• This week’s jobs data came in stronger than expected, suggesting the labor market is stabilizing rather than weakening, a positive sign for the overall economy.
• The four-week moving average for jobless claims is now at its lowest level in two years, reinforcing that layoffs remain limited and employment conditions are holding up.
• While inflation has cooled, steady jobs data means the Federal Reserve is likely to remain patient and keep interest rates unchanged for now.
• A wait and see Fed is not a surprise to us and it is something we have been preparing portfolios for as part of a disciplined long-term strategy.
• Even with rates holding steady, cash yields remain attractive compared to a year ago, providing flexibility and opportunity within portfolios.
• We are encouraged by renewed strength in US small and mid-cap stocks, which are now outperforming large cap stocks so far this year.
• Historically, small and mid-cap stocks have delivered strong long-term returns, and their recent resurgence may signal improving market breadth and healthier risk appetite.
• These companies continue to trade at more attractive valuations, meaning investors may be paying less today for future earnings potential.
• Small and mid-cap stocks also tend to be less exposed to geopolitical risks overseas, which can help reduce volatility during uncertain global periods.
• Margin debt, borrowing to invest, is near historic highs, which we monitor closely as a potential sign of market complacency.
• Importantly, high margin debt is currently offset by record levels of cash sitting in money market funds, helping balance overall risk in the system.
• While there are always risks, from geopolitics to earnings expectations, our investment process is designed to identify when conditions are improving and when caution is warranted.
• Right now, the market’s overall uptrend remains intact, and we are comfortable with our positioning while staying ready to act if conditions change.
• Our goal is simple, to help give you financial peace of mind. We want you to be out living your second childhood without parental supervision. Let us get the gray hairs for you.
• We hope this update brings you peace of mind knowing your retirement strategy is actively monitored by your RPOA team who is focused on making your money last as long as you do.

Transcript:

