In this Jarvis Weekly Update, Brian Dress, CFA (Director of Research at Left Brain) and CEO/CIO Nolan Langford discuss the market fallout from the Federal Reserve’s 0.75 % rate hike – the largest single‑meeting increase since 1994. They note that all three major U.S. equity indexes fell sharply (S&P ‑8.7 %, Nasdaq ‑9.4 %, Russell ‑10.9 %) and that the rally that typically follows a Fed announcement quickly evaporated. The conversation then moves to two major knock‑on effects: a 30 % weekly plunge in Bitcoin and a rise in 30‑year mortgage rates above 6 %, both of which could trigger broader portfolio stress. The hosts shift to a more positive outlook by highlighting insurance stocks as a potentially attractive sector in a high‑rate environment. They explain that insurers collect non‑discretionary premiums, invest the float in fixed‑income, enjoy pricing power, and are less exposed to credit losses than banks, with typical valuation multiples of 10‑12 × earnings and dividend yields of 2‑3 %. Finally, they assess whether the market has reached a capitulation point, concluding that panic‑selling has not yet materialized and that investors should re‑evaluate positions, looking for quality companies that may benefit from the current volatility. The episode also promotes new subscriber reports on a high‑dividend tax‑prep stock and a premier insurance business, and announces the return of the Jarvis newsletter.
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Does market weakness make you want to throw up your hands? We hope to provide you with some rational market analysis in 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, thank you, Brian.
Looking forward to it, and I'm really looking forward to this, uh, NBA Game 6 tonight. Maybe Golden State can close it out. We'll see.
Yeah, I'm torn on Golden State, but I love a Game 7 too.
So I guess, yes, we have to prolong this because we go into a sports drought for months after this.
So, all right, a quick preview for you all. Uh, of course, the Federal Reserve raised rates by 3/4 of a point this week, had a big impact throughout markets. Um, today's episode, we're going to cover 3 topics as we usually do. The first topic is going to be the knock-on effects that come from the Fed tightening. Topic 2 will be opportunities we're seeing in insurance. And then the third topic is going to be, have we reached the capitulation point? Before we get into our market update, uh, quick announcements. We got 2 new reports this week for subscribers. So if you're not a subscriber, check it out. We'll put the link down in the description below. But one of the reports is on a high dividend paying stock in the tax prep business. And the second is on one of the premier insurance businesses out there. So, uh, check that out. And also this week we have the Jarvis newsletters back again. It's an on week and make sure you sign up for the mailing list if you haven't already. So all the three indexes that we cover were down sharply this week. S&P was down around 8.7%. We had the NASDAQ down 9.4%. And then even worse than that was the Russell. That's the The small cap index down 10.9%. So a lot of carnage out there. Fed raised rates again by 3/4 of a percentage point this week. That's the most in a single meeting since 1994. Every single sector in the S&P fell, which you probably wouldn't be surprised to hear based on how weak the broader market was. So, Nolan, a lot to think about. What are your general thoughts this week?
I mean, I can't remember a time in the markets where the weakness has been not only so violent, but so broad-based. And I think that's the good news. And it's also the bad news. You know, no one has been spared. So you get the really gems, the really good businesses that are doing well, their shares have been punished just as much as the companies that, let's say, they should be punished. But yes, breathtaking. As you were talking about those numbers on the indexes this week and how much they were down, I was Yeah, it was sort of taken aback.
It's almost like a Lehman moment, um, in the markets. So, uh, for those of you who have been around since 2008— anyway, we'll jump right into topic 1. So topic 1, of course, the big news this week was again the Federal Reserve and their tightening. So we want to talk not necessarily about the Federal Reserve and interest rates, but more about the knock-on effects that we're seeing in the markets. I think that's more germane to a lot of folks out there who are trying to invest their money. First of all, the market rallied in the immediate aftermath. That's the second time in a row that we've had the Fed announcement and a sharp market rally, but gave it back right away. Another big story this week was Bitcoin and cryptos. Bitcoin's down more than 30% in a week. Again, very breathtaking number there. Obviously, that's terrible if you're invested in Bitcoin, but also we do think there's some potential contagion effects. As Bitcoin has become a little bit more mainstream over the last few years. And then finally, I wanted to mention mortgage rates are now over 6% for the 30-year fixed mortgage. You know, we were kind of in the 3% range for a number of months there about a year ago, and it's really steadily crept up, but really an acceleration in rates over the last couple of months. So Nolan, what are your, your thoughts after the Fed meeting? Especially in the aftermath, uh, with some of these knock-on effects that we've mentioned?
