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Town Hall Call Recording 8/13/20 Thumbnail

Town Hall Call Recording 8/13/20

Maureen: Welcome and thank you for joining HCM’S call with Doug Johnson and Mike Hengehold. Today is August 13th. Tonight's call will last about 30 to 45 minutes. And during that time, Doug and Mike will discuss the upcoming election and how it might affect the market, what makes this bull market unique, and some possible opportunities going forward.

They will also do their best to address any questions that come into our email account. Your lines are muted. So, if you do have questions just send them in to info@hcmwealthadvisors.com. I will turn this call over to Mike and Doug. Mike.

Mike: Thanks Maureen. This is Mike and Doug, and thanks everyone for joining us today.

Before we get started with the agenda, I have two announcements that I'd like to make. The first is one that we're relatively proud of. This week HCM was recognized by financial advisor magazine as a top advisory firm. So, we're obviously very pleased about that. And the second thing I wanted to do was to have you all mark your calendars. Next months call is going to be a little bit different, we're going to be hosting a webinar with Jeff Kleintop on Tuesday, September 22nd at four o'clock. Now we'll have more details about that coming up, we'll be sending that out shortly, but again, mark your calendars.

Jeffrey Kleintop is the chief global investment strategist at Charles Schwab. His group is responsible for figuring out and evaluating and then building strategies around significant opportunities and risks in the world's capital markets. So, you may recall that we had planned to bring Jeff in as a live speaker for a client event earlier this year. But obviously the plague put the kibosh on that. So, we've essentially rescheduled a virtual event, so that everybody can hear what Jeff has to say.

So, that takes care of the announcements so let's get started. With everything that's been happening around the world, all of the government responses. I find myself wondering, if it's different this time, you know, we have a lot of observations about the markets, but you have to scratch your head and say, is it different? But then I can't get out of my head what the great legendary investor John Templeton said, which is those four little words, “this time it's different”, are the four most dangerous words an investor can utter. So, obviously there are some big differences this time. One of the big differences, if not the single biggest, is that the fed has never provided so much money, yet at what is essentially zero interest rates. And that in and of itself sounds like a big differentiator, but it might be dangerous to look at that as justification for a fundamental reset, because there is precedent for that. Interest rates had been extremely low, have been extremely low, in Japan for the last 30 years or so. And they've certainly had their share of bear markets and recessions during that period of time.

So low interest rates certainly make us change the way we think about valuations, but it's not a cure all elixir, and extreme valuations do have to be reconciled sooner or later. So, to do that, the processes that we follow here at HCM basically takes the data as it presents itself. Hopefully we try and not even think of it as how we would like it to be but take it as it is. And then we use tools that have proven to been reliable over long historical periods to help us evaluate that data and evaluate the potential for either opportunity or risk. Just by way of example, one that comes to mind that we've been focused on a lot is something known as the buffet valuation indicator. And yes, it's named after Warren Buffet. What it does is it compares the value of the market, made up of some 3,800 stocks, to the value of the economy measured by GDP, or gross domestic product. The latest reading, the latest measure of this, had the stock market at about 171% or 172% of the value of the economy, which is higher than it was in 2000 and also higher than it was in 1929.

So, those are some big markers in terms of major shifts when valuation gets way out of hand. So another sign of overvaluation, that causes us not to dismiss the first as an aberration, is looking at the value of just the median stock on the New York stock exchange. Right now it's selling for more than 33 times earnings, or a PE multiple of more than 33. And we know from historical observations that stocks have struggled when that indicator gets much above say 20 or 21, something like that. So, valuations there are obviously getting expensive. In the small cap universe, as you start going down market cap, you start taking in a broader and broader swipe of companies. The multiples there are not at record levels, but at almost 43 or 44 times earnings, they're now three standard deviations above their mean or above where they would normally be. And so when we look at that statistically, we're getting out there to a pretty significant extreme. Some other indicators that suggest that, you know, when we're making this decision, if it's different this time or not, that we look at the amount of cash that that institutional investors have on hand.

So, if investors have idle cash, think of that as gasoline that can be thrown on the fire. So, if they had a lot of money to invest since stocks are essentially a commodity. That money comes in, more money's chasing the stocks, the price of stocks go up. Well, what we've seen recently is that cash levels for both domestic and global mutual funds are at historical lows. Meaning that there really isn't much in the way of gasoline to be thrown on the fire, at least in the mutual fund universe.

