ETF Edge - Market Mayhem – Navigating the Volatility with Charles Ellis 9/19/22

Episode Date: September 19, 2022

CNBC’s Bob Pisani spoke with Nick Colas, Co-founder of DataTrek Research, and Charley Ellis, author of Winning the Loser’s Game – now out with two new books on investing, Figuring It Out and Inside Vanguard. In the midst of the September swoon, they discussed how to wade through the market volatility and recent turbulence – honing in on the most popular ETF trends du jour to help investors make sense of it all. In the Markets ‘102’ portion of the podcast, Bob continues the conversation with Nick Colas. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge Podcast is sponsored by InvescoQQQQ, supporting the innovators changing the world. Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pisani.

With a September swoon in our midst, today on the show, we'll discuss how to wade through the market volatility and recent turbulence, honing in on the most popular ETF trends to help investors make sense of it all. Plus, we'll speak to legendary author Charlie Ellis and tap into his wisdom when it comes to the current investing landscape. What advice might Vanguard founder, Jack Bogle, give us today? Charlie's got a new book out on exactly that subject. Here's my conversation with Nick Colas, co-founder of Data Trek Research, along with Charlie Ellis, author of Winning the Losers Game.

Now Out with Two New Books on Investing, Figuring It Out and Inside Vanguard. Nick, 3,000 ETFs, less than half the number of mutual funds that exist, but it's still quite an achievement. We had one fund in 1993, one ETF, the market grew to 102 funds by what, 2002, nearly 1,000 by the end of 2009, 3,000 today. How are investors using all of these ETS? You know, most of the money seems to be going into index funds, but we see an increasing number of active strategies, especially this year. We've been talking about single-stock ETFs. What's your take on? Yeah, investors are using them in kind of the way they're being developed.

So we started off basically taking very broad index funds. SPY was the first one, obviously. And then the industry over the years built all these interesting overlays. So sector funds came along pretty soon after that emerging market, EFA funds, big themes. Then we drilled that into investment themes like clean energy or legal marijuana or a thousand other themes that might work. And investors now are really spoiled for choice

among just be able to pick not only the big sector funds or the big overall funds, but any kind of theme they think might be interesting. Yeah, so basically it's gone from disruptive innovation to sort of mainstream. They're just now trying to figure out new ways for increasing revenues, essentially, at this point here. Charlie, you're one of the founders, the fathers of the index revolution. You're 1975, that's a winning the loser's game, pointing out the value of indexing. At a time when there was no investable index, that's a classic today. I just reread it a few weeks ago.

What do you make of the rise of all these ETFs? Do they help or do they hinder the index investing story? It depends who you are and what you're trying to do. Most of the people who are buying into ETFs are using as a vehicle to get into index funds. They're going to do fine. People who go after the highly specialized ETF are at real risk of making serious mistakes that they will obviously suffer from. The more you get specific, the more the odds are high,

that you won't be able to make a rational long-term decision and you will get suckered into making, because we're all human beings, making an emotional short-term decision. And you won't like the outcome in the long run. You know, I can't help but hear Jack Bogle's voice in my head. If he was here, he would say, you know, Bob, you keep talking about these thematic tech ETFs,

like cyber security, ETS. And you know, in the long run, it's not going to matter that much. It all kind of blends together after a while. That would be what Bogle would say, wouldn't you think? Well, that would be true. But you have to understand, Jack was never very enthusiastic about ETFs. When Nathan Mose first went to him with the idea, Jack said, no, this was all speculation and ridiculous. I won't have anything to do with it. And it took several years for Gengarde to overcome Jack's original rejection and to come back into the business. And it's really Gus Sauter who made the impact on Vanguard being a major factor in the ETF business.

Because he linked to the index, Vanguard was already managed. Wonderful combination. Jack has never really quite understood that most of the trading volume in ETS are professionals hedging portfolios. Yeah, that's a good point. You know, the first ETF, Nick, the Spider, SPY, the SP-Y, the SP-500, is going to turn 30 years old in January. The fund is now the largest ETF in the world. It's one of the biggest funds in the world. $350 billion in assets under management. Quite a remarkable feat

considering we started not long ago. Yeah, it's fascinating if you think, okay, that was exactly the right product to start with. It was something that everybody understood and it's done fantastically well. What if we had started with an IFA ETF or an EMETF and had that boom and bust cycle that we had in EM or just had lousy returns like we've had in Longer NIFA returns. Ironically and interestingly, we started with exactly the right product, literally the best product to start with.

