WEBVTT 1 00:00:04.320 --> 00:00:07.820 Mark, so good to see you. We are going to dive into the headlines today, talking 2 00:00:07.840 --> 00:00:11.520 about markets and geopolitics with the question: when will stocks 3 00:00:11.560 --> 00:00:15.430 recover? Rising tensions in Iran have pushed oil prices higher and 4 00:00:15.460 --> 00:00:17.690 created short-term volatility in the markets. 5 00:00:18.060 --> 00:00:21.480 Historically, however, geopolitical conflicts tend to have only a 6 00:00:21.560 --> 00:00:24.520 temporary impact on stocks. But to take a 7 00:00:24.560 --> 00:00:28.180 closer look at what we're seeing right now, this is the S&P 8 00:00:28.360 --> 00:00:32.341 500's one-month performance. We see a lot of red on the board 9 00:00:32.420 --> 00:00:35.960 here. So why do we tend to see stocks fall first when 10 00:00:36.040 --> 00:00:37.140 tensions rise? 11 00:00:38.040 --> 00:00:41.720 Well, one of the drawbacks of stocks is that they're fully liquid, but it's 12 00:00:41.800 --> 00:00:45.680 also one of the benefits of stocks and the stock market, 13 00:00:45.820 --> 00:00:49.760 which is it's fully liquid, it trades all day, five days a week, and 14 00:00:50.060 --> 00:00:53.980 so forth. So you have to price on the fly, and then you're competing with 15 00:00:54.040 --> 00:00:57.200 inflows, outflows, and so forth, and then the estimate of 16 00:00:57.220 --> 00:01:01.210 future profits. So there's often uncertainty in 17 00:01:01.240 --> 00:01:04.850 the markets, and then sometimes it heightens quickly, and others have 18 00:01:04.880 --> 00:01:08.780 to sell for a variety of reasons, and maybe that's overseas 19 00:01:08.800 --> 00:01:12.640 investors that have to sell and bring back dollars to their home 20 00:01:12.700 --> 00:01:16.540 front. And being the deepest, most liquid market, 21 00:01:16.740 --> 00:01:20.620 we will usually get, the US will usually get the brunt of that selling, not 22 00:01:20.640 --> 00:01:23.680 too dissimilar to what happened during COVID and the pandemic. 23 00:01:23.720 --> 00:01:26.720 There's a lot of international selling, for example, 24 00:01:27.160 --> 00:01:30.780 because most international investors have a heavy 25 00:01:30.860 --> 00:01:32.300 allocation to the US. 26 00:01:32.810 --> 00:01:33.090 Mm-hmm. 27 00:01:33.900 --> 00:01:37.600 And I know that you've been working overtime, taking a look at a lot of historical 28 00:01:37.620 --> 00:01:41.600 data, and you recently presented 20 charts in your April CIO 29 00:01:41.660 --> 00:01:44.800 notebook. So I picked five to maybe take a closer look at. 30 00:01:44.820 --> 00:01:48.420 And I wanted to start with, as I mentioned earlier, the oil price 31 00:01:48.540 --> 00:01:50.380 shock. What should we notice in this chart? 32 00:01:51.520 --> 00:01:55.340 Well, the oil price has moved from the low 60s to over $100 a 33 00:01:55.420 --> 00:01:59.160 barrel, and in magnitude, it looks very similar to the 2022 move 34 00:01:59.280 --> 00:02:03.040 when Russia invaded Ukraine. But you notice after that, after 35 00:02:03.300 --> 00:02:07.240 several months, it started to fade back lower. So we call this oil price shock. 36 00:02:07.960 --> 00:02:11.860 The actual oil is there, so it's not something that's 37 00:02:12.100 --> 00:02:14.300 having a problem with supply necessarily. 38 00:02:14.680 --> 00:02:14.690 Right. 39 00:02:14.720 --> 00:02:18.480 This is really just getting the oil to its destination and to the 40 00:02:18.520 --> 00:02:19.510 refiners. So there's-- 41 00:02:20.600 --> 00:02:24.140 What you hear on the news is the Strait of Hormuz is kind of closed. 42 00:02:24.620 --> 00:02:28.340 About 20% of global oil consumption flows 43 00:02:28.360 --> 00:02:32.160 through the Strait of Hormuz, which is a 20-mile-wide stretch, and 44 00:02:32.200 --> 00:02:35.579 really it's only two miles wide for the shipping lanes. 45 00:02:36.020 --> 00:02:39.760 So ships can stop moving through there because of fear of 46 00:02:40.120 --> 00:02:43.660 heightened safety issues and danger and so forth, 47 00:02:44.080 --> 00:02:46.880 but that's a very clear choke point. 48 00:02:46.910 --> 00:02:46.910 Right. 49 00:02:46.960 --> 00:02:50.430 I also want to mention that the US doesn't get really any 50 00:02:50.520 --> 00:02:53.260 oil that flows through the Strait of Hormuz. 