Dryden Pence: Why I'm Bullish on Small-Caps, Defense Stocks, and AI

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Welcome to Barron's The Way Forward. I'm Greg Bartellis, and my special guest is Dryden Pence, Chief Investment Officer for Pence Wealth Management. Today we will discuss his market outlook for the next 12 months. Welcome to the podcast.

Thanks for having me. Glad to be here.

My pleasure. Before we jump into the topic at hand, I did want to talk a little bit about your biography because you do have a very compelling, interesting life story. In addition to an economics degree from Harvard, you were commissioned in the US Army as a military intelligence officer, and you specialized in psychological warfare. So I'm really curious about that and how that informs your thinking about investing in the markets, if you don't mind talking about that briefly.

Absolutely. Our, our general investment thesis really comes from two different areas. One is that human behavior drives consumption. Nobody makes a penny until someone decides to buy. So if we can understand the American consumer, kind of get inside their brain, understand the psychology of what makes someone want to buy something, we can be predictive about what they're going to buy, who they're going to buy it from, and then those are the companies that we try to invest in. So it really helps us look at kind of what's happening in the future and how we can be predictive about that.

So in terms of the warfare aspect though, is there a contrarian bent to this or how— I'm just curious how more in a granular way this might manifest itself.

In a granular way, it manifests itself really in two ways on the warfare. One, we also look for choke points in supply chains, right? So choke points, military term, It stands for a point in place in time. Everything's got to go through there to get from where it is to where it wants to be. So a company that dominates a choke point in a supply chain, satisfying human demand, has pricing power. And that pricing power turns into excess earnings, and that excess earnings turns into better performance typically. So those two things coming together really help us. But I think it's really just breaking down Maslow's hierarchy of needs, understanding why human beings do what they do and what external forces are going to force them to have a buy decision and what they're going to buy. That's how we focus on it.

Interesting. Yeah, and I do think that is something that's not oft discussed, so I can imagine that you have an advantage of sorts by focusing on that.

You can go through and identify companies very specifically that are going to fulfill a particular need based on where the human condition is at a given time. Interesting. That helps us focus on that demand signal.

Okay, great. Now I just want to mention for listeners that this is the second time I've met Dryden. Um, the first time was on April 4th, and I remember that because it was 2 days after Liberation Day. And at the time the S&P 500 was at 5,074. And as I speak today on September 9th, it's basically 6,500, um, which means that the index rose about 28% in less than 5 months. So well played. Thank you. But that's just the background. This is in all seriousness the case. So here we are, second time meeting. I'll hand the ball to you because there's so— you could start anywhere you want, but I'm really curious about all aspects of the markets. It could be stocks, bonds, gold, rates, you name it. Let's dig into the markets. I want to hear what you feel most conviction about and just what you see ahead and why.

Well, I think where we are at this point given point in time. If we're looking out from now to the end of the year, you're looking out all of next year, for the next 12 months, we're pretty constructive going forward. This is driven by some great, big, recognizable things. We still haven't burned up all the COVID stimulus. We put $5.4 trillion into the economy in one year. That's more money than we put into all of World War II. You had this underpinning of the COVID stimulus. And then you had the overreaction of the tariff tantrum and things like that. None of that has materialized. I think that people have begun to understand that it wasn't going to be this horrible thing everybody thought it was. And actually there's some positives coming out of it. And in the end, earnings are good. And just the fundamental math says earnings are good. If earnings are going to go up 10%, well, the market's probably going to go up 10%. And while we've been We've been captivated by the Mag 7. We've been overemphasized by the Mag 7. We've been really pushed into that. I think what you're going to begin to see is this matures, a widening out of the base, the resurgence of the 493. You're going to begin to see it. And this is true, right? And people forgot we dropped interest rates 1 point between last year and this year. And for small caps and mid caps or companies that finance their inventory and things like that, that lower interest rate goes right to their bottom line. And so margins have gone up, right? So everything's really pushing good for the rest of the year. We think we'll have some volatility and then recover. But then if you look at next year, it's, it's pretty much same game, pretty much same game.

