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 11 - Bob Carey - Will the Stock Market Rally Continue in 2024? - ROI Podcast
For the first episode of the podcast in 2024, Ryan is joined by Bob Carey, Chief Market Strategist at First Trust. After an unexpected rally for the stock market in 2023, Ryan and Bob discuss expectations for 2024.
📚 Bob's book recommendations:
----------------------------------------------------------------------------------------------
Subscribe Here to the ROI Podcast & other First Trust Market News
Website: First Trust Portfolios
Connect with us on LinkedIn: First Trust LinkedIn
Follow us on X: First Trust on X
Subscribe to the First Trust YouTube Channel
Subscribe to the ROI Podcast YouTube Channel
00:00:00:00 - 00:00:41:10
Ryan
Hi. Welcome to this episode of The First Trust, our podcast. I'm Ryan Issakainen, ETF strategist at First Trust, and Bob Carey, Chief Market Strategist at First Trust, will be joining me on today's episode. Bob's going to provide his outlook for what to expect in 2024. We're going to discuss different sectors that may provide opportunities. We're going to talk a little bit about what makes companies more profitable and why companies in the US in particular have managed to outperform some of their international counterparts.
00:00:41:10-00:01:02:20
Ryan
And we're also going to think about, you know, some of the reasons that people might consider in the future, allocating to international in some specific areas. I am really looking forward to this conversation. I hope you enjoyed it as well. Thanks for joining us on the First Trust. ROI podcast. So Bob, thank you for being the first guest on First Trust, our podcast.
00:01:02:22-00:01:12:20
Ryan
It's a great honor to have you on again, for this should be recorded in 2023, but this will be the first episode in 2024. Thank you for agreeing to do this once again.
00:01:12:21-00:01:16:14
Bob
It's an honor to be the first repeat guest here.
00:01:16:15-00:01:17:09
Ryan
I mean.
00:01:17:11-00:01:20:13
Bob
It was fantastic. I love it. I love it. I appreciate it.
00:01:20:13-00:01:21:14
Ryan
Car guy, right?
00:01:21:16-00:01:22:20
Bob
Love cars.
00:01:22:22-00:01:27:22
Ryan
I have an order in for the cybertruck. Is this a good idea or a bad idea?
00:01:27:24-00:01:30:04
Bob
This is absolutely a great idea.
00:01:30:06-00:01:38:23
Ryan
And do I go with this cyberbeast or one of the lesser models? I think it's 1.9 seconds (0 to 60).
00:01:39:00-00:01:58:23
Bob
I think my theory is that if you know, if you can spend a lot, spend a lot, you know, you can't take it with you and you are going to, I mean, that thing is unbelievable. Technology is just incredible. Yeah. In that vehicle, there is no doubt about it.
00:01:58:24-00:02:09:21
Ryan
I'm looking forward to seeing it, and I think I may have to put my hands on it before I place my order, but then I won't get an order for a couple of years. So it's I'm trying to decide back and forth. I'm not sure where I'll know.
00:02:09:21-00:02:12:15
Bob
What kind of rules are you going to get from living in Central New York?
00:02:12:15-00:02:14:20
Ryan
Yeah, that's the open question.
00:02:14:20-00:02:15:15
Bob
That would be when the.
00:02:15:21-00:02:21:10
Ryan
When the weather is below zero for a month straight, what happens with the range?
00:02:21:13-00:02:25:02
Bob
Driving, I think ten miles, and then all of a sudden, what do I need to charge?
00:02:25:08-00:02:32:04
Ryan
That's a good point. All this factors into the mental math as I'm figuring out what to do. Well, I.
00:02:32:04-00:02:58:05
Bob
I got to ride in something called this lucid sapphire this year. yeah. And it is a state-of-the art sedan electric sedan. It's the most ridiculously fast vehicle I've ever been in. This thing is just unbelievable technology. The best part about it were the diesel generators. They had to keep the batteries charged at the racetrack. It's like you realize now that some of the stuff has a way to go.
00:02:58:05-00:02:59:11
Bob
Yeah.
00:02:59:13-00:03:00:11
Ryan
Diesel generator.
00:03:00:12-00:03:07:05
Bob
Even with all the technology they had in that vehicle, It was a hot day. Yeah. The batteries were drained in no time at all.
00:03:07:11-00:03:12:01
Ryan
That's amazing. So I'm sure you were going pretty fast. Yeah, well, you're.
00:03:12:01-00:03:18:23
Bob
A singer, and that car was capable of going as fast as the track would allow.
00:03:19:00-00:03:35:23
Ryan
Yeah, the technology's pretty remarkable. Okay, so getting to the more. I don't know; I don't want to say mundane issues of the financial markets, but when compared to going from 0 to 60 in 2 seconds, sometimes it feels like I guess when your.
00:03:35:23-00:03:37:12
Bob
Question.
00:03:37:14-00:03:54:11
Ryan
So again, we're filming this right at the end of 2023, heading into 2024. It'll air in 2024. I guess my first sort of broad question is: What do you expect to happen, especially in the equity markets, over the next 12 months?
