How Should You Respond to this Market Correction? Jarvis® Update May 3, 2024

It's earnings season and results have been less than stellar. How should investors respond to this market correction? We answer that question and much more on this week's Jarvis Update. I'm your host, Brian Dress, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Fresh off the draft. Nolan Langford.

Here I am.

I'm here.

And we're in the midst of the NBA playoffs. I must say, I'm playing a little bit injured with a bit of flu here. So it reminds me of the Michael Jordan flu game since we're here in Chicago. But we'll press on. Before we jump into the meat of the program, we've got a couple of announcements for clients. The first is we've got Nolan's Notes. That's our annual write-up on the market, our look back at 2023 and our look forward to 2024. That is up on the website, also in the mail for our clients and also an email. So check that out if you want to get a jump start on 2024. Nolan's Notes is there for you. And also another announcement for clients. That's the June 1 event at Morton's. That's our client appreciation event. We're calling it our 2024 Investment Opportunities and Outlook event. So we'd love to have you there. Invite should be in the mail, so RSVP to us as soon as you possibly can so we can get an accurate count for that event. Looking forward to seeing you. With that said, let's jump into a quick preview. Major market indices have lost about 5% from their highs about a month ago. We've got two topics for you as usual. The first is two major takeaways from earnings, and then the second topic we've got for you is practical responses to a market correction. So markets are up actually slightly this week as we digest earnings, the Federal Reserve announcement, and 10-year rates being above 4.5%. That being said, things are looking a little bit up. S&P 500 up about 0.2%, NASDAQ up about 1.4%. And this is also great to see small-cap Russell 2000 up 1.7%. So a little bit of risk on in the market. Very good to see that. Nolan, we're about halfway through earnings and we've heard from many of the big boys. We'll get into that in our first topic. Do you have any opening thoughts about the market action before we jump right into those two topics?

You're right. There's a lot happening. Of course, we always watch the micro. That is how companies are reporting earnings. What's happening on the day-to-day standpoint? Is it showing up in revenues? Is it showing up in earnings? And how optimistic are CEOs, and what are their plans for the future? And on that score, I would say earnings results kind of, eh, this isn't a dynamite earnings season where you're seeing a lot of companies blow the doors off of earnings and then guide higher, that business is better than expected. Most what we're seeing is kind of the inline sort of thing. So the numbers that everybody's been modeling has come to fruition. And then we've seen a couple that haven't done very well and the share prices reflect that.

We're looking forward to seeing what he looks like on the transcript. I don't know if that's a technical market term or not. Let's jump right into our topics. Topic 1, earnings season. Things are changing a little bit. We've now heard from most of the Magnificent Seven. The only one we haven't heard from is Nvidia. From there, in terms of their earnings for the last quarter, we've had mixed results. Couple highlights we've had are Amazon and Google. They did pretty well and the stock reactions were pretty strong, but a few others have been less than stellar. We heard from Meta, pretty negative reaction from the stock price if it wasn't really an issue from the business point of view. And then Tesla, of course, they reported a pretty unappealing quarter. We also heard from AMD, Advanced Micro Devices, not such great news there. Nolan, do you have any thoughts on the Magnificent Seven that we've heard from? Or anything else in tech that we've seen in the last few weeks?

We're starting to get some bifurcation. I know we were talking as, as a firm in particular last year, and we were looking at the Magnificent Seven, one of the Magnificent Seven, the not so magnificent number one, which was Apple. We were all kind of shaking our head because it was a down revenue year last year, and yet the share price was still up. So now you're starting to see a little bifurcation. Some, it's not that interest rates or whatever forces were moving the market in 2023. That drove all the shares up. Now we're starting to disentangle the kind of the wheat from the chaff. So that really is what has my attention. The market's starting to move based off fundamentals and it's starting to be a market of stocks. Earlier you had mentioned Meta, the old Facebook earnings. The earnings reaction was, was down negatively, but that was a really good report. That is a drop we would definitely buy. Revenues up over 27% year to date. Market was disappointed because they spent— said they were going to spend an extra $3 to $5 billion on AI infrastructure, building out the future. And their investments are very profitable. As long-term shareholders, we kind of applaud that sort of action. It's another plug for CEO founders.

