First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep. 1 - Bob Carey - Why are stocks up this year & can the rally continue? - ROI Podcast
Why are stocks up this year…and can the rally continue?
On the heels of the worst year for stocks since 2008, pessimism dominated most forecasts coming into 2023. In this episode of the ROI podcast, Ryan and Bob discuss some of the most common questions investment professionals and their clients are asking, including:
- Why have stocks defied expectations so far in 2023?
- Will returns continue to be driven by a small number of stocks, or will markets broaden out?
- Will international stocks outpace domestic stocks?
- Perhaps most importantly, can the stock market rally continue?
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00:00:00:00 - 00:00:31:06
Ryan
Welcome to the ROI podcast. My name is Ryan Issakainen, and I am the strategist here at First Trust. Our goal for this podcast is to discuss some of the questions that financial advisors and their clients have in a very confusing market environment. Fortunately, I have some of the best resources here at first Trust to have conversations with to discuss some of these topics.
00:00:31:11-00:00:38:10
Ryan
And my guest today is Bob Carey, chief market strategist. Here for the first stretch. So, Bob, welcome to the podcast.
00:00:38:12-00:00:42:11
Bob
It was great to be with you, Ryan. I love the name of your podcast, the ROI podcast.
00:00:42:16-00:00:50:01
Ryan
It's got many layers of meaning. So to start things off, you've been at First Trust for how long?
00:00:50:03-00:00:51:01
Bob
32 years.
00:00:51:01-00:00:56:10
Ryan
32 years. And how was the world agenda up here 32 years ago?
00:00:57:18-00:01:18:05
Bob
Well, basically, at the very, very beginning of our firm, there was an opening in the research department, and I applied. I applied, and eventually we made it happen in the end of, more or less, the fall of 1991. So here we are, 32 years later.
00:01:18:06-00:01:40:23
Ryan
It's amazing. You spend quite a bit of your time traveling around the country, talking with investment professionals, and you kind of get feedback on, you know, what you're talking about. And I want to start there. When you talk to advisors around the country this year or midway through a little past midway through 2023, what is the most common question that you're getting today?
00:01:41:11-00:02:01:17
Bob
Great, great question. I would say that I think a lot of people are just very surprised that the market is up this year and up as much as it is. And I think everybody knows that the market has been driven largely by a handful of stocks. So it kind of begs the question, What's driving those stocks?
00:02:01:19-00:02:25:05
Bob
And I think a couple of things have happened, but I would say that's probably the biggest question that I'm getting right now: you know, why is the market up this year? We clearly see an economy that is doing okay. Inflation is coming down, which I think has been helpful. The employment situation is still solid at this point, but we've got the Fed raising interest rates aggressively.
00:02:25:05-00:02:44:13
Bob
And normally, when the Fed raises rates, you do eventually see the market roll over. We have a recession, we see valuations come down, and we're all kind of waiting for the next shoe to drop with all this tread tightening going on. So I can understand why people are apprehensive and kind of wondering why the market is up this year.
00:02:44:13-00:03:14:11
Bob
But I think it's pretty. I think it's pretty simple. I think, ultimately, two things happened at the beginning of the year. One of them is bad, obviously. We saw several rather high-profile financial institutions get into trouble, and you know, what's kind of interesting about both of the major institutions that failed was that they bought too many treasuries back in 2020 and 21 when yields were really, really low.
00:03:14:13-00:03:38:14
Bob
And then, obviously, you know, interest rates went up and the value of those investments went down. I have never seen a bank fail because they bought too many treasuries. I mean, it's just kind of talk about a sign of the times, but it kind of tells you how low interest rates were a couple of years ago. But the other thing that happened was that, all of a sudden, everybody got this chat thing.
00:03:38:16-00:03:56:22
Bob
I mean, everywhere I went, everybody's like, Hey, if you messed around with cheap, it was it was like, you know, And all of a sudden, this fascination with machine learning and artificial intelligence, if you want to call it that, I mean, there's all these different things that really got people very excited about, you know, the companies that might be involved in this.
