Jim Stack Stays Bearish But Spies Opportunity

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This is Greg Bartlett for Barron's The Way Forward. My very special guest is Jim Stack, CEO of Stack Financial Management and president of InvestTech Research. We are going to talk about the stock market because it would be ridiculous if we did not, given the predictions that Jim has made to Barron's, both on this program and in a Q&A with a colleague. For a brief introduction before we welcome Jim, In December, he spoke with Barron's and the NASDAQ was at 15,500, close enough to that. And he warned that losses looked highly likely and that investors were ill-prepared for that. Fast forward a couple months, in March we spoke at a conference and the NASDAQ was then just under 14,000. And that podcast was published April 5th. Jim was decidedly bearish. Now we are at 10,700. That has the NASDAQ down 31% since December when he spoke to Barron's. So when I had an opportunity to meet Jim at this conference we're at right now, I jumped at the chance and I wanted to get his take on what he thinks, what does the market think, and just to kind of sort it all out. With that long-winded introduction, you know, welcome back, Jim.

Thank you, Greg. It's great to be here again.

There's a lot to unpack. Why don't you take the ball? I'm very curious to hear what you think.

Well, when you look at the rally out of the pandemic lows, what we had was a pandemic plunge, one of the shortest bear markets in history. It lasted only 5 weeks, took down the NASDAQ and the S&P between 30% and 33%, And everyone thought— now today, they look back and say, wow, that was a bad bear market. In other words, that's their only perspective that they have over the past 13 years. Early last year, we were running close to an 85%, 87% invested position allocation in the market. When I did that interview in December, we had stepped down to, I think it was around 75%. When we did our interview in April, we were under 60% at that time. And we have moved more aggressively and toward a defensive stance. We're actually under 40% allocated in equities today. That's our lowest allocation since 2001, during that 2.5-year unwinding of the tech bubble, a very long bear market, very painful bear market that took the NASDAQ down 85%. The S&P was down 49%. And I think that the risk today is that I don't think this is over. I think you want to keep your seatbelts fastened. And we can get into that a little bit, but the pressures on the Fed are very real. They're very high. You have two big risks out there. I think one, there's a universal confidence that we can't have a recession because earnings forecasts are stable. And I love to talk about that one. The second one is the universal expectation that if things start going off the tracks at all, we're going to see an imminent Fed pivot. After all, that's what Jerome Powell has done every time since 2018. I think both of those are inherently wrong today.

Okay, well, why don't you break down those two points? 'Cause I know we could do either order, but the Fed pivot has really gained a lot of traction in the past 3, 4, 5 weeks.

Yeah, when you look at the Federal Reserve, what are the pressures? Add those up. Well, you know, we have the CPI, PCE, core CPI, no matter what you look at, okay, it may have peaked, it might be coming down, and you have economists out there or analysts saying, "Oh, once it peaks, that's the time to buy." No, that is the time to buy in some past cycles. But when you step back into the true inflationary bear markets, you have to step back over 40 years to do that. You have to step back into the '70s and '60s where we've done a lot of our research on the Invest Tax side. And really, that's where you see that the Fed is not done with this battle yet. I think I would summarize 3 things. Number 1, almost 35% of the CPI comes from housing, not housing prices. It comes from owner's equivalent rent and rent of primary residence. The owner's equivalent rent has hit a new high, and it's at the highest level since the 1980s. It hasn't even started to fall yet. So that's pressure number 1. Pressure number 2, wages. Employment cost index, and this is released by the Bureau of Labor Statistics, is up to over 5.5%. It's the highest level in 40 years, even, even higher than back in '83, '84. The highest employment cost index, private wages and salaries, in 40 years. And the Fed knows the consequences of a wage-price spiral. They know they can't acquiesce too soon. And inside the Fed, the Fed, the Atlanta Fed, Atlanta Federal Reserve releases their own sticky price CPI. These are components of the CPI that once they start rising, they tend to stick, continue rising. Thus the term sticky. And that sticky price CPI is also at a 39-year high. You have to step all the way back to the Paul Volcker years in the days of 1982 to find when prices have been sticky. So basically it means the Federal Reserve is between a rock and a hard spot. And I think the hopes for a Fed pivot are way too early and way too confident.

