The historically bearish month of August is presenting investors with unique challenges, as global economies struggle to reopen amid the surge in COVID-19 Delta variant cases. With return-to-office and back-to-school in flux, investors must navigate a changing macro landscape while handicapping how the Federal Reserve will respond to inflationary pressures and a soft but improving labor market. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, joins Yahoo Finance’s Jared Blikre to break down various investing strategies and market approaches when risks are elevated, as well as how to think about market cycles in conjunction with economic cycles. Jared will also demonstrate how to leverage the power of Yahoo Finance Plus for market technicals, fundamentals and portfolio management.
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JARED BLIKRE: I want to thank everyone, for joining our number 14 webinar for Yahoo Finance Plus. This one is called, “How to invest during economic uncertainty, as delta variant cases spike.” I’m Jared Blikre, and we’re going to be joined shortly by Liz Ann Sonders. She is the chief investment strategist at Charles Schwab. We’re going to break down the current macro and market environments. We’re going to get her takes on the latest inflation numbers, some of which only came out this morning, as well as employment and housing. She’s one of the best, so you’re going to want to stick around to the end. We’re also going to show you how to get the most out of Yahoo Finance Plus, how you can use it to filter for investment opportunities and use it to analyze your portfolio.
If you’ve been in one of these webinars before, you know how it goes with the Verizon-owned BlueJean software. For everyone else, here’s how it works. You’re going to be interacting with us in real time over the next 45 minutes. We’re going to be running polls, and you’re gonna to see them at the right-hand tab on your screen. You can also post questions around that same area. You can post them anonymously or use your real name. We’re gonna be answering those throughout the webinar, so please, please get those in.
Also, on the bottom-left hand side down, there you have sliders. You can increase or decrease the size of me, Liz Ann, or the presentation materials. You’re probably gonna want to make those bigger.
So everyone who is registered is going to get a full copy of the webinar by email, and I will be tweeting it tomorrow within about 24 hours of this event. Also, if you are not a Yahoo Finance Plus subscriber, you can check it out free for 14 days. Just scan that QR code on your screen, and we’re going to be re-posting this throughout the event. And one final note– nothing I or Liz Ann say during the course of this webinar should be construed as investment advice, and as always, past performance is not indicative of future results.
Now, let’s kick it off with a poll. And this poll is going to be, when a data series for a ticker makes predictable changes based on the time of year– this is a little technical– it’s called recurrence, calendacity, fractal dispersion, seasonality, or gamma surfing? And yeah, this is a little bit of a trick question here.
All right, so I want to bring in Liz Ann now. And thank you for joining us, because this is a particularly delicate time for markets. As you’ve noticed among your prolific Twitter tweets, low vol– excuse me, higher volatility in August. You tend to get those spikes. And also, traders are on vacation. Compounding the effect is that we don’t know if we’re gonna return to the office or school as we had planned months ago. So how are you viewing this economic and market environment?
LIZ ANN SONDERS: Yeah, and thanks for having me, Jared. I think to your point, August is often a bit of a tricky month because of vacation schedules, generally lower levels of liquidity, and just this odd history of surprising things cropping up in August when we’re all trying to take vacations. And you add into the mix not just the Delta variant and COVID, but what’s going on in Washington, and another debate around the debt ceiling, and that, I think, brings memories back from 2011, which was a very, very difficult August. And I think it does have investors on edge.
I mean, I don’t think– I would never recommend trading around the seasonality associated with a particular month, but I think in general, there are risks that have been brewing, not least being stretched sentiment and breadth, market breadth, that until recently had not been supportive of that [INAUDIBLE] sentiment. I just think this is not a time to back up the truck and load up on risk. I think you need to be mindful of some potential risks that the market has, at least, some choppiness.
JARED BLIKRE: Well, and then how do you manage that risk? We’re going to get in to do a deep dive on that a little bit later. But we were talking beforehand, people want to know how they protect themselves. And there are lots of different methods. And there’s no one-size-fits-all advice, but maybe you could just give some generalities here.
LIZ ANN SONDERS: Well, one generality is, don’t try to time the market. One of the most common questions I get from the financial media is, are you telling investors to get in or get out? And I always say, well, neither get in or get out is an investing strategy. That’s just gambling on moments in time, and I don’t think anybody can do that successfully. So I think first, you have to think of investing as a disciplined process over time.
