First Trust ROI Podcast
On the ROI podcast, we discuss some of the most important questions facing investment professionals today, ranging from macroeconomic views, to perspectives on the equity and fixed income markets, to insights on practice management. We aim to cut through the noise, examine the data, and provide fresh insights to investment professionals as they help their clients find better ways to invest…seeking to generate attractive returns on their investments.
First Trust ROI Podcast
Ep 5 - Dave McGarel - Why Should Investors Look Beyond the “Magnificent Seven”? - ROI Podcast
In this episode of the First Trust ROI Podcast, Ryan is joined by Dave McGarel, Chief Investment Officer at First Trust. Ryan and Dave discuss parallels between the current environment and previous recessions, why investors should pay close attention to valuations, and why some of the best long-term opportunities may come from smaller stocks.
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00:00:00:00 - 00:00:40:19
Ryan
Hi, welcome to the first Truss ROI podcast. I'm Ryan Issakainen, an ETF strategist here at First Trust. Today I'm joined by Dave McGarel, Chief Investment Officer at First Trust. Dave and I are going to talk about where the market is, why it's gone up so much so far this year, what investors should expect going forward, and where there may be areas of opportunity even in the midst of what may be a recession ahead.
00:00:40:21-00:00:50:01
Ryan
Thanks for joining us on the ROI podcast today. I'm joined by Dave McGarel, chief investment officer at First Trust. Dave, thanks for joining us on the ROI podcast.
00:00:50:01-00:00:51:22
Dave
Absolutely. It's great to be here, Ryan.
00:00:51:23-00:01:19:00
Ryan
So, Dave, you lead the team that is responsible for the analysis of our investments. You're more focused on equities and fixed income, and I will say this has been a year that probably nobody expected in 2023. I don't think the S&P 500 is up. I don't know; 13–15 percent was in any one expectation. So how do you explain, I guess, first off, why the market has moved up as much as it has?
00:01:19:02-00:01:47:07
Dave
Sure. I think the interest rate hikes that are taking place historically have had long lags. And when you start from zero and move higher, there's a lot of time for people to still spend all those excess savings; all that stimulus and the effect of the rate hikes actually don't hurt very much until you start getting to higher levels where they are now.
00:01:47:09-00:02:00:05
Dave
And I think you're starting to see the effect of those rate hikes on consumer spending and the pricing power of companies. And we would expect to see, if not a recession, some slower growth as we move forward.
00:02:00:08-00:02:08:10
Ryan
So do you think the excess savings that people built up over the course of, you know, the COVID period of time is all that's been spent at this point?
00:02:08:15-00:02:37:16
Dave
I think it's close to being spent, and where it isn't, it's sitting in wealthier or higher-income, higher-asset-value people. People who have more wealth are sitting on some of that excess savings, much more so than those in the lower income bands. So I do think we're close to the end of all that excess savings. But if you have a job, then you have the wherewithal to keep spending.
00:02:37:21-00:02:47:15
Dave
You just have to use other avenues, start taking out a little bit of credit card debt, and this is what we think will happen. You start seeing some cutbacks.
00:02:47:17-00:03:14:17
Ryan
So a lot of the performance in the S&P 500 in particular has been driven by a fairly narrow group of companies. You know, people talk about the Magnificent Seven, some of those air fuel stocks, Nvidia, and some others. So, in your opinion, is that likely to continue, or are we going to continue to have this narrow market, or do you expect some sort of broadening out in the months and years ahead?
00:03:14:19-00:03:39:03
Dave
Yeah, we expect it to broaden out, and it actually is broadening out. That story is actually a March-April-May story where those magnificent seven companies—Apple after Top, Medha, and Tesla—in that basket—you know, seven big names—are also featured in a video on Amazon. They have done all the heavy lifting this year, but it was particularly in those three months where they just absolutely crushed the rest of the market.
00:03:39:03-00:04:09:02
Dave
And by the end of May, those seven magnificent companies that you gave you all the return of the index—the other 493—were actually giving you a negative return. And if you pivot to today, it has been absolutely broadening out since the end of May. And now we see the rest of the S&P 500, even as the top seven are still doing fine, actually contributing not a negative percentage of the return but more like a third of the return.