Do you have a specific target as to where you think the Fed might eventually back off, or just certainly higher directionally? We're going higher, I'll leave it at that.

They have to see an easing in the pressures, not just the fact that the CPI might come down to 7% or maybe 6%. Remember their target, their target for core PCE is 2%. I mean, we're 3 times that. So the Fed has a long way to go. And until we see loosening in the labor market, and inherently that is accompanied by a recession, although those are always recognized later, way in arrears. Until we get into that, then I think the Federal Reserve is going to have to do what they hate to do or don't want to do, but they know they have to do, and it's continue to giving bad medicine to Wall Street, to those who are hoping for the Fed to pivot. The difficult part is Jerome Powell, when he was appointed in 2018, he was appointed in February. In December, we had the worst December loss in the market since the 1930s. That was the first pivot. And by the end of the month, the Fed had met, they suddenly softened rhetoric, the market tended to stabilize, they were cutting rates within 6 months, and they managed to put it to basically have the market go higher. Very, very similar to what Alan Greenspan did when Long-Term Capital Management collapsed in 1998, and the Fed cut rates twice and put another year and a half into the tech bubble. So I think they're looking at the Federal Reserve, looking at Jerome Powell, as if the Fed is driving a sports car. And it's not. It's one of the old, old acronyms or comparisons that I remember is, it's like pushing a barge up the Mississippi where your negotiation for the next turn, you have to make a mile or two in advance. And I'll tell you, the Fed is nowhere positioned for the curve that appears to be ahead.

Yeah, and it's fascinating how their predictions about the future, even one year out, can be wildly off. There was, I think when rates were, what, quarter, half point that they thought pretty much a year out we'd just be like incrementally higher, right? And there was so much— they were way, way off.

Yeah, in December when I did that interview, they were looking at maybe 3 rate hikes by the Fed this year. We're, you know, now it's looking like 5. Who knows? Yeah, the point is, is that no one can forecast, you know, basically, you know, how high rates will go. What we can look at is the evidence, and right now the evidence is pretty much all stacked against the Fed doing that widely expected pivot. And the other expectation I mentioned was on earnings. I think that is really an eerie complacency that I see.

Yeah, the earnings, I mean, we still have a ways to go in this cycle in this quarter, but I think they've— correct me if I'm wrong— but not been too hot, right?

Well, they're leveling. They say, okay, it might be up 1.5% over the next 6 months or 12 months. In other words, they're not forecasting a downturn. And I heard one analyst recently say, you know, that is the biggest argument against a recession is that corporations are not slashing, you know, they're not seeing slashing earnings forecasts. Well, here's the historical fact that the majority of analysts don't even know. If you step back to the 2000 tech bubble, The S&P and NASDAQ hit a peak in March. When did earnings forecast for the S&P peak? 6 months after the stock market peak. In other words, by the time the forecast peaked, it was October and the NASDAQ was already down close to 40%. OK, oh, that was a fluke, that was an aberration. No, it wasn't. Earnings never looked bad at the market peak, never. And when you step out to 2007, The stock market peaked, both the S&P and the blue chips and NASDAQ peaked in October 2007. And the earnings forecasts stayed high until the second quarter of the next year. It wasn't until June that earnings forecasts peaked. And then all of a sudden, all the cuts came and all the surprises came. And as Warren Buffett said, then the tide went out and you could see who was swimming naked.

What is the market assuming now? We talked about, there's a lot of chatter about the Fed pivot, which obviously seems there's hope. You can hear there's, I don't know if it's hopium or not, but there's definitely that. There's a lot of, I think there's an assumption that we will have a mild recession. That's also what I'm hearing. To what extent do you believe these narratives are reflect, you know, what the market thinks and to what extent do you think they're accurate or not accurate?