And although it’s boring to talk about in this world of soundbites and headlines that try to capture clicks, the tried and true disciplines around diversification, across asset classes, within asset classes. And then, not just the discipline of rebalancing, but truly understanding how rebalancing can work in an investor’s favor. And I think there are times where, if you’re in a more volatile market and you have the ability to do it based on turnover implications, tax implications, maybe more frequent rebalancing, what I like to call volatility-based rebalancing, where, maybe at the sector level or at the asset class level, you’re more frequently trimming into strength, adding into weakness.
And that’s the beauty of rebalancing. Your portfolio tells you when it’s time to do something. You don’t have to worry about which yahoo is it’s going to have the right short-term market call. And it forces us to do what we know we’re supposed to do, which is not so much buy low, sell high– that almost infers an all-or-nothing approach– but add low, trim high. And I think those disciplines, to a large degree, can keep investors from getting into trouble.
JARED BLIKRE: Yeah, and thank you for that. And we’re talking about long-term investors here. I do happen to do webinars on market timing, but those are very short-term traders here. So anybody in the room from those, we’re talking about the much longer term here.
I just want to get your take on the latest inflation numbers from this morning. Holding pretty high. There’s this huge debate– I mean, we talk about it every day at Yahoo Finance– over the nature of inflation. Is it transitory? Is it not? How are you seeing the picture right now?
LIZ ANN SONDERS: So I think that the debate sometimes gets a little bit too simplistic with, you know, transitory or not, as if it’s a binary situation. And even in the case of transitory in its definition– in fact, if you look up in the “Oxford Dictionary” online, the definition is “not permanent.” Well, by that definition, one could argue even the inflation of the ’70s into the early 80s was transitory.
JARED BLIKRE: Good point.
LIZ ANN SONDERS: So some of it is a function of time frame. I think the base effects, to a large degree, are getting behind us, largely in the rearview mirror, just the year-over-year comps to the shutdown period last year when we went into an actual bout of disinflation or deflation, depending on what category you were looking at. So I think that’s largely behind us.
The supply chain disruption, supply/demand imbalances, it really is a function of what service, commodity, product, good you’re talking about. I think some of those imbalances are probably stickier in nature, not least being semiconductors– that’s not a problem that can be solved very quickly– versus others that we’re already seeing ease. You saw the parabolic move up in lumber. That wasn’t really a shortage of lumber; it was actually a shortage of drivers to get the lumber from where it resided to where it was needed. That’s eased, and we’ve seen a 70% decline in lumber prices since then.
So I really think you almost have to go segment by segment. Finally, we’re seeing a little bit of a retreat in used car prices. That came out in the data today. That had been a big source of upward pressure on CPI. Medium to longer-term, though, I think what is key are two things. One, in the case of CPI, the rent component– the combination of actual rents and owner’s equivalent rent– account for more than 40% of core CPI. So that’s really what we want to watch, to see whether it’s starting to get embedded longer-term.
And then, the other component, of course, is the potential for the so-called wage price spiral– that we have to look at every measure of wage growth, not just something like average hourly earnings, but also look for whether the psychology is changing. When you go through real serious periods of inflation like in the 1970s, it had a lot to do with the psychology– the psychology of workers willing to ask for higher wages, companies willing to provide that, companies willingness to pass on higher costs. And there’s a psychological aspect to that that is harder to quantify, but something that we have to keep in mind as we think about the longer-term implications of what we’re seeing right now.
JARED BLIKRE: Well, on that note– and we’re going to get back to a number of these points in a few minutes– I want to share the results of our first poll, and then we’ll take the second one. All right, when a data series for a ticker makes predictable changes based on the time of year, it’s called seasonality. That was by far the biggest winner with 2/3 of you getting that correct. Nobody said gamma surfing– thank you for that– or fractal dispersion. Few said recurrence or calendacity. I made those terms up.
All right, let’s get to our next poll. And poll two is, the month with the highest number of VIX volatility spikes– and we might have answered this already; that would be my fault– on average is– is it February, May, August, or October, October? Ponder that.
All right, I want to take some audience questions here. And the first is going to be from Alero. “What are the control checks to manage volatility in the stock market?” And I’ll just field this first. Kind of maybe a trick question there, too, because I can’t manage volatility in the stock market. I can manage volatility in my own portfolio– I can try. And I do that by allocating– by, as Liz Ann was saying, being somewhat diversified, but also looking at risk-reward.
So I’m a trader. When I put on trades, I’m thinking about risk management from the time I get in the trade. And that’s as a trader, but I think if you’re a long-term investor– and Liz Ann, what you’re talking about, too– you just buy on the dips, and then you rebalance as things grow in your favor. What are your thoughts here?
