Show Transcript
U.S. equity markets are near record highs, despite suffering the 30-plus percent market drop in March. Can investors expect this bull market to continue into 2021? Kim Parlee talks with Phil Davis, founder of philstockworld.com and Managing Partner of PSW Investments.
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[THEME MUSIC]
- Hello, I'm Kim Parlee and welcome to the show. 13% and 38%. Those are the year-to-date returns for the S&P 500 and the NASDAQ, and that includes a 30% drop that we saw in March. Which begs the questions, what do we expect to see for the markets in 2021 with those elevated returns?
Joining me from Fort Lauderdale is Phil Davis. He's founder of philstockworld.com and managing partner of PSW investments and one of our favorite guests. Phil, great to have you with us. I'm just going to jump right in with the first question. I know from your blog-- for the reasons I just gave-- we've seen some huge gains in the markets, but you're pretty cautious right now. But maybe expand and tell us a little bit more about why.
- Why we're cautious? Well, I mean, look. The market's had a fantastic run, a very unusually fantastic run. And, come on, clearly we're ignoring the negatives that are out there.
The economy is down about 15%. That's number one. So earnings are not better than they were when the market was lower. They're generally lower than they were a couple of years ago. And there's been massive, massive stimulus to the tune of about $6 trillion in the US, which is getting towards one-third of the size of the entire economy.
When you're on that kind of stimulus it's like a life support system that's keeping everything going. But what happens when it stops? I mean, you have to think about the future. It's like, can we just keep doing this? Can we just keep making one-third of our entire economy stimulus? It doesn't really make sense.
- Well, let me ask you, though. I mean, could it keep going, though, in terms of equity markets? Because, I mean, I know what you're saying that it doesn't make sense so far. Although people would argue low interest rates, that's what prompts markets up. But could it, despite that, still keep going?
- Japan-- if you look at Japan, Japan's about 250% of their GDP in debt. The US is only-- you want to say only-- 150% of their GDP in debt. If you're 150% of your income in debt, you're in serious trouble. The fact that Japan is getting away with 250%, though, that indicates that there is more room for the US economy to keep borrowing and keep deficit spending, as crazy as that may seem.
Because indications are Japan is in deep trouble, although the Nikkei just took off and went flying higher. Because, again, the stimulus is going to trump everything else, frankly. If you're going to putting money into the economy-- and Japan just added a trillion stimulus into an economy that's one fifth our size-- or what I'm saying, one quarter our size. And you can keep this going for a very long time, but eventually there's going to be hell to pay.
- Well, let me ask you. With you saying that you think there could be hell to pay, I mean, how do you craft an investment strategy around that? I mean, I know we'll get specific in our next piece in the next few minutes about what you like, but I don't want to go there yet. Just overarching, what are your thoughts? I mean, what do you do?
- I mean, look, we learned our lesson in 1999. Because, frankly, I got to admit. I spent about half of 1999 like this. I'm like, you know, standing at the door like, I think this is a very bad idea. You're all going to get killed. And 1999, the market doubled and then it doubled again after that, until it finally crashed just after 2000.
So I learned not to call it too early, frankly. But on the other hand, 2008 taught you, you better not call it too late either, because by the time it starts falling apart, you don't have a lot of chance to get out with any kind of whole portfolio.
So we do a lot of hedging, we stay in a lot of cash, we remain very cautious. It's kind of like when you see a party's getting out of control and you kind of keep near the exit in case the police show up. [LAUGHING] So that if they come in the front door you go out the back door really quickly.
[LAUGHING]
- You don't like stand around the front door where the police are going to come. I think that's the way we kind of play the market is. Just one hand on the exit, knowing that the party will end, just not quite sure when, and you want to be there right up until that last moment.
- I think, yeah, for a lot of people it's like, how well do you want to sleep at night for part of this? And I saw, I think, in your blog you talked about being cashy and cautious, which you talked about, which is a nice little turn of phrase.