00:03:56:22-00:04:22:09
Bob
And there's no question; we all can kind of see that this is the future to some extent. But I think that really drove the market quite significantly. This reminds me a lot of the late 1990s. You know, we got the Internet, we got mobile phones, we could see the world was changing, and a lot of good things might happen four or five, ten, or 20 years down the road. You know, it gets pulled forward and the valuations go up.
00:04:22:11-00:04:29:23
Ryan
And sometimes it overshoots like it did at the dot-com bubble. A lot of ideas were pulled forward, and they were pulled forward too much.
00:04:29:23-00:04:30:17
Bob
No question.
00:04:30:21-00:04:36:02
Ryan
Are we in a similar state now, or where do you think we are with respect to that hype cycle?
00:04:36:02-00:04:54:01
Bob
We might be there's valuations are definitely very high for a handful of companies that are kind of the higher profile companies that were that were talking about. I mean, a lot of these stocks were beaten up last year, too. So they did get a bit of a correction, if you will, last year.
00:04:54:03-00:05:14:19
Bob
And it could very well be that maybe they were due for a little bit of a rebound. Maybe the correction went too far for some of these companies. I think that might be part of it. But the other thing that's happened this year is that we have seen inflation come down, and stocks are very sensitive from a valuation perspective, obviously to interest rates, but really to inflation rates.
00:05:14:19-00:05:31:08
Bob
That's a big, big part of it. So the inflation rate coming down, I think, is probably driving down the discount rate for companies to some extent. I think that's been helpful, and I think that's been really helping valuations for the market this year.
00:05:31:09-00:05:53:19
Ryan
Yeah. So are there any particular areas you brought up? Catchy Beat and I, and there's a lot of uncertainty about how that's going to play out. But when you think about broad industries and sectors, are there any that intersect with that that you think will be better off five years down the road, even more near-term than that?
00:05:53:21-00:06:15:08
Bob
Yes, I'd say probably the semiconductor industry. I think obviously software comes to mind. But I think there's going to be a lot of applications that will improve efficiencies in a variety of industries. There's no question about it. But, you know, we always kind of wonder, you know, the semiconductor industry has grown a lot over the years, but there's always these cycles.
00:06:15:08-00:06:36:20
Bob
Right. And we always kind of wonder—you know, we have a down cycle, and we kind of wonder what's going to be the next big thing that will drive the need for more bandwidth, mmoreinformation, and more data to be shared ultimately. And I think we may have found that with AI and machine learning, you know, this has all been, you know, brewing for a long, long time.
00:06:37:01-00:06:55:09
Bob
But it's something that the public now has—something they can mess around with and they can see it—and it's been going on for a long time. But, you know, a lot of things that we use, we don't realize. But there's this machine that's learning a lot of things about what we're doing. But I think it's much more tangible now.
00:06:55:09-00:06:57:13
Bob
And I think that's where the excitement comes in.
00:06:57:15-00:07:12:19
Ryan
So there's a lot of building happening with semiconductor foundries and factories, and it seems like all over the country that's happening. And that takes a little while to play out, doesn't it?
00:07:12:19-00:07:40:18
Bob
Yeah, with all of this, the cycle is very long. Yeah. To build a facility that produces semiconductors, it's not something that you just break ground and start producing chips next year. Yeah, it's as quick as maybe three years to as long as ten years before these things are actually finished getting built. I was just in Ohio a couple of months ago, and I could see where some of these facilities were being built.
00:07:40:18-00:08:06:22
Bob
And, you know, you just have vast amounts of land and these enormous slabs of concrete, if you will, the kind of stability. It's a long process. And these are the plants. A lot of things have to be done precisely before they ever produce a chip. So we're talking about billions of dollars in investments. And, you know, whether or not those investments pay off really depends on whether or not demand is there for these chips down the road.
