let this 10-year run make you think that that situation has changed because it has not.

Tron Welch

02:08 - 02:19

Question I get fairly often is you know is the market fairly priced too high to low and from this chart.

Tron Welch

02:19 - 02:26

We are currently properly priced in the way that we're looking at that is called price versus earnings.

Tron Welch

02:26 - 02:26

Okay.

Tron Welch

02:26 - 02:33

So when a company makes one dollar of earnings, we are going to pay sixteen point eight two percent.

Tron Welch

02:34 - 02:35

Tron Welch

02:35 - 02:39

Each times that phone company makes $1 in earnings.

Tron Welch

02:39 - 02:42

We're going to pay $16 and 82 cents for that.

Tron Welch

02:42 - 03:05

Okay, and you can see over time that we're pretty close to the 25 year average of that and we can see you know, the stock market was clearly overvalued during the tech wreck of 2000 and clearly undervalued during the Great Recession of 2008. So, you know PE ratio has been a nice indicator of where the market is and where we are.

Tron Welch

03:05 - 03:07

I keep hearing “well the markets gone up for 10 years…

Tron Welch

03:07 - 03:11

…It's time for it to go down” and that's just not how it works.

Tron Welch

03:11 - 03:26

The market will go down when earnings go down and we just don't see that today and actually earnings for JPMorgan and United Healthcare came out earlier today and both of those are up going Sachs came out and that was down a little bit.

Tron Welch

03:26 - 03:32

So as we kick off the earnings season we will see if how the P/E ratios look as of right now.

Tron Welch

03:32 - 03:33

They're doing just fine.

Tron Welch

03:37 - 03:41

Tron Welch

03:42 - 03:46

Here's the PE Ratio again price versus earnings subsequent one year.

Tron Welch

03:46 - 03:48

We don't care about one year.

Tron Welch

03:48 - 03:49

We don't invest for one year.

Tron Welch

03:50 - 04:00

But look at the five-year annualized returns in each dot here represents a five year period in the stock market here.

Tron Welch

04:00 - 04:07

We are in the PE Ratio and you know, so the expected returns during that five-year period.

Tron Welch

04:08 - 04:17

Is actually fairly narrow relative to you know, when you look at it on a one year basis, that's a pretty big spread but it tightens up quite a bit on a five-year span.

Tron Welch

04:17 - 04:23

So again, you know, the long-term is the way to go the correlation here is only 46 percent.

Tron Welch

04:23 - 04:31

So this is not the Silver Bullet of stock market returns, but it does help with that.

Tron Welch

04:31 - 04:37

So one of the things that I do want to go through and I don't want to rehash our economic presentation from a couple days.

Tron Welch

04:37 - 04:57

Ago, but the economic growth that we're experiencing right now since you know, here's the here's the down in the recovery through 2009 the average explore the expansion during the time period has been 2.3 percent which is wonderful, you know, but it is still below our longer-term average of two point seven.

Tron Welch

04:58 - 05:00

So the economy year over year.

Tron Welch

05:01 - 05:07

So the last 12 months has grown at 2.3 percent again, basically right on the average that we've seen since

Tron Welch

05:07 - 05:14

Was an 8 and then quarter-over-quarter is actually two percent which means that the economy is slowing a little bit.

Tron Welch

05:15 - 05:15

No surprise there.

Tron Welch

05:15 - 05:25

I think we all know that and understand that on that but what we're experiencing economically is really been the same thing that we've experienced since coming out of the Great Recession.

Tron Welch

05:27 - 05:57

What is changing a little bit is profits and to me this is really interesting and you know to really understand the impact of it requires some thought and I do look forward to seeing some research papers that kind of delve into this but what's happening here on the left side is the  SP 500 announced buy back and that means when a company a company says that they're going to buy back their stock they literally go out.

Tron Welch

05:57 - 06:04

To the open market just like you and I do to buy stock and they go buy their own stock.

Tron Welch

06:04 - 06:22

Okay, it would seem 2018 a huge spike at the end of the June quarter and then, you know continuing to make the buybacks materially in 2018 single thing with 19 off to another big round of buybacks.

Tron Welch

06:23 - 06:26

So what's happening with that is that there's fewer shares out there.

Tron Welch

06:27 - 06:27

Which means

Tron Welch

06:27 - 06:34

Is that each shareholder gets a higher percentage of the profits or another way to look at it.