But with that said, the world's not black and white, there are a lot of factors that suggest the cycle could be different. And if we take away the notion that it's different, and sort of respecting John Templeton's view of things. At least maybe it is being stretched out more than normal. So certainly, with the fed pushing interest rates down, those record low cash levels don't look nearly as bad, with alternatives essentially being paying effectively zero. And another measure of sentiment, when we think about valuation is, our different investor polls, and the AAII poll, which is a widely reported and well-respected poll. It's the American Association of Individual Investors, shows that individuals continue to be fairly pessimistic. So that means while institutions have invested most of their cash. People still have a lot of money on the sideline.

So, with all those things said, that's sort the struggle, the yin and the yang, or the angel and the demon, on my shoulders. Is it different this time or not? So, with all that, I turned to my buddy Doug here and say, so Doug, is it different this time?

Doug: Well, I don't know that I'm ready to make that definitive statement, but what I would say is there are certainly a lot of hallmarks of this bull market that have differentiated it from the bull markets of the past. Now can all of these things continue to happen, or are they sustainable so to speak? I think that's yet to be seen, but you know, Mike touched on the largest differentiator of this bull market, and that's been the fed involvement. So, I don't know that we need to touch on that in great detail, but I think it is important to reiterate that is, in our opinion, probably the strongest force behind what we're seeing right now.

So, some of the things that have kind of made this unique, I think for starters, we've never really seen a type of macroeconomic backdrop that we're witnessing right now. Normally when you see bull markets kind of begin, you're starting to, I guess, come out of economic recession. You've had a lot of demand destruction. You've kind of had a cleansing of the system, so to speak. At the same time, we've never really had the type of bad data that we've seen. Now, I will admit, we're starting to see things improve. But, from my perspective, this notion of an economic V-shaped recovery simply hasn't played out anywhere in the data. It certainly played out in the market, but again, we're talking about the divergence between what the market is doing and what the economy's doing. You still have 15 million people on continuing unemployment claims and you've had over 45 million file initial claims over the past five months. Those are astronomical numbers and they dwarf everything that we've seen in our economic history, including 1929.

A lot of the percentage gains that you're seeing, you've heard me say before, this concept of fun with numbers. It's pretty easy to get a big percentage gain when you're starting from one and you go to two, that's a hundred percent gain, but the absolute increase is really not that much. And I think it just goes back to the sense that you kind of ask yourself the question, if everything was so close to being back to normal, would we still be wrangling over an agreement for more stimulus? And it seems like we're kind of still very much on the edge of our seats, trying to figure out where the next stimulus package might come from what it's going to look like.

At the same time, maybe the market has just become so addicted to that process that it's going to be ongoing. But I say for now the market remains kind of in a world of its own. It's detachment from the economy has been something we've talked about for a while. You also have a very high concentration level at the top of the indexes, the S and P 500, you have the top five stocks representing almost 23% of the index.

Now, historically, when you get concentration levels above 20% or 21%, it's kind of signaled the beginning of what we call a topping process. But, to see it at 23% is certainly got our attention. And then you can see the return difference, between what would be an equal weighted S and P 500, and a market cap weighted S and P 500.

So, when we talk about equal weighted, just take the 500 stocks in the S and P you weight them all the same, and there you go. The normal S and P 500 is a market cap index. So, the larger the company, the higher the weighing is. So, the return differential between those two right now is about 7.5% year to date. So, you can see how much just owning those top five stocks has meant in terms of returns.

But we're also seeing massive divergence between styles. So, in a normal economic recovery or, the beginning of a bull market, you would see things like small cap and value and cyclicals start to outperform, and in some instances in a pretty significant way. But we haven't really seen that. Gross stocks have been roaring higher, mainly denoted by the NASDAQ, and you you've seen just this massive gap in performance between those. So, if we were truly seeing an economic Renaissance, we would expect to see more value stocks or cyclical stocks, more small cap stocks, starting to outperform, and we've seen some kind of false starts of this rotation, but nothing that's kind of truly stuck.

