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 47 | Bob Carey | Cataracts and Cadillacs…Unpacking Equity Market Trends | ROI Podcast
Bob Carey discusses his long-term outlook for equity markets as the baby boom generation ages. He also weighs in on potential near-term drivers of equity market performance, including tariffs, regulations, and the “one big, beautiful bill”.
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Hi, welcome to this episode of the First Trust ROI podcast. I'm Ryan Isakainen, ETF strategist at First Trust. Today I'm joined by Bob Carey, Chief Market Strategist at First Trust. Bob and I discuss what's happening in the equity markets, the impact or potential impact of tariff policies and some of the industrial markets, the impact or potential impact of tariff policies and some of the industrial policy of the Trump administration. We talk about Bob's views on sectors and where to position client portfolios in this environment. Thanks for joining us on this episode of the First Trust ROI Podcast.
Bob:I distinctly remember a lot of investment firms, including us, were talking about the fact that every seven seconds or so, a baby boomer turns 50 years old. Remember that it was like a big deal, like 50 years old, I mean, it's the year 2000, and we've got all these baby boomers that are going to be turning 50.
Ryan:Yeah, there was a lot of focus on demographics. Big time, big time.
Bob:So here we are, 25 years later those same people are now turning 75, lord willing, some of them most of them. And if you look at the population over the age of 85, even going deeper, that segment of the population is the fastest growing segment of the population. It's remarkable 500 people a day in the US turn 100.
Ryan:Is that?
Bob:right yeah, according to Hallmark, Wow, hallmark, yeah.
Ryan:Yeah, they're churning out the happy 100th birthday greeting cards, yeah.
Bob:Which is. I noticed this a couple of years ago. I turned 62 years ago and I'm buying birthday cards for other people turning 60 around that time and I noticed at the bottom of the shelf where they put cards for people turning 100, and it's way down at the bottom. There was a selection of cards down there. It's like a funnel. The 20-year-olds are up here and the 30-year-olds, and all of a sudden you hit 60 and you're below the equator. You're like, okay, I'm starting to look at the bottom, I see 70 and 80. And I saw at the bottom of the shelf people turning 100.
Bob:It's remarkable and I'm like so we think about the population and aging and people retiring and saving for retirement and where should you have your assets for the next five, ten years? People used to work until they were 60, 65, maybe 70, and they weren't around that much longer. So it's just interesting how demographics was everything. And back in the year 2000, we had a stock market selling at 35 times earnings at that time and we had treasuries yielding 6% plus 6.5%, even 7% nearly for a while, looking at the 10-year treasury. Now here we are today, many years later. The 10-year treasury is at 4.5% and the P and the S&P 500, if you plug in earnings estimates for the next four quarters is about 22.5 times earnings.
Bob:So, the S&P was nearly twice as expensive as the 10-year treasury back in the year 2000. And people were using that. You know you need to be invested, you need to be in the stock market. And here we are today. Valuations have come down significantly in the last 25 years and the yield on the 10-year treasury has come down, which means its valuation has also gone up.
Bob:So the two, in my view, are hand-in-hand and we're thinking about where we want to be for the next 10, 15, 25, 30 years. It really does get back to the companies themselves. Are companies going to continue to prosper, drive their earnings and revenues higher? So it's just interesting how demographics has almost been ignored. And yet when you look at, you know we're having this massive argument about the budget and the budget deficit and entitlements and all that sort of stuff and it's kind of come full circle. And now we're here. We're finally at the point where the boomers are retiring. I'm going to be 62. I'm at the end of the boom. A lot of my fellow boomers are going to be turning 75, 80, 65, 62. I mean, it's going to be. It's a big discussion.
Ryan:Well, and if everyone's living longer, that has some implications based on, you know, when Social Security was first launched back in what the 30s Exactly, people did not live as long as they're living now, and if they're extending their expected you know longevity, then you've got a lot of issues potentially coming down the road with Social Security.
Bob:There's a lot of people that are going to need cataract surgery. So we've got cataracts and Cadillacs. I mean those are two things that I'm thinking about.
