Decoding Market Confusion: Insights from Gary Aiken

 summary

In this episode, Wade Lopez and Gary Aiken discuss the complexities of the current market, the impact of interest rates, inflation, tariffs, and the future outlook for investors. They share insights on market volatility, investment strategies, and the importance of a disciplined process.

Transcript

Market outlook and misconceptions

SPEAKER_00 0:00

Views expressed are solely those of the speakers and do not represent this show or its team.

SPEAKER_03 0:05

This market seems like it has no direction, but it does have a direction, and that direction is is up. I think everything seems like a crisis because one, there's money in financial media turning everything into a crisis. And so a lot of this stuff that we deem are crisis are really just noise.

SPEAKER_01 0:29

Welcome to Built to Last, conversations about wealth, work, and life. Today I'm happy to bring back as our guest Gary Aiken, Chief Investment Officer for Concord Asset Management and Concord Wealth Partners. Gary, welcome back.

SPEAKER_03 0:45

Great to be back, Wade.

SPEAKER_01 0:47

Listen, I'm going to jump right into some tough stuff here. And I'm going to start out with basically some market context. And I need to know why this market seems so I don't want to say conversational, but complex for everyone. You got a spin on that?

Market direction and investor sentiment

SPEAKER_03 1:08

I guess if I'm thinking about it, you know, this market seems like it has no direction, but it does have a direction. And that direction is is up. And, you know, when we came out with our forecast last year, we said it was going to be a grind.

unknown 1:28

Right.

SPEAKER_03 1:29

Right. And when you're in the middle of, you know, a grinding higher market, it just feels like anything could could could set off a uh you know a big downturn, or we're we're too close to the end. Or you know, sometimes if if uh if things are going too well for you in your life, um the you know, the pessimistic person would always say, well, something's gotta give. And you know, this can't it can't be all roses like this.

SPEAKER_01 2:00

And let me let me stop you. I want to ask you a question. Just why don't you get into what's the difference between market uncertainty and market risk? I mean, uh explain a little bit about those differences.

Difference between market uncertainty and risk

SPEAKER_03 2:13

I think uncertainty is something that we're always present with. And uncertainty is hard to quantify.

unknown 2:21

Right.

SPEAKER_03 2:22

When we talk about risk, now we're putting quantifiables, uh, we're putting numbers to that uncertainty.

unknown 2:29

Right.

SPEAKER_03 2:29

Um, just saying uncertainty, everything is uncertain. Um, you know, whether whether there's going to be traffic on the beltway home, I don't know. I'm uncertain about that. But if I say, well, what's the probability that I get home in 30 minutes or the probability that I get home in 45 minutes? Um now I've taken risk into the picture and I can quantify that. And when we're talking about investing dollars for people, we're take we're moving uncertainty and we're trying to quantify that uncertainty so that we are defining what risks we view that are out there and you know what scenarios, uh, what we would do in different scenarios according to that.

SPEAKER_01 3:16

So if we're look at it from that aspect, when does that turn into a crisis? And because why does everything seem like a crisis today?

Why everything feels like a crisis

SPEAKER_03 3:25

I think everything seems like a crisis because one, there's money in financial media turning everything into a crisis. Um two, I think we live in a very polarized society. And so um, you know, the just that polarization leads everyone to overreact to things. And and I think also uh, you know, there's definitely a management style uh change um around the current administration. A lot of negotiations that are usually done behind the scenes in private are being done out in the open on social media. Right. And so everyone in the world gets to react, uh, that gets amplified, and it seems like more of a crisis around relatively mundane things.

SPEAKER_01 4:18

Uh, you think that's what's driving a lot of the volatility we see that just seems like it happens for a day, day and a half, and then we're back to looking at normalcy. Is that the answer to that?