And I think a big part of the industry's growth is because that first product was a great one. Yeah. And now it's grown. So we've got these 3,000 ETFs that are sitting out there at this point. They're all out there. What's amazing to me is still the majority of active management, or passive management, excuse me, but active is really kind of coming in here. Is this because all of a sudden the industry,

industry is maturing. There's only so many, you know, passive funds that you can put out there. And what do you think of that? What does it mean when you have a lot of people who are in mediocre mutual funds converting to ETFs? You're still a mediocre fund, right? Well, there's a lot of associated fees with a mutual fund that you get less of an ETF, and you have less of a tax liability as well. The math I've seen says an ETF wrapper on a mutual fund can boost returns by as much as 50 basis points. So, yeah, if you're a lousy manager, you'll still be a lousy manager, ETF and Mutual Fund. If you're right on the cusp, it might actually help, and you don't have to hold cash, which is a huge advantage in the mutual fund structure. Charlie, you've got two new

books coming out. One of them is called Figuring It Out. That is a collection of your best investing essays, including winning the losers game. There's the cover. And another called Inside Vanguard. It's a history of Vanguard and the legendary Jack Bogle. And we've talked about him a few minutes ago, but Jack passed away, what, in 2019, Charlie? I'm wondering what What would he say to investors who are seeing the S&P down 19% this year? What kind of advice would Jack Bogle give all those nervous investors? Jack Bogle would do the same thing that's been doing for years, and that is be a long-term investor. And if you're going to do long-term investing and be successful, first thing you want to do is

know yourself, then develop a serious plan that you will stick to and stick to and stick to through thick and thin. and indexing deep cut down because that really works well, ETFs and indexing are either pathway that you find right for you is fine, but staying out of active investing is really an important part of the total decision. And if you did all of that sensibly and hang on for the long run, you're going to come out fine. Yeah. You know, last week, Charlie, S&P released its semi-annual SPIVA report, on the state of active management.

And they've been following active management for 25 years. It's basically how active management performs against their benchmark. So so far in 2022, I thought those are very interesting. It's been a good year for active management. 51% of large-cap active fund managers are underperforming their benchmark. I know, 51% underperforming. It sounds terrible. But it's the best year for active management since 2009, believe it or not.

Now, the long-term records you see them here are terrible still. after five years, 84% underperform after 10 years, 90% of active big cap fund managers underperform after 10 years. You know, you pointed this out 50 years ago, this dismal record. Why is it so difficult for active managers to outperform? Well, there are a whole bunch of different reasons, but they all come together, meaning that the markets have gotten better and better and better and better at pricing, and that's the function of any market is to find the right price.

and make it available to people who want to buy or sell. So if you start off and take a look at some of the changes, when I came out of Harvard Business School in 1963, there were no courses on investment management. None. Now there's seven. If you look at how many students took courses in investment management is now over 100%, because many people take more than one. And you look at some of the other changes.

The trading volume on the New York Exchange was 3 million shares, 3 million shares a day. Now it's somewhere between 6 and 8 billion shares a day. That's an enormous change. And the volume in trading is reflective of all the people that have gotten involved in active investing. Back in 1973, for an example, there were as many as 5,000 people who were involved in trying to figure out what stock prices should be and what the earnings were going to be. Now there are easily 2 million people who are involved in feeding information into the actual management. Like Bloomberg was still in school, now the Bloomberg terminals, everybody has one. Most people have one at home and one at work, and a lot of people have one at home, one at

at work and one in the limousines as they drive to work because they want to be able to have access to all that extraordinary information. You take all of these different changes that have taken place. They've all contributed to making the markets more efficient, more correctly priced, and you've got a change in the volume of trading that's done by professionals. professionals went from less than 10%. When I say professional, you've got to believe it's a very fraud and friendly, general definition because that included bank trust departments and 14,000 banks across the country. And the only people went into the trust department were the people who were not doing

very well at the commercial banking business. They got transferred. We've gone from eight, nine, maybe 10% professional trading to 90%, 95%. 95% professional trading. So anytime you go to the market as an active manager, you're buying from, you're stealing two. Other people know exactly what you know, just as fast as you know it. That makes it awfully hard to get ahead of anybody else.