Excellent, Nolan. Good to hear that news that specifically that things are starting to respond more, a little bit more to fundamentals. We've got very worrying signs, however, coming out of a number of consumer-focused companies. So I'm going to name a few. First of all, we didn't mention Tesla. We've got McDonald's. Etsy came out this morning with a pretty awful stock reaction. We heard from CVS and Starbucks, which was especially awful. And Nolan, you and I were commenting, we saw one of the biggest eviscerations of a CEO we ever saw on CNBC yesterday of the CEO of Starbucks. So a lot of interesting stuff going on in consumer. What are your takeaways from the results we heard from consumer-facing businesses and what can we do with that analysis?

You know, I'm concerned about the consumer. I know we were talking about this. I don't remember if we talked about this on air, but certainly off air we did. Mortgage rates are up. Maybe you can still afford to buy a new home, but you're certainly not going to feel good about trading in your 3 or 4% loan for, for one that's 7%. And then after you get the new home, you go to car shopping and car prices are crazy. It's like they're mini homes or something. Car prices are up, financing the cars are up, car loans are about 7%. And then you go to the grocery store and it goes on and on and on. So that inflation that we've been talking about the last 2 to 3 years, it's a cumulative inflation. Even though we're saying it's— we want it to be down to 3% on the back of 8 or 9, it's a stack, right? So I think the consumer is starting to feel pinched and it's starting to show up in, in the data.

Nolan, thank you for that. Let's move into topic 2. So topic 2 is responding to a market correction. Nolan, we did want to give some context. Markets have been slightly weak over the last month or so. Looking back, zooming out back to the October 2023 lows, the S&P 500 is actually up 22% and the Nasdaq Composite is up 26%. So in the, in the broader context of a little over 6 months in the market, things are looking up. With that being said, major indices are down about 5% over the last about a month or so. Looked at the semiconductor index, that's really been driving a lot of the growth in the market. SMH, that's down around 10% in that same timeframe. And that, the backdrop for that is interest rates have been creeping higher. Nolan, interest rates do seem to be having some impact on the situation here. What opportunities does that create for investors in stocks, especially as we look at stocks that are falling just basically due to a lower valuation?

I think that is the opportunity, Brian. Typically when stocks fall for non-economic reasons, that's typically an opportunity for investors. And so we definitely have our sleeves rolled up, looking for a lot of these opportunities over the last 30 to 60 days for some of these companies that have, the share prices have fallen a lot, basically based off of interest rates, but not because of business fundamentals have deteriorated. So I do think there's an opportunity here. And ever from time to time, we get some pullbacks. Pullbacks generally aren't evenly distributed. Some companies don't go down very much and others go down a lot. Depending on circumstances, but it definitely gives you an opportunity if some cash is available or to rotate into some of these shares that are down for non-sound reasons temporarily. And then when you see a recovery, you have an opportunity to pick up some steam on the upside.

Thank you for that, Nolan. It really brings to mind the fact that, you know, a lot of more amateur investors, they kind of look at stock price and stock price movements as the be-all and end-all, whereas like you said, A lot of times stock prices fall for other reasons than for what's going on inside of the business. And so when we see those type of things go on, when we see markets pull back like we have seen in the last few weeks, like Nolan said, we're looking at our list of stocks that have fallen 15%, 20%, comparing that to their earnings reports that have come out in this particular earnings season. And then you're going to find a few gems in that. So that's kind of the process that we're looking for and certainly would, would caution investors not to throw the baby out with the bathwater because the stock is down 10 or 15%, not related to what's going on inside of the business. I did want to pivot slightly here to an area we've been covering over the last few months, Nolan, and that's income securities. First of all, I just want you to give us a brief definition of how we're defining income securities.

Generally with securities, or these are publicly traded securities, we're going to just call them stocks. Typically we say we're looking for stocks that can double over some period of time, 3 to 5 years. They're going to have some revenue growth, some earnings growth, and hopefully people will pay more for the business in the future. That's our companies that most of their revenue, they generally reinvest it in the business, which is how they grow. It's fuel for growing more revenues and sales in the future. But there's another group of businesses that aren't really managing their business so much for hypergrowth in the future. They're more managing them for cash flows today. So a lot of these businesses are more mature. And maybe there's not as much need for reinvesting in the business. But then there's the other group of securities that pay out most of their returns in the form of current income, and these are dividends. Generally, you don't get as much volatility because you're getting rewarded today from cash in your pocket today and not necessarily from promised growth in the future.

