How Could This Election Impact Your Portfolio? Jarvis Update October 25, 2024

We're at the peak of earnings, and if you haven't heard, there's an election on the horizon. How will these two key events impact your portfolio going into year-end and beyond? We answer this question and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research and Investment Advisor here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Thank you, Brian. It's good to be here. And the big question for you is, have you recovered from last week's marathon?

I'm back out running, man. So yeah, I have. And I'm thinking about another one.

So yes, I heard they're addictive.

Very much so. Very much so. A quick preview for you as we jump into today's program. There's plenty of news to cover this week, both economic and otherwise. We've got 3 topics for you this time. Number 1 is how should you be responding to the election noise? Number 2, our early read on earnings season. And number 3 is a bonus. We're going to talk about our income securities project. Before we jump into those topics, I wanted to do a little bit of a year-to-date review and we'll talk a little bit about what's been going on for the first 10 months of 2024. Year-to-date returns. The S&P is up around 22% as of today. Nasdaq up 24%. That's the tech-heavy index. And then the small-cap index Russell 2000 is up around 10%. So that's definitely a laggard. I also wanted to talk a little bit about interest rates because that's been a huge topic of conversation this year. The 10-year Treasury that started the year around 4.5%, now it's 4.2%, but it has certainly not been in a straight line there. We dropped to as low as 3.63% in September. So a huge move up in the last few weeks. And also the mortgage rates. That's something that we all look at as consumers. 30-year fixed mortgages, they started around 6.5% this year, as high as 7.2% in May, dropped to 6.1% in September, and we're back to 6.5%. So it's been kind of a wild ride in interest rates. Any thoughts on any of that as we look in toward 2025?

You know, it certainly puts to the test the old saying about bonds being safer and less volatile than stocks.

Talk a little bit about mortgage rates. So this has been a huge topic of conversation. Housing has been super tight and a lot of people have felt handcuffed to their home just based on the low interest rate they have on their mortgage. Talk a little bit about how that impacts things.

Yeah, we have a weird set of circumstances as it relates to housing. You're right. You know, in the last year or so, we've had the highs on mortgage rates at 7%. We've never gotten below 6%. So we haven't had a 5 handle on anything. And right now we're right in the middle at about 6.5. Housing has a really big impact on the economy. I think it's something like, you know, every dollar from a home sale transaction results in $5 of GDP spend, something like that. So it has a multiplier effect. Excuse me. And the fact that housing is still slow from a transaction standpoint, it's certainly an area of focus. You can see why on the campaign trail it's an area of focus. The way that it affects things, I think it does have something to do with consumer confidence. You know, we've heard through a lot of these earnings releases in these consumer-related businesses that the consumer is still struggling. We saw that from LVMH, which is the Louis Vuitton parent, Tractor Supply Company, which is a retailer of farm goods services, O'Reilly, the auto parts store, McDonald's. I mean, all over the place you heard the same thing— the consumer's hurting. And a sluggish housing market certainly can't help things, especially when interest rates are much higher, which almost acts as a tax, at least on housing.

Excellent analysis on that, Nolan. We'll jump right into our topics. So topic 1 is investing around the election. We've definitely had some increased volatility over the last few weeks in stocks, but especially so has been in the bond market. The, the 10-year Treasury, as we alluded to earlier, has gained about 2/3 of a percent in just a handful of weeks. So definitely some jitters around the election. What is your perspective on how to invest around the election? And then what sort of issues are at stake in terms of the election and what's going to get resolved here in the next couple of weeks?

Yeah, I think we're going to have— it's going to come down to it. You know, I would say it's exciting if it wasn't so important, but it looks like it's really, really close right now. And you have two polarizing figures. With two very different economic policies. I think you're going to be surprised either way. But I think if the— if Trump wins and gets in, you could see more volatility, at least in the short term. Brian's going to talk about the stats here in a while, but we know over the long term it really doesn't matter who wins. I think after we get a result, now we have certainty and then now people can make decisions and go on about life. And that's what we've seen in past election cycles.