Ryan:These are big issues All right, we're recording this episode on the 21st of May. It's going to air on June 2nd, okay, so there's a little bit of a lag there. So we'll give you a little bit of grace in terms of if the market crashes or surges between now and then. I hope so, but I was thinking we're talking about different focuses and slogans that the market has really keyed in on. Back then it was demographics. One of the slogans over the years that you hear time and time again in May is sell in May and go away, and I don't know, maybe it's stuck around for so long because it rhymes and things that rhyme are easy. What do you think of that slogan?
Bob:Well, there was a time when the economy was very, very seasonal. I mean, the summertime factories would shut down, people would take extended vacations. You could really see economic activity. It's still seasonal to some extent, but not anywhere near as seasonal as it used to be, and I think part of it was well, if we sell in May, we're on vacation anyways in the summer, we're not worried about what happens to the stock market, and then we'll kind of revisit it once we get back from vacation later in the year.
Bob:There is some seasonality to the market as well. The market seasonally doesn't go up quite as much during that time from May to October, but it still goes up. We've been putting this blog post out now for many, many years that basically says don't sell in May and go away because the stock market, generally speaking, does okay. It doesn't do as well as it does other times of the year, but it still goes up typically looking at the last number of years. So I just think from a longer term perspective, just getting back to that idea of you have to have capital for your lifetime and if every year you're selling in May and going away, you're actually hurting yourself. You're potentially paying taxes on gains and, at the same time, the market has tended to go up in the middle of the year and not go down.
Ryan:Yeah, and you run the risk of figuring out when you should be buying again. Right.
Bob:Exactly.
Ryan:You buy in the fall, I guess Right, maybe buy when everything is supposed to go bad right in October or something like that. Exactly. It just seems like these seasonal patterns, at least for the market, don't really hold, and especially when everyone gets really excited about one, that's when they really don't hold. That's very true. And the mix of industries for the economy, I think, has shifted so much over the last few decades.
Bob:Half the population lived on farms 120 years ago.
Ryan:I mean half of us.
Bob:And now it's a couple percent of the population is actually involved with producing food. We've first moved, obviously, into the industrial age and now, increasingly, we're moving into the information age and technology, and those are industries that have you know, 24-7 activity typically.
Ryan:So, that being said, as the economy changes, you know, one of the things that has changed has been the moving away of a lot of the industry and manufacturing and, as a result, we've had this trade deficit, or that's part of the reason why we have a trade deficit, and the current administration's really focused on that the trade deficit and using tariffs as a way to address some of the imbalance in the trade relationship with other nations, and everyone's focused a lot on tariffs and I guess I'm curious what you think just in general on.
Ryan:Is that a tool that will be effective in restoring some balance? Is it a good idea? Do we need a trade, a balanced trade relationship with other countries?
Bob:Well, we do want other countries to open up their markets. In my view and I think that's really the end game, I think really is the goal is we do need certain industries, be it steel and maybe semiconductors, things like that. We do need to produce more of those things in the United States and so to some extent, do tariffs help encourage production here in the US? I'm not so sure I mean it really. You know, the private sector has to make that decision.
Bob:Ultimately and historically, in an industry like steel very, very low return business, very capital intensive We've, you know, we've got regulations to contend with a lot of issues like that there's a reason we don't produce steel in a dominant fashion like we used to. We still do, but it's not to the same extent, it's not as important an industry. And yet from a defense perspective, we obviously need steel to produce planes and ships and things like that. So I think, to the extent that raising tariffs might shift production to the United States to some extent for mission-critical defense, national security-related reasons, it makes some sense. But I think markets don't like taxes, don't like taxes going up.
Ryan:And that's what tariffs are.
Bob:That's exactly what they are. I would argue that even if we had zero tariffs around the world, that we would have a trade deficit. In the United States, we are significantly wealthier on average you know, when you look at individuals than any other place in the world. I mean our GDP per capita is multiples of that of China, for example. It's significantly higher than the Europeans and whatnot.
