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 58 | Bob Carey | The Tug of War Between FOMO and Fear | ROI Podcast
Bob Carey discusses some of the biggest questions on the minds of financial professionals heading into the final stretch of 2025, including whether or not investors should be afraid of higher equity valuations.
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As we approach the end of 2025 and the calendar gets ready to flip to 2026, investors have a lot of questions. They wonder where do stocks go from here? Are we at valuation levels that are too expensive? What's going to happen with the Fed? Are they going to continue lowering interest rates next year? What's going to happen with the economy? What's going to happen with alternative assets like gold, which reached new highs recently? Well, today I've got Bob Carey, Chief Market Strategist at First Trust, to address some of those questions and others on this episode of the First Trust ROI podcast. Thanks for joining us. So you were telling me before we turned the cameras on about an event that you were speaking at, and uh you said that most of your questions that people were asking you were what?
Bob:Yeah, it it seems like people are fishing for uh what could go wrong. I mean, we've obviously had just an incredible couple of years here uh in the stock market. Um you think about where we were at this time back in 2022 when a lot of folks were concerned about the Fed raising rates, having a recession. Uh the recession didn't materialize in the way that that many thought. And here we are, essentially uh, you know, the SP's almost doubled from where it was just a few years ago. And you know, a lot of people are comparing what we're going through now with the late 90s and and a lot of memories of of the dot-com meltdown in those years after that. Um so it seems like investors are I mean, they're obviously happy. If they've if they're in the market, they're happy. But there seems to be this foreboding, ooh, something's gonna go wrong at some point. And and there's no question something will go wrong. We have, you know, these always kind of happen, but trying to figure out what could be the problem or the issue or the trigger point is is anybody's guess. And it that seems like a lot seems like behind every question that we you get when you are talking to financial advisors, their clients, it seems like that's yeah, that's right at the fr at the front of their mind when they when they are asking me, and I'm you know, I'm looking at them going, I I don't I don't know exactly what what could go wrong. All I know is that companies are spending a lot of money right now on AI and AI-related investments, and it you know, maybe those investments don't pay off. And that that's probably the simple answer, but what the what the catalyst will be, who knows?
Ryan:It's it's healthy for markets for people to ask that question. What can go wrong? Exactly. It's uh it's only when everyone is really, you know, charged up emotional about FOMO, fear of missing out, that you know they're throwing capital at things because they don't want to they don't want to miss the next 20 percent. Right. That's when you run into trouble.
Bob:Trevor Burrus, Jr. Exactly. One of the things that we can do, when we when we we look at a stock or an index in the market or a sector, um we can see what companies are generating in terms of the returns on their business, and we can see how fast they're adding um items to their balance sheet, we can calculate fair value using a variety of scenarios. And one of the things that we can do is we can see what the market is implying about future returns, you know, based upon today's stock price. Today's today's stock price at any stock is a reflection of what the market thinks is going to happen in the future. And you know, it is interesting looking at some of these tech companies that are generating just massive returns on capital. I mean, they are just they're just cash flow machines at this point. And I I'm encouraged somewhat that that most of those stocks have considerably lower returns baked into the share prices when you when you look ahead, say five years. Um that you know isn't all that's not always been the case. And when you have uh a high return business and you've got it priced so that it remains a high return business into a longer period of time in the future, some say perpetuity, um, that's when you start to get worried about valuations. And so we we see some of the Mag 7 companies generating, you know, 40, 50 percent returns on capital, but the market you're essentially paying for a 20 percent return business five years down the road. Now, still that's a pretty high expectation. The company remains a 20 percent return business, and it's not a guarantee that it's it's that's the scenario. But um I think trying to quantify what the market is expecting is critical. And to me, it's a margin of safety issue then for investors.
Ryan:Yeah. So the market is you're saying that the market's not assuming that we're gonna maintain this level of profitability and growth. Trevor Burrus, Jr. Right. But it's actually a little bit more sanguine and a little bit more um not pessimistic, but but not quite as uh overly optimistic as it's maybe in the late 90s.
