June 2, 2025 • 37 mins
Bob Carey discusses his long-term outlook for equity markets as the baby boom generation ages. He also weighs in on potential near-term drivers of equity market performance, including tariffs, regulations, and the “one big, beautiful bill”.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Ryan (00:08):
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, ETFstrategist at First Trust.
Today I'm joined by Bob Carey,Chief Market Strategist at First
Trust.
Bob and I discuss what'shappening in the equity markets,
the impact or potential impactof tariff policies and some of
the industrial markets, theimpact or potential impact of
tariff policies and some of theindustrial policy of the Trump
administration.
(00:28):
We talk about Bob's views onsectors and where to position
client portfolios in thisenvironment.
Thanks for joining us on thisepisode of the First Trust ROI
Podcast.
Bob (00:39):
I distinctly remember a lot of investment firms, including
us, were talking about the factthat every seven seconds or so,
a baby boomer turns 50 years old.
Remember that it was like a bigdeal, like 50 years old, I mean
, it's the year 2000, and we'vegot all these baby boomers that
(01:01):
are going to be turning 50.
Ryan (01:01):
Yeah, there was a lot of focus on demographics.
Big time, big time.
Bob (01:06):
So here we are, 25 years later those same people are now
turning 75, lord willing, someof them most of them.
And if you look at thepopulation over the age of 85,
even going deeper, that segmentof the population is the fastest
growing segment of thepopulation.
It's remarkable 500 people aday in the US turn 100.
Ryan (01:31):
Is that?
Bob (01:31):
right yeah, according to Hallmark, Wow, hallmark, yeah.
Ryan (01:35):
Yeah, they're churning out the happy 100th birthday
greeting cards, yeah.
Bob (01:43):
Which is.
I noticed this a couple ofyears ago.
I turned 62 years ago and I'mbuying birthday cards for other
people turning 60 around thattime and I noticed at the bottom
of the shelf where they putcards for people turning 100,
and it's way down at the bottom.
There was a selection of cardsdown there.
It's like a funnel.
The 20-year-olds are up hereand the 30-year-olds, and all of
(02:06):
a sudden you hit 60 and you'rebelow the equator.
You're like, okay, I'm startingto look at the bottom, I see 70
and 80.
And I saw at the bottom of theshelf people turning 100.
It's remarkable and I'm like sowe think about the population
and aging and people retiringand saving for retirement and
(02:26):
where should you have yourassets for the next five, ten
years?
People used to work until theywere 60, 65, maybe 70, and they
weren't around that much longer.
So it's just interesting howdemographics was everything.
And back in the year 2000, wehad a stock market selling at 35
times earnings at that time andwe had treasuries yielding 6%
(02:51):
plus 6.5%, even 7% nearly for awhile, looking at the 10-year
treasury.
Now here we are today, manyyears later.
The 10-year treasury is at 4.5%and the P and the S&P 500, if
you plug in earnings estimatesfor the next four quarters is
about 22.5 times earnings.
So, the S&P was nearly twice asexpensive as the 10-year
(03:12):
treasury back in the year 2000.
And people were using that.
You know you need to beinvested, you need to be in the
stock market.
And here we are today.
Valuations have come downsignificantly in the last 25
years and the yield on the10-year treasury has come down,
which means its valuation hasalso gone up.
So the two, in my view, arehand-in-hand and we're thinking
(03:36):
about where we want to be forthe next 10, 15, 25, 30 years.
It really does get back to thecompanies themselves.
Are companies going to continueto prosper, drive their
earnings and revenues higher?
So it's just interesting howdemographics has almost been
(03:56):
ignored.
And yet when you look at, youknow we're having this massive
argument about the budget andthe budget deficit and
entitlements and all that sortof stuff and it's kind of come
full circle.
And now we're here.
We're finally at the pointwhere the boomers are retiring.
I'm going to be 62.
I'm at the end of the boom.
A lot of my fellow boomers aregoing to be turning 75, 80, 65,
(04:22):
62.
I mean, it's going to be.
It's a big discussion.
Ryan (04:26):
Well, and if everyone's living longer, that has some
implications based on, you know,when Social Security was first
launched back in what the 30sExactly, people did not live as
long as they're living now, andif they're extending their
expected you know longevity,then you've got a lot of issues
potentially coming down the roadwith Social Security.
Bob (04:46):
There's a lot of people that are going to need cataract
surgery.
So we've got cataracts andCadillacs.
I mean those are two thingsthat I'm thinking about.
Ryan (04:56):
These are big issues All right, we're recording this
episode on the 21st of May.
It's going to air on June 2nd,okay, so there's a little bit of
a lag there.
So we'll give you a little bitof grace in terms of if the
market crashes or surges betweennow and then.
I hope so, but I was thinkingwe're talking about different
(05:20):
focuses and slogans that themarket has really keyed in on.
Back then it was demographics.
One of the slogans over theyears that you hear time and
time again in May is sell in Mayand go away, and I don't know,
maybe it's stuck around for solong because it rhymes and
things that rhyme are easy.
What do you think of thatslogan?
Bob (05:40):
Well, there was a time when the economy was very, very
seasonal.
I mean, the summertimefactories would shut down,
people would take extendedvacations.
You could really see economicactivity.
It's still seasonal to someextent, but not anywhere near as
seasonal as it used to be, andI think part of it was well, if
we sell in May, we're onvacation anyways in the summer,
(06:04):
we're not worried about whathappens to the stock market, and
then we'll kind of revisit itonce we get back from vacation
later in the year.
There is some seasonality to themarket as well.
The market seasonally doesn'tgo up quite as much during that
time from May to October, but itstill goes up.
We've been putting this blogpost out now for many, many
(06:27):
years that basically says don'tsell in May and go away because
the stock market, generallyspeaking, does okay.
It doesn't do as well as itdoes other times of the year,
but it still goes up typicallylooking at the last number of
years.
So I just think from a longerterm perspective, just getting
back to that idea of you have tohave capital for your lifetime
(06:51):
and if every year you're sellingin May and going away, you're
actually hurting yourself.
You're potentially paying taxeson gains and, at the same time,
the market has tended to go upin the middle of the year and
not go down.
Ryan (07:03):
Yeah, and you run the risk of figuring out when you should
be buying again.
Right.
Bob (07:08):
Exactly.
Ryan (07:09):
You buy in the fall, I guess Right, maybe buy when
everything is supposed to go badright in October or something
like that.
Exactly.
It just seems like theseseasonal patterns, at least for
the market, don't really hold,and especially when everyone
gets really excited about one,that's when they really don't
hold.
That's very true.
And the mix of industries forthe economy, I think, has
(07:30):
shifted so much over the lastfew decades.
Bob (07:33):
Half the population lived on farms 120 years ago.
Ryan (07:36):
I mean half of us.
Bob (07:37):
And now it's a couple percent of the population is
actually involved with producingfood.
We've first moved, obviously,into the industrial age and now,
increasingly, we're moving intothe information age and
technology, and those areindustries that have you know,
24-7 activity typically.
Ryan (07:57):
So, that being said, as the economy changes, you know,
one of the things that haschanged has been the moving away
of a lot of the industry andmanufacturing and, as a result,
we've had this trade deficit, orthat's part of the reason why
we have a trade deficit, and thecurrent administration's really
(08:19):
focused on that the tradedeficit and using tariffs as a
way to address some of theimbalance in the trade
relationship with other nations,and everyone's focused a lot on
tariffs and I guess I'm curiouswhat you think just in general
on.
Is that a tool that will beeffective in restoring some
(08:40):
balance?
Is it a good idea?
Do we need a trade, a balancedtrade relationship with other
countries?
Bob (08:46):
Well, we do want other countries to open up their
markets.
In my view and I think that'sreally the end game, I think
really is the goal is we do needcertain industries, be it steel
and maybe semiconductors,things like that.
We do need to produce more ofthose things in the United
(09:06):
States and so to some extent, dotariffs help encourage
production here in the US?
I'm not so sure I mean itreally.
You know, the private sectorhas to make that decision.
Ultimately and historically, inan industry like steel very,
very low return business, verycapital intensive We've, you
(09:27):
know, we've got regulations tocontend with a lot of issues
like that there's a reason wedon't produce steel in a
dominant fashion like we used to.