00:08:06:22-00:08:29:20
Bob
So it's not without some risk, and the market's always trying to gauge those risks. And last year we could see there was a slowdown in the tech sector, a bit of a hangover from, you know, the work from home, everybody getting equipped to work from home. You could really see that tech spending was down this year. You know, it looks like things have maybe stabilized a little bit in that space.
00:08:29:20-00:08:51:20
Bob
So now we've got something to think about for the next several years that has the market excited. But, you know, some of these companies that are in the semiconductor industry that have gone up a lot this year don't even own any plants. They just design these chips, and they rely very heavily on plants being built around the world that might not come online.
00:08:51:20-00:09:11:03
Bob
Some of them for many, many years. So, you know, it's a development. It's exciting, but it's not without risk. And, you know, last year, the market was very aware of these risks. I mean, we saw these Sony stocks cut in half this year, and some of these stocks are, you know, up, you know, 100% or more.
00:09:11:03-00:09:14:06
Bob
So it's not for the faint of heart, for sure.
00:09:14:08-00:09:36:11
Ryan
So I think of semiconductors and some of the stimulus acts that have been passed, like the CHIPS Act, and, you know, the way that that is framed is that this is a geopolitical issue and we need to have manufacturing restored in the U.S. Do you think that's happening? Is there any impact now, or is this something that is not as relevant?
00:09:36:13-00:09:36:23
Ryan
Yeah, I.
00:09:36:23-00:10:02:23
Bob
I would say the jury's out. You know, we've never really had anything resembling an industrial policy in this country. A lot of countries have, you know, industrial policies that kind of favor industries that get, you know, more or less coddled. Well, sometimes those industries become less competitive when they have a lot of government assistance. And so the free market person inside of me is skeptical that this is having any impact at all.
00:10:03:00-00:10:25:06
Bob
I think it's natural that if you're running a business that relies on outsourcing and your suppliers are coming from parts of the world where you might not be able to get access, it makes sense that you would want to maybe work onshore. Some of that. I think onshore has been going on anyway. And I think Congress knew that.
00:10:25:07-00:10:34:17
Bob
I think a lot of people realize the importance of shoring. And I think Congress wanted to get involved and take some credit for it in a way—you know, it's how it is.
00:10:34:19-00:10:57:02
Ryan
So when you think about investing from a U.S. versus international perspective, especially, you know, at the point that we're at today, midway through 2023, do you have any thoughts on where investors should be looking from an allocation perspective? Should they be tilting more towards international than they have in the last few years, or should they stay on the domestic side of things?
00:10:57:04-00:11:17:02
Bob
I think near-term, I would say that maybe, you know, international will keep up and maybe even outperform a little bit over the next year. When I look at earnings estimates for the rest of the year and estimates for next year, I would say the trend is probably a little bit better for overseas markets than it is for, say, the S&P 500.
00:11:17:02-00:11:42:10
Bob
Domestically, however, you know, for the last ten, 11, 12, and 13 years, it has really been the US market, especially the S&P 500. And the reason for that is that, normally, currency plays a huge role in that. You know, if you want to invest overseas, you expect those stocks to outperform overseas.
00:11:42:10-00:12:01:16
Bob
Typically, the dollar weakens when that happens, and the dollar goes up. You want to be in U.S. stocks normally; that's the relationship. But in the last seven or eight years or so, the dollar has pretty much been rangebound. Yes, it did surge last year, but it's come back down. The dollar is not the swing factor anymore, like it used to be.
00:12:01:16-00:12:31:18
Bob
What's really happening is that U.S. companies and S&P 500 companies have a significantly higher Getting back to your podcast term, our why return on investment for U.S. companies today Looking at S&P, they are much, much higher-producing cash flow machines ultimately than companies overseas. You know so many companies that have really come on the scene here in the last five, ten, 15, and 20 years.