Bob:It's a life cycle thing. You know, every company has a life cycle, and you know, there are some companies that have defied those expectations over long periods of time where they just you look at a um just as an example of Microsoft, you know, it's been a high return business from the moment they came on the scene 40 years ago. Um it's incredible how long they have remained a high return business. So the it's it's pretty obvious the companies continue to come up with new uh new businesses, new investments have paid off, and it can they they maintain a very, very high return on their business. And and yet we've got companies that have come along in the last you know five years, and VIDI is a good example where it's it's a you know it's a good business five years ago, certainly nothing to sneeze at. All of a sudden it's like this company is generating more cash than they they know what to do with. And so as the company looks at its business, it its problem is it has more cash coming in than they can they can reasonably invest it back into the business. And uh in in that particular case, there are there is a pretty significant fade of both returns and and asset growth at some point down the road. And you know, the longer they go defying those expectations, that's that's usually what drives share prices higher.
Ryan:Yeah. So some of those big technology companies that have been really high return businesses have been characterized by being pretty capital light. They haven't they don't typically have to make these huge capital investments that they've made. Um Well, let's say investments are different.
Bob:It's not like they're going out and buying um plants and equipment and whatnot. But you know, but now they are. But yeah, because they they kind of have to. I think we we are reaching a physical limitation in terms of our ability to produce enough electricity and and you know these plants, um, you know, we can only build chip plants so so quickly. And so it it really it is interesting to see um some of these companies realize that at some point they they need physical assets. You know, they they can you can stay a design firm and have somebody build your chips for you for so long, and at some point um you you might not necessarily want to rely on that that supplier to continue to be your manufacturing agent. It at some point you probably need to get in that business yourself. Yeah. Uh so there's a risk that that might not work.
Ryan:Yeah, and there's I I I'm thinking mainly of like all the data centers as well. Right. All I mean, there's that's not all technology companies, but uh the the hyperscaler companies, those big hyperscalers, they're spending a lot on um building up that data center capacity. Exactly. And and all that goes with that. I mean, we think of you mentioned energy. Um I just saw uh Jensen Wong on CNBC a week or two ago, and he was talking about the need to uh create more energy, but one of the things that he suggested was that um some of those data center big tech companies would actually have their own power plants that are you know behind the meter instead of relying on the utilities to supply power.
Bob:Exactly.
Ryan:Which uh that's interesting.
Bob:Well, I remember a couple years ago, Delta Airlines was um in need of jet fuel, and so they bought a refinery. So there's there are some analogies with other other industries where uh a company that has a vital uh need to uh to grow, they they they make that investment themselves rather than relying on somebody else. So um I remember I think it was about this time a year ago that uh it was announced that that constellation um energy was starting to reopen Three Mile Island. I think we might have talked about it. And uh oh, by the way, uh when we're done bringing this plant back online, we're gonna sell all of electricity to Microsoft.
Ryan:Yeah.
Bob:I mean it's like wow, that's pretty incredible. I mean, what would have powered a spit a city or maybe in a region of the country with a lot of people, you've got one company saying, no, no, no, we need that electricity for our you know for our data uh needs going forward.
Ryan:And and that one in particular, if I'm not mistaken, I think they signed like a 20-year per power purchase agreement.
Bob:So it wasn't just like, yay, but it's a long-term commitment. Trevor Burrus, Jr. Exactly. I mean these these assets, um, a a an electric power plant, I don't care whether it's gas or whether it's nuclear, you know, these are long-lived assets. Yeah. So it makes sense that your revenue stream, you'd want to lock that up for the long-term life of the asset. So I I think it is it it tells you how far into the future some companies are are thinking about these things.
