Investment Trends in 2020 | Dude Where's My Money? | Ep 10
Updated: Jun 19
In this episode, we discuss whether or not the stock market recovery is overheated, the incredible growth of Amazon and what is propelling that growth, the misery in retail and why certain companies are surviving versus others, the fallacy of comparing your investment portfolio to a benchmark like the S&P 500, and the current crisis facing colleges - online or in-person?
Off the cuff personal finance discussions with the owners of Mellen Money Management in Nocatee, FL, Ian and Scott.
We cover a broad range of investment issues as we near the midway point in 2020:
Is the stock market overvalued?
How has Amazon continued to outperform?
Will the traditional retail shopping experience become extinct?
Do investors get envy when comparing their returns to benchmarks?
Commentary on colleges and their financial struggles
Scott : [00:00:11] This is Scott Snider and I'm here with Ian Aguilar, my business partner at Mellen Money Management, a financial planning firm here in Nocatee. Today we're doing our Dude Where's My Where's My Money? video series. And today's video is going to center on the current investment trends. Starting with last week, are stocks still overheated after last week's five percent drop?
Ian: [00:00:46] I mean, for so many of our clients, I thought it was so hard to sell when we were at the bottom, right, when we had the first huge drop. For me it was almost too easy to say let's just stick tight.
Ian: [00:01:02] The harder question is now that we've come back to levels where we're pretty close... If nothing else, we're back to where we were at the end of 2019. It's a much tougher question to answer. And to be honest, now that you've come out the back end of all of what's floating out there as far as possible bad news for the market... I think there are people looking for an excuse for something bad to happen to a certain extent.
Scott : [00:01:38] Right. I mean I tend to be in that camp, quite frankly. I think we are due for another 10 to 20 percent drop before the year-end. Some things that stood out to me as I was doing some reading over the weekend, investors, I think, were quick to latch on to the first signs of hope. When they saw that 2.5-million jobs were added for the May jobs number. But what isn't being reported enough on is that the unemployment data was misleading from the Bureau of Labor Statistics. And they've been getting it wrong for the last two months. They mistakenly counted 4.9-million people as being employed when in fact they were unemployed. So...
Ian: [00:02:31] And I think there's that and then there's also the other flip side of it in that you're looking at it from the rational numbers perspective. Not everyone sees that, right? I was watching CNBC at one point last week and Mohamed El-Erian came on and was talking about how it's almost a win-win for the stock market. In a sense that it's either if you look through all the bad data and you hope that you're getting this massive recovery on the back end of it... that the stock market's going to continue with what it was doing before all the stuff happened. Or even if the bad data does come through...You're hoping that the Fed is going to backstop it. It even came out today, right, with some more news around purchasing corporate debt. There are certain arguments to be had on the other end of it, too. But definitely when you look at the numbers, it's hard to see how well we come out of this.
Scott : [00:03:30] Well, I mean, think about it. Yeah. We've had the Federal Reserve and the government provide a lot of unprecedented stimulus and a backstop, if you will. But. At the same time, you've got companies and small businesses like restaurants and the service industry that are operating at 50% capacity. You can only do that for so long before there are long term ramifications. At least a very prolonged recovery in my opinion. And that's I think the issue that I'm coming to grips with is, yes, we're getting adjusted to a new normal, but that new normal still means less growth. Doesn't it?
Ian: [00:04:17] Yeah, I mean think about it, right? I mean, PE ratios aren't the end all be all, but prices if they're still around the same where they were last year but earnings are definitely going down. I think they said that PE ratios are an imperfect measure. But the fact that they're trading at 22 times forward earnings makes it the highest valuation since May 2001.
Scott : [00:04:42] Right. We all know what happened then. The dot com crash.
Ian: [00:04:52] Yeah, we're a little hot and heavy. I know for us, we've been doing some things for our clients, especially in certain instances more so than others. But this is a hot market, to say the least.
Scott : [00:05:07] Yeah, a little bit overbought at the moment. But, you know, at the same time, the other argument is to look at Apple and Google and Amazon and these bigger tech companies, they make up 20 percent of the S&P 500. And they're obviously doing pretty well. So maybe that's what's really making the markets look better than than the rest of America. The way we're feeling when it comes to the smaller businesses is on the other side of that. The other worry is, you know, small businesses could trickle up into the economy if enough fail.