Yeah, you know, Nick, Charlie makes a very key point. It's not that active managers don't underperform because they're stupid. Exactly the opposite. They're all really good, but you're primarily trading against us. other active management. And as Charlie pointed out, what is the real information advantage when you're, everyone has essentially the same amount of information. We always doresively refer to retail traders as dumb money, but they didn't have the same information advantages that professional players have, but there's not as many of them anymore. It's important to remember that

efficient market theory doesn't say markets are priced correctly every day. It says there's no reliable way to find the mispricing. And that's still true. and that is why active management is so hard. There's no, you might catch one name or two name or three names and think you're doing pretty well, but then you get reversion to the mean and you don't get that performance going forward. So it isn't just that markets are pricing correctly or correctly.

It's very hard to find the systematic mispricing enough to outperform. Yeah, so what do you do? I mean, we talk about efficient market hypothesis, generally what people say now is markets aren't completely efficient, but they're efficient enough. Now, repeat the point you made just earlier there, that efficient markets doesn't say that every moment they trade at the correct price. It says why.

Yeah. It doesn't say that that price that we're seeing across the tape right now is correct. It says there's no systematic way to find the missed pricings, meaning there's no way to find the anomalies enough to make consistent outperformance. So that is the trick, finance. And basically, great investors who I've met who do it well, focusing on one core edge. Warren Buffett's beat in the market. How did he do that?

He understood the value of brand. George Soros beat the market, how do you do that? He understood how currency markets work and that central bank interventions are dislocations that are temporary. Every great investor has one phenomenal idea. And that includes Jack Bogel with indexing, a phenomenal idea that people didn't believe

for a long time, and now has been proven true. So how do you advise people all the time? How do you tell them about active versus passive management? At what point do you say, I believe active management has a role to play here, for example, in the bond market, when all of a sudden bonds are plummeting in the last year. Sure. Is there moments when you can walk in and say, I think active management would do very well here?

The way we look at it is this. The first thing is there's actually no such thing as passive management. Everything, including buying an index fund, is still a choice. It's an active choice, yes. And those choices are informed by emotion, and that is something that we talk about a lot. The second is don't take it for granted. So if you think indexing is great, that's fine. But look at the longer in terms of the S&P and Russell versus EFA and EM.

EFA and EM are basically up 3% a year for the last 10 years, and the S&P is up 10%. Why is that? And understand why it is. We recommend underweighting EAM and EFA just dramatically as you can possibly stand because those are not money-making areas. And according to the current structure, they never will be. They never will be? EFA, Europe, Africa, Far East. Europe, Asia, Far East.

Asia, will never outperform to the U.S. essentially develop. Good part of the developed world is in there. It will never outperform? No, not over a sustainable period. You will catch one cycle when this cycle turns, where EFNEM will do fine. Those are trades. But as far as the underlying underpinnings of venture capital.

And that is because of the U.S. capitalist system? Why is that outperforming? It's two things. It is we get the right folks into top schools, or at least enough of them to create ideas. And then we have a huge venture capital community that funds their ideas. That is the engine of innovation, the engine of growth. So it's the capitalist system and our educational system combined. Yes. Now, our educational system is not so great for the average person.

Yeah. But if you're gifted with a huge IQ, there's a good chance you can get into those schools, and then a VC will give you money. As simple as that. Charlie, one of the reasons I love talking to you and reading your stuff is you're full of folksy wisdom. You often have said to me there's three important numbers that people should keep in mind. I'm going to put them up here on the screen on your hand. First is the number 76%, 76%.

