Ep. 237 – Andrew Opdyke – 2023 End-of-Year Economic Update
In this Episode of the Secure Your Retirement Podcast, Radon and Murs speak with Andrew Opdyke about a 2023 end-year economic update and the expected shift in the economy in 2024. Andrew is a Certified Financial Advisor and Economist at First Trust Advisor.
Listen in to learn about the impact of the concentration of investments in the top ten companies and when the market broadening will happen. You will also learn about things to consider when expanding your investment portfolio in 2024, like profitability, appropriate pricing, and portfolio evaluation.
In this episode, find out:
- The expected rate cuts in 2024 in the market after the end of rate hikes this last quarter.
- The concentration of investments in the top ten companies and when the market broadening will happen.
- Why early 2024 will be when we can correctly vet the health of the US economy without outside factors.
- Things to consider to expand your investment portfolio in 2024 and avoid making costly mistakes.
- The geopolitical shift happening in the world right now and how it will impact the economy.
- Why there are no clear AI winners in the future as it continues to grow.
- The end-of-year concerns – how geo-political issues could impact our economy if things shift in the wrong direction.
- The end-of-year excitement – the progress of AI and the unleashing of human potential happening right now.
- “There are things you’re never going to predict, but we can build portfolios to try to deal with the unknowns.”– Andrew Opdyke
- “New technologies take longer to make an impact than we anticipate in the short-term, but they do more than we anticipate over the long-term.”– Andrew Opdyke
Get in Touch with Andrew:
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the full transcript:
|Radon Stancil:||Welcome everyone to Secure Your Retirement Podcast. This is one of our most exciting episodes that we get to do throughout the year when we have our guest and I say he’s really not our personal, but we claim him as our personal economist, Andrew Opdyke. So, Andrew, thank you so much for coming on and talking with us today.|
|Andrew Opdyke:||Absolutely. Happy to be here.|
|Radon Stancil:||Good. Well, you know what? Let’s just jump right in. Just in case you’ve not heard Andrew before, what we really try to utilize is his broad base knowledge around the economy, not only here in the U.S., but across the world. And this has been one of those years where we’ve seen the markets kind of surprisingly go up, then we’ve had the pullback, and here we are again as we’re talking where the market’s kind of edging up again. And so could you kind of give us a baseline of where you think things are as we sit here at this time of the year?|
|Andrew Opdyke:||It’s interesting. So coming off of October now in November, October was one of those months where for much of the month concern built, right? People were worried because we had an escalation. We saw the conflict rising over in Israel and Gaza. We started to see concerns because inflation numbers have remained stubbornly high, and they were starting to see the economic data on the plus side has remained positive, and it’s been coming in stronger than they anticipated. For much of the month, people said, “Hey, maybe that means the Fed’s going to have to go even further. The Fed’s been saying they’re going to be higher for longer.”|
|So throughout much of the month, concern built, and you saw the markets kind of pull back, but I think the key turning point was the latest Fed meeting. It happened November 1st. Powell and company came out and said, “Maybe we’re done. Maybe there aren’t any more hikes after this.” They paused again for consecutive meetings and they said, “Look, there’s a couple things that are happening and maybe that’s doing some of the tightening for us. We’re going to sit back, we’re going to watch.” And the market as of right now is pricing in the Fed is completely done with rate hikes and the next thing to come is going to be rate cuts in 2024. And that belief that maybe they’ve done enough, maybe inflation is done, maybe we’re going to go into the easing phase next is bringing some confidence to the markets.|
|But just like two weeks, a week before that, they were concerned, and how quickly that sentiment shifted, we could see that happen again. There’s still a lot of data to come. The employment report we got for the month of October was showing a bit of a slowdown, and so let’s watch the data. Let’s watch and see how it plays out. The Fed is not committed to anything. If inflation remains sticky, if there’s escalation further on geopolitical fronts, it could shift things again. So right now, the market’s kind of ebbing and flowing with the momentum, the movement, the feeling of the day, and that can shift at any point.|
|Murs Tariq:||So while we talk about the market for the year, Andrew, so if you look at, say, the S&P 500, we know and what we educate clients around is that a lot of the return in the S&P has come from what is being touted as the magnificent seven stocks, right? Your Apples, your Amazons, your Facebook or Meta, and Google, and them. But one thing that we want to also point out is that if you were to say take a look at, because S&P 500 is market capitalized, so those top seven stocks-|
