Secular Bull Market: Guest argues the U.S. remains in a secular bull market that likely began in 2009, tracking closely to prior multi-decade bull runs with valuations still within historical bounds.
AI: Compares today’s AI cycle to the late-1990s, concluding it’s not yet a bubble; earnings are driving returns more than multiple expansion, suggesting runway remains before extremes appear.
Key Companies: Nvidia (NVDA) cited as the current AI bellwether with more reasonable P/E versus Cisco (CSCO) in 1999-2000; historic references to Dell (DELL) and AOL highlight past concentration episodes.
Inflation Outlook: Expects a “3 is the new 2” regime (around 2.5%-3%) due to fiscal dominance and deglobalization; stocks can tolerate this, but bonds and term premia should care.
US Treasuries: Warns of potential bear steepening if deficits persist and neutral policy aligns with higher inflation; a 10-year near 5% could pressure equity valuations via the Fed model channel.
60/40 Portfolio: Not dead, but correlations have risen; proposes adding uncorrelated diversifiers (e.g., gold, managed futures, long/short) and being more thoughtful across fixed income sleeves.
Gold: Positioned as the “anti-bond” and a strong diversifier in the current regime, helping hedge both equity and bond drawdowns when correlations shift.
High Yield: Despite a softer labor market, tight spreads reflect strong corporate balance sheets, robust margins, and double-digit earnings growth, keeping risk sentiment supported for now.
Transcript
Welcome. This is Ask the Compound, the show where you ask and we try to provide the answers. I'm your host, Ben Carlson. Some say the bull market started in 2009 at the bottom. That's what I say. Uh others say, "No, no, no. There's a reset in 2020 or 2022 in the bare markets." Um this is a new bull market. Regardless of when you think it started, the biggest question is how much longer does it have to run? We're going to dig into this question and more on today's show. Let's do it. All right, if you have a question for us, email askthe compound show@gmail.com. On today's show, we're tackling questions all about the length of bull markets, an update on the AI bubble timeline, where the inflation rate is heading, is 60/40 portfolio dead again, why the bond market doesn't care about the slowing labor market, dot dot dot yet. Uh, we have a very special guest coming on to help answer all these questions, and any questions you might have in the chat. We already pulled a few. Uh, but first, today's episode is sponsored by Grayscale. Curious about investing in crypto and not sure what to start? Start with Grayscale. Grayscale, the world's largest crypto focused investment platform, has been in crypto since 2013. That's a long time when you consider how early we still are in crypto adoption. Grayscale offers the widest selection of crypto investment products in the US. Over 30 different funds for investors to choose from. It's plenty of choice for both first-time crypto investors or crypto experts. You may not be considering crypto for your portfolio today, but whenever you're ready, Grayscale can be your guide. Grayscale invest in your share of the future. Investing involves risk including loss of principle. For more information, visit gsayscale.com. All right. >> Okay. >> Welcome everyone in the chat. Live chat as always. Live on Twitter. We appreciate it. A lot of good stuff today. >> Things are feeling a lot better than a few weeks ago. You know, when I >> reached you were worried about a crash. >> Yeah. I was like, is this is this the end? >> So, yeah. Now I'm feeling a lot better. >> Most of the time the world doesn't end. All right. Let's do it. Great question. >> Up first today, we got people often argue about the timing of bull markets. Have we been in a secular bull market since the bottom in 2009? Did it reset in 2022? >> Where do you think we stand in terms of the broader market cycle? >> Okay, let's bring on our expert guest today to help out. Yurin Timmer from Fidelity Investments. Hey, welcome back to the show. >> Good afternoon. Um, I think a lot of the arguments we have in finance are often semantics, you know, but I think it can be helpful to define these cycles because it it can kind of help you understand, you know, how how much longer these things can go, especially with a bull market. So, I created a chart probably about a year ago. So, Dan, give me a chart on here. I tried to match the start of the bull market and I say 2009 um to the 198 1982 to 1999 bull market. And you can see it's actually pretty darn close. And I haven't updated this in I don't know probably 6 months or so, but it it's closer than you think. Um you've got a neat chart on sort of the longer term sec secular moves in the markets. It also includes you know valuations. So I guess my question for you on this chart and you're looking at the secular bull markets. Um do you look at these things through more of a lens of valuations rising or falling or is it really just like the length of time and magnitude? Like how do you try to define these things? Yeah, it's a great question and I look at basically all of the above. But before I start, I would differentiate between market cycles tied generally to the business cycle, to the monetary policy cycle, to the waxing and waiting of earnings, etc., etc. And by that measure, we've been in a bull market, a cyclical bull market since October 2022. uh we did have a 21% decline in in March and April of this year the tariff tantrum but it was so short that I don't consider that a bare market. So I think the bull market is now 38 months old and before then we had one you know from COVID to 20 late 2021 um etc. And so those are the market cycles and we have bare markets by that standard you know every every four years or five years or so. We've had 27 cycles over the past 150 years. A and so that's kind of the typical bull and bare market cycle. Uh beyond that we have secular trends. So these are long waves of above or below average returns. And so you pulled up the 2009 to present which is what I think also is the current secular bull market. Many technicians, including colleagues here at Fidelity, disagree with 09 as the start. I think it's 2013 when the S&P finally bested the levels uh produced in ' 07 and 2000. Uh it's not an exact science. Um there's only a few secular bull markets in history given how long they last. So we don't have a really statistically robust way of determining this. So we we're left with a more subjective u approach. But 1982 to 2000, I think most people would agree, was a secular bull market. It's the one you highlighted. Uh 1949 to 1968, I think, was also a powerful secular bull market. They both lasted about 18 years. So if you were to overlay the current secular wave against those two, like as you already did, uh we would we're like within like 10% of what would have been predicted 16 years ago. So really it's tracking very very close. Uh so the way I kind of come up with this is obviously you look at the timeline that you know secular bears are about 14 years secular bulls are about 18 years but you look at valuation. So, the cape model, right, the six weekly adjusted PE um over a 10-year period tends to have strong forward-looking um implications for the next 10-year annualized return or Kager. And so, uh you look at that and that kind of helps, uh determine 09 as the start of that secular bull. Uh I look at trend deviation, right? If you take a a regression trend line, an exponential regression trend line from 1870 to today, you're getting a 10 10 11% trend line in nominal terms, 6 and a half, seven in real terms. And then if you look at the actual market relative to that trend line, you can identify very clearly secular peaks and troughs. So at secular peaks like in 2000 or 1968 or even 1929 the market was about 100% above that trend line and at secular lows it's about 50% below and in 2009 we were 50% below. So it's a mosaic approach but I look at all of those u all of those factors and that's kind of how I come up with these time periods but again it's not an exact science. someone could make an equally compelling case that it was some other time. Uh but the absolute PE level also matters because I often get if if someone pushes back to me at the 09 start they say well by that measure the 82 bull market would have started in 74 because that was the low >> right >> and my rebuttal there is yeah but the the the real index bottomed in 82 the PE bottomed in 82 and so when so it's like a you just look at a bunch of factors and by that measure to me 09 is a good starting point and it also engineered Uh it also started this whole kind of zero interest rate Fed balance sheet expansion financial engineering era because every one of those periods has has a has a narrative to it right 82 to 2000 was declining interest rates and then it ended with a tech boom um and so that that's my approach >> so you you mentioned the business cycle and I think that makes it even harder to define these because if you look at all the that 74 to82 period was there was you know three recessions right in early 1980s there was two backto-back recessions essentially. We had the COVID recession, but it wasn't really a real recession because so much money was thrown at it and essentially we we it was man-made. So, we really haven't had one in like 16 years and these these recessions keep getting the time in between them keeps going further and further out. And I think part of it is because we're just a more mature, diversified, dynamic economy. Does that make it harder to define these cycles because we don't have like the recessions that happen every 5 to seven years as much as the bare markets do? Yes, it has um the the um the expansion cycles have gotten elongated and the recessions have become fewer and fewer. So back let's say before the 1900s that's going way back when the economy was really uh mostly agricultural. Uh there was basically a boom bust cycle every two years. There was a recession every two years and it was highly deflationary. >> Yeah. And they were they were nasty