Exactly. No, that's what we kind of wanted to note here today in terms of the election is, you know, no matter where you're— where you stand in the political spectrum, we want to make sure that we separate our political views from what we're doing from an investment point of view. Many dollars have been lost. Many billions of dollars have been lost investing along the lines of our political views. That's certainly something to keep in mind over the next few weeks. Also, something to keep in mind, as Nolan alluded to, is markets tend to do pretty well in the US regardless of who occupies the halls of power in Washington. I'm going to put a chart on the, on the screen here that shows the S&P 500 return every year since 1957. Just to end it, and for Republican presidents, obviously it's going to be red bars. For Democratic presidents, we're talking about blue bars. We just want to show you kind of how the things tend to do pretty well either way. Since the mid-1950s, under Republicans, the median annual return in the S&P 500 is 9.9%. Under Democrats, it's around 12.9%. Either of those returns we'd be pretty happy with going forward. So we just wanted to kind of caution viewers again not to get too wrapped up into what the results of the election are from an investment point of view. Nolan, how do you react to the historical return set as it relates to the political situation? And then how can an investor use this information to help them make the best portfolio decisions for, for them and their families?

So my reaction, it surprised me when I saw the data. I thought it would be much closer as far as the Democrat, the returns under a Democrat and returns under Republican. I thought it would be more neck and neck. And if you told me, you know, there was one that had about a 3 percentage point lead, I would have guessed it was the Republicans. So it shows you how much I know in my prognostication in politics. And I would say to investors, you should almost ignore that data. It should give you heart that no matter who wins, historically returns have been positive. And I think as an investor, that's all you care about. And so if you have cash to invest, I think stick to the plan. I would not let the— this upcoming election dissuade me from taking advantage of any opportunities. Especially those in the publicly traded markets. So if we, if we've witnessed a lot over the last 5 years, things change very, very quickly. I would almost say rapidly. Trying to time things is really, really difficult.

It's interesting what you said, Nolan, there. It just draws the contrast between correlation and causation, right? There is a correlation between the stock market does well under which type of administration. But that doesn't necessarily imply there's a causation there. There are a lot of different factors at play, not just who occupies the White House. So we'll put that topic to bed for this week and we'll move on to topic 2. So topic 2 is earnings season now in full swing. This is an area where we're on a little bit more solid ground, Nolan, um, from our point of view. We love earnings season as a way to take a barometer of where the market and the economy stands. This week we've had some bombshell earnings from some really large tech firms. We've got Netflix, of course, the leader in streaming, NFLX. We've got ServiceNow. This is a leader in, uh, AI— I, I'm sorry, a leader in IT software in the cloud computing space. And then of course we've got Tesla, TSLA. Everyone knows the leader in electric vehicles there. Any reaction to those three major earnings in tech this week, Nolan?

They were all really good earnings and they were well received by the market. I think it's a positive sign if we're looking for any. I think the Tesla earnings report points to more, uh, bullish animal spirits in the market. It was not a flawless report by any stretch of the imagination, but the way the market received it, sending the stock up— last I looked, it was up 22% or something on the day, which takes it into positive territory on the year-to-date. I think that's a good sign. That's just saying that You know, investors are forgiving and they will pay again for growth or even opportunities for growth. I think that's a good backdrop.

Definitely. As growth managers, we take heart in those 3 positive earnings reports. There's a lot of other earnings coming out in the economy. I wanted to talk about one specific one that was UPS came out this, this is Thursday, the 24th of October. So we want to put a timestamp on things. It came out with, with a report stating they had significant profit and sales growth. What are your takeaways from that for the broader economy, Nolan, with UPS?

