Ken Moraif: Hello, everyone, thank you for watching our weekly market alert video, we have a very special one this week, because the tide seems to be changing in the markets in case you haven’t noticed, and it kind of all started towards the end of June. And so we wanted to share with you our perspective on where things are going, given that tide that seems to be changing, and also where we’re gonna end up the year. And of course with all the political stuff that’s been going on. And it’s just a crazy world. So we thought we’d give you some clarity, from our perspective. So what I’m going to do now is I’m going to bring on Jordan Roach, who is the Director of our Investment Oversight Committee. Hi, Jordan, how are you?
Jordan Roach: I’m great, Ken, I’m doing really well. Awesome.
KM: So it’s been a fun period for you. You guys that like to delve into all the analytics and all the stuff that’s going on, the more craziness stuff happens, the more fun you have. It’s like it’s boring, but nothing’s happening. You got nothing to analyze. So we got a lot of thought and a lot to talk about. Right?
JR: That’s exactly right, a ton to get through and see where does this what does this all mean?
KM: Okay, so let’s, let’s just dive right in then. So we’ve had some major volatility in the market, especially over the last week, but certainly, you know, with all the political stuff that’s been happening, you know, the assassination attempt, and Joe Biden not running for reelection, and Kamala Harris, and all the stuff that’s been going on. So we had a lot of volatility. But really, as we always said, we want to follow you know, I’m a tennis player, so you want to keep your eye on the ball. And yes, politics are interesting. But what’s going on in the markets is what drives everything in the end. So let’s let’s start with, what does your analysis tell us kind of from a big picture?
JR: Okay, so let me pull up my screen here. And hopefully, we can see this fairly easily. So this is a look at the broader market. Alright, so this is the S&P, right, with our strategy, we track largely the S&P, you know, we talked about the NASDAQ and the Dow, we look at that, too, but it’s the S&P that we’re looking at. So what I been looking at here is this is really the last three years in the market, okay. And there’s a reason there’s last three years there. But ultimately, if we look now, where we are, you know, we go all the way to the right hand side here. You know, we’re close to all time highs, which is a good thing. You know, sometimes it feels like it’s scary when we get to all time highs, because we have to go lower. But largely, that’s not always the case. And so if we look right now on it, and the red line here is going to be the 200 day moving average, right that we use as a signal gauge, we’ll see that we are well above the 200 day average. Again, always, that’s supportive. Always when we are above the 200 day average, that is going to be at least that’s not a negative. Okay, let’s say it that way. And if we look at the 200 day average itself, it’s moving up. So its slope is up. Again, that’s very, very positive. Okay. And if we look above that this pink line here is the 50 day average. Now, you know, we don’t trade off the 50 day average, but it is good to look at just another signal to see is it telling us something different than our broader signal? And so for us, we’re, you know, right about on the 50 day average, that 50 day average is also moving up. And that is a positive thing. So despite all the news, despite all the negativity and the craziness out there, it’s really hard to deny that we are in anything except a very strong uptrend. And largely with us, we want to follow that.
KM: Okay. So the trend is our friend right now. That’s a good thing. So now I’m looking there, you actually have two charts on here. The one on the bottom tells us about the breadth of the market really. In other words, how diverse is the growth of the market? And where does it mostly lie? So explain that one and tell us what the chart at the bottom of the screen tells us.
JR: So the one on the bottom Ken to me is it’s almost it’s another health gauge. Okay. And sometimes it’s almost more true. Because what it’s going to do is look under the surface of the S&P, and it’s not going to tell us is the S&P up and down, it’s going to tell us what percentage of companies inside of the S&P 500 are in an uptrend or above their own 200 day moving average
KM: I see so so there are 500 stocks in the S&P 500 Index, or they’re about actually there’s a few more but basically it’s 500. What this is telling us is what percentage of those 500 stocks are actually rising at this time. So if it’s really low, it means a very small percentage of them are driving the whole market. But if it’s up then it means that the broad market all the stocks or whatever percentage that represents are going up, right?
JR: That’s exactly right. So that’s very that’s a very important point because I think we’ve heard a lot of this in the last year that the stock market has been driven by five seven big stocks, you know, the NVIDIAs the Googles the Apples of the world. And while it’s true that, you know, they represent a big portion of the gain, those are not the only companies that have been doing well. In fact, 76% of companies are in an uptrend. And so that is positive. So there are other companies that are coming back on the backs of those companies that are also doing well. And that’s really useful. So we look at right now, you know, 76%, you know, the market can continue in an uptrend with that level of breath, you know, positive breath for a long time. Now, just because it’s really high, doesn’t mean we have to go lower. We’ve seen periods throughout this year, we kind of been in this range for a long time.
