#49 | 2024 Mid-Year Review Part 1

Guest Profile

Jason Hosler holds Series 7 and 66 FINRA securities registrations. He brings a technological edge to our firm and helps many of our clients stay current in the fast-moving age of the internet.

Transcript

Protecting and Preserving Wealth – 2024 Mid-Year Review Part 1

Speakers: Jon Gay, Bruce Hosler, & Jason Hosler

[Music Playing]

Jon Gay (00:06):

Welcome back to Protecting and Preserving Wealth, I’m Jon Jag Gay. I am joined by Bruce Hosler and Jason Hosler of Hosler Wealth Management. Gentlemen, always good to be with you.

Bruce Hosler (00:13):

Jon, great to be with you this morning. Thanks for joining us.

Jason Hosler (00:16):

Good to be here again, Jon.

Jon Gay (00:17):

So, we are halfway through 2024, and for those of us who don’t follow the markets on a day-to-day basis as our full-time job like you and the team at Hosler Wealth Management, I think it’s a good time for us to take a look at where things sit six months into the year.

So, this is the first of a two-part series. We’re going to take a look high level at what’s going on in the markets and keep our listeners in the loop as far as where things are at this point.

So, let’s start with a pretty straightforward question: S&P 500, that huge index. Where do we sit halfway through the year, Bruce?

Bruce Hosler (00:49):

Well, Jon, halfway through the year, as a market update, the index is sitting at a year-to-date performance of over 15%. Currently today, July 2nd, sitting at 5,495. That is truly an amazing place from where it was just last November when it dropped as low as 4,250.

The forward-looking price to earnings ratio in June, it was up to 20.99. And when we look at that, that’s a little higher than the average, but it’s not so astronomical like some people would with their hyperbole right now, just be going crazy thinking that this market’s going to have an immediate crash.

Jon Gay (01:38):

Real quick, when you say price to earnings ratio, also known as a PE ratio, for any of our listeners who don’t know, can you give me a quick explainer what that is?

Jason Hosler (01:45):

So, the price to earnings ratio is looking at the price of a share of stock and how much it earns, and you take the price and you divide the earnings into it, and it gives you how many years it would take for the earnings to pay for that share of stock.

Jon Gay (02:00):

Got it. Thank you, Jason.

Bruce Hosler (02:01):

And it’s forward-looking earnings too. So, the company is projecting out what they expect their earnings to be. So, how many years or months is it going to take for the stock price to be paid for from the earnings?

Jon Gay (02:13):

Got it.

Bruce Hosler (02:14):

Jason, do you have any observations on the S&P 500 and just the general market in general that you want to share with our listeners?

Jason Hosler (02:22):

We’re obviously very pleased with the great performance that we’ve had since November of last year, and it’s been really good for everybody participating in the market. So, good in fact that some people are wondering is there another shoe that’s going to drop? Is there going to be a pullback?

Well, pullbacks every year tend to happen if we look back historically. So, I wouldn’t be surprised if we see some volatility in the second half of this year. But our point of view is still that the market is probably going to end the year higher than where it is even right now.

Bruce Hosler (02:53):

Jason, we have a lot of noise in the marketplace with both our clients asking questions, and with the talking heads and the media discussing. Last year it was the magnificent seven, now they’re saying it may be 10 stocks. But the vast majority of the earnings and almost 30% of the capitalization of the S&P 500 (and the capitalization means the representative capital in the S&P 500) is included in just these big companies.

What are your thoughts or what’s the conversation that we’re having with clients right now that we want to share with our listeners?

Jason Hosler (03:29):

So, those big companies, Nvidia, Apple, Microsoft, those are the top three companies in the S&P 500, and each of them make up between 5 and 7% of the index. So, just between those three companies, you’ve got a whole lot of the value of the index.

Well, they’ve been beating earnings, they’ve been bringing out new products, there’s been huge demand for their products. Could they see a pullback? Yeah, we’ve had a little bit of a pullback in Nvidia we saw recently, of course that can happen.

But when we look forward over the next six months to one year at their projected earnings, which they keep beating on their quarterly earnings reports, I think it’s highly likely with the order flow that they can see coming in that they’re right, they are going to continue to see earnings growth over the next six months to a year, and I think their stock prices are going to continue to reflect that.