I mean, they're still relevant, UPS and FedEx, but there are so many more competitors now to their business that I don't know we can get the exact read on the economy that we can, for example, with the railroads or something with no competition. But I think that's a good sign that things are better. I just know that between UPS and FedEx, their results are very, very lumpy. You know, you have double-digit moves per quarter and these old industrial stocks, you don't expect that from— hopefully this is a continuing trend with UPS. But we've seen good quarters be replaced by not so good quarters in the past. Let's see if they can continue. I would like to hear how they're doing versus Amazon. You know, Amazon's competing a lot with FedEx and UPS now with their own delivery, and I know this is going to make a, a big difference for both of them. If nothing else, they're going to have to invest to compete. So be interesting to see how that plays out.

Okay, Nolan, and there were two other interesting reports this week I wanted to mention, and these are from some throwback companies that used to be absolute behemoths and then this year have actually had really, really strong years. That's GE, General Electric, and then we've got IBM. Nolan, both of those had pretty solid reports from the qualitative standpoint, but the market didn't respond so positively. Any thoughts on GE and IBM?

Talk about a blast from the past. And if anybody's watching this video that haven't heard of either company, that's— you're really making me feel old. But both of these stock reactions and stock movements recently are related to M&A, mergers and acquisitions. And that's something we haven't talked a lot about with our clients on these shows where we talk to viewers, but we should, because this is a very profitable space to invest. Yes, these companies going through change. In the case of GE, it split itself into 3. It had the healthcare division, GE Healthcare, which trades separately. GEHC is the ticker. Then they had their energy and wind and alternatives business spun off into a business, GE Vernova. GEV is the ticker on that one. And then the third business, which is what we've all historically known as GE, is now a pure-play aviation business. And they make pretty much all the jet engines from any airline you fly in. And that business is growing. It's growing double digits. I think it's been less than 2 years since the spinoff. So Wall Street's just getting used to the financials and it's been rewarded with a higher multiple. So that's GE. IBM has done the opposite. Instead of breaking up, it's actually started to buy growth. And about 5 years ago, I bought a software company called Red Hat. And a lot of you from the '90s tech boom will, will know that name. They do the Linux software and the open source software. IBM, which is kind of had this dying, couple dying divisions, invested in growth and bought Red Hat. And over the last 5 years, Red Hat's business has doubled. And that software business is high margins and is growing at double digits. That is what brought IBM stock back. So two old stodgy stocks with a long-dated history reinventing themselves for the 2025 timeframe. Interesting.

Yeah, both reinvigorated, both pretty exciting stories that we've been following closely over the last year. With that, let's move to topic 3. So topic 3 is our Income Securities Closed-End Fund project. I'm going to kick it over to Nolan and let him start us off on topic 3.

So as you guys know, we always like to say we do 3 things: get growth, income, and taxes. And income is one that we've been talking about for a couple of decades. As we have more and more clients that retire, they need income, predictable income from their portfolio to replace their paycheck. And so we're always on the lookout for sources of fixed income. Historically, we've done that in a high-yield space in the past, but we kicked off a new project. High yields, you know, interest rates are down, Fed cut the, uh, cut cut interest rates. And so now interest rates are, are way down, and so are bond yields. So even in the high yield space, no matter how far we go out in duration or time frame to maturity, the yields are still 6% or so. We think it's okay in this environment, but not wonderful. So a few weeks ago, we started on a search. I asked Brian, our director of research, to evaluate a new crop of what we're calling income securities that will help us replace the income that we'll need to support our lifestyle. And I'll turn it over to Brian and talk about what he found.

