Welcome to Make your Money Matter, the show that aims to change the way we think about financial advice. So, you can make better decisions.
Brad Barrett is a managing director and partner at One Capital Management, a wealth management firm serving nearly 1500 clients nationwide. With over $2.5 billion in assets, they’re a group of advisors dedicated to ensuring their clients achieve their investment and retirement goals. And now here's your host Brad Barrett. [00:26.1]
Brad: Welcome to Make your Money Matter, the show dedicated to helping you create a better relationship with your money. I'm your host, Brad Barrett, and it's my goal to help you distill the best ideas when it comes to your finances so you can make more confident money moves. Here at One Capital Management, our mission is simple to help our clients and you listeners take control of your finances and build the life you deserve.
Friends, today the challenge is no longer the access to information, but rather it's finding the right information, and more importantly, how that applies to you. And that's my commitment to you here today on the Make your Money Matter podcast, because after your money matters and knowing how to plan your financial future is vital to your financial success. And before we get started on today's episode, if you want to find out more about myself or any one of our advisors here at One Capital Management, you can go to our website at onecapitalmanagement.com. There you can actually set some time with any one of our advisors to go through your investment and retirement planning. You can also click on our media tab and you can download the, the Make your Money Matter podcast and leave us a message. Let us know how we're doing, it's always good to get feedback. You can also download the, Make your Money Matter podcast on any platform where you would otherwise download a podcast, whether that's Google podcast, Spotify, SoundCloud, or the iTunes app on your phone. And if you like the show, if you liked today's episode share with someone you like, if you don't like it, I guess, share with someone you don't like, but share it nonetheless, because today we're going to be talking about what we call here at One Capital Management, our Playbook. [02:04.6]
We used to do this every quarter here at our firm for all of our clients and what I want to do each quarter here on the Make your Money Matter podcast is let each of you hear the inside perspective from our investment committee, from our partners, from our advisors, all in the light of serving each of our clients here at the firm and our playbook is designed to share, again, our quarterly views with comments, providing context to what we believe are the more pertinent issues of the most recent quarter and what we see moving forward and what a time to do it, given all that's going on right now in each quarter, really for the past couple of years has been quite eventful. So, with that said, we're going to dig right in and real quickly for reference, if you want to go and download our playbook, whether you're a client or prospective client listening here today, you can go to our website at onecapital.com and you can click on our IDEA LAB and there will see a dropdown for our playbook. And you can click on the SUMMER 2021 - DOWNLOAD. And there you'll be able to see more of a presentation or a visual presentation along with some of the notes I'm going to go through today. So again, onecapital.com. You can click on the idea lab and there, you will see a downloadable version of the SUMMER 2021 Playbook for One Capital Management. [03:19.4]
And as we head into talking about our playbook for this quarter here at the firm, you know, despite continued COVID challenges, the equity market of all things maintains its momentum through the middle part of this year with again, the breadth of the returns really spreading to most equity classes. And so, we're gonna be talking about valuations, how they're elevated, but not bubbling, managing bonds in a low yield environment, and really talking about labor inflation and taxes, all of which we'll dissect here in the next few minutes. And it feels though, as we head into this, that every asset class is up for the year. I think a lot of us are seeing it. And a lot of us are scratching our heads, not necessarily when you look at the numbers as we are. But if you're thinking right now and you're scratching heads, like how can this be? Let's go through it. [04:04.9]
So, for equity, this is all true regarding the asset classes, being up. Small company stocks and us real estate really lead the group with returns in the 23% range. Now, most others are in the 12 to 19% range with again, merging markets, really bringing in a solid 7 and 1/2 percent for the first half of 2021, pretty astounding. Now bonds, on the other hand, they faced more headwinds so far with nominal yields near historic lows and interest rate fluctuations, creating volatility. Again, they're very near flat for the year with an exception of really riskier issuers, providing higher yields and, and longer duration bonds at the other end posting more so low returns, if not negative returns in the U.S right now, short duration, municipal bonds returned 0.4% for the year so far. And it brings up a question that we've been seeing here as advisors and we talked about this in our think tank here at the firm. You know, one of the more frequent questions is after the 2020 rally, and really so far, the strong first half of 2021. What about valuation? Now while valuations of stocks are above long-term averages, currently trading at 21 and ½ times next 12 months, earnings estimates, which essentially is a price to earnings multiple. They are not at their highest point in near term history. What do I mean by that? [05:30.5]