|Murs Tariq:||… have a tremendous amount of weight in how the index moves. But if you were equal weight and go to an equal weight index and say, “Every single one of those stocks in the 500 are the exact same,” the number is that it would be a negative year for an equal weight type of index-|
|Murs Tariq:||… whereas you’ve got the S&P depending on the day somewhere up around 10% or something like that. So are you worried at all about… I guess if you think about investor behavior, and a lot of times you hear the words of Apple being a safe stock to go invest in. It’s like a defensive position for a lot of people now. Are you worried about that type of concentration up there?|
|Andrew Opdyke:||I mean, when you look at it, like you mentioned, the equal weight, generally speaking, the average company is down this year. In fact, the percentage of companies that are beating the overall index, it’s the most concentrated. We have seen it going back 20, 30 years. But if you look at the index as a whole, the earnings are also flat to slightly down this year. I think the equal weight is a better example. It’s a better picture of what the average company is seeing, but you have this handful of companies that have significantly outperformed. The question when you look at that is how much of that is driven by their earnings and how much of that is driven by sentiment? How much are people paying up for those types of companies, the Apples, the Microsoft’s?|
|And if you look at the big 10, right? Instead of going with the big 10, let’s look at the top 10 companies in the index. They’re trading at a multiple, a price to earnings multiple closer to 25 to 30, whereas the rest of the market is at about 17. So you are definitely paying a premium, and now those companies have to live up to those expectations. The way that I’ve looked at this in terms of the sustainability of market movement is if you’ve got five bodybuilders, just massive people pushing a rock up a hill, right? They can get some of that momentum, they can push it up. But if one of them gets tired, it puts a lot more pressure on each remaining one. If you’ve got 300 people, average people that are pushing it, one or two gets tired, right? You can still keep that momentum up. You’re putting a lot of reliance on these companies to continue to maintain.|
|So really right now, I would be broadening out. I want to have that broader exposure. If the Fed starts cutting, and we will get passed, whether we have a recession or not, we can certainly talk about that. But in six months, 12 months, 18 months from now, when we start seeing that prolonged extended return bull market, whatever you want to call it, it’s going to come from a broadening out. We’ve seen this historically, concentration happens for a period and broadens out. So I’m a little hesitant when I look at that S&P 500 number for the year. It’s not a good representation of generally what’s been happening. And in order for that to maintain, we need to see so many more of those other people participating. And I think we will see it, but it may take some time.|
|Radon Stancil:||Good. Thank you. That’s nice to kind of get that viewpoint. So Murs and I went out to the Charles Schwab conference and that’s a big conference and we enjoy going there because you get so much good education. But a couple of different folks that were there that were talking, one in particular, his opinion was this. He says, “We hear about this hard landing for the economy. We talked about a soft landing.” And he kind of said, “I really kind of feel like we’re probably not going to land. I think the economy is at a place where it’s really going to just take off from here that we’ve had this little blip with the inflation and all that. And so I think we’re poised right now to see the economy just kind of go off from here.” How would you speak to that? What would be your thoughts on that?|
|Andrew Opdyke:||So depending on how we define these soft landing, hard landing, the way I look at it is this, the third quarter data, right? Third quarter for the United States was an incredibly strong quarter from a consumer standpoint, from a business investment standpoint, but we see some of those tides turning. One thing we saw was big inventory accumulation by businesses. And when they’re doing their earnings calls right now, they’re saying, “You know what? We kind of planned ahead.”|
|Remember, two years ago, a year ago, they were dealing with this cycle. It was hard to predict when inventories would get in, right? If you went through 2020, 2021, even into 2022, you were ordering six, nine, 12 months in advance in order to try to get things for the holidays. Now that supply chains have caught up, they’ve said, “Hey, maybe we overdid it. We’re going to pull back a little bit on our spending.” And by the way, right? In the second half of this year, treasury rates, interest rates have risen 100, 200 basis points, a full percent or two, and now our cost of borrowing is rising. And so we’re pulling back a little bit on projects.”|