Well, I think the recession debate is over. I mean, we are going into a recession. Now, some will say, well, look, what about the first quarters? They were down. First quarter was down, I think it was 1.6%, 1.9%. Second quarter, 0.6%. No, they weren't. The first and second quarter actually had strong nominal GDP growth. In the first quarter, nominal GDP was up 6.5%. Second quarter was up 8.5%. And it wasn't until you adjusted for inflation that it took it negative, and that's what made the headline, was real GDP is negative, we're in recession. I don't care whether we were or weren't in a recession the first half. What I care about is what lies ahead. And if you look at the government's own leading economic index, LEI, and you put it over an 18-month moving average, when it crosses below that moving average, which it just did in the last couple months, Every single time, going all the way back to 1960, every single time we went into a recession within the next 12 months. I don't like betting against those odds.

Let's drill down to equities. We could talk about S&P, Dow, NASDAQ, and I know you're loath to give specific numbers, and I get that, but we could speak perhaps directionally. Can you share your thoughts on all of that?

Well, I never forecast the market. It's one of my frustrating— when I used to do all the media appearances and the 1980s and '90s, they say, "Okay, what's the high-low-close, or what's the close going to be for the Dow this year?" I haven't a clue. But what I can tell you is that in terms of bear market statistics, we could still easily be in the first half of this bear market. Now the S&P is down 25, you know, around 25%. As you said, the NASDAQ's down around 31% from my December interview, around 35% from the high. And you go, wow, those are Those are pretty bad. I mean, that's comparable to the 30% to 33% we saw in the pandemic plunge in both the NASDAQ and S&P. But in terms of historical perspective, when you start with a market at the valuation extremes that we were at, at the start of this year, I think you have to allow, particularly when the Fed is backed into a corner, you have to allow for the prospect that the bear market's not going to be average. There's going to be a bigger one. And when you step back to those bigger bear markets, like the washout of the tech bubble or the financial crisis, it's not unusual to see the S&P drop between 49% like it did, 50% in the tech bubble washout, or even over 55% as it did in the financial crisis. Now, am I forecasting that? No. But what we have done is we have cut our allocation back since our interview in April to where we are under a net 40% invested in equities today. That's the lowest level since the washout of the tech bubble. That's my level of— I wouldn't call it comfort. That's my level of discomfort with this market today.

Since 1950, the S&P 500 has fallen 8 or 9 times by 25% or more. And in each instance, going 3, 5, and 10 years out, the market was higher. So there's that. But what I'm curious about is because we're at 25, it doesn't mean that we will stop at 25. It could go 30, it could go 35. 35, 40. So yes, we're unclear of the bottom, but once that threshold has been pierced, that often is a long-term bullish— at least the numbers show that. So if I ask you what's different, you did mention that the Fed's in a corner, which is a pretty big deal. I don't know if in the past there was ever something somewhat analogous or not, but I just was wanting to share and get your take on that.

Well, the Fed has been backed into a corner before. And again, most investors and even most analysts today don't remember that, because you have to go all the way back to, like, the '73-'74 bear market, a 21-month bear market in which it just rambled on and on. And every time there was an inflation surprise, either to the upside or the resilience of it, the stubbornness of it, the Fed had to raise rates. And it just— it turned into this horrendous bear market. That was my indoctrination. And it was very painful as a valedictorian of an engineering college who thought he had all his ducks in a row and got his clock cleaned as he started a new profession.

But that was early in your career with less money in hand.

Yeah, it's what influenced my aversion for risk today. But I think the important thing you have to keep in mind today is that we started into this bear market with valuations at extremes, very similar to 1972. And if you remember back to that era, there was the Nifty Fifty, the one-decision stocks, you buy it and you never sell it. And we went back when we did some of the research, and we did this research on those Nifty Fifty, and on average, they lost 53%, more than the S&P in that bear market.

Not so nifty-fifty there.

And you're seeing something like that Today, because we had such a high concentration going into this market top in January, we had just 10 stocks of the S&P, that's 2% of the S&P comprising 25% of the S&P capitalization. And they were all the big players. And a lot of investors remember, they know some of them, like the FAANG stocks, Facebook, or Meta now, Amazon, Netflix, Google. The FANG stocks collectively on average are down 50% from their high. There's a lot more pain going on in this bear market than perceived or relayed by just looking at the S&P 500 index. So again, I'm not a doom and gloomer. I'm looking at this and I say, I do think there's going to be a big light at the end of the tunnel. But what I look at ahead with not just the pressures on the Federal Reserve, but I think there's another risk that A couple other things we should talk about out there in terms of the high volatility and that one that no one wants to talk about, and that is the housing risk. Let's just call it, if you don't want to use the B word, call it the overvalued housing market.