Tron Welch

06:34 - 06:37

We used to cut the pie in four slices.

Tron Welch

06:38 - 06:41

Now we're only cutting it in three slices.

Tron Welch

06:41 - 06:52

So it's not that the pie has gotten materially bigger because the stock market's up in 2019. So it's not that the companies themselves for the pies have gotten bigger.

Tron Welch

06:53 - 07:05

It's more of we're splitting it fewer times which is helping drive up share prices and from the economics that we talked about last time, you know about half the earnings per share growth is due to share buybacks.

Tron Welch

07:05 - 07:07

So there's material in it is

Tron Welch

07:08 - 07:09

thing or

Tron Welch

07:11 - 07:16

share prices another thing to look at I'm just going to blow this up a little bit.

Tron Welch

07:16 - 07:27

Is it the piece that concerns me is if you look at the green bar here, this is capital expenditures by The Fortune 500 companies.

Tron Welch

07:28 - 07:30

And what's concerning to me is that

Tron Welch

07:31 - 07:35

There's a drastic drop in spending addresses.

Tron Welch

07:35 - 07:47

Probably a little bit too strong, but can you can certainly argue that spending in capital expenditures declining by companies and that's concerning which for a couple reasons one.

Tron Welch

07:48 - 08:01

You know, they do have extra cash on hand due to the reduced corporate taxes, but that means that they're not really finding good projects or things that they want to invest in or equipment that they like

Tron Welch

08:01 - 08:05

We'll be like wow, we need this equipment is really going to help our process.

Tron Welch

08:05 - 08:10

They're not finding those those things to invest in.

Tron Welch

08:10 - 08:11

And so instead of doing that.

Tron Welch

08:11 - 08:22

They're really going back and buying shares and you know, so that's the process of buying back shares, even though it does increase the stock price.

Tron Welch

08:22 - 08:28

It doesn't really benefit the company in terms of using their cash in the best efforts.

Tron Welch

08:28 - 08:31

So when they return the cash to the shareholder that

Tron Welch

08:31 - 08:35

Means that we just can't find anything interesting to invest in or just going to give it back to you.

Tron Welch

08:38 - 09:07

to think yours a little bit moving from domestic market to now the world market the two graphs here and you can even see in Prior years prior time periods between 1997 and really 2009 that they were, you know, the domestic Market in Gray and the international market in purple were pretty highly correlated moving along but then since

Tron Welch

09:07 - 09:35

2011 they've gone on two different paths and you can see that our stock market is up three hundred forty percent since then, but the world is only up a hundred and seven percent and that's interesting to me and you can see that in the P/E ratios are PE ratio is 16.8. The PE ratio for the rest of the world is 13.3. And so that means that a valid dollar made in Europe.

Tron Welch

09:35 - 09:37

We don't see that.

Tron Welch

09:37 - 09:42

As an important as an important of a dollar is one that's made here.

Tron Welch

09:44 - 09:49

So what's interesting to me is one the sp500 half of the profits come from overseas.

Tron Welch

09:50 - 09:52

So it's not a u.s. versus the world thing.

Tron Welch

09:53 - 09:57

And obviously, I mean what kind of foreign goods do you have in your house?

Tron Welch

09:57 - 09:59

What kind of foreign goods do you have in your garage?

Tron Welch

09:59 - 10:13

And so there's plenty of foreign activity going on in this is a little bit of I'm making the argument of a global economy and that we're really all very very connected that the only difference between these two lines.

Tron Welch

10:14 - 10:16

Is where their stock market resides?

Tron Welch

10:16 - 10:22

Okay, and that's you know, that's got to be a part of it on that.

Tron Welch

10:22 - 10:37

And so, you know, we do see opportunities in international seeing the Pu ratio going from 13 percent maybe more of a historical number that we would expect of maybe a 14 or 15 percent.

Tron Welch

10:37 - 10:41

So we do see some opportunities International and we're continuing to wait that way.

Tron Welch

10:43 - 10:43

Hopefully the

Tron Welch

10:43 - 10:56

dollar will weaken as we reduce our interest rates and then as our economy slows, which it is that will also weaken the dollar which should bring these two points together.

Tron Welch

10:56 - 10:59

So, let's see what happens moving forward.

Tron Welch

11:00 - 11:03

On kind of a different point but a little bit finer point.