The valuation today relative to say 2000 is backed by bond yields currently at historical lows. On a comparative investment basis for a second stocks today, pay dividends nearly at par with the U S ten-year treasury. While back in 2000, the 10 year was at 6.2% and was not very simulative to the economy. Now, in addition to that, as reflected in the presentation, if go to onecapital.com, you will see this, the earnings yield for stocks. Basically, the inverse of the price to earnings ratio is well above its 25-year average. One more reflection that equity valuations, while elevated. I agree with you, we hear at the firms see that they're elevated, but they are justifiably so. So, with earnings rising, they're also catching up with elevated prices. Something good to note. [06:24.9]
Now, the acceleration of earnings out of the COVID-19 recession pushed earnings growth to 19.7% year to date. Now, while the valuation multiples on stocks have shrunk by 5.3%, bringing valuations better in line with historical metrics. Now with earnings catching up to equity prices, what about the other side of the portfolio Brad, you might be asking. The bonds side. So right now, currently in, through our perspective and through our playbook through the summer here of 2021 rates around the world are really at historical lows lifting durations of bonds to riskier levels than normal. So be cautious of that. Now, should we see a jump in interest rates in a short period of time, bonds with longer durations will feel the pinch. The 30 year us treasury with yield currently near 2% she'll particular vulnerability to rising rates. They might decline by about 19% on a price basis, notching a 17% loss after interest income. This essentially furthers our conviction to seek yield stretches and credit and not duration. Something we're doing for our clients here at the firm. [07:37.4]
We will diligently study credit to again, take measured risk in order to maintain shorter duration diversification, ultimately from equity risk. And again, ultimately produce income when it comes to our fixed income or bond asset classes. Now that brings up the labor market. Now the labor market, if you look at it, remain sluggish, but not for a lack of demand, as many might think. And more on that subject actually was spoken about a week or so ago in our economic indicators or economic forecast, podcast we did take a look at that and we can go through some of the unemployment and employment rates as it relates to the labor statistics. But again, the labor market, although sluggish is not for lack of demand. Jobs are available in small business are saying, Hey, jobs are hard to fill. Believe it or not at an increasing pace, despite millions of being out of work, something to consider as we look at this, I know we are, as we look under the hood here of the economy. [08:30.9]
And investors tend to focus on the spike in the consumer price index, as we make our way through the reopening. And again, the CPI, the consumer price index again, we focus on that a lot in episode 15 of the Make your Money Matter podcast, when it came to economic forecast. Now, headline measures of inflation have been hot lately. Let's just be honest, rising at the fastest yearly since really the mid-1990s, but they're largely being driven by specific reopening categories or supply chain bottlenecks. You know, things like microprocessors, which are creating demand for used cars and trucks lodging, and airline prices, they're all recovering yet overall inflation is not too hot. Something that's being talked about really heavily in the headlines right now is inflation, whether it's transitory or not, but we're seeing that overall inflation really isn't too hot currently. And it's largely being driven again by specific reopening’s of certain categories. Again, with microprocessors creating demand for again, used cars and trucks, lodging airline prices, all coming back on board. [09:32.3]
Now their pressures should ease as things normalize, as things become a little bit less stop and go. And there are some interesting quirks in the measures that we looked at. The CPI again, the consumer price index puts a higher weight on energy use vehicles and housing compared to the PCE. The Fed's preferred measure of inflation, which puts more emphasis on healthcare. Interesting to think about it. Now for example, and I would say of particular relevance now, the CPI puts a significantly higher weight on used cars and trucks than the PCE because the CPI doesn't account for the higher prices received by consumers when they sell used vehicles to dealers or essentially trade them in. So furthermore, the recovery of oil prices to that note when it comes to automobiles from negative $37 a barrel to positive $68 a barrel caused a big spike in energy price changes. You see what we're seeing now, again, this is a playbook. This is what we are seeing in our economic committee in our investment committee. [10:35.5]
The reality is, as we look out, we're looking at pressures easing as things normalize. To us, the differences emerge during periods of economic volatility, but generally move in line with one another. The CPI is supposed to track the out-of-pocket costs of living for the average American while the PCE is supposed to help track the prices of everything consumed by households, regardless of who foots the bill. So, the CPI puts a relatively small weight on the price of say, doctor visits or trips to the hospital or prescription drugs. Since most of America's health care spending is paid for by employer, subsidized insurance and by the government, rather than the individuals. Something interesting to note that most people don't realize when it comes to consumer price indexing numbers. Now due to the transitory nature of shifting from a, again, a closed economy that we've seen through this pandemic to an open economy of this size, the gaps in housing price changes and the end to failing rents in major cities, the microprocessor shortage impact on used cars and trucks as I mentioned, and energy will all likely show elevated measures into next year, and a fear of rising taxes has investors on edge as well. [11:53.5]