00:12:31:20-00:12:46:03
Bob
For the most part, those companies that are very, very high-return, high-growth businesses are based here in the U.S. They're very multinational. Typically, they do business everywhere. But those companies happen to be based here in the United States the most. Why is that?
00:12:46:03-00:12:50:00
Ryan
Is that from an educational or regulatory standpoint? Like what? What cause.
00:12:50:02-00:13:16:07
Bob
We are? I think it's just technology. I really do think the Internet age, just going back to the nineties—you know, the age of the Internet and information technology and all the technologies that we enjoy—is really a global phenomenon. But for the most part, the companies that have really figured out how to make more with less, which is really what entrepreneurs do, are in the US.
00:13:16:07-00:13:36:14
Bob
We are the most entrepreneurial country in the world. And I think you could argue that maybe we kind of lost our way for a while back, maybe in the sixties and seventies. But I would say that in this day and age, it's pretty obvious that we have much, much better businesses and a better environment for creating these kinds of companies.
00:13:36:15-00:14:11:17
Bob
You think about all the companies, and in biotechnology, semiconductors, and software, for the most part, those are the leading companies, even in automotive manufacturing today. I mean, the leading kind of company in that industry over the last couple of years is Tesla. And Tesla is based here in the US. Yes, they do business all over the world, but there's really no equivalent. There are a lot of companies that want to compete with Tesla that might be based in Germany, China, or Japan, but nobody's able to figure out how to make vehicles and make them as profitably as a company like Tesla.
00:14:11:17-00:14:37:09
Bob
But we see that again and again, these companies are really emerging from the U.S. Just to put some numbers to it, I calculate that the ratio for the S&P 500 this year at the balance sheet level is nearly three and a half percentage points higher than it is for most developed countries around the world. So we simply have companies that generate more cash flow and dominate our market.
00:14:37:12-00:14:53:07
Ryan
So why don't technology companies blossom in other countries? What is it about the U.S. that causes these companies to be located here? As you mentioned, you know, all these they can locate in other places. Why are they located here?
00:14:53:12-00:15:19:00
Bob
Well, you need capital, and you need people to make things happen. And, you know, you look at the list of the top, you know, engineering, science, and STEM-related programs around the world, universities, and whatnot. Boy, we heavily dominate those on that list. Look at the top 100 engineering schools in the world. I mean, half of those universities are based here in the United States.
00:15:19:02-00:15:32:19
Bob
So I think we've always had this technology-driven economy. But I think, especially now in this day and age, with all these new industries that have been created, it just kind of feeds on the cycle. That's what it is. Exactly.
00:15:32:21-00:15:39:18
Ryan
Well, that is probably good news for us. And hopefully that virtuous cycle continues despite efforts to
00:15:39:18-00:16:05:23
Bob
Yeah, I mean, when you think about running a business, you need capital. And we have, you know, obviously enormous amounts of capital, and you need knowledge, and you also need, at the same time, private property protection and intellectual property protection. We tend to do a much better job of protecting intellectual capital in the US compared to many, many other places.
00:16:05:23-00:16:08:03
Bob
Yeah.
00:16:08:05-00:16:34:18
Ryan
Okay. Another broad question for you What do you think is the biggest misconception that investors or investment professionals have as they're thinking about how to allocate capital? Where we are today, we've had this surprising surge in the market and equity markets this year. Is there any misconception that you come across that you think, you know, this would be a good thing to discuss?
00:16:34:20-00:17:00:15
Bob
Yeah, I think one thing that I keep mentioning in my comments and in my presentations seems to be getting some traction. I'm trying to get people to think about things from a longer-term perspective. Obviously, there's a lot of focus on markets in the short term. I mean, I'm reading the newspaper this morning online, and, you know, they're talking about, you know, a lot of things that might happen this week.