51 00:02:53.420 --> 00:02:57.280 The destination is generally the Asia-Pacific region, and 52 00:02:57.300 --> 00:02:59.000 that's led by China for sure. 53 00:02:59.600 --> 00:03:03.020 Mm-hmm. All right, and next I'd like to talk through the 54 00:03:03.120 --> 00:03:06.280 US being the largest producer. 55 00:03:07.660 --> 00:03:11.340 Yeah, a lot has changed in the oil market and the geopolitical impact. 56 00:03:11.380 --> 00:03:15.140 You'd think that oil spiking would have a great impact on our economy, but not 57 00:03:15.200 --> 00:03:18.340 really. Over the last 10 to 15 years, the 58 00:03:18.840 --> 00:03:22.730 geopolitical landscape and the oil landscape has changed dramatically, 59 00:03:22.890 --> 00:03:26.840 where today, the US is the largest petroleum producer 60 00:03:26.880 --> 00:03:30.720 in the world. In fact, we're larger than Russia and Saudi Arabia 61 00:03:30.760 --> 00:03:31.300 combined. 62 00:03:31.630 --> 00:03:31.630 Mm. 63 00:03:31.640 --> 00:03:35.049 So there's really been a big shift, and we're somewhat immune from some of these 64 00:03:35.120 --> 00:03:38.940 impacts. In fact, on the margin, we might be 65 00:03:39.200 --> 00:03:42.720 kind of a net beneficiary with the rising prices because we are a net 66 00:03:43.040 --> 00:03:46.910 exporter of petroleum products. So that's a pretty interesting change that's really 67 00:03:46.960 --> 00:03:50.750 only happened in the last couple of years, and so the red line on 68 00:03:50.800 --> 00:03:54.700 this chart just shows that big jump in the last 10 to 15 years in terms of the 69 00:03:54.760 --> 00:03:55.720 US being that 70 00:03:56.540 --> 00:04:00.100 producer. And we still import some 71 00:04:00.280 --> 00:04:04.220 oil. Now, I said we're a net exporter, but we also import oil, 72 00:04:04.260 --> 00:04:06.840 and the reason for that is there are two types of crude oil. 73 00:04:06.920 --> 00:04:10.760 There's Brent or heavy crude oil, and then there's Light 74 00:04:10.900 --> 00:04:13.460 Sweet or West Texas Intermediate crude. 75 00:04:13.470 --> 00:04:17.231 That's what we produce in the US. Overseas or from 76 00:04:17.519 --> 00:04:20.880 other destinations that we import is the heavier or Brent crude. 77 00:04:20.899 --> 00:04:24.080 And the reason we do that is because we have somewhat of a mismatch between our 78 00:04:24.100 --> 00:04:27.040 refining capacity to turn that into gasoline- 79 00:04:27.050 --> 00:04:27.050 Mm 80 00:04:27.120 --> 00:04:31.040 ... and other fuels. And where most of our refining capacity 81 00:04:31.060 --> 00:04:34.540 is actually built to handle that heavy crude oil. 82 00:04:34.950 --> 00:04:38.280 And so we just have a little bit of a mismatch, so we do still import, but where we 83 00:04:38.360 --> 00:04:41.160 import from is not really hostile regions. 84 00:04:41.360 --> 00:04:45.200 The bulk of our imports come from Canada and Mexico, so well within the 85 00:04:45.260 --> 00:04:46.600 North America region. 86 00:04:47.280 --> 00:04:51.150 Okay. And let's circle back a little bit and talk more about geopolitical 87 00:04:51.280 --> 00:04:52.460 crisis events. 88 00:04:53.680 --> 00:04:57.640 Sure, and you asked that question, when do we think a recovery and so forth would 89 00:04:57.700 --> 00:05:01.550 happen? Well, this is a composite of 57 different geopolitical events, how the 90 00:05:01.700 --> 00:05:05.290 S&P 500 has performed. And for about 60 days, 91 00:05:05.740 --> 00:05:07.600 you have some volatility in the market. 92 00:05:07.660 --> 00:05:11.480 I think that's a very natural response of how the market would 93 00:05:11.580 --> 00:05:15.340 handle it with all the uncertainty and kind of the fog of war in this 94 00:05:15.640 --> 00:05:18.900 case. But then after that, you really have a 95 00:05:19.540 --> 00:05:22.900 decidedly bullish trend that comes out of these 96 00:05:22.980 --> 00:05:26.979 events. So after that uncertainty folds, maybe the worst case doesn't happen, and 97 00:05:27.000 --> 00:05:30.920 the market then can find its footing and move forward and move beyond the 98 00:05:31.520 --> 00:05:33.400 current present circumstances. 99 00:05:33.820 --> 00:05:37.300 Mm-hmm. Right. We often talk about those rallies that follow the troughs. 100 00:05:37.880 --> 00:05:41.140 And next, let's talk through the cash that is on the 101 00:05:41.320 --> 00:05:42.900 sidelines. What do we notice here? 102 00:05:43.996 --> 00:05:47.156 So there's been a big jump in cash on the sidelines. 