Bruce Hosler (04:26):

So, I would say overall as a firm, we’re kind of bullish on the market through the end of the year. Wouldn’t you agree?

Jason Hosler (04:31):

I would.

Jon Gay (04:33):

Alright, let’s take a look at annual returns and intra-year declines. So, where are we at when it comes to that topic?

Jason Hosler (04:39):

So, like I was just mentioning, in every year, you’re going to see some pullbacks in the market. On average, you see about a 13 or 14% pullback, even in years when the market ends up positive. Right now, the biggest drawdown we had is 5% this year. And the market is up 15%.

So, could we see another drawdown of a 5 or 10% pullback? That’s very possible, perhaps even likely, but I think the market is still going to be moving up from here.

Bruce Hosler (05:08):

And the other thing that we tell clients is, this doesn’t go straight up. So, you have to expect for the portion of your portfolio that you’ve allocated to the stock market that that can be volatile, but if you’re not selling, it can go down temporarily.

But as long as you have a long enough runway or a holding period in the future until you need to cash it out, that volatility can work to your advantage and actually, give you an opportunity when you need it in the future when the market’s up to sell at a much higher gain.

Jon Gay (05:45):

That’s what we’ve talked about in previous episodes about short, medium, and long-term buckets, and potentially being more aggressive with your longer-term investments because you have exactly that runway that you’re talking about, Bruce.

Bruce Hosler (05:54):

Right, and we call that holding periods, and we use the buckets of money approach. So, if you need money in the near term, that should be in safer investments like fixed income or buffered products that guarantee your downside protection so that if the market is volatile, you’re not selling when the market is down.

Jason Hosler (06:11):

Glad to see that you’re learning from our podcast, Jon.

Jon Gay (06:14):

I pay attention, I take lots of notes every time. Let’s look at consumer finances, I think that’s going to really hit home for a lot of our listeners

Jason Hosler (06:22):

With the inflation that we’ve seen over the last few years, we’re starting to see some of the first signs of stress since the pandemic, in consumer finances.

But overall, if we look back historically since the 80s on the household debt service ratio, we’re only back to the lows that we had in the 2010s of about a 9.9% ratio of debt payments as a percentage of people’s disposable personal income. That is still pretty low compared to the last 40 years.

So, while it’s risen from the really low numbers that we saw around 8 and 9% when we had all of the assistance during the pandemic, historically, we’re still low. And we’ve seen some flows into early delinquencies on credit cards and auto. So, people at the bottom of the income scale are starting to feel the pinch of inflation, but I think overall the consumer in America is relatively healthy.

Jon Gay (07:29):

Jason, that’s a really good point because I think it’s very easy to have a short-term memory and compare where we are now to where we were when all that influx of government money was coming, and that assistance coming during COVID.

But if you zoom out just a little bit and look at where we were, say the 2008 crisis, or other times historically, when you put it on that longer timeline, it’s really not as bad.

Bruce Hosler (07:51):

Yes. Historically, this period of time where we’re at right now as far as household debt service ratio, is within the norms of the last, let’s say, almost 10 years. And so, it just looks like it’s a big change from when they had all the stimulus during COVID and everybody had all that other money floating around, the household debt service ratio was much easier for people to deal with.

Now, that doesn’t mean that this change… we become accustomed to spending and living on however big our paycheck is, we’ll spend it all given the opportunity. And so, the American consumer has done that. But based on historical terms, the household debt service ratio is not historically super high right now.

Jon Gay (08:39):

Well, Bruce, you’re actually transitioning me into my next question, which is consumer saving. How are folks saving at this point?

Bruce Hosler (08:45):

Well, there’s no doubt that that’s a different story, Jon. Historically, looking at that, it’s under 4% right now, and that is not something we like to hear. I think people are having to spend more of their earnings on maintaining their standard of living and that has left less money for them to be able to save.

And we’ve seen that across the whole spectrum in the country. And so, it’s a little disappointing to see that the peak savings has now dropped way down compared to where it was just a couple of years ago.

And again, that kind of ties in with the money that was floating around from the government from COVID. But there’s a lot of families that are starting to feel the pinch and this whole retirement savings thing is going to become a crisis if we don’t get that savings rate up.

Jon Gay (09:37):

That makes sense. And Jason, we’ve talked about this in previous episodes as well, that savings is sometimes the last thing that folks think about. We talked on the previous point about making sure their debt isn’t out of control so they’re paying those credit card bills for the most part.