Tron Welch

11:03 - 11:05

This is emerging markets.

Tron Welch

11:05 - 11:19

So this is looking at the stock markets or how we value company or countries that are not not u.s. Not Japan not Europe.

Tron Welch

11:19 - 11:29

These are these are countries that are kind of bridging over from third world to First World typically is described as brick brush Brazil, Russia.

Tron Welch

11:29 - 11:40

In India and China, obviously, it's a little bit broader than that, but currently, you know, here's the historical average when we look at Price to Book ratio.

Tron Welch

11:40 - 11:42

And this is where Emerging Markets is currently trading.

Tron Welch

11:42 - 11:50

So we're just not valuing assets held at other countries as much as we have in the past.

Tron Welch

11:50 - 11:53

So we've always traded them as a discount.

Tron Welch

11:53 - 11:55

We were only giving them 68% credit.

Tron Welch

11:56 - 12:06

For every dollar of assets they have now, we're only giving 47 cents for every dollar of assets that they have so pretty good discount there in a real opportunity.

Tron Welch

12:06 - 12:07

And you do see on this chart.

Tron Welch

12:07 - 12:24

It's a little bit hard to follow but the gray bar returns over twenty year period so not just yesterday but over the 20-year period where you've got just straight u.s. Stock and zero emerging markets and you can see as you introduce Emerging Markets.

Tron Welch

12:24 - 12:26

The returns go up.

Tron Welch

12:26 - 12:42

So this bar hop performing at seven one point one percent has 40% us and 40. I'm sorry 60% us and 40% Emerging Markets has a higher return but then we need to also pay attention to this purple bar.

Tron Welch

12:42 - 12:44

And that is volatility.

Tron Welch

12:44 - 12:54

So one thing to keep in mind is that Emerging Markets typically does outperform our domestic Market over time, but it does bring volatility into the

Tron Welch

12:54 - 13:16

We're seeing a lot of clients talking about volatility and younger and younger clients are talking about volatility and it's not unusual for somebody 65 or 70 to be concerned when their account shakes a little bit, but that that's also happening in our 40 and 50 year old clients are calling with concerned volatility.

Tron Welch

13:17 - 13:24

So I think generally people are just kind of pulling back from Emerging Markets, but there's real money being made out there and there is real progress out there were

Tron Welch

13:24 - 13:30

Just not valuing it so we do see an opportunity internationally do see opportunity in Emerging Markets.

Tron Welch

13:32 - 13:34

Fixed income yields.

Tron Welch

13:34 - 13:41

This is where we don't the opportunity, you know continues to concern us us treasuries.

Tron Welch

13:41 - 13:43

The 10-year is currently trading.

Tron Welch

13:43 - 13:49

Well as of September 30th

Tron Welch

13:49 - 13:51

It's trading at one point six percent.

Tron Welch

13:51 - 13:53

So that means that we're going to loan

Tron Welch

13:54 - 14:04

Money to the federal government for 10 year period and earn an interest rate of 1.68 and that seems concerning to me if we're trying to get somewhere.

Tron Welch

14:05 - 14:09

We're trying to get your portfolio to grow that seems like a really hard way to do that.

Tron Welch

14:11 - 14:17

And then the other piece of it to keep in mind is that if interest rates go up.

Tron Welch

14:18 - 14:23

So this is the impact of one percent fall in interest rates the same happens the

Tron Welch

14:24 - 14:26

One percent rise in interest rates.

Tron Welch

14:27 - 14:42

So if the 10-year treasury goes from one point six eight two two point six eight, you're going to lose 11 percent total return on that investment and that just feels really risky to me now bonds have performed.

Tron Welch

14:42 - 14:53

Well in 2019, but that's driven by rates going down at this point, you know, people are buying a longer bonds, but they're doing it for speculation.

Tron Welch

14:53 - 14:59

I don't like using speculation and your retirement in the same sense.

Tron Welch

15:00 - 15:03

So it's just an area that we're not going to fiddle with we're stepping away from that.

Tron Welch

15:03 - 15:08

It's reusing very little bonds in our portfolios and we think we've got good marriage for that.

Tron Welch

15:10 - 15:10

From here.

Tron Welch

15:10 - 15:27

I do want to go into this is a slide that I came across and it's really interesting to me in this is a little bit more of let's think about who we are and how we view the world and it's you know, it's based on Republicans and Democrats.