back then, right? They were >> they were incredible. Yeah. Um and then you know we had uh obviously the great depression and we had like the start of the Fed and Keynesianism and policy trying to uh mitigate the business cycle and then we got into the four-year cycle. So a recession every four year and you know when I started out uh as a technician the four-year cycle was a huge thing and like in terms of charting and you can you can line line them all up. four years apart were the lows. Uh that's kind of gone now because you know the economy's become more of a service economy and now it's much more of a of an IP type of economy and so these cycles kind of you know start to um start to whittle away a little bit and once in a while you get a big one. Obviously the financial crisis was one uh but from there you know we had before that we had.com was technically a recession but not a very big one but the market fell 53% you know from 2002 and then we had COVID which certainly was like a recession or it was even like a depression but like you said it was very short it was kind of man-made uh and then there was so much money you know helicopter drops coming in after that that the market fell 35%. I mean that is a bare market by anyone's count but again it was very short like that 35% happened over 6 weeks and a few months later we were back at new highs. So even that one you could argue a traditional bare market is measured both in price and time. Um and that one even that one kind of came up short but at 35% I'm going to call it a bare market. >> Yeah, that was like a 1987 situation. So the big question of course is like how much longer could this possibly run? So let's do another question. I think that kind of gets into it. >> Okay. And I just asked I just asked the uh live viewers uh did the bull market reset in 2022. 74% are saying yes. So that's what they uh that's what they seem to think. >> The people have spoken. >> Okay. Uh up next we got let's say this is a bubble or it morphs into one. Do you think we're closer to 1996 in terms of AI hype or 1999? So, so we got one recently like this and I pull up a chart here, Daniel, real quick. I I I put the 90s bull market and I showed when Greenspan made that irrational exuberant speech, but he wasn't really pounding the table. Um, you've got some more charts like this. So, let's let's show one of yours. You kind of have the bubble watch and you show the 98 to 2002 and you got a lot of good stuff on here because you show the the 1994 kind of matches up with 2022. uh there's kind of a gap, but you're saying listen, 1999 kind of really or 1998 really that LTCM Russia default that really m matches up with the tariff tantrum of 2025. Um you also have some Cisco and Nvidia stuff because you have a lot going on here. Um you can do the chart off here, Daniel. So it's easy I think it's easy to make that AI.com bubble comparison like do you think it's it's really that simple or do you think that that there's like more going on here? Um, so there there are a bunch of dimensions here, but you know, analoges are great because like they're great until they don't work, of course, but but they are they are instructive in in in telling us what we could [snorts] or could not learn from history. And so, you know, 1994 was the stealth bare market, as we tend to call it. Um, uh, where Greenspan raised rates 300 basis points. uh the bond market cratered, you know, like long bonds went to like 8.6%. Um and the stock market just kind of did nothing for a year. Uh it fell 10% which is nothing but twothirds of the stocks that year were down at least 20%. So it was not an outright bare market but a stealth bare market. And I mentioned that because then uh Greenspan achieved the soft landing. He gave back some of the rate hikes. That's kind of what happened in 2022. you know, Powell achieved a soft landing and he and he kind of stepped it took his foot off the brakes and we had this very big robust rally in 95 uh S&P went up 38% and in 95 Netscape went public. So that was sort of the birth of the internet boom. Uh or at least it's a it's kind of a a way to tell time and um so in 2022 in October the market bottomed and in November of that year chat GPT was launched. So that's another sort of bell ringing event. Um and so fast forward in '98 we had long-term capital 22% very brief decline very robust recovery and then Greenspan sprinkled three more rate cuts on top of that um and then we got into silly season right we had 1999 market was up more than 20% but uh only 15if of the stocks in the S&P outperformed so that's was extremely concentrated very narrow it was the what we used to call the Janis 20 stocks like the growthiest like Dell, AOL, Cisco, those kinds of uh of companies. And fast forward to this year, we had the tariff tantrum, a 21% decline, very fast recovery. Powell is about to deliver the third rate cut this year. Um, so very analogous. And now we're starting to see some of the sort of cats and dogs of the AI story uh run a bit wild, right? So like the Goldman Sachs nonprofitable tech uh basket, you know, uh or meme stocks or nuclear stocks, even the Bitcoin miners have become kind of hypers scale in place and some of the pees on those groups are like 200, right? But you look at the bottom panel of the chart that you showed, the real bell weather, you know, is obviously the Mac 7 and especially Nvidia. it trades at a P of like 35 or something. Back then, uh during the internet days, you know, Cisco was the bell weather or one of them. And uh in 1998, it traded at I think a 45p by 2000 it was at a 215 PE. Right? So those are the kind of like real eyeopening uh valuation numbers and we just don't have those yet. We have them in some of the speculative corners, but not for like the big bell weathers. And so for me, it's not a bubble. Uh that doesn't mean it's not going to become a bubble, but it's not a bubble now. And my guess is that, you know, we are kind of on that 1999 timeline. Uh but uh but a lot of the extremes that we had back then are are just not yet in place now. >> Well, Daniel, put up the earnings and valuation chart of your here. I think this one's interesting because you you look on the bottom here at uh the growth in EPS but also the change in PE. And I think that's the interesting thing is that the the P the EPS growth is similar over the past 5 years but the change in valuations is not like the change in valuations went you know to the sky essentially in 1999. That hasn't quite happened yet. So you're right the valuations seem to still be somewhat in check. Um I think that has to be sort of a good thing you do chart off Daniel. Um, it is interesting though that so I think we had five years in a row from 95 to 99 of 20% plus gains and we're working on year three right now, right? It's it's pretty darn close. Uh, and I think it would be uh four out of five years or something because 2022 is obviously the outlier. Um, I I think the biggest thing I keep coming back to is the fact that just these these big companies are so much higher quality now than they were back then, right? They're cash flow producing machines. They have higher margins. um all the other stocks there are some speculative stuff going on but the the companies that are really leading the charge uh they have the earnings they have the sale you know so that that's the biggest difference is the the quality is much higher that doesn't mean we can't get silly and we won't but um I think that's the thing you hang your hat on for for not having that blow up like that >> absolutely and I would just point out um you know bubbles are always about valuation right um uh a stock that goes up a 100 times because it has a 100 times increase in earnings is not a bubble it's a very strong bull market but not a bubble. And so what you showed in the chart back in 2000, you know, earnings growth had propelled most of that run and then that side decelerated and then the valuation side took over and we've had a similar run in earnings now, but we don't have the valuation side taking over. It's still on the earning side. So if it is a bubble, I think we're a couple of years away from an extreme. And then in the meantime, you know, um Duncan, you were saying that you were scared, you know, worried a few weeks ago. I mean, some of those cats and dogs started to really unravel. And I think that's good, right? Because if you don't see that and this just keeps running, then you're going to have a real bubble. And you know, there is no easy recovery from a bubble. Like then you have a real problem. Um you know, a real mess. So, I would rather have the tree being shaken occasionally of the kind of the weak-handed longs and that only sustains the long-term uptrend. >> Yeah. >> Well, and even even with all of that, uh, Michael and Ben were talking on animal spirits yesterday. The VIX this year has peaked at what what did you say around 50 or something, Ben? >> I think I think it might have got there during the the liberation day stuff. So, yeah, >> it's kind of surprising that the VIX has been pretty low. >> Yeah, we have some scar. I But I agree that having some of the speculative stuff, people get slapped on the wrist. I think that's a healthy development as opposed to that stuff just keep going up and up every single day. >> So, all right, let's do another question. >> Okay, up next we got the historical inflation rate over the past 75 years or so is 3%. The Fed's target is 2% inflation. What do you think the right goal is, and which level do you think is more likely going forward? >> All right, so I pulled up a chart on this. Uh Daniel put it up here. Uh so the average inflation rate going back to 1950 I'll do the other one. my Y charts one. Never mind. Pull this off. Maybe I didn't. Uh, it's like three and a half percent. But in the 2010s, it was sub 2%. I think it was 1.8% was the average in 2010. So, obviously that had a lot to do with the hangover from the great financial crisis. I think this decade so far, we're looking at like 4% inflation. Um, but the difference between it doesn't sound like much when you say, well, 