I think if we were able to start to see that economic growth, maybe through a viable COVID vaccine, we could maybe see that rotation stick a little bit. But for the time being, it just doesn't seem to be able to hold any sort of traction. And looking outside of the equity market you're also not seeing bond yields rising in a significant way. And normally that would be a sign that we're seeing economic growth starting to take hold. And again, you've seen fits and starts with this. The 10 year treasury was a 55 basis points, I think at the beginning of the week, and today I think it hit 70. But still very low levels for interest rates, denoting that the expectations for growth going forward are still really really low. So, it continues to beg the question, how has the fed truly changed the market? And if they have, then, you know, things are different this time. Maybe more likely just simply stretching the cycle out, but it's going to kind of change the way that we think about investing going forward. Not only from a valuation standpoint, but I think from an allocation standpoint too. The issue is we don't know how long that stretch might be.

There's a famous economist, John Maynard Keynes, who said that the market can stay irrational much longer than you can stay solvent. And he was actually referring to kind of betting against the market, but I think a lot of people out there are kind of looking at this in disbelief thinking how much longer can this go on? And I think that in our heads we think rationally, this shouldn't be happening, but it is. And I think we need to take a step back and try to embrace this in the best way that we can, without going overboard and taking too much risk. And I think that's why we try to use a wide variety of indicators to try to make sure that we're not really missing anything so to speak. But Mike, I think the other thing too is it can create some opportunities on the other side.

Mike: Okay, so, you said two things there that I want to follow up on. The first one is, if something does spur potential growth, I think, at least from our perspective, we can all agree that using traditional metrics, the market is at least somewhat expensive, even in light of the low interest rates. Ultimately, valuation and price have to get reconciled. The question I guess that's in my mind is, can we have a spark of growth? So you mentioned, if we get a viable vaccine announcement and things sort of open up and full stream ahead. Can fundamentals grow up to support valuations?

I'll stop there, I think that's the question, can something happen? So obviously, the fed has changed things and has declared with sort of some odd comments that they're not thinking about, thinking about, thinking about raising rates. They've talked about the fact that they're willing to watch inflation, they want to stimulate inflation, and are willing to watch it rise above their long term targets that they've had for a long point without fighting that back. And so, at a minimum, that could be lengthening the cycle, but then coming back to my original question, if we had something that really spurred growth, is there a chance we can avoid that reconciling moment and have fundamentals grow up to meet where valuations are. Maybe the market has it right with valuations and we're just not thinking far enough ahead.

Doug: Yeah so, I think there's pockets of the market that are actually cheaper than others. I mean, we just talked about this massive divergence between growth and value. And we're seeing growth valuations at that very, very extreme levels, almost higher than we saw in 2000, and all the focus has been on that growth side of it. Now, for the sake of argument, let's say that we get a viable vaccine and things go “back to normal”, what opportunities might come out of that?

So, we mentioned a few minutes ago that the potential for a rotation back into some of these unloved sectors. Specifically value, specifically small cap, and even emerging markets, if economic growth were to fall and we would assume that it would. So right now, we’re remaining underweight small cap, and slightly underweight emerging markets, but we've slightly increased our value exposure over the past few months. And our concern in the small cap and emerging market space starts with the fact that we haven't necessarily, I guess technically, you could say we're out of recession based on just the GDP growth numbers that we may see. But I think for all intents and purposes, we can agree that the economy is not running it at full capacity. So you couple that yeah slow growth with still high valuations, and that causes some concerns about the market in general. But, in areas that are more volatile, small cap in emerging markets, specifically. Those concerns get amplified a little bit.

So, the return potential is certainly higher, but against this macro backdrop, the risks are higher as well. So, we've balanced out that risk reward exposure in our portfolio during their recovery. And while we're close to being back at neutral equity targets, we still feel that we need to have a level of prudence to keep some caution in our allocation mix.

Now, outside of equities, inflation has been a big topic lately. And I think that we're starting to see some small inflationary pressures pop up. You've seen the price of gold increasing, and then you've seen the dollar decrease. Now, what opportunities can inflation present? So, there's an asset class that's been hated for a long, long time, that you probably haven't seen your portfolios for a while, and that's commodities. So, if the fed lets inflation run a bit higher than their target for a while, as they've kind of indicated they would, commodities are historically cheap versus equities right now. And the prospect of a declining dollar with high inflation could set up the possibility for, what we think could be, a bull market in commodities. I don't know that we're quite there yet, I think if you were thinking of it as a baseball game, lots of people like to refer to what inning you're in. I think this trade may be in the batting practice stage. But you're certainly seeing the ingredients start to come together, to see that as a possibility.