Excellent, Nolan. So I have been doing a lot of work on an asset class we haven't talked about much here, which are closed-end funds. So mutual funds, we all have probably heard about mutual funds. Many mutual funds are open-ended, meaning there is an infinite number of potential shares. So if you buy an open-ended mutual fund, they issue new shares. Closed-end funds have a finite number of shares, and so they act a little bit differently. There's what's called net asset value, NAV, and sometimes the share, which is the value of the holdings in the fund, sometimes the shares trade above that NAV, sometimes they trade below that NAV, and they create a lot of opportunities. So we've been looking at a lot of these closed-end funds, many of which have really nice income streams associated with them. Out of this project, we've looked at a dozen or so, so far. One that really stood out for us was the DoubleLine Income Solutions Fund. That's DSL. The ticker is DSL. That's a closed-end bond fund managed by Jeffrey Gundlach. He's been called the Bond King. There are probably lots of bond kings, but he's one of them out there. But what really interested us about this one, it has a monthly distribution and it's got about an annual yield around 13%. So that's really attractive, especially as interest rates start to fall. And in an income vehicle generating something close to 13%, they do that with leverage. And some of that 13% is actually tax advantaged because it's actually what's called a return of capital. So part of this is actually taxed at your capital gains rate as well. So some tax advantage there as well. This fund holds high-yield bonds from all around the world. And it's consistently outperformed what's called the Bloomberg Global Aggregate Index. So that's an index of bonds globally that tracks, you know, kind of what the global bond market looks like. We looked at this over the last 5 years and it's generally outperformed that global aggregate index. And so we feel pretty good about this one going forward. Again, Jeffrey Gundlach, really well-known bond manager, has done quite well over the last few years. And also that 13% return really stands out for us. Nolan, any thoughts on DSL?

Yes. I had a question for you because this is a bond fund. What's your— what do you anticipate? How will it react if rates go down from here?

As interest rates go down, this should impact DSL positively. Again, the relationship between rates and bond prices is such that when rates go down, bond prices tend to go higher. And there's also a little bit of leverage in this one as well. So not going to be a 1-to-1 ratio. As interest rates go down, these bond prices tend to go up in a little bit more than a 1-to-1 ratio. So you're going to get a little bit of an extra kicker. So you do need to be careful when rates— when the rate cycle turns back around and interest rates start to go back up, that might be a time to move away from this one. But in a falling interest rate world, we think this one could be really positive for your portfolio.

And just to remind everybody, this one trades on the, on the stock exchange. So you can buy this one as a 3-symbol ticker, just like a stock does. You can buy it intraday. And also it's very unique in that most of these funds typically would pay income quarterly. You know, we buy fixed income or bonds. The bond payouts twice a year. But generally with these income funds, it's quarterly. That's the most common, just like with stock dividends. This one's unique because it pays it monthly. There's a few other ones that pay monthly and a few stocks, but it's very, very rare. So that's another thing that's unique about this one. So nice work on this, Brian. One last thing, how big is the fund itself?

The size of this fund is around $1.7 billion, so pretty sizable fund here.

Yeah, that's what you want to look for in these closed-end funds because of the premium and the discount. You know, you want to make sure it's something that from a volume standpoint, it's easy to get in and easy to get out from a liquidity and a spread standpoint. So typically the larger funds, those over $1 billion, you're going to get a lot more liquidity. You should get a lot narrower spreads and just makes the, you know, makes it much easier to get in and get out. That's another thing that's, I think, a positive about this fund is just the size of it as well as the diversification of the credit offerings. You know, a lot of cases with these bond funds, they all do something different. In this case, the other thing that I think is unique and valuable is this fund, the DoubleLine Fund, gets you access into bonds that you typically wouldn't be able to buy if you're a retail investor yourself.

Excellent. And a lot of good characteristics to DSL. Again, if you're interested in the types of closed-end funds that we're doing research on, we're happy to have a conversation with you and see if this might be suitable for your portfolio going forward. With that being said, if you've gotten this far, we would ask you to like and share the video. It does help others find it and helps us out as we try to grow this channel and subscribe and hit the bell for notifications. That way you find out every time we're out with these videos on a biweekly basis. Nolan, any final thoughts as we close out this week's video?

Yes, this is awesome. We're in the fourth quarter headed to Christmas. It's earnings season. Football's midseason and basketball just tipped off. This is awesome right now.

I thought you might say that, Nolan. It's good we're back in basketball. It seems too early, but I'll take it. With that said, we'll close out for the week and we'll see you on the other side of the election. Have a great, have a great rest of your week.