00:17:00:15-00:17:20:20
Bob
We've got all these reports coming out. We've got earnings coming out. And it's important to focus on that. Maybe, to some extent, it's very easy to lose sight of the long term. And I think that's why I've been thinking about this a lot lately. There are obviously a lot of folks getting older. A lot of baby boomers are well into their retirement years already.
00:17:20:20-00:17:43:19
Bob
A lot of them are about to retire. At the same time, I've been going to birthday parties here lately and buying birthday cards. And at the bottom of the shelf, there are birthday cards for people turning 100 today. I'm pretty sure that market didn't exist that many years ago. I certainly mean, the idea of living to be 100 years old was just something you didn't think about.
00:17:43:19-00:18:09:20
Bob
So, you know, for somebody who's in their sixties or seventies, you know, obviously we never know how long any of us is going to be around. But the need to think about the potential to be alive and well in your eighties, nineties, or even 100—I think it's, you know, you've got that going on. And of course we have; we've got these elevated levels of inflation over the last couple of years.
00:18:09:20-00:18:31:09
Bob
So it really kind of forces us to think about the long term, knowing that, hey, in the near term, a lot of things can happen. But we know that, from a long-term perspective, it's investors that win. And a lot of folks are, you know, buying T-bills, thinking they're making investments. So you're not really making an investment.
00:18:31:09-00:18:48:09
Bob
You're, you know, hopefully earning a decent rate of return enough to offset inflation. But we all know that, you know, those rates can be very short-lived, and they're probably not going to live up to where the inflation rate is going to go over the long term, especially after taxes. Right.
00:18:48:11-00:19:08:13
Ryan
So if that's the case, and I think that's a really interesting point, people are living longer. And when it comes to, are there certain rules of thumb that we all learned early on that you take your age and, you know, that should be your allocation to bonds, and it kind of grows over time? Does that change the math?
00:19:08:13-00:19:27:16
Bob
I think for some people, it might. I really do. I really do. I think for a lot of people, I started my career just to back up a little bit. I started my career in the eighties, and I saw a lot of people retiring and selling literally all of their equities and saying, Hey, at this point, I just want some income.
00:19:27:18-00:19:52:06
Bob
If I can earn six, seven, eight, or 9% on my bonds, if you will, my fixed income, my CDs, whatever people were buying back then, you could argue that, well, that kind of made sense because inflation was coming down and the rates of return were real. I mean, you actually had a spread between the inflation rate and what you earned on your interest, and that spread is very thin right now.
00:19:52:06-00:20:11:12
Bob
I mean, it's gotten a little bit better as the Fed has increased rates this year. But, you know, the reality is that that transition to being maybe a little bit more cautious, having more safe assets, So I think that transition for a lot of people should probably be pushed out further into the future. I mean, everybody's situation is unique.
00:20:11:12-00:20:35:07
Bob
And I think that's the art of being a financial advisor. A financial planner knows your client's circumstances. And for some people, maybe they can't have a lot of risk in their portfolio. But I think to the extent that you can plan for the next ten, 15, 20, or 30 years down the road, I think it's important to just be open to that idea.
00:20:35:09-00:20:44:01
Ryan
Yeah, if someone's retiring at 65 and living at 75, that's ten years. If they're retiring at 65 and planning to live, you know, 85, 95.
00:20:44:01-00:21:04:15
Bob
On a personal note, my grandmother's sister died last year at the age of 105. I mean, my grandmother died in 1976, just to give you some perspective. And she had, you know, at that point in her sixties, the idea that her younger sister would be alive in 2022; it's like you're just going to blow your mind.
00:21:04:17-00:21:05:21
Bob
So you never
00:21:05:21-00:21:07:22
Ryan
Know. That's remarkable. 105.
00:21:08:01-00:21:11:03
Bob
- Wow.
00:21:11:05-00:21:29:00
Ryan
So that makes me think of the health care sector. Right? And that's an area that I know you have talked about a lot over the years: biotechnology, health care, and some of the things that are happening in that sector. Are there any thoughts on, broadly speaking, the health care sector or biotech specifically?
