Enlightenment - A Herold & Lantern Investments Podcast
Enlightenment - A Herold & Lantern Investments Podcast
Navigating Market Shifts: Election Impacts, Investment Insights, and Disney's Leadership Change
October 21, 2024
Season 6 | Episode 38
Ever wondered how election outcomes might reshape your investment portfolio? We promise a comprehensive understanding of market dynamics as we approach Election Day, offering insights into how you can strategically position your investments amidst potential political shifts. We explore the cautious sentiment shadowing the stock market following a remarkable equities rally. Dive into Goldman Sachs' forecast on U.S. equity returns, and discover why sectors like nuclear energy and companies like Costco could be key to unlocking future investment opportunities.
Catch up on the latest market movements with a focus on the S&P 500's recent dip and pivotal earnings reports from giants such as Tesla and Humana. Gain a deeper understanding of geopolitical tensions in the Middle East and Moldova's EU referendum, while we also dissect the current political landscape with Vice President Harris leading in national polls. Learn about the broader economic indicators affecting sectors like housing, and what high mortgage rates might mean for future market trends.
Finally, explore the evolving market trends where the dramatic fall in electric vehicle prices and economic power shifts between the U.S., Europe, and Japan come into focus. Discover how the resurgence of nuclear energy and Costco's bold urban expansion in Los Angeles might redefine future growth strategies. We wrap up with a spotlight on Disney's leadership reshuffle, analyzing what James Gorman's appointment as chairman could mean for the company's stock and the strategic direction under Bob Iger's continued leadership.
** For informational and educational purposes only, not intended as investment advice. Views and opinions are subject to change without notice.
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And now introducing Mr Keith Lnton Good morning. Today is Monday, october 21st. We have 15 days to go before Election Day. We've got about 10 weeks left in all of 2024. And we have a lot to talk about.
Alan Eppers:This morning we are going to talk about the election and how you may or may not want to situate your portfolio ahead of the potential change in direction from either candidate, and we'll talk about the news this morning. And then we will take a look at the financial markets, as Barron's talking about the stock market getting a little bit cautious with the big run-up in equities. We'll talk a little bit about Goldman Sachs this morning making a big macro call on returns in US equities over the next decade, and then we'll switch gears, take a look at a few individual sectors in Barron's. We'll talk about nuclear energy touch on Costco and then we will talk about pivoting from the Magnificent Seven stocks to stocks that Barron's has perhaps offered more upside potential now that the Magnificent Seven have rallied so much. And we're going to talk a little bit about small cap stocks, which a lot of investors have discussed as being an opportune time to consider those, especially with the Federal Reserve cutting interest rates here in the United States. And then we'll talk about some dividend-paying stocks that have those high dividends because they've got, hopefully, the ample cash flow, but also because their share prices dropped, raising those dividends, and we'll see if those offer an opportunity. Then we're going to turn things over to Brad. Brad will give us his thoughts and insights into the markets. So let's talk about what's coming in 15 days from now, and that is the elections.
Alan Eppers:And of course, the elections bring out a lot of emotions in many of us who have a strong affiliation or affinity for either of the presidential candidates. But we've talked about it before. Successful investing requires us to remove emotion from our financial decisions. These days, not much is more emotional than many of our feelings regarding the presidential candidates. I know some of you are saying to yourselves that's true, I should be removing my emotions from my financial decisions, but this time is different. This is an election that is going to be so pivotal and so consequential that it is truly different. And that may be, but the odds are that, despite the stakes, which are significant, that it is not a game changer when it comes to your financial decisions. Remember, this country has had a civil war, two world wars, a Great Depression, financial crisis, we had McCarthy era witch hunts. More recently we've had 9-11. And we've, of course, had a COVID meltdown, and the financial markets have withstood all of those factors. So we'll see if the financial markets can withstand this election cycle, regardless of who the candidate that you are rooting for, whether they get elected or not.