|I don’t see an acceleration at this point. I think we’re going to decelerate here over the next three, six, nine months. Now, whether that means we hit a recession or not, is that major question, and people have been having this conversation. I mean, the recession has been six months away for 18 months now, and the question of will we ever get there is a major question. There’s no doubt that consumers are slowing in some areas. There’s no doubt that an 8%, 30 year mortgage rate leads to a slowdown in home building. There is no doubt that companies are borrowing less. You can see this in the bank [inaudible 00:09:31]. They have to report all this data. You can see the slowdowns there.|
|The question is, do we kind of just stall? Do we kind just flatten out and let things kind of recalibrate? Do we get things back in check? Or do we see any sort of drop-off? And if we see a drop-off, and that is still my base case that we may technically go into a recession. It’s going to be very shallow. This is a very shallow recession. It’s been such a wild ride for the last three years. So many unprecedented things. So much money is hitting the system with the PPP loans, the direct stimulus checks, the additional unemployment benefits.|
|In the last year, so much money has been hitting the Inflation Reduction Act and the CHIPS Act that people are like, “How much of this is sustainable? How much of this was a one-time hit?” We have to get to those sustainable spending rates, those sustainable business investment rates without these outside factors to really judge the health of the U.S. economy. But we keep putting stimulus in, we keep putting pieces in, and the question is, when are we going to reach that point where there’s no more of that outside influence, we’re really fully walking under our own weight? And right now, it looks like we’re going to get that test early in 2024.|
|Murs Tariq:||So sticking with the recession topic and now kind of talking more about portfolio construction in a way. So with the idea of a recession coming in, you’ve got certain companies that will not necessarily thrive, but they’ll hang in there. You’ll have certain companies that will take the brunt of the recession. So from an investor perspective, how should someone be considering aligning their portfolio if we are going into something like this, also realizing that some of this is complete guesswork as to when it does happen, if it actually does happen?|
|Andrew Opdyke:||Right. So here’s the way that I think about it right now. Whether or not we have a recession, there’s questions like, are interest rates still going to be high in six, 12, 18 months? Even if the Fed starts cutting, they’re not going to cut rates down to zero. Will the cost of borrowing… If you are one of the biggest companies in the world right now, apple right now, their cost of borrowing is today what it was for some of the riskiest companies three, four years ago. Rates have just risen. Inflation has risen. People are demanding more in order to lend, and that’s going to impact projects. Who is in a good position today to be able to operate, to be able to continue to do some projects, invest in their company and grow?|
|So the first thing I’m looking for is strength and balance sheets. Look for companies that have sustainable cash flow. There are a lot of unprofitable companies that came into existence in 2020 and in 2021, that time period where you turn on the TV and they said, “The world has changed. Go buy your Peloton because we’re not going back to gyms. We’re going to do all this from home.” Everybody was buying Zoom. Zoom became worth more than ExxonMobil even though their revenues were so much smaller because people said, “The world has changed.” We put a lot of capital, a lot of people started to allocate into these idea funds that didn’t come to fruition, that didn’t come and start generating profits. They’re facing trouble today. The first thing I always look for is do you generate cashflow? If you generate cashflow and you’ve got the capacity to self-finance yourself, to be able to fund your own projects without having to take on that five, six, 7% loan, that’s the first thing I would look at.|
|Second thing I would look at is are you paying up for it right now? Right? Most of the market is trading towards more historically average multiples, right? You’re paying kind of an average level. And so we are, I am more down towards that smaller end, not with the big 10 names, but towards those smaller companies with healthy cash flows. And then outside of that, you want to have exposure to everything. You still want to have exposure to the magnificent stuff, and you want to have exposure to small and medium-sized companies. You may want to still have some exposure to international. Diversification is your friend over time.|