00:03:54:13-00:04:06:16
Bob
Yeah, I think we're in the process of finally starting to broaden out. I mean, we did have a broader market last year in 2022. That was the one thing about the year. Last year, yes, it was a tough year.
00:04:06:18-00:04:07:11
Ryan
In 22.
00:04:07:11-00:04:39:22
Bob
And 22, but we actually saw mid-caps do better, small caps as real value did. Well, a lot of the areas where investors have been maybe under allocated over the last four or five, six years, did reasonably well, and that spilled over into January, February, and then March. We had banks failing, and at the same time, it seemed like it became a thing. All of a sudden, the AI revolution became much more tangible for a lot of people, and that set us in motion for everything that we saw from that point on.
00:04:39:22-00:05:00:16
Bob
And then we had a correction a few weeks ago. The ten years got to 5%. We had a big sell-off, and I would submit that the market has done a pretty good rebound. November was terrific. Yeah. And it wasn't just the big cap, the Magnificent Seven, or however you want to call it. It wasn't just those stocks participating.
00:05:00:16-00:05:14:12
Bob
So I do think that we're going to see a broader market. I'm not necessarily saying the market's going to do great, but I think that the days of the market being incredibly narrow are going to go by the wayside. I think we're going to see better participation.
00:05:14:14-00:05:36:06
Ryan
Is your expectation that those companies way at the top, the Magnificent Seven, or whatever you want to call them, are going to perform right in line with the broader, say, you know, maybe the equal weight S&P 500 or the midcap, or do you think that you know, if I look at valuations, they are so bifurcated in terms of those really expensive companies?
00:05:36:06-00:05:40:05
Ryan
So do you have expectations about this kind of relative performance? First of all,.
00:05:40:06-00:05:41:02
Bob
Do you look upward?
00:05:41:02-00:05:42:07
Ryan
By bifurcating.
00:05:42:07-00:06:07:19
Bob
Bifurcated means? No, no, I know what you mean. There's no doubt there are two tiers. You've got very expensive companies, and it's not unusual. I mean, we've had these in the past. We had this two-tiered market back in the late sixties and early seventies. The Nifty 50 stocks we had a handful of energy companies in the early eighties were 30% of the S&P 500, the big oil companies.
00:06:07:21-00:06:35:16
Bob
And then, of course, we had the dot.com stocks driving the market back in the late nineties. And I think the one lesson we can draw from those markets is that it's not a permanent situation where the market is driven by just a handful of companies and doesn't last for ten years. It's usually a very short-term phenomenon. After a couple of years, two or three years, some of the companies that are highly valued in the end prove to be good investments, but a lot of them don't.
00:06:35:16-00:07:04:05
Bob
And it really is a bunch of random things. Looking back and looking at the companies that dominated the market then and where they're at today, So if you think back to the late nineties, we had companies like Sun Microsystems and Dell and whatnot that were just, you know, hugely valued and had a lot of expectations. And they're still around, but if they weren't, they haven't done all that well relative to other companies in the same industries, other companies in tech.
00:07:04:05-00:07:24:16
Bob
And I think that's probably what's going to happen: some of these companies will do well and continue to do well, and some of them will just fade. They will attract competition. Yeah, they will. They will reach obsolescence. Something will happen that will cause them to fade. You know, no company stays at a very, very high level of return forever.
00:07:24:18-00:07:26:02
Bob
You become a target.
00:07:26:04-00:07:45:14
Ryan
So you use the word random. And I'm just wondering if there's a way to really tell which companies will be around in the long run. Like, what do you look for? Yeah. And is there a way to tell who eventually is going to be the winner? Who's going to be the loser?
00:07:45:16-00:08:07:00
Bob
Yeah, I think it all goes back to a metric that I've talked to you about before. You know, companies, you know, make investments. We don't think of ourselves as investors when we buy and sell stocks. But really, what we're doing is sorting out how well or not the companies that we might buy are doing, how they're doing, and making investments.
00:08:07:02-00:08:39:04
Bob
And are they making the right investments in terms of R&D, new markets, and things like that? And that relationship between balance sheets, basically investments, and returns on investments is crucial. And once a company's returns tend to go down, they start to grow at a much slower rate. And we've seen this time and time again, and that's why paying attention to returns on capital, of course, and how fast or how rapidly those assets are expanding is part of the equation as well.
00:08:39:06-00:09:04:24
Bob
But really, it's, you know, the fate of it. If a company has a 25% return business, let's say, and then all of a sudden we look at you a couple of years later, boy, they're no longer 25% return business. Now they're 14% return business. So that decline usually, once it starts, pretty much sets things in motion, and the companies eventually become typically average or sometimes worse.
00:09:05:00-00:09:12:14
Ryan
So you can't command the same earnings multiple if you're a 14% return business as you were when you were at exactly that business.
00:09:12:14-00:09:31:16
Bob
So not only does the business, but what's funny is that a lot of times these companies continue to grow, their earnings keep going up, and the stocks are just priced according to expectations, and that's always the key to figuring out, okay, what is baked into those share prices and then whether or not it actually happens all the time.