But I think so many people, instead of making the savings a line item in their budget, they just take whatever’s left at the end of the week or the end of the month and put that into savings as opposed to prioritizing it. And that can really lead to trouble down the road, especially when there’s not as much money to go around.

Jason Hosler (10:05):

Definitely. And that insidious tax that affects us all, inflation, definitely affects people in the bottom two quartiles more than higher income earners. And if we’re looking at our current economy and where we’re at in the business cycle, the economic cycle, we’re still in an expansionary phase, but we’re trending towards the end of that expansionary phase.

Jon Gay (10:29):

Jason just mentioned that insidious inflation, Bruce. That is certainly top of mind for a lot of Americans at this point in time. Where are we at in terms of inflation halfway through 2024?

Bruce Hosler (10:39):

This is really a difficult topic, Jon. There are really smart people on both sides of this. I think commercial, real estate, and some businesses, mortgage brokers, things like that, real estate agents, people that are tied into industries that are affected by the interest rate are being hurt tremendously right now.

And yet, a lot of the other economy – try and go get on an airplane right now, they’re all full. There are people traveling, there are people spending money. So, this inflation is not contained. So, whether the Fed lowers in September or December or next year, I anticipate that they probably will at some point, but the hard part is, is this inflation’s not controlled.

If we look at the markets right now today, and let’s just say that we want to look at oil. So, today oil is up to $82.85 a barrel. That has not gone down; it’s gone up in the last little while. This is going to be sticky and the Federal Reserve is going to have a difficult time getting this inflation under control.

So, it’s just a matter of them waiting out as long as they can with these high interest rates to try and hurt the growth in the economy. And it seems like the economy is still kind of handling those interest rates, and so it’s going to be hard for them to get this under control.

Jason Hosler (12:08):

With those higher interest rates, it kind of changes investors’ allocations within their portfolios. People who are holding fixed income when we had the low interest rates and continue to hold it while those interest rates went higher, they took a bath on those holdings.

And now, that we’ve reached most likely the terminal rate, people are looking at their fixed income and there could be an opportunity there. People are looking at their stock holdings and they’re wondering which companies are going to perform better when interest rates are higher.

And that’s another reason that we’ve seen such concentration in those big companies that can still make money even with higher interest rates because there’s such demand for their products.

As far as the consumer’s concerned with these higher prices, there’s going to have to be an adaptation because it doesn’t seem like there’s a lot of places where we’re going to see prices going down in the next few years here.

Bruce Hosler (13:03):

And I think inflation, so the inflation caused the Federal Reserve to raise interest rates. They’re holding those interest rates higher. And with the higher interest rates, this is affecting the profitability of businesses because they’re struggling with not only inflation in their cost of goods sold, and in their employees and in wages and everything else that they’re dealing with, but now they’re dealing with higher interest on the loans they borrowed.

So, the businesses profit margins are getting crushed. And there’s some businesses that are going to have a very hard time in this, and so it’s very selective right now on where you want to be invested. because some businesses are having a hard time.

And there’s going to be this teeter-totter fight going on with the Fed trying to figure out how many businesses are we going to damage, and how long do we have until we have the lower interest rates to save these companies that are struggling in this higher inflationary, higher interest rate environment.

Jon Gay (13:57):

So, in a way, we’ve come full circle. Halfway through 2024, we’re talking about what we were talking about at the beginning of 2024, which is interest rates and inflation.

Bruce Hosler (14:04):

Absolutely.

Jon Gay (14:06):

I think that’s a good place to leave it for part one of our series, looking at the markets and where we’re at halfway through 2024. We’re going to be back in a couple weeks with part two, hit on some more points related to where we sit as we record here on July 2nd.

In the meantime, if one of our listeners wants to talk to you and the team at Hosler Wealth Management, how do they best find you?

Bruce Hosler (14:23):

Hey, they can reach us at the website https://www.hoslerwm.com or call us at either one of the offices, Prescott (928) 778-7666 or in Scottsdale (480) 994-7342.

Jon Gay (14:39):

Excellent. We’ll be back in a couple weeks to talk more about where we sit as of right now.

Bruce Hosler (14:43):

Fantastic, Jon. Thanks.

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Jason Hosler (14:45):

Thanks, Jon.

Jon Gay (14:46):

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