We still do, but it's not tothe same extent, it's not as
important an industry.
And yet from a defenseperspective, we obviously need
steel to produce planes andships and things like that.
(09:49):
So I think, to the extent thatraising tariffs might shift
production to the United Statesto some extent for
mission-critical defense,national security-related
reasons, it makes some sense.
But I think markets don't liketaxes, don't like taxes going up
.
Ryan (10:08):
And that's what tariffs are.
Bob (10:08):
That's exactly what they are.
I would argue that even if wehad zero tariffs around the
world, that we would have atrade deficit.
In the United States, we aresignificantly wealthier on
average you know, when you lookat individuals than any other
place in the world.
I mean our GDP per capita ismultiples of that of China, for
(10:33):
example.
It's significantly higher thanthe Europeans and whatnot.
So we're wealthier in generaland we have higher incomes.
We have a higher GDP per capita.
We are going to probably importmore from places like Europe
than the Europeans can importfrom us.
I just spent several weeks inItaly back in April and it was
(10:57):
quite obvious, looking at theroads throughout most of Italy,
why they drive small cars.
You cannot drive a largeAmerican-made Cadillac SUV
throughout a place like Italy,for example, and I'm sure that's
true for other parts of EuropeMaybe not Germany, but for other
parts of Europe that havenarrow roads.
Ryan (11:17):
The first time I was ever in Italy, I had one of the most
terrifying experiences in thebackseat of a taxi.
Yes, and I don't know exactlywhat rules of the road are in
effect, but I mean, it was likewhite knuckles on the dashboard.
Bob (11:30):
Yeah, we were in a taxi in effect.
Ryan (11:31):
But I mean, it was, like you know, white knuckles on the
dashboard.
Bob (11:35):
Yeah, we were in a taxi in Rome and our taxi driver
literally rammed into the taxiin front of him so that he could
take a left-hand turn.
I mean it's like and you're inthese little cars.
You know relatively small carsthat you just would never see in
the US.
Ryan (11:49):
They've produced some good race car drivers over the years
.
Bob (11:58):
Oh, there's no doubt about it, and some great cars.
I mean, it's amazing that thecountry that produces
Lamborghinis and Ferraris andwhatnot is somehow, but they
can't drive those cars in toomany places in their home
country.
Ryan (12:06):
So what do they?
Bob (12:06):
do they export them here?
Ryan (12:08):
Okay, so what do you think the impact on corporate profits
are likely to be?
What is the impact of tariffsand some of the uncertainty
surrounding tariffs this year?
We don't know.
Bob (12:20):
And the estimates initially .
Ryan (12:21):
That's the uncertainty.
Bob (12:22):
Yeah, we can see the analysts across the board have
cut earnings estimates acrossthe board, but the magnitude of
those earnings estimate cutsreally not very deep.
Earnings estimates today are alittle bit lower than they were
at the beginning of the year,but not significantly lower.
I think it's just going to taketime to see how this all plays
(12:45):
out.
I think some industries someyou know, I think about
retailing, some of the majorretailers that import a lot of
products from China, for examplehow do you predict how they're
going to do in this environment?
If, in fact, we do end up withthese massive tariffs on goods
coming in from China, you wouldthink that's going to hurt a
(13:06):
company that is on the importingside of something like that.
They just simply aren't goingto import and have the product
available at the price thatconsumers want to pay in that
environment.
So I know a lot of thosecompanies have been very vocal
and they have lobbyists.
And trade policy is not thepurview of just the president.
(13:26):
It really does take theCongress, it takes the Senate.
It's a multi-pronged issue.
The president certainly hasmade it front and center.
The financial market's reaction, I'm sure, is not what he
wanted to see as president, andobviously we've recovered and I
think the market is basicallysaying that this is an issue
(13:48):
that is not going to have asmuch negative impact on earnings
going forward.
I think that's really themessage of the market through
this trough and then subsequentrecovery.
Ryan (13:58):
Yeah, I was looking at and thinking back to 2018, during
the first Trump administration,where there was all the
volatility during that yearsurrounding tariffs and, of
course, the Fed was more likelyto raise rates and that we're
raising rates than right nowGreat point.
Bob (14:17):
We're more likely to have rate cuts this year.
Ryan (14:19):
And then in 2019, really, it was like Christmas Eve of
2018 was the bottom of thetrough of the fourth quarter and
then things kind of took offand there wasn't a lot of
resolution with some of thetariffs.
And that's kind of surprisingbecause a lot of people are
waiting for the tariffs to allget resolved and then things can
maybe take off.
Bob (14:39):
Right exactly.
It's something that it mightnot get put to bed right away.
This is something that couldtake weeks or months, maybe even
years, before we really have abetter sense of just exactly
where tariffs do play out.
I think the currentadministration, I think, really
would like to get some dealsdone.
(14:59):
They clearly don't want theeconomy to suffer significantly.
Next year is a midterm for theHouse and for a portion of the
Senate, for the House and for aportion of the Senate, so I
think a lot of this is going tobe done.
My guess is that a lot of thisis going to be mostly this year
(15:21):
and other issues will becomemore important next year.
Ryan (15:29):
Yeah, one of the things that's being debated right now
is that reconciliation bill.
That's kind of weaving its waythrough Congress and there's
some interesting provisions inthere.
And I think there's a lot ofkind of weaving its way through
Congress and there's someinteresting provisions in there
and I think there's a lot ofkind of negotiation back and
forth on what's ultimately goingto come of that.
Do you have any opinions orexpectations?
I don't want to see it untilit's finally done.
It's just.
Bob (15:46):
I mean, who knows where these things go?
I think you know we'rerecording this.
You know, in the middle of theweek heading into Memorial Day
weekend.
I think that by the time thisairs we'll have a bill that's
more or less ready to be passed.
I think the president wouldlike to get this done before the
Memorial Day weekend here, sowe'll see.
Ryan (16:07):
Yeah, that would be good, I think, to provide a little bit
more certainty to markets,because no one likes to have
that uncertainty floating around.
Bob (16:16):
When I'm watching racing on Sunday and we've got Monaco and
F1 and we've got the Indy 500with 400,000 people at the race,
and then we've got the Coke 600at Charlotte for NASCAR.
I don't want to be thinkingabout taxes and tariffs and all
that.
I want to focus on other thingsto be thinking about taxes and
tariffs and all that.
Ryan (16:34):
I want to focus on other things.
Okay, so this will air afterthe weekend that those races are
taking place.
So let me put you on the spot,do you?
Bob (16:43):
have any favorites for any of those races.
I just want to see a good race,I want to see passing, I want
to see racing.
Unfortunately, monaco, thefirst race of the weekend.
Typically, whoever wins thefirst corner wins the race.
It's very, very hard to pass.
They race in the streets ofMonaco, as a lot of people know.
It's just an amazing thing towatch these cars navigate these
(17:04):
narrow streets.
Well, that's part of theproblem is the cars have gotten
wider over the years.
The streets are the same widthbasically, so there's just not
as much room for passing.
And these drivers and these carshave gotten so good at
navigating all tracks to beginwith.
I mean it really takes a majorcatastrophe, a screw up, you
know, driver missing a turn thatkind of thing.
(17:26):
It doesn't happen very oftenanymore.
Ryan (17:28):
Yeah, okay.
So one more question about sortof a philosophical your view on
the Trump administration's veryactive role in negotiating
deals, and you know Trump's adealmaker and he's always done
that throughout his publiccareer, whether it's in business
or in politics.
But you know part of me has askeptical eye anytime the
(17:51):
government's really heavilyinvolved in making deals.
Do you think that's a goodthing for the long-term health
of the economy, or is it a?
Bob (17:58):
negative.
I agree with you.
That's a negative.
I think we want certainty, wewant policies to be known.
I think once we know the rulesof the game, then it's game on
at that point.
And you know, here in the US wedo better at that than anybody
else.
We have the highestproductivity in the world and I
think part of the reason we dohave these high levels of
productivity is there has beenrelative policy certainty over
(18:21):
long periods of time.
We don't change tax rates awhole lot.
Regulations change a little bitover time, but we've been able
to overcome all these issues,and a lot of it, I think, is
because of our predictabilityand the rule of law.
And you know, that doesn'talways apply in other places.