00:04:09:04-00:04:15:20
Dave
So we would expect to see that continue to broaden as we move forward into this slower growth environment.
00:04:15:22-00:04:29:21
Ryan
So valuations for those stocks—I mean, I know they're elevated relative to the rest of the S&P 500—but can you put some numbers on that? You know, where do we trade for those largest companies compared to some of the others?
00:04:29:23-00:04:59:09
Dave
Sure. So the five largest, which comprise about 24% of the S&P 500, So imagine that a quarter of the index is just in five companies—five great companies—but they trade an average forward multiple north of 30 times with the S&P at 20 times. Of course, because of their big weight in the index, they're also elevating that multiple for the whole index based on their trade net 30+ times.
00:04:59:11-00:05:29:06
Dave
So they're certainly priced as if we're in a different environment in our view, an environment that existed 18 months ago when long-term growth stocks were the only game in town and everybody talked about Tina; there was no alternative to these companies. Well, glad with a little bit of FOMO, fear of missing out as companies came public and enjoyed massive valuations without any profits, and so those companies have benefited from that environment.
00:05:29:09-00:05:37:13
Dave
I think investors have just continued to reward those companies, but with a little bit too much of a look back instead of a look forward.
00:05:37:15-00:05:53:11
Ryan
So it seems to me, and I know you've talked about this for the last several months as well, that there are some similarities between the concentration in the market today and the later part of the nineties. So can you talk about that a little bit?
00:05:53:11-00:06:21:18
Dave
Sure. Yeah. In the late nineties, the market was led by a handful of mega-cap companies—not all tech companies, but certainly Cisco Systems stood out, enjoying at one point a $500 billion valuation. This is in 1999, a massive trade net, a level of sales. Forget about profits that were unprecedented, and that stock is not back to where it was in 1999.
00:06:21:18-00:06:53:18
Dave
Today, 22 years later, And another example: I think G.E. actually had a $500 billion market cap back then as well, and today it enjoys nothing close to that kind of valuation. So valuation matters. No one can see a slowdown in the best companies in the world, but invariably it does happen. And if you're paying just an extraordinary price for those companies, that's where you can get harmed, especially if the environment does change.
00:06:53:18-00:07:32:19
Dave
After 99, we got to the Y2K scare—that everything was going to stop in the world at midnight. When we started in 2000, it didn't. And they enjoyed a spurt until the middle of March 2000. And then, from that point forward, all of those companies—many still really good companies—had to get repriced for an environment that was not going to be anywhere near as spectacular and much more focused on fundamentals and investing instead of just enjoying a ride that was detached from a fundamental picture.
00:07:32:21-00:07:58:01
Ryan
And so the interesting part about the dot-com bubble bursting in the next few years for me anyway is that there were a lot of stocks that were different types of sectors and factors that tended to perform well. So when you look back at that, what actually did better after, you know, those big stocks that concentrated at the top of the index kind of started to pull back?
00:07:58:03-00:08:20:21
Dave
Sure. Of course, it was all about that secular, long-term story of lighting up the Internet and companies like Cisco benefiting from that back in 1999. And then when we pivoted and got to that period of March, the market did start to fall, and then we had the recession, then the Y, and then the 911 attacks.
00:08:20:21-00:08:48:01
Dave
Sure. Yeah. Exacerbating the two-year downdraft in the market. We found three consecutive years. Investors started to notice that if you're investing, you want to look at cash flows, you want to look at valuation, and you will find that there were names that were nowhere near as prized as Cisco, but in the Campbell soup of the world, companies that started trading eight or nine times, ten times, but were profitable and paid a dividend.
00:08:48:03-00:09:11:16
Dave
And that shift in value during the recession Stocks. It was a company that did pay a dividend yield and was even a little bit larger. The smaller mid-cap and smaller, larger-cap names actually started to perform better than just that mega-cap basket that had been rewarded all through 97, 98, and 99, during what is now referred to as the tech bubble.
00:09:11:16-00:09:17:06
Dave
But again, it was broader than just tech when you see names like G.E. with those kinds of valuations.