SPEAKER_03 4:33

I think so. I think in the short term that's that's definitely the case. And so these these one-day, two-day, uh, you know, over-the-weekend kinds of things that that make news, drive, uh, drive markets, you know, in the in temporary times, or, you know, in in a short time span, that's certainly what's driving it. You know, if we step back though, and we step back to sort of Concord's view,

Long-term trends: dollar decline and tech investment

SPEAKER_03 5:03

right? That we're grinding higher, but there's certain things that are that are going to be prevalent that are longer term that we can we can trend back towards. You know, um, the dollar is likely to continue to decline over time, and that's for a number of different factors. Um, so even though there's a lot of volatility around that decline, um, you know, the trend we think is still there for that. You know, are we still going to spend more and more money on information technology and information technology infrastructure? Yes. Are there news headlines around that? Um, are the players going to change over time? You know, are different investments, you know, from different countries going to happen and drive news? Yes. But over time, that trend we think is still intact. So I think it's it's one of those things. There's that that that uh phrase, you know, you need to distill the noise from the signal. And uh and so a lot of this stuff that we deem are crises are really just noise.

SPEAKER_01 6:12

Right. So let's let's talk about interest rates for a second. Why does it seem like, or do you agree or disagree with this statement, that interest rates seem to be impacting every asset class right now?

Interest rates' impact on asset valuation

SPEAKER_03 6:26

Interest rates have always impacted every asset class. And the reason that interest rates are so important is because the way that we value financial assets is by dividing cash flows by an interest rate. And that um some call it discounted cash flow uh valuation, like a DCF. Um, some in real estate it's it's a cap rate. Um, you know, you take your net operating income divided by an interest rate, and that's the value of the property. Um, so interest rates drive asset valuations, and so the direction of interest rates, getting that right, is very important. Um so we start, you know, a lot of our analysis uh based upon what do we think interest rates are going to do.

SPEAKER_01 7:25

Well, I'm gonna use the term higher for longer, just throw that out there. What does that mean in practical terms?

Higher for longer: what it means in practice

SPEAKER_03 7:33

In in from my perspective, I think higher for longer means that we're just not going back to the 0% interest rate environment that we were at for so long. Um does that mean interest rates will will be you know going back towards eight or ten percent? Uh I don't think so. I don't think there's there's reason to support that.

SPEAKER_01 7:59

Um but but what areas of the market where where do you see let's let's focus on where you think the struggle is going to come in for certain sectors? Let's let's isolate that first.

SPEAKER_03 8:10

I've got to say, you know, I don't see a lot of struggles from an interest rate perspective.

SPEAKER_01 8:17

Okay.

SPEAKER_03 8:18

Um in in almost any sector of the economy. That's great news. And and the reason is that corporations don't have a ton of leverage. They're not using a ton of debt. Secondly, they refinanced a lot of their debt when interest rates were super low. And even when they're refinancing debt, it's not like interest rates are so high that it's going to be a major factor in whether they're profitable or not. And then finally, you know, the GDP numbers that just came out for the final of the third quarter showed the nominal GDP was growing at like an 8% nominal rate year over year.

SPEAKER_02 9:02

Right.

SPEAKER_03 9:02

It's it's very, very hard to imagine that interest rates going up 1% or 2% is going to impact a business's ability to refinance, pay its debt, or or grow in in the kind of environment where we are today.

SPEAKER_01 9:22

Well, let's shift gears and talk a little bit about where you know what are what are investors getting wrong? What are some common mistakes that you see occurring already beginning this year?

Investor mistakes: short-term focus

SPEAKER_03 9:33

I think the the mistake that investors make is thinking too short term and trying to game, trying to game every one of these uh market moves. Um and you know, there's a great uh there's a great analysis that that showed that a lot of the value creation in markets happens when markets are closed. That because because news happens at night, and by the and that news gets factored in overnight into the opening bid.

SPEAKER_01 10:12

Yeah.

SPEAKER_03 10:12

So at 9 30 when the bell rings, that value gets reflected. And so if you're not in the stock overnight, if you're out of the market, you're you're missing a lot of that value creation.