LIZ ANN SONDERS: Well, you know, it’s funny on the subject of volatility. And here, I’ll speak specifically about the VIX, and I’ll parrot one of my colleagues at Schwab, Randy Frederick, who is our options and active trader [INAUDIBLE].
JARED BLIKRE: Yes, we love him. He’s on our show.
LIZ ANN SONDERS: Yeah, he is fantastic. And I had kind of a sidebar conversation with him many, many years ago about trading the VIX. And he threw in the caveat that he generally doesn’t recommend people try to do it, but if you insist that you want to try to trade the VIX, the better approach is not trying to anticipate, after an extended period of low volatility via the VIX, when it’s going to spike, and buy it at that attempt at a low, but wait for the spike to happen and then short it on the way down. Because spikes in volatility tend to be much shorter-lived in time frame terms, and you tend to see these true peak inflection points happen very quickly, versus low volatility that, as we learned in years like 2017, can stay low and fairly boring for months and months– if not quarters– at a time. So once he said that, I went back and looked at a lot of longer-term and shorter-term charts of the VIX, and I think he has something there.
JARED BLIKRE: I couldn’t agree more. And one of my favorite vol traders, @themarketeers on Twitter, says– one of his catch phrases is, you buy protection when you can afford it, not when you need it, because it gets expensive really quickly. And also, don’t confuse pace with direction. And when we’re talking about volatility, you can see price make a price low, but volatility can remain elevated, and price can keep making those lower lows with the VIX spiking any further. Anyway, VIX, volatility, is an entirely different asset class, and it does trade a lot differently.
All right, I want to get to another question here. What is your top investment idea for the next one-year period any why? Liz Ann, I know you don’t give investment ideas, so I’m just going to take this and kind of answer it in a roundabout, backwards way. First, I’ll begin by saying that I do believe that– and Liz Ann is going to clarify in this next segment exactly what is meant by value, and cyclical, and growth– but I think we’re going to see a return into not only the small and mid caps, but also the large cap financials. They’ve been outperforming since the July 19 bottom, and I think that’s going to continue, with some fits and starts. But I think we are still in an economic expansion. And so Liz, I’ll just kick this over to you. Where do you see us in the current economic expansion, and the potential for it?
LIZ ANN SONDERS: Well, clearly based on the NBR’s declaration of the recession having only lasted two months, and the trajectory of metrics like GDP and coincident indicators since then, we have moved from what was the recovery phase to the expansion phase. What I think is still yet to be decided, even if officially we had a two-month recession and it’s over, whether we’re going to look back in history longer-term and see that as just a break in an ongoing economic cycle or truly the end of one cycle and the start of a new cycle.
And at this point, I don’t know that I have perspective on that. I think that obviously, the economy is still to a large degree at the mercy of the virus– in a very different way than was the case last year, because we’re unlikely to see federally, or even at the state level or local level, mandated shutdowns. But what we’re already seeing in some of the high-frequency indicators– mobility data, TSA traveler throughput, airline cancellations, OpenTable seated diners, especially in parts of the country where the virus, the Delta variant, is raging most significantly– we see that human beings still will react to concerns about the virus, and that can change the trajectory of the economy absent anything done in terms of a full lockdown.
So I think that the virus continues to be an issue, and we have fiscal relief– at least direct fiscal relief– largely already in the rearview mirror. We’ll see the final waning of enhanced unemployment benefits in September– that, of course, tied to, ostensibly, the return to school, which I think has been a factor in some of the funkiness in the labor market statistics and labor force participation rate. I think the fall will be the point where we can start to get a better sense of, truly, what this recovery or expansion looks like outside of the very unique policy- and virus-related circumstances that have just wreaked havoc with the data in the last year.
JARED BLIKRE: Yeah, not only the data. I think everybody watching this and participating in this, I’m on pins and needles to see what happens with my own particular situation here. So I’m going to get to the results of the last poll, then we’ll do another one. And then, related to our discussion here, we have a clip from Marty Walsh, labor secretary, that we’ll play in a second. All right, the month with the highest– well, I guess we’ll play it now. There we go.
– And some companies are still saying that they’re having a hard time filling positions, having a hard time hiring people. What needs to happen there? What do you think is causing that?
MARTY WALSH: Well, again, I still think I think– I think it’s the virus. I think it’s lack of good child care. I think as we move forward to September, we’ll get kids back into school. You’re gonna start seeing more people be able to go back in the workforce as kids will be back in school, hopefully. Again, the variant could cause a little havoc there. And I think we’re gonna hopefully start to– continue to see these numbers moving forward.