2% versus 3%, but cumulative over a decade that's like I think it's like 35% versus 20 something%. So, it's like a it's over a 10% difference cumulatively. And that in terms of sentiment is enough to get people up in arms, which is what we've seen obviously. Um, you have a chart that plots out a handful of different inflation gauges and targets. And Daniel, I can throw it up here. Um, I'm just curious like what what do you think is realistic going forward? Do you think that we're in this new world of 3% inflation because governments around the globe can't seem to slow their spending? Like is that is that the new normal now for the time being? >> Yeah. So, um, just to to backtrack for a second. So over 150 years uh the inflation rate is 3%. So that's kind of the baseline. Uh obviously uh during the financial crisis era um and until very recently a few years ago inflation was chronically below two which monetary policy uh uh officials thought was threatening because uh you know it's it's relatively easy or not easy but it's relatively straightforward to battle inflation. you just do a vulker and you you raise the cost of capital until it kills the inflation beast. Deflation is a much more treacherous area to to dwell in because as we know from the financial crisis and beyond um once you get to zero you kind of run out of ammo and then you have to do kind of tricky stuff like play with the balance sheet and you never know what the risks are and the moral hazard is >> and that stuff still didn't lead to inflation, right? Like they tried everything they could and it still didn't help. >> Yeah. So, so what I I how I delineated is the difference between fiscal and monetary policy. So during World War II, we had very loose monetary, very loose fiscal. Obviously, we had the debt for the war. In the late60s, we had loose fiscal, loose monetary that created inflation. Uh you know, in recent years until 2021, we had relatively not loose policy, but they were kind of in balance. Let's put it that way. Now we have loose fiscal. We had restrictive monetary until kind of now we're now getting into neutral. And the thought is that if we get into a fiscal dominant uh era where uh deficits are going to grow uh and be very persistent and rates are going to get brought below what would be otherwise justified. Uh so the Fed kind of loses some of its independence. You would expect inflation to come back. Um but so far you know the the true inflation index uh which is a nifty real-time inflation index is running at two and a half and it's been fairly stable. But as you point out you know look at the consumer confidence data. People are really concerned about the cost of living and a Fed official might explain it away or an economist as well two and a half is pretty close to target but yeah that comes after three after four after five after nine. Um, and cumulatively, you know, the 5-year inflation rate is 4.3% now. And so, and that is like not it's not something that mean reverts. It mean reverts around two maybe, but not around zero. So, what does it all mean? If three is the new two, uh, which I think it is because we have delobalization, we have kind of state capitalism, we have potentially f in the future a combination of loose fiscal and monetary. uh the stock market's not really going to care like if you look at returns ver or or valuations versus the inflation rate kind of one to four is the sweet spot. So whether inflation is three or two stock market's not going to care but the bond market should care. the term premium should care uh and the Fed should care, right? If neut if a neutral rate is inflation plus let's say 100 basis points. So that would be our star. Then neutral right now is four. If inflation's three, it's three and a half if inflation's two and a half, which is what I'm going with. Um and the Fed is about to go to three and 58. So the Fed is going to be very much at neutral but at a time when uh fiscal deficits keep running the economy actually is growing beyond potential um and the inflation rate is still above the target. So it does to me create a risk of a bare steepening in the yield curve and maybe uh increasing inflation expectations going forward. But I think that's going to be mostly a bond market story unless the 10-year yield goes to five and then that's a problem. >> Okay. And we have we have a good question. I think it's a follow-up of like what does this mean for your portfolio? Because I like you mentioned the stock market doesn't care. Maybe the bond market will. So don't go to the next >> I was going to just follow up. A lot of people I see the sentiment in the chat right now. You know people say well I've seen food items go up 20 30% over the last year or two. Um how is inflation really that low? you know, a lot of people don't believe the numbers. What do you what do you say about how do you combat that kind of mentality? >> Um, again, it it's level versus rate of change, right? So, the big inflation reset was in 2022, right? The CPI was up 9% in the middle of 22 over 21. Um, and the inflation rate has moderated since then, but it's again, it's cumulative, right? So, if the price of eggs of a dozen eggs, whatever, I'm just making this up, goes from 5 to 10, and then it goes to 11 and then to 12 and then to 13, the consumer is looking at this not like, well, it only went from 12 to 13 last year. Like, that's a good rate of change. It's going to look at it went from 5 to freaking 13 in three years, and that that hurts, right? So I think that's the disconnect between how academics think about inflation and how real people think about it. >> Yeah. And and no one's personal inflation rate matches that. It's an average of course. It's there's a wide range and and you look at the stuff and pay attention to stuff that's up in price a lot and you don't really think about the stuff that that has stabilized or gone down or whatever. So that's the average kind of gets you. And if depending if you're paying for stuff that has gone up then you're going to then your personal inflation rate is different than the average. But but it's an average. Of course >> my walnuts have have almost doubled in the last year. It's crazy. >> And I would make one more observation that when inflation goes above target of two in order to go back to two, it needs to go back below two in order for the average to to to be at two. It hasn't done that, right? It went from one and a half to nine to two and a half and it's never crossed over two. And not to alarm anyone, but the same thing happened in the late60s, like ' 67,68. Inflation went from 1 and a half to like whatever five or six uh during the Vietnam War, the guns and butter era, and then it went back to 2 and a half. Um, and then it went to like seven or eight or whatever it was. And I'm not predicting anything like that, but it never it never compensated for that first push. And then so then it it started making a series of higher lows and that's when inflation gets really uh entrenched and that of course is something the Fed and everyone else should really worry about because once the expectations are entrenched uh it's very hard to get the genie back in the bottle. >> The good news is the the way to bring inflation down is a recession. So it's pretty easy. Let's just have a recession and that'll that'll fix it. >> Y everyone will be thrilled with that. >> All right, let's do another one. >> Okay, up next we got Ben. He recently wrote, "The 60/40 portfolio was not dead, just dormant for a year or two. Do you think there's a case to be made that correlations for stocks and bonds will be higher with increased government spending and thus higher inflation going forward? And if that's the case, should we be rethinking this traditional asset allocation mix?" >> All right, so Yuri and I wrote about this because I think the financial media has been trying to throw dirt on the grave of the 60/40 portfolio for a while. Dan, you can throw my thing up here. >> I think it's because it's boring. I just have to say it's boring to write about. >> It is boring. Yeah. Um, and my main point that like if you think 6040 is dead, that means diversification's dead. You can take that off. Um, I think this year alone, a global diversified portfolio of 6040 is up like 16%. So, it's having a good year obviously after a really bad year in 2022. Um, I do think a lot of advisers and investors began to question their long-held beliefs on a traditional balanced portfolio in 2022 since you had stocks and bonds both go into a bare market. Um, so you have this chart that shows correlations and draw downs of a 6040 portfolio. Daniel's put that one up here. Um, and you show how they became more correlated in in this past cycle. So, I'm I'm curious if you think that this this theory of rising correlation staying with us for a while, it's legitimate. If we have, you know, 3% inflation instead of 2%, we have a lot of government spending. And then taking that a step further, does that mean we need do people need some other diversifiers for a traditional portfolio mix? >> Yep. Uh, so yes. Um, so the 6040, you know, our generation of investors, you guys look a little younger than me, but you know, during the late from the late 90s until COVID, basically, all you needed was S&P 5 and Barkclays, Bloomberg, a you got a 9% KGER with a 9% V. Uh, while inflation was two and a half. I mean, like, what's not to like about that, right? bonds were not only providing income, so it was a hedge that paid you to own it and it was negatively correlated to stock. So when you had uh a draw down, bonds were like a port in the storm, if you will. Um that's not how history has always been. So when yields are higher and inflation is higher uh and yields on safe assets like treasuries are competitive with equities as they are now right so the 10-year Treasury yield is uh what 415 you invert the PE on the S&P you get somewhere in the low fours and so when when the risk-free rate goes up and is competitive with risky assets the risky assets need to uh adjust their valuation to compete. And of course, Alan Greenspan uh