00:09:31:18-00:09:40:13
Bob
Yeah, tell. And if something happens that causes the market to reassess what's happening at the business level, then you get a reevaluation.
00:09:40:13-00:09:45:01
Ryan
It's almost like the normal life cycle of a company. But then you accept.
00:09:45:03-00:09:46:03
Bob
Issue of life cycles.
00:09:46:03-00:09:55:02
Ryan
Exceptions like, you know, I think of Microsoft and what their business used to be 20 years ago compared to what their business is today. They have. But they're the exception, aren't they?
00:09:55:02-00:10:10:12
Bob
They absolutely are. They have beaten the fade, as we said. Yeah, they have. They have, absolutely. And then a lot of times, companies, once they have gone into the abyss, never come back. Apple came back. Yeah. I mean, they commanded, or it's.
00:10:10:12-00:10:11:09
Ryan
True if there's another great.
00:10:11:09-00:10:31:02
Bob
Example: They're one of the few companies that I can think of that was dominant in a way, and then they just faded, and they actually needed help. They needed capital to be it; actually, Microsoft, I believe, played a significant role in helping them, you know, come out of their doldrums. And then here they are, a $3 trillion company.
00:10:31:02-00:10:44:13
Bob
So, yeah, you know, these things happen, but they're rare, and it's pretty amazing how, you know, most companies, once they hit a wall, that's it. You know, they just never get back to what they once were.
00:10:44:15-00:10:54:03
Ryan
It seems like the obvious examples are what we've been talking about in technology, but there's examples of that in other industries and other sectors as well.
00:10:54:03-00:11:25:12
Bob
Arthur Absolutely. One of the best examples that I can give you is Kmart. You know, one of my first jobs, if you will, and one of my first tasks was to analyze Kmart back in the mid-1980s. So they were still, at the time, the largest discount retailer, but Wal Mart was starting to come along. And if you looked at the two stocks, you know, Kmart was a single-digit piece, I believe, and Wal Mart was at a huge premium as far as their P and growing much faster.
00:11:25:14-00:11:46:14
Bob
And so here they are. They're selling pretty much the same things that Walmart would put in a store right next to a Kmart, and you could go from store to store to sell the same merchandise. Well, how is it that this company was so successful and growing and this company was not growing, and the difference was really more in the application of technology?
00:11:46:16-00:12:09:19
Bob
Walmart did a much better job of getting inventory into the stores. And so they took that cycle of selling everything in the store and cut it massively. I think it took roughly six months for Kmart to sell all the merchandise in their store and replenish it—you know, the turnover. And I think Walmart had a turnover of like 6 to 8 weeks by comparison.
00:12:09:21-00:12:42:19
Bob
And you could really see that the management team had spent a lot more money on technology and getting, you know, a much better hand. They were a logistics company masquerading as a retailer. So, technology—just implementing technology even as long ago as the eighties—was a crucial difference in how these companies performed. It was, you know, so it's not just the tech companies that that drive fade and fade themselves and whatnot, but they also impact companies and how they succeed.
00:12:42:20-00:13:05:05
Ryan
So I'm thinking through what is likely to happen in 2024 or 2025. One of the forecasts that a number of economics teams, including ERs First Trust, have suggested is that there's likely to be a slowdown or recession, probably by the end of 2024, although it seems to be a moving target. And I guess one.
00:13:05:05-00:13:07:01
Bob
Day we will have a recession.
00:13:07:03-00:13:28:19
Ryan
That's true, and it's really difficult to forecast. But one of the things that's important, I think, for investors is: what does that mean for your investments? And when it comes to technology, there are certain types of investments that companies can make to become more efficient that are actually, you know, maybe more likely to be made when they see a slowdown coming.
00:13:28:21-00:13:35:16
Ryan
I mean, is that why we've seen some of the technology companies do better this year? I guess that's where I'm.
00:13:35:18-00:13:59:17
Bob
Well, I think a lot of it just goes back to productivity, right? Companies are always trying to figure out how to do more with less. We are in a very tight labor market. We have been here for several years. And so substituting investing in technology as a way to boost productivity as opposed to just simply hiring more people has been a huge change in the way companies operate.
00:13:59:17-00:14:22:19
Bob
So I think that's one reason why we've perhaps not had a recession: that the investment process has continued. We also have massive fiscal stimulus, which will probably, all right, keep the economy from slipping into recession. But now that interest rates are, you know, tighter than they were, it's going to be harder, potentially, to stimulate through fiscal means going forward.
00:14:22:21-00:14:41:18
Bob
So, I think we will have a recession. I think a lot of it is: how much does the market look beyond the recession? You know, we know that a valley is going to happen at some point. We're going to see a slowdown in activity. Earnings will probably fall. And so it's really a question of how far into the future the market begins to look.
00:14:41:18-00:14:59:13
Bob
Do they view this recession as temporary, or do they start to get very myopic and think, Well, we're never going to recover from this? And that really gets back to whether or not we have a soft landing or a hard landing. Hard landings tend to make us much more short-term in our thinking, and the markets reflect that.