That is the difference between waiting for Social Security at 62 years old and 66.5 years, meaning that's the difference of what you'll make if you wait until 66.5 years. The second number is 10, and that's the number Warren Buffett said you would be a better investor if you only had 10 decisions your life to make, meaning it would limit your options and be good for you to do that. And the third number is 60, which is the number of years most of us have to be investors. These are great numbers. Riff on these for a moment for us. I'll start with the last one. 60. If that's the reality, then you ought to think about investing with that reality in mind. The biggest advantage you can possibly have is the long term. So 60 is a very good measure because most people start investing somewhere in their mid-20s, and they stop investing somewhere in their mid-80s.

But that time period is a wonderful opportunity to take advantage and really do something with it. 76 is, to me, speaking just as an American citizen, the most important single number for almost every single person. Social Security will pay you every year, as long as you live, inflation protected. in the last year or so, we've seen what inflation protected really means, will pay out to you more every year by 76% if you can wait until your 70.5% claim. In addition, if you have investors and you're working for a company that has a retirement plan

and you stay with that company during that same time period, you will at least double the size of your 401k during that same time period. put those two together and you go from at risk of having an unhappy, impoverished, elderly period in your life to having plenty and being able to do the things that you really, really want to do. I think those numbers are really important for almost everybody. Ten, I happen to love because it's an easy way to remember to be self-disciplined. Any advice that any of us get from Warren Buffett is probably darn good advice and go to

attention to it, then 10, if you only can make 10 decisions, then you know, not going to be because the market is different, not going to be because the economy is different, not going to be because interest rates have changed all of a sudden, it's going to be because you have changed. And if you think in terms of when you're in your early 20s, you've got one set of variables to think about, when you're in mid-40s, you've got other things to think about, when you're in your mid-late 60s, you've got other things to think about, when you're in your late 80s, You've got other things to think about.

And those would be reasons to think about changing your portfolio structure in response to what your real needs are. You know, it's a very good point he brings up that Social Security is inflation protected. We're probably going to get the biggest increase ever, perhaps, I don't know, forever, but this year in Social Security. So it is inflation protected. And when you think about it, and Charlie and I have talked about this many times, there's really three things that you own in your portfolio. You have your house, you have Social Security, and you have your private savings, your 401K, and some people may also have a pension. So I wonder if you can take, if the house is there and your Social Security is there,

and that's a significant part of your assets, whether you could stand to take a little more risk owning your 401K, for example. So a lot of people decide when they turn 70, they're going to dramatically reduce stock exposure, but people are living to 90 today. You know, I'm wondering what you recommend to people at that point. We talked a lot about not outliving your money, which is a real problem. And you're right, and plenty more people are living past 85 and 90 and even to their late 90. My mom is 94 years old and still going strong.

And thank goodness she had invested a ton in equities in the 90s and 2000s because otherwise I'd be paying her rent right now. So it is super important. You have to plan to live a long time. And if you don't, you don't, but you've got to plan for it. So Charlie, riff on this, can your 401k pick up on what Nick was saying? Should you take a little more risk in your 401k if, say, you're my age? I'm 67. So suppose I'm going to live in 90.

Can I take a little more risk knowing that I have a house and I have Social Security at the same time? I'm trying to figure out what are we advising people to do? Because when they turn 70, everybody starts buying bonds, which seems kind of crazy to me if you're going to live another 20 years. Thank you for saying it just the right way. Pendocracy is exactly right. Look at the major components of your total portfolio. You've got your securities portfolio, 401K. If you're done pretty well, not super, but pretty well, you've got something $250,000 right there. Another value really important is your family home, where the chances are you've got another $250,000. And then this third part is your social

security most people have no idea how big social security is typical person would have social security value coming their way streamed year by year by year of another 500,000 so let's go back to the first 450 that you've got in your portfolio at the 401k level you have 60% in stocks okay well then add your house which is a stable value but it's real economic value then what percentages, it's no longer 60%. It drops to 30%. Oh, wait a minute. Drop in the part you're going to get from Social Security, which is largely like a bond, although it's a fancy kind of bond, but it's a stable value one more time. Then you wind up with, you've got 16, 15% in equities, total in your total portfolio. So I would urge you to think about total portfolio and what percentage

of that should feel comfortable putting into the stock market. market where the returns are higher. This makes a lot of sense to me. I mean, people don't think about, for example, your house as part of your portfolio or Social Security. And in case you're wondering, how do you get, he mentioned $500,000. He's talking about over the lifetime. So an average person might collect, you know, do the math here, $20,000 a year. And Social Security times 20 years or 25 years, you get $500,000.