was a big fan of this approach. It was called the Fed model back in the 80s. And the 87 crash was a a a very good example of that because yields were rising, the stock market ignored it, and eventually you had you had the crash. So my sense is that in a fiscal dominance era if yields are going to go maybe to 5% or even higher um the stock market's going to have to um repric itself um and it doesn't have to be a bare market. It just means the PE can only go up so much if the risk-free rate is competitive. And so when I look at 6040 today um and we look at what happened in 2022 when bonds were not the port in the storm um bonds are now positively correlated to stocks not as much as they were a year ago because that period from 5 years ago rolls off but they are modestly positively correlated to stocks. uh they are providing an attractive yield right at 415 and if inflation is two and a half to three you are getting a real positive spread on that but if they don't protect you against a draw down in stocks then what else can we own um that are not bonds and there are things we can own they're not negatively correlated but they're not positively correlated they're uncorrelated so gold is one various uh liquid alts like managed futures long short equity, maybe tips, maybe commodities, absolute return cash-like strategies. They all they all start to kind of play a role as substitutes for bonds, uh even though they're not negatively correlated, there really isn't anything that's negatively correlated. And I'll just add one more thing to that that historically or over the past few decades, right, bonds were we held bonds because when stocks go down, bonds go up. Before that time, during the Fed model era, um it was often the bond market that actually caused the draw downs in the stock market because yields would rise and then the stock market would kind of, you know, start to wobble like we've seen in the last few years. And so that tells me that I want to have a hedge not against the 60 alone, but against both the 60 and the 40. So for me, the new 6040 is like a a 603010, a 60 2020. I still want the 60 in equities and you can mitigate the kind of the concentration risk in the market with the MAG7 by owning international equities which are very competitive finally for a change. So the 60 I think you know we can work with and then the 40 is just you want stuff that doesn't behave like other stuff so that when something goes down whether it's either the 60 or the 40 or the 20 uh that you have stuff that behaves differently and gold has been the poster child of that. Gold has been the anti-bond now. Uh well, it's always been the anti-bond, but especially in the last few years. >> I also think >> silver is having quite a week too, right? >> Yes. 60. Amazing. >> Big. >> I also think if you want to keep that 40% relatively simple, it's not like a one decision anymore. Like you said, you own the egg. I think now it's hey, we own short-term tips because we want that inflation piece and we don't want to act like bonds, right? Because a lot of people own tips in 2022 but realized they were long duration and they got they acted like a bond, not a inflation protection. I think owning something like T bills or cash is great in a rising rate environment because those yields pick up quicker and you don't have interest rate risk. So I think you you you also if you want to just keep it towards fixed income, you might just have to be a little more thoughtful about the types of assets and strategies you use within fixed income. So yeah, it's just not as quite as easy as it was there for 20 30 years. I think that's the point. >> Yeah. Yeah. the declining interest rate era if that ended in 2021 uh means you don't have that secular tailwind anymore. >> Yeah. And I will say with bond yields at four to 5% at least there's more of a margin of safety now though. Absolutely. >> Right. It's it's they're not going to get crushed as bad as they did. All right. We got one more question. >> The same theme is why we're seeing so much talk about private assets and private equity and things. Right. >> Yeah. That's what a lot of people want for their 10 or 20%. That's that's a that's a an offset. Yep. For sure. Okay, last but not least, we got a lot of people are worried about the slowing labor market. However, the financial markets don't seem all that worried. High yield spreads remain low and junk bonds are up about 5% this year. Why isn't there more concern in high yield yet? >> All right, so there are a lot of macro people freaking out about the labor market and I mean for good reason. The data is slowing quite a bit. Uh the stock market doesn't care. The S&P is less than 1% from alltime high. I think the Russell 2000 hit an alltime high again this week. Uh I looked at the returns. This must have been sent a couple weeks ago if you throw my chart on here, Daniel. I think high yield bonds are up uh I'll take that one off. The high bond high yield bonds are up 8% or something this year. Okay, so junk bonds are up 8%. Spreads remain low. Euron, you have a chart on this. Let's throw up the equities and high yield credit chart. Um these the spreads on high yield remain quite low. So my question for you is why is this the case? Why is there there such a big freak out with the labor market and people worried about the economy slowing and it's not being reflected in the bond market yet? Is the bond market smarter than all the macro tourists or do you think the bond market is just going to be late on this? >> Uh it it's a great question. I mean the labor market clearly is soft. I wouldn't say it's quite contracting. I mean we've seen some layoffs but I think generally speaking kind of companies are not hiring but they're not really firing either. Obviously immigration has slowed u there's been just a slowdown in the whole jobs market. But um you know in the past when that would happen uh the credit markets would immediately start connecting the dots say oh my god you know companies are are laying off people they're going to make less money this and that and we're not seeing that. So the 10-year yield is is very low at 415 almost to the point where the bond market seems to be worried that the the government bond market but you look at you know um investment grade spreads high yield spreads they're what 342 and 112 right there nothing to see here and uh the credit analysts tend to know these things uh before the the stock market people do but earnings are growing at 11 12% are even accelerating margins are skyhigh and rising and we have an AI boom. We have the the the one tripleB uh you know bill the capex um depreciation the tariff tantrum ended up not being nearly as bad as what it could have been. Um and so I think the markets are focusing on corporate balance sheets, uh free cash flow, margins, earnings growth, and if the layoffs are pertaining to maybe some pockets in the markets that are mean maybe being disrupted to by AI, um stock, you know, people are going to care, but the stock market is not necessarily going to care about that because the fundamentals of the economy of the of the corporate economy remain intact. So that could easily change of course, but at this point it's not bad enough, I think, to get everybody anybody spooked. Uh the Fed clearly is taking out some insurance cuts just in case. Uh so the Fed certainly seems to be on the case here, but uh and maybe the 10-year yield is a little bit as well, but it's really not being reflected anywhere else. and and like we actually have some proprietary data on this because we do the the benefits for so many companies that we have an eye on what happens to payrolls um or like what we see in the ADP reports and again we're not seeing like like a meaningful contraction or anything like that even if we don't have the payroll data to to support that. So I think we're just kind of in a slow and steady point right now. So you're saying you're still seeing people saving in their 401ks, still spending money, still getting Yeah. So I think that's the that's the point is the labor market is slowing, but it's it's kind of on the edges and it's not really impacting consumer spending as a whole yet. >> Correct. >> Yeah. >> Yeah. Well, that makes sense. So So the market is right to not freak out quite yet. >> Yeah. I I've been on 75 planes this year. I've traveled 103,000 miles and um I don't think I've seen an empty seat on any of the planes. So, you know, the economy is still moving. No pun intended. >> It is quite crazy that people thought business travel was dead forever during the pandemic, right? And it's come back and I I same with me. Uh I went to the airport last week and there was no spots at the in the parking garage, right? It's uh >> also big big trips too. I I don't I've met more people this year that are going to Japan than ever, which is kind of a big trip, you know, like John, our producer, is there right now. Uh and yeah, I've I've known a lot of people. >> You got to do it before the dollar falls further. Get that GPN. All right, Yurian, tell everyone where they can find your weekly newsletter. weekly asset allocation review. >> Uh so I I pub I publish this internally every Sunday on Monday it gets sort of approved by our compliance folks and then usually by Tuesday morning it lands on LinkedIn in its entirety uh like yeah there it is and um I usually post a picture of my travel. So that was London like five days ago. Um and uh and then there's a link to that report on X. And in addition to that, there's generally a YouTube video of a podcast that I do every Monday floating around on YouTube. So there's plenty of places to to find me and and the handle is is timmerfidelity. >> Perfect. All right. Well, thank you for joining us. This was great. You have some of the best charts in the game. As always, everyone subscribe to that newsletter. We appreciate it. Um thanks everyone in the live chat for checking in this week. If you have a question for us, remember ask the compound show@gmail.com. We'll be back here next week. Thanks everyone. >> See you everyone. Thanks Erin. >> Thanks.