However, when you have recessions, usually those bring more deflationary pressure because of lack of demand. Which isn't a good thing for commodities, but again, we need to ask ourselves, has the fed change the rules of the game, so to speak. One other thing that weaker dollar would probably do is lead to international assets outperforming. We've seen U S outperform international for quite a while now, but based on that currency effect of a weaker dollar, you could finally start to see international assets start to make some headway against U S assets.

Mike: Alrighty, so that sort of begins to dovetail into the other thing I wanted to touch on that you'd mentioned earlier, which are other asset classes. It's natural, I think when we have these conversations, that we're always focused on the stock market because that's sort of the most exciting and sexiest piece of the puzzle. But when we put portfolios together, when we're thinking about risk management in the portfolios and keeping some powder dry, to take advantage of rebalancing opportunities, if we do get a sell off, to gain diversification. Almost all portfolios contain non-equity constituents, and the vast majority of those are typically fixed income investments. They could be commodities for example, but they're typically fixed income investments. Can you just speak to that side of the portfolio for a few minutes? Because clients may have anywhere between 20, 30, 40, even some more conservative allocations, even more. And with interest rates being at such extreme lows, how are we thinking about that now?

Doug: Sure, so, as rates have moved lower, based on fed communications, they're expected to stay low for a really, really long time. We've had a lot of questions about, does it make sense to hold bonds, especially longer duration bonds. Now if you remembered, durations just a fancy way to talk about the relationship between interest rates and bond prices. So, you think of it as like a teeter totter, so to speak, when rates move up, bond prices move down, and vice versa.

So, when we talk about duration, duration, just a number that gets assigned to that relationship, the higher the duration, the higher the rate sensitivity. So, for example, a portfolio has a duration of 10 and rates go up 1%. In theory, that bond portfolio should go down approximately 10% in value, and again, vice versa. So far this year with rates going down, most bonds have provided a very good return in portfolios.

But you know, in order for the bull market and bonds to continue, we'd have to see rates continue to move lower from where they are, and it's not completely out of the question. We've seen it in other countries where rates have actually gone negative Europe, specifically, Japan. But it does have to end someplace, and if we get a growth resurgence with a vaccine announcement, or even just a moderate level of economic improvement, we could see a spark of inflation, and that could cause rates to move up a little bit. The options there would be a lower rate sensitivity, which in this environment would mean accepting less income, or taking on more credit risk. There you have the possibility of losing value, if the recession were to be prolonged. And again, this is all assuming the fed doesn't come in and just buy every corporate bond in existence.

But other asset classes that we could include in this, dividend paying stocks is something that we focused on for a while. You have things like preferred securities, real estate, emerging market debt, leverage loans, and then commodities, which we already mentioned. Those are the types of things that can increase portfolio income in that type of environment and offer a little bit better risk return profile than what we've seen on the fixed income side. With that said, they all bring in their own unique risks to them, which is kind of something you don't want to see in a bond allocation. But it's kind of balancing out the outlook versus what's going on right now. And there's no real good answer for this dilemma right now, but for us rates don't seem to be heading significantly higher quite yet. So, we like that kind of offset protection we get from treasuries for the time being. We may consider slowly shifting some of that exposure to high-grade corporate bonds, for maybe a little bit of extra income. But we really want to see that shift in the indicators before we make any kind of material changes in that area.

Gold is another asset class that has gotten a lot of attention, we wrote about it I believe two weeks ago. The thing with gold is it doesn't produce any income. It's volatile and it's really hard to value. So it's not a necessarily a good bond substitute, but if you were really worried about inflation, it can certainly provide you some buffer there. But we would certainly proceed with caution on the gold trade in terms of how much of that you're going to allocate in your portfolio.

So Mike, now that we've kind of touched on these things with the market, the economic stuff. I know there's a lot of people waiting to hear about the one topic that I've probably been asked about more in the past two weeks than anything else this year, and that’s the election.