SPEAKER_01 10:26

Yeah, the overreactions are definitely you know, you I don't I don't want to say in our client-based course, but overreactions can be a thing. But let's talk about I still think there's some complacency out there. Do you believe that it still exists?

Market complacency and international diversification

SPEAKER_03 10:43

There's definitely complacency. Um and and some of that complacency is a hesitancy to believe that international markets are going to outperform US markets over some extended period of time, complacency around the the dollar losing ground against other currencies. Um and you you're starting to see um some of that complacency be eroded and in f fund flows into international stocks, into international bonds, away from US uh stocks and bonds. Um you know, is there going to be a tipping point where all of a sudden, you know, there's a there's a rush for the exits from US markets? I don't think so, because US companies are still the most profitable companies. US GDP is growing faster than China, um, you know, and faster than Europe. Uh so the US is still an incredible place to invest, an incredible place to live, um, an incredible place to uh build businesses. Um so so I don't think I don't think it's it's something where we need we're gonna wake up one day and all of a sudden uh you know we should have been a hundred percent somewhere else.

SPEAKER_01 12:05

Right.

SPEAKER_03 12:06

Um but there's definitely some complacency in that the US is the only place. Right because for 20 years it was.

SPEAKER_01 12:13

Yep, yep, I agree. But you know how I feel went into out SP 500, but that's pretty easy,

US market dominance and global exposure

SPEAKER_01 12:20

right?

SPEAKER_03 12:20

So it certainly is, and and there's nothing wrong with that approach either, because if you look at the S P 500, 55 to 60 percent of the revenues of big US companies come from overseas, right? So, you know, if you don't feel like you want to buy Unilever stock, uh you can buy Procter and Gamble, and you're still getting, you know, similar types of exposure, but Procter and Gamble is dealing with currency fluctuation and and selling products all over the world. Yep. Um, and so um there's a lot to be said for you know big US companies who are global in nature, providing you diversification um i uh to to markets outside the U.S.

SPEAKER_01 13:09

Very few exist that don't have a footprint in other countries in in today's world, which is one often overlooked you know, diversification part of the S P 500 that I know we track and you track and we look at you know ex-US or NUS companies when you break those down, which which really helps when it comes to you know segregating and how you pull out certain sectors in the S P 500, because you've done a really good job of outperforming the S P 500 you know over the last uh three years. Um so I want to commend you for that. Um we really appreciate that, as in our investors do. But I do want to bring up one thing. I I I want to ask you an honest, you know, your impression of tariffs in the beginning of the year to your impression of tariffs now, has it changed? The outlook changed? I mean, I think we you know uh who knew what we were getting, but what where how do you sit with that now?

Tariffs: expectations vs. reality

SPEAKER_03 14:08

So as an economist, um don't go defending yourself already. Tariffs are taxes, yeah. And I generally don't like taxes. They distort how people uh uh interact with the products and services they use on a day-to-day basis. It it uh distorts you know international trade. And so generally uh, you know, I don't like taxes and and I don't like tariffs. Um that being said, you know, what we got as opposed to what was advertised on Liberation Day was significantly different.

SPEAKER_01 14:51

What was we yeah, exactly different.

SPEAKER_03 14:55

Significantly different. I mean, we were expecting 30 and 40 percent tariffs on you know every country around the world. Yep. And uh, you know, we ended up getting 10% baseline tariffs uh with with Europe and and the UK and some trade deals here and there, um, certainly some some more tariffs on China, um and uh and the use of tariffs, you know, in in ways that tariffs hadn't been used before. Yep. Um but but in terms of our analysis of what that would do, I think we were pretty close. And we were close because we relied upon banks like JP Morgan and Goldman Sachs and their analysis, delving deep into it, that said that you know, taking all these tariffs together and the product mix and changes in product mix and how consumers would react, that, you know, ultimately it would be about a half a percent to maybe, you know, uh three quarters of a percent in terms of the increase to inflation.

unknown 16:02

Right.

SPEAKER_03 16:02

And that that wouldn't happen sort of over time. It would have, or it wouldn't happen all at once, it would happen over time.