We'll start with the volatility. So let's rewind. So last week there was a significant drop and then we had an inflation number that looked bad, but then the market spiked and then the next day it tumbled.

I mean, it's big up days, big down days. You have buy the dip, buy the bottom, and then And then, you know, all of a sudden it's, oh my gosh, we gotta get out, something's going wrong here. And it's up and down. We actually tally a statistic, we call it our heat map, and it looks at the total number of 2% daily moves, doesn't matter up or down, 2% daily moves and the number of 1% daily moves each year in the total number, and we color the 1% yellow and the 2% red. So that looks like a heat map. And what you're seeing this year is we are on course to see— we are seeing the highest, second-highest volatility in 60 years. The only year that was higher was 2008.

Yes, and I was going to add that high volatility is more, well, byproduct or symptom, or, you know, reflects more a bear market than a bull market. Bull markets often are just slow and steady and boring.

You're right, you're right. The blast-off in a bull market is very sharp. Of course, you have a V-shaped bottom. But the highest volatility years, invariably going back 60 years, really you could overlay that and you could put dots at the top of the highest volatility, and you look and you go, "Wow, those were in bear markets." Now here's the second thing you have to remember. The extreme volatilities, the ones that were the most extreme on that heat map, were the biggest bear markets. As I said, the only one higher was 2008. The 2000 to 2002 bear market wasn't too far below now, the '73-'74 was right up there, and that's why I'm looking at the current bear market and my advice would be just don't underestimate the downside risk.

[Speaker] So the VIX is elevated, but it doesn't suggest extreme panic. I think we're in the low 30s, maybe thereabouts. There are various sentiment indicators that would suggest, one could argue, sufficient fear to justify buying, But there's also, I don't know, a palpable sense that people are scared but not terrified.

Right, right. It's not really— I wouldn't know if— from the average investor standpoint, I wouldn't call it a complacency. I would call it kind of a universal acceptable level of discomfort. In other words, you know, I really don't like this. My stomach is turned inside out, but I'm not going to panic because After all, over the last 13 years, every time you've bought the dip, even with the pandemic, remember bear market only lasted 5 weeks. We had 5 corrections of 10% over the last 13 years. Most investors today don't remember what a true bear market is like. And if they do remember 2008, they think of it as an aberration.

So many people only have known a bull market 10, 15 years. And that was all against a backdrop largely of declining interest rates or an accommodative Fed. I guess my big question is going forward, are we looking at a new paradigm or something at least sufficiently different? I, and I wonder to what extent are rates gonna stay high longer, et cetera. And how does that impact the markets?

Yeah.

Because it's not an apples-to-apples comparison given what the Fed's mandate is right now.

Well, Again, what people think of a bear market and their perspective of a bear market is very much out of step with historic reality. In reality, bear markets, while the average bear market lasts maybe a year or 15 months, the bigger bear markets very often last 1.5 years, or they can go as long as 2.5 years, like the washout of the tech bubble. You can't forecast the bottom, but you have to watch the weight of the evidence. And right now, the weight of the evidence is pretty much stacked against it. Everything that we look at in terms of pressures on the Fed says the Fed's going to continue. And it's not that the Fed's going to take rates to 6%, 7%. They don't have to. We went into this with this perhaps being the most interest rate sensitive market in Wall Street history. And the problem for the Fed is that even though oil prices have peaked, they're coming down, commodity prices, those that are not in the sticky price index are coming down much faster. And we are going to see more, I guess you'd say favorable news as inflation starts to ease, but it's still the resilience and the stubbornness are going to keep the Fed from caving.