KM: And so when I looked at, that’s a very positive looking thing to as we look at it, if 70, it was down in the in, like 20%, were driving, you know, they basically tends to, you know, 100, stocks are driving the whole thing. But now, it’s up to 76. So, the next thing then is okay, this is a broad market, this is looking at three years, but let’s kind of narrow our scope a little bit. And let’s look specifically at you know, what are the flows of stocks and bonds and all those kinds of things are. Okay, so the the chart on the bottom then is telling us that the larger percentage, 76% of the stocks in the S&P are now going up. And it’s not just the Magnificent Seven as they’ve been called, and that kind of thing. So that’s actually a very positive sign. So but that’s kind of we’re looking at three years, we’re looking at a big broad picture. So what does last quarter tell us? And specifically, June was very interesting, because we saw a change in the tide, if you will.
JR: We did so I’ll point it out so you know, obviously, you want to always look at what are our signals that we track doing, but we want to see are there other signals out there other things going on, that are confirming or denying what we’re saying. And so one would be, like you mentioned would be fund flows. So fund flows are just saying is money on a net basis over a certain time period, going in or out of certain asset classes. And that can be really helpful to know what’s going to what’s going to likely happen in the short term looking at fund flow data. Because if you have an asset class where money is leaving there left and right, just out the door, it’s very likely over the following month, that’s going to be one of the best gainers just not gonna probably happen. So if I’m looking at this is, you know, second quarter of this year, which would run to April through June, so it’s kind of a longer term trend. What we’re seeing right now, is money is heavily moving out of money markets, the safety of money markets at 5% rates, it’s moving out of there, and it’s moving into bond funds, and it’s moving into stock funds. And that’s a super positive thing. Right, we’ve had rates at 5%. So most money markets can make for three, four or 5% for a long time. And now institutions, other investors are taking money out of that safety out of that guaranteed return and move it into riskier parts of the market, moving into stocks moving into bonds.
KM: So that’s a very good sign, because up until now, you know, so the volatility that we’ve been seeing would would imply perhaps, you know, we had that big down 2% day, you know, a few days ago. And so that would imply perhaps that, oh, no, the trend has changed. But really, what you’re saying is, is that money is moving inside of the markets away from some things and into others. And since everybody sees the Dow and the S&P, which are large companies, they’re not seeing that the money is actually maybe just being reorganized. And what’s driving that what why is why are people coming out of money market funds where they can it’s nice and safe and warm, and you get 5%? Why would you go into these more risky bonds and this kind of stuff, and maybe even into other parts of the stock market?
JR: Well, I’ll tell you one thing you wouldn’t do that for as if you think if a recessions on the horizon, you certainly wouldn’t be doing that. Right? So largely, what I think is happening is is economic data is still relatively healthy. Okay. And we get more and more signs that inflation is coming down, therefore the market is saying I really think finally, I have confidence that we’re at that long awaited, maybe fed cut, and that’s what they’re waiting for a world where rates come down, money, loosens again, and now all sorts of things that are lagging, because they’re not the big mega cap stocks that have access to capital can do a lot of things that other companies can’t, they now can outperform bonds will look more healthy, you know, in a lowering environment. And so what I’m saying is that, yeah, so
KM: So 60, almost 60. Well, $68 billion went into bond funds. And we’ve talked about this in our videos in the past when when the Fed is lowering interest rates, bonds tend to do well. And so that’s a real reflection of that. And money markets tend not to do so well, because interest rates are going down, you’re not making as much. So you’re seeing money coming out of money market funds, and people are now more willing to take a little bit more risk, because they’re now seeing that the interest they could get into the the money market could go down. So what’s the trend? This trend seems to have started in June. Right? So do you what did June tell you?
JR: That’s right. So you know, that was last quarter that ended in June. But if you look at June itself, and that’s where things started shifting very rapidly. It’s just essentially a confirmation, the same story. So you know, we see stock funds lead with inflows, money markets lead outflows. So right there, if you’re if your biggest outflows come from the safety of money markets into the riskiest part of the market buying large, that is not because everybody’s worried about a recession or the economy falling apart. I mean, it’s extremely unlikely. So that’s good, that’s good for the things that we’re in, that’s good for what we think can happen, you know, running through the end of the year. So we see stocks with heavy inflows. And again, money’s coming in to bonds. And if we look at, you know, the bond funds that we own, we’re seeing the benefit of that as well. So it’s been really supportive of, you know, markets as a whole. And this does not tell me or make me fear that uhoh, you know, something, these recent down days and sell offs we’ve seen are a sign of a broader issue that we have.