Bob:So we're wealthier in general and we have higher incomes. We have a higher GDP per capita. We are going to probably import more from places like Europe than the Europeans can import from us. I just spent several weeks in Italy back in April and it was quite obvious, looking at the roads throughout most of Italy, why they drive small cars. You cannot drive a large American-made Cadillac SUV throughout a place like Italy, for example, and I'm sure that's true for other parts of Europe Maybe not Germany, but for other parts of Europe that have narrow roads.
Ryan:The first time I was ever in Italy, I had one of the most terrifying experiences in the backseat of a taxi. Yes, and I don't know exactly what rules of the road are in effect, but I mean, it was like white knuckles on the dashboard.
Bob:Yeah, we were in a taxi in effect.
Ryan:But I mean, it was, like you know, white knuckles on the dashboard.
Bob:Yeah, we were in a taxi in Rome and our taxi driver literally rammed into the taxi in front of him so that he could take a left-hand turn. I mean it's like and you're in these little cars. You know relatively small cars that you just would never see in the US.
Ryan:They've produced some good race car drivers over the years.
Bob:Oh, there's no doubt about it, and some great cars. I mean, it's amazing that the country that produces Lamborghinis and Ferraris and whatnot is somehow, but they can't drive those cars in too many places in their home country.
Ryan:So what do they?
Bob:do they export them here?
Ryan:Okay, so what do you think the impact on corporate profits are likely to be? What is the impact of tariffs and some of the uncertainty surrounding tariffs this year? We don't know.
Bob:And the estimates initially.
Ryan:That's the uncertainty.
Bob:Yeah, we can see the analysts across the board have cut earnings estimates across the board, but the magnitude of those earnings estimate cuts really not very deep. Earnings estimates today are a little bit lower than they were at the beginning of the year, but not significantly lower. I think it's just going to take time to see how this all plays out. I think some industries some you know, I think about retailing, some of the major retailers that import a lot of products from China, for example how do you predict how they're going to do in this environment? If, in fact, we do end up with these massive tariffs on goods coming in from China, you would think that's going to hurt a company that is on the importing side of something like that. They just simply aren't going to import and have the product available at the price that consumers want to pay in that environment.
Bob:So I know a lot of those companies have been very vocal and they have lobbyists. And trade policy is not the purview of just the president. It really does take the Congress, it takes the Senate. It's a multi-pronged issue. The president certainly has made it front and center. The financial market's reaction, I'm sure, is not what he wanted to see as president, and obviously we've recovered and I think the market is basically saying that this is an issue that is not going to have as much negative impact on earnings going forward.
Bob:I think that's really the message of the market through this trough and then subsequent recovery.
Ryan:Yeah, I was looking at and thinking back to 2018, during the first Trump administration, where there was all the volatility during that year surrounding tariffs and, of course, the Fed was more likely to raise rates and that we're raising rates than right now Great point.
Bob:We're more likely to have rate cuts this year.
Ryan:And then in 2019, really, it was like Christmas Eve of 2018 was the bottom of the trough of the fourth quarter and then things kind of took off and there wasn't a lot of resolution with some of the tariffs. And that's kind of surprising because a lot of people are waiting for the tariffs to all get resolved and then things can maybe take off.
Bob:Right exactly. It's something that it might not get put to bed right away. This is something that could take weeks or months, maybe even years, before we really have a better sense of just exactly where tariffs do play out. I think the current administration, I think, really would like to get some deals done. They clearly don't want the economy to suffer significantly. Next year is a midterm for the House and for a portion of the Senate, for the House and for a portion of the Senate, so I think a lot of this is going to be done. My guess is that a lot of this is going to be mostly this year and other issues will become more important next year.
Ryan:Yeah, one of the things that's being debated right now is that reconciliation bill. That's kind of weaving its way through Congress and there's some interesting provisions in there. And I think there's a lot of kind of weaving its way through Congress and there's some interesting provisions in there and I think there's a lot of kind of negotiation back and forth on what's ultimately going to come of that. Do you have any opinions or expectations? I don't want to see it until it's finally done. It's just.
Bob:I mean, who knows where these things go? I think you know we're recording this. You know, in the middle of the week heading into Memorial Day weekend. I think that by the time this airs we'll have a bill that's more or less ready to be passed. I think the president would like to get this done before the Memorial Day weekend here, so we'll see.