Alan Eppers:And I will talk about a study done by a gentleman named Ryan Detrick, chief market strategist at Carson Group, saying you'd be wise to factor in where potential lawmakers fall on the issues when considering how you'll vote. But don't worry, he says about how a particular candidate might affect the stock market. And he analyzed decades worth of stock market performance under Republican and Democratic administrations. And had you started with $1,000 in the broad US stock market in 1953, that's the year that Dwight Eisenhower took office and you had kept your money invested only during Republican presidency and you had pulled your money out on the Democrats, you'd have $30,000 today. If you follow the same strategy but invested only with Democrats, you'd have double the money. You'd have $60,000 if you invested only when Democrats got elected, sold when Republicans came to power. However, had you stayed invested during that entire time frame, you'd have $1.7 million. The reason for that is simple. The broad US stock market has gone up in 17 of the 20 four-year administrations since Dwight Eisenhower took office.
Alan Eppers:Regardless of what you see on C-SPAN, you'd be wise to avoid making any wholesale moves in your portfolio based on how you expect the election to turn out. If you have any rooting interest, says Detrick, it should be for gridlock. What's going to matter more than the presidential election is the makeup of Congress, he says. When you have a divided Congress, that tends to be the best thing. Indeed, from 1951 through 2013, the S&P 500 posted an average annual return of 6.7%, when Democrats had control of Congress, 11%, when Republicans controlled both houses of Congress and when things were split, markets returned 14.5%. Of course, remember past performance is no guarantee to future results. The bottom line is that politics are fun to watch they matter but when it comes to your investments, how the economy is doing is what matters more.
Alan Eppers:Now let's take a look at some studies here, also from T Rowe Price, and we're going to talk about presidential election years. That's the year that we're in right now, and in presidential election years, the average return of the financial markets is 11%, and when we look at non-presidential election years, it's about 11.6%. So this year is somewhat of an anomaly or an outlier where we have, at least so far, markets outperforming even during a presidential election year. When you take a look at presidential election years versus other years, typically what we see is that we have lower returns after a presidential election than the lead up into a presidential election. So typically when we have presidential elections, like we're experiencing now, six months prior, the election markets up about 4%. Six months after we're looking at returns of about 2.5%. So perhaps after the election the returns that we see may be a little bit more muted, but what we do see is what we're taking a look at, the volatility Twelve months before and the month immediately following the vote, the S&P 500 experiences less volatility on average in and around election years compared with similar periods in non-election years. So something to keep in mind that we perhaps will see more volatility perhaps next year. And also an interesting statistic that T Rowe Price had regarding S&P 500 returns and incumbents incumbent parties, specifically retaining power or losing power, and typically when the financial markets are up strongly one year prior and six months prior and three months prior all what's taking place today, typically the incumbent party wins the election when the performance going into the election.
Alan Eppers:One, three and six months out is weak. Typically the incumbent party loses the election. Three and six months out is weak. Typically the incumbent party loses the election. We will see if that in fact is the case. I don't know if we'll know on November 5th, but we will find out eventually.
Alan Eppers:All right, so let's take a look at this morning's news. We're seeing Dow futures down about 70 points. S&p futures down about 16. Nasdaq futures down about 90 points. Nasdaq futures the weakest of the bunch this morning, down about one-half of 1%. We see bond yields moving up, bond prices moving down. Ten-year is at a 4.13 this morning. Oil stronger this morning, up about $1.14, 1.5%. We have continuing uncertainty in the Middle East, perhaps influencing energy prices.
Alan Eppers:I mentioned Goldman Sachs earlier in the conversation. They said that the S&P 500's decade of big gains is over is over. Goldman Sachs out this morning saying that S&P returns maybe just 3% a year for the next 10 years. That compares to the long-term average of 11% After adjusting for inflation. Goldman's expecting after-tax returns, or after-inflation returns I should say to be a paltry 1%. Goldman's saying that equities have trounced other assets in recent years but that won't continue. By their math, the S&P 500 has roughly a 72% chance of of trailing bond returns and a 33% likelihood of lagging inflation through 2034.
Alan Eppers:In other markets this morning gold set a fresh record I mentioned. Oil is higher. Bitcoin is flirting with $70,000 price. Speaking of price, t Rowe Price, the financial services firm, out this morning saying that they think the 10-year treasury yields will reach 5% in six months. On higher inflation expectations News from China this morning that they are cutting their lending rates, adding fuel to government stimulus efforts over in Asia.