Ryan (18:40):
Yeah, I mean, there's been literally trillions of dollars
worth of like factory buildingand investment that companies
are making in the US that havebeen announced since
Inauguration Day.
And I look at that and think,well, hopefully these companies
were already going to do thoseinvestments because otherwise,
(19:01):
you know they're makingmalinvestment, like they're
doing bad things with theirinvestors' capital.
But you know and the other partof that is I'm concerned well,
this administration only hasthree and a half more years and
some of that will be, um, youknow, sort of a um the end of
the presidency.
You don't tend to get a wholelot done, so that's the other
(19:24):
part that I think concerns me,you think about investments in,
you know, building semiconductorplants, things like that.
Bob (19:31):
I mean that that's not something that you can wave a
wand and six months later it'sup and running.
These are investments that takea very, very long period of time
.
I would say that for the mostpart, the companies that are
based outside the US that haveannounced these investments in
the United States, generallyspeaking, these are good
businesses.
These are well-run, these arecompanies that don't have a
(19:53):
history of making badinvestments.
They're successful for a reason.
They know how to make this go.
I mean, you need capital andyou need labor to make this
happen, and I would argue that alot of them are probably doing
this for political reasons.
They don't want to be perceivedas being under a negative eye
from any administration.
(20:14):
So I understand your skepticism.
You're wondering do they reallymean this or not?
Only time will tell when welook at these companies and
their balance sheets and theirinvestments, and I think
ultimately these companiesunderstand that strategically,
we need to have more investmentin the United States.
We do have.
(20:34):
I mean.
One byproduct actually of atrade deficit is you have
capital surpluses and I'd ratherhave companies take these
dollars that we're sendingoverseas, bring them back to the
US and make capital investmentin the United States as opposed
to buy treasuries.
You know that's all fine, welland good, but I'd rather have
(20:54):
that money turn into hard assetsand productive assets.
Ryan (20:58):
Yeah, and it seems to me that the most effective way for
the government to actuallyincentivize that investment is
not necessarily to make sort oftransactional deals but to lower
some of the regulatory hurdlesfor building things.
Bob (21:12):
Yeah, it's organic.
Ryan (21:13):
At that point you put the incentive that says build it
Right exactly, and then they candecide.
Bob (21:19):
When we look at the world and we've talked about this
before when I look at companiesaround the world and it could be
just about any industry for themost part we have higher return
businesses than businessesoutside the US.
And just to give you somenumbers, when I look at the US
stock market all the companiesin the United States the average
(21:39):
rate of return is nearly threepercentage points higher than it
is in Europe.
I mean, we have historicallydone a better job of cultivating
companies that have higherreturn businesses, their job of
cultivating companies that havehigher return businesses.
I think other companies outsidethe US see that and they want a
piece of that.
And I think that all theseissues with trade and tariffs
(22:01):
and all that, I think it's tosome extent companies
recognizing and really facing upto the fact that they might not
necessarily be as good as theircounterparts in the United
States.
So if they make an announcementthat they're going to invest
here, they're basically saying,hey, we want to have our capital
working in the US and this isprobably going to happen,
(22:23):
regardless of who is in theWhite House, I would assume, but
obviously it gets a lot ofpublicity in this environment.
Ryan (22:29):
Yeah, so that makes me think you know the higher return
businesses located in the USand then internationally.
That is reflected then invaluations, exactly, and the
cheaper valuations ofinternational indexes,
especially, is a result of thatright Totally yeah, there's a
reason we are just plugging inearnings estimates.
Bob (22:48):
This year the S&P 500 is 22.5 times earnings as of right
now.
You look at companies in Europe, they're 15 to 18 times
earnings, depending on whichpart of the world.
I think ultimately, when youlook at leading companies and
the companies that dominate thetop of the index, these are
(23:09):
companies that have returns oncapital of 20%, 25%, 30% some of
them.
You just don't see those kindsof companies in the indexes of
companies overseas and there wasa time when even a mature
industry like retailing orenergy or something like that,
you would lump companiestogether and if you just looked
(23:29):
at their financial statementsand calculator returns on
investment, there was verylittle difference between a
company in Europe and a companyin the United States and Japan
and whatnot.
Today it's pretty obvious whenyou look at the numbers where
the US company is.
I mean, they do stand out, evenin industries that have been
around forever that are moremature.
So I think technology reallyplays the biggest role.
(23:54):
We utilize more technology, wecreate more technology, we
implement it.
It's making our companiesbetter.
We see it in all theseindustries that are even very
mature industries.
Ryan (24:07):
Yeah, to me, the takeaway, if you're an investment
professional trying to figureout an international allocation,
is that you really do need moreselectivity than just maybe
buying an index fund for yourclient.
Bob (24:18):
Completely agree, you're going to get, if you market cap
weight your European exposure,you're going to buy a whole
bunch of financial servicescompanies that.
Do you want to bet on financialservices companies out of
Europe over the next 10, 15years, or would you rather bet
on technology companies based inthe US?
Yes, they have highervaluations, but they're probably
going to grow a whole lotfaster.
Ryan (24:40):
Right, yeah, the market cap weighting of the S&P 500
gives you all that technologyexposure to the market cap
weighting overseas, morefinancials and we might see Some
of our leading companies mightstumble and fade and we might
see some companies emergeoverseas.
Bob (24:56):
So having that more selective approach I think makes
a lot of sense in thoseenvironments.
Ryan (25:02):
Okay, so we talked a little bit about sectors.
As we stand right now towardsthe end of May, as you kind of
look at the sectors of the USnow towards the end of May, as
you kind of look at the sectorsof the US economy, are you kind
of more likely to tilt towardsthe defensive areas or the
cyclical areas or the moretechnology sort?
Bob (25:22):
of areas.
I think right now most sectorsare priced about where they
should be.
If you're defensive, you canclearly see, for example,
consumer staple stocks notgrowing very fast, but you've
got a lot of stability in thosecompanies.
You've got franchises that arenot going to fade, probably, if
(25:42):
at all, over the next 10, 15, 20years.
At the same time, the morecyclical industries maybe
industries such as healthcarethat has regulatory issues and
those kinds of macro-relatedfactors their valuations reflect
that as well.
So the one sector that I keepgetting back to that has my
(26:02):
attention where I think there'san opportunity, that I think the
market's onto it.
It's not necessarilyundiscovered but I think
utilities which man.
When interest rates were atzero all those years and I saw
the valuations and I see thesecompanies really not growing,
selling at these high valuations.
(26:23):
It made sense in that interestrate environment but I just
couldn't get excited aboututilities in that environment.
We're now starting to seeearnings going up for utilities
faster than we've seen in a very, very long time.
And I think a lot of this getsback to what's happening in the
electricity marketplace.
We are producing moreelectricity, the demand for
(26:44):
electricity is going up Afteryears and years of encouraging
conservation and companiesreally kind of sitting on their
assets without doing anything.
They've just been managingtheir current assets.
All of a sudden you've gotcompanies actually adding to
their facilities, adding capitalinvestment.
Ryan (27:02):
And these are.
Bob (27:03):
you know you talk about long-term investments.
So an electric utility planthas a 30 to 40-year lifetime.
This is not something that youjust decide to build for the
next couple of years.
So we're starting to seebalance sheet investment in
these companies.
Returns on capital are likelyto be stable going forward and
at the same time, growth ratesare a little bit higher.
(27:23):
Valuations are a little bitlower than they were relative to
the S&P going back five or six,seven years ago.
Going back five or six sevenyears ago.
Ryan (27:38):
So I think that's a sector that is kind of a backdoor,
safe way to play AI andautomation robotics, all those
kinds of things.
It seems like they have aneasier time passing along the
cost of those investments totheir clients as well, because
where else are you going to getyour electricity?
It's a monopoly, that's right.
And so the other part of that,I think, is, if they're making
capital investments and theyhave to use a lot of steel and
aluminum, that could havetariffs attached to it.
(27:59):
They can pass that along prettyeasily too.
That's right.
So, yeah, I think that's areally interesting sector.
Bob (28:05):
Yeah, yeah, I like it, I think anything that has and I've
not been necessarily all thatbullish on that sector until the
last couple of years.
Yeah, I don't think I've.
Yeah, I must be getting old orsomething.