Jordan Roach
Jordan. Hello everybody. Thank you for joining us today on Friday January 16 for our Weekly Market Alert video. I’m Jordan Roach, Chief Investment Officer, and we got a lot to get through. Like usual, we’re going to talk about today a little bit of jobs data, and is it going to signal anything differently for the Fed and what they might do over the next six months with rates. We’re going to talk a little bit more piggyback off of last week, talk about small and mid cap stocks in the US, and then we’re going to talk about what is something called margin debt, and is it signaling anything about speculation, about complacency? So a lot to get into. Let’s jump right in. So the only major economic data we got this week was on jobs, and we got good news. There largely continuing claims, new claims were below all estimates, okay? And again, this is something we’ve been talking about. The Fed’s been looking at for quite some time. Inflation looked like it was coming back down, but jobs were weakening. Labor market softening. That could signal a problem. But right now we’re getting jobs data kind of come back in below estimates, right? So it looks like the market either maybe be stabilizing. It’s not cooling as much. I wouldn’t say it’s heating up. And we probably could see for the foreseeable future, some sort of lockout where you don’t see a ton of layoffs, right? Because unemployment rates coming back down a little bit, but you’re not seeing a lot of new jobs either that are created. We’re kind of this standstill because of geopolitical risk, because of AI talk, because of valuations, a number of things. But it’s interesting that the four week moving average, which kind of smooths the day to day data points for jobs data, is the lowest we’ve seen in two years. Okay, so that is a good thing for us. Now, where the other side of this, why it really matters outside of broad employment? You know, we always want to talk about that. Everybody wants. That everybody wants jobs, is what it’s going to signal for the Fed to do. So we’ve gone really quite a bit different probabilities over the last three months. As new debt has been released, it looked like the Fed was going to continue to almost certainly bring rates lower. In January, almost 100% probability down to 75 to 50 to where, based on recent jobs data, it’s looking like there’s a 0% chance the Fed is going to lower rate this month. It’s going to be a wait and see. They’re going to want to continue to look at inflation. If jobs is not getting worse, right? If the labor market’s not cooling, we’re seeing unemployment coming down. They might say, You know what, let’s just hold rates where they are. And then, of course, stocks are going to have to reset for that, because, again, leading into the year, I think largely probability is that we’re going to probably pull rates down. And so again, the markets got to settle on this, this new jobs data to figure out what it means. But right now, the odds are in its 0% chance the Fed cuts this month, which would leave the Fed funds rate, cash rates, basically at 3.64% almost a full percent lower than than a year ago, but at 3.64% so this is something we’re going to continue to watch. Jobs is not going to go away. The importance of that in the economy, obviously we’ve also alluded to it’s a wonky number, sometimes week to week, but nonetheless, the Fed the market is still watching it. So the next thing I want to talk about is, are we going to see a continued resurgence in small and mid cap US stocks, small and mid caps historically have done very, very well, right? If you look at 20 and 30 year periods, most of the time they outperform large cap stocks. But we’ve seen anything except that scenario in the last 15 years, right? It’s been a one way dominance of large US stocks, but recently, this year, you almost have three times the performance in small mid caps that you see in large caps, you see mid cap stocks breaking to an all time high. That’s a good sign where, again, money is now shifting a little bit, and we’ll go into why, from potentially large cap stocks, and certainly technology stocks could start be moving into others the market, and we like to see small and mid caps doing well. That’s a sign that maybe a risk appetite is improving, that we have a breadth improvement, and that can lead to good things on a forward looking basis. Now, why would the market be looking for smaller mid cap stocks, instead of the AEI theme, the dominators, the big hyperscalers. Well, there’s a few things that are working in favor here on the small cap, mid cap side. One is you have persistent lower valuations. And what lower valuations means is, in order to get your dollar, if I invest $1 How long is it going to take to be potentially to get that dollar back in earnings? Well, you get lower valuations, meaning lower time to get your money back on the small and mid cap side, right? They’ve been undervalued for about a decade now, so that’s working in their favor versus large cap stocks. The other thing is, small and mid cap stocks in the US are less sensitive to geopolitical risk, and we’ve had plenty of that over the last 12 months, and that’s probably not going away. And again, small and mid cap on average, are less sensitive to things going on in Venezuela, going on in Iran, going on in Russia, Ukraine, all those things. So that helps. And the other thing is that would really work in their favor. Is we might get out, get it in January, but a lower rate environment is typically favorable to small, mid cap stocks that are typically more saddled with debt than large cap they have. Less access to capital. So lower rates is usually a good thing, right? So again, we’ll see if this continues. We’ve had some head fakes in the prior years where it looks like small mid caps are breaking out and that stops. But it is a good sign and interesting. Interestingly enough, in the y 2k blowout, right? So the.com bust from 2000 to really 2003 lows when you know NASDAQ is down 80% large cap stocks are down 50% small and mid caps pretty much held their ground. Okay, so it is interesting that that part of the market can hold up depending on what is causing the broader market to move down. So something we’ll keep looking at, and the last thing we want to talk about is something called margin debt. So obviously, we look at a number of indicators that we use to help us clear our decision making to help we use to know we move from offensive defense and vice versa. We don’t use margin debt, but it’s something we do track. And margin debt effectively is a data point that can signal complacency or speculation. It allows an investor to effectively borrow cash from their broker dealer, right, from their securities firm, their investment firm, they borrow money so they can invest more than they could with their own cash, right? And if you’re going to borrow money to put it into a risky asset, you have to feel pretty good that you’re going to be able to pay that loan back and you’re going to have a return. And we’re having margin debt right now close to all time highs. And the interesting thing is, pretty much prior to every major market peak, you will see margin debt levels raising to all time highs, prior to a slowdown, prior to a sell off, and we’re seeing that right now. So maybe that’s a sign there’s too much speculation complacency in the US market. We’ve talked about bad economic sentiment, but if you look at the market itself, people are pretty excited about it. Now, the thing where it doesn’t necessarily worry us the margin that’s so high, is that what balances that is also there is a record amount in cash in money markets on the sidelines, right? So yes, we do see excess borrowing, but we also see cash beside it, right? That could back that up, that if things go wrong, dollars can come in to either pay margin debt, potentially, or to backstop losses. Okay, so that’s a balancing act. That might say, Yes, margin debt’s high, but we have a lot of cash there, and you can go get you can go borrow, as long as you have the cash to back it up. So we’re not too worried about it, but it is something we want to continue to watch, because again, historically, every time before the market rolls over. You see this in 2018, 2022, certainly 0708 certainly in White’s UK margin debt levels go to historic highs. Market sells off. So something we’ll keep watching. But broadly, this week, we got mid caps, small caps back on. We had a couple day skid for tech stocks, but they’re rallying back again. We have jobs data improving. Say, well, a lot of this is good, right? Maybe some geopolitical tension in Venezuela is coming down, same with Iran. So what could go wrong? Right? What could go wrong? Well, there’s still a ton of things can go wrong, right? Geopolitical risk can escalate very, very quickly. I don’t think anything’s done and dusted with our relations with Iran, with Greenland and Denmark, certainly not with Venezuela. So certainly, geopolitical events could cause the market to have to reprice things if that pulls up, because that could affect oil prices, commodity prices, just general sentiment. You could have jobs data again. Ken and I have talked about this before. It looks good right now, but it’s hard to really understand if that’s a really good data point to judge the health of the broader economic cycle here in the US. So jobs could weaken again, right? And that could be signal that things are a problem. You also could have the Fed doing something different than what the market expects or wants. The Fed in the last few years has been pretty good about forecasting to the market ahead of time what it’s likely to do, and they’ve almost done exactly what the bond market expected to do each time. But that could change if you have rates stay where they are for the next 12 months, instead of six months or three months, the market might have to reprice things right, because the cost of borrowing and debt levels would be that much higher. And then the last thing could be earnings.

Right now we’ve had double digit earnings pretty much back to back years, and the market right now expects that to improve even more, almost a Goldilocks scenario. So if you price in Goldilocks and earnings do not live up to expectations again, market could sell off pretty quickly. That’s a valuation driven sell off that could happen. So there’s, there’s, there’s more things go wrong than probably things go right. So the good news is, that’s why we are thankful for our strategy. We have a strategy in place with clear monetary credit technical indicators to give us clarity around our decision making, to help us understand do we feel Yeah, we see all this noise, but we feel good about being an offensive state, or do we see things deteriorating and we’re ready to make a move? So right now, broadly, we’re pretty clear that we feel like this market continues to sustain its uptrend, and we’re ready if that doesn’t happen, we have clear things, and we’re thankful for that, and I hope it brings you peace of mind as well. So that’s all for this week, plenty more to get to next week. Look. Forward to talking to you again. Thanks everybody.

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

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