Alan Eppers:Significantly this morning, boeing and the union representing 33,000 striking workersached a tentative agreement over the weekend, ending a five-week impasse. Boeing shares up about five points at 3.9% in pre-market trading. We'll talk a little bit more about that deal in a few minutes. Perplexity AI, which is building a search product to compete with Google, is in early talks to raise funding valuation of about $9 billion, and insiders are busy selling stock. Last week, despite the fact that many corporate executives were offering reassuring earnings guidance, underneath the rosy outlook they were selling stock. A gauge of insider sentiment, one that tallies the number of sellers versus buyers, is poised to hit the highest monthly reading in more than three years, the last time insider indicators shot up to this level of insider selling. It was in July of this year which was a precursor to market pain.
Alan Eppers:Subsequently, the S&P 500 fell about 8%. Taking a look at earnings, we have a slew of earnings coming out this week. Tesla leasing results on Wednesday and its outlook for vehicle deliveries will be in the spotlight, after sales figures earlier this year disappointed investors and after the Tesla robo-taxi event did not inspire investors. Other companies in the news this morning Kenview, symbol KVUE, is up about 9%. In the news this morning Kenview symbol KVUE is up about 9%. Starboard and a company run by Jeff Smith building their stake in Kenview, suggesting that there is value to be unlocked there. That was a spinoff from Johnson Johnson. Household products like Tylenol are made by Kenview.
Alan Eppers:Sirius XM symbol SIRI up about 3% this morning to over 28. 10% owner Berkshire Hathaway buying another million and a half shares between 26.5 and 27.5, about $42 million, and that stock continuing to move higher on increasing positions by Berkshire In the health space. Humana H-U-M up about 10 points of 4%. They filed a lawsuit to reverse a reduction of Medicare quality ratings. According to Bloomberg, cigna shares CI dropping after they resume merger discussions with Humana. Spirit Airlines, symbol SAVE up about 50 cents, which is 35% After they said they expect to end this year with about a billion dollars of liquidity. They also called off their merger, which was being challenged by the FTC, with JetBlue and Southwest symbol. Luv said they are discussing a possible settlement with Elliott Management, and that is according to Bloomberg Overseas.
Alan Eppers:I mentioned the Chinese stimulating their economy. Nevertheless, the Hang Seng dropped about 1.6% on the heels of last week's 2% decline. Major European markets were trading higher, but as US futures started trending lower, many of those markets started to follow the US and get weaker in sympathy. In geopolitical news, moldavia was voting on a referendum on whether or not the country would consider joining the EU. That the small nation is tugging between the East and West, and over half the votes looks like right now are that the Moldavians are voting to consider joining the EU. This is something that we could see a reaction from out of Vladimir Putin as he seeks for countries which he views as within his alliance to resist joining the EU and the European Union, and, of course, that often leads to discussions about them joining NATO, and this is something that Russia has proven very sensitive to, not getting a lot of attention this morning but may see more fallout in the weeks to come.
Alan Eppers:All right, we talked about the presidential election this morning. Polling averages are showing Vice President Harris ahead marginally nationally, but former President Trump ahead marginally in all seven swing states. That's according to some polling data from RCP this morning. Also news this morning that Israel resumed its bombardment of Lebanon and that the White House is proposing a rule to expand affordable coverage to contraception under the Affordable Care Act. This is something, of course, that is contentious, with abortion playing a key role here in the presidential election. We were talking about Boeing. What did that settlement look like with the union? Well, new contract has a 35% pay hike over four years, also a $7,000 ratification business. They reinstated an incentive plan and enhanced contributions to workers' 401k retirement accounts. Is what was in this recently agreed-to plan. We'll see if the union ratifies it.