00:14:59:18-00:15:07:02
Ryan
Yeah. And maybe for longer-term investors, when you see those sharp sell-offs, that's really often a great opportunity to be buying, right?
00:15:07:04-00:15:28:22
Bob
Because you're thinking long-term and the market is worried about whether or not, you know, things are going to be around in a couple of weeks or the next day. I mean, that's what happens every once in a while. We have these massive declines. And I think a lot of it is just the market thinking that this is going to be this bad thing that just happened, whatever it may be, is going to be more of a permanent situation.
00:15:28:23-00:15:45:16
Bob
And sometimes it is for a while, but a lot of times it is not. And that's recovering. So I think a lot of it just gets back to how long you have in being and just how long a time horizon somebody has before they actually need or want to use the assets that are being invested.
00:15:45:16-00:15:46:21
Bob
Right.
00:15:46:23-00:16:07:12
Ryan
Okay. So as you think about different pockets of opportunity for 2024, that's the year that we're heading into. So that's what everyone's focused on. But from a sector standpoint, you know, one of the areas that hasn't done as well this year as I would have expected it to do better is the health care industry, right?
00:16:07:14-00:16:25:04
Ryan
You know, in particular, I look at some of the biotech companies, but health care in general, do you have any thoughts on maybe what has gone wrong this year, if that's the right way to look at it? But, more importantly, what's your outlook for the next couple of years as we think about health care?
00:16:25:06-00:16:25:14
Ryan
Well, I.
00:16:25:14-00:16:48:04
Bob
Think of a couple of things. First of all, pretty much every sector of the market that's defensive has underperformed this year. Utilities, which are consumer staples, have not done well. I think, given the fact that we came into the year, we'd seen the Fed raise interest rates last year. The expectation a year ago, when we were having this conversation, was that we would have a recession.
00:16:48:06-00:17:20:11
Bob
I think a lot of people decided to put their chips in and buy the more defensive sectors. And then here we are, almost a year later, and we haven't had a recession yet. So the recession not happening is probably sending some investors looking for things that are not defensive. We also have higher interest rates this year. The higher rates do impact valuations across the board for everything, but there's no doubt about it that the higher rates are, you know, a lot of these companies pay pretty sizable dividends in some areas.
00:17:20:13-00:17:37:03
Bob
That's also part of it. But I think, in the health care sector, you do have a combination of different companies. You have these big, mature pharmaceutical companies, right? They are, in some cases, doing well if they've got weight-loss drugs.
00:17:37:05-00:17:38:19
Ryan
Anything, that is. Well, this year.
00:17:38:19-00:17:42:12
Bob
Yeah. And if they don't have that, it's like their stocks have not done well.
00:17:42:12-00:17:43:13
Ryan
Right.
00:17:43:15-00:18:03:18
Bob
So it's really, once again, kind of a two-tiered market for those companies. But I think the biotech innovation is still happening. As for R&D spending as a percentage of revenues, that number is still very, very high. I think that quite possibly politics might be the main reason why biotechs haven't done this as well this year.
00:18:03:18-00:18:25:18
Bob
I think that might be part of it. Yeah. You know, we always worry as investors in that particular space about, you know, price controls eventually coming into play. And here these companies have spent all this money bringing these products to market, and all of a sudden you've got it's not market forces driving pricing, it's the government driving nursing.
00:18:25:18-00:18:29:06
Bob
And that's what definitely spooks investors.
00:18:29:08-00:18:51:03
Ryan
Yeah. You mentioned interest rates. The other part of interest rates is that, apart from competing with dividends, it seems to me anyway that some of those smaller biotech companies that aren't profitable are, you know, relying on capital markets to actually fund their operations. It seems to me that that is another headwind that has been in their face this year, right?
00:18:51:05-00:19:22:00
Bob
That's risky capital. How much capital is willing to go in to take the risk of investing in these companies that need capital and time? You know, I think companies that have proven getting to milestones will probably have no problem getting capital. I think there's plenty of risk capital to do that. It's just, you know, the market at this point realizes that a lot of these companies are eventually acquired by big pharma companies, and those stocks get hit.
00:19:22:02-00:19:38:20
Bob
That is effectively their currency in many cases, which they use to buy some of these smaller companies. So, you know, it's kind of a snowball effect where the big-cap farmers are under pressure, and then that's going to spill into anything that they might invest in or acquire. Yes. Well.
00:19:38:22-00:20:04:11
Ryan
You know, the other thing that you said that kind of struck me, talking about price controls. You know, for example, I think some of the provisions of what we've talked about before, the Inflation Reduction Act, say that we're applying price controls starting in 2026. And then it kind of ratchets up from there. But one of the things that seems to do, if I understand it properly, is that it shortens the life of certain drugs and their pricing power over those drugs.
00:20:04:11-00:20:26:22
Ryan
That's right. And it's similar in my mind to when you reach the end of a patent—you know, the exclusivity in the market pricing capacity of those companies ends. And so, what do they do? Well, they go shopping. They try to find attractive intellectual property that they can acquire, especially if a company has gotten cheaper. That's right. And then you start to see the M&A cycle.