|What I would be doing today is looking and saying, “Given the way that the market has moved over the last one, two, three years, has my portfolio construction for how I want to be over time, has that kind of gotten out of whack?” Because some companies have really run and some lagged behind. Maybe it’s time to just bring things back into that balance because we never know. In a year or two… I don’t know how many people you talked to in 2019 that were saying, “Hey, I’m really getting prepared for that global pandemic that’s coming eight, nine months from now.” There are things you’re never going to be able to predict, but we can build portfolios, we can design to try to deal with the unknowns, to have some protection, make sure that these are fundamentally strong companies and still have exposure to the growth that comes from major technologies that get released. So today, profitability, make sure they’re appropriately priced, and just evaluate those portfolios and make sure that anything that got out of whack, you’re bringing them back into balance.|
|Radon Stancil:||Excellent. So I’m going to switch over here to one of those things that’s obviously kind of a sad part of the world right now. But we’ve been talking about Ukraine and Russia now for a while, and now we have this scenario, this conflict between Hamas and Israel. We know that the U.S. has been sending money and efforts to Ukraine. Now they say that they’re going to be sending money and efforts over for this conflict. What do you see from that type of geopolitical issue? How could that affect the economy? I hate to break conflicts into the economy because it’s obviously just a sad thing. With the report I saw today said every 10 minutes right now, a child is dying and two are injured critically. So I mean, it’s a big deal problem, but how does this kind of play out economically speaking?|
|Andrew Opdyke:||And it’s a great question. It’s one of the difficult parts of the job, right? Is that you watch what’s taking place, and I got two kids that are sitting at home. Every time I turn on the TV and I see these families that are stuck in the middle of these conflicts that they may not want anything at all to do with, it is absolutely heartbreaking. And then I go into the office and I got to put on that econ cap, that market cap and say, “Where are we exposed?” There’s the humanitarian side of this and then there’s the mathematical logistical side. We don’t have a lot of exposure specifically to Israel to that Gaza region. But the major risk of something like that is one, there’s obviously an energy risk. There’s a lot of geopolitical players in that area, places like Iran that if they were to get involved, it’s going to impact energy markets, which is going to impact inflation.|
|Now, I will say Iran, they don’t really want to get involved because they know the U.S. has put carrier ships by their single biggest port. They have one major export facility for oil, and that is the major driver of their economy. And this ship is positioned there basically saying, “Hey, if you act, if you get involved in this thing, we can shut down your exports and absolutely demolish economic activity.” So a lot of the surrounding nations don’t want to take part in this. They’re trying to kind of stay back, stay neutral.|
|People would love to see a ceasefire, but remember, right? This is not a conflict that arose out of nowhere. This is a conflict that’s been ongoing not just for decades, but for centuries. And unfortunately, I don’t see a quick solution to this one. I think it is going to be a difficult, and it could be an ongoing fight, something that we will hear a lot about on TV. But I think the economic and market repercussions will be less substantial unless similar to Russia, Ukraine, unless Russia invades Poland and starts a bigger war. These conflicts kind of stay contained and we see what we can do from a humanitarian side, how we can aid, how we can help those people that are caught in the middle of this. But from an investment standpoint, there’s a little less action to take. It’s more of, “That’s an unfortunate thing that’s taking place,” but it’s not heavily impacting a lot of companies.|
|I will say this though. We have seen some fracturing on the global trade landscape over the last two, three, four years, and it happened even before Covid. If you remember 2018, 2019, Trump was escalating trade conflicts with places like China. And we are seeing this fracturing. We’re seeing some groups, China, Russia, Syria kind of break off into their own little pocket trying to do some things.|
|What we’ve done in the United States is we’ve said, “Who do we feel like we have strong relationships with?” We signed new contracts, new trade agreements with Canada, with Mexico, with Japan, and if you look, China’s no longer our number one trade partner. They were for years. Now they’re down to number three. And we are kind of slowly shuffling back, pulling away, trying to make sure that where we’re plugging in, where we’re allocating capital, where we are putting in agreements for resources that we need are with people we can trust and feel confident that their political structure, that their economic structure is going to sustain and is kind of aligned with ours. I would expect that trend is going to continue here over the next five, 10 years, that you will continue to see some separation between these groups. And that may mean a little more pressure on inflation, but it’s the nature of what’s going on right now.|