So I know you mentioned the small caps. I mean, they've had an extremely good month, past month with rates falling. And the Dow actually has outperformed the S&P and NASDAQ in the past month. Year to date, it's still NASDAQ, you know, above the other indexes. What do you think in terms of conventional wisdom is something that a lot of people are missing? Because I understand that you don't anticipate a recession over the next 12 months. In terms of earning calls, mentions are down dramatically. What is the conventional wisdom missing? Because I think there are a lot of concerns about, concentration of tech stocks, you hear more and more about valuations, et cetera. I'm just curious.

I think there's two parts of this where conventional wisdom may be off a little bit. With regard first to the economy in and of itself, and then I'll come back if you don't mind.

Sure.

So you get this data around employment. I worry more about how many people are working than how many people aren't, because we have about 160 million people working. That's more people than we ever had before. And they all have jobs and they make income and then they spend that money and it has a multiplier effect. And so I look at that number and then people have overreacted to some of the labor data recently because they're going like, oh my gosh, we don't have it. We're not adding as many jobs as we were. Well, what they're not looking at is when we don't have as much immigration as we used to have, we don't have an expansion in the labor force we used to have. Your breakeven number for stability in the unemployment rate is now half. You used to have like 166,000 a month just to kind of keep everything in line. Well, now that's down to 86,000 a month.

Right. So that's why it's bouncing around at a more consistent level.

Exactly. And so people say, oh my gosh, we only added 70,000 jobs. Well, we only needed to add 86, right? So I think that where the conventional wisdom people aren't looking beneath the numbers. So I think that our unemployment situation is probably pretty decent. There is some weakness in the economy. Going back to the Mag 7 issue, and we are so much still in the very early stages of the AI buildout and this huge transformation that we have. I think we see there's really two parts of it. There's infrastructure and there's implementation. It's like building the Transcontinental Railroad, right? We first had to build it, right? And then you had all the fruits of the labors of the Industrial Revolution come once people were running things up and down and we linked the entire country. We're just in the early stages of that. So we're just this massive build-out that we're doing for AI, this massive build-out that we're doing for chips. I always say buy chips on dips. And so we're early stages here. Obviously the hyperscalers, the big cap expenditures, all of those guys are positioning themselves to be the infrastructure of the next industrial revolution. And I think that that's where people may be going, gosh, valuations are stretched and gosh, it just seems too much. But I think they're underestimating the fact that we are in a transformational moment To me, AI has the labor productivity increased value of the light bulb. I mean, it's just phenomenal what it's going to do for labor productivity.

Let me ask you, so from an investor's point of view, we know that NVIDIA, et cetera, they've done fantastically well. And to your point, if you are an investor and let's say your thesis is fully embraced and they want to make money, do you think it's more constructive for them to invest directly in these companies? Are the benefits gonna— has the easy money made, even though we're early innings, is it more that the benefits will accrue and filter down throughout the economy? Or I'm just curious. Yeah.

So I think there's two places to look, right? So the first are who's building the infrastructure, right? So you have chip manufacturers, you have the guys who are making the chips, who are designing the chips, who are building the chips, this whole thing. We still have a long way to go there. You've gotta figure out how you're gonna power it. I mean, power is also are going to be a choke point in this. It's not just— I mean, fossil fuels are great, but I don't think fossil fuels are going to get us completely there. You've got those alternatives to play with this. Then I think you have to look for transformational technology companies. Those come in two fliers. They're either big and spend a ton of money on R&D, or they're brilliant and do one thing really, really well, and then the big guys come and buy them. I think that the first thing you look for is who's got the infrastructure.. And then what we're trying to spend some time on is beginning to look at, and we're in the early stages of research on this, is who is going to really use AI to increase labor productivity because that increases profit margins. And so it's the next wave. It's what I call AI plus H. How do you take AI plus a human factor and increase labor productivity tremendously?

Can you mention sectors, if not companies, that fit this bill?