Yeah, and let me ask you about job losses, because it's interesting in a way, On the one hand, I think on some level they want job losses arguably to reduce demand, reduce inflation. However, the consumer already has burned through a lot of the savings and largesse from the government. So then if you have more job losses, again, while you may benefit on inflation, that's going to hurt the economy on the flip side too. So how do the job losses figure into all this?

And again, when you look at the Employment Cost Index and the fact that it's a 40-year high. I mean, it was back in 2009, coming out of the bottom, it was 1.5%. Today, it's 5.5%. And the difficulty with the Fed from a wage standpoint is that it is a very slow reaction. And there's an argument— this is another big argument— we can't have a recession because we have a tight labor market. We have 1.5 job openings for every person looking for a job. No labor problem, therefore no recession. We've tracked another leading statistic that is job openings. This is a survey done at the consumer level on job openings. And if you look at this back over again, over the past, you know, 50 years, it peaked early last year and is falling like a rock. In other words, all of a sudden, and if you look at this chart and you look at it historically, wow, recession, recession, recession, recession. But when it's falling like this, it has never fallen this fast to this extent without going into a recession. So I think the cards are already in place that we are going into recession. The question is, is it going to be shallow? Is it going to be deep? Could it be a hard landing? And when you look at that potential hard landing, there's an outlier out there. And that really relates to some of the recent statistics that have come out. And that's looking at the other valuation problem in the economy, and that's really stepping into the housing market.

Tell me about housing.

Well, historically, median family home prices track cumulative inflation. If you look at a 50-, 60-year chart, cumulative inflation gradually goes up on a persistent uptrend. And housing prices track that very closely. And the reason is because that also measures affordability. You know, as long-term cumulative inflation goes up, wages go up, and that means your ability to make the down payment, make the payments, go up, depending on interest rates, of course. Well, we had a detachment from that in 2005, and median family home prices went 35% above that long-term trend. And guess what happened? Yeah. Over the next 6 years, it actually came down and went back under that long-term trend. Yeah. The bad news is that this time, and it peaked last year, those median family home prices went 43% above that long-term trend.

And where are we right now? I know it's lower, but how much lower are we now?

Well, it's still over 30%, 35% above it. Wow. So, okay. In other words, and we're going to get more updated statistics, you know, this month and next month, but I think you're going to see home prices come down fast. And—

Well, that's happening right now.

Well, and when we talked, we talked about housing and we published an issue on Investec Side earlier this year, housing headed for a hard landing. That is pretty much guaranteed now, virtually assured. With what we're seeing, especially with the latest statistics from the NAHB. My question is, on this hard landing that is all but assured, could the wheels come off? Could we have a crash landing in housing? And if we do, then you've got a situation developing like 2008. And I don't want to— I'm not forecasting that. What I'm saying is that you choose your own level of risk. And if you're an investor in your 20s and 30s, Dollar-cost average, don't even look at the market, don't read the internet about the market, and just buy good diversified index funds and put the money aside. But if you're in your 50s or 60s or in retirement, heading to retirement, you do have to look at risk. You have to manage risk. If you don't, then the wrong decision when one of those major bear markets hits can change your life.

Yeah, I mean, in terms of housing, what's kind of remarkable is that there's precious little room to hide. So for owners, if you own a house, the value is falling most likely. If you rent, rents are much higher than they were. You're getting squeezed on rent. If you're looking to sell a house, your house is losing value. And if you're looking to buy a house, you're getting really high rates suddenly. So you're getting squeezed whether you want to own it, whether you own it, whether you rent, in a way, that whole housing— even, I mean, REITs obviously are getting hit too, I mean, with rising rates and whatnot.

The difficulty is that, again, it's a level of comfortable discomfort. In other words, housing prices went up a lot. If you're looking for a house, particularly with mortgage rates, well, you're kind of out of luck for a while. But the difficulty in looking at housing is that with prices so far above what is affordable in terms of down payment and mortgage payments, they could come down a lot. And what we're seeing, we don't look at— everyone looks at housing prices and says, you know, they're stable. We have a supply-demand out there that is going to keep housing stable. This is not 2007 to 2008 again. And yet, I'm afraid it's looking more and more like it is. And what I'm looking at is some of the most leading surveys, the NAHB, National Association of Home Builders, puts out a survey where they survey the home builders and they find out about traffic of prospective buyers. The traffic of prospective buyers has fallen for 10 consecutive months.