00:09:17:07-00:09:32:14
Ryan
So drawing that forward to today, none of us knows what's going to happen tomorrow. You know, next year. Do you think that there's maybe an opportunity for some of those same sorts of better-valued companies to outperform going forward?
00:09:32:16-00:09:55:17
Dave
I do. To be clear, the basket of names at the top is The Magnificent Seven. Yeah, almost across the board, they're just magnificent companies. Sure. They're not just magnificent stocks that have given us phenomenal returns. They are great companies. They're a world away from the valuations and the lack of earnings power that existed with a lot of those companies back in the late 1990s.
00:09:55:17-00:10:22:20
Dave
Now we do have the thousand IPO plus that came in 2021. That's similar to some of the craziness that did take place back then. But the big seven stocks this time are high-quality names. They're just too expensive in this environment. So if we look at the aftermath of the 2000-0102 recession, if we go to 0809 again, you see the same factors at the top.
00:10:22:20-00:10:49:10
Dave
Investors say, Look, I need to take some risk off the table. I want valuation on my side. But I also want to see where there's cash flows, where there's positive earnings and increasing dividends, and that's where you start seeing a different basket of stocks end up in portfolios as we get an adjustment across the board, but especially names that are too highly valued for an environment that no longer exists.
00:10:49:12-00:11:20:05
Ryan
So I think it's pretty clear that, you know, the Fed policy changes that have taken place over the last 15 months or so now have had an impact on valuations. And, you know, as the discount rate goes up in some of these companies, valuations go down. So two-part question. First off, do you think that the Fed is pretty close to being done or maybe done, and then, you know, what sort of impact will Fed policy or interest rates in general have on valuations?
00:11:20:06-00:11:46:19
Dave
Sure. So the best line I saw on this was a little higher for a lot longer. So one, two rate hikes, perhaps even more if inflation rears its head again, the Fed will keep going. It will continually have an effect if we don't go any further on the environment. When you think about a high-rate environment, it's obviously affecting homeowners and mortgages.
00:11:46:21-00:12:10:21
Dave
Nobody wants to move because they don't want to give up their mortgage. Right? So we've certainly seen the effect of rates, and higher rates can only have a bigger effect on economic activity. And that's what the Fed very calmly said. We want the economy to grow slower than it is capable of for a period of time. And Chairman Powell said, when asked what he's capable of, he said, Well, we've been right around 2% the last 20 years.
00:12:10:22-00:12:47:03
Dave
So he wants slower growth than 2%. So when you think about going forward, if we're not going to have this global growth environment, if we're not going to have the stimulus of low rates and just cash out to consumers, then you're going to really have to look at what you're paying for equities and where there's an opportunity going forward if it's not just going to be in the same basket in that different environment, massive stimulus, low interest rates, and companies that could thrive in that environment.
00:12:47:05-00:12:58:13
Ryan
So do you think earnings multiples will kind of stay at the level that they're at in general now? Or would you expect, you know, if policy stays stable, that you would drift one way or the other?
00:12:58:19-00:13:21:19
Dave
Sure. Absent earnings dropping, the multiple doesn't look that bad when we get rid of the top seven names, and in fact, the top ten names after the Magnificent Seven represent about 30% of the S&P 500 traded 30 times. But as soon as we start getting below that, 11 through 50, 50 to 100, and stocks numbers 400 through 500 actually traded almost 15 times.
00:13:21:21-00:13:57:14
Dave
So much lower multiples just as you get away from the very, very top of the S&P 500. So those don't look overvalued. The question is, can earnings that have massively accelerated since 2019 actually maintain or grow from a level that in the S&P 500 is about 35–40% higher than it was just in 2019? And you would expect that some of that stimulus in the low-rate environment helped the earnings growth and the pricing power of inflation for a lot of companies.
00:13:57:16-00:14:20:23
Dave
So that's the real key: what earnings hold is what you forget about growing at. He said it was 215 this year, up from 218 last year on the S&P 500, and the forecast for next year was 40, and we actually only hit 225. That's a massive amount of profit for the S&P 500 Max, significantly higher than just four years ago in 2019.