Ryan (28:18):
Over the last 25 years, it's been pretty rare that
you've been excited aboututilities.
Yeah, I think this might be thefirst time.
You think that reflects thematuration of Bob Carey.
Bob (28:29):
It gets back to cataracts and Cadillacs.
Ryan (28:33):
What do you think about?
You've talked a lot about thehealthcare sector over the years
as well and you know obviouslywe've talked a little bit about
demographics and the populationaging and that clearly has more
demand for some of thosepharmaceuticals and other
medical treatments and thingsthose pharmaceuticals and other
medical treatments and things.
But there's also, as you noted,some regulatory things that are
(28:57):
happening and threats of pricecontrols and I'm not sure, on
balance, whether or not how thatplays out for the health care
sector.
Bob (29:08):
Do you have a view?
Yeah, we've actually seen theindustry, the pharma industry,
lose some pricing power over thelast several years and you can
see margins are not quite asgood as they were a decade ago.
Still good margins, very goodbusiness ultimately, but not
quite the business that it wasmaybe 10 years ago.
There was a time when leadingcompanies, successful companies
(29:29):
in biotech and pharma basically,were valued and had the same
kind of metrics as the techcompanies did, and we don't see
that today and we see companiesmuch more cautious on research
spending and things like that.
There was a time when R&Dspending as a percentage of
sales was going up and up and upand up.
That peaked about seven, eightyears ago and really over the
(29:50):
last almost decade now we'veseen that number begin to come
down a little bit.
It's still elevated, but it'snot what it was maybe 10 years
ago.
So I think companies when theysee threats of price controls,
they're less likely to engage inR&D and that that, as a free
market individual, that scaresme a little bit, that we've got
(30:14):
government policy maybecurtailing investment in R&D,
which is really where all theseproducts come from.
Ryan (30:21):
On the positive side.
One of the things that I thinkcould also happen with health
care is and again, this isspeculative, but artificial
intelligence and all of thetechnology.
Yeah, but artificialintelligence and all of the
technology.
You hear stories about howthat's going to make the
research more productive andclinical trials more efficient
and targeting different segmentsof the population, and that's
(30:43):
one thing that I think is maybenet bullish.
Yeah, I pray you're right.
Bob (30:47):
I mean that would be as someone who's getting older.
I hope you're right.
I do think that breakthroughsare still happening.
I think progress is still beingmade.
That's why Hallmark sells 500and some odd cards to people
turning 100 today.
There's a pretty good chancethat people are getting treated
for things that would have takenthem out years ago, so we'll
(31:10):
hopefully see that trend persist.
Ryan (31:13):
Okay, so what's your take on where the Fed's going to end
this year?
Bob (31:18):
A couple of weeks ago I was traveling and I woke up and I'm
checking my Bloomberg on myphone and a headline popped up
about the Fed maybe reevaluatingpolicies going forward and this
got some attention but didn'tget as much attention as I would
have thought.
I interpreted this initiativethat maybe we should reexamine
(31:39):
our policies as a recognition bythe Fed that maybe a 2%
inflation target is unrealistic,and I think that that implies
to me that we will see the Fedactually cut interest rates this
year.
They will not wait until wehave seen months and months of
2% inflation.
We might not see that 2.5%inflation when they're holding
(32:00):
rates at 4.5% gives them a lotof more or less headroom to cut
rates and I think we'll get somerate cuts over the next 12
months 2.5% versus 2%.
Ryan (32:10):
That seems like you could structure your basket of goods
that you're measuring in adifferent way.
Exactly, it doesn't seem likethat big of a difference.
Bob (32:19):
Exactly, we're not 8% or 9% In long-term inflation is
actually averaged closer to 3%,not 2%.
Right, the objective might be2%, but rarely has that
objective been met, actuallyfrom a long-term perspective.
So 3% inflation is the numberthat I recommend people use for
financial planning purposes.
And if the Fed gets inflation inthat 2.5% to 3%, 3.5% range
(32:43):
from a long-term perspective, Idon't think they have failed.
I prefer inflation to be zero.
But the end result of thatmight be the economy in dire
straits if we have inflation atbe zero.
But the end result of thatmight be the economy in dire
straits if we have inflation atthose levels.
Ryan (32:56):
So if the Fed does end up cutting one or two times, does
that have an impact onespecially looking at the
different size of companies midand small cap stocks?
You think they'll be moresensitive to rate cuts?
Bob (33:08):
Definitely smaller companies, the companies that
are, I would argue, at themargin in terms of earning their
cost of capital, tend to besmaller companies, companies
that are just starting to getgoing.
They need capital, businessmodels that aren't necessarily
as proven.
They tend to be smallercompanies and one byproduct of
(33:31):
the Fed holding off on furtherrate cuts over the last six
months has been small caps haveunderperformed.
You know, mid-caps have doneokay.
In fact, the equal weight S&Pthrough the end of last month
actually has done okay.
Mid-caps have done okay, butit's really been the small caps
that the market is waiting, kindof adopting a wait-and-see
approach as far as the Fed isconcerned and I think if we get,
(33:51):
say, 50 basis points of ratecuts this year, I think it would
be tremendously helpful forsmall caps.
Ryan (33:58):
So we've seen some broadening out in the US equity
market this year.
Do you think that continuesthen through the end of the year
?
Bob (34:04):
I think it continues for the next.
I think to me that's going tobe the story for the next three
to five years as we see themarket broadening out.
We got so concentrated that Idon't think that's sustainable.
Ryan (34:17):
I think it's inevitable that the market broadens out,
and I think we're starting tofinally see that, yeah, and
there's definitely some moreattractive valuations in the
smaller, even the smaller S&P500 companies Right exactly
exactly, and year to date we'veseen some slight outperformance
and, going back to July when theFed started its shift in policy
(34:41):
, started cutting rates.
Bob (34:42):
The Fed announced that on July 9th, or Powell did, and you
know we've seen the marketbroadening out since that time.
So we have a lot of capital inthose MAG-7 companies.
We have a lot of capital in S&P500 index funds that are market
cap weighted.
There's just so much.
It's just that's been kind ofthe safe thing to do over the
last three or five years and nowthat we've gone almost, you
(35:02):
know, nine, 10 months when thathasn't worked quite as well, I
think eventually investorsrecognize that and they start to
move their capital and look foropportunities elsewhere.
So price discovery, in otherwords, happens going forward.
Ryan (35:16):
All right, bob.
The time has flown by Onceagain.
I have a final question for you, because you were just in
Europe.
You spent some time in Italy.
Yeah, what was your favoriteplace that you went to?
That was maybe a surprise thatyou didn't expect to be Anything
, as you reflect back on yourtrip, Boy, it's hard to say
Every day.
Bob (35:36):
we were there, we enjoyed where we were.
I would say that Pompeii wasprobably the place a bit of a
history buff, and I just wasblown away by Pompeii.
Ryan (35:48):
No pun intended yeah.
Bob (35:51):
I thought I knew what that place was all about and the
history of it and they're stilldiscovering things all these
years later.
It's, it was a much bigger citythan I realized.
I mean, we were there forseveral hours one afternoon,
pretty much all afternoon, andwe looked at a map of the place
afterwards, like we only sawjust a fraction of this entire
(36:14):
city, so it's pretty amazing.
Uh, what they're learning about, you know, basically, ancient
life, and and they you realize,wow, they didn't live all that
differently than we lived.
They had stores, they had roads, they had houses, they had, um,
you know, their, their life wasnot that different than ours in
some respects, and here we aretalking about a place that has
(36:35):
been gone for 2,000-plus years.
Ryan (36:37):
And they're still excavating a lot of it.
Bob (36:40):
Yeah, yeah, there's still segments that they are still
peeling away the layers, andit's just amazing when you go
there.
So that blew me away.
I just I'm thinking about that.
I wish we're going to go backnext year and spend more time
there?
Ryan (36:54):
Yeah, interesting.
I'll have to add that to thelist of places to visit.
Bob (36:58):
Yeah, it's down by Naples, napoli.
It's incredible, yeah, allright.
Ryan (37:04):
Well, glad we were able to put this together.
Bob, thanks for spending a fewminutes with us on the podcast.
Hopefully we can do it againsoon.
I would love to do it again, asalways.