Alan Eppers:We talked earnings season. So we have SAP releasing results today, on Monday, followed by Danaher, ge, aerospace and Verizon tomorrow. At&t, ibm, tesla, t-mobile on Wednesday, honeywell, ups, thursday, sanofi closing the week out on Friday. On Wednesday, we get economic data from the National Association of Realtors existing home sales for September expected to be 3.9 million homes sold slightly more than August. If you're wondering what that statistic looks like on a historical basis, existing home sales are near their lowest level since 2010. As the lock-in effect high mortgage rates dissuading homeowners who purchased at lower rates from selling has put a lid on the housing market. Thursday, s&p releasing both its manufacturing and services purchasing managers index for October, looking for those to be relatively flat relative to September.
Alan Eppers:A couple of statistics and then we'll move on to Barron's. $28,000, that's the average selling price of a three-year-old electric vehicle. That's a 25% drop since the start of last year, 2023. 25% drop since the start of last year, 2023. 40% that's the estimate of economic output per person in the United States over Europe, and the US is 60% above Japan. All right, let's move on here to Barron's and the markets.
Alan Eppers:Let's take a look at what took place last week, as the bull run in, stocks remained in full swing, animal spirits continuing to move the markets forward, although we're getting a little bit of a pause this morning. We'll see if that pause is just a breath of fresh air or something more. S&p ended last week up nine-tenths, was up 1%, hitting a record on Friday. Both indexes hit a record on Friday Six weeks in a row of gains for both the Dow and the S&P and we're starting to see investment banking revenues surge across the major banks as the big companies here in the US feeling more optimistic and engaging in more mergers and acquisitions activities. Also, last week we saw retail sales rise 0.4% better than expected, and the Federal Reserve still remains to be on track to cut interest rates again in November by a quarter of a percentage point.
Alan Eppers:But with the S&P trading at 22 times expected earnings over the next four quarters, valuations are pricing in a lot more than good vibes and some of the economic signs aren't as positive as hoped for. There are hints that consumers are pulling back in some areas. American Express stock fell about 3% on Friday because even its well-off customers are feeling cautious these days. Because even its well-off customers are feeling cautious these days. Shaky consumer sentiment and lofty valuation mean that stocks will have to successfully walk a high-wire act for the rest of this year. For now, analysts expect the earnings per share of S&P 500 companies to rise 15% in 2025. If that number drops well, valuations could decline as well.
Alan Eppers:Moving on to a few individual ideas, as we focus on going from the macro level to here, the micro level, one of the trends that has been building here in 2024 is that nuclear energy is making a comeback, and Barron's talked about a few different stocks to consider if you think that this trend will perpetuate in 2025. So, when they're not inventing chatbots, tech giants have a new obsession and that's nuclear power. This week, alphabet, google and Amazon announced investments in new kinds of reactors, the latest sign that nuclear energy is making a comeback, some 50 years since the technology was last considered a growth industry. The trend has already lifted the stocks of companies that own reactors, including Vista and Constellation Energy, but the Google and Amazon deals signal a new phase where companies could actually build new nuclear reactors. The Google and Amazon deals signal a new phase where companies could actually build new nuclear reactors. As a result, a separate group of stocks has begun to rise companies that are designing, building and fueling novel kinds of nuclear reactors and if the trend continues, all of which rose last week, and that's because the tech giants are looking for ways to secure power for their data centers, which are consuming more electricity as artificial intelligence usage grows.
Alan Eppers:The biggest obstacle for nuclear adoption are that reactors take a long time to build and can be very expensive. The new kind of nuclear power plants that are being built by some of the tech leader partners being built by Kairos and X-Energy are known as small modular reactors or SMRs, and they are supposed to be cheaper and easier to construct. They produce about one-tenth as much power as the behemoths that exist today and are called modular because they are designed to be built by factories in pieces. Only three SMRs exist in the world today and none are in the United States, but there could be dozens by the 2030s. Congress passed a law this year meant to speed up approval of new SMRs, and the Biden administration said it would invest $900 million in helping companies build small reactors. It's not easy to invest directly in this trend. Kairos and Xenergy, which I mentioned earlier, are privately held, but two other SMR developers are publicly traded Oklo O-K-L-O, whose chairman is OpenAI CEO Sam Altman completed a SPAC merger earlier this year, and another player, nuscale, which is the only SMR developer to receive approval for its design from the Nuclear Regulatory Commission. Until this technology becomes more entrenched and until it gets off the ground, these should all be viewed as speculative investments.