Sure. Well, I think sectors and obviously on the company's side, you have, if NVIDIA is the choke point to AI, then TSMC is the choke point to NVIDIA, and ASML is probably the choke point for TSMC. And so you have that whole piece of it and then everybody else is trying to get into the fray there. But then when you look at other companies, I think that The sectors that are going to be interesting is anything that can be codified. You see it in law, you see it in services, you see it in stuff where we're looking at data or science. I don't think AI is going to help art that much, but I think you're going to look at data sciences. And this is also why you're seeing an unemployment problem in college entrance. Right. So you got to do— I'm going to try AI or I'm going to hire an intern. I don't know. Let me try AI first. So you're beginning to see that. So I think the sectors that you're looking at are anything that has a high analytical piece of it or a high data piece of it. And they're trying to see whether or not AI can do that. And then also the companies that are trying to come up with new new technologies. So it's a whole group, but I think the sectors, I don't think you're gonna get, I don't think AI is gonna fix plumbing, you know? And robotics eventually, you know? But I think that we're going to begin to see the data pieces of it are gonna, you know, a lot of these kids who studied coding, now AI can do coding. So you're gonna see those companies that are involved in that are gonna find higher labor productivity from the use of technology.

So valuation obviously is tricky, especially if you believe we're in the early innings. How do you assess, let's say, if not exactly what inning we're in, but even like in the first third of the ballgame or middle, or how do you, what data points or touchpoints do you look for to make that inference?

I would say on the infrastructure portion of it, we're probably in the third inning, right? Or very early in the ballgame. We don't even quite know what the whole demand signal's going to be. On the implementation, AI generation thing, man, we're at the first pitch. I mean, it's still very, very early. But what's interesting is what do we do? We had in 2 months ChatGPT got 100 million subscribers. It took Facebook 5 years. So just the speed with which we absorb this technology and that we use it and that human beings embrace it or try it is gone up exponentially. And so I think there's gonna be some screw-ups. There's gonna be some stuff that are gonna blow up and it's not gonna work, but we'll overcome that.

Yeah. What, I mean, I've heard, for example, that healthcare is often cited as one industry that should be a beneficiary. It's hard to paint a broad brush 'cause healthcare comprises all these different industries, different companies within that group. I mean, are people thinking, optimistic, like, you know, shaving off in terms of efficiency or savings, 10% cost save, 20, and I don't know, just directionally things are clear, but there's a lot of admitted ambiguity, I think. And then there's the question of what is the market assuming as well, layered in that too.

So I think there's, I think there's two, two issues in healthcare. The first one is in administrivia. I mean, anybody who's, who's tried to file an insurance claim, anybody who's tried to get payment or go through this, I think you're going to see probably AI begin— this is where the data, the figuring it out, the looking at it, all of those things. I think that if you apply that to the administrative portion of healthcare, then I think you're going to see some tremendous labor productivity increase and some better results from an economic standpoint. The other thing that I think that's I think even more important is let's take a look at applying this to the outcomes. If you are able to have a doctor really have a tremendous greater wealth of information on a global basis with regard to a patient's particular problem, then they're able to probably find better outcomes. And then I think the one thing that I see when we take a look at cancer, we take a look at all of these other things is that so often the treatments' side effects are what ends up making it so difficult for a patient. I just had a family member go through cancer. And so the side effects of the treatment can be devastating. But what if we can use AI to help us customize those treatments to the DNA of the patient so that we minimize the external side effects and are really able to focus on the outcome. So from an administrative standpoint, you can really solve a lot of problems. From the outcome standpoint, I think that there's a tremendous amount of opportunity there in healthcare for that. Now, in caring for a patient, I don't think we're ever going to get to the moment where the computer's going to be able to to be that individual that really has to provide that customized care for somebody.

Yeah, I've heard a lot about the benefits with outcome. I mean, you're just tapping this collective wisdom, if you will, and the more you input, the better the accuracy should be in diagnosing and detecting things.

Right. And so I think it's a new wave of all these things that we're going to be able to take advantage of.

All right, let's widen the lens and just go back more big picture. What are your thoughts about the markets? We could start with S&P, NASDAQ, Dow, et cetera, or wherever you feel conviction.