As always, thank you, andthanks to all of you as well,
for joining us on this episodeof the First Trust ROI Podcast.
We'll see you next time.
Hi, welcome to this episode of the First Trust ROI
podcast.
I'm Ryan Isakainen, ETFstrategist at First Trust.
Today I'm joined by Bob Carey,Chief Market Strategist at First
Trust.
Bob and I discuss what'shappening in the equity markets,
the impact or potential impactof tariff policies and some of
the industrial markets, theimpact or potential impact of
tariff policies and some of theindustrial policy of the Trump
administration.
(00:28):
We talk about Bob's views onsectors and where to position
client portfolios in thisenvironment.
Thanks for joining us on thisepisode of the First Trust ROI
Podcast.
Bob (00:39):
I distinctly remember a lot of investment firms, including
us, were talking about the factthat every seven seconds or so,
a baby boomer turns 50 years old.
Remember that it was like a bigdeal, like 50 years old, I mean
, it's the year 2000, and we'vegot all these baby boomers that
(01:01):
are going to be turning 50.
Ryan (01:01):
Yeah, there was a lot of focus on demographics.
Big time, big time.
Bob (01:06):
So here we are, 25 years later those same people are now
turning 75, lord willing, someof them most of them.
And if you look at thepopulation over the age of 85,
even going deeper, that segmentof the population is the fastest
growing segment of thepopulation.
It's remarkable 500 people aday in the US turn 100.
Ryan (01:31):
Is that?
Bob (01:31):
right yeah, according to Hallmark, Wow, hallmark, yeah.
Ryan (01:35):
Yeah, they're churning out the happy 100th birthday
greeting cards, yeah.
Bob (01:43):
Which is.
I noticed this a couple ofyears ago.
I turned 62 years ago and I'mbuying birthday cards for other
people turning 60 around thattime and I noticed at the bottom
of the shelf where they putcards for people turning 100,
and it's way down at the bottom.
There was a selection of cardsdown there.
It's like a funnel.
The 20-year-olds are up hereand the 30-year-olds, and all of
(02:06):
a sudden you hit 60 and you'rebelow the equator.
You're like, okay, I'm startingto look at the bottom, I see 70
and 80.
And I saw at the bottom of theshelf people turning 100.
It's remarkable and I'm like sowe think about the population
and aging and people retiringand saving for retirement and
(02:26):
where should you have yourassets for the next five, ten
years?
People used to work until theywere 60, 65, maybe 70, and they
weren't around that much longer.
So it's just interesting howdemographics was everything.
And back in the year 2000, wehad a stock market selling at 35
times earnings at that time andwe had treasuries yielding 6%
(02:51):
plus 6.5%, even 7% nearly for awhile, looking at the 10-year
treasury.
Now here we are today, manyyears later.
The 10-year treasury is at 4.5%and the P and the S&P 500, if
you plug in earnings estimatesfor the next four quarters is
about 22.5 times earnings.
So, the S&P was nearly twice asexpensive as the 10-year
(03:12):
treasury back in the year 2000.
And people were using that.
You know you need to beinvested, you need to be in the
stock market.
And here we are today.
Valuations have come downsignificantly in the last 25
years and the yield on the10-year treasury has come down,
which means its valuation hasalso gone up.
So the two, in my view, arehand-in-hand and we're thinking
(03:36):
about where we want to be forthe next 10, 15, 25, 30 years.
It really does get back to thecompanies themselves.
Are companies going to continueto prosper, drive their
earnings and revenues higher?
So it's just interesting howdemographics has almost been
(03:56):
ignored.
And yet when you look at, youknow we're having this massive
argument about the budget andthe budget deficit and
entitlements and all that sortof stuff and it's kind of come
full circle.
And now we're here.
We're finally at the pointwhere the boomers are retiring.
I'm going to be 62.
I'm at the end of the boom.
A lot of my fellow boomers aregoing to be turning 75, 80, 65,
(04:22):
62.
I mean, it's going to be.
It's a big discussion.
Ryan (04:26):
Well, and if everyone's living longer, that has some
implications based on, you know,when Social Security was first
launched back in what the 30sExactly, people did not live as
long as they're living now, andif they're extending their
expected you know longevity,then you've got a lot of issues
potentially coming down the roadwith Social Security.
Bob (04:46):
There's a lot of people that are going to need cataract
surgery.
So we've got cataracts andCadillacs.
I mean those are two thingsthat I'm thinking about.
Ryan (04:56):
These are big issues All right, we're recording this
episode on the 21st of May.
It's going to air on June 2nd,okay, so there's a little bit of
a lag there.
So we'll give you a little bitof grace in terms of if the
market crashes or surges betweennow and then.
I hope so, but I was thinkingwe're talking about different
(05:20):
focuses and slogans that themarket has really keyed in on.
Back then it was demographics.
One of the slogans over theyears that you hear time and
time again in May is sell in Mayand go away, and I don't know,
maybe it's stuck around for solong because it rhymes and
things that rhyme are easy.
What do you think of thatslogan?
Bob (05:40):
Well, there was a time when the economy was very, very
seasonal.
I mean, the summertimefactories would shut down,
people would take extendedvacations.
You could really see economicactivity.
It's still seasonal to someextent, but not anywhere near as
seasonal as it used to be, andI think part of it was well, if
we sell in May, we're onvacation anyways in the summer,
(06:04):
we're not worried about whathappens to the stock market, and
then we'll kind of revisit itonce we get back from vacation
later in the year.
There is some seasonality to themarket as well.
The market seasonally doesn'tgo up quite as much during that
time from May to October, but itstill goes up.
We've been putting this blogpost out now for many, many
(06:27):
years that basically says don'tsell in May and go away because
the stock market, generallyspeaking, does okay.
It doesn't do as well as itdoes other times of the year,
but it still goes up typicallylooking at the last number of
years.
So I just think from a longerterm perspective, just getting
back to that idea of you have tohave capital for your lifetime
(06:51):
and if every year you're sellingin May and going away, you're
actually hurting yourself.
You're potentially paying taxeson gains and, at the same time,
the market has tended to go upin the middle of the year and
not go down.
Ryan (07:03):
Yeah, and you run the risk of figuring out when you should
be buying again.
Right.
Bob (07:08):
Exactly.
Ryan (07:09):
You buy in the fall, I guess Right, maybe buy when
everything is supposed to go badright in October or something
like that.
Exactly.
It just seems like theseseasonal patterns, at least for
the market, don't really hold,and especially when everyone
gets really excited about one,that's when they really don't
hold.
That's very true.
And the mix of industries forthe economy, I think, has
(07:30):
shifted so much over the lastfew decades.
Bob (07:33):
Half the population lived on farms 120 years ago.
Ryan (07:36):
I mean half of us.
Bob (07:37):
And now it's a couple percent of the population is
actually involved with producingfood.
We've first moved, obviously,into the industrial age and now,
increasingly, we're moving intothe information age and
technology, and those areindustries that have you know,
24-7 activity typically.
Ryan (07:57):
So, that being said, as the economy changes, you know,
one of the things that haschanged has been the moving away
of a lot of the industry andmanufacturing and, as a result,
we've had this trade deficit, orthat's part of the reason why
we have a trade deficit, and thecurrent administration's really
(08:19):
focused on that the tradedeficit and using tariffs as a
way to address some of theimbalance in the trade
relationship with other nations,and everyone's focused a lot on
tariffs and I guess I'm curiouswhat you think just in general
on.
Is that a tool that will beeffective in restoring some
(08:40):
balance?
Is it a good idea?
Do we need a trade, a balancedtrade relationship with other
countries?
Bob (08:46):
Well, we do want other countries to open up their
markets.
In my view and I think that'sreally the end game, I think
really is the goal is we do needcertain industries, be it steel
and maybe semiconductors,things like that.
We do need to produce more ofthose things in the United
(09:06):
States and so to some extent, dotariffs help encourage
production here in the US?
I'm not so sure I mean itreally.
You know, the private sectorhas to make that decision.
Ultimately and historically, inan industry like steel very,
very low return business, verycapital intensive We've, you
(09:27):
know, we've got regulations tocontend with a lot of issues
like that there's a reason wedon't produce steel in a
dominant fashion like we used to.
We still do, but it's not tothe same extent, it's not as
important an industry.