How Much Longer Will the Bull Market Last?
Summary
Transcript
Welcome. This is Ask the Compound, the show where you ask and we try to provide the answers. I'm your host, Ben Carlson. Some say the bull market started in 2009 at the bottom. That's what I say. Uh others say, "No, no, no. There's a reset in 2020 or 2022 in the bare markets." Um this is a new bull market. Regardless of when you think it started, the biggest question is how much longer does it have to run? We're going to dig into this question and more on today's show. Let's do it. All right, if you have a question for us, email askthe compound show@gmail.com. On today's show, we're tackling questions all about the length of bull markets, an update on the AI bubble timeline, where the inflation rate is heading, is 60/40 portfolio dead again, why the bond market doesn't care about the slowing labor market, dot dot dot yet. Uh, we have a very special guest coming on to help answer all these questions, and any questions you might have in the chat. We already pulled a few. Uh, but first, today's episode is sponsored by Grayscale. Curious about investing in crypto and not sure what to start? Start with Grayscale. Grayscale, the world's largest crypto focused investment platform, has been in crypto since 2013. That's a long time when you consider how early we still are in crypto adoption. Grayscale offers the widest selection of crypto investment products in the US. Over 30 different funds for investors to choose from. It's plenty of choice for both first-time crypto investors or crypto experts. You may not be considering crypto for your portfolio today, but whenever you're ready, Grayscale can be your guide. Grayscale invest in your share of the future. Investing involves risk including loss of principle. For more information, visit gsayscale.com. All right. >> Okay. >> Welcome everyone in the chat. Live chat as always. Live on Twitter. We appreciate it. A lot of good stuff today. >> Things are feeling a lot better than a few weeks ago. You know, when I >> reached you were worried about a crash. >> Yeah. I was like, is this is this the end? >> So, yeah. Now I'm feeling a lot better. >> Most of the time the world doesn't end. All right. Let's do it. Great question. >> Up first today, we got people often argue about the timing of bull markets. Have we been in a secular bull market since the bottom in 2009? Did it reset in 2022? >> Where do you think we stand in terms of the broader market cycle? >> Okay, let's bring on our expert guest today to help out. Yurin Timmer from Fidelity Investments. Hey, welcome back to the show. >> Good afternoon. Um, I think a lot of the arguments we have in finance are often semantics, you know, but I think it can be helpful to define these cycles because it it can kind of help you understand, you know, how how much longer these things can go, especially with a bull market. So, I created a chart probably about a year ago. So, Dan, give me a chart on here. I tried to match the start of the bull market and I say 2009 um to the 198 1982 to 1999 bull market. And you can see it's actually pretty darn close. And I haven't updated this in I don't know probably 6 months or so, but it it's closer than you think. Um you've got a neat chart on sort of the longer term sec secular moves in the markets. It also includes you know valuations. So I guess my question for you on this chart and you're looking at the secular bull markets. Um do you look at these things through more of a lens of valuations rising or falling or is it really just like the length of time and magnitude? Like how do you try to define these things? Yeah, it's a great question and I look at basically all of the above. But before I start, I would differentiate between market cycles tied generally to the business cycle, to the monetary policy cycle, to the waxing and waiting of earnings, etc., etc. And by that measure, we've been in a bull market, a cyclical bull market since October 2022. uh we did have a 21% decline in in March and April of this year the tariff tantrum but it was so short that I don't consider that a bare market. So I think the bull market is now 38 months old and before then we had one you know from COVID to 20 late 2021 um etc. And so those are the market cycles and we have bare markets by that standard you know every every four years or five years or so. We've had 27 cycles over the past 150 years. A and so that's kind of the typical bull and bare market cycle. Uh beyond that we have secular trends. So these are long waves of above or below average returns. And so you pulled up the 2009 to present which is what I think also is the current secular bull market. Many technicians, including colleagues here at Fidelity, disagree with 09 as the start. I think it's 2013 when the S&P finally bested the levels uh produced in ' 07 and 2000. Uh it's not an exact science. Um there's only a few secular bull markets in history given how long they last. So we don't have a really statistically robust way of determining this. So we we're left with a more subjective u approach. But 1982 to 2000, I think most people would agree, was a secular bull market. It's the one you highlighted. Uh 1949 to 1968, I think, was also a powerful secular bull market. They both lasted about 18 years. So if you were to overlay the current secular wave against those two, like as you already did, uh we would we're like within like 10% of what would have been predicted 16 years ago. So really it's tracking very very close. Uh so the way I kind of come up with this is obviously you look at the timeline that you know secular bears are about 14 years secular bulls are about 18 years but you look at valuation. So, the cape model, right, the six weekly adjusted PE um over a 10-year period tends to have strong forward-looking um implications for the next 10-year annualized return or Kager. And so, uh you look at that and that kind of helps, uh determine 09 as the start of that secular bull. Uh I look at trend deviation, right? If you take a a regression trend line, an exponential regression trend line from 1870 to today, you're getting a 10 10 11% trend line in nominal terms, 6 and a half, seven in real terms. And then if you look at the actual market relative to that trend line, you can identify very clearly secular peaks and troughs. So at secular peaks like in 2000 or 1968 or even 1929 the market was about 100% above that trend line and at secular lows it's about 50% below and in 2009 we were 50% below. So it's a mosaic approach but I look at all of those u all of those factors and that's kind of how I come up with these time periods but again it's not an exact science. someone could make an equally compelling case that it was some other time. Uh but the absolute PE level also matters because I often get if if someone pushes back to me at the 09 start they say well by that measure the 82 bull market would have started in 74 because that was the low >> right >> and my rebuttal there is yeah but the the the real index bottomed in 82 the PE bottomed in 82 and so when so it's like a you just look at a bunch of factors and by that measure to me 09 is a good starting point and it also engineered Uh it also started this whole kind of zero interest rate Fed balance sheet expansion financial engineering era because every one of those periods has has a has a narrative to it right 82 to 2000 was declining interest rates and then it ended with a tech boom um and so that that's my approach >> so you you mentioned the business cycle and I think that makes it even harder to define these because if you look at all the that 74 to82 period was there was you know three recessions right in early 1980s there was two backto-back recessions essentially. We had the COVID recession, but it wasn't really a real recession because so much money was thrown at it and essentially we we it was man-made. So, we really haven't had one in like 16 years and these these recessions keep getting the time in between them keeps going further and further out. And I think part of it is because we're just a more mature, diversified, dynamic economy. Does that make it harder to define these cycles because we don't have like the recessions that happen every 5 to seven years as much as the bare markets do? Yes, it has um the the um the expansion cycles have gotten elongated and the recessions have become fewer and fewer. So back let's say before the 1900s that's going way back when the economy was really uh mostly agricultural. Uh there was basically a boom bust cycle every two years. There was a recession every two years and it was highly deflationary. >> Yeah. And they were they were nasty back then, right? They were >> they were incredible. Yeah. Um and then you know we had uh obviously the great depression and we had like the start of the Fed and Keynesianism and policy trying to uh mitigate the business cycle and then we got into the four-year cycle. So a recession every four year and you know when I started out uh as a technician the four-year cycle was a huge thing and like in terms of charting and you can you can line line them all up. four years apart were the lows. Uh that's kind of gone now because you know the economy's become more of a service economy and now it's much more of a of an IP type of economy and so these cycles kind of you know start to um start to whittle away a little bit and once in a while you get a big one. Obviously the financial crisis was one uh but from there you know we had before that we had.com was technically a recession but not a very big one but the market fell 53% you know from 2002 and then we had COVID which certainly was like a recession or it was even like a depression but like you said it was very short it was kind of man-made uh and then there was so much money you know helicopter drops coming in after that that the market fell 35%. I mean that is a bare market by anyone's count but again it was very short like that 35% happened over 6 weeks and a few months later we were back at new highs. So even that one you could argue a traditional bare market is measured both in price and time. Um and that one even that one kind of came up short but at 35% I'm going to call it a bare market. >> Yeah, that was like a 1987 situation. So the big question of course is like how much longer could this possibly run? So let's do another question. I think that kind of gets into it. >> Okay. And I just asked I just asked the uh live viewers uh did the bull market reset in 2022. 