These last three months have been really strong and solid. Last month was 938,000 jobs. This month, it 945,000 jobs. Those are good months. Those are good reports. Hopefully, to keep that momentum going, we have to just keep our eye on this variant and to make sure that we’re not seeing spikes around the country.
JARED BLIKRE: And we’ll have to see if we can print a million next month. All right, results of the last poll. The month with the highest number of VIX volatility spikes, on average, is August, and 51% of you got that right. Next highest response was October, 29%. October has the highest average VIX, I think, because of a number of outliers over the years, so that accounts for that.
And then, our next poll, poll three. And this gets to our next discussion. Which one of these is not a style factor that drives investment returns? Is it value, is it momentum, is it minimum volatility, is it tech, is it quality? And as our audience is ruminating on that, Liz Ann, we’ve had a couple of good discussions about these terms that people throw around– and I’m probably guilty of it, too– value, growth, cyclical, without much context. And could you provide that for us?
LIZ ANN SONDERS: Sure. So particularly the growth-value debate, because it is so dominant across many of those factors that you talked about. And too often I’ll hear, whether it’s a debate forum, or somebody just writing or saying in the financial media, we think value is going to work, or we think growth is going to work, or we’ll talk about what’s working.
And I always think, well, what are you talking about? Are you talking about the value and growth indexes? And even if you are, which indexes are you talking about?
I’ve tweeted in the past– though probably not in a few days, so I won’t torture you, Jared, of going through days, and days, and days of my Twitter feed– but it’s six pie charts representing S&P, Russell 1000, and Russell 2000 growth indexes– three separate growth indexes– and then the same for value indexes, and then a pie chart showing what the sector representation is across those six.
So even if you’re just looking at growth indexes, vast differences in terms of what the sector makeup is within those. So the reality is, in the case of large cap growth– S&P growth or Russell 1000 growth– about twice as much tech exposure as what you would find in 2000 growth. So if tech has a big move in one direction or another, that’s going to have an outsized influence on, not growth across the board, but on those indexes that have a loftier weight. Same with financials– much heavier in the small cap Russell 2000 Value Index.
But I like to think about growth and value as factors or characteristics. I almost– I’ve sometimes called it the differentiation between lowercase g and v, and uppercase G and V– meaning uppercase are the indexes. And here’s an example. If you screen across all 11 S&P sectors for, say, your classic value factor, stocks that screen well on free cash flow yield, and then screen for stocks on– call it a traditional growth factor, like five-year earnings growth, value is outperforming growth the most in sectors that dominate the growth indexes.
Conversely, the only sector in which the growth factor is dramatically outperforming the value factor is energy. Energy is a value sector. It’s in the value indexes. But the growth factor is outperforming within that.
And then, one last example is utilities. They’re really expensive. They don’t offer a lot of value right now. That doesn’t mean Russell or S&P moves them into the growth indexes. They’re not growth stocks; they’re just expensive stocks housed in the value index.
So I think you can take a value approach, screen for value across a number of characteristics, but not limit yourself to the value indexes or the sectors that make those up. You can take a value approach, much like in late ’02, after the tech bust ended and you finally bottomed out– in the case of the NASDAQ 100, down 83%– if you were a deep value factor-based investor, you wanted to go into those beaten-down tech stocks that were ultimately gonna be survivors. A lot of them were still in the growth indexes, but that’s where you went to find that deep value. So when I talk about growth and value, I talk about the factors, not the index labels.
JARED BLIKRE: I will say the correct way. Yeah, just thinking about– just saying the words “value tech,” just I’ve got to think about that for a second. It’s not in my everyday vernacular here.
We also talked about momentum. And if we think back to the election, that was a major rotational event. We saw a lot of– we saw financials, energy, we saw them picking up, and what I would call the value and cyclicals as well. And then, six months later, we had all these rebalancing in momentum ETFs and indices. And guess what? Now, suddenly, financials are making up to 1/3 of some of these indices. And I’m just wondering, when people think about– maybe you can help people think about, when I’m looking for certain factors, just how they change over time, and how to be mindful of that and know what you’re actually investing.
LIZ ANN SONDERS: Momentum is a characteristic. It’s not a pre-defined label of what types of stocks are represented. You can have momentum in high-beta tech stocks, which I think generically, people, when they hear momentum, they often think that’s what you’re talking about. But momentum simply means, as a factor, stocks that have been doing well continue to do well. Or asset classes, it can be applied to, outside of just the equity markets.