Ryan:Aaron Powell Yeah, that constellation uh Microsoft deal, I just saw an update. I think originally they said that 2028 was the expected um time that they were going to restart the nuclear reactor, and I thought, well, that's you know pretty pretty optimist. It seemed optimistic to me. I mean, I'm not a nuclear engineer either. But then I saw an update recently, and they said they're actually ahead of schedule and might be able to do it by 2027, which that's pretty amazing.
Bob:That is I hadn't I hadn't seen that. That's that's crazy. Yeah, it's crazy.
Ryan:It is. It makes you um for the for those that need power, it makes you uh wish that there were more decommissioned nuclear reactors that they could just kind of flip the switch back on.
Bob:Exactly. What's interesting about nuclear energy is or nuclear power is the U.S. Navy is it runs on nuclear power. I mean, we've so we have you know decades of expertise with that technology. And i I I think I think I think that clearly is going to be part of where we get more and more of our capacity. Yeah. So we'll we'll see how this plays out.
Ryan:Okay, so um I want to get back to FOMO and fear and valuations. Um, you know, one of the reasons, one of the things that people point to and they're concerned about, myself included, is um, you know, valuations are if you just look at a forward PE multiple for the S P 500, when we're recording this, it's somewhere north of 22 times, 22 and a half times, something like that. And uh, you know, the last you know, it it's varied over time, but you look longer term, maybe the last 25 years, it's about 17 times forward earnings. That's right. If you look back at other things like the um the you know Schiller PE ratio, the cyclically adjusted PE ratio, there's there's all different ways people look at valuation. Um, in your view, what explains why stocks have gotten more expensive and is that sustainable? Should we be you know hiding under the desk and afraid of these high valuations?
Bob:I think it's it's really two things. First of all, uh profit margins for the companies in the S P 500, uh when you look at revenues and you take a look at what's what's what's left over in terms of profitability, uh margins are at an all-time high. So essentially from an earnings and a cash flow perspective, it just simply means that the companies are getting more from from their businesses than ever before. A building that is fully occupied is gonna be worth more than a building that's empty. Um any business that has pricing power is gonna be worth more than a company that is uh you know a price seeker, you know. It it really it's just interesting how how this all plays out. So profitability has gone up largely because of margins, and we have a higher percentage of companies in the SP today that are higher returned businesses. So the collective um kind of a coupon, if you will, of corporate S P 500 companies is higher. So if you think of if you just imagine a bond that used to have a 6 percent coupon, um, and you wake up and now it's a 10 percent coupon, it's it's just gonna sell for a higher price because there's more cash flow attached to that asset. Um at the same time, in the last year we've seen that the yield on the 10-year treasury, this the the S P 500 historically is valued mostly on the 10-year treasury, is is typically where the discount rate discussions come in. And we were at five percent about this time a year ago. Now we're closer to four percent. Um I look at it this way, it's pretty simple. Four percent is exactly twenty-five times earnings. And here we are, we have an SP at about twenty-five times trailing earnings and about twenty-two times looking ahead at next year. Um I I think the market is probably right where it should be. I think it it could it change, could valuations come back down? Obviously they could, but I think it would take an increase in interest rates, which I don't is likely I don't think that's gonna happen with the Fed perhaps cutting interest rates a couple times here going forward. Maybe, maybe, maybe the sh most of the actions in the short end. But I I don't really think that um that we're gonna see the 10-year treasury go back to five percent. Maybe, maybe it does. But um and I think as long as companies continue to generate high returns on their business for the for the time being. And if you look at earnings, I mean we're obviously in the middle of earnings reporting season. I'm not seeing anything in these earnings reports that implies that we should take down our estimates for next year.
Ryan:Yeah. And the 10-year yields, I mean, around four, by the time we air the this podcast episode, we're not really sure what'll where it will be. But um, watch it go to five. Um when I looked um, you know, yesterday, uh and today's uh October 23rd, it was below four. And it's been a while since we've been below four, and it's trending lower. And you know, again, it'll be popped up a little bit this year. So um but that's um that that's that is kind of interesting that we have seen uh the rates trend lower, and it seems to me that I mean the October rate cut from the Fed is all but certain. We'll see that next week. And then it's it just behaviorally, forget about why what the Fed should do in the economy. If you've got a new Fed chair that's going to be appointed next year, and that's you know, I think May is when Powell's term is up, um, and you've got you know the people jostling to be the next Fed chair, and it just seems like there's a lot of reasons why the Fed will be more dovish next year.