00:14:21:01-00:14:37:13
Dave
And that means a lot of excess cash flow to make sure you can keep funding that dividend, so that you can reset your debt levels or just pay off debt if you need to. If rates are four or 500 basis points higher and some of your bonds are coming due, it certainly will hurt some companies moving forward.
00:14:37:19-00:14:45:13
Dave
But if we have that level of profitability, I think valuations outside of the very top of the index actually look okay.
00:14:45:15-00:15:04:03
Ryan
So when you're looking at just sort of a broad basket of stocks, you mentioned some higher-quality attributes. Is that the sort of company that investors should be more focused on today than just buying an index? Should they look at more high-quality names?
00:15:04:05-00:15:38:16
Dave
Tier quality, obviously, is where you want to be when there's more uncertainty. So we like quality. Of course, it's no longer cheap to trade. The last several months have been a quality trade; not quality to us is really great. Balance sheets have a low debt-to-equity level. So that you know that you can withstand an environment and don't need to do as a company are things you don't really want to do but but you're forced to because of the leverage that you're using and then really strong returns on equity return on assets for those companies.
00:15:38:16-00:15:59:05
Dave
So those are the kinds of companies that would be able to weather the storm as you move forward. But the real opportunity, if we slow down or go into a recession, is to determine when you want to start putting money in small-cap value stocks, but you'll get hit in a recessionary environment, especially in a hard recession.
00:15:59:07-00:16:22:17
Dave
But if eight or nine is on the table and we don't have any valuation levels like we did in the late nineties, then the opportunity to get in a little bit early, if you can stomach it, is clearly in some of those small-cap profitable companies that might be trading at eight or nine times earnings and significantly below the large cap.
00:16:22:17-00:16:33:11
Dave
And that's an anomaly. I know that's what's existed over the last ten years, where big is better, but historically, the big return has always come from small-cap stocks over large-cap stocks.
00:16:33:13-00:16:53:14
Ryan
So preparing for kind of what's ahead and recognizing that you're not likely to time perfectly when a recession is coming, when it's going to end Do you think that, you know, just sort of building in some of those biases towards smaller companies might work out? Well, I think that worked out pretty well in the previous time period.
00:16:53:14-00:17:00:06
Ryan
We're talking about the dot-com bubble bursting in 2001. So you think it's kind of a similar setup?
00:17:00:10-00:17:18:02
Dave
Absolutely. I mean, look, every day we go to bed, somebody owns every one of those equities. It's not naive people who own equity when your environment is imperfect. The market has priced in, to some extent, this slowdown. That's why you see stocks and do trade eight, nine-, or ten-times earnings that have a history of profitability.
00:17:18:07-00:17:46:00
Dave
They happen to be more than small and mid-cap land today. They happen to be on the value side of things because growth, technology, and consumer service communication services are so exciting, and they deliver the best returns. So invariably, we all look backwards and see great returns, and we chase those returns. But when there is a big shift, and that's what we see today, the Fed is telling us, hey, we're going to slow down.
00:17:46:02-00:18:08:16
Dave
I think they were full steam ahead for quite a long time when they did try to slow it down in 2019 and raise rates immediately in 2019. At the first sign of any weakness, they cut rates, but not this time because of inflation. So, we do think if things got soft, they would cut rates, but not when we see an unemployment rate where it is today.
00:18:08:18-00:18:28:00
Dave
Mort generation lows I've never seen an unemployment rate much lower than it is today. But when that starts to move up, maybe we'll see some rate changes. And I guess the answer would be, well, the Fed does cut rates, and you've got to jump right back into those long-term growth stocks. I wouldn't think so.
00:18:28:03-00:18:46:21
Dave
I think a lot of other companies are going to benefit if the Fed does cut rates, and a lot of investors are going to notice these companies in the high single digits or low double-digit multiples that have profits and are raising their dividends. So, I think that's an opportunity. You're right. Even if you do get in early,
00:18:46:23-00:19:02:08
Ryan
What do you think about some of the defensive areas of the market? I know that's something that people have kind of gone back and forth on a little bit this year. It was something that was somewhat popular after, you know, the swoon that we had in 2022. You know, the markets rallied some.