00:21:29:03-00:21:52:16
Bob
Yes, we have been watching very closely the number of products that are in clinical trials. I think that's a very important thing to keep a handle on when it comes to pharmaceutical companies and biotechnology companies. These companies can't just come up with something and sell it in the marketplace. They have to prove that these products are safe, effective, and all those different things.
00:21:52:18-00:22:20:10
Bob
So the number of different products keeps climbing. You can really see the investments being made in R&D and clinical trials. At the same time, we have been in a bit of a moratorium on mergers between maybe bigger companies in the biotech space, for example, or maybe companies in the pharmaceutical space that want to maybe broaden their pipeline or have more products.
00:22:20:12-00:22:45:09
Bob
You know, that's always a challenge. If you're running a company in the pharma sector and in biotechnology, you need new products that have patent protection, that have something novel, something new that can create some shareholder value. So the race is on to gain control of these products down the road. And in the past, there have always been mergers and a lot of activity.
00:22:45:09-00:23:17:04
Bob
One of the reasons you might buy, for example, shares of a biotechnology company is the prospect that it might be taken over one day. We have really seen a moratorium on that over the last couple of years. The current occupant of the White House, his administration, is very hostile to mergers in general, and in general, I think the market is kind of waiting to see, you know, where the next big deal might happen.
00:23:17:04-00:23:30:16
Bob
And we have had some deals happen here lately, and we've started to see maybe a bit of a thaw. Market forces are naturally going to give us this result, but we've got a pretty heavy hand from the government right now holding some of this back.
00:23:30:18-00:23:52:17
Ryan
Yeah, that is interesting because, you know, the usual state of biotech companies is that they have trouble having the capital to make it through phase three trials. Right. And so having a larger, better-funded biotech or pharmaceutical company can come in handy when going through those.
00:23:52:19-00:24:14:03
Bob
No question. You know, the concern that I have is that without the risk capital necessary to make these investments and get these products to the marketplace, we could very well see a drought at some point in new products. And at the same time, we've got people living longer and longer. You are alive, and the more likely we are to have something happen to you,
00:24:14:04-00:24:43:15
Bob
So yeah, you can't help but wonder if, in fact, we are going to see the future like we maybe thought a couple of years ago. We'll see if this plays out. I have faith in technology and, eventually, policies heading in the right direction. But I think it's pretty fair to say that there has been a little bit of a political cloud over the pharmaceutical and biotech sector the last couple of years, and it's left of stocks, I would say, reasonably priced compared to a lot of other areas of the marketplace.
00:24:43:15-00:24:45:04
Bob
Right.
00:24:45:06-00:25:09:08
Ryan
Another area, Bob, that I have been getting questions on, and I'm sure you have as well, is when you look at the structure of equities, what has performed well versus not as well this year? It heavily favors large-cap stocks, especially some of the companies that we were referring to before that are related to AI and have gotten a boost from some of those technology expansions.
00:25:09:10-00:25:27:03
Ryan
But I guess my question is, why has there been such a trend over the last decade where small and mid-sized companies' stock valuations have gotten a lot cheaper relative to large-cap stocks? You have any thoughts on why that is taking place, and is it going to continue or is this going to reverse at some point?
00:25:27:07-00:25:50:05
Bob
At some point, I do think it will reverse itself. When you look at the outlook for earnings growth over the next two years, small and mid-cap indexes actually have a better earnings outlook than, say, the S&P 500. So I think the market will eventually recognize that. I think the market recognized that last year we actually did see mid-caps, especially, do relatively well.
00:25:50:05-00:26:12:15
Bob
And I think through the first couple of months of the year, we saw the same thing. But then we had these bank failures, and then we had this massive flight to safety. Right. One of the things I've been watching very closely for a long time is the difference in returns between the S&P 100 index and the X index. If you look at that year to date versus the S&P 500, that gap is enormous.