And yet from a defenseperspective, we obviously need
steel to produce planes andships and things like that.
(09:49):
So I think, to the extent thatraising tariffs might shift
production to the United Statesto some extent for
mission-critical defense,national security-related
reasons, it makes some sense.
But I think markets don't liketaxes, don't like taxes going up
.
Ryan (10:08):
And that's what tariffs are.
Bob (10:08):
That's exactly what they are.
I would argue that even if wehad zero tariffs around the
world, that we would have atrade deficit.
In the United States, we aresignificantly wealthier on
average you know, when you lookat individuals than any other
place in the world.
I mean our GDP per capita ismultiples of that of China, for
(10:33):
example.
It's significantly higher thanthe Europeans and whatnot.
So we're wealthier in generaland we have higher incomes.
We have a higher GDP per capita.
We are going to probably importmore from places like Europe
than the Europeans can importfrom us.
I just spent several weeks inItaly back in April and it was
(10:57):
quite obvious, looking at theroads throughout most of Italy,
why they drive small cars.
You cannot drive a largeAmerican-made Cadillac SUV
throughout a place like Italy,for example, and I'm sure that's
true for other parts of EuropeMaybe not Germany, but for other
parts of Europe that havenarrow roads.
Ryan (11:17):
The first time I was ever in Italy, I had one of the most
terrifying experiences in thebackseat of a taxi.
Yes, and I don't know exactlywhat rules of the road are in
effect, but I mean, it was likewhite knuckles on the dashboard.
Bob (11:30):
Yeah, we were in a taxi in effect.
Ryan (11:31):
But I mean, it was, like you know, white knuckles on the
dashboard.
Bob (11:35):
Yeah, we were in a taxi in Rome and our taxi driver
literally rammed into the taxiin front of him so that he could
take a left-hand turn.
I mean it's like and you're inthese little cars.
You know relatively small carsthat you just would never see in
the US.
Ryan (11:49):
They've produced some good race car drivers over the years
.
Bob (11:58):
Oh, there's no doubt about it, and some great cars.
I mean, it's amazing that thecountry that produces
Lamborghinis and Ferraris andwhatnot is somehow, but they
can't drive those cars in toomany places in their home
country.
Ryan (12:06):
So what do they?
Bob (12:06):
do they export them here?
Ryan (12:08):
Okay, so what do you think the impact on corporate profits
are likely to be?
What is the impact of tariffsand some of the uncertainty
surrounding tariffs this year?
We don't know.
Bob (12:20):
And the estimates initially .
Ryan (12:21):
That's the uncertainty.
Bob (12:22):
Yeah, we can see the analysts across the board have
cut earnings estimates acrossthe board, but the magnitude of
those earnings estimate cutsreally not very deep.
Earnings estimates today are alittle bit lower than they were
at the beginning of the year,but not significantly lower.
I think it's just going to taketime to see how this all plays
(12:45):
out.
I think some industries someyou know, I think about
retailing, some of the majorretailers that import a lot of
products from China, for examplehow do you predict how they're
going to do in this environment?
If, in fact, we do end up withthese massive tariffs on goods
coming in from China, you wouldthink that's going to hurt a
(13:06):
company that is on the importingside of something like that.
They just simply aren't goingto import and have the product
available at the price thatconsumers want to pay in that
environment.
So I know a lot of thosecompanies have been very vocal
and they have lobbyists.
And trade policy is not thepurview of just the president.
(13:26):
It really does take theCongress, it takes the Senate.
It's a multi-pronged issue.
The president certainly hasmade it front and center.
The financial market's reaction, I'm sure, is not what he
wanted to see as president, andobviously we've recovered and I
think the market is basicallysaying that this is an issue
(13:48):
that is not going to have asmuch negative impact on earnings
going forward.
I think that's really themessage of the market through
this trough and then subsequentrecovery.
Ryan (13:58):
Yeah, I was looking at and thinking back to 2018, during
the first Trump administration,where there was all the
volatility during that yearsurrounding tariffs and, of
course, the Fed was more likelyto raise rates and that we're
raising rates than right nowGreat point.
Bob (14:17):
We're more likely to have rate cuts this year.
Ryan (14:19):
And then in 2019, really, it was like Christmas Eve of
2018 was the bottom of thetrough of the fourth quarter and
then things kind of took offand there wasn't a lot of
resolution with some of thetariffs.
And that's kind of surprisingbecause a lot of people are
waiting for the tariffs to allget resolved and then things can
maybe take off.
Bob (14:39):
Right exactly.
It's something that it mightnot get put to bed right away.
This is something that couldtake weeks or months, maybe even
years, before we really have abetter sense of just exactly
where tariffs do play out.
I think the currentadministration, I think, really
would like to get some dealsdone.
(14:59):
They clearly don't want theeconomy to suffer significantly.
Next year is a midterm for theHouse and for a portion of the
Senate, for the House and for aportion of the Senate, so I
think a lot of this is going tobe done.
My guess is that a lot of thisis going to be mostly this year
(15:21):
and other issues will becomemore important next year.
Ryan (15:29):
Yeah, one of the things that's being debated right now
is that reconciliation bill.
That's kind of weaving its waythrough Congress and there's
some interesting provisions inthere.
And I think there's a lot ofkind of weaving its way through
Congress and there's someinteresting provisions in there
and I think there's a lot ofkind of negotiation back and
forth on what's ultimately goingto come of that.
Do you have any opinions orexpectations?
I don't want to see it untilit's finally done.
It's just.
Bob (15:46):
I mean, who knows where these things go?
I think you know we'rerecording this.
You know, in the middle of theweek heading into Memorial Day
weekend.
I think that by the time thisairs we'll have a bill that's
more or less ready to be passed.
I think the president wouldlike to get this done before the
Memorial Day weekend here, sowe'll see.
Ryan (16:07):
Yeah, that would be good, I think, to provide a little bit
more certainty to markets,because no one likes to have
that uncertainty floating around.
Bob (16:16):
When I'm watching racing on Sunday and we've got Monaco and
F1 and we've got the Indy 500with 400,000 people at the race,
and then we've got the Coke 600at Charlotte for NASCAR.
I don't want to be thinkingabout taxes and tariffs and all
that.
I want to focus on other thingsto be thinking about taxes and
tariffs and all that.
Ryan (16:34):
I want to focus on other things.
Okay, so this will air afterthe weekend that those races are
taking place.
So let me put you on the spot,do you?
Bob (16:43):
have any favorites for any of those races.
I just want to see a good race,I want to see passing, I want
to see racing.
Unfortunately, monaco, thefirst race of the weekend.
Typically, whoever wins thefirst corner wins the race.
It's very, very hard to pass.
They race in the streets ofMonaco, as a lot of people know.
It's just an amazing thing towatch these cars navigate these
(17:04):
narrow streets.
Well, that's part of theproblem is the cars have gotten
wider over the years.
The streets are the same widthbasically, so there's just not
as much room for passing.
And these drivers and these carshave gotten so good at
navigating all tracks to beginwith.
I mean it really takes a majorcatastrophe, a screw up, you
know, driver missing a turn thatkind of thing.
(17:26):
It doesn't happen very oftenanymore.
Ryan (17:28):
Yeah, okay.
So one more question about sortof a philosophical your view on
the Trump administration's veryactive role in negotiating
deals, and you know Trump's adealmaker and he's always done
that throughout his publiccareer, whether it's in business
or in politics.
But you know part of me has askeptical eye anytime the
(17:51):
government's really heavilyinvolved in making deals.
Do you think that's a goodthing for the long-term health
of the economy, or is it a?
Bob (17:58):
negative.
I agree with you.
That's a negative.
I think we want certainty, wewant policies to be known.
I think once we know the rulesof the game, then it's game on
at that point.
And you know, here in the US wedo better at that than anybody
else.
We have the highestproductivity in the world and I
think part of the reason we dohave these high levels of
productivity is there has beenrelative policy certainty over
(18:21):
long periods of time.
We don't change tax rates awhole lot.
Regulations change a little bitover time, but we've been able
to overcome all these issues,and a lot of it, I think, is
because of our predictabilityand the rule of law.
And you know, that doesn'talways apply in other places.
Ryan (18:40):
Yeah, I mean, there's been literally trillions of dollars
worth of like factory buildingand investment that companies
are making in the US that havebeen announced since
Inauguration Day.