And let me ask you this, what does that track exactly? Residential, commercial, everything?

It's residential. Tell me about that. What is it? It's residential. I think it's also multifamily residential. And, but it, It has fallen from one of the highest levels that has been tracked over the past, over the past 35 years to now. The only time that it was lower was in that washout from 2007 to 2009. In other words, the traffic of prospective buyers for new homes has virtually dried up. It was reading a level close to 75 early last year. It's down to 25 now. About the lowest it went in 2008 was 10. So, and if you look at that, along with that survey, there is another survey that's the Homebuilder Confidence Survey. And it has fallen off a cliff. It has declined even faster, sharper, and more deeply than it did in 2005 and '06 going into that financial crisis. So those are the leading numbers that worry me.

Okay. Now, you did earlier speak about a light in the distance, and I don't know if you mean that's a train or— I'm taking it to be good news. If you don't mind, we could perhaps pivot to that, or we could continue if there are other points we haven't talked about.

I think strategy would be a good thing to do. The first thing that investors should do is sell down to a level of comfort, sell down to a level at which you can sleep at night. Don't look at the internet. I'm not saying don't listen to your advisor, but again, keep in mind that most advisors have been conditioned to stay fully invested, and there's nothing wrong with that in your 20s and 30s, but if you're in retirement or nearing retirement, that means that if we're less than halfway through the bear market, then be prepared for more pain ahead. I— when you look at We've gone through this in the tech bubble, and we were too bearish too early. I remember being criticized on the front page of the Wall Street Journal in the last 18 months for being out of step with the new paradigm. We were too cautious. And in 2007, we were very defensive, and we survived very well. Today, we have taken our portfolio to the most defensive stance that since those two eras. And I think as we get through this, and as we go into this recession, which, based on the job openings, based on the LEI, is imminent— and I don't mean next month, I mean by the first quarter of next year, possibly by December— it will be recognized that we are going in, or in a recession. Then you have to get through some of that. And I think that we could be setting up for one of those great buying opportunities. It's interesting, we track one technical model And it was actually Barron's that first introduced it back in, I think it was the 1950s, from Sedg Coppock, called the Coppock Guide. It looks at the very, very long-term momentum and psychology of the market. And really, for only the second time since 2009, that Coppock Guide has fallen down to a level where it is drop below zero, and that means we're setting up for what could be a very, very good buying opportunity over the next 18 months. I'm not a market timer and I'm not a market trader. Keep in mind, our allocation shifts generally are very slow and very gradual. This has been a very rapid shift for us from last year's 85% invested down to, as I said, less than 40% today. But as we go through this, we're already starting to look together, look at picking up our potential buy list. And keep in mind, we still are holding on to, you know, about half of our portfolio in equities.

Right. And I wanted to ask about that, if you can name any of the names that you own now. And then when that greater buying opportunity that you spoke about comes, what you anticipate you might be buying then. So like, we can start with now. What are some equity positions that you have?

Well, let's talk about— there's 3 ways you manage risk. One is overall portfolio allocation. How much do you have allocated to equities versus defensive cash? And right now the best cash is short-term Treasuries. Yeah, even at 3% to 4%, it's not as high as the inflation rate, but trust me, it's beating the socks off everything out there, including bonds. So allocation is the first way. Second way is sector weighting. Which sectors of the market do you try to focus on and which ones do you try to avoid? And then the third way you manage risk is in individual stock selection. So let's step into sectors first. Which are the sectors to weight toward today and which are the ones to avoid? One of the best sectors, I think, of course has been and still is right now, is energy. In some of the studies we've got done going all the way back over 40, 50 years, back to 1960, we've looked at bull markets and the sector that has been the most resilient in that last stage of a bull market and even into the first third or half of a bear market is energy. And of course, that's what we're seeing today. I don't think you— right now, we are very heavily overweighted in energy, but we will likely be starting to pull some of the profits off the table once we see confirmation of a recession, because then you're going to see economic growth contract and even energy will get hit. Two other areas, best sectors in bear markets. Historically healthcare. And today particularly so. You have two contributing factors. One is the aging demographics, and that's only going to increase. The second is technology adoption or evolution. I think we're seeing more of that adapt to the healthcare industry. And the third area, of course, is staples. You know, those are the things that people have to go out and buy. They have strong pricing power. It's what will people buy even if the economy goes into recession. One of the stocks we own, and full disclosure, yes, we do own it in our model portfolios, in our managed accounts, is PepsiCo. And they have pricing ability. Yeah.