Mike: Yeah, one of the things that we do before these calls is we survey all the advisors to see what the most popular questions they're talking to clients about. And it wasn't even close, the vast majority of questions that we've been getting from clients are related to the election and what may happen in the markets, particularly in the economy, obviously, based on various potential outcomes between the white house and Congress.

Before we get into that though. I want to sort of renew my comment, sort of a public service announcement, that we are agnostic when it comes to markets and politics. We're not advocating here for either party, or any particular outcome. Rather what we're doing is relaying how the analyst community that we're in touch with on a regular basis is thinking through this. And then how our thoughts apply to this as well.

So, with that said, Doug, do you have a reaction to this whole thing? What are you telling people when you talk to them?

Doug: Yeah so, the hard part is that neither candidate has really had the opportunity to give us a clear “platform.” So, I think for what we can go with right now, I think it's fair to operate under the general assumption that the two candidates are going to have opposing views on several different topics. And as you mentioned, our objective is to assess what the market or financial implications of those policies are. Certainly not the same thing as saying, we don't care about the social issues or, we favor one candidate over the other. We're simply trying to look at this and say, okay, based on tax policy and things like that, how do we feel that it's going to affect the market or could? So from a very general sense right now, I think we can say that Trump has been seen as a very anti-tax candidate while Joe Biden is seen as more of a pro-tax candidate. And what does that mean? So higher taxes mean lower earnings at the corporate level, which again, it's historically meant lower stock prices. Now with that said, many have pointed out that the Biden has a large lead in the current polls. And if the market sees that wouldn't it be selling off an anticipation of Biden winning the election.

So, I think that could mean two different things. First, it could mean the market simply doesn't buy the current polling numbers. We talk about the 2016 election with that, I think that most of the major polls had Hillary Clinton winning the election at a 95% confidence interval, pretty much to the minute the polls were actually opening up. So, it seemed almost unfathomable that she could lose the election, yet she did.

So, the market may be looking at this and for whatever reason saying, we're not buying that the lead is as wide as it is, or there at all. Another, I think, more realistic approach is that neither candidate has mentioned anything about disrupting the one thing that truly matters. And that's the fed providing liquidity. Trump has already shown no opposition to an aggressive fed, and he's actually been quite adamant about that at times, he felt that that rates should have been lower, and that the fed should have been more aggressive in their policies. And so far Biden has shown no reason to oppose further stimulus, I think it's important to remember that that the Biden was actually the vice president in our Obama's presidency. And Obama presided over the first market environment that really had this kind of idea of quantitative easing. And Janet Yellen had Ben Bernakie only raised rates one time during Obama's presidency. So the fed is supposed to be apolitical, I don't think they favor Republicans, I don't think they favor Democrats, and I think that if both candidates are willing to kind of just let the fed do its thing, it may not actually be that big a deal, believe it or not.

I think it remains to be seen what kind of effect we're going to see right now. And because of that, we're not making any anticipatory changes to portfolio to try to kind of gain the system of what we might think happen. I think we don't want to get caught guessing, so to speak, and we'll kind of let the data play itself out. And like I said, we still have even really heard from the candidates in a formal setting to understand what their tax policies really look like.

Now, I will give you some hard data, from a report that I saw in terms of kind of what each presidency, in terms of Republican or Democrat, means for the markets. So, since 1933, the average return for the S and P 500 index under democratic presidents was 10.2%. And it was 6.9% under Republican. So, a lot of people hear that and it's kind of surprising. And some of you may be thinking, wait a minute, you just told me that the democratic candidate is pro-tax and that's not going to be a good thing. The trick in these numbers is that these go back to 1932, or 1933, i'm sorry. And what you see is that almost all of the outperformance advantage can be traced by the boom years under Bill Clinton, and then the subsequent dot com boost or bust, i'm sorry. And then the global financial crisis under George Bush. If you take those two periods and strip them out, the difference is eventually zero.

Now, take that information for what you will. But I think we want to, right now, put a lot of stock into what might happen in the election. And it's certainly a big topic and we're certainly going to pay attention to it. But we don't want to overestimate that the effect that may or may not have.

