Markets Still Turbulent -- What Should Investors Do? Jarvis® Update September 30, 2022

Another turbulent week in markets. What's the best course of action for investors? We answer this question and much more on this week's Jarvis Update. I'm your host, Brian Druss, Director of Research here at Left Brain, joined as always by our CEO and Chief Investment Officer, Nolan Langford. Nolan, welcome to the program.

Hey, Brian, thanks a lot. Glad to be here. And before we get started, we certainly want to send our our thoughts and our good vibes to our fellow Floridians. It's been a tough week for them weather-wise, and with Hurricane Ian, uh, just wreaking devastation on Florida. From what we understand, it's going to be— it's going to go down as one of the highest-cost insured events in U.S. history. The estimates are over $600 billion. We haven't got totals yet on loss of life, but Our thoughts and hopes are with all the families that were devastated. We were spared in downtown Miami, but other parts of Florida weren't so lucky.

Yes, Nolan, our thoughts go out to those folks and also to the folks who are going to be facing that storm in a couple of days here in South Carolina. With that said, let's give everyone a quick preview of what we're going to talk about this week. First of all, topic one is going to be macroeconomic picture. We're going to talk about the Federal Reserve and its impact on markets. All over the globe. And then the second, we're going to talk about a topic that we haven't really talked about here before, but it's very important to investors, which is when to sell. We've got a lot of stocks that are falling rapidly, and I think a lot of investors are looking for answers on when to sell and whether to sell. So we're going to cover that for you. Before we get started, a couple of announcements. First of all, we do this show for the everyday investor. So if you have a 401(k) or an IRA, if you manage your own portfolio or if you work with an advisor, we'd love to help. We'd like to be a second opinion for you in a difficult market. And we also would like you to hear a little bit more about the opportunities we're seeing specifically in securities with a fixed end date and a fixed return. If you're interested in that, we'd love to talk. Make sure you give us a call at the number that we list below here. Also, if you're an institutional investor, there's something for you as well from Left Brain, and that's our investment research service, Left Brain Investment Research. There we have 8 to 10 full-length stock reports every month. And also The Chosen. That's our favorite bond and favorite stock opportunity each month. So check the link below if you're interested. Either way, we'd love to have you on our list for our newsletter. It's biweekly. This week will be on with the newsletter, so definitely check that out. We'll put the details below for you if you want to sign up for the mailing list and receive that in your inbox every Saturday morning. Of course, if you like the video, if you find the video useful, we ask you to like and share the video. It helps other investors find it. It's a difficult time for markets. So of course we want investors to find good positive information and also subscribe and hit the bell for notifications so you can find out when the next video comes out. And we're out every Friday with our videos. With that, we'll jump right into the market recap. We follow 3 indexes here. The S&P 500, it was down 3.0% this week. NASDAQ was down 3.1%. And then the small-cap Russell was down 2.75%. But it certainly felt like a lot more— very volatile week. Couple of very big up days and a couple of very big down days. Uh, we also had a banking crisis, crisis narrowly averted over in the UK. Interest rates in the UK spiked exponentially early in the week. The Bank of England had to take some action, buy some bonds and tamp those rates back down. So a crisis was averted there. Uh, 10-year Treasury rates in the US actually were also quite strong this week, up to 4%. They pulled back a fair bit on Wednesday, but still very high and as high as they've been in, in some time. And then the 2-year, that's really been the strongest, uh, the highest rate that we've seen in the Treasury curve, actually touched as high as 4.35%, which is pretty amazing. Uh, it was down in the 1 to 2% range earlier in the year. So, uh, huge moves there in the Treasury market and the interest rates. With that all being said, Nolan, what are your initial thoughts?

Uh, I have a few. The first one, like you, I was surprised to hear that the numbers this week, that they were only down 3%. It certainly felt like a lot worse, especially on the back of we ended last week on such a down note in the markets, and usually when you end on such a bad note, you get a bounce. And so I was, uh, you know, I was a little bit disappointed and, uh, and surprised it was only down 3%. The other thing I was thinking, you know, you were talking about the UK and the issues that they're having, and they have avoided a crisis. I would say it's probably only temporary. You kind of have two different issues in the UK. On the one side, you have a new parliament in that really wants to stimulate the economy. And so, they're suggesting these huge tax cuts. When you have huge tax cuts, that's going to be lower revenue that comes in for the government. So, you're going to be running bigger deficits at the same time that they're trying to balance out this interest rate issue. So, these are kind of conflicting policy guides that they're doing. So, that is really worrisome. Anytime you have to have the government to step in to avert a crisis, that means things aren't healthy. And then the other thing we keep talking about, inflation and interest rates, and we just think about how this impacts us here in the US. Mortgage rates this morning just crossed 7% on the 30-year. My goodness. I remember when I went and bought my first home in the '90s, they were 7% and it just come down from like 8% and we were thrilled to get something at 7%. And man, that's been a long, long time ago. So to see them back at 7% and to have spiked so quickly is certainly an issue. But we think about the issues we're having here in the US, and what we don't often focus about is that the pain we're inflicting on other citizens of other countries. When the US dollar is this strong, when interest rates go up, the US dollar becomes very strong. And what they say is that we export inflation to other places, meaning that a lot of goods and services are priced in US dollars. The prime one is oil, and oil's priced in, in, um, in US dollars. And when we're raising rates, the other economies, their currencies gets very weak. And so when they have to go out and buy these worldwide goods like, you know, oil and other things, um, it's very inflationary on their economies. And that's why other governments are also raising rates. So it's, it's causing heartache here in the US, but a lot of pain elsewhere in the world.