SPEAKER_02 16:08

Yep.

SPEAKER_03 16:08

And I think that's what we've seen that there have been some price pressures on you know the goods side of inflation, but the services side of inflation has been, you know, steady to declining. And we've seen shelter inflation start to roll over a little bit. And so we've actually seen, even though there have been these tariffs, we haven't seen inflation in the U.S. go up. We've seen the inflation rate actually come down. And um, and so that's sort of antithetical to uh to what we might have expected or what a lot of people expected. Um but um tariffs didn't turn out to be the boogeyman that uh

Tariffs' actual impact on inflation and GDP

SPEAKER_03 16:54

that we all expected they would be.

SPEAKER_01 16:56

So what's the real effect on GDP in your opinion? You know, you hear so much about it. Is it really making that much of an effect, or is it just uh the outline things that have occurred that are helping a little bit? I mean, what what's your opinion concerning tariffs into GDP? Help, hurt, indifferent?

SPEAKER_03 17:17

I I think the the main thing, you know, as I think about you know where pressures were going to come from before tariffs versus where they're where they're coming from post-tariffs is really in the US government deficit. Um we've seen the deficit come down substantially as a result of that. And that means the US government isn't going to need to borrow as much money. Now, this is all before the Supreme Court comes back with whatever ruling they're gonna come with. Whatever. We we don't have access to that yet. Right. Um they're still trying to figure out how to thread the needle. Um and I'm not a lawyer and you're not a lawyer, and we don't know how that works. But exactly. But um but uh but but the US government deficit has budget deficit has come down dramatically as a result of incoming revenues from tariffs. And that means that interest rates don't have to go, or long-term interest rates probably don't need to go up as much as they did uh the because the government isn't borrowing as much as it might have otherwise. I think that has a big impact on the way that we view the world, especially as we you know go back to that first discussion we had about interest rates. Um you know, if interest rates don't have to go up as much, that means you know, if interest rates go down, valuations go up very simplistically. Um so if interest rates don't have to go up, then valuations don't have to go down.

SPEAKER_01 18:56

So

US government deficit and interest rates

SPEAKER_01 18:57

where do you see the consumer well first before we uh talk about confidence, talk about business confidence? And where where are businesses right now in all this compared to maybe this time last year?

Business confidence and pricing power

SPEAKER_03 19:09

I think businesses are, you know, we have to bifurcate it, you know, sector by sector. Um and also by large businesses who have pricing power and smaller businesses that maybe don't have pricing power.

SPEAKER_01 19:25

Explain what you just said by buying power versus those who don't.

SPEAKER_03 19:31

So certain businesses or certain companies uh can raise prices and it doesn't matter. People will still buy that product.

SPEAKER_01 19:42

Example.

SPEAKER_03 19:43

Um example, uh Coca-Cola.

SPEAKER_01 19:46

Okay.

SPEAKER_03 19:47

Coca-Cola can raise the price of of their syrup, and it really doesn't affect how much Coca-Cola people are consuming. Right. Um, you know, one of the one of the great reasons why Warren Buffett, you know, bought so much Coca-Cola stock. Um you know, other other types of companies, you know, raise their prices and uh people people stop buying. Um, you know, look at uh um you know furniture companies. Um you know, they can't necessarily raise their price because people will just decide not to buy furniture

Consumer and small business dynamics

SPEAKER_03 20:30

or clothing or jewelry, things that aren't you know essentials.

SPEAKER_01 20:34

Right.

SPEAKER_03 20:34

Um and when we look at you know smaller businesses, you know, they they are having a tougher time raising raising prices. And so, but but that means that instead of growing at growing revenues by double digits, they're only growing revenues in the high single digits.

SPEAKER_02 20:54

Right.

SPEAKER_03 20:54

So it's you know, when we look at when we look at the economy, that's why you know we're still kind of bullish, uh, is that is that yeah, things aren't a hundred percent fantastic, but they're also not bad.