Bob:Trevor Burrus Well, inflation, the the trend right now for inflation is closer to three percent. Yeah. And the Fed's, you know, the upper bound is four and a half percent or four and a quarter percent on the Fed funds rate. That that spread between four and a quarter and say three is that's that's room for the Fed to cut rates. I I don't think the Fed wants to lower interest rates below the inflation rate. I mean I think we've learned I think we we saw what that will do. Right. And all of a sudden we had the highest inflation in 40 years. Um I I don't think, you know, I I think I think you're correct that we're gonna get a more dovish Fed. You know, maybe maybe they cut rates down to three percent over the next year. Yeah. Um I think a short-term interest rate of three percent uh may prove to be a little bit too low. It might stoke some inflation concerns, but it's pretty clear the Fed is more worried right now about the labor markets and the economy. And uh markets tend to like it when the Fed is worried about that as opposed to taking away the punch ball and raising interest rates. So don't fight the Fed. That's that's that's an old axiom that's been around forever. That's that's you know, that that that's always been a factor in driving markets. Trevor Burrus, Jr.
Ryan:Yeah. Well, and and the reality is right now, again, this could change by the time we air this episode on Monday, but the data from government data is basically on hold for the most part. There's so much.
Bob:We should just get the government out of the business of releasing data. We don't need it. Private uh there's a lot of sources of economic data. Private data sources aren't bad. Yeah. That's they've that's maybe the government should get out of that business.
Ryan:Yeah. Um the the other thing that's interesting regarding valuations, um, the equal weight S P 500, last time I checked, was right around 17 times forward earnings. Right. I mean, that's the difference between 22 and a half and 17. That's pretty wide. Exactly. It's been a while since we've seen that that big of a differential.
Bob:Yeah, and I think that reflects the differences between, you know, those 493 companies that are driving that that equal weight index. You know, they're not um they're good businesses, they're certainly generating great returns on capital. Uh their their ROIs have gone up, but not anywhere near like what the Mag 7 companies have. So I think it's just a reflection of of I mean, uh a high PE is is a reflection of high returns, high growth. Lower PE is usually lower growth. Um there's no doubt there's there's a lot of value. More traditional value investors are going to find a lot to like about the S P 493.
Ryan:And then as you get lower into mid and small cap stocks, valuations are even a bit cheaper. That's right. Um what's your what's your take there? We've talked about that a little bit before. But um is there still opportunity in mid and small cap stocks?
Bob:Yeah, I think uh my confidence level is probably a little bit higher for mid-caps, but I think small caps, you know, for the most part, if we look at earnings estimates every year for the last three or four years, at the beginning of the year, and you look at estimates throughout the year, uh small caps have just not generated the earnings growth that investors were maybe hoping for. So we've had um essentially a constant kind of revaluation, but this year, uh estimates are holding up better this year than they have in the past. One of the problems with uh a Russell 2000 index, or maybe it's an SP small cap index, is that a lot of times the more successful companies in the index graduate into the next tier. So there's a little bit of a problem where you've you've got companies that are succeeding that that have larger market caps within the index, and then all of a sudden we can't continue to ride that momentum.
Ryan:That's what it is, exactly.
Bob:Yeah. Well said. That's exactly what it is. So it's it I think that's part of the problem with that part of the market.
Ryan:I I would also think that the headwinds of higher interest rates have a bigger impact on those smaller companies. No doubt about it.
Bob:Um over the last couple of years, which small companies need capital to grow. Right. And now with the Fed uh more likely to cut rates a little more aggressively here going forward, I would I would think that we would get a pop from that. Yeah.