So, one take that I heard that’s interesting, was a combination of Joe Biden as president and a Republican Congress, would probably be the most Goldilocks scenario. Because you would get a tougher time passing any level of tax reform through Congress as the Republican leadership would be somewhat opposed to that. But then you would also have a president who may be able to, I guess the word that they used was, thaw, some of the international relations. That in their view, the president had kind of frozen a little bit. So, this will certainly continue to be a very big topic going forward and it's certainly something we have our eye on. But again, we're not in a position right now to kind of preemptively do anything to front run that outcome.

Mike: And I would add on the planning side, and it may be a bigger deal on the planning side, quite frankly, because of steps that people would typically not want to take until the answers are known and then there'll be a rush for the exits, which could have a bearing. And what I mean by that is, one of the things that, in terms of policy, that's been announced is that if we have a situation where the democratic administration and democratic Congress are both in control, from an estate planning perspective there is a good chance that there would be an effort to reduce the estate tax exclusion. And so, families that have taxable estates would likely be planning and then acting to accelerate transfers when they can be done essentially on a tax free basis. Rather than risking having the government, grab 40%, or potentially more if the state tax rates would go up, on the estate planning transfers. So, the estate tax arena is something to think about, we will be talking to clients who are exposed in that area, just so that thinking can be done. But again, it's a sort of thing you wouldn't want to do until potentially November 4th, and then everybody's going to be trying to move.

Along the same lines but shifting sort of taxes from estate taxes to income taxes, the policies that have been discussed are increasing tax rates. So, tax rates were already scheduled under the current rate schedule are already scheduled to go up in 26. That certainly could be accelerated, especially on higher income taxpayers. And what does that mean? Well, remember you're a high income tax payer if you're receiving social security, and you make more than $30,000 or $40,000.

So, while the social security benefits would be protected, how they're taxed could change and we already have good precedent for that. And as you know, there's two tiers of taxing social security benefits. And then when you dig a little deeper, anybody who has a little bit higher than average income and retirement also understands that Medicare premiums, the way those premiums are taxed also change. So that's an area of exposure. Probably the biggest thing that could ripple through the stock market is a plan to change the capital gains tax rate from where it would stand now for higher income people, which is a 20% capital gains rate, to 39.5%. So, it would be taxed as ordinary income. Anybody who would likely be exposed to that higher rate is potentially going to try and accelerate transfers or sales gain recognition into 2020. And if that winds up being material, then there's a lot of selling, which could of course cause a drop in the stock market unless people immediately purchased those securities back again. Remember there are rules against triggering losses, called wash sale rules, but there are no rules against triggering gain. So, somebody could go ahead and trigger a gain in hopes of paying tax at what they believe is a safe lower rate, and immediately buy those securities back again and there could be very little impact on stock prices. But it's something to be concerned about.

So those are some of the big things that I think ripple through, on the planning side that have some political risks associated with them. So, we've already sort of consolidated a lot of the things advisors are talking to clients about, now we want to get, with a few minutes we have left, we want to get into some of the actual questions that have come in specifically to Doug and I. And I am going to put a couple of questions together here, just as a reminder, compliance does not allow us to talk about anything that relates to a specific security. So, if you send a question in and ask us about a particular stock, we can't really deal with that in a public forum. So, I'm going to kind of rephrase a couple of questions here into one. In addition to naming particular securities, it also asked about certain sectors, things like financials. So, if you think about the S and P 500, you can slice it and dice it in a variety of ways, and one is within sectors. So, this question dealt with financials, industrials, health insurance companies, airlines, retailers, and just in the interest of time, I'm going to throw in another question that also dealt with specific companies, but there have been some big stock splits in the news recently.

And so when I throw these to Doug, if you can kind of address some of these sectors and instead of these companies and stocks splits. Some of these stocks have rallied nicely on this news and why would they do that?

Doug: So, yeah, so let's start with the sectors first. So in the specifically financials, industrials, and then you kind of throw in the airlines and retail. Now I look at those and those are very value focused sectors. So, I think if you saw an increase in economic growth, you would expect there to be a decent level of rotation into those names.

So, for the airlines, for instance, we track TSA checkpoint data. And what you saw is that year over year the data at its worst was the passenger counts were down almost 90% from what they were last year. And you've seen a slow increase, but we're still running it 60%- 65% below what we were last year. So, if you can see those numbers start to pick up, if you can see economic growth start to pick up, you would expect the cyclical sectors to maybe have a little bit of a tailwind behind them.