You can have momentum in anything. From a sector stocks perspective, you can have momentum in tech. You can have momentum in financials. You can have momentum in health care. It’s just a characteristic of how the market is behaving.
Just like saying, defensive. We’ve historically thought of defensive stocks as being consumer staples and utilities. Well, in the COVID era, the defensive stocks, where you went for defense, the anchors to windward during the worst part of the pandemic, were actually the big 5 and a few others– the Apple, Microsoft, Google, Amazon, Facebook– not classically defensive stocks. But that was this cycle’s defensive areas because of the unique nature of this crisis. So we just have to really understand what is being discussed when we talk about those labels of whether it’s cyclical, defensive, growth, value, momentum.
JARED BLIKRE: Yeah, and I remember when energy was considered defensive, because everybody has to drive a car. And it’s interesting how that’s changed. All right, I’m going to take a few minutes here and demo our Yahoo Finance Plus platform. But first, if you have a question, don’t hesitate to put it in the chat. It’s in– not chat, but you can post questions on the right-hand side of your screen here, and we will be taking those in a few minutes.
So let me share my screen. Everybody can see Dashboard for Yahoo Finance Plus. If you watch me on the daily shows, you know I love the investment ideas. But I’m going to start from our dashboard here.
And this is my portfolio. I began this years ago. It’s somewhat arbitrary, but we can see, my dartboard picks are outperforming. We’ve got 31.93% over this year-to-date time period versus the S&P 500. And then, I can take a look at insights here into valuation, diversification, risk level. It’s saying 6 of 13 stocks are overvalued in the mid-term. In terms of diversification, we have 68% of the stocks, they’re exposed to the communication services sector– so maybe not as diversified as I would like, and we can get into detail in a minute. But risk level, moderately aggressive with a beta of exactly 1. I would say that’s moderate.
Investment ideas– that’s what I was talking about before. We can click on these, and we can see the recommendations. Let’s try that again. There we go.
And this will pop up. This is what I use for my– what I highlight in my daily reports here. This gives you some bullet points. But you can see all of it in this tab here, view all reports. You can see the history. All the research is done by Argus, Argus Research, and the technical patterns that we note here, those are provided by Trading– that’s going to come to me in a second. But we’ll get to that in a minute.
So we have the research reports. We also have an explanation of fair value. That’s using the Peter Lynch valuation model. For Apple, for instance, near fair value. Bank of America, slightly greater, up 9% there. Netflix overvalued by about 26%. And click for some more detail here, and get some more insights.
Tons of stuff, and also lots of new stuff being added. Community insights– that’s something I highlighted in the last webinar. Very useful for identifying meme stocks and other trending tickers if you happen to be more of a day trader. For the current environment, probably going to be centered more on the fundamental research reports. And also, let me just go to the investment ideas here so you can see what will be popping up for you on a daily basis.
These are both fundamental and technical. Fundamentals tend to come after the earnings reports. Technicals can be based on a variety of factors. Here is Dick’s Sporting Goods. This will pop up, say we got a continuing wedge, bearish wedge pattern. We can see it in a chart.
It’ll draw it for you, identify it as it is here. And I recognize I’m going pretty quickly here, but it is a very powerful tool if you’re trying to figure out exactly where you’re overexposed or underexposed in your portfolio. And go back to the beginning page here, we go over insights. Here’s that valuation in more detail.
We can see that indeed, we have a risk profile, moderately aggressive here. We’ve got valuation, six overvalued, three near fair value, one undervalued. And here’s that diversity breakdown that we were looking at before with the overweight in communication services. So all in all, a lot to help you on your journey as an investor– or trader, as the case may be.
All right, we took another poll. Did we get the results of the last poll yet? I don’t think we did, so let me read those results right now.
Which one of these is not a style factor that drives investment returns? People are paying attention here, because almost 50% got the right answer, which is tech. A few people said minimum volatility and quality. Those are, in fact, all factors that do drive investment returns, tech simply being a sector, a classification of what the company does.
All right let’s take our fourth poll here. This is a tricky one. When do value stocks tend to perform best? Is it when the yield curve is expanding, when the yield curve is flattening, when the Fed begins easing, when the Fed starts tightening, when the Fed starts tapering? And you’ve got to use your brain for this one. I had to think about it a couple of times while I was putting it together.