Yeah, the two big ones that you mentioned, well, all three are big, but the last two I think are doozies. The first one is mortgage rates. You know, for so long we've seen this cascading down effect with interest rates and mortgage rates, which have made homeownership a lot more affordable for a lot of people. And we've seen multiple rounds of refinancing where you can take cash out or just lower your more your mortgage rate, and now you have extra disposable cash that you can do something with. And that's been a stimulative for the economy. That's gone away. And I think what's more worrisome is, you know, rents have risen. We've seen that over the last couple of years. A lot of these people, you know, it forces them to take a look at homeownership. You might as well buy than continue to pay higher rents. But now if you look at a mortgage rate, it's 6%, you know, affordability really comes into play. You The good news is everybody that has a mortgage that locked in a low rate, I think you can forget about refinancing those rates lower probably for forever. The other one, the Bitcoin thing really worries me. It worries me a lot. It turns out the rails it was built on and the story or the narrative is changing. It was supposed to be this anti-fiat currency, this anti-digital gold. It's supposed to be non-correlated to other investments, and you would put your money in it because it doesn't respond to the same stimulus that other assets do. All of that has been debunked. And when you put it all together, it's like, OK, well, what is it? I can't really spend it and buy things. I really need somebody else to pay me more money for it. And now you've gotten the opposite of that. People are paying less. And I worry, is there a natural bottom? I'm not necessarily worried about the price of it. But what I am concerned about is if things don't work out, there's been so much energy, effort, and resources built around Bitcoin. If it goes kaplunk, you don't have a Federal Reserve or government backstopping it. There's going to be a lot of losses. They're going to be widespread. And you're right, that could have knock-on effects to other assets, like financial assets.
Sure. I guess what we're concerned about, Nolan, just to kind of echo what you're saying, is that folks who may be holding Bitcoin and holding losses in their portfolio might be catalyzed to do some more selling of other assets, could create a cascading effect. Certainly not predicting it, but that's something we're keeping an eye on. So let's talk about something more positive in topic 2. So topic 2 is simply a question: Insurance, is it an opportunity? Nolan, we early in the year, we were high on financials. We've been disappointed by financials. There are a number of reasons we liked financials because, of course, interest rates were going higher. That's supposed to work out well for banks as they borrow short and lend long. What we've noticed is, of course, they've fallen pretty rapidly in 2022. Recession expectations and the promise of possible credit losses has really weighed on banks. I'm going to throw up a chart here and it's going to show you the IAK, which is the insurance index plotted against the XLF, the financials index. As you can see, insurance has done a lot better than financials. So just a couple of words about insurance. It's a non-discretionary expense in a lot of cases, but it has the same— you know, these insurance companies take in premiums and they're able to invest those premiums in fixed income instruments. They can take advantage of higher interest rates just like financials and banks can, but they don't have that same exposure to credit losses. So that's something that makes it a little more attractive as a as an investment from our point of view. Nolan, tell us a little bit more about your thoughts on insurance, and is this one place that you see opportunity?
[Speaker:NOLAN] We do like it. It is an area of interest. And then for those subscribers or prospective subscribers, we have written up over the last several weeks, several of these insurance companies that look very, very attractive. One came out just this week, which is the largest property and casualty insurance company in the world. We like the shares. In general, insurance isn't very expensive for the businesses. You can get them at 10 to 12 times earnings, which is a reasonable number. You're generally getting a decent dividend yield. Generally, they pay in the area of 2 to 3% on dividend yields, which is attractive. In some cases, you get stock buybacks. But what we really like— think about your homeowner's insurance or your auto insurance. Or your business liability insurance. Those aren't things you would ever consider cutting, even if the prices go up, or I should say, when the prices go up. You just continue to pay. And so it's a very predictable purchase. On the other side of that, the operator of these insurance businesses, not only do they have pricing power and sort of a captive audience, they also can expand and grow into new lines. They can add new lines of insurance, do M&A and buy other companies. And then sometimes they have an underwriting profit. You know, generally an insurance company, all the dollars they take in in premium, they're going to end up, end up paying up in claims. But if they do a good job of underwriting, for every dollar they take in, they may only pay out 90 cents in claims. And so now you get a 10% earnings. And on top of that, that you mentioned, you have this float or this time between when they take in premiums and when they pay claims. That's generally how insurance companies have made their profits. Over the last couple of decades, the profits have been shrinking as interest rates went lower. So they weren't earning much on that float. But now that rates are going up, you know, every quarter or 50 basis point move in the Fed rates, for a lot of the big insurance companies, you're talking millions of dollars of increasing earnings. So yes, it's very attractive in this environment.