Ian: [00:05:47] So, yeah, I mean, it's an interesting time. You see, when you look at the ticker of the stock markets, you look at the different sectors, when it's a down day sometimes, you know, the only green when you see is tech. Yeah, think about that...
Scott : [00:06:06] Five companies make up 20 percent of the S&P 500. Like, that's enormous.
Ian: [00:06:14] This number is only getting worse. It's only getting bigger. Right.
Scott : [00:06:18] So, I mean, I think the bottom line is that if you're at or near retirement, you probably want to be in a more defensive stance with your investments. But for those that are at the accumulation stage, I don't think you really need to be worrying day to day or month to month what the markets are doing. Just keep saving and, you know, allocate appropriately.
Ian: [00:06:44] Sure, yeah... That's the most logical thing is that there's so much that's up in the air. You look at those big companies. I know we're talking about one just the other day. Right. Amazon is just continuing to push through all this. And, even last week when the rest the market was down, they were pushing up.
Scott : [00:07:07] Yeah, Amazon's been crushing it. They're up 36 percent annualized since 1997. Which is... I'm glad I own it for my own portfolio. By the way, we're not endorsing as an investment in this video, but Amazon obviously has been crushing it. And a lot of it has been attributed to what's known as the flywheel business strategy. Are you familiar with that at all?
Ian: [00:07:33] Yeah, yeah. I've read a book at one point... "Read a book." I listened to it on audiobooks. But your general strategy in terms of one business basically keeps propelling on the other. You just keep adding to the flywheel and eventually you go so fast.
Scott : [00:07:56] A thousand small results aimed in the same direction with all these business segments that they have. The other thing they're doing is using big data and AI and machine learning to really allow them to respond to this pandemic a lot more swiftly than other companies have been. When you think about all the data they've been able to collect just from people buying stuff on Amazon.
Ian: [00:08:19] Yeah... How do you feel about that? I sometimes go back and forth on what my thoughts are in terms of how much data they collect.
Scott : [00:08:28] If it makes my life easier, I'm like big deal.
Ian: [00:08:32] Yeah, That's right.
Scott : [00:08:34] I really don't have much to hide. It's when it starts getting a little creepy and invasive, like on Facebook, that's when it bothers me a little bit more. But, you know, if I'm purchasing something and they are trying to make the user experience better then I have no problem with that.
Ian: [00:08:54] Which is what makes them so successful, especially at this time. Right.
Scott : [00:08:57] Yep, yep. So what do you think about the current retail business trends? There was a piece I read in Fortune called Misery at the Mall. And as you would expect, the winners lately have been Amazon, Microsoft, Apple. But there was one surprising company in there. Do you have a guess as to who it might be?
Ian: [00:09:24] Those three are all electronic facing. Best Buy, I guess. I don't know.
Scott : [00:09:29] No, but they've actually done OK. They weren't in this report, but it was actually Lululemon. Surprising.
Ian: [00:09:37] Yes, it's e-commerce. I mean, if you're able to drive home, that's what's going to keep you afloat during these tough times.
Scott : [00:09:46] Yep. And some of the losers were Gap, Nordstrom's, Macy's and Chicos all down about 50 percent or more on their revenue.
Ian: [00:09:58] Exactly! Again, furthering our point. People aren't going shopping for clothes on the weekends. I mean its just not happening.
Scott : [00:10:07] Nordstrom's has a pretty strong online presence. I was a little bit surprised to see them in there. Macy's, Gap. I mean, Gap, geez, they are not even paying their rent.
Ian: [00:10:17] So I think there are so many things that are particular... at least for me. I speak from personal life, I can't shop for clothes online. I have to go in-store.
Scott : [00:10:30] That's fair. Yeah, I know some things I get online. But, you know, my father in law is one of those that he has to go in person to get something.
Ian: [00:10:39] So if enough people feel that way, you know it's an issue.
Scott [00:10:43]: Yeah. But, you know the biggest surprises, I think, are the failures, where the ones that went bankrupt -- Neiman Marcus and J. Crew. As somebody who shops at J.Crew, I was a little bit disappointed to see that one.
Ian: [00:10:58] Yeah, yeah. There are certain names that you're more surprised than by others. J.Crew is definitely one of them to be more surprised with.