Alan Eppers:Other US nuclear renaissances have petered out because of costs or safety concerns, but with big tech and government joining forces. This one is looking like it may have more of a sustainable chance than previous renaissances or lights that were seen at the end of the tunnel for nuclear energy previously. Of course, this is an uncertain path and we will see how it develops. All right, let's talk about another company. We're going to completely change gears and Barron's talking about the market darling, and that is Costco. Symbol C-O-S-T Costco recently investing and participating in one of their first mixed-use urban developments.
Alan Eppers:They are partnering with Thrive Living, a California-based developer that's converting a vacant lot in the Baldwin Village neighborhood neighborhood of los angeles into an amenity rich apartment building complete with 800 rentable units, a rooftop pool, gym, basketball court. But the most appealing amenity might just be the costco warehouse that is slated to take the ground floor, complete with a pharmacy and optical services. It's the first time costco is leasing a space in a residential development like this one. Long term, however, the biggest upside may be for Costco in this development and its shareholders. The retailer's move could set a new precedent for its urban expansion strategies, giving Costco more flexibility to tap into densely populated areas and position itself closer to where shoppers live. The reason Costco is engaging in this partnership is because Costco building additional warehouses in Los Angeles is difficult. There's not a lot of free land and therefore they are getting creative and doing the first of its kind of deal here. Doing the first of its kind of deal here, where they are building a Costco at the base of a mixed-use industrial property with urban living space right above it.
Alan Eppers:It's interesting to note that California is critically important to Costco. 27% of Costco sales are in the state of California. The retailer's decision reflects a growing willingness to experiment with new formats, particularly in hard-to-access markets. The new development could open up new revenue streams for Costco because Costco owns so much of its real estate. As of their last filing, costco owned about 703 or 80% of their properties If the Current multi-use development goes well. Interesting that Costco might be tempted to build residences on its existing properties or sell the air rights for others to develop residential housing above existing Costco. So potential growth there. Nothing set in stone, but interesting to think about. All right, I mentioned earlier Magnificent 7 Stocks certainly have had a tremendous run here in 2023, 2024, and many suggesting that it's time to at least consider other equity investments.
Alan Eppers:Barron's says to take a look at some dividend-paying stocks, and they talk about stocks that yield 4% or more. Barron's pointing out that many of the dividend-paying stocks, like in pipeline companies and banks, have appreciated significantly this year and therefore their dividend yields have ticked lower. But they say there are still opportunities. They mention Pfizer, symbol PFE. Their problems, they say, are well known, notably a collapse in sale of COVID vaccines and looming patent expiration for some drugs. But much of the financial hit, they say, could be over Stocks. At 11 times 2024 earnings.
Alan Eppers:Activists invest to Starboard. We mentioned them earlier, participating in Kenview, but they've recently also taken a position in Pfizer and the stock now at $30 a share, yielding 5.7%. The dividend looks very safe based on the cash flows. So if you believe Starboard can extract some value and continue to earn that 5.7% dividend might be a worthy investment. Article also talks about Verizon, trading around $44 a share, yielding 6%, benefiting from stabilizing conditions in the wireless market. Verizon has made some cosmetic annual increases to its dividend and earnings are set to bounce back and the stock relatively inexpensive at about 12 times earnings. Then there's United Parcel Service, symbol UPS, down 15% this year because of disappointing revenue margins and profits, but the stock yields 4.8%, just above the rate on its 10-year bond and it's trading for 15 times projected 2025 earnings. Next up, chevron, which is unchanged this year. Symbol CVX versus a 10% gain for the energy group versus a 20% gain year-to-date for its rival, exxonmobil. Chevron yielding 4.4% against Exxon's 3.2% and boasts more than 25 years of annual dividend increases.