KM: Now, this is also very interesting, because the so the big performers heading into the end of June, and into June where the very largest companies, right? And so now what’s happening is, is that it looks like at least so far, and of course, that could change at any time. But right now, it seems like what’s happening is, is that money is coming out of those very large companies, and going into smaller companies going into bonds going into other parts of the market. So it’s kind of a rotation, as opposed to we’re heading into a bear market or a recession. Right?
JR: I think that’s exactly right. I mean, I think we’re going into what you call it, so simply just a rotation. And so what what things people are willing to be in because of the environment where they think they’re heading into. So if I look, first, you know, specifically, let’s look at bond funds, the fixed income world, okay, and what type of bonds are being rotated into? Well, the biggest inflow is actually long government funds. So again, this is a very interesting scenario. And there can be a couple reasons for people rotating out of money markets, and into long term government bonds. But But the big signal to me is, you know, if you’re going out of the safety net of 5%, into long government bonds, I mean, generally speaking, that’s the riskiest type of bond you owned, where day to day it almost trades like a stock. And so if investor and institutions willing to take money out of guaranteed environment, and putting it in one of the more risky fixed income bond funds out there, that’s probably a signal they think rates are coming down. And so that’s healthy. You know, even if an after that is actually, you know, two types of bond funds that largely that we would look at. So ultra short term bonds, those are bonds that you know, have a little bit more incremental risks that money markets do, but are similar, but it’s going to pay more if rates come down. So what we’re starting to see is institutions moving into just a little bit more risk, and say, and hopefully capturing a little bit more upside. And you know, with our most conservative model, that is what we do is we effectively rotate between money markets and ultra short term bonds. And we made that rotation late last year. And we’re really starting to see the benefit of that. And then after the ultra shorts is intermediate government bonds, which again, that’s the broader aggregate bond market treasuries, mortgage bonds, things that we have with the bond funds we own. And that’s having a big inflow.
KM: Yeah, yeah. So it just seems like what’s happening is that the the safest part of the bond market is, is leaving and going into more risky. And again, the reason is because of the increased confidence that the feds going to lower interest rates. So it’s safer to be in those than it was before. And so therefore, I can, I can take advantage of not only relatively good interest rates, but I can also take advantage of a capital appreciation because if interest rates go down those long term bonds and those kinds of things go up, because people buy them. That’s one of the reasons why they go up, right. So what about what about stocks? What do you see about with regard to stocks? Stocks is real interesting. So, Jordan, let me stop you right there. Okay. Some of us are not as young as you are. Okay, so I need him magnifying glass to read that, so you’re gonna have to help me to understand what you got on this screen.
JR: Okay, let me see if I can pull this up when I’m actually referencing something. So fair enough, I’ll work on my PowerPoint skills here. So if we look over the last three months, so again, that’s three months, as of really, you know, this week. And so that’s gonna include most of July. And so we look at what’s what’s been leading in terms of just pure performance, because a lot of times pure performance is a reflection of funds of fund flows. So what we’re seeing is money moving into small caps, the much hated much a lot maligned small caps that have been lagging for years relative to those mega cap players, we’re seeing money finally leave and move into that. So you know, small caps, and we own small caps. But as a broad asset class, it’s up about 13% In the last three months, you know, and that’s, that’s really healthy, because
KM: That’s totally contrary to what was happening before that, because large caps were sucking all the air out of the market, right? The very largest companies were the ones who were going up and up and up. And small companies were languishing and people were wondering, When is the when is that ever going to become something. And so you know, when you see a big change like that, that’s where a strategy that we use, called rebalancing can work really well, right, because it doesn’t always work as well as it did this quarter. But at the end of each quarter, we rebalance our portfolios, which means we take some profits from the high fliers, in this case, the very largest companies, and reinvest them into the ones that are not doing as well. And in this case, that would be small caps among them. And they’ve done as you said, 13%, over the last three months, phenomenal rotation, since that’s what we’re using, right?