Ryan:I mean, if it if if I'm right and it is a headwind, then the same the opposite would be true that you get a tailwind from lower rates.
Bob:Yeah, and we and it was about this time a year ago that the small and mid-caps were running pretty hard. And then we get to December of last year, and all of a sudden our expectations for the Fed change quite a bit. I mean, we we got the rate cut in September of twenty-four, and as we wrapped up twenty-four, it became pretty obvious that the Fed was in no hurry to cut rates. And I think I think the Fed was using you know the tariffs as an argument. Well, we can't cut rates now when we could have pricing issues, inflation issues. Uh now that that's been implemented and we can gauge the impact of of tariffs on inflation better now than we could a year ago, um I I think investors in small caps, I think they've been disappointed. And I just think a lot of investors are just like, yeah, I just, you know, you know. But all of a sudden what will happen is you'll have a big run in that part of the market and everybody will be like, oh, yeah, small caps. Yeah. You know, so I I want to be ahead of it. And I think I think there is I think there's an opportunity in small and mid.
Ryan:Yeah, yeah. There's a reason why uh contrarian uh opportunities exist. And that it's if you're ahead of what everyone has already come to understand, then maybe the opportunities pass you by.
Bob:Exactly right.
Ryan:Yeah. Um, another uh another narrative that um is you know we come across from time to time has to do with the concept of dry powder and uh money market fund assets. And we're at a there's a lot of money market fund assets right now. Um do you do you think that um, you know, is that money that's gonna stay parked in money markets, or now that rates are coming down, do you think that that's gonna find a way into risk assets again?
Bob:I would think some of that money will get reallocated. And it might not go into equities, but I I would think that some of it would at least go into um the array of fixed income areas that where yields are a little bit higher. You know, the yield curve uh you think about we got short rates at over four right now from a Fed perspective. Um the two years at three and a half roughly, and the ten years closer to four, and the thirty years at four and a half, the yield curve is you know, I think that's probably gonna be the story over the next couple of years, is the yield curve gets back to its normal shape. And I would think that some uh some of that cas some of that money market fund asset flow might slow down a little bit and end up further out in the curve at some point. Or maybe some of it goes into other areas, maybe it goes into real estate. It's just I think things like that. I think eventually people are gonna go, you know, I'm getting a decent yield, it's you know, maybe maybe inflation is three percent, maybe trends lower and I'm earning three percent. I might not move a lot of of that money into other assets, but I I think it is a sign that investors are still cautious and concerned. I I've talked to a lot of financial advisors and a lot of them have, you know, they've they've they've got higher levels of cash and you know, equivalents, T bills, things like that became very um you know, very popular. And you think about it, you're running five percent here in in T-bills not that long ago. Um as these these mature, you would assume that investors are gonna start going, hey, I'd I'd like to maybe look at something else.
Ryan:Yeah, yeah. And you know, we we just uh our our last podcast episode I had Bill Housey and John Wilhelm on, and we were talking about um even some of the the tax-free bond yields. For higher quality tax-free bonds, you get like a tax equivalent yield in some cases seven, eight percent. Right. Um, and you know, all of a sudden you're looking at fixed income where you're getting returns that are similar to what people expect for equities. Exactly.
Bob:Um, it's one one of the things I learned last night, I I I knew this, but I didn't realize it the extent that there is a large segment of the muni market that's taxable. Yeah. And um I was on this panel last night with this gentleman from a firm that specializes in munis. It's an $800 billion asset class. And the collective quality of those credits stacks up really well against corporate credits, and the yields are are competitive with potentially less credit risk. So um, you know, it's it's funny. I think of munis and I immediately default to taxable equivalent, but there's a there's there's an opportunity there as well for some investors who might not be as sensitive to taxes. Trevor Burrus, Jr.
Ryan:So that's municipal issuers who have projects that don't qualify for tax-free uh status, right? That's so they're borrowing money for something that doesn't qualify. Yeah, that is that is an interesting market because it's it seems very uh niche, you know, kind of it's an $800 billion niche.