|Murs Tariq:||Well, great. That’s a great summary there. Let’s transition to one more topic and then I think we can close out with the usual that we ask you, what are you excited about, what are you worried about. But before we get to that, so if you go back a couple years, the frenzy was all around cryptocurrency and then it was, “Let’s not worry about cryptocurrency. Let’s invest in the technology,” which is buying in the blockchain. And now today from what has really launched in the magnificent seven is all around artificial intelligence, AI. So there’s obviously been a massive run-up because of some of those companies that have a lot of that technology, and there’s really some really cool things that you can do with AI. I guess the question becomes, is it going to continue to be a good thing? Are we going to continue to have good run-ups and the markets benefiting from it? Or, in your opinion, are we going to see issues around it as well down the road?|
|Andrew Opdyke:||So the way I think about AI to a degree is what we saw in the late 90s is related to the internet. A lot of the same conversation. This is changing the way that we work. This is going to change industries, this is going to lead to certain types of jobs not being needed anymore. And that’s back in the late 90s. People are talking and say, “Hey, if we introduce these things, if we unlock these things, if all of a sudden the global conversation expands, what does that mean for U.S. middle class workers? Is that going to lead to a destruction in U.S.?” There’s a lot of similarities and there’s a lot of hype and consideration investment movements that are tracking on a handful of companies that people are saying, “These are the winners. The world is changing, our environment is changing. Let’s be involved with these winners.”|
|Now, if you go back to 1999 and you look at who were the major companies, right? What you’ll see is that the names are things like Nokia, GE, AOL-Time Warner, IBM. There’s a lot of companies who were very well positioned at the time, Bell Labs, [inaudible 00:20:38] Technology, I’ll include in there as well, and they were leaders going into the new technology, but they were big names that also had bureaucracy and it was very hard for them as the new technology came out. Nobody was sitting there in 1990 again, or at least very few people were saying, “Hey, we really need to pay attention to those two guys, Larry and Sergey who are over there at Stanford,” because they think it looks like they’re working on something cool. And there’s this other guy on a college campus named Mark Zucker something, right? He has created this new Facebook thing, and that seems like… People weren’t looking at it, they weren’t looking at Amazon who was a bookseller at that point.|
|We get surprised at where innovation is driven from, and a lot of times it’s driven by where people can take risks. And a lot of companies will fail along that path, but we see this turnover over time. Of the 10 biggest companies in 99, only two of them, Microsoft and Exxon, are still in the top 10 largest companies. So when I look at AI and I see people saying, “Hey, the magnificent seven, the biggest companies today are going to win this fight,” I’m a little more cautious. I look at it and say, “Hey, historically, the trend has been that smaller companies, more risk taking companies are able to come into this space and they end up taking a lot of the awards.” And don’t forget, it takes longer than we expect. New technologies take longer to make an impact than we anticipate in the short term, but they do more than we anticipate over the long term.|
|AI could be a legitimate shift. I’ve got more faith in AI than I did in crypto. From our prior conversations, if anybody has seen this before, I was not a big crypto person. I do like blockchain. I think that’s going to be a part of this. But AI, as it develops over the next few years, nobody knows who the ultimate winners are going to be. We will, I think the people will be winners because efficiencies will come through. We’ll have more options, smarter options, we’ll have more choice. We have been historically moving for the last 100 years towards less physical labor, less total hours worked, but greater income, greater leisure, more choices on what we do in that leisure time. I think that side of it will continue. But AI, I’m not putting all my eggs in one basket. I’m going to spread it across this big group because again, we just don’t know who those winners are going to be. And I love innovation, I love entrepreneurship. Let’s bet on the group and see what they can do. And I think they’ll do amazing things.|
|Radon Stancil:||Excellent. All right. Well, let’s do our wrap up here with our final two questions. I’ll start off with the one and let Murs close out with the positive. So what is it that right now, sitting here in November of 2023, are you worried about?|