Ryan:Yeah, that would be good, I think, to provide a little bit more certainty to markets, because no one likes to have that uncertainty floating around.
Bob:When I'm watching racing on Sunday and we've got Monaco and F1 and we've got the Indy 500 with 400,000 people at the race, and then we've got the Coke 600 at Charlotte for NASCAR. I don't want to be thinking about taxes and tariffs and all that. I want to focus on other things to be thinking about taxes and tariffs and all that.
Ryan:I want to focus on other things. Okay, so this will air after the weekend that those races are taking place. So let me put you on the spot, do you?
Bob:have any favorites for any of those races. I just want to see a good race, I want to see passing, I want to see racing. Unfortunately, monaco, the first race of the weekend. Typically, whoever wins the first corner wins the race. It's very, very hard to pass. They race in the streets of Monaco, as a lot of people know. It's just an amazing thing to watch these cars navigate these narrow streets. Well, that's part of the problem is the cars have gotten wider over the years. The streets are the same width basically, so there's just not as much room for passing.
Bob:And these drivers and these cars have gotten so good at navigating all tracks to begin with. I mean it really takes a major catastrophe, a screw up, you know, driver missing a turn that kind of thing. It doesn't happen very often anymore.
Ryan:Yeah, okay. So one more question about sort of a philosophical your view on the Trump administration's very active role in negotiating deals, and you know Trump's a dealmaker and he's always done that throughout his public career, whether it's in business or in politics. But you know part of me has a skeptical eye anytime the government's really heavily involved in making deals. Do you think that's a good thing for the long-term health of the economy, or is it a?
Bob:negative. I agree with you. That's a negative. I think we want certainty, we want policies to be known. I think once we know the rules of the game, then it's game on at that point. And you know, here in the US we do better at that than anybody else. We have the highest productivity in the world and I think part of the reason we do have these high levels of productivity is there has been relative policy certainty over long periods of time. We don't change tax rates a whole lot. Regulations change a little bit over time, but we've been able to overcome all these issues, and a lot of it, I think, is because of our predictability and the rule of law.
Bob:And you know, that doesn't always apply in other places.
Ryan:Yeah, I mean, there's been literally trillions of dollars worth of like factory building and investment that companies are making in the US that have been announced since Inauguration Day. And I look at that and think, well, hopefully these companies were already going to do those investments because otherwise, you know they're making malinvestment, like they're doing bad things with their investors' capital. But you know and the other part of that is I'm concerned well, this administration only has three and a half more years and some of that will be, um, you know, sort of a um the end of the presidency.
Ryan:You don't tend to get a whole lot done, so that's the other part that I think concerns me, you think about investments in, you know, building semiconductor plants, things like that.
Bob:I mean that that's not something that you can wave a wand and six months later it's up and running.
Bob:These are investments that take a very, very long period of time. I would say that for the most part, the companies that are based outside the US that have announced these investments in the United States, generally speaking, these are good businesses. These are well-run, these are companies that don't have a history of making bad investments. They're successful for a reason. They know how to make this go. I mean, you need capital and you need labor to make this happen, and I would argue that a lot of them are probably doing this for political reasons. They don't want to be perceived as being under a negative eye from any administration.
Bob:So I understand your skepticism. You're wondering do they really mean this or not? Only time will tell when we look at these companies and their balance sheets and their investments, and I think ultimately these companies understand that strategically, we need to have more investment in the United States. We do have. I mean. One byproduct actually of a trade deficit is you have capital surpluses and I'd rather have companies take these dollars that we're sending overseas, bring them back to the US and make capital investment in the United States as opposed to buy treasuries. You know that's all fine, well and good, but I'd rather have that money turn into hard assets and productive assets.
Ryan:Yeah, and it seems to me that the most effective way for the government to actually incentivize that investment is not necessarily to make sort of transactional deals but to lower some of the regulatory hurdles for building things.
Bob:Yeah, it's organic.
Ryan:At that point you put the incentive that says build it Right exactly, and then they can decide.
Bob:When we look at the world and we've talked about this before when I look at companies around the world and it could be just about any industry for the most part we have higher return businesses than businesses outside the US.