That's how Charlie's getting those numbers. So if you think of your portfolio as your house, Social Security, and your 401K, his point is, you know, you may actually own 16% of stocks in your 401k at 6040, not, you know, 60%, if you look at a total portfolio. There used to be an old rule of thumb that's sort of the rule of 100. So take your ads, subtract that from 100, that's your allocation. It might have to be a little even more aggressive. It might have to be 110 or 120. Charlie, you've got the Vanguard book out. I wonder what's your take on Vanguard today? I mean, obviously it's a huge success. They went into ETFs against Jack Vogel's wishes. Brennan did.

But, you know, I hear these complaints from the old guard, the Bogleheads. You know, they say Vanguard has strayed from Jack's principles, has become a behemoth that offers everything. It shouldn't do that. What's your take on where Vanguard is today? Oh, I think Vanguard's an extraordinarily favorable position, just to be can. All of my investments are in V-Wife's investments are in Vanguard, and we're independent people in terms of our financial thinking. Our children are all in Vanguard, and our grandchildren are all in Vanguard. So at least I put my money where my mouth is. I've had the privilege of working with Vanguard one way to another for 60 years, that it is the same organization all the way through all the changes that have taken place in Vanguard. It's the same organization in terms of values, what it's trying to do.

It's really trying to provide highest value at the lowest possible cost for the largest number of investors. And that's why they have been far in the way the most successful mutual fund management company in the country. Really substantially so, starting from Jack first left, the Wellington organization. He was starting with 27 other people. No assets under management and no way of adding new business except it was paid up to him, delivered to him through the organization he was serving. Over the years, developed all those other capabilities, so the same mission, same purpose, serve the people who would like to have long-term investing in high quality and low-cost.

That's a wonderful metric, and it causes people to come. together wanting to work at Vanguard, causes people to stay employed with Vanguard. It causes people to invest with Vanguard to feel really great about it and stick with it for the long run. You can argue, and I think it's a fair argument, that there are parts of the service activities of Vanguard these days, everybody working remote, that are not as up to speed as some of the past capabilities, and candidly, Fidelity has got a super service level, so that they've done even better than Vanguard. But in terms of organization,

there's something really important about Vanguard for all this to keep in mind. And Vanguard thought seriously about making an acquisition. They were able to raise $5 billion overnight. How in the world can you do that? You can do that because the fund own Vanguard. And the funds had to do is put a tiny amount of each fund into that point. into that pool and then borrow the rest, and they've got $5 billion. So people look at Van Gogh that say it's a break-even operation, correct, very cost-conscious,

correct. They can't possibly make a capital investment, incorrect, because they do have the capability of not reducing fees or letting fees rise up a little bit. And on an $8 billion, $8 trillion base, you come up very quickly with $80 million, every year for the rest of your life. And that gives them a capital throw weight that almost nobody has in mind when they think about VanCard. Are you suggesting? Go ahead.

Major commitment delivering advice and the kind of advice that they're delivering is increasingly sophisticated and that's the new wave in the investment management management industry. It's good advice for individuals who like some coached on what they should do. Yeah, soft-de-record investing advice. Are you to suggest that was a tree about they could make acquisition if they want, raise $5 billion. Are you suggesting they should? If so, what should they buy? They could have when they were thinking about making an acquisition.

And that was the ETF business that was originally Wells Fargo and then Wells Fargo and NICO. And then it was acquired by BlackRock, which made a brilliant move to buy. in at a right time. But they bought the whole organization, which was more than Vanguard would have been interested in doing. The tip of the hat to BlackRock, but then a very nice insight into, you know, when Vanguard really wants to get something done, they can get it done. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the market's 102 portion of the podcast. Today will be continuing the conversation with Nick Coles from Datatrek research.