- Yeah, cashy and cautious is the way to go. You've got to be flexible. When there's a dip, you want to take advantage of it. You don't have to chase all these high stocks.
[MUSIC PLAYING]
- Hello, I'm Kim Parlee and welcome to the show. 13% and 38%. Those are the year-to-date returns for the S&P 500 and the NASDAQ, and that includes a 30% drop that we saw in March. Which begs the questions, what do we expect to see for the markets in 2021 with those elevated returns?
Joining me from Fort Lauderdale is Phil Davis. He's founder of philstockworld.com and managing partner of PSW investments and one of our favorite guests. Phil, great to have you with us. I'm just going to jump right in with the first question. I know from your blog-- for the reasons I just gave-- we've seen some huge gains in the markets, but you're pretty cautious right now. But maybe expand and tell us a little bit more about why.
- Why we're cautious? Well, I mean, look. The market's had a fantastic run, a very unusually fantastic run. And, come on, clearly we're ignoring the negatives that are out there.
The economy is down about 15%. That's number one. So earnings are not better than they were when the market was lower. They're generally lower than they were a couple of years ago. And there's been massive, massive stimulus to the tune of about $6 trillion in the US, which is getting towards one-third of the size of the entire economy.
When you're on that kind of stimulus it's like a life support system that's keeping everything going. But what happens when it stops? I mean, you have to think about the future. It's like, can we just keep doing this? Can we just keep making one-third of our entire economy stimulus? It doesn't really make sense.
- Well, let me ask you, though. I mean, could it keep going, though, in terms of equity markets? Because, I mean, I know what you're saying that it doesn't make sense so far. Although people would argue low interest rates, that's what prompts markets up. But could it, despite that, still keep going?
- Japan-- if you look at Japan, Japan's about 250% of their GDP in debt. The US is only-- you want to say only-- 150% of their GDP in debt. If you're 150% of your income in debt, you're in serious trouble. The fact that Japan is getting away with 250%, though, that indicates that there is more room for the US economy to keep borrowing and keep deficit spending, as crazy as that may seem.
Because indications are Japan is in deep trouble, although the Nikkei just took off and went flying higher. Because, again, the stimulus is going to trump everything else, frankly. If you're going to putting money into the economy-- and Japan just added a trillion stimulus into an economy that's one fifth our size-- or what I'm saying, one quarter our size. And you can keep this going for a very long time, but eventually there's going to be hell to pay.
- Well, let me ask you. With you saying that you think there could be hell to pay, I mean, how do you craft an investment strategy around that? I mean, I know we'll get specific in our next piece in the next few minutes about what you like, but I don't want to go there yet. Just overarching, what are your thoughts? I mean, what do you do?
- I mean, look, we learned our lesson in 1999. Because, frankly, I got to admit. I spent about half of 1999 like this. I'm like, you know, standing at the door like, I think this is a very bad idea. You're all going to get killed. And 1999, the market doubled and then it doubled again after that, until it finally crashed just after 2000.
So I learned not to call it too early, frankly. But on the other hand, 2008 taught you, you better not call it too late either, because by the time it starts falling apart, you don't have a lot of chance to get out with any kind of whole portfolio.
So we do a lot of hedging, we stay in a lot of cash, we remain very cautious. It's kind of like when you see a party's getting out of control and you kind of keep near the exit in case the police show up. [LAUGHING] So that if they come in the front door you go out the back door really quickly.
[LAUGHING]
- You don't like stand around the front door where the police are going to come. I think that's the way we kind of play the market is. Just one hand on the exit, knowing that the party will end, just not quite sure when, and you want to be there right up until that last moment.
- I think, yeah, for a lot of people it's like, how well do you want to sleep at night for part of this? And I saw, I think, in your blog you talked about being cashy and cautious, which you talked about, which is a nice little turn of phrase.
- Yeah, cashy and cautious is the way to go. You've got to be flexible. When there's a dip, you want to take advantage of it. You don't have to chase all these high stocks.
[MUSIC PLAYING]