00:20:27:01-00:20:43:14
Bob
We have seen some deals this year in that space. So we certainly didn't; we didn't see very much last year, but this year we're starting to see deals getting done. You know, companies—we've seen some takeouts and some buyouts. So I think it's kind of percolating. Yeah. That companies are realizing, well, we've got we've got to go.
00:20:43:17-00:20:52:14
Bob
We need to figure out what we're going to be, you know, 5 to 10 years down the road. Sure. So making sure that you have the pipeline filled with new products is what it's all about.
00:20:52:14-00:21:13:05
Ryan
Yeah. Do you have a take on interest rates? And let me ask it in two ways, because I think we can kind of get them confused sometimes. One is Fed policy, but two is more, you know, market-oriented, spanning the ten years and beyond. So what do you think's going to play out going forward here?
00:21:13:05-00:21:38:01
Bob
Yeah, I've been concerned about interest rates going higher for the last couple of years. And we did see the ten-year average get to 5%, which I thought was probably at the high end of a range. I think that the low end of the range is probably where inflation is. And, you know, inflation right now is running at maybe three and a half wage inflation, which I think was 4% in the last report.
00:21:38:01-00:22:08:04
Bob
So I think the ten years should be at least at those rates, and we kind of touched those rates. Now we're back up to four and a quarter. I think that unless we have a really, really sharp decline in the economy and the Fed is massively cutting rates, the ten years will stay at these levels. And I think that, you know, the idea that somehow it's going to go back down to 2% or 3%—I know I'm not really in that camp yet at this point.
00:22:08:06-00:22:10:00
Bob
I think it's going to depend on the economic data.
00:22:10:02-00:22:27:15
Ryan
Yeah, well, that makes sense. The other thing that's been interesting is that in the real estate industry, which's obviously very sensitive to rates, and just some of the lockup that we've seen in terms of transactions, there just hasn't been as much. And I wonder, is that going to influence.
00:22:27:15-00:22:30:13
Bob
We mean commercial real estate, or more really? Well, I'm.
00:22:30:15-00:22:53:11
Ryan
I'm thinking about residential real estate. I mean, mortgages have been so high. There is only a small amount of turnover in certain markets. That's right. Why would you want to refinance your mortgage? You want to hold on to it as long as you can. Absolutely true. And so there's not as much commercial real estate. It seems like there's a whole set of other problems that are probably also somewhat related to rates and somewhat related to people not going back to cities, right?
00:22:53:13-00:22:55:04
Ryan
But do you have any thoughts on it?
00:22:55:06-00:23:14:17
Bob
Yeah, no, I think you covered it. It really depends on the location. Obviously. It depends on what kind of asset you're talking about. I think, you know, the one aspect that I keep thinking about with, you know, where mortgages are at today is that we've got a lot of people locked in mortgages. When rates were lower, it became so easy to refinance.
00:23:14:17-00:23:39:03
Bob
Yeah. And now the rates are higher. We've got incomes going up and wages going up. And that obligation has been locked in at a lower interest rate. And I think that's probably good for the consumer. This might be one of the reasons why consumption has remained fairly strong this year. Sure. If you have any kind of savings at all, you're earning income now from your savings.
00:23:39:03-00:24:02:07
Bob
You weren't earning anything 2 to 4 years ago. So now we've got, you know, basically if you paid off your mortgage or if you have a mortgage that's a low rate and your income is going up and you've got savings on top of that, your cash flow position is terrific. You've got money to spend from a discretionary standpoint that you might not have had a couple of years ago.
00:24:02:07-00:24:08:22
Ryan
So there's an incentive to save now that wasn't there for that span from, wait, just a few years ago.
00:24:08:23-00:24:28:02
Bob
You think about it: we had the Fed keep interest rates below the inflation rate for more than a decade. That's not good. Yeah, that's not a good thing. And we've been on the other side of that here, but now we're at the point where our savings are actually earning us more than inflation. I'm hoping that that actually remains the case.
00:24:28:02-00:24:49:15
Bob
I know a lot of people are. We need to cut rates, and there's going to be enormous pressure on the Fed to cut rates. And I think that's already starting to build. And we've got a Fed chair that is going to be in an office for three more years before he has to step down. So, yeah, you know, under Greenspan, those 19 years, for the most part, he kept interest rates above the inflation rate for 19 years.
00:24:49:15-00:25:10:23
Bob
And when he stepped down, he finally retired. He did such a good job that Washington got together and said, We can never let that happen again. And now the Fed has his two terms, and they're limited. Yeah. So I think the one aspect of those low interest rates for all that period of time was that it did encourage the government to spend money.
00:25:10:23-00:25:36:00
Bob
And we had a lot of fiscal stimulus here the last five years, especially during COVID coming out of it. They had the excuse that they needed to raise spending. And I know our colleague, Mr. Wesbury, is absolutely terrified of that. He's very, very concerned. And I think it's a legitimate concern. We really don't, you know; we don't need the government to be this big.