I mean, it's an amazing company because recession or not, people can still afford a bag of chips or a soda, right?

Yeah. Another one we own is Walmart. And you say, "Well, wait a minute, Walmart's a department store." Yeah, but when people stop shopping everywhere else, they still go to Walmart. You look at— and Walmart got hit earlier this year in a sell-off because of overstock supply and some labor issues. But if you look at Walmart in the 2007 to 2009 bear market, you go, "Wow, that is what a true staple is." So those are the best sectors. The sectors to avoid Unfortunately, technology is at the top of the list. In terms of bear market losses, regardless of which bear markets you go back to, technology is usually number 1 or 2 in terms of the size of the loss. And that's where we have the largest underweight today. We're not completely out of it. But the other is consumer discretionary, the things that people can cut back on. You don't want to be owning those stocks. The other one, The other ones I would avoid completely would be anything associated with real estate. We don't know how this is going to unwind. I can tell you the leading stats scare me. And some of the financials. We do own a couple financials. We own Allstate, we own Berkshire Hathaway. In terms of the energy, we are holding Chevron and ConocoPhillips, but keep in mind, that we're leaning toward, you know, that's almost one quarter, it's about one fifth of our holdings that we are holding in that 40% that we're invested. And we're looking at possibly pulling some of that off the table as the evidence of a hard recession or a hard landing increases if we go into the last quarter of this year. In terms of the healthcare, we own Merck, and UnitedHealthcare. So there are opportunities out there. And I think that the problem that investors are trying to do today— and this comes from 12 years of conditioning, overconditioning— is they're trying to make a great buying opportunity out of something that isn't. And that is the biggest mistake in a bear market, particularly a protracted one or a bigger one. And if this is a bigger one, We're only 9 months into it. And keep in mind, that compares to 18 months, you know, twice this long in terms of the 2007 to '09, and it's about 1/3 of the length of the washout of the tech bubble. I'm not expecting this one to go 2 years or longer, but I want to see some of that evidence, some of the pressures on the Fed, ease, and they're going to have to ease dramatically. And unfortunately, that's not going to happen in the labor market very quickly. It's going to be very slow, and it's going to be very painful economically as it happens.

Yeah. And can you get a little more granular about what that might constitute or how it may manifest itself, that pressure comes off of them, which would make you more constructive on the market?

Well—

And a lot of it's contextual. I understand everything is changing at all times. So yeah.

There are two questions about the Fed. You know, when will they pivot? And as I said, the pressures suggest that today's hopes are widely overexaggerated, both in terms of how soon and how much. And then the second question, and perhaps more importantly right now, is when they do pivot, will it matter? And what I mean by that is that there again, a lot of people are remembering the last 4 years, the Fed pivots and boom, the bottom's in place. It happened after the pandemic and the new bull market was born. What they forget is that as the last housing bubble unwound, housing prices peaked in 2005, actually 2 years before the stock market peaked. Stock market peak didn't peak until October of 2007. And for the first time in history, the Fed actually recognized what was happening in the housing market. They knew it was coming down hard. They knew it was going to get ugly. And they started cutting interest rates before the market peaked that October. And throughout 2008, the Fed was cutting interest rates. In other words, they had pivoted, and they were running 100 miles an hour in the opposite direction, but it didn't matter. You still had the unwinding of that housing bubble. So that's the concern, I think, of putting all your confidence in hoping and waiting and watching for that imminent or inevitable Fed pivot in policy.

And do you think the election has any importance here or not? I mean, it's more peripheral to everything.