00:19:02:08-00:19:12:16
Ryan
So maybe some people have abandoned the defensive areas. And I think they were somewhat expensive at the end of last year. So, what's your take on some of those defensive areas today? Sure.
00:19:12:16-00:19:45:06
Dave
So when you talk about defensive in the S&P 500, it's primarily health care, more so consumer staples and certainly utilities are the three big defensive areas. Health care has enough growth in it that it's not entirely defensive. Consumer staples certainly are defensive, but they have enjoyed such massive pricing power. If you listen to conference calls and CEOs, the ability to increase their prices and Nazi any demand destruction at all has been prevalent for the last 18 months.
00:19:45:06-00:20:09:04
Dave
That's probably fading. It certainly looks like it in the numbers. So those enjoy pretty high multiples. So it's hard to get excited about consumer staples with health care, but at least you have some of the growth, and you have a decent valuation along with an earnings outlook next year that shows that health care should be one of the top sectors when it comes to earnings growth.
00:20:09:09-00:20:32:09
Dave
And then you get to the utilities, at least for the first time in a long time. Utilities are priced, in our opinion, like utilities. The difficulty with utilities is that every investor in the last ten years has usually used utilities by proxy. You can't buy bonds; there's no yield. Well, buy utilities and take a little bit more risk, but low-risk utilities will continually give you a little bit more in dividends and dividend growth every single year.
00:20:32:11-00:20:56:22
Dave
They're finally at a spot where they're valued lower than the market, not at a premium, which they shouldn't be, because we know their growth is not going to be great. And so they're starting to look attractive; certainly, in a harder recession, a bigger slowdown, those defensive sectors will hold up better, but they won't necessarily give you a positive return.
00:20:57:00–00:21:16:00
Dave
When the Fed does cut rates, that would be the first signal to say, okay, at some point we may be using utilities as a bond proxy again. And you might see investors say there's some value there. Those dividends are going to be there, and maybe I can get those before we assume perhaps a slightly higher multiple.
00:21:16:02-00:21:38:13
Ryan
So the other sector I wanted to ask you about was the energy sector. You know, this is an area that did very, very well for a stretch, especially following the spike in oil prices when the Ukraine war started. And this year, energy sold off a bit. But more recently, it has actually started to perform a bit better as oil prices have moved up.
00:21:38:13-00:21:44:02
Ryan
So what's your outlook for the energy sector? Not just over the next few months, but really over the next few years?
00:21:44:04-00:22:18:10
Dave
Sure. Energy is one of our overweight's right now. We do like the energy sector. There's a small weight in the index today versus where it was ten, 15, or 20 years ago. In 1980, the S&P 500 had 20% of its market cap in energy names. Today, it's closer to four and a half percent. So certainly, we've seen energy become a much smaller and less important part of the index over the last 40+ years, but it enjoys very little competition today.
00:22:18:12-00:22:57:22
Dave
We see high oil prices. The transition from fossil fuels is taking place, but it is going to be at a much slower speed than many want, or maybe many expect. But the absolute truth of it is that there's a big, big developing world out there with four times the number of people in the developed world. The developed world is trying to find solutions for using fewer fossil fuels, but they're not going to be able to do that and export them across the rest of the developing world, which needs cheap, reliable sources of energy, better food, shelter, health care, and better lives for all its citizens.
00:22:58:00-00:23:28:10
Dave
And so it'd be hard to expect those developing countries not to use the same resources that Western civilization used to make our lives so much better. So, we're going to continue to see an increase in the amount of oil use per forecast for the next decade, going from slightly about 100 million barrels per day today to maybe 107 million barrels per day, using the globe as the expectation ten years from today.
00:23:28:12-00:23:45:21
Dave
And without more capital being invested in new companies or in exploration, you're going to see higher oil prices for quite a long time. So, we think that's a sector that you definitely want exposure to.
00:23:45:23-00:24:12:19
Ryan
I mean, it seems that companies are a bit disincentivized from investing in long-term capital projects because, you know, there's the thinking that there's going to be a transition and maybe regulations will tighten, and, you know, maybe you're not going to get a payback on these projects over the next couple of decades. The supply seems like it could be a bit constrained relative to the increasing demand you're talking about, right?
