As we approach the midpoint of 2021, where do things stand for investors? In this episode of MarketFoolery, Motley Fool analyst Ron Gross, with host Chris Hill, discusses the recent Federal Reserve meeting, the relative volatility of the market, and what he’s watching in the second half of the year.
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This video was recorded to play on June 21, 2021.
Chris Hill: It’s Monday, June 21st. Welcome to MarketFoolery. I’m Chris Hill, and I am off this week. As you’re listening to this, I’m actually headed to Charleston, South Carolina, for a bit of time off, a little time on the beach, and more than my fair share of good food. But did I record some episodes to run this week while I’m gone? Yes, I did. We are just about at the midpoint of 2021, so I thought it would be a good opportunity to take a step back from the daily grind of news. We could all collectively lift up our heads, look around and see where we are. I asked a few people to help me out with that this week, starting with today’s guests, Ron Gross. Thanks for being here, my friend.
Ron Gross: You’re very welcome. Does this mean I’m working this week? It’s all very confusing.
Hill: I don’t know. We’re taping this a few days before Monday, the 21st. What you do starting Monday, the 21st, you’re grown man, Ron, that’s up to you.
Gross: That sounds good to me.
Hill: Let’s start with inflation. Inflation is one of those things that we don’t talk about all that often. We’ve been talking about it recently on Motley Fool Money. We had the Fed meeting last week. Did Jay Powell and the good people at the Federal Reserve give us any clues to it? Based on what they said, do you think there are some industries that are more attractive or less attractive because of what they said?
Gross: I’ve got some thoughts. As you say, inflation is tricky, because once we start talking about economics and economic theory, I almost hate to go down too much of a rabbit hole with it because Foolishness is about picking great companies and holding them for the long term. But I do think it’s important to understand some of these concepts and how it could impact your investments. Just to unpack it a little bit, so prices are definitely higher across many sectors. I think we all see it across the board. Real estate for sure, food, Chipotle recently announcing price hikes, energy is up, commodities. Some of this I think is certainly transitory as the economy reopens. But all that stimulus money that was pumped into the economy over the last year has to have some impact. You can’t just print money and it does not have an impact. Plus, you have the Fed quantitative easing programs, buying bonds, that leads to I think probably some sustained inflation as well. Then you’ve got supply chain problems, semiconductors being one of the most glaring examples. You have a labor shortage. Not everyone is back to work yet. In fact, lots of folks are not and that’s also added I think to some increase in prices.
I do think those higher prices, some of them are here for a while, but we’ve already seen some prices fall back a bit. Lumber is a good example, it was sky-high, and has taken a step back. Copper I think is another good example. We’re already seeing some pullback in some inflationary pricing. Then the Fed steps in and considerably raises its expectations for inflation this year and brings forward the time frame of when it will next raise interest rates. They raised their headline inflation expectation to 3.4%. That’s a full percentage point higher than in March. They did not give an indication of when they would begin cutting back on their aggressive bond buying program. The forecast, if you read between the lines and actually take some of the verbatim, suggests two interest rate hikes in 2023. They’re still committed to their inflation goal of 2% over the long run. They raised their GDP expectations for this year to 7% from 6.5%. Unemployment estimate remains unchanged at 4.5%.
It’s really interesting to see what happened in the market the day after the Fed made all these announcements. The day after tech stocks were up, breathing a sigh of relief that the Fed is going to fight inflation, they’re doing something about it, interest rates will likely be higher and inflation won’t be as bad. The Dow Jones index was down because folks are saying, well, if the Fed is going to actually combat inflation then maybe commodity prices are going to come back down. That impacts a lot of the stocks and Dow Jones Industrial Average. But it’s so interesting because one day stocks could react to the increase in interest rates one way and then very next day they could go the exact opposite for another reason. Traders and institutional investors are an interesting bunch. What we learned to summarize everything I just said was that the Fed is steering the ship. They see inflation, they don’t think it’s all transitory, they do stand ready to fight it with somewhat higher interest rates which will still be historically low depending on how much they hike. 2023 is likely the time they’ll do that and the economy does look like it’s relatively strong as measured by their expectations for GDP.