00:26:12:15-00:26:34:23
Bob
And normally those two indexes sit right on top of each other over the decades, with very, very little difference in returns between 105 hundred This year, the 100 is outperforming by the most; it's outperformed the 500 since 1999. And you think about what was going on in 1999—the same sort of thing.
00:26:34:23-00:26:55:02
Bob
There is a lot of excitement about technology. So to some extent, I feel like we're reliving the late nineties. The one difference, I think, is that returns on capital are substantially higher today. Most of these companies that are doing well on the stock market are companies that have, you know, a lot of cash on hand.
00:26:55:02-00:27:18:02
Bob
They've got proven business models. They generate a lot of cash. So the upward swing in valuations that's driven the S&P 500 this year is really because of a handful of stocks. I do think that the improvements in returns on capital have been significantly higher for larger companies than they have been for smaller companies.
00:27:18:04-00:27:41:12
Bob
So, you know, you think about some of these big technology companies; you just don't find these types of companies to the same extent as some of these small-cap indexes. So it might be that we need a correction, maybe a stiff correction, or even a substantial pullback in the tech sector for the market to begin to broaden out, which is exactly what happened back in the early 2000s.
00:27:41:14-00:27:49:01
Ryan
Looking at returns from 2000–2001, you really did have some pretty decent performance in those mid and small caps.
00:27:49:01-00:28:05:23
Bob
Yeah, as long as you didn't speculate on the dot.com stocks that melted down and the tech stocks actually did pretty well during that environment. I mean, it was, you know, banks that walled energy stocks and things that nobody wanted to buy in 1998, which actually turned out to be pretty good investments over the next five years.
00:28:06:01-00:28:29:14
Ryan
Okay. The final question is energy. The energy sector has been really confusing for a lot of investors over the last couple of years. It went from COVID, where energy stocks were rock bottom valuations because there was so much uncertainty, right to a point where they surged last year. This year, they've been reined in again. Yeah, well, how should we think about energy stocks?
00:28:29:16-00:28:51:00
Bob
Well, the reality is that the energy sector is very diversified. There are a lot of different companies that do different things. But with lower oil and gas prices, natural gas prices being as low as they are, and oil prices coming down, it's not a good environment for investors to want to take on a lot of risk in that particular sector.
00:28:51:00-00:29:12:14
Bob
You've got producers cutting back production, which in the end should eventually lift prices. But it's amazing how cheap some of these stocks are. A lot of these stocks have six, seven, or eight times their earnings. The problem is that earnings for the rest of the year, in the next year, have been coming down. So you've got this massive headwind of earnings expectations going down.
00:29:12:14-00:29:39:00
Bob
From a near-term perspective, it's still an important sector, and we can't really do anything without energy. But investors, just whenever a sector rolls over and profitability begins to come down and you've got returns on capital that are, you know, going down at a time when there's excitement about other sectors, you can really see the market preferring those companies where returns are higher, maybe headed higher.
00:29:39:01-00:29:55:21
Ryan
So if investments are not incentives, we don't have incentives to make investments over the long term. Doesn't that mean that we're going to have less production and, therefore, likely higher prices for oil and gas? Possibly, yeah. which could be good for the earnings of those companies. Like I would think.
00:29:55:21-00:30:03:15
Bob
I had an economics professor who said the cure for high prices is high prices, and the cure for low prices is low prices. Eventually.
00:30:03:17-00:30:04:21
Ryan
Free markets are amazing.
00:30:05:02-00:30:18:23
Bob
Exactly. And at some point, you would think that if investment is low and production goes down, at some point you're going to see some pricing power getting restored. But it doesn't look like it's going to happen this year.
00:30:19:01-00:30:43:17
Ryan
Yeah. All right, Bob. Well, thank you for having this conversation. Thanks for all the wisdom, and thank you toall the financial professionals and investors that may have joined us today. Again, I'm Ryan Kanan, and this was the ROI podcast.