Tron Welch

15:27 - 15:29

Although I don't believe this is a political slide.

Tron Welch

15:29 - 15:38

I believe these are just this is data and facts and so, you know during this time period where a republican was in the White House

Tron Welch

15:39 - 15:41

You know Republicans really optimistic about the economy.

Tron Welch

15:42 - 15:55

This is economic conditions and the Democrats are really pessimistic and then everything kind of all gets into disaster land of the Great Recession and everybody feels horrible, but then climbing out of it.

Tron Welch

15:56 - 16:02

The Democrats are more optimistic about the future in the economic conditions than Republicans are.

Tron Welch

16:03 - 16:06

And the argument that I would make is that neither is true.

Tron Welch

16:07 - 16:26

The economy is the economy and you see this, you know, this inflection point with the change in administration is just you know in a very short order the Republicans feel that the you know, that the economy economic conditions have improved drastically.

Tron Welch

16:26 - 16:30

Well, the Democrats feel that the economy is in peril.

Tron Welch

16:31 - 16:33

And again, neither of that is true.

Tron Welch

16:33 - 16:42

Been the same economy basically since 2009 all of this data here represents the same economic growth as we saw in that earlier slide.

Tron Welch

16:42 - 17:01

We're going to flip on in just a second that that you know, I think you need to look at how your view the world gets tainted by politics that aren't indicators of actual economic data, and that's what we're missing.

Tron Welch

17:01 - 17:03

So I do think this is a this is an issue.

Tron Welch

17:03 - 17:09

Two of you know, letting your politics go into how you invest your money.

Tron Welch

17:09 - 17:14

But then also the tainted information that you get depending on which side of the aisle that you sit on that.

Tron Welch

17:14 - 17:19

You may not be getting a complete picture to go back to a slide that we looked at earlier.

Tron Welch

17:19 - 17:27

Here's the expansion that we've seen since the Great Recession and basically it's average 2.3 percent.

Tron Welch

17:27 - 17:33

It's all been the same the economy, you know kind of picked up a little bit and then drop back down and out speak back.

Tron Welch

17:33 - 17:37

A little bit and it's drop back down and we've had you know, two or three little jagged points.

Tron Welch

17:38 - 17:45

But certainly it doesn't support the way that we feel about it depending on how you vote.

Tron Welch

17:47 - 17:53

And so just be aware that in yourself and check yourself to are you viewing economic data properly or not?

Tron Welch

17:55 - 18:01

So with that here's our last slide that we're going to go through today and this is class returns.

Tron Welch

18:06 - 18:15

So the best performing asset classes again real estate, which it has been regularly over the you know, since 2004 real estate's done very well.

Tron Welch

18:16 - 18:20

Performing Market is 20% and that's large cap.

Tron Welch

18:20 - 18:28

That's the sp500 and then on down we go to the least performing asset class is cash at one point eight percent.

Tron Welch

18:29 - 18:46

Okay, but the point that I want to make is the asset allocation of 13 percent year-to-date growth is probably a little bit of where you should be if you've got a well-diversified portfolio and that's you know, certainly better than down in 2018 down six which all occurred in

Tron Welch

18:46 - 18:59

in the base of the last quarter 2018, you know, but during that time period so with that if you're Diversified your returns should be around 13 in with that.

Tron Welch

19:00 - 19:05

Sorry got one more slide gonna drive home or long-term investors one more time.

Tron Welch

19:06 - 19:15

This is the one year Returns the worst one year period is down 39 percent the best one year period is up 47 again.

Tron Welch

19:15 - 19:16

That doesn't matter to us.

Tron Welch

19:16 - 19:16

We're

Tron Welch

19:16 - 19:36

Interested in this data out here at the 10-year in the 20-year rolling the best 10-year period is up 19 the worst ten year period is down to one obviously contains 2008 in that and then the worst 20 is at 6 percent and the best one is up 17. So you know, if you're going to do the stock market, you got to be long term.

Tron Welch

19:36 - 19:40

There's no data that supports short-term investments in the stock market.

Tron Welch

19:41 - 19:45

So have yourself a wonderful day if you got any question or things that you want to talk about?

Tron Welch

19:45 - 19:46

Feel free to give a call.

Tron Welch

19:46 - 19:50

We're happy to help any way we can thank you for your attention, and we'll talk to you soon.