And Nick, thanks for sticking around. What I didn't have a chance. We had a great discussion with Charlie Ellis about the value of long-term investing, the difficulties of market timing. What I didn't get is your take on the markets. Every day you have a terrific analysis, a report that you do out,

which I highly recommend, Data Trek, everyone who's not familiar with it. Tell us what you're telling investors right now. FedEx threw everybody for a loop over the weekend. So everyone said, oh my gosh, FedEx is saying global economy is terrible, it might go into a recession. And now everybody's back to where we were in May, reducing or considering reducing earnings expectations.

But does this, is FedEx really the right global indicator that we're going to somehow enter some imminent recession? We've had these cell site conferences for the last few weeks. There's been a big banking conference. The banks seemed okay. Ammex had very positive things to say, separately Home Depot had positive things to say. I'm just wondering, should we all freak out and start reducing our estimates for the S&P

because FedEx is not happy? Yeah, the short answer is no. The reason markets are so keyed off of earnings right now is for a simple reason. Before the pandemic, we were doing about $160 a share on the S&P. That was 2018 and 2019. The run rate right now is close to $230. We've had a 40 plus percent increase in earnings power through the pandemic from 0.8, at point B. That's very unique. It has not happened in Europe. It has not happened in Asia.

It's only happened in the U.S. the degree we're talking about. That's why we're still up 30% versus the pre-pandemic levels because earnings are up. The rate picture is not a great part of the equity story. The earnings story is the entire equity story. And that's why markets are so on tenter hoax about what are earnings going to be because without that earnings component, we don't have an equity story. So in May, everyone, April, May, there was the big freak out. Everyone was convinced there was an imminent recession. And we all know in recession, earnings shrink. We were expected to be up, what, so close to 10% a year for 2022. Everybody said, oh, my gosh, in a recession, earnings drops. They could drop a little or

they could drop 25%. And yet it didn't happen. The earnings came down a little bit, but when the market didn't, when companies didn't freak out and give terrible guidance, the market started lifting off of the June lows. Now everybody's back to doubting all these numbers again. What's the story? The story is, you're right, in a typical recession, recession in the US, going back to the 80s, earnings dropped 25%. Ironically, from the current levels now, to add down 25%, is right back to the earnings we had in 2018 and 2019, that $160 a share. We are not seeing any signs that earnings are eroding that quickly, but the market knows

one existential fact. The Fed can only reduce inflation by cutting, by increasing interest rates and causing a recession. There's never been a case in this country where inflation comes down from seven or eight or nine percent back down to two percent. without a recession. There is nothing. No example in history that shows we can do that. That's why markets are so afraid because they connect the dots. Recession, down 25% earnings, down 25%. The odds of the so-called legendary soft landing are pretty small based on a historical. There's no odds, it's on historical precedent. But there's also no historical precedent for starting

a recession at a 3% unemployment rates. With the global pandemic, I mean, this is pretty extraordinary. It is. On top of a Russian invasion, when everybody, so three years ago, if you would have said, you know, we're going to have a global pandemic, and a million people are going to die in the United States and say, you know, all I know that story, that's Michael Crichton in 1972, science fiction stories. And then if I would have said, you know there's going to be a conventional ground war in Europe, Russia is going to invade the Ukraine with an army of just tanks and people.

And everybody said, no, that's over. Nobody will have a conventional ground war anymore because that doesn't make any sense. And yet these two things happen. Right. The things don't, everybody said, it's not even on anybody's radar, happened. And the Fed had an extraordinary response. So I'm wondering, I'm trying to go back to this legendary soft landing, whether something might be able to happen that would actually defy the zero chance of the difference. Absolutely. Absolutely. And the fascinating thing with your scenarios is

they propose very, very difficult circumstances, but the investor needs to ask, that's all fine. I understand those headlines. What are corporate earnings going to be? Because those drive stock prices. It is not the headlines about the war or the pandemic or anything else. It's what are we going to earn, how long are we going to earn it. And your point is exactly right. We've never had it happen before. There's no reason it can't happen right now. It's already happened for two quarters. It's been raising rates, and I think Q3 is going to be almost as good as Q2. And then we have to wait to see what holiday looks like, but earnings are still very strong. No one wants to sell this market, even with the current volatility,