I mean, what are— I think we're obviously, we hit all-time highs today. I think we're probably have a couple more percent that we can go from here. We'll probably have a little pullback. Something will go bump in the night and you'll have a 3 or 4% pullback and everybody will jump in. And so I think we end up this year, positive. I think earnings were up 10% this year, market's gonna probably end up low double digits, 12, 13, somewhere in there. And yeah, I mean, that works. But going into next year, I think the story is much the same for a little bit different reasons. I think we do begin to see the broadening out of the S&P 500. We do begin to see the maturation of this earnings growth at the rest of it. But then also, I think The real opportunity here, I think, is coming up in small and mid-caps. And the reason— half the Russell doesn't make money, but the other half of the Russell does, right? So the guys that are— the half of the Russell that makes money, those guys are probably going to see margin expansion. They're gonna see lower interest rates. They're gonna see increased demand. They're gonna see better efficiencies. Those people that embrace trade-off of technology and labor productivity. You're going to see that.

Some onshoring too, to the extent it's going on, can help.

Absolutely. The onshoring is going to happen. And so I think companies that make things and are making money are going to make a lot more. So I think that that's the things that we're looking at in that space really all the way across it. And then the other sector I think we have to look at is global defense.

I know Europe is obviously amping that up now.

They have to. I mean, the idea that the world is going to spontaneously break out and sing Kumbaya is not happening. And it's a dangerous place. The United States is pushing the rest of the world to pay their own defense bill. The world's a dangerous place. And so you're going to see this global defense expansion. And I think, but there's also collateral benefit from that because defense companies spend a lot of money on technology and a lot of money on R&D, and there's all sorts of collateral goodness that comes out of that. So if you just, if you look at whether it's global communications, whether it's any of these things that we have, the whole ecosystem, the whole ecosystem. I mean, you have a GPS in your phone because we had to throw a bunch of satellites up in the air during Desert Storm back in the '90s. I mean, you know, these are the things that become, become adoptive. And, uh, and so I think global defense is going to be a big key issue over the next couple.

And would you say your average person, if they're looking to invest, are they best served by buying an ETF, for example?

I know there's at least one out there, and there's, there's a couple of ETFs out there, there's a couple of unit investment trusts out there. Um, I think that, um, but, but also there's just not that many companies, right? So you can go through and say, look, there's 5 or 6 of them that are playing and you can pick them and they're going to be Lockheed Martin and Raytheon and Northrop Grumman and all in the whole that sector are in there. But then you have to also look at global. You've got a lot of companies in Israel, you've got companies in Europe that have this whole idea. And then you have all the new companies coming into it as well in this technological advance. Down. So I think that that's going to be important. And I think also the way consumers do things are going to continue to be a big, big deal. A couple other sectors that I think that are important. I think we're still not up to the global average on online retail. And we're still— and the interesting thing is, Children today are digital natives. They don't even pay attention to the stores. The stores are a sociological event for them. They're not, it's like, I go there to have fun, but I'm doing all my shopping online. So as age goes on, more and more shopping becomes online. So I think that we're going to see that grow. I think in the United States, I like infrastructure. I mean, roads and bridges, we've got to rebuild all our, I mean, our interstate highway systems started in the '50s, right? So we've got roads bridges that we have to rebuild and do that. And those are small and mid-cap companies. They, you know, government actually does agree. Everybody agrees on both sides of the aisle. You got to build a bridge, right? How would you like to be the congressman who didn't vote for the highway bill in a district where a bridge collapsed? I mean, it's not going to happen. Yeah. So I think that that's important. And then just this mammoth movement forward in global technology, global behavior and, you know, again, this next big wave of labor productivity. You know, if you can make an input of labor more productive, you've got a solution.

And that's, I would assume, especially relevant and important given the low birth rate, aging demographics, all of that. It's almost out of, I don't wanna say out of necessity, but maybe out of necessity forcing us to that new model where we need to embrace productivity.

Absolutely. I mean, you think about it, you know, 100 years ago, it took 100 people to farm 1,000 acres of cotton, right? Well, now it's like it's one tractor that's autonomously working itself. And so you see these advancements coming on in both agriculture and fundamental things that we have to do. But the United States is the best at this. Our labor productivity today is at an all-time high. And we are the best at transferring that age-old deal between capital and labor. So we have a history of being able to do this. And I think that our best days are ahead of us in the way I look at it.

Well, I agree that it's much more in our DNA than many other countries where it just doesn't seem as reflexive.