JR: That’s a real boost. That’s exactly right. So, you know, part of those fund flows was us moving into small caps. So that’s a good deal. There. So that was us, we were part of that equation. But that’s exactly right. And, you know, the interesting thing is, you know, if the market was pricing in broader decline, where, you know, if we started really seeing economic cracks out there, it’s very unlikely that the leader would be Russell 2000, you know, small cap stocks, because in a big, deep recession, you know, those types of companies usually do not survive those very well. Right. And so this to me, like, what we’re seeing what the type of bonds that are being rotated into, it’s probably conducive of a larger rotation rate environment where it’s, it’s, you know, we’re money supplies a little bit easier to get to, and it’s, we’re seeing the, you know, that pick up if you look beyond even small caps, so this is certainly healthy. You know, over the last three months, while technology is a leader, okay, real estate’s a leader, you have healthcare, communication services, mid caps, you know, that’s kind of right in the middle financials, the main thing to look at here to me, is what I don’t want to see what would what would lead me to some level of concern is, if all of a sudden over the last three months or one month look back, if I see consumer staples start leading, if I see cash, outperforming the broader market, outperforming tech stocks, that is usually because institutions are already starting to rotate to be ready for, you know, rough waters. So the fact that small caps, technology stocks, the broader market communication services, all are ahead of consumer staples, that usually is a good thing. And that’s what we want to see.
KM: Yeah, yeah. The ones on the bottom there, the treasuries and the one on T bill, those, those are basically cash. And people go into that when they’re scared. So the fact that they’re at the bottom implies, well, we saw before money’s coming out of money market funds and buying all the rest of the market. But it’s it’s kinda disorganized right now. So it feels very volatile. But so what is a so by the way, I want to just make my compliance team happy. Rebalancing does not always work like it did this quarter, sometimes, you know, what you buy goes down, there’s no guarantee past performance does not guarantee future results or anything like that. So kind of summarize what we’ve seen here. If you could unshare your screen and summarize what what your, your conclusions are, from what you’ve seen.
JR: So what I would say, you know, what I would say, and I have one more that, you know, we can look at two, which is a one month look back, which says the same thing, that largely money is moving, it’s not moving into defensive sectors, money is not moving into cash, it’s moving into different parts of the market, it’s rotating. And so ultimately, to me, what I’m seeing is people are taking profits technology, mega cap have had an incredible run, where we the market thinks we’re gonna move into an environment with lower rates. And so people are booking their profits, we’re in earning season, they’re booking their profits, they’re reapplying it to elsewhere, where they think that if we head to a lower environment, and you know, right now the markets pricing, it’s like a 90% chance we see a rate cut, who knows if we do right? I mean, there’s things change very quickly, as we know, but right now, you know, I think the uptrend continues with rotation along the way.
KM: Now, having said all of that, I think it’s very important for me to reiterate the importance of having a strategy to protect on the downside, you know, at our firm, we have what we call Invest and Protect. It’s a strategy that told us to sell in November of 2007, before the big stock market crash of 2008, told us to sell literally the day before the pandemic was announced, told us to sell in April of 2022. Before all this inflation caused the market to go way down after that. So because we work with people who are retired or retiring soon, it’s extremely important, in our view, to have a strategy, you know, Despite the rosy picture that you’re painting, Jordan, and I don’t dispute it. But you know, we’ve seen just here recently how one event could change everything. I mean, suppose that sniper had been, you know, one inch to the right, where would we be right now, as a country? I mean, I don’t even want to think about, you know, what could come what could have come from that. And what would the market have done because of that? And what kind, you know, worst case scenario, we’ve heard people say, you know, we could even have a civil war, what would the stock market do if we had a civil war? So, you know, in our view, that wouldn’t have happened. We’re not saying that. But planning for those kinds of things. Having a plan in place to protect against that we think is very important, because bear markets and bad things come out of the blue. They’re usually unexpected. You know, people don’t expect the pandemic when it was announced. It was like what, you know, nobody expected anything like that. When when y2k happened, it kind of came by surprise and 2008 surprised almost everyone. So the important thing is to have a strategy that you’re ready to use, even when the picture is very rosy, because things can change. Would you agree with that, Jordan, I think you would.
JR: I totally agree that it makes it easier to be optimistic at times knowing that you know, ultimately if we were wrong in our in our guests that we gotta get out of jail card, so that’s exactly right.
KM: So, ladies and gentlemen, this is a long video. I hope you got a lot of good information out of it. And thank you for watching and we will talk soon.

Please note: transcript has been modified after the time of recording. 

Economic indicators and stock market performance cannot be predicted. Opinions expressed regarding the economy and the stock market belong solely to Ken Moraif on behalf of Retirement Planners of America and may not accurately portray actual future performance of the economy or stock market outcomes. Opinions expressed in this video is intended to be for informational purposes only and is not intended to be used as investment advice for individuals who are not clients of Retirement Planners of America. All content provided is the opinion of Ken Moraif, CEO and Founder of RPOA Advisors, Inc. (d/b/a Retirement Planners of America ) (“Retirement Planners of America”, “RPOA”). ©Copyright 2023