74% are saying yes. So that's what they uh that's what they seem to think. >> The people have spoken. >> Okay. Uh up next we got let's say this is a bubble or it morphs into one. Do you think we're closer to 1996 in terms of AI hype or 1999? So, so we got one recently like this and I pull up a chart here, Daniel, real quick. I I I put the 90s bull market and I showed when Greenspan made that irrational exuberant speech, but he wasn't really pounding the table. Um, you've got some more charts like this. So, let's let's show one of yours. You kind of have the bubble watch and you show the 98 to 2002 and you got a lot of good stuff on here because you show the the 1994 kind of matches up with 2022. uh there's kind of a gap, but you're saying listen, 1999 kind of really or 1998 really that LTCM Russia default that really m matches up with the tariff tantrum of 2025. Um you also have some Cisco and Nvidia stuff because you have a lot going on here. Um you can do the chart off here, Daniel. So it's easy I think it's easy to make that AI.com bubble comparison like do you think it's it's really that simple or do you think that that there's like more going on here? Um, so there there are a bunch of dimensions here, but you know, analoges are great because like they're great until they don't work, of course, but but they are they are instructive in in in telling us what we could [snorts] or could not learn from history. And so, you know, 1994 was the stealth bare market, as we tend to call it. Um, uh, where Greenspan raised rates 300 basis points. uh the bond market cratered, you know, like long bonds went to like 8.6%. Um and the stock market just kind of did nothing for a year. Uh it fell 10% which is nothing but twothirds of the stocks that year were down at least 20%. So it was not an outright bare market but a stealth bare market. And I mentioned that because then uh Greenspan achieved the soft landing. He gave back some of the rate hikes. That's kind of what happened in 2022. you know, Powell achieved a soft landing and he and he kind of stepped it took his foot off the brakes and we had this very big robust rally in 95 uh S&P went up 38% and in 95 Netscape went public. So that was sort of the birth of the internet boom. Uh or at least it's a it's kind of a a way to tell time and um so in 2022 in October the market bottomed and in November of that year chat GPT was launched. So that's another sort of bell ringing event. Um and so fast forward in '98 we had long-term capital 22% very brief decline very robust recovery and then Greenspan sprinkled three more rate cuts on top of that um and then we got into silly season right we had 1999 market was up more than 20% but uh only 15if of the stocks in the S&P outperformed so that's was extremely concentrated very narrow it was the what we used to call the Janis 20 stocks like the growthiest like Dell, AOL, Cisco, those kinds of uh of companies. And fast forward to this year, we had the tariff tantrum, a 21% decline, very fast recovery. Powell is about to deliver the third rate cut this year. Um, so very analogous. And now we're starting to see some of the sort of cats and dogs of the AI story uh run a bit wild, right? So like the Goldman Sachs nonprofitable tech uh basket, you know, uh or meme stocks or nuclear stocks, even the Bitcoin miners have become kind of hypers scale in place and some of the pees on those groups are like 200, right? But you look at the bottom panel of the chart that you showed, the real bell weather, you know, is obviously the Mac 7 and especially Nvidia. it trades at a P of like 35 or something. Back then, uh during the internet days, you know, Cisco was the bell weather or one of them. And uh in 1998, it traded at I think a 45p by 2000 it was at a 215 PE. Right? So those are the kind of like real eyeopening uh valuation numbers and we just don't have those yet. We have them in some of the speculative corners, but not for like the big bell weathers. And so for me, it's not a bubble. Uh that doesn't mean it's not going to become a bubble, but it's not a bubble now. And my guess is that, you know, we are kind of on that 1999 timeline. Uh but uh but a lot of the extremes that we had back then are are just not yet in place now. >> Well, Daniel, put up the earnings and valuation chart of your here. I think this one's interesting because you you look on the bottom here at uh the growth in EPS but also the change in PE. And I think that's the interesting thing is that the the P the EPS growth is similar over the past 5 years but the change in valuations is not like the change in valuations went you know to the sky essentially in 1999. That hasn't quite happened yet. So you're right the valuations seem to still be somewhat in check. Um I think that has to be sort of a good thing you do chart off Daniel. Um, it is interesting though that so I think we had five years in a row from 95 to 99 of 20% plus gains and we're working on year three right now, right? It's it's pretty darn close. Uh, and I think it would be uh four out of five years or something because 2022 is obviously the outlier. Um, I I think the biggest thing I keep coming back to is the fact that just these these big companies are so much higher quality now than they were back then, right? They're cash flow producing machines. They have higher margins. um all the other stocks there are some speculative stuff going on but the the companies that are really leading the charge uh they have the earnings they have the sale you know so that that's the biggest difference is the the quality is much higher that doesn't mean we can't get silly and we won't but um I think that's the thing you hang your hat on for for not having that blow up like that >> absolutely and I would just point out um you know bubbles are always about valuation right um uh a stock that goes up a 100 times because it has a 100 times increase in earnings is not a bubble it's a very strong bull market but not a bubble. And so what you showed in the chart back in 2000, you know, earnings growth had propelled most of that run and then that side decelerated and then the valuation side took over and we've had a similar run in earnings now, but we don't have the valuation side taking over. It's still on the earning side. So if it is a bubble, I think we're a couple of years away from an extreme. And then in the meantime, you know, um Duncan, you were saying that you were scared, you know, worried a few weeks ago. I mean, some of those cats and dogs started to really unravel. And I think that's good, right? Because if you don't see that and this just keeps running, then you're going to have a real bubble. And you know, there is no easy recovery from a bubble. Like then you have a real problem. Um you know, a real mess. So, I would rather have the tree being shaken occasionally of the kind of the weak-handed longs and that only sustains the long-term uptrend. >> Yeah. >> Well, and even even with all of that, uh, Michael and Ben were talking on animal spirits yesterday. The VIX this year has peaked at what what did you say around 50 or something, Ben? >> I think I think it might have got there during the the liberation day stuff. So, yeah, >> it's kind of surprising that the VIX has been pretty low. >> Yeah, we have some scar. I But I agree that having some of the speculative stuff, people get slapped on the wrist. I think that's a healthy development as opposed to that stuff just keep going up and up every single day. >> So, all right, let's do another question. >> Okay, up next we got the historical inflation rate over the past 75 years or so is 3%. The Fed's target is 2% inflation. What do you think the right goal is, and which level do you think is more likely going forward? >> All right, so I pulled up a chart on this. Uh Daniel put it up here. Uh so the average inflation rate going back to 1950 I'll do the other one. my Y charts one. Never mind. Pull this off. Maybe I didn't. Uh, it's like three and a half percent. But in the 2010s, it was sub 2%. I think it was 1.8% was the average in 2010. So, obviously that had a lot to do with the hangover from the great financial crisis. I think this decade so far, we're looking at like 4% inflation. Um, but the difference between it doesn't sound like much when you say, well, 2% versus 3%, but cumulative over a decade that's like I think it's like 35% versus 20 something%. So, it's like a it's over a 10% difference cumulatively. And that in terms of sentiment is enough to get people up in arms, which is what we've seen obviously. Um, you have a chart that plots out a handful of different inflation gauges and targets. And Daniel, I can throw it up here. Um, I'm just curious like what what do you think is realistic going forward? Do you think that we're in this new world of 3% inflation because governments around the globe can't seem to slow their spending? Like is that is that the new normal now for the time being? >> Yeah. So, um, just to to backtrack for a second. So over 150 years uh