Right. And this is also why all these people are talking about, oh, we're going to go back into stagnation and it's going to be the '70s and blah, blah. No, because we have a much more vibrant labor force than we had back then, and we have a labor force that's more—

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Adapted these days.

So you're painting a very positive picture. What concerns you most, to the extent it concerns you? Maybe it's a small concern, but on a relative basis, what do you— what, you know, I think you You leave the door open for policy mistakes.

I mean, we've been in this huge debate about how much is the Fed going to cut. I mean, September, okay, I think everybody's made up their mind. Yes, we're going to get one. Then the question is, is it 1? Is it 2? Is it 3? How much is that? Do we unleash— when you add all the stimulative nature that's coming in, then you get a you have to balance that. So a big policy mistake could reignite inflation. That would be not good. Also, you know, if they're slow, they can always speed up, right? They got room, they have dry powder, right? So it's okay to err on being slow in my book because you can always kind of speed that up and be okay. You get it going the other way, it's a lot, it's a lot harder to slow it down than it is to speed it up. Yeah. And so, and it's more painful slowing it down. Yeah. So I think that I think that that's a big policy issue. I think that the navigation around the deficit is always out there. And so I think that we'll have to react if the Supreme Court comes back in and says, okay, we're going to make the current tariffs illegal. Well, there's plenty of opportunity to put them back on. There's half a dozen different authorities that they can use. They can do that. Get this volatility moment, everybody overreacting to those policy moments with regard to tariffs and worrying about the deficit, worrying about the debt and those kind of things. So I think that the Supreme Court's going to probably say no, we keep it in place. But if they don't, then there's other ways to do it. So the tariff regime stays in place one way or the other, volatility to get there. But the thing that bothers me or that would cause me concern is a big policy mistake on the part of the Fed. A big fiscal policy error on the part of the federal government, or that inevitable black swan terrorist event or something like that. You always have to be vigilant about that. But left to our own devices, if we can get those mistakes out of the way, I think we're moving forward with a pretty good environment for the next 18 months.

The dollar, it fell, I think, by the most for the first half of the year. It was like the most in something like 50 years. We know gold is near record high, close to $3,700 an ounce. Foreign markets, both developed and emerging markets, have handily outperformed the Dow, S&P, I mean, I think by about 2x this year. So I think a lot of these concerns are related to the debt, and they all come together if you have debt, about dollar weakness. Do you see this as maybe getting worse or reversing or maybe stabilizing? I mean, what do you just make of all that?

I mean, I think part of the answer to that is going to be what happens with the tariffs. When you think of the billions of dollars that that can reset, I think that that's— it's funny, people keep complaining. The guys are complaining about the debt, complaining about the debt, complaining about the debt, and then how do we We get this money and then Trump in effect creates the largest tax increase on the globe, global tax increase that possibly helps fund some of that repair. And then the same people are complaining about it. Things are kind of crazy. But I think that when we get past this Supreme Court issue, it's probably better to have some clarity on this thing. But if you make the assumption that we get past the Supreme Court on it, I think that we're going to begin to see the first opportunities of some math that allows us to say, wait a minute, we do have a path forward to improving. Now that means Congress also has to have some fiscal discipline of not being such prolific spenders on things. So I think there's progress. I'm positive towards that.

Well, and it's interesting, you've referred to, I love the term, you call it a generally noisy economy. And I really, I like that term. Yes. So you have, to your point, the trade policy uncertainty is this major shift. Immigration is going through a major shift. And then AI is another layer. And then you could just throw in, you know, Fed uncertainty. I mean, there's so many balls in the air right now. It's a really, really interesting time. And that's why I'm really curious for your opinion because it's—

yeah. Everybody needs a set of noise-canceling headphones, you know, and kind of like, what is it? What are you going to pay attention to? It's as if, you know, It goes back to military background. In the middle of a battle, you can't look at all the variables. You can look at the ones that are most important. And I think that in this particular issue, where we stand on just making sure that we get this infrastructure piece right, that's the big thing. If you're sitting here saying we're going to increase labor productivity of the American worker by 10 or 15 or 20% across the board over the next 5 years, you have a harbinger of growth that really solves many of the problems that have been plaguing us for a long period of time. If I want to go, what's the most important number that I'm going to look at to to turn off all the rest of the noise, I'm gonna look at increased labor productivity. Show me that. And then I can, we have a way clear to solve most of these other problems.

