00:00 Speaker A
For most of my career, we’ve talked about panic sellers coming into markets and as of late, it’s been more about the panic buyer uh that has really embraced buying the dip in in these markets. There’s definitely a sense of FOMO pervading markets right now and traders have been conditioned to do this. You look back the last couple of geopolitical events that we’ve had and the markets bottomed well before there’s been a resolution. Um so, you know, history has taught us that, you know, it’s it’s paid off to sort of take advantage of of any weakness in markets and that’s certainly the type of behavior that we’re seeing now. It’s pretty astonishing to see how well markets have held up and it’s not really even just a US story. Um areas like emerging market equities, Japan, Europe, all these places that should be more negatively impacted by the conflict given that they’re oil importers, um have actually outperformed the S&P 500. So the global story I think is even more notable.
00:54 Jared
So we’ve been talking mostly about large caps so far. I and a lot of times we talk about small caps, but I know you like mid caps. Talk about this Goldie Locks exposure as you’re as you’re defining it.
01:08 Speaker A
Yeah. Midcaps really have been the sweet spot for us and it’s all about our preference for quality, but also relative value. So quality is going to be companies that have great balance sheets, they have a lot of cash, good free cash flow. You can find that in large, but there’s a valuation risk there. You don’t want to go all the way down to small caps because those companies tend to be less profitable. about 40% of the Russell 2000 index is comprised of companies that don’t make money. So with mid caps, we’re still getting quality and we’re getting good earnings growth prospects and we’re getting that industrial exposure in a really big way. So that to us has really been a place to find some value. It’s trading a little bit expensive to its 20-year average now, but pretty hard right now, Jared, to find anything that’s cheap. So that to us is really a continued opportunity into the rest of this year.
01:54 Jared
What about bonds? Uh anything cheap there or do you like them more for other characteristics, you know, diversification, income?
02:02 Speaker A
We love the income and they’re cheapening up. Um when you think about bond returns, every investor I’ve been talking to lately is like, why would I own bonds? The five-year returns look terrible. Well, guess what? Five years ago, the yield on the aggregate bond index was in the 1 to 2% range. If you want to think about what drives the return of your fixed income portfolio, about 90% of it can be explained by the starting yield. So not only did we have a low starting point, we also had bond enemy number one, which was explosive inflation. Way different than what we’re getting just from this commodity shock this time around. So we like the starting point, 4 to 5% on the aggregate bond index is really attractive to us and we think that disinflation is ultimately setting in, sort of once we get to the haze of the conflict that’s going on, impacting commodity prices right now. So, bonds I think can actually do more heavy lifting in portfolios this year, uh and you’re going to get that income, which is a huge benefit.