Now Congress and The White House are working on an infrastructure spending plan and we're seeing it come to light here real soon and taxes will certainly come along as a means to pay for it. Now while buying this proposing increase from the current rate of 20% on long-term gains to 39.6%. And by the way, you got to add the 3.8% and an IT tax AKA the Medicare tax, and you arrive at a proposed 43.4% tax, which likely has everyone listening here and anyone who's read this at all like we have, a little bit alarmed. But if you listened to episode 14 of the Make your Money Matter podcast, when I talked about don't sweat the Biden tax sites, there's probably three reasons why you may not be concerned with this. One, you may not be in the category where you have the income that this tier of tax rate increase will hit. Two, he's made no conversation in, nor has been anything noted around it being retroactive to 2021 and three it may not even pass it all, it may not even get through Congress. [12:52.7]
So, understanding that we are looking at it as a forecast and indicators heading into it, nothing is sure. So, understanding, sitting with your advisor and discussing these things that may kind of bring you fear and anxiety has a lot to do with how you prepare your planning. Now outside of what the Congress may or may not do, and whether or not you fit into that category, the impact of that kind of an increase in taxes will be muted as well as just 25% of the U. S equities are held by investors subject to the levy. So, think about that from an investing standpoint. The rest of the U.S stocks are held by retirement funds, endowments, and really non-US investors. Now, quick note, the maximum rate I mentioned includes provisions that alter effective rates such as exclusions and alternative tax rates. So, when you look at the entirety of the picture, as we do here at the firm, when it comes to what we are seeing for the summer or the second and third quarter of 2021, as we head into the fourth quarter or the ending quarter of 2021, a lot of interesting things have been coming out. And by the way, this is not to disregard what is going on abroad. [14:00.1]
We have geopolitical and political environments that are happening as we speak, as we are listening to this right now that have a large impact on what we may see. That said proper planning, active management, rebalancing diversification, global diversification, and asset class design has a lot to do with how you prepare for potentially volatility, but also taking a look at, Hey, there's a lot more under the hood and I use that reference when we're looking at a car and you're a mechanic, knowing what you're looking at in the engine, when we're opening up that hood and seeing what's in there, we're seeing that, yeah, look, there's some oil changes that need to happen here and there, but ultimately we've got a good engine here. Price to earnings multiples, as we mentioned at the top of the show is well in check, especially relative to the current yield we are seeing. And we have a lot of price to earnings growth that makes a lot of value for what we are seeing for our clients. [14:49.2]
So, as you discuss this with your advisor, with your accounts, and if you're listening right now and you haven't met with that advisor that you found trust in, you can give us a call. You can call us at (805) 409-8150. You can also go to our website at onecapitalmanagement.com. You can actually schedule some time with myself or any one of our experienced advisors here at the firm, and schedule some time to go through your retirement track review meeting. Something, we call our discovery meeting. It's the very first meeting with a prospective client to go through your goals and objectives when it comes to retirement. And by the way, you may be thinking, Brad, I don't know what my goals and objectives are. We will help you do that. [15:26.7]
Each of our advisors here at one capital management are experienced fiduciary advisors ready to help you make sure you know, where your investments lie and understand how that investment portfolio, whether it's a brokerage account, an after-tax account, maybe it's an IRA or a Roth. Maybe it's your 401k or 403 B plan or a 457 deferred comp plan, whatever it is you have going on. In your working life, or maybe you're looking at that transition from your working in accumulation phase of your life to the retirement years, or maybe you're listening right now and you're in your twenties to thirties, just kicking off your investment life. Understanding how your portfolios fit into the greater picture of planning has a lot to do with the success you will see of making your money matter both while you're working and in retirement. [16:09.7]
And I hope today, gave you a little bit of a perspective of what we're seeing right now, again, in the second quarter, third quarter of 2021, and we're gonna be doing this each quarter to go through our playbook and really what's coming from the think tank i.e our investment committee here at One Capital Management. As a quick reminder, please visit our website at onecapital.com and you can click on the ideal lab and download our SUMMER 2021 Playbook. And there you'll see more of a visual presentation of some of the numbers and items I went through today on the show. And remember to download and subscribe, to Make your Money Matter podcast coming to you each week, every Friday, a new episode, and you can go to onecapitalmanagement.com, click on our media tab there, you can download it, subscribe the podcast, or again, go to any platform where you would otherwise download a podcast, whether that's iTunes app on your phone, Google podcasts, Spotify, SoundCloud, leave us a message. Leave us a review. Always good to get feedback. [17:05.5]
And remember before acting on anything discussed today, speak with a financial advisor near you. And if you're not sure where to turn and you'd like our help, you can visit us at onecapitalmanagement.com for a complimentary retirement track review meeting. And until next week always remember make your money matter. [17:21.9]
The information in this podcast is educational and general in nature and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific individualized, financial, legal, or tax advice.
To determine which strategies or investments may be suitable for you consult the appropriate qualified professional prior to making a final decision. [17:44.9]