Bob:And just to give you some numbers, when I look at the US stock market all the companies in the United States the average rate of return is nearly three percentage points higher than it is in Europe. I mean, we have historically done a better job of cultivating companies that have higher return businesses, their job of cultivating companies that have higher return businesses. I think other companies outside the US see that and they want a piece of that. And I think that all these issues with trade and tariffs and all that, I think it's to some extent companies recognizing and really facing up to the fact that they might not necessarily be as good as their counterparts in the United States. So if they make an announcement that they're going to invest here, they're basically saying, hey, we want to have our capital working in the US and this is probably going to happen, regardless of who is in the White House, I would assume, but obviously it gets a lot of publicity in this environment.
Ryan:Yeah, so that makes me think you know the higher return businesses located in the US and then internationally. That is reflected then in valuations, exactly, and the cheaper valuations of international indexes, especially, is a result of that right Totally yeah, there's a reason we are just plugging in earnings estimates.
Bob:This year the S&P 500 is 22.5 times earnings as of right now. You look at companies in Europe, they're 15 to 18 times earnings, depending on which part of the world. I think ultimately, when you look at leading companies and the companies that dominate the top of the index, these are companies that have returns on capital of 20%, 25%, 30% some of them. You just don't see those kinds of companies in the indexes of companies overseas and there was a time when even a mature industry like retailing or energy or something like that, you would lump companies together and if you just looked at their financial statements and calculator returns on investment, there was very little difference between a company in Europe and a company in the United States and Japan and whatnot.
Bob:Today it's pretty obvious when you look at the numbers where the US company is. I mean, they do stand out, even in industries that have been around forever that are more mature. So I think technology really plays the biggest role. We utilize more technology, we create more technology, we implement it. It's making our companies better. We see it in all these industries that are even very mature industries.
Ryan:Yeah, to me, the takeaway, if you're an investment professional trying to figure out an international allocation, is that you really do need more selectivity than just maybe buying an index fund for your client.
Bob:Completely agree, you're going to get, if you market cap weight your European exposure, you're going to buy a whole bunch of financial services companies that. Do you want to bet on financial services companies out of Europe over the next 10, 15 years, or would you rather bet on technology companies based in the US? Yes, they have higher valuations, but they're probably going to grow a whole lot faster.
Ryan:Right, yeah, the market cap weighting of the S&P 500 gives you all that technology exposure to the market cap weighting overseas, more financials and we might see Some of our leading companies might stumble and fade and we might see some companies emerge overseas.
Bob:So having that more selective approach I think makes a lot of sense in those environments.
Ryan:Okay, so we talked a little bit about sectors. As we stand right now towards the end of May, as you kind of look at the sectors of the US now towards the end of May, as you kind of look at the sectors of the US economy, are you kind of more likely to tilt towards the defensive areas or the cyclical areas or the more technology sort?
Bob:of areas. I think right now most sectors are priced about where they should be. If you're defensive, you can clearly see, for example, consumer staple stocks not growing very fast, but you've got a lot of stability in those companies. You've got franchises that are not going to fade, probably, if at all, over the next 10, 15, 20 years. At the same time, the more cyclical industries maybe industries such as healthcare that has regulatory issues and those kinds of macro-related factors their valuations reflect that as well.
Bob:So the one sector that I keep getting back to that has my attention where I think there's an opportunity, that I think the market's onto it. It's not necessarily undiscovered but I think utilities which man. When interest rates were at zero all those years and I saw the valuations and I see these companies really not growing, selling at these high valuations. It made sense in that interest rate environment but I just couldn't get excited about utilities in that environment. We're now starting to see earnings going up for utilities faster than we've seen in a very, very long time. And I think a lot of this gets back to what's happening in the electricity marketplace. We are producing more electricity, the demand for electricity is going up After years and years of encouraging conservation and companies really kind of sitting on their assets without doing anything. They've just been managing their current assets. All of a sudden you've got companies actually adding to their facilities, adding capital investment.
Ryan:And these are.