the inflation rate is 3%. So that's kind of the baseline. Uh obviously uh during the financial crisis era um and until very recently a few years ago inflation was chronically below two which monetary policy uh uh officials thought was threatening because uh you know it's it's relatively easy or not easy but it's relatively straightforward to battle inflation. you just do a vulker and you you raise the cost of capital until it kills the inflation beast. Deflation is a much more treacherous area to to dwell in because as we know from the financial crisis and beyond um once you get to zero you kind of run out of ammo and then you have to do kind of tricky stuff like play with the balance sheet and you never know what the risks are and the moral hazard is >> and that stuff still didn't lead to inflation, right? Like they tried everything they could and it still didn't help. >> Yeah. So, so what I I how I delineated is the difference between fiscal and monetary policy. So during World War II, we had very loose monetary, very loose fiscal. Obviously, we had the debt for the war. In the late60s, we had loose fiscal, loose monetary that created inflation. Uh you know, in recent years until 2021, we had relatively not loose policy, but they were kind of in balance. Let's put it that way. Now we have loose fiscal. We had restrictive monetary until kind of now we're now getting into neutral. And the thought is that if we get into a fiscal dominant uh era where uh deficits are going to grow uh and be very persistent and rates are going to get brought below what would be otherwise justified. Uh so the Fed kind of loses some of its independence. You would expect inflation to come back. Um but so far you know the the true inflation index uh which is a nifty real-time inflation index is running at two and a half and it's been fairly stable. But as you point out you know look at the consumer confidence data. People are really concerned about the cost of living and a Fed official might explain it away or an economist as well two and a half is pretty close to target but yeah that comes after three after four after five after nine. Um, and cumulatively, you know, the 5-year inflation rate is 4.3% now. And so, and that is like not it's not something that mean reverts. It mean reverts around two maybe, but not around zero. So, what does it all mean? If three is the new two, uh, which I think it is because we have delobalization, we have kind of state capitalism, we have potentially f in the future a combination of loose fiscal and monetary. uh the stock market's not really going to care like if you look at returns ver or or valuations versus the inflation rate kind of one to four is the sweet spot. So whether inflation is three or two stock market's not going to care but the bond market should care. the term premium should care uh and the Fed should care, right? If neut if a neutral rate is inflation plus let's say 100 basis points. So that would be our star. Then neutral right now is four. If inflation's three, it's three and a half if inflation's two and a half, which is what I'm going with. Um and the Fed is about to go to three and 58. So the Fed is going to be very much at neutral but at a time when uh fiscal deficits keep running the economy actually is growing beyond potential um and the inflation rate is still above the target. So it does to me create a risk of a bare steepening in the yield curve and maybe uh increasing inflation expectations going forward. But I think that's going to be mostly a bond market story unless the 10-year yield goes to five and then that's a problem. >> Okay. And we have we have a good question. I think it's a follow-up of like what does this mean for your portfolio? Because I like you mentioned the stock market doesn't care. Maybe the bond market will. So don't go to the next >> I was going to just follow up. A lot of people I see the sentiment in the chat right now. You know people say well I've seen food items go up 20 30% over the last year or two. Um how is inflation really that low? you know, a lot of people don't believe the numbers. What do you what do you say about how do you combat that kind of mentality? >> Um, again, it it's level versus rate of change, right? So, the big inflation reset was in 2022, right? The CPI was up 9% in the middle of 22 over 21. Um, and the inflation rate has moderated since then, but it's again, it's cumulative, right? So, if the price of eggs of a dozen eggs, whatever, I'm just making this up, goes from 5 to 10, and then it goes to 11 and then to 12 and then to 13, the consumer is looking at this not like, well, it only went from 12 to 13 last year. Like, that's a good rate of change. It's going to look at it went from 5 to freaking 13 in three years, and that that hurts, right? So I think that's the disconnect between how academics think about inflation and how real people think about it. >> Yeah. And and no one's personal inflation rate matches that. It's an average of course. It's there's a wide range and and you look at the stuff and pay attention to stuff that's up in price a lot and you don't really think about the stuff that that has stabilized or gone down or whatever. So that's the average kind of gets you. And if depending if you're paying for stuff that has gone up then you're going to then your personal inflation rate is different than the average. But but it's an average. Of course >> my walnuts have have almost doubled in the last year. It's crazy. >> And I would make one more observation that when inflation goes above target of two in order to go back to two, it needs to go back below two in order for the average to to to be at two. It hasn't done that, right? It went from one and a half to nine to two and a half and it's never crossed over two. And not to alarm anyone, but the same thing happened in the late60s, like ' 67,68. Inflation went from 1 and a half to like whatever five or six uh during the Vietnam War, the guns and butter era, and then it went back to 2 and a half. Um, and then it went to like seven or eight or whatever it was. And I'm not predicting anything like that, but it never it never compensated for that first push. And then so then it it started making a series of higher lows and that's when inflation gets really uh entrenched and that of course is something the Fed and everyone else should really worry about because once the expectations are entrenched uh it's very hard to get the genie back in the bottle. >> The good news is the the way to bring inflation down is a recession. So it's pretty easy. Let's just have a recession and that'll that'll fix it. >> Y everyone will be thrilled with that. >> All right, let's do another one. >> Okay, up next we got Ben. He recently wrote, "The 60/40 portfolio was not dead, just dormant for a year or two. Do you think there's a case to be made that correlations for stocks and bonds will be higher with increased government spending and thus higher inflation going forward? And if that's the case, should we be rethinking this traditional asset allocation mix?" >> All right, so Yuri and I wrote about this because I think the financial media has been trying to throw dirt on the grave of the 60/40 portfolio for a while. Dan, you can throw my thing up here. >> I think it's because it's boring. I just have to say it's boring to write about. >> It is boring. Yeah. Um, and my main point that like if you think 6040 is dead, that means diversification's dead. You can take that off. Um, I think this year alone, a global diversified portfolio of 6040 is up like 16%. So, it's having a good year obviously after a really bad year in 2022. Um, I do think a lot of advisers and investors began to question their long-held beliefs on a traditional balanced portfolio in 2022 since you had stocks and bonds both go into a bare market. Um, so you have this chart that shows correlations and draw downs of a 6040 portfolio. Daniel's put that one up here. Um, and you show how they became more correlated in in this past cycle. So, I'm I'm curious if you think that this this theory of rising correlation staying with us for a while, it's legitimate. If we have, you know, 3% inflation instead of 2%, we have a lot of government spending. And then taking that a step further, does that mean we need do people need some other diversifiers for a traditional portfolio mix? >> Yep. Uh, so yes. Um, so the 6040, you know, our generation of investors, you guys look a little younger than me, but you know, during the late from the late 90s until COVID, basically, all you needed was S&P 5 and Barkclays, Bloomberg, a you got a 9% KGER with a 9% V. Uh, while inflation was two and a half. I mean, like, what's not to like about that, right? bonds were not only providing income, so it was a hedge that paid you to own it and it was negatively correlated to stock. So when you had uh a draw down, bonds were like a port in the storm, if you will. Um that's not how history has always been. So when yields are higher and inflation is higher uh and yields on safe assets like treasuries are competitive with equities as they are now right so the 10-year Treasury yield is uh what 415 you invert the PE on the S&P you get somewhere in the low fours and so when when the risk-free rate goes up and is competitive with risky assets the risky assets need to uh adjust their valuation to compete. And of course, Alan Greenspan uh was a big fan of this approach. It was called the Fed model back in the 80s. And the 87 crash was a a a very good example of that because yields were rising, the stock market ignored it, and eventually you had you had the crash. So my sense is that in a fiscal dominance era if yields are going to go maybe to 5% or even higher um the stock market's going to have