00:25:36:00-00:25:39:01
Bob
So it is, and it's going to be a very, very big issue here going forward.
00:25:39:03-00:26:03:13
Ryan
It seems like one of the aspects of those fiscal spending programs that is intriguing to me is that they're not just a one-year or a two-year thing. They're packages that were maybe five years old. That's right. That was passed, you know, in 21. So from 22 to 26, or something like that. Right. And so it seems like they're going to have an influence for, you know, the next few years.
00:26:03:14-00:26:14:01
Ryan
Yeah, maybe not from a growth standpoint, but putting all that capital into the system, you can't just, you know, cut it off because there are already bills that have been passed and laws that are, you know, it's.
00:26:14:01-00:26:34:19
Bob
It is very hard for the government to stop spending money. I mean, that's the only thing that will change the trajectory of fiscal spending. I would have to imagine interest payments going up. And if all of a sudden we've got a larger share of the budget, just simply interest payments on debt, those are dollars that are apolitical.
00:26:34:21-00:26:56:20
Bob
And, you know, fiscal spending is a lot of it's politically driven. Yeah. And those interest payments are political. So there is an incentive eventually for whoever happens to be in power at the time to get the spending under control so the interest rates come down. Yeah, yeah. That's basically the story of the eighties and nineties.
00:26:56:22-00:27:10:07
Bob
So I know what Bob Steiner's been talking about. Well, maybe this is the one byproduct of these deficits. It's in these higher interest rates that it does bend the curve a little bit as far as fiscal spending going forward.
00:27:10:07–00:27:14:22
Ryan
Yeah, well, one can hope that that is what plays out.
00:27:14:22–00:27:17:05
Bob
And I'll let you talk to Bob about that. The other is Robert.
00:27:17:10-00:27:25:17
Ryan
Yeah, we actually will have a call or a podcast with Bob next. It'll air in February. So that's a commercial offer. That's for the other Bob.
00:27:25:23-00:27:29:15
Bob
To go talk to. As far as politics and all that stuff,.
00:27:29:17-00:27:47:11
Ryan
What do international markets look like from your perspective with respect to, you know, especially the equity markets? We look at valuations; they seem pretty attractive, but obviously valuations reflect what people think about those assets. What do you think about them? Well, there's.
00:27:47:11-00:28:14:23
Bob
There is a big gap between wealth creation trends and earnings growth trends in US companies versus the rest of the world in general. There are some exceptions, but I do think that the dollar is right about where it was at the beginning of the year. If, in fact, the Fed is on pause and we actually start to see the Fed cutting interest rates, the dollar might cool off a little bit, which would be good for those markets.
00:28:15:00-00:28:37:24
Bob
The dollar still has some influence on things, but just taking a step back, there really isn't any comparison between how U.S. companies are doing at creating shareholder value versus their counterparts overseas, especially companies in Europe and Japan. It's going to take a shift in policies, probably, for that to happen. There is, and we were talking about Microsoft.
00:28:38:01-00:29:02:15
Bob
Yeah, some of these companies are there. And we look at those kinds of magnificent seven stocks, and you start looking well. Are there other companies overseas that have the same sort of characteristics? It's hard to find. You really don't see it. Right. And that's probably one reason why the market here has done so well relative to markets overseas: we have something here that you simply can't get in Europe, Mexico, Japan, or even China.
00:29:02:19-00:29:26:06
Ryan
Yeah. Yeah. I sometimes wonder some of those trends of sort of shifting supply chains and what that's going to do for opportunities. We've just seen such a beginning of buildup down in Mexico and maybe some South American and Latin American countries shifting some manufacturing out of China and other places.
00:29:26:07-00:29:38:09
Bob
The world is no longer beating a path to China like it once did. Yeah, I think the beneficiaries are, for the most part, here in the Americas. Yeah, I do. I think a lot of capital is coming back this way.
00:29:38:11-00:30:03:13
Ryan
The other thing that is sort of intriguing, and I like your take on it, is that in Europe, there's a concerted effort to shift to more renewable sources of power. And, you know, obviously there's some push in the US as well. But it seems like whatever you think politically on that issue or even, you know, from an investment standpoint, that's going to require expenditures, you're going to have to spend money on that.
00:30:03:15-00:30:19:00
Ryan
And that seems like that would be for those economies a cost that, you know, maybe you're not going to get paid, but maybe get paid back over the long term. But it seems like that would be a push for maybe inflation, but certainly lower margins. Am I thinking about that right?
00:30:19:01-00:30:40:23
Bob
No, I think you are. I think ultimately, a lot of these expenses are heavily subsidized by governments. There's a massive subsidy aspect to these things, which means that they have to be subsidized. You end up with a misallocation of resources. And I think that's definitely a problem. And a lot of companies in Europe are successful.
00:30:40:23-00:31:01:04
Bob
Companies have globes; they're very much global enterprises. These big companies have many cases of operations all over the world. And they're looking at how their home markets are going; I don't know that I want to invest in my backyard where I can. I can make investments in the US, or I can make investments elsewhere. Yeah. And maybe I could be closer to my customers that way, too.