Bob:It's a big niche. Trevor Burrus, and the gray and well and the gray I mean you think about the size of the bond market, we're talking about trillions of dollars. But it's you know it's approaching a trillion dollar asset class. It's you know I I I'm certainly not an expert in that part of the marketplace, but I I thought it was compelling.
Ryan:Yeah. Well, and then you've you've also got people pouring money into gold, which um, you know, the gold prices have really surged this year. More recently, they've really pulled back pretty sharply. Do you uh have a an opinion on anything related to gold?
Bob:Well, I I've been joking for years that my wife likes gold. Uh maybe platinum a little bit more than gold. Um not as an investment perspective from an investment perspective, but just from an aesthetics perspective. But um no, I think I think you know, basically the precious metals as an asset class did nothing for a long time. Just absolutely nothing. And I remember during the during the pandemic watching the money supply surge and you know, the m you started to see gold prices maybe maybe bottom out and perk up a little bit. Um and now that we've got the Fed positioning to r to cut rates further, um I I think I think that's that's probably driving some of the concern. The dollar weakened in the first half of the year, it seems like it's stabilizing here. But I think that like like anything, it's it's an area of the market that investors wanted nothing to do with, and all of a sudden we get this big pop, you know, 50 percent move basically uh in recent uh times, and all of a sudden investors are like, oh, I need to buy gold. It's like um the problem with gold is that it doesn't it it doesn't it's somewhat useful as a as a as a commodity but it's you know it's really a s it's a store of value. And um they they continue to find more gold, they continue to produce more gold, so it's not a fixed you know, supply. It is it is a supply that tends to go up over time. And I just think investors um you know, I do think investors should have some commodities in a properly diversified asset allocation model. Um but it's interesting, like you know, we we we haven't talked about this, but the price of energy. You know, normally gold and oil kind of go together historically. And then I'll if you look at the price of oil, it's right where it was twenty years ago. And natural gas prices have barely changed even further back in time. You know, we're we're it's just I think ultimately it's about productivity and in our ability to produce these commodities. And I I I'm sure that with this recent increase in silver and and gold, uh you are gonna see production go up significantly. You have to. I mean, it's just that's the market uh reacting to that, and that that will probably cool some of this off.
Ryan:It's it seems like some of those commodity assets and gold is sort of a unique uh asset because it has held that sort of store of value defensive aspect trade to it. Um but it's really hard to figure out what is overvalued or undervalued or expensive or cheap, unlike we were talking before about uh the value of equities. You look at you know, what are their profits, how are they gonna grow, what's the likelihood they continue to grow at a certain pace? There's no profits for gold. Um the gold companies have profits, but there's no PE ratio, there's no dividends that you can analyze for gold. That's right.
Bob:It's it's like crypto. Yeah. I mean, what's what's you know, what are these cryptocurrencies worth? Well, you know, it's just I I think all of this goes back to COVID, COVID policies, the massive increase in the money supply. There's just a and you mentioned how much money is in money market funds, it all kind of ties together. There's just a lot of liquidity that just kind of finds places to go and drives prices up. And it was just it seems like we have this this um this wave of of money that just kind of sloshes around and and just occasionally sends up prices of things.
Ryan:You know, it does make sense to have some of those some of those assets that are sloshing around that you don't expect in your portfolio. It makes sense to diversify and allocate to those things. But um yeah, they're just part of the reason why it makes sense is because they don't necessarily behave with the same rules that you do with stocks or bonds.