All right, and I’m going to bring in Liz Ann one more time. And I want to ask you about risk management. We talked about some strategies for hedging, perhaps, but in general, when you’re looking at your portfolio, how do you look at it and assess where you might need to do some trimming? Or if you’re just beginning, for instance, how would you go about this?
LIZ ANN SONDERS: Well, first of all, you have to start by actually having a plan and going through that detailed process of, maybe, working with an advisor, doing it on your own through various education platforms that are out there, but assessing what your risk tolerance is. And I would say one of the first mistakes that a lot of investors make when it comes to risk management is that they’ll tie time horizon almost solely to risk tolerance, or their perceived risk tolerance. In other words, I’m young. I’m not going to retire for another 40 years. Therefore, I should take a riskier approach in my portfolio; vice versa if you’re older.
But the reality is that age is not the only factor. I’ve known young investors who think they have a high risk tolerance, and then the first 10% decline in the portfolio comes, and they panic, and they dump everything. So I don’t care how young you are; you’ve proven you’re not a risk-tolerant investor. So one of the first things to try to do is assess a differential, especially if it’s wide, between your financial risk tolerance and your emotional risk tolerance. So that is really key, because as we know, the emotional side tends to kick in when you start to get extreme moves.
So that is the first step in the process. And then, that leads to a strategic asset allocation approach, a decision whether you’re going to manage money on your own, whether you’re going to use outside advisors. If it’s on your own, do you want to take a passive approach? Do you want to take an active approach?
Factors that come into play there, of course, would be correlations and dispersion as to whether the playing field is more level for active relative to passive, which hasn’t been the case until this year. The frequency of rebalancing– again, that comes into play as to whether you’re talking about a taxable account or a non-taxable account. So there are so many factors that come into play.
And then, in terms of starting to put that money to work– akin to rebalancing, which is something done once you’ve established a portfolio– is approaches like dollar cost averaging and not feeling compelled to sort of pick the day you want to start investing, either broadly or specific to any one asset class. I think that that is fraught with potential disaster, and I think a dollar cost averaging approach, again, is very similar to rebalancing in the sense that it allows us to be adding more into our portfolio when prices are lower and adding less when prices are higher.
So none of this is rocket science. None of this is new, unique strategies. But especially in this recent environment of this massive influx of younger, newly-minted day traders, I think those long-term sort of education topics around diversification and rebalancing, I think, need to be front and center.
JARED BLIKRE: Yeah, there’s a lot of focus on the quick hits being made by the retail army. And that grabs a lot of headlines, and it sells a lot of ads. But definitely, focus on those fundamentals.
I want to get to an audience question that’s somewhat related to this. What is the expected outcome of US interest rates and the impact– or the revision, so I guess, as they change– as the Fed adjust its benchmark rates, and the impact to the market? I mean, that’s the million-dollar question, because we get these reports out like CPI this morning, jobs report last Friday, and we’re all trying to figure out, what’s the Fed thinking about all of this? And Liz Ann, can you take this one for us?
LIZ ANN SONDERS: Sure. Well, there are so many factors besides the traditional fundamentals of growth expectations and inflation expectations that goes into how yields are behaving. I mean, we know, on the short end of the spectrum, the Fed’s in control of the Fed Funds rate. Longer-term, they’re more in control than they have been in the past. And that goes back to the financial crisis era with the adoption of massive quantitative easing.
But what’s interesting about quantitative easing– and it really points to just the signaling effect that the Fed provides, especially when they have their heavy hand even on the long end of the yield market– is the purpose of QE, when it was started back in the 2008 period of time, of course, was for the Fed to wrest some control over the longer end of the yield curve, not just on the short end. But what actually happened, if you look at a chart of, say, the 10-year yield over the span of the three rounds of quantitative easing during the financial crisis, you’ll see that the opposite actually happened.
When they were in the process of doing QE– again, with the stated purpose of bringing yields down– actually, yields were rising. And then, when they would have those interim periods, yields actually fell. And that is just a function of the signaling nature of the Fed and the fact that markets– equity markets, fixed income markets– discount the signals that we’re getting much more clearly from the Fed, which in turn helps to explain the recent period of time.
We knew inflation was set to significantly increase because of some of those things we already talked about– the base effects and the supply chain disruptions. Yet we saw the yield, which peaked at 1, close to 1.75 in March come down quite substantially to about 1.13 on an intraday low during this period of time where we were seeing this massive surge in inflation. I think that had a lot to do with the signaling nature of the Fed.