00:31:01:06-00:31:06:15
Ryan
And that's not to say there aren't pockets of opportunity. We're not overstating that, because I think there probably are.
00:31:06:15-00:31:24:24
Bob
I just think you need to be more selective. Sure. When you go into overseas markets, I think, you know, we've been having this conversation now for almost 15 years. And you know, the old model—well, I need to be 30% invested overseas. You know, I think a lot of that assumption is backward-looking, first of all.
00:31:25:03-00:31:54:22
Bob
And I think that in previous times, there really wasn't a huge difference in performance between US companies and maybe companies in Europe or Japan. Know, I mean, you get through it. If you threw a blinder on me and just gave me the numbers, I couldn't really tell you much difference between a company in Germany or a company in the UK or the company in the US or Canada, but increasingly, or the US companies are just simply better at what they do, and the end result is higher returns on capital, more growth.
00:31:54:24-00:32:01:11
Bob
And a lot of it is just technology. We're more tech-intensive, and it's made us more competitive.
00:32:01:13-00:32:21:19
Ryan
The last question I have for you. International markets. One of the areas of the world where we've seen pretty decent growth in 2023 has been India. Yeah, obviously there's some difference between, say, India versus China or some other markets. They've got, you know, a different system. And I guess I'm curious about what your thoughts are, if you have any, on India.
00:32:22:00-00:32:24:00
Ryan
Do you have any perspective that you could share?
00:32:24:02-00:32:50:08
Bob
Really, nothing earth-shattering. But I think if you are concerned about China from a political perspective, maybe you're not trusting that they are truly moving in the direction that you want them to move. From a long-term perspective, I think India is a good alternative. They seem to be becoming much more market-driven. They still have a lot of issues and a lot of corruption.
00:32:50:10-00:33:11:24
Bob
You know how their fiscal situation is; you know, they've spent a lot of money, too. But there are still companies in that market that are intact. They're in health care; they're in high-growth industries. And I think I think they've been beneficiaries. I think of a little bit of the reluctance to go into China.
00:33:11:24-00:33:27:01
Bob
I think some of their capital has gone into their economy. Yeah. So I think it's done well this year. And I think it's a market that if I had to go into, I would definitely put that on my shortlist of somewhere where I would want to have some allocation. Okay.
00:33:27:03-00:33:47:00
Ryan
Make sense. Okay. So one of the questions that I've started asking my guests on the podcast that I've gotten some really good recommendations from, so I'll ask you, are there any specific books that either are on the Bob Kerrey reading list or maybe that you've read recently that you would recommend?
00:33:47:02-00:34:08:19
Bob
Yeah, I have a book that I would recommend. I know a lot of people listening to this podcast are financial advisors and work with clients. A friend of mine by the name of Stan Slogan wrote a book called Better Listening, and I am about a third of the way through the book, and it's a really easy read.
00:34:08:19-00:34:31:16
Bob
It's, it's, but it's filled with a lot of good advice and some good anecdotes about just learning to become better at asking the right questions and getting more comfortable asking questions. It's applicable to not just financial advisors but, I think, people in general. And it's a terrific book that I would recommend. If it's just better listening, better listening.
00:34:31:18-00:34:34:02
Ryan
It seems like a skill we could all probably benefit from.
00:34:34:03-00:34:51:13
Bob
Amen. There is no question about it. Yeah. The other book that I recommend that I would recommend is an old book. It's been around for a long time, but it's written by a guy by the name of Julian Simon. And when I started my career in the mid-1980s, I used to watch the nightly business report on PBS.
00:34:51:13-00:35:22:18
Bob
You know, we didn't have CNBC at the time. We didn't have the Fox Business Channel; there might have been something like a local cable show dedicated to financial markets. But usually the big business show for us in the industry was to watch the nightly business report. Well, they would have commentators on at the end of every episode, which should be 30 minutes of market commentary, and they would have somebody come out and they would give like a two- or three-minute just commentary about something.
00:35:22:20-00:35:44:03
Bob
And quite a few of the people were the economists and legends in the industry and legends of not just Wall Street but in academia and whatnot. And this guy, Julian Simon, I remember watching one of his little short vignettes that he did for the show, and I'm like, Wow, I just really liked what that guy had to say.
00:35:44:07-00:36:03:07
Bob
You start delving into his history and whatnot, and he was a frequent guest on the Louis Rukeyser show, which is what we watched on the weekends, you know, back in those days. And I really love the guy. He was just a terrific individual. And yet he wrote a book called It's Getting Better All the Time. And it's been around.
00:36:03:07-00:36:20:15
Bob
He wrote us years ago, and I think it's one of those books that you need to read every couple of years. Sure. Let's once, once a decade, just dusted off and read it. And it's one of the things that I did this year. I'm like, I hadn't read the book in a long time. Yeah, and I read it again here a couple of months ago.
00:36:20:15-00:36:37:10
Bob
And I'm like, I don't know. I just feel it's just a reminder of just how far we have come as people in the last 25, 30, or 40 years. And he was writing; he wrote this book, you know, years ago, decades ago. But I think it's over for me. It's one of those evergreen books.