It's all really helpful. I think insurance is not the most exciting business out there. But you know what, this is the time for not the most exciting businesses. So, and I'd also point out Uncle Warren Buffett has always been high on insurance. He continues to be heavily invested in insurance. So if it's good enough for him, it's good enough for me. With that, we'll move on to topic 3. So topic 3, we ask a simple question, have we reached capitulation? So Nolan, if you've done any historical studying on the markets, basically we expect investors to be desperate, reach a desperation point before we get to a bottom. So I guess the question that we're trying to answer is, are we there yet? So on 5-year charts, I just wanted to point this out. If you look at stocks like Apple, Tesla, many other tech names, they're still up quite significantly over the last 5 years. So, you know, folks are still sitting on pretty sizable gains even though we've pulled back. We've talked about buy the dip for the last few years. That's been what investors have done every time these stocks have fallen a little bit. They've bought the dip. It has worked up until a point, and then about 6 months ago, it stopped working. I think a lot of investors are still doing that. But my point of view, sell the rips like we saw yesterday on Wednesday's session. Rallies aren't holding. Nolan, have we reached capitulation? And if not, what's it going to take to get there?
Man, that is a really good question. It's very profitable for those who can answer it correctly. I don't think we'll know in retrospect. There's certainly signs we can look at, the market action, the VIX. I think there'll be a lot in the popular press that'll point us in that direction. My sense is no, we're not at capitulation yet. I still think there's a lot of hope in the market. I still think that there's a lot of people that, you know, I think this Bitcoin thing really is a lot more related to stocks than what we'd like to admit. You know, there's that saying in the digital asset world, HODL, And people have gotten used to the volatility in Bitcoin and digital assets. And so when prices drop a lot, I don't think people flinch as much today as they did maybe a decade or a couple of decades or so ago. They just kind of get used to it and immune to it. And so I don't get the sense from the man on the street— there's concern, obviously, but I don't get the sense there's been alarm or panic. Or just widespread, widespread liquidation, at least not yet. Let's hope that we don't get to that before the market sort of starts to bottom and settle down.
It is true that over the years we've seen a lot of these bottoms, and there tends to be a cascading or just a, you know, a washout event. We certainly haven't seen that yet. As you mentioned, still quite a bit of hope out there. There's a lot of people asking us, oh, is this the time, this is the time, again and again. Um, so people haven't thrown in the towel on a lot of these names that made them a lot of money. Um, you know, that's something we've mentioned is, uh, you know, I think it's time for people to take out a blank sheet of paper on all their positions and really reassess whether they make sense in the current environment and kind of forget what they did, what these stocks did for them years ago. I think until that happens, it's going to be difficult for for us to find a bottom. So, um, agree with you, Nolan. I think it's still kind of undetermined. So that's the end. We're gonna, um, close it out there. Ask you to like and share the video if you, if you enjoyed it, and hit the subscribe button, make sure you get the video every time they come out. We are out every, uh, every Friday with these videos. And, uh, Nolan, any parting shots as we, uh, head into the weekend here?
Yeah, I just want to remind the, uh, the viewers there is reason for optimism. You know, we're working on this bounce-back list, and I mentioned that the worst the market environment is, the more violent it becomes on the downside, the more attractive securities actually show themselves. There are a lot of companies out that are doing very well. Revenues are growing, earnings are growing, competitive positions are getting better, but the stocks are getting cheaper. Those are attractive places to put money because when the, uh, the selling stops, those will be the ones that generally do very well. And, um, the other thing is in this market environment where there's been so much carnage on the downside, Things change very, very quickly. One note, one event, one word from the Fed, one inflation report that looks more benign, and you can get, um, you can get a lot of moves on the upside as well. So, um, reach out to us. We're here. Subscribe to LBIR, uh, and, and, um, we'd love to hear from you.
Thank you, Nolan. Thanks to everyone, and we'll see you again next week.