Bob:Trevor Burrus, Jr. Exactly. Asset allocation is uh is is an interesting topic because um correlations change over time and uh assets don't always move the way they have in the past. And I think it's I do think that with the stock market as high as it is right now, that there has been a lot of interest among investors and investment advisors, I'm sure, to diversify or maybe mitigate some of the risk of of a of a decline in the stock market. I mean, at some point we're gonna wake up and the market's gonna be down ten percent, twenty percent. And so I think, you know, I think this is this all kind of this is all related. I think I think that investors are are looking for things to position themselves in that might not necessarily correlate with the market going down. Demand for products that have hedging strategies and different, you know, financial engineering, yeah, if you want to call it. Um the demand is high, and I get it. It's I think a lot of investors have lived through enough bear markets and enough enough downturns that they know that at some point we will have a a recession, we'll have a bear market, some event will happen. Um what what that event is we don't know, but it it's it's I think a lot of folks are just trying to stay ahead of that or trying to get ahead of it.
Ryan:Yeah, and we don't know because if we did it would already be reflected in the prices and you wouldn't have to worry about a ten percent decline. Exactly. Yeah. That that you the you only get these big movements when new information gets priced in quickly. That's right. And that's why uh to your point. Yeah, all those those buffered strategies, all those things that protect on the downside um have been really popular. Yeah, and for good reason.
Bob:Yeah. And they they make a lot of sense. I think, you know, we talked about this before. Uh demographics are what they are. I mean, we are we are living, on average, a lot longer past our working years. And, you know, the days of people working, retiring, and and passing away in five years or ten years, I mean, that is now turning into maybe twenty or thirty years or even more for a lot of people. So I think anything that keeps investors in the market or you know, w uh in in whatever way makes sense or whatever is in line with their risk tolerance is I think is is wonderful. I think it's a good thing. Um it's funny, the other day I went to uh to a hospital to give a presentation. It was a luncheon and I arrived at the hospital and it's you know you know 15 minutes here from the offices here at First Trust in Wheaton and I could not find a parking place in this parking lot. I mean it was just I mean, uh there were I mean I'm driving I finally found somebody and I tracked them down and I followed them to their parking space. I had to stalk them to you know to find and I and I'm realizing I've only got a couple minutes before my presentation. And then I started thinking about something, and I don't know what made me think of this, but twenty-five years ago, at the turn of the century, um it seemed like we we were talking about the baby boomers getting older, and you know, the this this the I remember the tagline was every six or seven seconds a baby boomer turns fifty. And that was a big deal. You know, and I realized that's twenty-five years ago. Well, those same people that were turning fifty twenty-five years ago now turning 75, and I think most of them were at the hospital having something done. Uh and and so demand for you know for for health care and the need to have um have assets to pay for for health care uh and and the all the things that are inevitable as we get older, um, I I think it all kind of ties in. And it and it to me it's and we we've kind of forgotten about that. We're all focused on this AI stuff, but we still have this aging population and these demographic issues that um I think are going to affect investors um profoundly.
Ryan:Yeah. It it's amazing. Time time uh kind of flies, you know, the 2025 we're already kind of rounding third base and uh heading heading towards home. I mean, we're end of October, two months left in 2025, and then the calendar flips again. Exactly. Um so do you has has 2025 uh met your expectations coming into this year? Do you do you think uh, you know, as you look back over the last 10 months or so, is it what you expected?
Bob:Uh I I do think that um I think the market the market's done better than I thought it would do. I thought we'd have a pretty good year. Um if we look at where earnings estimates were at the beginning of the year, you know, I thought that we would eventually get the Fed to to cut rates maybe once or twice this year. Uh there were times this year we thought maybe the Fed might not cut rates. But I d I thought that we'd have enough earnings growth to grind out, you know, maybe an eight to ten percent return. Instead we're here, I don't know, what fourteen percent as of today.
Ryan:Yeah.
Bob:Uh not including dividends. So uh I think it's been a better year than than I would have thought. Uh the problem is when you when you strip away you know that S P five hundred return and you look at the rest of the market, it's like it's the same story that we've had for the last couple of years, where it's the S P and the Mag 7, the the market cap weighted indexes um have done well. And you know, kind of everything else is is more in line with that 8 to 10 percent rate of return. Uh maybe the biggest surprise this year is is how outsized returns have been in in overseas markets. Yeah. That's been a it's been a really good year for that. It has. Uh I think currency uh was was the main driver of that. Um and I think other I think central banks around the world uh have been more aggressive in cutting rates this year. Uh the fact that the Fed's only our Fed has only cut rates one time. We've had multiple rate cuts from the Europeans by comparison. I think that um I think I think that is the main driver of outsized returns in markets overseas. And valuations are lower overseas, too.