SPEAKER_01 21:11

Right. So let's talk more specific. What about the financial services areas, banking and stuff? Because I mean, you know, you were one of the first ones that said if banks can make that I heard that if banks can make money or at least break even when interest rates are where they are, I certainly believe we need to advance more into that sector as interest rates come down. Where are you now when it comes to the financial sector?

Financial sector outlook and banking profits

SPEAKER_03 21:40

So the financial sector has done great over the past year. And um, you know, we were we were very big into uh investment banks in in client portfolios this year. So Goldman Sachs, Morgan Stanley, JP Morgan, um did didn't. Fantastic. And, you know, one of the things I think that's going to happen this year is that interest rates on the short end, maybe not in the first half of the year, but in the second half of the year, are going to decline again. You know, we can talk about the politicization of the Fed and politics, but uh President Trump is probably going to get the nominee for Fed governor that he or for Fed chairman that he wants and a couple of governors that he wants. And um and we're probably going to have lower short-term rates. I also think that because the economy is doing well in that environment and there's tailwinds for the US economy, that longer-term rates are likely to go up. And so what that means when short-term rates are down and long-term rates are up, you have a steeper yield curve.

SPEAKER_02 22:57

Right.

SPEAKER_03 22:57

And a steep yield curve is great for banks because what do banks do? They borrow on the short end and they lend on the long end.

SPEAKER_02 23:06

Right.

SPEAKER_03 23:07

Um, and so it means that banks are going to increase their net interest margin or their their general profitability. And so banks should do well in that environment, especially since the US economy is still growing. That means there aren't going to be a lot of credit losses. Um, and there's going to be lots of opportunities for ancillary services and growing their customer bases. So well-run banks should do great in that environment.

SPEAKER_01 23:35

Well, let's assume that that that works well in the credit card world if you know interest rates do come down, inflation is coming down, people can make their payments, but what about capping what they're talking about, capping interest rates? I see that as a as a steep dive. That that seems to me, I don't want to call it a crisis, but I call it a fundamental risk. How do you see that?

Risks of price caps and regulation

SPEAKER_03 24:01

Um one, I don't think it's going to happen.

SPEAKER_01 24:04

Okay. Um averted crisis.

SPEAKER_03 24:06

How's that? Another averted crisis. I mean, we but but seriously, we saw the the the stocks of you know major banks decline in the face of this idea that somehow the president of the United States was going to be able to force banks to cap credit card rates at 10%. Um one we know from Nixon, and you know, we can go back as far as ancient, you know, Mesopotamia probably. Anywhere price controls have been tried, they fail. They produce much, many more problems than they than they attempt to solve. Uh so price controls just don't work. It's a bad idea. Um, will there will there be some companies? Wait, my guess is that there's a couple of companies out there, and I think we even saw one um built was one, and a couple of other, and probably some of the other banks are gonna come out with a gimmicky 10% credit card. And the and guess what? No one's gonna be able to get it. No one will actually qualify.

SPEAKER_01 25:16

That's exactly. I had a conversation with a bank CEO yesterday, and they're you know, when we were just kidding around, and I said, So how do you feel about the credit card cap? And he said, I won't be in the credit card business. You know, I mean it's they can't take the risk, right? There's too many default ratios on that that are just that are sort of baked into the whole process that I think a lot of consumers don't understand. But from a financial aspect, you know, it I I don't see that. I hope it doesn't happen. Let's just put it that way. Um, let's talk about capital investments. And um, you know, I'm I'm starting to see more, you know, money being thrown back into the supply chain and the manufacturing. Where what do you see for 2026 moving forward in that direction?

Capital investments and infrastructure growth

SPEAKER_03 26:06

I think there's been a lot of commitments made um by companies to invest, both US companies to invest in the U.S. and foreign companies to invest in the U.S.

SPEAKER_02 26:17

Right.

SPEAKER_03 26:17

And I think what you're seeing anecdotally is is probably right on track. That you know, it takes time. Yeah, you don't just build a a giant factory overnight.

unknown 26:29

Right.