00:24:12:19-00:24:13:03
Ryan
Sure.
00:24:13:03-00:24:37:03
Dave
And I think shareholders have spoken loudly. You look at those companies and what they've done with their dividends and stock buybacks recently and rewarded shareholders, and the stocks have gone up massively. Energy's been a phenomenal trade for the better part of a couple of years now, after it had massive lows. I think it may have hit below 2% in the S&P 500 during a covered period of time and then snapped right back.
00:24:37:04-00:25:04:07
Dave
And what they've done is just make their balance sheets fantastic. But yeah, they're reluctant to invest because the money coming from their shareholders is saying we don't know what's going to happen; that's not the investor's money; give it back to us. And that's what those companies are doing. And now they're in across the board. The S&P 500 energy sector is in a phenomenal position when it comes to its balance sheet strength.
00:25:04:09-00:25:21:14
Dave
I mean, being able to turn themselves out of debt, increase those dividends, and then, you know, doing what so many companies have been doing for the last ten years, but now they can do it themselves, is buying back stock and rewarding their shareholders with a bigger share of the company and future profits.
00:25:21:16-00:25:41:16
Ryan
So higher oil prices obviously feed into inflation as well. Inflation was, you know, 9% last year. It's come down quite a bit. What's your take on, kind of, you know, the next several months? Do you expect that inflation will kind of moderate back to a level and stay there, or do you expect it to, you know, kind of accelerate?
00:25:41:18-00:25:42:14
Ryan
What's your take?
00:25:42:14-00:26:02:06
Dave
I don't know if I have a great perspective on whether it's going to reaccelerate. I don't think the Fed's going to hit its 2% objective. I think it's going to be higher for longer due to inflation. They may live with that. We'll see what effect that has. But I would be surprised if they would get this thing back to where it had been before.
00:26:02:08-00:26:23:13
Dave
And that means that rates are going to stay somewhat elevated, and we're not going to be able to grow as fast because the Fed is going to be worried that if they're going to settle on three and we can say that if it's four, they still have a problem, they're going to have to go higher. So, I would expect it to stay above average for quite a few years going forward.
00:26:23:13-00:26:47:07
Dave
And that's why we think rates will be above average again. We just enjoyed an incredible period of time where rates had no effect. Actually, they had a massively positive effect on investing capital and better return projects, and that's why they're going to get a lot harder to price and determine if you want to invest your capital when the risk-free rate has gone up as much as it has.
00:26:47:09-00:27:02:09
Ryan
So for someone trying to figure out their expected returns over the next several years, would you say that they should plan on having equities? We're talking about lower expected returns than we've had over the last decade.
00:27:02:10-00:27:29:11
Dave
Sure. We were starting from a standpoint today where we are at 20 times our next year's earnings, even if we take the top names out and we'll get to a number closer to 17 or 18, that's that multiple expansion opportunity, 2019, 20 and 21, the returns were phenomenal, 31%, 18%, 28%. In the S&P 500 It's a 100% cumulative return in just two years.
00:27:29:13-00:27:55:17
Dave
So what we wrote this January in our market minute was that we would expect over the course of this decade to see something closer to a 7% return or so on equities, something closer to seven 70% over the next six years or so when it came to the total cumulative return of the index. More muted than history, there are no multiple expansion opportunities.
00:27:55:17-00:28:16:15
Dave
That's when you see a decade and you look back, and you say, Well, the big reason for that excess return was because of the starting point and how cheap stocks were. Nobody liked them. Nobody wanted to buy them, but they were interestingly cheap. And when you see a decade where the market underperforms, it's because we started at or above those longer-term multiples.
00:28:16:15-00:28:33:17
Dave
So I think we're in that environment today where we're going to be at or below those longer-term returns because of valuation today. And then, of course, an environment that does not speak to the TINA trade. There's no alternative to stocks. There's a lot of alternatives today; it will return.