Hill: I just love that some small number of people flipped out because we might have two interest rate hikes in 2023 as though there is no way the Fed changes its mind in the next two years.
Gross: So many things can happen. Literally, everything from pandemic related things to geopolitical things to market cycles. If you look at the market, by all measures, the market’s expensive. You can look at so many different things. You could look at the Shiller CAPE ratio, which is the cyclically adjusted price-to-earnings ratio. That’s basically like the second-highest it’s ever been. If you look at the Warren Buffett indicators of market cap to GDP, all-time high. We’ve had free money for a long time. Interest rates have been close to zero for a long time. Lots of money pumped into the economy. Stocks have been on fire for a long time. They’re just high right now in terms of valuation and there’s not necessarily anything to panic with respect to that. You can be concerned. We might see a pullback. In fact, we always see a pullback within a reasonable period of time and then we regroup. Good companies build back, earnings get posted, and the stock market moves higher. We could be at a point like that now, especially with interest rates expected to rise. If we do get a pullback, if we get a little bit of a breather, it’s actually natural and that you shouldn’t panic as long as you don’t have money in the market that you need over the next three to five years.
Hill: Maybe it’s because we’re starting summer and here in the U.S. things are opening back up, people are getting out of their homes, going on vacations, etc. Is it me or is volatility coming down? It just seems like things are a little bit calmer in the market than they were three, six months ago.
Gross: I think you do see volatility as measured even by the VIX, a little bit lower than where it had been. Over the last year, every three months, not even necessarily surrounding earnings time, you saw a spike. But now it’s on the wane. I think even more importantly than something like the volatility Index or the VIX, you’re seeing some speculative pockets. I stole that word from Schwab. Some speculative pockets that are in the market appear to be declining, so SPACs were this frothy crazy thing going on earlier in the year and last year, SPACs have come back down to earth. I think you see some non-profitable technology companies that were sky high and it’s trading at really lofty valuations, come back down to earth. Now that doesn’t mean that they won’t regroup, become profitable at some point, and be wonderful investments over the next five to 10 years. But you’ve seen some of that froth come out of the market. The meme stocks are a whole other animal. I don’t know if we can say that they’ve waned. You look at what’s happening with AMC, or Naked Brand is a new one. There’s one called Castor Maritime that the Reddit community has taken a liking to. Those remain and I don’t even know how. I think we don’t play that. We just ignore that. Let’s just invest, not trade.
Hill: Speaking of the meme stocks, you and I inadvertently got caught up in the meme stocks in a small way in that we were both shareholders at Bed Bath & Beyond (NASDAQ:BBBY). Just to provide the context, we were doing Motley Fool Money. This was the end of 2019. The story around Bed Bath & Beyond was that Mark Tritton, who is a very accomplished retail executive from Target, had gone over to become the CEO. He, I think within a month of taking the job, essentially cleaned house of the executive ranks and you and I just looked at that situation and said, “Well, this is something to keep an eye on because he clearly knows what he wants to do and has set things up as, ‘Look, this is my plan and either you’re on board or you’re not. If you’re not, then let’s talk about having you leave.'” Cut to spring of 2020, the stock gets just crushed. I think at about the same time, maybe even certainly the same week, you and I both independently were like, “I think I’m going to buy some shares of the stock.”
Hill: Yet, it got caught up in the meme stuff. My memory of the day, this was a few weeks ago, I was doing MarketFoolery and you sent me a message on Slack. You just wrote, “Bed Bath & Beyond up 37%.” 20 minutes later I was done with the show. I got to look, I was like, “Well, let me see if that’s still the situation.” It was up 47%.
Hill: On that day, I just decided, OK, it’s time to go. I just sold my share. Did you sell all of your shares of Bed Bath & Beyond or did you keep some?