Yes, Nolan. And we saw inflation figure out of Germany topping 10% this month. So obviously, like what you said, it's definitely happening. We're exporting inflation to other countries. With that said, let's jump into the first topic. So topic one is the macroeconomic picture and how it's driving all markets. So here at Left Brain, we like to focus on the fundamentals, the microeconomics, but unfortunately we just can't get away from it. The Federal Reserve, macroeconomics in general are really driving all markets. So we've got to pay attention to it and address it. So the first thing we'd say is we had a number of speeches from U.S. Federal Reserve governors this week. They all reiterated they're going to remain aggressive to fight inflation, and that means higher interest rates. They're going to be managing inflation, and we have no reason to believe that's going to change anytime soon. So we got to take that under advisement, understand that interest rates are going to be high and proceed accordingly. Nolan also mentioned mortgage rates have moved up quite a bit. They've actually doubled in the last year. We had mortgage rates down in the 2s and 3s, uh, in 2021, and how now we're up around 7%. So it's a really drastic change for the housing market. Remains to be seen how that's gonna play out, but we certainly expect housing prices to fall. That's probably what the Fed's trying to do. Um, Nolan, can you tell the viewers a little bit more about how the macroeconomic picture is driving markets of all types?

Yeah, the macro view is driving everything and just So the viewers are aware, when we say macroeconomics, that means things like inflation, interest rates, what the Federal Reserve Board's going to do. For the most part, these are things that are out of our control, and there's a lot of them. We generally at Left Brain, we like to focus on the micro, and that is at the individual business level. What— how are revenues growing? Are they— if they were growing at 5, are they still growing at 5 or 10? Or have they fallen to zero or one? And how about earnings? How much money, cash flow, or earnings that a company's bringing in? How sustainable are those things? And then are there catalysts? Those are the things that we like to focus on. Historically, that's how stocks move up. You find some company that's growing share, growing their business, growing cash earnings, and there you find higher stock prices. And, and so that's what we look at. Unfortunately, now these macroeconomic shifts, inflation, interest rates, the supply chain issues, they're having such a big impact, not only at the macro level, but they are affecting these companies at a micro level. So it is affecting their revenue, it's affecting their earnings, margins are going down. And so Brian's right, we have to kind of balance both of them and pay attention to the impacts that it's going to have.

Well, taking that under consideration, Nolan, how are we approaching asset allocation in light of the recent developments? What are some things investors can do to combat kind of the inflationary picture, the interest rate picture, and a lot of the other factors that we're seeing creep into all markets?

[Speaker] So there are a few things that they can do. Clearly, you know, we wish we had our crystal ball 'cause we certainly would've done things differently earlier this year. First thing that we did is we have made adjustments this year trying to move from things that we think would be more impacted and moving to things that we thought would be more favorable or at least would hold up better in this environment. And we have been whipsawed just like everybody else. And the market environment has created a sort of a no place to hide scenario. The last couple of places that people were hiding is consumer staples and utilities. And what we've seen is they have really rolled over as well the last 4 to 6 weeks. And so nobody has been spared. Typically, I think conservative investors, I think, have the toughest go of it. Generally their playbook is bonds and safe bonds for safekeeping, munis, Treasury bonds. And in this environment, they have been impacted just as much as stocks have. And so it's been very difficult. One of the things I can say is, as an investor, you certainly don't want to make your situation worse. And right now, at this point, we know interest rates are clearly going up. It's just a matter of how far they're going to go up and for how long. So there are some things we certainly don't want to own. One of the things that I think is tougher to own right now are bond funds. So a lot of people, particularly, particularly if they're invested at work, will have exposure to bonds, but it's in a mutual fund or portfolio of bonds. And what that means is there is no natural maturity date. So the longer time horizon you have on your bond, the more sensitive it's going to be to interest rates movements. And it's a negative or an inverse effect. So rates up, bond prices down. And if I own them in a bond mutual fund or basket, there is no natural maturity date. So it trades like a perpetuity. So these are very, very sensitive. And my income isn't fixed. When I buy bonds, what I really want is fixed income. I want a fixed start date, a fixed end date, and I want a fixed stream of income. And bond mutual funds give me the worst of all worlds. So that would be the first thing that I would say to investors.