Alan Eppers:Another company to mention is T Rowe Price symbol T-R-O-W. The gap between T Rowe Price and some of its competitors which have been growing faster, especially given their alt space participation Blackstone and KKR, two companies to compare to T Rowe Price, but T Rowe Price is valued at less than 15% of Blackstone, despite managing more money. T Rowe Price yields 4.5% Stock's around $111 a share, trading at about 12 times 2024 earnings around $111 a share, trading at about 12 times 2024 earnings. Outflows have weighed on the stock, but management is optimistic that flows will turn positive in 2025. The company continues to see inflows into its target date funds, which is its best business, where it's number three behind Fidelity and Vanguard, and they've got $453 billion in assets in that category.
Alan Eppers:I'll also mention SiriusXM because it's in the news this morning. S-i-r-i Satellite radio company might not seem like an obvious place to go for yield. It's stocked down about 50% this year, but certainly getting another bump up this morning on continued purchases from Berkshire Hathaway. Investors are worried about the subscriber losses. The shares, though, look inexpensive at around 27, where they traded around nine times 2025 earnings and yield around 4%, and that is for Berkshire investment in Surrey S-I-R-I. I was going to talk a little about some small cap stocks, but it's already nine o'clock so I'm going to skip that until next week and turn things over to Brad to talk some more about the financial markets. Good morning, brad.
Brad Harris:Good morning Keith. Good morning everyone. I hope everyone had a great weekend. For many of us around the country, it was one of those perfect fall weekends, so I hope you all got to enjoy it.
Brad Harris:As we get close to the election, I prefer not to make any prognostications, as the only thing that we know now is that we don't know what's going to happen. I mentioned last week that it seemed as bonds had over-rallied here and now be getting towards oversold and now be getting towards oversold. The 10-year sits at 4.12% this morning, up from a low of 3.6% just a couple of weeks ago. The chart is claimed that 4.16% is resistance and we'll either rally off that or, if it breaks through, to higher rates, the next stop is 4.25%. That is definitely interesting for a trader or maybe a potential home buyer, but as an investor, it is just noise at the moment, unless we really break through that significantly to higher rates. So, generally speaking, when it comes to bonds, my feeling is always buy what you're withholding, take into account rate of return, duration and, most importantly, credit. Speaking of credit, my eyes are telling me that we should be bullish on New York.
Brad Harris:As I've said in the past, as a New York municipal bondholder, which many of us are. I want to see strength in the quote-unquote company, so to speak. And lately, with the exception of pro football, there have been more positive news for New York sports for as long as I can remember. When sports teams are successful, people go out watch the games, go to the games, travel to the games, tourists come in, etc. Etc.
Brad Harris:All this revenue, this tax revenue, goes to New York's bottom line collections. It's not only sports. I'm seeing it in theaters, restaurants, foot and vehicle traffic. It may be busier now than pre-COVID, and this is all great for tax revenue collections. We sell a lot of New York municipal bonds here, primarily because they're such a large issuer with so many different authorities and communities that there's a lot to choose from. But it gives me comfort to see all of this activity when we're dependent on these tax collections and revenues to pay the bonds that we hold. Feel free to analyze your own community, wherever you may be, new York or not, tell me what you see and think. With that, I hope everyone has a great week and I'll send it back to Keith.
Keith Lanton:Thank you, Brad. I'll also mention some comments that Walt Disney this morning named. James Gorman is chairman of the board effective January 2nd 2025. He's currently head of Morgan Stanley, stepping down at year end and also announcing that Bob Iger, who is CEO, will stay on until 2026. And James Gorman will oversee the next CEO hiring there and Mr Iger is going to be staying on a little bit longer than anticipated. So we'll see how Disney stock reacts to that news.
Keith Lanton:That's everything I've got.
Alan Eppers:Thank you for listening to Mr Keith Lanton. This podcast is available on most platforms, including Apple Podcasts, Spotify and Pandora. For more information, please visit our website at www. heraldlantern. com.
Sophie Cohen:Opinions expressed herein are subject to change and not necessarily the opinion of the firm. Past performance is no guarantee of future results. The information presented herein is for informational purposes only and is not intended to provide personal investment advice. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. The material does not constitute research, investment advice or trade recommendations.