And then, there are other– there are trading, speculation, positioning things that occur where you get short-term money that moves into the Treasury market to play the momentum in prices down, yields higher, and vice versa. So I think a lot of what seems to be a move in yields that has been disconnected from perceived fundamentals has to do with positions getting caught on the long side inappropriately, getting caught on the short side inappropriately, and somewhat what kicks in in the aftermath of some of those speculative streams. So there’s a lot of factors that drive yields besides just growth in inflation.
JARED BLIKRE: Definitely. A lot of wise words there, because the recent moves in the Treasury market and what you’ve been noting– a seeming disconnect from inflation figures that we’ve been getting– caught a lot of people that I’ve noticed on some of our programs off guard as well. So you recently wrote about housing, and this is a great article. I’m going to show a couple of the charts from it, because we’ve seen some of the figures in the housing data just kind of come off their highs here.
This is, for instance, new single-family home sales. This is a first chart here. This goes back to 2000. This is the housing boom and bust. You can see, well off the highs from last year, or earlier this year, and then the same for existing home sales here. So what’s your point, and what are you trying to convey in this article?
LIZ ANN SONDERS: So I think there are several factors behind the rolling over in sales. I think some of it is– and I don’t remember who said it 1,000 years ago, and I think it was more tied to commodity prices– but the cure for high prices is high prices. And I think that, to some degree, has had a dampening effect on sales, because price appreciation, both for new and existing homes, sort of went stratospheric. The lack of inventory is another factor as well.
So I think that the combination of prices, maybe some COVID-related concerns, also the inventory problem, and possibly the fact that– what we couldn’t have fathomed at the time during the worst part of the lockdown– the unique nature of this crisis and what conspired to cause this massive increase in demand for larger homes, for homes outside of urban areas, some of that demand, I think, has been satiated– hence the rolling over in sales.
I think what’s importantly different the current environment versus, say, the ’05-’06 period of time is that the spikes we’re seeing in prices, like you’re seeing here, both for single-family and existing homes, is not on the back of a massive amount of leverage infiltrating the financial system with trillions of dollars of derivatives associated with what we know, with the benefit of hindsight, was ridiculous lending practices. This really is more traditional supply-demand imbalance. And that’s why, even if we got to a point where prices were not sustainable, we shouldn’t call this a bubble– to the extent you’re using that term– as a descriptor of what happened in the ’05 to ’07 period of time.
JARED BLIKRE: And thank you for that. We’ll get to another question from the audience here. This is kind of back to basics. I love it. This is from [? Fusail. ?] By the way, what is VIX? I’ll just take this first.
VIX, you can get the history of it, the time series history going back to 1990. I think it was started in 1993. They did a little backwards historical on it. And this tracks– it tracks the options market on S&P 500 stocks, how much activity you’re seeing in puts versus calls. So when you see a higher VIX, that’s indicating greater implied volatility, expected volatility by the markets, as expressed through the options market of those S&P 500 stocks. And then you have realized volatility– so that’s how much the S&P 500 actually moves on a day-to-day basis. And usually, those two are somewhat in line, but not necessarily.
And as we talked about before, a higher VIX, just because prices are going lower doesn’t mean VIX has to go higher. They can just stay at those relatively high levels for the VIX while price declines. I don’t know, any thoughts on the VIX, Liz Ann? Any further thoughts there?
LIZ ANN SONDERS: No, I think you nailed it.
JARED BLIKRE: All right, all right, we got the VIX question out of the way.
LIZ ANN SONDERS: Yeah.
JARED BLIKRE: I want to touch on some of the alternative investment classes– crypto, for instance, I know Schwab doesn’t have crypto access on its platform per se. You can trade the Grayscale Trust, as it were. But Trust, [INAUDIBLE], meme stocks– get into it. I know it’s not an official recommendation, but how should an investor [INAUDIBLE]?
LIZ ANN SONDERS: In terms of not providing a platform direct access, that has pretty much everything to do with the regulatory landscape and the uncertainty at this point associated with it. But the assumption that there’s going to be regulations put on cryptocurrency, and even the platforms, may, more broadly. And so we’re waiting until there’s more clarity there.
I am an admitted skeptic to some degree. I’m not on either end of the spectrum, meaning I’m a skeptic, but I’m not on the, this is complete nonsense. But I will be perfectly honest, Jared. I have yet to get a very compelling answer to the question I ask all the time of– whether it’s crypto experts, or crypto fanboys, so to speak– which is, what problem is this solving for? And I get myriad answers, but none that, at least, resonate with me to a significant degree.