Ryan:Valuations and the the opportunities for to to pick up stocks at a cheaper price. Right. Um there's plenty to go shopping from. Yeah.
Bob:It's monetary policy, it's the dollar, it's price discovery all going on, but still I I caution people at the end of the day, I don't I don't know that I'd want to have a portfolio uh necessarily overweighted in international stocks. I still I still think we are far and away the most fertile ground for opportunities for companies. We just simply have better companies longer term. You just have to pay more for them.
Ryan:Yeah. Yeah. Well, I usually um end the conversation asking you about a book, right? Yeah. Today I'm gonna throw you a curveball here. Uh-oh. Um and uh This has not been scripted. This is unscripted, surprise. But one of the things I know about Bob Carey is that he is uh uh a highly interested in music sort of guy. Yeah. Um so I'm gonna ask you instead in the Bob Carey deep tracks, like give us a give us a good music recommendation that is not you know super mainstream, uh that uh, you know, when someone's done with a podcast, they can say, you know, Apple Music, find this for me. I got something. Okay.
Bob:It it is a book. I asked for a song and give me a book. But it's but it's music related. Okay, perfect. Okay. I I just I got done reading um uh Tom Petty's guitar player, Mike Campbell. Okay, uh was with Tom his whole career, and Tom's obviously been gone for a while, uh passed away a number of years ago now. But his his guitar player, his bandmate uh Mike Campbell wrote a book just simply called Heartbreaker.
Ryan:Okay.
Bob:And it's a big thick, you know, memoir basically of his of his life and his time in the band. But it goes it's a lot more than just music, but it's it's about just a lot of things that have happened in the past. I everybody that I've recommended that book to has been like, that is incredible. And you can listen to it on Spotify. You can listen to him narrate the book. It's about 24 hours of him talking, and you think you think, God, that's just a that's a lot to get through. It it is amazing how fast those 24 hours go if you listen to it. Interesting. I did both listening and I was reading, and it's just incredible what he saw.
Ryan:So it was read by the author. Yeah, exactly. Yeah, exactly. Heartbreaker by Mike Campbell. Mike Campbell. Um there was another uh there's a book that I read a year or two ago when it had first come out um from Bono. Have you ever read the Surrender by Bono? It kind of goes through uh a variety of song titles and he's got stories that go along with them.
Bob:Yeah, yeah. I I think it's cool that that we get to hear from these people that are still with us telling their stories about uh about all this great music um that's that's that's been a part of our lives if you're especially if you're a little bit older. It's just like I mean, how do you how do you not know Tom Petty and you two or the Beatles? Or yeah. I mean it's it's it is kind of cool that we get to hear from these guys. All right. Well, we'll add Heartbreaker to the uh Mike Campbell.
Ryan:Mike Campbell Heartbreaker. Um Bob, it's always a pleasure. Thank you for uh for joining. I think this is our 58th episode of the podcast, and you were the first episode. So always appreciate having you on. So is this the end of it? Are you are you gonna continue bookends? No, no, we're uh you need to keep going.
Bob:This is these are these are really, really valuable, uh insightful, and they're fun to listen to.
Ryan:Yeah, well, they're definitely fun for me to uh to do. And uh so again, thank you for helping us kick it off and and uh continue.
Bob:Just so many interesting people who work here, and you you get you get out of what what what we're all about with our these conversations.
Ryan:Well, it gives me an excuse to talk to uh some of my favorite people at the firm, so yourself included. So thank you. Thank you. And thanks to all of you for listening and uh joining us on this episode of the First Trust ROI podcast. We'll see you next time.