00:28:33:19-00:29:00:00
Ryan
So what does that mean for international stocks? Because those are cheap and those have underperformed for, you know, a while. Should we expect better returns for international stocks going forward? I mean, I believe our models are still pretty much either underweight or waiting for international stocks. So as you think about the next several months or several years, is there an opportunity in international?
00:29:00:02-00:29:21:13
Dave
Sure. I don't think it can be worse than the last decade. You're exactly right. It's just a disaster. Our international space And as you look forward, it's really hard to identify a catalyst. If you think our oil and gas prices are high, just go over to Europe. They're just, you know, multiples higher than we are. So they hurt the growth of those economies as well.
00:29:21:13-00:29:46:01
Dave
So it's hard to see those countries and the rest of the world growing much faster than the U.S. China has its own problems. So there's not a great catalyst to say I want international exposure. But what's interesting is that we know that the U.S. is the dominant economy in the world; 25% of the world's GDP sits right here in the U.S., but that means 75% sits somewhere else.
00:29:46:03-00:30:15:20
Dave
And those are citizens of those countries who are trying to improve their lives. And going to work every single day. And it's 75% of all the GDP in the world. And I think to ignore that and the opportunity there, when you do see incredibly cheap valuations, when you're actually seeing some stock buybacks in the European countries for a lot of those stocks right now because their stocks are so cheap and so depressed that there's new must be some sort of opportunity, if nothing else.
00:30:15:22-00:30:36:18
Dave
Here's what we know about the rest of the world. The U.S. is a technology giant, and in my opinion, nobody's in second place. There's not a country that can come close to the U.S. and its technology footprint. But what that means is that the rest of the world is a lot more cyclical and defensive in many cases than the U.S. economy when it comes to their stock markets.
00:30:36:20-00:30:58:17
Dave
And so you can actually take the international story today, the international basket, and in many ways actually make that part of your value content as you move forward, that cyclical defensive because they just don't have the technology that we do with our technology versus cyclical footprint in the S&P 500 is actually much heavier in tech than or tech plus, as we call it.
00:30:58:17-00:31:00:21
Dave
And then just the cyclical trade.
00:31:00:23-00:31:14:04
Ryan
Okay. So the final question for you, Dave, as you kind of think about where we are today, what makes you optimistic looking forward to our industry, but just in general?
00:31:14:06-00:31:51:15
Dave
Sure. Well, I mean, I'm an optimist anyway, so that's helpful. I see all the discord politically between both parties and all that cancel culture and everything else going on in the world. And when you really think about where we sit today, we have absolutely wonderful lives. I mean, we live in a world that has never had as many benefits for human beings as we have today, whether it's food, clothing, or health care shelter.
00:31:51:17-00:32:25:20
Dave
Across the board, we have, in many ways, eradicated a lot of the poverty around the world in the last 40 or 50 years. And it's due to capitalism. And there's no threat to capitalism. There's no threat to the U.S. being the dominant superpower in the world right now. And when you have basically a democracy, you have those, you know; it's a gamble on personal property rights, the rule of law, a functioning democracy.
00:32:25:22-00:32:45:08
Dave
You can't do anything except grow long-term. You just grow long-term. That's what happens. And so we'll get through this hiccup in the road, a bigger bump, or a little bit of a valley, and then we'll come out of it. And the story of equity returns It's not your house that provides the greatest return in the history of the world.
00:32:45:08-00:33:14:07
Dave
It's always been equity, and nothing has ever come close to equity. So if you could stay the course and focus on the longer term and bite you throughout any type of recession in the equity basket, you're going to be rewarded with some fantastic returns. It's so hard to do emotionally. So you set a plan in action, and that's really going to reward you.
00:33:14:07 - 00:33:33:14
Dave
And so that's why I'm so optimistic: people understand that we try to deliver that message. Don't think about tomorrow. Think about ten years, and in ten years, the stock market is going to be significantly higher. Earnings are going to be higher, and our lives are going to be better. And I don't have any inkling that that's not going to be the case.
00:33:33:16-00:33:57:06
Ryan
All right. Well, that's a great place to leave things. Dave, thanks for coming on The First Trust Our Way podcast. I really appreciate it. Thanks to all of you for joining us as well.