It’s, well, I don’t trust fiat currencies. And my response there is, well, at this stage– this is just my personal view– I still put some faith in the entire US financial system, the banking system, all of its protections, as well as the power of the central bank, the Federal Reserve, to sort of control the Fiat currency that is also the global monetary standard and the world’s reserve currency, versus, say, Bitcoin miners. But there are people that want to put more trust and faith there.
And then, sometimes I get the answer, well, it’s an inflation hedge. And I think, well, you know, Bitcoin has been around since 2009, and the only burst of inflation that we’ve gotten since that period of time was during a three-month period where Bitcoin was cut in half. So you sort of lose that argument.
What I think is concerning to me that doesn’t get discussed much is actually tied to is a thread associated with other mishaps that have happened this year, tied to some of what you already talked about– whether it’s the meme stocks or heavily-shorted stocks. And it’s a concentration issue.
The implosion of Melvin Capital with GameStop was a short concentration issue. The implosion of Archegos in stocks like CBS/Viacom was a concentration issue– in that case, on the long side. The latest data that I’ve seen is the top 2% of Bitcoin holders own somewhere between 90% and 95% of Bitcoin.
And then, there’s leverage associated with a lot of this. And I think that thread of leverage and concentration, arguably, can weave its way through a lot of these areas where you’ve seen a tremendous amount of speculation. And I’m not suggesting it’s some moment-in-time house of cards, but I just don’t think that there is yet enough connecting of those concentration and leverage dots. And it could be a risk factor that is underestimated right now.
JARED BLIKRE: Yeah, and not only concentration system-wide, but also in individual investor portfolios. The worst lesson an investor, I think, can get from the get-go is stocks only go up, and then they’re all in, and they get hurt, as a lot of investors did earlier in the year. We’ve got a few minutes left, just a couple of minutes left. I do want to get to one more question here, and I think it’s relevant in terms of what we’re discussing and how investors should perceive the market now. What does Liz Ann think of infrastructure stocks or funds now that the large infrastructure bill has passed?
And I just want to share my screen real quick. I have a five-day heat map of infrastructure stocks. We see Caterpillar, on the left, is up 7%. I’ve got some nice numbers. Nucor up 16% year-to-date, even more impressive. Nucor, steel company, at record highs, basically more than doubled in price this year.
So an investor sees this, is it too late to pile in, or should I have already bought earlier in the year? How does an investor take information like this if they already have investments, and how should they think about this particular issue?
LIZ ANN SONDERS: Well, first of all, most important caveat, I don’t cover individual stocks at all.
JARED BLIKRE: Right.
LIZ ANN SONDERS: I will say that there’s always a lot of knee-jerk trading at the industry stock, sector level when it comes to prospective policy changes– especially at a point where a bill gets passed in the Senate like the infrastructure bill. But the reality is that the sausage-making process, certainly from the point it becomes proposed, then through to the point it gets passed in one or both houses of Congress, to, ultimately, when it’s transactional and out in the economy, a lot can happen. And I would just be really careful about establishing a long-term investment thesis based on the phase we’re in right now with infrastructure.
I happen to believe, thinking bigger-picture, that we’re in an environment now where we’re going to see the investment side of the economy. So within GDP, the categories would be non-residential fixed investment– that’s business capital spending. Residential investment, which is housing. And then, of course, when we’re talking about infrastructure, you’ve got to weave government spending in there as well given some of these public-private partnerships that we’re likely to see. And I think we’re going to see more of an investment-driven economy and less of a consumption-driven economy. That’s more of a medium to long-term view, but certainly, the passage of the infrastructure bill is additive to that thesis.
JARED BLIKRE: And some would say we are long overdue for that investment phase of the economy.
LIZ ANN SONDERS: Absolutely, absolutely.
JARED BLIKRE: Liz Ann Saunders, this has been fabulous. Thank you for taking time out of your day to join all of us, and thank you to the audience for stopping by. I want to remind everybody, for Yahoo Finance Plus, we’re gonna throw that QR code up on your screen one more time. You can get expert research reports, actionable investment ideas, advanced portfolio tools, and much more. 14-day free trial, start it today.
One more time, thank you again, Liz Ann, everybody out there. We’re going to be back here in five weeks, Wednesday, September 15. Mark your calendars. You will get an email again. We’re going to be emailing you, everybody, a copy of this transcript. And thank you.
In the meantime, check out our live shows on yahoofinance.com. Good trading, everyone, and good investing. Goodbye.