Now for the stock split, it's interesting because from an economic standpoint, stocks splits don't create any value. You're basically taking the price of the stock and you're giving, or, if I have a hundred shares of XYZ, the stock splits two for one, they'll give me an extra hundred shares, but then the price also gets cut in half. So, you own the same dollar value, the earnings per share the same, everything really stays the same from a company basis. But there's this psychological aspect of it where investors feel like the shares become more affordable. And therefore, sometimes you see some demand. Now it's interesting because now you can, in Schwab and other platforms, you can actually buy fractional shares of companies. So, I think that the split is more of a magic trick than anything else. So, does it create any lasting fundamental value? No. Can it alter the perception of the stock? Yes.

Mike: Okay. This is an interesting one that I think people you kind of regularly lose sight of, but the question is, does the fact that the top 5 or 10 stocks make up 20% of the S and P 500, does the fact that most stocks have negative returns this year and only a few of the big ones are positive have any influence on how we think about things?

Doug: Well, I think it's concerning from the standpoint that concentration levels have historically shown to be kind of a topping process. So, there's definitely a precedent when the market gets this narrow, it hasn't been a good sign. Now, you look at kind of the last time this has happened. I believe it was back in the 2007-2008 timeframe, and it was energy names. So, the biggest thing for energy was oil prices. We had a recession, oil prices drop precipitously, and then all those energy names were affected. The names of the top of the index right now are more on the tech side. So, there has been some concern about government going after some of these tech names, is pseudo monopoly, so to speak. But it just shows that there's not a lot of broad-based participation in the rally.

And it's just like anything else, if you build something that has 500 very strong pillars it's going to be more stable. Whereas if you have something that has 5 strong pillars and 495 rickety maybe some will work, maybe some won't, that's not going to be as stable of a structure. So, it certainly, I think it should concern people, but for the time being, as I said earlier, it can continue to go on longer, maybe more than people think.

Mike: Okay, we actually have a lot of questions today, but we're running out of time. So, I'm going to touch on maybe one or two more different ones. And then if you asked a question and we did not answer it, your advisor will get back to you personally.

This next question is more of a planning one. Does the current situation affect how I should be thinking about social security? If I had planned the delay until 70’s, should I be filing early?

I'll take that one I guess, and the answer is probably should not change the way you think about it. There are two primary concerns that people have when they are making their claiming decision. And the first is like a breakeven point, people are often focused on how long do I need to live in order to win that bet. As a practical matter, more often the way men think about that. The maximum income though, if you're thinking about living beyond your actuarial expected age and protecting sort of the maximum income for somebody well into their nineties, is sort of the opposite way to think about it.

And here at HCM, we have strong feelings about that. It obviously depends on somebody's specific circumstances and how well funded they are. But regardless of how you think about it, neither of those payouts really would be affected by the current situation. The one thing that could have some bearing though, and we regularly have this conversation, is there is a certain level of political risk in how benefits are paid and how their taxed, we kind of touched on that earlier. There's no way to know the answer to that question, but for people who are concerned about the fact that their benefit is going to be reduced through some sort of tax change or some sort of means testing. That's more of a bet I guess, than anything else, but it certainly could factor into that decision.

Just one quick last one, and then I think it will be time to go. This one for Doug probably.

Should retirees hold treasuries instead of corporate bonds in their portfolio, as opposed to somebody who's working, or does that matter?

Doug: You know, I think they should hold a mix of each, quite honestly. I think it probably depends more on what your fixed income allocation looks like relative to your equity allocation. Obviously if you have an equity heavy allocation, treasuries are going to provide kind of the safest offset to any equity volatility. But if you've got a pretty hefty allocation of fixed income, then it probably makes more sense to hold a mixture of treasuries, corporates, and then even some of the other things that we mentioned earlier. Floating rate, emerging market debt, leverage loans, high yield, other asset classes like that.

Mike: Okay, well we're at the end of our call today, folks. Thanks everybody for participating. Don't forget that our next call will be the Klein top call on Tuesday, September 22nd. That'll be at four o'clock. We will get out more information to you about that. And of course, if news breaks, we will be reaching out to you, and scheduling a call if that makes sense to do. And of course, as always, if you have any questions in between these feel free to reach out. We'd love to be there for you. Thanks everybody. That does it for today. Bye bye.


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