And I look at that and think,well, hopefully these companies
were already going to do thoseinvestments because otherwise,
(19:01):
you know they're makingmalinvestment, like they're
doing bad things with theirinvestors' capital.
But you know and the other partof that is I'm concerned well,
this administration only hasthree and a half more years and
some of that will be, um, youknow, sort of a um the end of
the presidency.
You don't tend to get a wholelot done, so that's the other
(19:24):
part that I think concerns me,you think about investments in,
you know, building semiconductorplants, things like that.
Bob (19:31):
I mean that that's not something that you can wave a
wand and six months later it'sup and running.
These are investments that takea very, very long period of time
.
I would say that for the mostpart, the companies that are
based outside the US that haveannounced these investments in
the United States, generallyspeaking, these are good
businesses.
These are well-run, these arecompanies that don't have a
(19:53):
history of making badinvestments.
They're successful for a reason.
They know how to make this go.
I mean, you need capital andyou need labor to make this
happen, and I would argue that alot of them are probably doing
this for political reasons.
They don't want to be perceivedas being under a negative eye
from any administration.
(20:14):
So I understand your skepticism.
You're wondering do they reallymean this or not?
Only time will tell when welook at these companies and
their balance sheets and theirinvestments, and I think
ultimately these companiesunderstand that strategically,
we need to have more investmentin the United States.
We do have.
(20:34):
I mean.
One byproduct actually of atrade deficit is you have
capital surpluses and I'd ratherhave companies take these
dollars that we're sendingoverseas, bring them back to the
US and make capital investmentin the United States as opposed
to buy treasuries.
You know that's all fine, welland good, but I'd rather have
(20:54):
that money turn into hard assetsand productive assets.
Ryan (20:58):
Yeah, and it seems to me that the most effective way for
the government to actuallyincentivize that investment is
not necessarily to make sort oftransactional deals but to lower
some of the regulatory hurdlesfor building things.
Bob (21:12):
Yeah, it's organic.
Ryan (21:13):
At that point you put the incentive that says build it
Right exactly, and then they candecide.
Bob (21:19):
When we look at the world and we've talked about this
before when I look at companiesaround the world and it could be
just about any industry for themost part we have higher return
businesses than businessesoutside the US.
And just to give you somenumbers, when I look at the US
stock market all the companiesin the United States the average
(21:39):
rate of return is nearly threepercentage points higher than it
is in Europe.
I mean, we have historicallydone a better job of cultivating
companies that have higherreturn businesses, their job of
cultivating companies that havehigher return businesses.
I think other companies outsidethe US see that and they want a
piece of that.
And I think that all theseissues with trade and tariffs
(22:01):
and all that, I think it's tosome extent companies
recognizing and really facing upto the fact that they might not
necessarily be as good as theircounterparts in the United
States.
So if they make an announcementthat they're going to invest
here, they're basically saying,hey, we want to have our capital
working in the US and this isprobably going to happen,
(22:23):
regardless of who is in theWhite House, I would assume, but
obviously it gets a lot ofpublicity in this environment.
Ryan (22:29):
Yeah, so that makes me think you know the higher return
businesses located in the USand then internationally.
That is reflected then invaluations, exactly, and the
cheaper valuations ofinternational indexes,
especially, is a result of thatright Totally yeah, there's a
reason we are just plugging inearnings estimates.
Bob (22:48):
This year the S&P 500 is 22.5 times earnings as of right
now.
You look at companies in Europe, they're 15 to 18 times
earnings, depending on whichpart of the world.
I think ultimately, when youlook at leading companies and
the companies that dominate thetop of the index, these are
(23:09):
companies that have returns oncapital of 20%, 25%, 30% some of
them.
You just don't see those kindsof companies in the indexes of
companies overseas and there wasa time when even a mature
industry like retailing orenergy or something like that,
you would lump companiestogether and if you just looked
(23:29):
at their financial statementsand calculator returns on
investment, there was verylittle difference between a
company in Europe and a companyin the United States and Japan
and whatnot.
Today it's pretty obvious whenyou look at the numbers where
the US company is.
I mean, they do stand out, evenin industries that have been
around forever that are moremature.
So I think technology reallyplays the biggest role.
(23:54):
We utilize more technology, wecreate more technology, we
implement it.
It's making our companiesbetter.
We see it in all theseindustries that are even very
mature industries.
Ryan (24:07):
Yeah, to me, the takeaway, if you're an investment
professional trying to figureout an international allocation,
is that you really do need moreselectivity than just maybe
buying an index fund for yourclient.
Bob (24:18):
Completely agree, you're going to get, if you market cap
weight your European exposure,you're going to buy a whole
bunch of financial servicescompanies that.
Do you want to bet on financialservices companies out of
Europe over the next 10, 15years, or would you rather bet
on technology companies based inthe US?
Yes, they have highervaluations, but they're probably
going to grow a whole lotfaster.
Ryan (24:40):
Right, yeah, the market cap weighting of the S&P 500
gives you all that technologyexposure to the market cap
weighting overseas, morefinancials and we might see Some
of our leading companies mightstumble and fade and we might
see some companies emergeoverseas.
Bob (24:56):
So having that more selective approach I think makes
a lot of sense in thoseenvironments.
Ryan (25:02):
Okay, so we talked a little bit about sectors.
As we stand right now towardsthe end of May, as you kind of
look at the sectors of the USnow towards the end of May, as
you kind of look at the sectorsof the US economy, are you kind
of more likely to tilt towardsthe defensive areas or the
cyclical areas or the moretechnology sort?
Bob (25:22):
of areas.
I think right now most sectorsare priced about where they
should be.
If you're defensive, you canclearly see, for example,
consumer staple stocks notgrowing very fast, but you've
got a lot of stability in thosecompanies.
You've got franchises that arenot going to fade, probably, if
(25:42):
at all, over the next 10, 15, 20years.
At the same time, the morecyclical industries maybe
industries such as healthcarethat has regulatory issues and
those kinds of macro-relatedfactors their valuations reflect
that as well.
So the one sector that I keepgetting back to that has my
(26:02):
attention where I think there'san opportunity, that I think the
market's onto it.
It's not necessarilyundiscovered but I think
utilities which man.
When interest rates were atzero all those years and I saw
the valuations and I see thesecompanies really not growing,
selling at these high valuations.
(26:23):
It made sense in that interestrate environment but I just
couldn't get excited aboututilities in that environment.
We're now starting to seeearnings going up for utilities
faster than we've seen in a very, very long time.
And I think a lot of this getsback to what's happening in the
electricity marketplace.
We are producing moreelectricity, the demand for
(26:44):
electricity is going up Afteryears and years of encouraging
conservation and companiesreally kind of sitting on their
assets without doing anything.
They've just been managingtheir current assets.
All of a sudden you've gotcompanies actually adding to
their facilities, adding capitalinvestment.
Ryan (27:02):
And these are.
Bob (27:03):
you know you talk about long-term investments.
So an electric utility planthas a 30 to 40-year lifetime.
This is not something that youjust decide to build for the
next couple of years.
So we're starting to seebalance sheet investment in
these companies.
Returns on capital are likelyto be stable going forward and
at the same time, growth ratesare a little bit higher.
(27:23):
Valuations are a little bitlower than they were relative to
the S&P going back five or six,seven years ago.
Going back five or six sevenyears ago.
Ryan (27:38):
So I think that's a sector that is kind of a backdoor,
safe way to play AI andautomation robotics, all those
kinds of things.
It seems like they have aneasier time passing along the
cost of those investments totheir clients as well, because
where else are you going to getyour electricity?
It's a monopoly, that's right.
And so the other part of that,I think, is, if they're making
capital investments and theyhave to use a lot of steel and
aluminum, that could havetariffs attached to it.
(27:59):
They can pass that along prettyeasily too.
That's right.
So, yeah, I think that's areally interesting sector.
Bob (28:05):
Yeah, yeah, I like it, I think anything that has and I've
not been necessarily all thatbullish on that sector until the
last couple of years.
Yeah, I don't think I've.
Yeah, I must be getting old orsomething.
Ryan (28:18):
Over the last 25 years, it's been pretty rare that
you've been excited aboututilities.