Scott : [00:11:04] But again, it goes back to this e-commerce thing. So I think when you're looking at stocks and the people that are the DIYers, they gotta look to the companies that are doing more of the online retail model and keeping the retail center side of it a little bit more bare-bones.
Ian: [00:11:29] There could be some opportunities down the road from a value perspective if any of these companies have enough cash flow in and cash on the sidelines to weather the storm.
Scott : [00:11:42] Yeah, T.J. Max comes to mind for me. So moving on to our next point, something that I think has been kind of coming up lately, as you look at what the markets have been doing is investor envy. Do you have any thoughts on, you know, people looking at the benchmark as a way to measure their success? Is there any fallacy in that?
Ian: [00:12:14] There's a lot of things you can poke holes at here. The one that really gets me is, you know, the majority of your index funds aren't going to be the index because there are certain fees, there are trading aspects. They are just a whole plethora of things.
But they're also probably the closest thing to the index because they're their index funds at the end of the day. But they're always going to be below the index. They are never gonna be market beaters. Now you start to see some smart beta ETFs that can add a little bit here and there.
But even then, oftentimes you'll see you'll find those not performing too what some backtests might suggest.
What do you think?
Scott : [00:13:03] So what I think really is going on is the financial services industry is trying to create all these benchmarks to some degree to get people to move their money around because they are feeling the envy of well, I'm not beating the benchmark.
I use this analogy... If you tell somebody they made 12 percent and if you just said that, they would be very happy. But if you tell them everybody else made 14 percent, well they're going to be pretty upset. So that's sort of what's going on with these benchmarks.
It's kind of creating this fallacy that you should be beating it, when really you should be more focused as an investor on what your goals or objectives are and the downside risks and minimizing those sort of factors, especially as you're nearing retirement.
Or needing money for paying for college. So capital preservation is certainly a part of the equation. And if you're in that mode of capital preservation, it's going to be less than the benchmark. But if it's a return that is sustainable and able to help you meet your goals and objectives, who cares?
Ian: [00:14:19] Right and that's the nice thing about those indices too. There's that diversification, but you also get a certain level of predictability because over the long-haul you know how these indices will trend in the long term. Better more so than some one-off investments.
Scott : [00:14:39] Yeah, I mean, they're nice to have as a reference point, but that's it. So our last point here today is about the current college crisis. I watched the video on Anderson Cooper. He had interviewed I can't remember the guy's name, but I know you watch the video too. What were your thoughts on what they deemed as a college crisis? And what is that college crisis right now?
Ian: [00:15:02] Yeah, I wrote an article on this on our blog and it kind of speaks to it a bit more. We'll link it in the notes. But just so much stuff was happening before all the pandemic in terms of college and there are a lot of colleges on the bottom end that we're getting squeezed. They were struggling to find talent enough to pay the bills because the smaller schools really do rely on butts in the seats really.
And now that people are raising the question of does it make sense to actually pay such a high cost for college? Those colleges are really hurting. So that is where the college crisis arises.
Scott : [00:15:49] Yeah, well, if you're going to be forced to take classes online. Like why should you be paying full sticker price?
Ian: [00:15:56] That's the question everyone's asking. And it's causing some smaller colleges, I think, to scramble.
Even some of the bigger colleges. When you look at some of the losses that these schools have and it is jaw-dropping. I think I saw in Michigan had one estimate of losing a billion dollars.
Scott : [00:16:15] Michigan?
Ian: [00:16:17] Yeah, Michigan University.
Scott : [00:16:19] Well as an Ohio State fan that's OK by me. No, I don't wish that on my worst enemy. And, you know, I think we're certainly in an interesting period of time for colleges. But they're going to have to adapt. They're going to have to start thinking about these places not feeling like a resort all the time.
Ian: [00:16:50] Colleges are going to come out of this looking a little bit different just from an experience standpoint. If nothing else, they're going to have to think on their feet for once. You know, they've had the luxury of being able to bump prices above and beyond everyone else for the last 20, 30, 50 years. This is the first time that they're going to get a little pushback.
Scott : [00:17:10] Yeah, that's nice.
Ian: [00:17:11] Yeah, a little refreshing.
Scott : [00:17:15] Well, thank you for tuning in today. This wraps up our latest episode of Dude Where's My Money? Stay tuned for future content.
Ian: [00:17:22] Thanks, guys.