Yeah. And I guess of course earnings, of course, are a big thing. Exactly.

Higher labor productivity, you get higher earnings and higher earnings gonna give you better performance. And it all just cascades from there.

So it seems like most of the engines for AI growth are really coming primarily from the US. In terms of adoption, how does the rest of the world compare to the US in terms of adoption so far?

What's interesting is you see lesser developed countries leapfrogging. So when you look at— I mean, I don't think Indonesia ever had, and this is old data, but I don't think Indonesia ever had hardwired phones. I mean, they went straight to cellular. I think in Africa you have 400 million people who their banks They don't really have a real sophisticated banking system. They just have their phones and it's all digitized. So you have these developing markets that are actually leapfrogging legacy behaviors that are making them even more efficient. So I think that's when you look at— you brought up global, right? I'm kind of excited about it because they're able to watch what we do. And go, well, wait a minute, let's just not do that. Let's do this. And we can leapfrog a whole generation.

On a relative basis, they can make even more of a leap.

Right. They catch up faster. And then certain economies have, it's funny, we talked about some stuff here at Barron's Conference and stuff, but I mean, who makes the best robots? Japan. Why? 'Cause they don't, they've had a population problem for a lot longer than everybody else. So they have to have robots. So you begin to look around in the world who's dealing with their problems as they grow. The United States does not have a monopoly on best ideas. We have to think about existing in a global environment.

International stocks have been doing, finally, doing well this year. There are two schools of thought. That this is kind of a blip, an anomaly if you will, and then eventually we'll go back to US dominance. Other people think that, hey, sometimes international and US can take turns with leadership, sometimes at a decade at a time, and some people think this is early innings where international will suddenly take to leadership. Do you have any high-level thoughts on that, Count?

Sure. Well, first of all, companies become— the big, big guys become global, so you have You have companies without borders.

Yeah, I mean, that's like, actually, I'm sorry, but like John Bogle of Vanguard, I think he didn't even advocate for owning international funds. He said, if you own the S&P 500, those companies derive, I forget what the number is, but a very large percentage from overseas. So it's like you're already getting your international exposure there.

You're already getting, but let's go back to, I'll use Mellie as an example.. In South America and Central America, you have— you have— MELI is in effect the Amazon of this region. So you have different companies dominant in different regions. Mercado, I think. Yeah, Mercado Libre. Yeah. Thank you. Mercado Libre is— I use the symbol, not always the name. But, you know, you have these behaviors. Humans aren't that different, right? So you have these behaviors going on in different parts of the world. You can go, it's just a different company serving the same behavior. And you can take a look at these patterns because one thing that we know when we do research at the individual level or Maslow's hierarchy of needs level, where you go physiological, safety and security, love and belonging, self-esteem, self-actualization, right up the line. As incomes rise, spending follows in a very predictable pattern.. And so as economies go from, you know, grow over time, their consumers follow these predictable patterns. So you just want to find the companies that are servicing those in that space. You have a similar playbook.

And right, there's that high correlation.

Exactly. Exactly. So that's why you want to, you know, who's the equivalent of Amazon in South and Central America? Who's the equivalent of Amazon in Australia? Who's the equivalent of Amazon in in different countries, in China, in Asia, and then you kind of figure out who's going to be the major player in telecommunications. Who's the Netflix, right? Or who's the Flipkart, or who's whatever it is in India. What's the Walmart of India? Those kind of things you want to look through it.

Yeah, and I imagine a lot of US investors are very US-centric. A lot of them are unaware and/or don't even invest on an individual basis, but therein perhaps lies opportunity because there's less efficient market on that level.

330 million people, you know, a multi-billion population. But we are the most productive and our economy's bigger than anybody else's. But I mean, with 330 million people, we're bigger than 1.4, 2.4 billion in China. But still, human beings aren't that different. And so their fundamental demand signals, you know, are similar. So you just have to say, who's supplying this thing in this place to these people?