00:36:37:10-00:36:50:21
Ryan
Yeah, some of those old books I actually just started reading again; it's a really short book, but that old Dale Carnegie book, How to Win Friends and Influence People—I mean, just some of these fantastic books.
00:36:50:21-00:36:51:20
Bob
Absolutely.
00:36:51:20-00:36:57:05
Ryan
I mean, they have some examples and things that are, you know, decades and decades old.
00:36:57:06-00:37:23:07
Bob
Another book, Economics in One Lesson, by this guy, Henry Hazlitt, wrote a very, very small book. And it's basically, if you really want to understand economics, this is all you need to understand, or not all. But yeah, if you want to kind of get a foundation, the same thing. It's like, you know, I wrote I read that again a couple of years ago, and I remember reading that when I first started working in this industry and it's there, it's good to go back and revisit some of these things.
00:37:23:07-00:37:24:03
Bob
Yeah, Yeah.
00:37:24:03-00:37:42:23
Ryan
So tastic. All right. Final question for you. Again, looking out, 2024 is upon us. Yep. What makes you optimistic? Well, it doesn't have to be in our industry; it doesn't have to be. Well, Bob Kerrey, what makes you optimistic in your outlook on life or the industry?
00:37:42:23-00:38:04:08
Bob
Well, I think the one thing that I keep getting back to is that we do continue to come up with new products and new services. I mean, not just here in the US, but everywhere. Everywhere. That's free. It is. It is remarkable all the things that we have available to us, and all of the time we talk about technology, but the things, even the things that we buy.
00:38:04:08-00:38:27:06
Bob
You were talking about the cybertruck. Yeah. You know, you think about it, it's a truck ride. Trucks have been around for 100 years. It is remarkable how we continue to innovate and come up with new things. And I think that to me, that's exciting. That's what makes me want to get up and go to work and have the resources to maybe buy some of these new things as they become available.
00:38:27:06-00:38:38:09
Bob
And I know I'm not alone. You know, I like having old things too, mostly guitars. But I think it's remarkable how much innovation is impacting the way we live.
00:38:38:12-00:38:47:22
Ryan
It's pretty remarkable. You look back at the not-too-distant past, and it's a lot different than where we are today. And who knows what the next five or ten years hold in terms of innovation?
00:38:47:22-00:39:01:20
Bob
I interviewed with Intel back in 1985 when I was finishing college. I'd taken a class in something called condensed matter physics solid state. Yeah, it was. It was.
00:39:02:01-00:39:02:13
Ryan
Late elected.
00:39:02:16-00:39:23:05
Bob
If you managed to get through this class, you had a chance to get a job in the semiconductor industry. That was the goal, right? Well, there was actually a recession in the semiconductor industry going on. And in that particular year, because of cutbacks in defense spending, And I mean, you think.
00:39:23:05-00:39:24:04
Ryan
That's where the.
00:39:24:04-00:39:42:11
Bob
That's yeah, that's where I interviewed, and it turns out they weren't hiring anybody; it was like they were in a hiring freeze. But I remember the interviewer at Intel was all excited because, hey, we're going to be a $1,000,000,000 company here fairly soon. They were like, Wow, we're going to be a $1,000,000,000 company. Obviously, the company is a lot bigger than that today.
00:39:42:17-00:39:58:04
Bob
And it's not just Intel. There are a lot of other companies that are significantly larger as well. So it's it's it's interesting having that perspective now after almost 40 years of looking at this stuff and being around it; I think it's where I draw a lot of my inspiration from.
00:39:58:06-00:40:00:19
Ryan
It's like the title of the book: It's getting better all the time.
00:40:00:19-00:40:28:08
Bob
Yeah, it might not seem like it. It's not that we don't have struggles. Everybody goes through struggles. But taking a look at the big picture, I think that's the big thing: people are getting older and we're living longer. And you've got to have something that is going to go to create some shareholder value, some wealth for the eventuality, the potential that you're around, you know, 20, 30, 40 years down the road.
00:40:28:14-00:40:48:13
Bob
You know, it might not look a lot of fun in the short term. But I think it's important to have those assets and think long-term. I think especially with our call for recession and, you know, it's, you got to be, you got to make sure you have enough capital to get you through a downturn, because it is disruptive.
00:40:48:15-00:40:52:17
Bob
But I'm thinking longer-term, I think it is critically important.
00:40:52:19-00:41:05:03
Ryan
All right. That's a great place to leave things. Bob, thanks for making a second appearance on the podcast a lot better. We'll try to get you on, you know, some six months down the road, if we can get you back.
00:41:05:03-00:41:06:17
Bob
On, give me a call.
00:41:06:19-00:41:07:14
Ryan
Well, thanks for having.
00:41:07:14-00:41:10:05
Bob
There was no trouble getting people to join the show. I think it's wonderful.
00:41:10:08-00:41:34:16
Ryan
You know, we we appreciate you and all of you who have joined us on the First Trust. All right, podcast. We'll see you next time.