if next year's a 240 earnings number. Yeah. The other question is the multiple. And this is, of course, one of the things Jack Vogel pounded in my head in the 1990s, that stock prices are three determinants. One is a dividend. The second is the rate of expectations of growth or contraction of earnings. And the third is the market multiple. How much are you willing to pay for a dollar of earnings? So if you've got a stock that's $10 in December one year and you're expected to throw off a dollar in earnings, the P.E, the multiple is 10. Now, the question is the S&P 500 has been trading between about 16 and 21 this year. The historical average is 15 to 17, somewhere right around there. Right now, it's probably 16 or so.

What's the right multiple to put on? What's the right multiple for investors in this kind of environment to be putting on a future stream of earning? Should it be very much on the low end at 15, which is close to recessionary levels? Or should it be 18? How's the right way to look at this? There's two difficult questions to answer. The first is how much longer is volatility going to hang around? Because the math for the last 20 years shows that when you get five years of all,

and by the way, we're kind of three years already into it. When you get five years of volatility like we've gotten, multiples can track two or three points on their own just because investors are just tired of the volatility. So we need to calm this volatility down very quickly, which I think Powell understands. The second issue is what is in the S&P? Because you can't look at the S&P in 1980 and the S&P today

and compare them in any way because energy was 30% of the S&P back then, and even though energy was earning a lot of money, everybody knew that train was going to be a fairly short ride. Tech is now 30% of the S&P, big tech plus tech is like 35, almost 40, you're going to pay more for those earnings. And so it's very difficult. The way I tell clients think about it is, tell me about the earnings surprise. If we get an upside earnings surprise,

P, multiple will stay the same or go up. If we get downside surprise, they go down. So in 1980, energy was 30%. Correct. What was technology? Eight. Tech was eight. Right. So today, technology sector is maybe 25%, 26%, but if you include communication services, I don't know, Was that tech? Yeah. Oh, yeah. You know, Facebook, Google, Amazon, and Tesla. Sure, that's tech, right?

You go to 35, 40. Yeah. Now, those are great companies doing great things. They deserve a good evaluation. Their moats are incredibly broad. But I want to get to your point. I think you said something so profound. 1980 S&P is not 20-22 S&P.

So 30% of energy in 1980, 8% tech. And today, 4% energy and 35%. What's the implications of that? Apple, 7% of the S&P, all energy is 4.5. So what's the implications? The implication is it's extremely hard to just guess what the earnings multiple is going to be. The way we look at it is, again, back to basics. Our earnings is going up, our earnings going down.

Right now, earnings estimates are going down, probably still have a ways to go down, more volatility ahead. I have no problem with the S&P trading at 17 times earnings if Apple is 7% of it. Matter of fact, I can argue for a higher multiple. I can't really argue for a lower one. So you're comfortable with 17 times multiple. Absolutely. Now, if we get two more years of volatility, it'll go to 14. Just connect the dots. Where do we end up on the year? We're at 3800 and change right now at 16 times

16.1, something like that forward earnings estimates. Where do we end up? Somewhere between here and 4,000? Really? It's a very narrow range. It is a very narrow range because the earnings the earnings are not changing very quickly. And what's left, as you said, very rightly, it's P.E multiple. What's your P multiple going to be? And as long as earnings don't fall apart, P's are going to hold in. Now, if we get another two years of this, that's a problem. Yeah. So you want lower volatility, number one. You want earnings to be growing, which would argue for expanding multiple. And you certainly want a more stable economy. I mean, nobody's going to buy into a declining economy. Multibles will go down. Exactly. They have a 97 to 03 or 2007 to 13. Multiple from down three points, four points. Yeah. Thank you, Nick. Thank you. Thank you. Thank you.

Nick Cole is the co-founder of Data Trek research and has been bought to us on the ETF Edge podcast. And thank you for listening. believes new innovations create new opportunities. Become an agent of innovation. InvescoQQQQ, Invesco Distributors, Inc.