That's where I want to be. Yeah. So you've established that, right? People are similar on that level in terms of our wants or desires, needs, et cetera. Are there any aspects of human behavior that you see as emerging that are ascendant, but that the market has not really picked up on? Like for example, and I don't believe the following, but I'm just saying, let's say people think that we're becoming more fearful people, that we're more risk-averse. Then people might be spending more on insurance or things to protect themselves, whether the risk is real or not. So I'm just kind of putting it out there. It doesn't have to be for a product or a sector. It just could be manifested by something like fear or aversion to something.

I think I can give you an example for this, and it's already very well diffused. But I think if you look at, again, Maslow's hierarchy of needs, you start off with physiological needs, and the next one you go to safety and security. Why does everybody have one of these? Why does everybody have a smartphone? And it's within 5 feet of you, probably. And whoever you are, you probably freak out when you can't find it. But you have to recognize what is the sub-thing in my psyche that makes me so dependent on it? And it goes back to when you were almost— when you were a baby. You cried when you didn't know where you were and you couldn't find your mother. Yet today, this, your mobile device does two things. It tells you exactly where you are and it lets you dial 911. Those fundamental desire behavior, this is why everyone's going to update their phone. Phone. They're not going to be without it, but they want the most current phone because it fulfills some of that fear factor that they have.

When people years ago, they would get— they might be, oh, maybe at lunch I left my phone, oh, whatever. But now it's like, nope, I got to get the phone. There's that. It's even more stronger. And something really interesting that Warren Buffett said, big shareholder of Apple, he— you know how Buffett is so great sometimes at reframing things and looking at things in a way that's profound, but your average person doesn't think of. He said something, and I'm paraphrasing wildly here, but the gist of it is he said something like, if you ask someone, like, if I gave you $2,000, but you could never again buy an iPhone, would you do it? Like, so the point is people would leave a lot of, would not accept a lot of money because it's that important to them. And when you saw that, that was just such a sign of loyalty and future cash flow in business that it's, and it's, yeah, it's like, to your point, you're gonna own it. And it's also, multigenerational kids increasingly, the average age keeps going down, all of that.

So it's, it's, it's where it is so much part of our lives. And it changes our, it changes our behavior for shopping, it changes our behavior for communicating, it changes our behavior for travel, all of these kinds of things, right? And it's just, it's, and it goes, it goes to the next level, whatever you ever say.

And even if you didn't want to have it, I mean, if you wanted to, let's say, live off the grid in the wilderness or whatnot, It's harder than ever to do it because just to exist in modern society, you know, you really kind of need an email address and a cell phone number to verify links for security. I mean, it's just, there's what you're talking about, but then realistically business is just pushing everything in that direction as well.

It's harder and harder and harder to live off the grid. And quite frankly, with technology, if somebody wants to find you bad enough, Yeah, they will.

Of course. All the geolocating, it's all there.

Yeah, yeah, yeah. Yeah. So they will. Yeah. So, so it's just like, you might as well just succumb.

There you go. Do you have any special thoughts on precious metals, crypto, or anything else?

I think you, you mentioned this a little bit before we talked about gold is peaked or has taken off and, you know, with precious metals and stuff like that, the way I've always kind of looked at gold is gold is a fabulous store of value. It doesn't necessarily create value. It's a store of value. So if you think of ancient Rome, in ancient Rome, 1 ounce of gold would outfit a centurion. It could buy their shield and their spear and their little things they put on their ankles and their breastplate. And today, an ounce of gold buys a pretty decent business suit. So it is a store of value. It goes through these moments, and we've seen it, where, boy, it picks up and it becomes one of the best performers. Well, yes, you had a moment where we had 9% inflation a couple years ago, and you have all this built-up inflation, and so it leapfrogs into that. I think that you're going to continue to see the commodities that the world needs to expand are going to change. Change. The commodities that are going to be important, energy commodities important with lithium and all of these other things are going to be important. Those demand signals are going to change. But I think that again, it's all about how it is dynamic within the utilization of the human experience. And I think those are important things to look at. But in terms of sectors and stuff like that, I think we're going to see Is it another commodity supercycle? You probably will see some of that just because, but it's gonna be very specific as to which commodity goes into the things that we need. And I think obviously the big one's oil. I mean, the two most recognized prices in America are your interest rate and what you pay for gasoline. You know, if you wanna give the American public a bunch of money, lower the price of gas real quick. You fill up your car more often more often than you pay your mortgage. And so the point of the matter is, is that's a big number we always look at. And as it stands right now with efficiency, EV, better public transportation, all these things happening around the world, you're seeing an increase of supply. Supply right now is outstripping demand for oil right now. And I think you see companies and countries trying to fight for that dominance. And that's a good thing right now. And I think we're going to— we're in this period of time that oil prices are— that's the thing I kind of watch. If I've got to watch the one or two things, I'm going to watch oil prices. But I think oil prices were fairly benign right now. And that's, that's good for everything we're trying to do.