103 00:05:47.196 --> 00:05:50.945 So between corporations and households, we have about 104 00:05:51.116 --> 00:05:55.056 6.7 trillion in essentially cash, checking accounts, savings accounts. 105 00:05:55.456 --> 00:05:58.486 Now unlike some that may say, "Is this going into the market?" That's not our 106 00:05:58.556 --> 00:06:02.326 position. The position is that this is allowing households and 107 00:06:02.436 --> 00:06:06.256 corporations really to weather uncertainty, 108 00:06:06.536 --> 00:06:10.436 whether it's employment conditions or whether it's a 109 00:06:10.496 --> 00:06:14.316 short-term bump up in prices, inflation, and was part of the reason 110 00:06:14.356 --> 00:06:18.276 why we really didn't see a recession coming out of 2022 when we had that 111 00:06:18.296 --> 00:06:20.876 big bump in inflation and higher prices. 112 00:06:20.916 --> 00:06:24.616 Well, the extra cash on the sidelines was actually dipped into a little bit, which 113 00:06:24.656 --> 00:06:28.176 is different than most cycles, to help support the consumer and consumer 114 00:06:28.316 --> 00:06:32.076 spending. And on the flip side, it's going to help corporations as they spend 115 00:06:32.176 --> 00:06:34.776 in CapEx and that trend continues. 116 00:06:34.806 --> 00:06:38.516 So capital expenditures, investing for the future to improve 117 00:06:38.536 --> 00:06:41.976 productivity and ultimately profits for those corporations. 118 00:06:42.036 --> 00:06:45.136 Mm-hmm. Okay. And then the last chart, let's talk through valuation, please. 119 00:06:46.396 --> 00:06:50.356 So there's been a lot of concern about elevated valuations in the market, 120 00:06:50.376 --> 00:06:51.426 and somewhat 121 00:06:52.396 --> 00:06:56.376 true. But what happens is stocks follow earnings, 122 00:06:56.756 --> 00:07:00.356 and ultimately earnings trend higher over time, and that's why 123 00:07:00.416 --> 00:07:04.236 stocks move higher over time. This chart shows the P/E ratio or the 124 00:07:04.276 --> 00:07:05.756 price to earnings ratio, 125 00:07:06.756 --> 00:07:10.716 and it's already come down off its high almost 19%, the 126 00:07:10.756 --> 00:07:13.686 circle down bottom right, it's come down 18.9%. 127 00:07:13.696 --> 00:07:17.216 So this isn't the price coming down, this is the price to earnings or the multiple 128 00:07:17.296 --> 00:07:21.196 coming down. And if you look back historically, going back with this 129 00:07:21.256 --> 00:07:25.136 chart, almost 20 years now, the average decline 130 00:07:25.316 --> 00:07:28.896 is about 18.9% in terms of valuation 131 00:07:28.956 --> 00:07:29.556 reduction. 132 00:07:29.956 --> 00:07:30.216 Mm-hmm. 133 00:07:30.556 --> 00:07:33.566 And the average time is about 115 days. 134 00:07:33.676 --> 00:07:35.516 Currently, we're about 48 days in. 135 00:07:35.636 --> 00:07:39.546 So from a valuation standpoint, we've already done some of the, and 136 00:07:39.576 --> 00:07:43.246 maybe a lot of the hard work. In other words, stocks don't necessarily have to come 137 00:07:43.256 --> 00:07:46.986 down too much further, given history, when it corrects, 138 00:07:47.156 --> 00:07:48.716 the valuation improves. 139 00:07:49.976 --> 00:07:53.145 And we just have a little bit extra time, I think, just to work through this 140 00:07:53.156 --> 00:07:57.096 period, which would line up with some of our indicators in our historical 141 00:07:57.136 --> 00:08:00.686 context that says, "Well, maybe we've done the work on the downside." Maybe there's 142 00:08:00.756 --> 00:08:04.696 a little bit more at some point if uncertainty picks up 143 00:08:04.736 --> 00:08:07.476 again or oil prices have a little bit of a snag. 144 00:08:08.236 --> 00:08:10.506 But we don't really have to do too much work on the downside. 145 00:08:10.536 --> 00:08:14.436 Now, we just may be in an era where we just need 146 00:08:14.456 --> 00:08:16.745 to give it a little bit more time to work itself out. 147 00:08:18.496 --> 00:08:21.906 Right. That being said, Mark, talking through, as you mentioned, the 148 00:08:21.936 --> 00:08:25.756 historical context really is important and can help us as we work 149 00:08:25.856 --> 00:08:29.555 through these stressful headlines. Mark, thank you so much for your time today. 150 00:08:30.096 --> 00:08:30.636 Thanks, Erin.