|Andrew Opdyke:||So we talked about this a little bit earlier. The geopolitical issues that are starting to pop up in different areas. Again, you’ve seen that with Russia-Ukraine, you see that with what’s going on with Israel-Palestine. I think we could see a couple more of these. When there are these shifts taking place, there’s winners and there’s losers and people that feel like they’re losing access to the world markets or losing presence on the world market and because there’s a population shift, demographic shifts that are taking place where some of the biggest nations right now, China included, are probably at peak population and they are going to see a decline, a more difficult path over the next 10, 20, 30 years.|
|So here in the short-term, intermediate term, the fighting has got me a little concerned, it’s got me a little stressed. It’s tragic, right? And I wish there was an easier solution. I wish there was something that we could do to alleviate that, but I think we’re going to hear more and more of it. And then next year, we’re going into an election year, right? And so locally, domestically, we’re going to hear the fights. There’s a wave of negativity that comes because people are frustrated, people are concerned.|
|I think the negativity side of it could put some downward pressure on the markets. I think that’s what I’m concerned about is that people are getting emotionally drained and people, in a lot of these other countries, are dealing with some incredible conflict that we need to find a way to help them, but it’s no easy solution. So that side of it, I hope it doesn’t escalate. If it does, that could throw everything off track. If China invades Taiwan, Russia invades Poland, Iran gets in this war, it’s a whole different picture. It’s a whole different path forward than where we are today. Fingers crossed that they don’t escalate to that point.|
|Murs Tariq:||I agree with you there. All right. Well, let’s end on a positive note. Andrew, what are you excited about as we close out the year and then enter into 2024?|
|Andrew Opdyke:||So AI, the more I spend time, again, I don’t think it’s going to change the world over the next six months, 12 months, 24 months, but the progress. I live in a family of programmers. My dad, both of my brothers are programmers. They spend a lot more time and the things they keep bringing, they’re like, “Hey, have you seen this? Have you seen this?” It is unbelievable. I think one of the times in the past, I shared the stat about global literacy. Up until 1963, less than half of the world’s adult population was literate and it had never broken 50% at any point in the history of the world up until 1963. Today we’ve got about 90% of the global adult population is literate, which is an amazing progress in terms of unleashing human potential, human prosperity.|
|I was reading a book last week on energy production. They brought up another stat because they were talking about how we do more with less. One thing I hadn’t thought about is that back in the 1960s, the world’s population was less than half of what it is today, right? And you think about what that not only are we reading, learning, attacking problems, right? At a higher level, we’ve got a far greater percentage of the population that is fighting to resolve issues, we’ve got more than twice as many people here on this earth to do that. We have never, ever in history had more people fighting the fight. And to me, that is absolutely awesome.|
|I get a newsletter, I think it’s called Human Resource Project every Sunday, and it talks about where their growth is. What are things that we’re doing across? And every week I’m hearing about a new fight on cancer or a disease that we’ve been trying to alleviate for a very long time. The latest news was how dementia is in decline. The rates of dementia are declining about 13% in the last decade. It’s an amazing thing. We are making amazing progress in a lot of categories. And while we have our issues and while we have our fights and those will never fully go away, we have more people than ever today fighting with more information, with more knowledge, with more learning, with more sanitation, with more food.|
|So as we go here into Thanksgiving soon and then we close out the year and we’ve got Christmas, there’s a lot to be thankful for. There is a lot to reflect on as we look back on this year. And don’t just look back and say, “Hey, what were the issues? What were the frustrations?” Look back at the progress. Look back at the unbelievable. And unfortunately, you have to fight harder to find them. They don’t get as much news coverage because if it bleeds, it leads, right? But I’m unbelievably excited about what the world is doing and what the world is unleashing right now. It is, quite frankly, mind-boggling if you take a step back and think about, right? How human potential is being unleashed today. It’s awesome.|
|Murs Tariq:||That’s a great point. I think it’s easy sometimes to just only hear about what the bad things are that are going on because of the media and everything like that. So to realize that there are a bunch of really good things happening in tandem as well, I think that’s great. Andrew, thank you so much for hopping on with us today. We know you’re a busy guy, but our clients and listeners, they love hearing from you. They think you explain it in such a nice and easy way. So we really appreciate you carving out some time.|
|Andrew Opdyke:||Thank you so much. Appreciate joining you.|