SPEAKER_03 26:30

Uh you don't you don't just build a data center and populate it with uh with chips and everything else that goes in there, you know, in in three months. These things take time. And um and they're starting and they're gonna continue, and they're gonna be helped by the expensing and depreciation rules in the one big beautiful bill act, the uh the tax bill that was passed last year that encourages business investment. I mean it I agree. When the government wants to encourage people to do things, people respond to incentives. That's that's something that I've that I've always that I took from business school and and have always sort of applied to any analysis of a company or or the economy, you know, where are the incentives? Because people respond to incentives. And if incentives are out there for them to do bad things, uh they're gonna do bad things. And if incentives are out there for them to do good things, they're gonna do good things. Yes, but but you can't blame people for acting in their own, you know, self-interest. That's what we want them to do. So but in this case, you know, people are in businesses, companies, whether they're foreigners or U.S. are incentivized to build, and they're gonna build.

SPEAKER_01 27:52

Yeah, and I we're seeing that even locally. We're seeing, you know, which we've kind of cautioned our small business owners, you know, you're competing with a lot of uh a lot of growth that's gonna be coming. And if you see that growth, you better be advancing your plans forward, you know, to square footage necessary for their their expansions into their manufacturing plants and their lines. And certainly we're seeing some problems with commodities when it comes to you. Do you want to touch touch on that a little bit?

SPEAKER_03 28:20

Yeah,

Commodity prices and supply chain investments

SPEAKER_03 28:21

I thought that's where you might be going, because I think that's that's one of the reasons that we're seeing the commodity complex start to start to have a bunch of you know uh you know, increases in price. You know, there's you know, just like it it takes time to build a building, it takes even longer to open a new mine or you know, and to and to to get stuff out of the earth and process it. Um you know, we we didn't do a lot of this stuff in the US for sure, and then we weren't incentivizing it like we are today, or there wasn't maybe a geopolitical need to uh or a sensitivity to the geopolitical need to build it um in the past. And so, you know, mining companies just didn't put a lot of money into that infrastructure, and so um, you know, you're seeing the price of copper go up. Um and you're seeing, you know, uh silver, um, you know, gold to to a lesser extent from an industrial standpoint. Um, but you're seeing platinum, palladium, um, you know, all of the metals, I think, are responding to that. You're you know, we're we're in a couple of steel companies um in client portfolios, and we're seeing the price of steel, I think, start to go up a little bit too. Um you know, but but I think that the one big commodity, oil, that's a totally different, totally different situation.

SPEAKER_01 29:56

Hey Gary, we're this conversation is going on uh a little longer than I anticipated and it's great information. So, yeah, I think what in the in honor of what we're trying to do with this podcast, keep it short and sweet, I think if it's okay with you, we'll end it here and then we'll come back with part two immediately following.

Conclusion and upcoming part two

SPEAKER_01 30:14

Sounds great. Thanks for spending time with us today on Build to Last. If today's conversation helped bring clarity to your thinking around wealth, work, or life, that's exactly why we do this. Till next time, stay focused on building something that truly lasts.

SPEAKER_00 30:32

This podcast is produced by Concord Wealth Partners, LLC, an investment advisor registered with the Securities and Exchange Commission. Registration does not imply a certain level of skill or training. The information presented is for educational and informational purposes only and should not be construed as personalized investment, financial tax, or legal advice. Nothing discussed should be considered a solicitation or offer to buy or sell any security or investment product. All investing involves risk, including the potential loss of principal. Past performance is not a guarantee of future results. Individual results will vary based on personal financial circumstances, risk tolerance, and other factors. Concord Wealth Partners does not provide tax or accounting services. Tax and accounting services are offered through Concord Business and Tax Advisory, an affiliated CPA firm. For more information about Concord Wealth Partners, including our Form AB Part 2A and Form CRS, please visit ConcordWealthpartners.com or contact us at 800 838 4370.