Yeah, I think this might be thefirst time.
You think that reflects thematuration of Bob Carey.
Bob (28:29):
It gets back to cataracts and Cadillacs.
Ryan (28:33):
What do you think about?
You've talked a lot about thehealthcare sector over the years
as well and you know obviouslywe've talked a little bit about
demographics and the populationaging and that clearly has more
demand for some of thosepharmaceuticals and other
medical treatments and thingsthose pharmaceuticals and other
medical treatments and things.
But there's also, as you noted,some regulatory things that are
(28:57):
happening and threats of pricecontrols and I'm not sure, on
balance, whether or not how thatplays out for the health care
sector.
Bob (29:08):
Do you have a view?
Yeah, we've actually seen theindustry, the pharma industry,
lose some pricing power over thelast several years and you can
see margins are not quite asgood as they were a decade ago.
Still good margins, very goodbusiness ultimately, but not
quite the business that it wasmaybe 10 years ago.
There was a time when leadingcompanies, successful companies
(29:29):
in biotech and pharma basically,were valued and had the same
kind of metrics as the techcompanies did, and we don't see
that today and we see companiesmuch more cautious on research
spending and things like that.
There was a time when R&Dspending as a percentage of
sales was going up and up and upand up.
That peaked about seven, eightyears ago and really over the
(29:50):
last almost decade now we'veseen that number begin to come
down a little bit.
It's still elevated, but it'snot what it was maybe 10 years
ago.
So I think companies when theysee threats of price controls,
they're less likely to engage inR&D and that that, as a free
market individual, that scaresme a little bit, that we've got
(30:14):
government policy maybecurtailing investment in R&D,
which is really where all theseproducts come from.
Ryan (30:21):
On the positive side.
One of the things that I thinkcould also happen with health
care is and again, this isspeculative, but artificial
intelligence and all of thetechnology.
Yeah, but artificialintelligence and all of the
technology.
You hear stories about howthat's going to make the
research more productive andclinical trials more efficient
and targeting different segmentsof the population, and that's
(30:43):
one thing that I think is maybenet bullish.
Yeah, I pray you're right.
Bob (30:47):
I mean that would be as someone who's getting older.
I hope you're right.
I do think that breakthroughsare still happening.
I think progress is still beingmade.
That's why Hallmark sells 500and some odd cards to people
turning 100 today.
There's a pretty good chancethat people are getting treated
for things that would have takenthem out years ago, so we'll
(31:10):
hopefully see that trend persist.
Ryan (31:13):
Okay, so what's your take on where the Fed's going to end
this year?
Bob (31:18):
A couple of weeks ago I was traveling and I woke up and I'm
checking my Bloomberg on myphone and a headline popped up
about the Fed maybe reevaluatingpolicies going forward and this
got some attention but didn'tget as much attention as I would
have thought.
I interpreted this initiativethat maybe we should reexamine
(31:39):
our policies as a recognition bythe Fed that maybe a 2%
inflation target is unrealistic,and I think that that implies
to me that we will see the Fedactually cut interest rates this
year.
They will not wait until wehave seen months and months of
2% inflation.
We might not see that 2.5%inflation when they're holding
(32:00):
rates at 4.5% gives them a lotof more or less headroom to cut
rates and I think we'll get somerate cuts over the next 12
months 2.5% versus 2%.
Ryan (32:10):
That seems like you could structure your basket of goods
that you're measuring in adifferent way.
Exactly, it doesn't seem likethat big of a difference.
Bob (32:19):
Exactly, we're not 8% or 9% In long-term inflation is
actually averaged closer to 3%,not 2%.
Right, the objective might be2%, but rarely has that
objective been met, actuallyfrom a long-term perspective.
So 3% inflation is the numberthat I recommend people use for
financial planning purposes.
And if the Fed gets inflation inthat 2.5% to 3%, 3.5% range
(32:43):
from a long-term perspective, Idon't think they have failed.
I prefer inflation to be zero.
But the end result of thatmight be the economy in dire
straits if we have inflation atbe zero.
But the end result of thatmight be the economy in dire
straits if we have inflation atthose levels.
Ryan (32:56):
So if the Fed does end up cutting one or two times, does
that have an impact onespecially looking at the
different size of companies midand small cap stocks?
You think they'll be moresensitive to rate cuts?
Bob (33:08):
Definitely smaller companies, the companies that
are, I would argue, at themargin in terms of earning their
cost of capital, tend to besmaller companies, companies
that are just starting to getgoing.
They need capital, businessmodels that aren't necessarily
as proven.
They tend to be smallercompanies and one byproduct of
(33:31):
the Fed holding off on furtherrate cuts over the last six
months has been small caps haveunderperformed.
You know, mid-caps have doneokay.
In fact, the equal weight S&Pthrough the end of last month
actually has done okay.
Mid-caps have done okay, butit's really been the small caps
that the market is waiting, kindof adopting a wait-and-see
approach as far as the Fed isconcerned and I think if we get,
(33:51):
say, 50 basis points of ratecuts this year, I think it would
be tremendously helpful forsmall caps.
Ryan (33:58):
So we've seen some broadening out in the US equity
market this year.
Do you think that continuesthen through the end of the year
?
Bob (34:04):
I think it continues for the next.
I think to me that's going tobe the story for the next three
to five years as we see themarket broadening out.
We got so concentrated that Idon't think that's sustainable.
Ryan (34:17):
I think it's inevitable that the market broadens out,
and I think we're starting tofinally see that, yeah, and
there's definitely some moreattractive valuations in the
smaller, even the smaller S&P500 companies Right exactly
exactly, and year to date we'veseen some slight outperformance
and, going back to July when theFed started its shift in policy
(34:41):
, started cutting rates.
Bob (34:42):
The Fed announced that on July 9th, or Powell did, and you
know we've seen the marketbroadening out since that time.
So we have a lot of capital inthose MAG-7 companies.
We have a lot of capital in S&P500 index funds that are market
cap weighted.
There's just so much.
It's just that's been kind ofthe safe thing to do over the
last three or five years and nowthat we've gone almost, you
(35:02):
know, nine, 10 months when thathasn't worked quite as well, I
think eventually investorsrecognize that and they start to
move their capital and look foropportunities elsewhere.
So price discovery, in otherwords, happens going forward.
Ryan (35:16):
All right, bob.
The time has flown by Onceagain.
I have a final question for you, because you were just in
Europe.
You spent some time in Italy.
Yeah, what was your favoriteplace that you went to?
That was maybe a surprise thatyou didn't expect to be Anything
, as you reflect back on yourtrip, Boy, it's hard to say
Every day.
Bob (35:36):
we were there, we enjoyed where we were.
I would say that Pompeii wasprobably the place a bit of a
history buff, and I just wasblown away by Pompeii.
Ryan (35:48):
No pun intended yeah.
Bob (35:51):
I thought I knew what that place was all about and the
history of it and they're stilldiscovering things all these
years later.
It's, it was a much bigger citythan I realized.
I mean, we were there forseveral hours one afternoon,
pretty much all afternoon, andwe looked at a map of the place
afterwards, like we only sawjust a fraction of this entire
(36:14):
city, so it's pretty amazing.
Uh, what they're learning about, you know, basically, ancient
life, and and they you realize,wow, they didn't live all that
differently than we lived.
They had stores, they had roads, they had houses, they had, um,
you know, their, their life wasnot that different than ours in
some respects, and here we aretalking about a place that has
(36:35):
been gone for 2,000-plus years.
Ryan (36:37):
And they're still excavating a lot of it.
Bob (36:40):
Yeah, yeah, there's still segments that they are still
peeling away the layers, andit's just amazing when you go
there.
So that blew me away.
I just I'm thinking about that.
I wish we're going to go backnext year and spend more time
there?
Ryan (36:54):
Yeah, interesting.
I'll have to add that to thelist of places to visit.
Bob (36:58):
Yeah, it's down by Naples, napoli.
It's incredible, yeah, allright.
Ryan (37:04):
Well, glad we were able to put this together.
Bob, thanks for spending a fewminutes with us on the podcast.
Hopefully we can do it againsoon.
I would love to do it again, asalways.
As always, thank you, andthanks to all of you as well,
for joining us on this episodeof the First Trust ROI Podcast.
We'll see you next time.
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