Indeed. And we've been talking for the last few weeks about individual bonds. Again, if you have interest in learning a little bit more about how those might be a fit for your portfolio, definitely contact us using the data and the information down in the show notes. Love to speak with you about the the individual bonds that we're seeing. With that, we'll move on to topic 2. And topic 2 is a question that a lot of investors have on their minds about a lot of the stocks and bonds in their portfolio, and it's when to sell. And we're going to use a case study in a company that we've followed for years, which is NVIDIA, that's ticker NVDA. Most investors think of investing in terms of picking the right stocks and riding them out for the long term. And then for the most part, that's how, how it works. And that's what you do as an investor. But what might be more important than what to buy is when to sell in terms of your long-term returns. Just generally, Nolan, how do you approach the question of when to sell something?

I think it's one of the most difficult questions in all of investing. I think it's more difficult as well if you own a mutual fund or particularly an index fund, when to sell. I think those cues are a lot more complicated. They're more difficult. And sort of tougher to read. I think in our case, we're going to talk about an individual business. And I think it's a lot more simple when you think about an individual business. And sort of the opposite of what we're looking at when we're looking to buy. So we want, again, a reasonable valuation. We certainly don't want to overpay for anything. We want a business, the trajectory is up. That means the business momentum is going up, sales are moving up. Earnings, um, are moving up, and then the share price is also showing upward momentum. Those are the things that we want. We also want catalysts if we can have them, and we want to have a good idea of the competitive environment that this business is going to sustain itself. The opposite of that, when you have those factors go against you, the majority of them, then it's time to think about getting out.

Let's talk about something that's not theoretical. Let's talk about something practical. That's a company we've been following for years, NVIDIA, ticker NVDA. We've loved this business for years. Great CEO in Jensen Huang, plenty to like. It's an innovator. But let's talk through kind of and do a scorecard here, Noland, on all these points. Acceleration in sales and profits, reasonable valuation, positive price action, and catalyst. Where does NVIDIA fall on that? And then after you answer that, does that tell you, is it time to sell?

Right. So let's go right to the punchline. I think they're 0 for 4 here. If you take a look at the sales numbers, they've come down all year. It's not just the inventory correction, but they sell graphic processors, GPUs, and we use them in gaming, use them in the data center, they use them in crypto, and then they use them in the auto market. And the sales trends have come down for NVIDIA all year. Gaming, which is the, the biggest business that they're in, uh, the gaming sales have come down. And then the crypto market really has gone kaput. That's another— was another engine of growth. And so that hurt them as well. We take a look at the earnings. It was just, you know, 8 weeks or 12 weeks ago, uh, it looked like they were going to earn over $6 in earnings, closer to $7, $6.70 or something next year. And today those earnings estimates are about $4 $50. So they've dropped a whole heck of a lot. And then if you look at the share price itself, the share price does not have upward momentum. If you— we follow the technicals here as well. It has downside momentum, and it's gaining, and it's gaining downside momentum. And so as you mentioned, it's 0 for 4. It's time to step away from Nvidia and wait for things to sort of settle down in the business.

You know, Nolan, it's interesting because a lot of stocks that have made investors a ton of money in the last 5 or 10 years are the stocks that are 0 for 4 on these metrics. And I know it can be difficult to go away from something that's made you money over the years, but, you know, going forward, we got to be forward-looking as investors. And some of these investments might lose you money going forward. So it's something you got to consider. It may be difficult to make the decision on your own. It's an emotional decision. It can be if something's made you money over the years. We'd love to help and definitely give us a buzz. We'd be happy to talk you through that, maybe give you some advice on how to pull the trigger on some of these investments that you may really be emotionally attached to. Well, Nolan, it's been another tough week. I think it's time for investors to make some difficult decisions. Is there anything you want to leave with, with the viewers as we bid them adieu this week?

Yes, I'm going to talk about an easy decision, and that is Thursday Night Football, Dolphins, my Dolphins against the Bengals. An easy decision is go to DraftKings, take the Dolphins. I think that's the easiest decision we can make this week.

Okay, that's not investment advice, everybody, but again, thank you for joining us. We're happy you've been with us this week, and we will see you again next week.