to um repric itself um and it doesn't have to be a bare market. It just means the PE can only go up so much if the risk-free rate is competitive. And so when I look at 6040 today um and we look at what happened in 2022 when bonds were not the port in the storm um bonds are now positively correlated to stocks not as much as they were a year ago because that period from 5 years ago rolls off but they are modestly positively correlated to stocks. uh they are providing an attractive yield right at 415 and if inflation is two and a half to three you are getting a real positive spread on that but if they don't protect you against a draw down in stocks then what else can we own um that are not bonds and there are things we can own they're not negatively correlated but they're not positively correlated they're uncorrelated so gold is one various uh liquid alts like managed futures long short equity, maybe tips, maybe commodities, absolute return cash-like strategies. They all they all start to kind of play a role as substitutes for bonds, uh even though they're not negatively correlated, there really isn't anything that's negatively correlated. And I'll just add one more thing to that that historically or over the past few decades, right, bonds were we held bonds because when stocks go down, bonds go up. Before that time, during the Fed model era, um it was often the bond market that actually caused the draw downs in the stock market because yields would rise and then the stock market would kind of, you know, start to wobble like we've seen in the last few years. And so that tells me that I want to have a hedge not against the 60 alone, but against both the 60 and the 40. So for me, the new 6040 is like a a 603010, a 60 2020. I still want the 60 in equities and you can mitigate the kind of the concentration risk in the market with the MAG7 by owning international equities which are very competitive finally for a change. So the 60 I think you know we can work with and then the 40 is just you want stuff that doesn't behave like other stuff so that when something goes down whether it's either the 60 or the 40 or the 20 uh that you have stuff that behaves differently and gold has been the poster child of that. Gold has been the anti-bond now. Uh well, it's always been the anti-bond, but especially in the last few years. >> I also think >> silver is having quite a week too, right? >> Yes. 60. Amazing. >> Big. >> I also think if you want to keep that 40% relatively simple, it's not like a one decision anymore. Like you said, you own the egg. I think now it's hey, we own short-term tips because we want that inflation piece and we don't want to act like bonds, right? Because a lot of people own tips in 2022 but realized they were long duration and they got they acted like a bond, not a inflation protection. I think owning something like T bills or cash is great in a rising rate environment because those yields pick up quicker and you don't have interest rate risk. So I think you you you also if you want to just keep it towards fixed income, you might just have to be a little more thoughtful about the types of assets and strategies you use within fixed income. So yeah, it's just not as quite as easy as it was there for 20 30 years. I think that's the point. >> Yeah. Yeah. the declining interest rate era if that ended in 2021 uh means you don't have that secular tailwind anymore. >> Yeah. And I will say with bond yields at four to 5% at least there's more of a margin of safety now though. Absolutely. >> Right. It's it's they're not going to get crushed as bad as they did. All right. We got one more question. >> The same theme is why we're seeing so much talk about private assets and private equity and things. Right. >> Yeah. That's what a lot of people want for their 10 or 20%. That's that's a that's a an offset. Yep. For sure. Okay, last but not least, we got a lot of people are worried about the slowing labor market. However, the financial markets don't seem all that worried. High yield spreads remain low and junk bonds are up about 5% this year. Why isn't there more concern in high yield yet? >> All right, so there are a lot of macro people freaking out about the labor market and I mean for good reason. The data is slowing quite a bit. Uh the stock market doesn't care. The S&P is less than 1% from alltime high. I think the Russell 2000 hit an alltime high again this week. Uh I looked at the returns. This must have been sent a couple weeks ago if you throw my chart on here, Daniel. I think high yield bonds are up uh I'll take that one off. The high bond high yield bonds are up 8% or something this year. Okay, so junk bonds are up 8%. Spreads remain low. Euron, you have a chart on this. Let's throw up the equities and high yield credit chart. Um these the spreads on high yield remain quite low. So my question for you is why is this the case? Why is there there such a big freak out with the labor market and people worried about the economy slowing and it's not being reflected in the bond market yet? Is the bond market smarter than all the macro tourists or do you think the bond market is just going to be late on this? >> Uh it it's a great question. I mean the labor market clearly is soft. I wouldn't say it's quite contracting. I mean we've seen some layoffs but I think generally speaking kind of companies are not hiring but they're not really firing either. Obviously immigration has slowed u there's been just a slowdown in the whole jobs market. But um you know in the past when that would happen uh the credit markets would immediately start connecting the dots say oh my god you know companies are are laying off people they're going to make less money this and that and we're not seeing that. So the 10-year yield is is very low at 415 almost to the point where the bond market seems to be worried that the the government bond market but you look at you know um investment grade spreads high yield spreads they're what 342 and 112 right there nothing to see here and uh the credit analysts tend to know these things uh before the the stock market people do but earnings are growing at 11 12% are even accelerating margins are skyhigh and rising and we have an AI boom. We have the the the one tripleB uh you know bill the capex um depreciation the tariff tantrum ended up not being nearly as bad as what it could have been. Um and so I think the markets are focusing on corporate balance sheets, uh free cash flow, margins, earnings growth, and if the layoffs are pertaining to maybe some pockets in the markets that are mean maybe being disrupted to by AI, um stock, you know, people are going to care, but the stock market is not necessarily going to care about that because the fundamentals of the economy of the of the corporate economy remain intact. So that could easily change of course, but at this point it's not bad enough, I think, to get everybody anybody spooked. Uh the Fed clearly is taking out some insurance cuts just in case. Uh so the Fed certainly seems to be on the case here, but uh and maybe the 10-year yield is a little bit as well, but it's really not being reflected anywhere else. and and like we actually have some proprietary data on this because we do the the benefits for so many companies that we have an eye on what happens to payrolls um or like what we see in the ADP reports and again we're not seeing like like a meaningful contraction or anything like that even if we don't have the payroll data to to support that. So I think we're just kind of in a slow and steady point right now. So you're saying you're still seeing people saving in their 401ks, still spending money, still getting Yeah. So I think that's the that's the point is the labor market is slowing, but it's it's kind of on the edges and it's not really impacting consumer spending as a whole yet. >> Correct. >> Yeah. >> Yeah. Well, that makes sense. So So the market is right to not freak out quite yet. >> Yeah. I I've been on 75 planes this year. I've traveled 103,000 miles and um I don't think I've seen an empty seat on any of the planes. So, you know, the economy is still moving. No pun intended. >> It is quite crazy that people thought business travel was dead forever during the pandemic, right? And it's come back and I I same with me. Uh I went to the airport last week and there was no spots at the in the parking garage, right? It's uh >> also big big trips too. I I don't I've met more people this year that are going to Japan than ever, which is kind of a big trip, you know, like John, our producer, is there right now. Uh and yeah, I've I've known a lot of people. >> You got to do it before the dollar falls further. Get that GPN. All right, Yurian, tell everyone where they can find your weekly newsletter. weekly asset allocation review. >> Uh so I I pub I publish this internally every Sunday on Monday it gets sort of approved by our compliance folks and then usually by Tuesday morning it lands on LinkedIn in its entirety uh like yeah there it is and um I usually post a picture of my travel. So that was London like five days ago. Um and uh and then there's a link to that report on X. And in addition to that, there's generally a YouTube video of a podcast that I do every Monday floating around on YouTube. So there's plenty of places to to find me and and the handle is is timmerfidelity. >> Perfect. All right. Well, thank you for joining us. This was great. You have some of the best charts in the game. As always, everyone subscribe to that newsletter. We appreciate it. Um thanks everyone in the live chat for checking in this week. If you have a question for us, remember ask the compound show@gmail.com. We'll be back here next week. Thanks everyone. >> See you everyone. Thanks Erin. >> Thanks.