Gross: I kept 100 shares, but I sold the majority of my stake, and that was really something. We were buying this. We don’t always buy stocks to play turnarounds. In fact, I rarely do nowadays, but this was when I was really interested in owning. I was really impressed with what Tritton did at Target. I loved that he was selling off non-core assets. He was really strengthening the balance sheet, he was, as you said, changing the management team, moving more into private-label. I was really interested in watching it and there’s no better way to watch it than when you are a shareholder and you’ve got some skin in the game. I was almost disappointed when the stock price and market cap, all of a sudden, for no reason at all, reflected the fact that he won, he was right. He restructured the company and everything is perfect. He didn’t need to do that because the meme stock thing ramped up his stock price for him. I was disappointed when I said I can’t be silly about this. If the market is handing me a gift, I’m going to take the gift. Bed Bath & Beyond actually shouldn’t theoretically be at $40 a share yet until Tritton proves he is turning this ship. Even if it gets to $40, I’m not sure it’s going to get to $50, or $60, or $70, or certainly no time soon. So it just made sense to take the gift that we were given. Luckily, it was long-term capital gains, by the way, I think for both of us, and we moved along. I’m not going to look a gift horse in the mouth, but I’m still very interested to watch what happens at Bed Bath & Beyond.
Hill: I am too, but it reminded me of something. This was a member event that The Motley Fool had at the Westin Hotel near Fool HQ in Alexandria. Bill Mann was on a panel. I think you might have been on the panel with him. I’m pretty sure Charly Travers was as well. I’m going to paraphrase the first part of what Bill said. He was asked a question and talked about all the usual things in terms of, “Look, we like to focus on the business. We like to hold for the long term. That’s the best way to win.” But then he punctuated it by saying, “But to be clear, every stock I own is for sale at the right price.”
Hill: He’s, “Look, there are companies I own shares of. I love these companies. But if someone’s going to offer me a ridiculous multiple, I’m going to take that price.” I thought of that quote on that day a few weeks ago and I just thought, all right, look, I like this story. I believe in Tritton. I believe in what he is doing there. If you’re going to hand me a ridiculous multiple on a stock I’ve owned for just over a year, I’m going to take it.
Gross: It’s just prudent investing. It really is. I know we fall in love with our companies and we want to think like long-term shareholders, and we really and truly do. But you also have to be prudent if at $40 a share Bed Bath is either going to produce a subpar return going forward, perhaps a negative return, a 2%, 3%. There’s better places for your money in that case. Just in terms of portfolio optimization, portfolio allocation, it makes sense to sell and reallocate to something better.
Hill: Before I let you go, I’m curious what you’re going to be watching in the second half of 2021. Personally, I look at the earnings season we got coming up in July. I know how important the back-to-school shopping season is for major retailers. So I’m curious to hear what people like Brian Cornell, and Doug McMillon, and other retail executives are saying about what they are seeing and expecting in August and September. But that’s me, what are you going to be watching?
Gross: I like that. I’ll be looking at that, too. There’s a few things for me and some of it’s related to this inflation conversation we had. If inflation continues to be an issue, it will be really interesting to watch if the typical inflation plays, are beneficiaries as they have been in the past, are commodity companies going to do well? Real estate and REITS, for example, typically do well in an inflationary environment. High dividend stocks, conversely, don’t do well in an inflationary environment. I want to keep an eye on that. Energy sector is another one. Lots of interesting plays from an inflation interest rate perspective I’ll be watching. But just more generally, I’m really going to be interested to take a look and keep an eye on the reopening stock, specifically the airlines and the hotels. I want to see this business travel come back. I want to see if personal travel gets back to the level that they seem to be indicating that it will. Then I also want to keep an eye on infrastructure stocks. It looks like there might at least be some kind of a bipartisan deal that Biden and the Congress can get through. It’s not going to be three or four trillion. It could be close to a trillion. That’s going to be really interesting to me to see. If all of a sudden we across our neighborhoods are seeing our roads all repaired or our bridges all repaired, who is going to be the beneficiaries? Is it going to be Vulcan Materials, or Nucor, or Freeport-McMoRan? Lots of industrial companies, a lot of commodity companies could be interested to keep an eye on those guys as well.
Hill: Ron Gross, loved talking to you. Thanks for being here.
Gross: Thank you, Chris. I appreciate it.
Hill: As always, people on the program may have interest in these stocks they talk about and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I’m Chris Hill, thanks for listening. We’ll see you tomorrow.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.