Bob:you know you talk about long-term investments. So an electric utility plant has a 30 to 40-year lifetime. This is not something that you just decide to build for the next couple of years. So we're starting to see balance sheet investment in these companies. Returns on capital are likely to be stable going forward and at the same time, growth rates are a little bit higher. Valuations are a little bit lower than they were relative to the S&P going back five or six, seven years ago. Going back five or six seven years ago.
Ryan:So I think that's a sector that is kind of a backdoor, safe way to play AI and automation robotics, all those kinds of things. It seems like they have an easier time passing along the cost of those investments to their clients as well, because where else are you going to get your electricity?
Ryan:It's a monopoly, that's right. And so the other part of that, I think, is, if they're making capital investments and they have to use a lot of steel and aluminum, that could have tariffs attached to it. They can pass that along pretty easily too. That's right. So, yeah, I think that's a really interesting sector.
Bob:Yeah, yeah, I like it, I think anything that has and I've not been necessarily all that bullish on that sector until the last couple of years. Yeah, I don't think I've. Yeah, I must be getting old or something.
Ryan:Over the last 25 years, it's been pretty rare that you've been excited about utilities. Yeah, I think this might be the first time. You think that reflects the maturation of Bob Carey.
Bob:It gets back to cataracts and Cadillacs.
Ryan:What do you think about? You've talked a lot about the healthcare sector over the years as well and you know obviously we've talked a little bit about demographics and the population aging and that clearly has more demand for some of those pharmaceuticals and other medical treatments and things those pharmaceuticals and other medical treatments and things. But there's also, as you noted, some regulatory things that are happening and threats of price controls and I'm not sure, on balance, whether or not how that plays out for the health care sector.
Bob:Do you have a view?
Bob:Yeah, we've actually seen the industry, the pharma industry, lose some pricing power over the last several years and you can see margins are not quite as good as they were a decade ago.
Bob:Still good margins, very good business ultimately, but not quite the business that it was maybe 10 years ago. There was a time when leading companies, successful companies in biotech and pharma basically, were valued and had the same kind of metrics as the tech companies did, and we don't see that today and we see companies much more cautious on research spending and things like that. There was a time when R&D spending as a percentage of sales was going up and up and up and up. That peaked about seven, eight years ago and really over the last almost decade now we've seen that number begin to come down a little bit. It's still elevated, but it's not what it was maybe 10 years ago. So I think companies when they see threats of price controls, they're less likely to engage in R&D and that that, as a free market individual, that scares me a little bit, that we've got government policy maybe curtailing investment in R&D, which is really where all these products come from.
Ryan:On the positive side. One of the things that I think could also happen with health care is and again, this is speculative, but artificial intelligence and all of the technology. Yeah, but artificial intelligence and all of the technology. You hear stories about how that's going to make the research more productive and clinical trials more efficient and targeting different segments of the population, and that's one thing that I think is maybe net bullish. Yeah, I pray you're right.
Bob:I mean that would be as someone who's getting older. I hope you're right. I do think that breakthroughs are still happening. I think progress is still being made. That's why Hallmark sells 500 and some odd cards to people turning 100 today. There's a pretty good chance that people are getting treated for things that would have taken them out years ago, so we'll hopefully see that trend persist.
Ryan:Okay, so what's your take on where the Fed's going to end this year?
Bob:A couple of weeks ago I was traveling and I woke up and I'm checking my Bloomberg on my phone and a headline popped up about the Fed maybe reevaluating policies going forward and this got some attention but didn't get as much attention as I would have thought. I interpreted this initiative that maybe we should reexamine our policies as a recognition by the Fed that maybe a 2% inflation target is unrealistic, and I think that that implies to me that we will see the Fed actually cut interest rates this year. They will not wait until we have seen months and months of 2% inflation. We might not see that 2.5% inflation when they're holding rates at 4.5% gives them a lot of more or less headroom to cut rates and I think we'll get some rate cuts over the next 12 months 2.5% versus 2%.
Ryan:That seems like you could structure your basket of goods that you're measuring in a different way. Exactly, it doesn't seem like that big of a difference.