Yeah, it was like down low, low mid-60s, thereabouts, something like that. Yeah.

And you know, you, you— we're— our economy moves fine at 80, you know, it begins to have a problem at 100, you know, but, uh, you know, if we're, we're in the low to mid 60s and folks have more money in their pocket and they're going to spend it on something. Yeah. You give the American consumer money, they're going to spend it. Yeah.

They're going to spend it. So we're, we're, I guess, nearing the end of time here. Um, just what I did want to ask you, just going back to the original idea of the, of the market outlook in terms of the key indexes, not asking for specific numbers, but is there a ballpark, you know, let's say we're looking 12 months out, do you think we might be up 5 to 10%, 10% or more or flat or I'm just curious what your high-level thinking is.

Well, earnings expectation, I mean, we're looking at, you know, we're with $269 right now for 2025. We're, I guess, probably $302 for 2026. That's about another 10 or 12%, right? So in the end, it is all about earnings. You turn off all the rest of the noise, right? It all gets down to earnings. So you're going to turn off all the noise and focus on that. If earnings are going to hit an all-time high and they're going to be up 10% across the board and you're looking at the S&P 500, S&P 500, uh, and the predictions are we're up 10 or 12% next year. Well, then the S&P 500 is probably going to be up 10 or 12% next year.

It doesn't need to be more complicated.

Okay.

And if you had to pick, like, let's say you had to invest all your money into one of those three indexes, NASDAQ, S&P, or Dow, which of those three do you think offers the best relative value today?

The NASDAQ is probably, because of its weightings, right? The NASDAQ has probably got the greatest of course, but it also has the greatest volatility. So I tend to, at least for our clients who are people who are more in tune with wanting to build long-term wealth over a long period of time and avoid some of these huge pitfalls of volatility, I tend to pay more attention to the S&P 500. And that's the index that I would pay close attention to.

Right, right. That's definitely, you get a little bit of the growth and the tech, whereas the Dow you get far less and NASDAQ is heavy on that.

Yeah, and of course, if you take a look, it's a cap-weighted— if you look at the S&P 500 cap-weighted, the vast majority of it's Mag 7 anyway. So I think that you're— that push-through. So if you wanted me to say, gee, what I think— when people ask me what do I think a market's going to do, I'm going to reference more the S&P 500, and that's going to be your broadest thing of this earnings expansion, and I think we're probably probably moving forward into a 10, probably. Okay.

Yeah. All right. That makes sense in terms of running. So I guess we're just about out of time unless there's any last words you want to add, if there's anything we didn't touch on.

I think the thing that maybe if I can share with the listeners is that there's always noise. There's always people screaming and yelling through megaphones and stuff like that. There's always noise out there. But in the end, when you look at the American economy, we are the most productive in the world. We allocate capital better than anybody else. We tend to increase labor productivity better than anybody else. In doing that, I think we're in a good go-forward place, and you can begin to move forward with confidence and go about your lives and be reasonably confident that the rest of this year and next year are looking pretty You're echoing Warren Buffett's words about don't bet against America.

That's right. All right. Well, it's a great point to wrap things up.

So thank you so much for joining.

Absolutely.

Happy to be here.

This was fun. Wonderful. Thank you. My guest has been Dryden Pence. For more podcasts and the latest wealth management news, visit barons.com/advisor and please check out The Way Forward: Next Generation, a new podcast hosted by Allison Tucci that puts the spotlight on the emerging leaders who are shaping the future of financial advice. For The Way Forward, I'm Greg Bartalus.

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