Well, and thank you for clearing that up for everyone. We do have a list of more than 20 income securities and growing in our Income Model Portfolio. Nolan, we do have our Investment Ideas service that's been relaunched. It's our 5 Model Portfolios, income being one of those. And if you're interested in learning a little bit more about how you can get access to our list of income securities, take a look at the link on the screen, follow that, and you can get some information on that. That being said, Nolan, we do like to talk, of course, in the practicalities of things. Do you have a specific income security that you've been looking at over the last few weeks that looks interesting to you today?

The security that I want to talk about is a bank loan fund that trades in the market. Think about it very roughly, sort of like a money market. It's not exactly like a money market, but what it is is a pool of bank loans that then get put into an investment in exchange-traded fund. The security actually collects interest from the loan payments that are made by the bank, and then that gets paid out to shareholders in the form of a monthly dividend. The price of the security is very, very stable. It's not a money market where it's always $1, But if you take a look at the historic price pattern, a lot of stability to it. The yield right now is about a little over 8%. I believe it's 8.4% at today's pricing. What I like is it pays the yield monthly. And I also like that, you know, if you take a look at the 1, 3, 5, and 10-year returns and you compare it to other sort of bond or other income type securities, the total returns stack up very favorably. One last thing I'll say, Brian, in this current environment that we're in, I know interest rates are up and you can get, you know, 4.5% or maybe even 5% on a short-term CD or on money markets. This is a really good alternative. You do have liquidity. It's in a brokerage account, so you have daily liquidity. You have a high current yield, and then you also have an opportunity for capital appreciation. Should rates go down and decrease, you know, these are underlying loan packages that are owned in the securities. So you do have some chance for capital appreciation. But again, that yield, that 8.4%, will be the majority of the return.

Thank you, Nolan. And I just wanted to state so everyone knows, this is called the Invesco Senior Loan ETF. The ticker is BKLN. We'll put a chart up on the screen just to show what Nolan had mentioned, the stability of the actual price. Most of the return that you're going to get from BKLN is going to be from those monthly dividend payments. So we'll close this topic out. Nolan, explain how this might fit into a portfolio and why we're looking at income securities in today's market.

Yeah, typically in order to get really good yield, you're generally going to have to tie your money up for a significant period of time in today's market. And this is a way for clients to kind of have one foot in and one foot out. I know a lot of clients have this money that's just sort of sitting in a bank or a money market or even a CD that they roll every few months. And there is no specific purpose where the money isn't sort of dedicated to a new home purchase or home remodel or car. It's just there indefinitely in case a client needs it. So I like the security for a client to actually hold until they actually need it. The return is a really good return at 8.4%. It pays it out monthly and there is daily liquidity. So if a client actually needed to get the cash back, they could. I'll just remind people, these ETFs, if you're doing it on your own, are sold by prospectus. So make sure you double-check the prospectus. And also clients of Left Brain Wealth Management do own this security in their account.

No, thank you for those disclaimers. Definitely something that people want to look at, both BKLN and then more broadly income securities. Given that we have higher interest rates, there are some great opportunities. If that's something you're interested in learning more about, get in touch with us. We're happy to have a conversation about where that might fit into where you— what you're trying to do with your portfolio and financial plan. With that being said, we'll thank everyone for being with us. We'd like to ask you to like and share the video if you found it useful. It does help other investors find it and helps us grow the channel and also subscribe and hit the bell for notifications. That way, you know, every time we're out with these videos and we're out every couple of weeks with these— Nolan, any final words before we close out today?

Well, we got Cinco de Mayo coming up. We have a great weekend of NBA basketball. And if you're like me, you probably are already doing a little fantasy football work on the upcoming season. But more importantly, it's earnings season. We got Apple as we record, and there are many other of our favorites that are coming up over the next couple of weeks. So this is our playoff season for earnings. So I'll leave you with that.

And I'll leave you with this. Hopefully your horse wins on Saturday. Thank you for being with us, and we'll see you again next time.