Bob:Exactly, we're not 8% or 9% In long-term inflation is actually averaged closer to 3%, not 2%. Right, the objective might be 2%, but rarely has that objective been met, actually from a long-term perspective. So 3% inflation is the number that I recommend people use for financial planning purposes.
Bob:And if the Fed gets inflation in that 2.5% to 3%, 3.5% range from a long-term perspective, I don't think they have failed. I prefer inflation to be zero. But the end result of that might be the economy in dire straits if we have inflation at be zero. But the end result of that might be the economy in dire straits if we have inflation at those levels.
Ryan:So if the Fed does end up cutting one or two times, does that have an impact on especially looking at the different size of companies mid and small cap stocks? You think they'll be more sensitive to rate cuts?
Bob:Definitely smaller companies, the companies that are, I would argue, at the margin in terms of earning their cost of capital, tend to be smaller companies, companies that are just starting to get going.
Bob:They need capital, business models that aren't necessarily as proven. They tend to be smaller companies and one byproduct of the Fed holding off on further rate cuts over the last six months has been small caps have underperformed. You know, mid-caps have done okay. In fact, the equal weight S&P through the end of last month actually has done okay. Mid-caps have done okay, but it's really been the small caps that the market is waiting, kind of adopting a wait-and-see approach as far as the Fed is concerned and I think if we get, say, 50 basis points of rate cuts this year, I think it would be tremendously helpful for small caps.
Ryan:So we've seen some broadening out in the US equity market this year. Do you think that continues then through the end of the year?
Bob:I think it continues for the next. I think to me that's going to be the story for the next three to five years as we see the market broadening out. We got so concentrated that I don't think that's sustainable.
Ryan:I think it's inevitable that the market broadens out, and I think we're starting to finally see that, yeah, and there's definitely some more attractive valuations in the smaller, even the smaller S&P 500 companies Right exactly exactly, and year to date we've seen some slight outperformance and, going back to July when the Fed started its shift in policy, started cutting rates.
Bob:The Fed announced that on July 9th, or Powell did, and you know we've seen the market broadening out since that time. So we have a lot of capital in those MAG-7 companies. We have a lot of capital in S&P 500 index funds that are market cap weighted. There's just so much. It's just that's been kind of the safe thing to do over the last three or five years and now that we've gone almost, you know, nine, 10 months when that hasn't worked quite as well, I think eventually investors recognize that and they start to move their capital and look for opportunities elsewhere. So price discovery, in other words, happens going forward.
Ryan:All right, bob. The time has flown by Once again. I have a final question for you, because you were just in Europe. You spent some time in Italy. Yeah, what was your favorite place that you went to? That was maybe a surprise that you didn't expect to be Anything, as you reflect back on your trip, Boy, it's hard to say Every day.
Bob:we were there, we enjoyed where we were. I would say that Pompeii was probably the place a bit of a history buff, and I just was blown away by Pompeii.
Ryan:No pun intended yeah.
Bob:I thought I knew what that place was all about and the history of it and they're still discovering things all these years later.
Bob:It's, it was a much bigger city than I realized. I mean, we were there for several hours one afternoon, pretty much all afternoon, and we looked at a map of the place afterwards, like we only saw just a fraction of this entire city, so it's pretty amazing. Uh, what they're learning about, you know, basically, ancient life, and and they you realize, wow, they didn't live all that differently than we lived. They had stores, they had roads, they had houses, they had, um, you know, their, their life was not that different than ours in some respects, and here we are talking about a place that has been gone for 2,000-plus years.
Ryan:And they're still excavating a lot of it.
Bob:Yeah, yeah, there's still segments that they are still peeling away the layers, and it's just amazing when you go there. So that blew me away. I just I'm thinking about that. I wish we're going to go back next year and spend more time there?
Ryan:Yeah, interesting. I'll have to add that to the list of places to visit.
Bob:Yeah, it's down by Naples, napoli. It's incredible, yeah, all right.
Ryan:Well, glad we were able to put this together. Bob, thanks for spending a few minutes with us on the podcast. Hopefully we can do it again soon. I would love to do it again, as always. As always, thank you, and thanks to all of you as well, for joining us on this episode of the First Trust ROI Podcast. We'll see you next time.