It's funny, you go back and you look at elections, you can make all sorts of arguments. I know that I saw some of the studies. Well, You know, we've never gone into a recession the year after a midterm election. You know, and I, you know, we haven't had a lot of— if you go back 100 years, you have 25 sampling points, you know, or 50 sampling points. If you go 100, if you go 50 years, you have 25 sampling points, you know, or 10 sampling points there. And you go, you know, it's not going to have an effect one way or the other. I think it's going to be emotional. And I think you're gonna see it help contribute to the volatility that we have, but I don't think that it's going to have an influence on the outcome any more than the last election did in terms of what happened to stocks.

Okay, and any thoughts about the dollar, commodities, precious metals, any thoughts?

Well, in terms of precious metals, gold has languished. We have a small position in our portfolio, I think it's about 3 or 4%, in gold stocks, but it's part of a defensive hedge. It's part of a diversified allocation, defensive hedge. It's language. Anyone who's holding gold says, "What's going on? Inflation is going up, why isn't—" And the reason is this: gold does not have a strong correlation to inflation. If you go back historically, statistically, and yet, What gold is statistically very tightly tied to is the US dollar. And the dollar has been on an upward tear over the past 18 months. That is why any of your investments in gold, precious metals, are languishing. And at some point, the dollar is going to reverse. And when that happened, coming out of the tech bubble washout in 2002, 2003, the Fed, of course, pivoted. And they cut interest rates, and the dollar was very, very strong through the decade of the '90s. Once it reversed and the dollar started falling, over the next 8 years, gold went from $300 to $1,800. So I don't think gold is a primary investment, but I think it can constitute a defensive hedge in a portfolio. Don't get discouraged if you're holding it. The reason is because the dollar's been so strong, and I don't think the dollar is going to be as strong if we are imminently going into recession by the fourth quarter of this year.

When the Fed eventually pivots, or when the dollar starts to— when it peaks and goes down, would you consider allocating more resources to overseas stocks with the dollar? Yes.

Yeah. Yeah. I think that the dollar influences all of your international or your commodity or precious metal holdings. And when that dollar does peak, you know, we are starting to look at international markets, but it's way too early to decide where the survivors are gonna be, which economies are going to stable perhaps ahead of the US. A lot of the other economies are dealing with housing bubbles too. And if you don't wanna use the B word, just say extreme valuation problems in housing.

If you have any final words or anything you'd like to share we haven't touched on, the floor is yours.

Well, I think that the overall advice to investors would be just be aware that if you, And if you only have, say, 15, 20 years of experience in the market, don't look at today in comparison to those 15, 20 years, because we basically have been in a bear marketless market, other than the pandemic panic, which lasted only 5 weeks, and all of a sudden we were recovering to new highs. The 2007 to '09 was not an aberration. It was a bubble in housing. That washed out, and all of a sudden, as it washed out, then you saw all the debt and credit problems behind all of that. Are there similar problems today? I don't know. We won't know until liquidity disappears. That's when you find out the liquidity exposures. So steer a cautious course. You know, look at the next 1 to 2 years, and I would say 12 to 18 months, differently than you would the next 10 years. Stay more defensive and know that at some point in the next 18 months, you're probably going to get a buying opportunity that would rival 2009. At least that's what I, what I expect to unfold.

I'd like to ask you for an actionable idea.

I think the best actionable idea would be for investors to stop listening to the noise. There are great resources out there. They're well-founded. Barron's, of course, is one of the best. And it's not that you're going to find opinions all on one side or the other side, but you're going to have well-founded, you know, arguments, and you can make the weighting on those arguments yourself and say, what makes sense and how do I allocate my portfolio? The problem today is with the internet, you know, almost every week there's another headline The bottom's in place. And that's been since the first week of January that we started correcting. So stop listening to the noise and do some hard research. Sell down to the level of comfort that allows you to sleep at night and be patient.

Well, excellent advice. And it was a pleasure again. And hopefully we'll have another chat in the future.

Always my pleasure, Grant. All right.

Well, thank you very much. My guest was Jim Stack. For more advisor-specific podcasts, please check out barons.com/podcast. For The Way Forward, I'm Greg Bartalus.

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