Strong Economy: Positive for Earnings, Negative for Rate Cuts?

Lindsey, what is going on with you?

[00:00:26] Lindsey Bell: What's going on with me? Well, I'm in New York City today, I got a couple meetings and doing a little media. I'm going to be on mornings with Maria tomorrow morning.

[00:00:34] Chris Versace: Nice. Nice. Any particular topics or have you not gotten them yet?

[00:00:38] Lindsey Bell: I haven't gotten them, but I have a sneaking suspicion that we're going to talk about earning season, which I know we're going to talk about today too. So.

[00:00:45] Chris Versace: True. I, and if you're on with Maria Bartiromo, somehow Lindsey, I'm going to guess the election is going to come into play. I could be wrong, but that's what I'm thinking.

And, and Bob, I understand you have some, uh, interesting news to share with us based on, cable TV news last night.

[00:01:01] Bob Lang: Yeah. Well, last night I got, a nice segment on Jim Cramer's mad money show for the off the chart segment. And it's been a while since I had done that. So Jim asked me to produce some charts and produce a segment for him.

And it was on, I think it was pretty, pretty well done. He does a great job putting those segments together. And we did some work on the housing. area, residential construction, and I was very happy with that. So

[00:01:26] Chris Versace: excellent. Excellent. Excellent. Well, the only news that I have to say, folks, is that I am back from Connecticut, where I was last week, and I voted.

So I took advantage of voting. I'm not going to tell you who I voted given my right not to do so. But if you were to say, did I vote for an orange Oompa Loompa? The answer would be no. With that, what do you say we move on?

We got three big topics and folks. Just so you're ready, here they are. Topic one, how reliable are equity strategies for big investment banks when it comes to price targets for the S& P 500? Second big topic is ETFs. We know that they've been proliferating. Total assets in the U. S. just crossed 10, not million, Not billion, $10 trillion.

Lindsey, I feel like I should do a doctor evil here. $10 trillion.

[00:02:17] Lindsey Bell: It's appropriate, very appropriate .

[00:02:18] Chris Versace: So we'll talk about that. And our third topic, rounding everything out today, is the economy good for earnings? But bad for rate cut expectations. All that and the usual banter back and forth when we return.

All right, you two, let's start off with our first topic. I think, Bob, you were the one who suggested this and it's how reliable are strategists for big investment banks? You know, it's funny that you Wanted to talk about this today, and I know the reason why it's on the back of what Goldman Sachs said, and I'll let you talk about that in a second.

But earlier this year on my, I guess, X feed, I posted a snapshot of S& P 500 targets. By the leading investment banks captured by the Wall Street Journal. And when you look at it, they were like 4, 800 to 5, 100. Now, Bob, where is the S& P 500 today?

[00:03:16] Bob Lang: I want to say it's just about 58 20 or something like that.

It's well, well above the high target of the analysts that you just mentioned.

[00:03:24] Chris Versace: Yeah. So why don't, why don't you use that as a springboard, Bob, to kind of take us into today's first topic?

[00:03:30] Bob Lang: I would just ask the question, how useful are these targets?

Are we supposed to be using these as a springboard for getting long the markets are getting short the markets? I mean, if these, Analysts or strategists who came out with these targets that you just mentioned are correct. Why isn't everybody short the market right now or selling everything that they have waiting for these targets to come to fruition?

And, you know, I, I guess, like anything, you know, targets are just estimates. They're just guesses. And we can't really trust what we hear from these analysts, from these strategists. A hundred percent, right? We have to trust our eyes and what we and what we see, right?

[00:04:09] Chris Versace: If we were playing tennis, because I know you love to play tennis, Bob, and Lindsey was my fundamental analyst partner, I would let her just smash the return on that lob you just set up.

Do you want to take

[00:04:24] Bob Lang: it,

[00:04:24] Lindsey Bell: Lindsey?

Yes, as someone who has been in the seat where they have to come up with these price targets, it's not from a place of evil, Bob or trickery, it comes from a place of, you know, just kind of giving guidance as to where the market's supposed to go.

And, you know, from a fundamental perspective, you're going to look at earnings. You're going to look at, you're going to take into consideration what the different risks could be and what the different headwinds or tailwinds could be. And you know what? It was my least favorite thing to do as an investment strategist, because it really is one of the most difficult things to do.

Predicting the return on a stock or the index is just practically impossible. And especially in a very short period of time, right? I mean, you might have a better chance of predicting the weather. It's like saying. What, Lindsey, what is the weather temperature going to be in New York City on December 31st?

And I mean, we're in late October. I have no idea what I could tell you right now. It's going to be 80 degrees today in New York City, and it's October, so it's, it's pretty unpredictable to do it. I do think that you know, the reason we do it, though, is just kind of to keep our eye on where we're going.

Right. And what is impacting us along the way.

[00:05:37] Chris Versace: I think the other big thing there is typically these things are rolled at at a moment in time So they're reflecting a snapshot of what folks are seeing And I think if we look back particularly this year, I mean What a roller coaster ride we've had on a number of fronts, you know early in the year Six rate cuts were expected dialed all the way back now to two during the summer GDP expectations and we'll talk about this with another topic in a bit You we're as low as 2 percent and now for the Atlanta Fed GDP now model with just like a thimble full of additional September data to come, 3.

4%. So you really have to be careful. And just remember that a snapshot in time is one thing, but as investors, it's our job to evolve our thinking as new information, fresh data, whatever you want to call it, comes about.

[00:06:33] Bob Lang: Bob, Yeah, what I was gonna say is that there's an old economic saw Chris and Lindsey that said, give him a price or give him a time, but don't give him both.

Right? So, so when you, if you come out with a price target or something with an objective at the end of the year, More likely, one of those two things are going to be wrong and you're going to have egg on your face. So a lot of these analysts do. I mean, if you look at somebody like a, like a Cathie Wood, who, runs a fund, runs money, or a Mike Wilson, on the other hand, who's a strategist for Morgan Stanley, right?

And, he's always, seems always to be bearish. Or then if you look at a fellow like Chris and I talk about Dan Ives, who is very bullish all the time 24 seven about Apple and Tesla and a few other companies like that, where, where's the accountability at, you know, I mean, they come out and they say, you know, if they're wrong or the, is it just swept under the rug or is it, there's just some accountability there and says, Hey, look, you know what?

I was wrong and I'm sorry. I sure recently Stan Druckenmiller say, Chris, that Boy, it's a huge mistake of me selling that to NVIDIA a couple months ago. You think? I, I, absolutely. I mean, listen to what the CEO had to say a couple of weeks ago. it's been very, very strong.

And what do you, you know, what do you do? You apologize and you say, I'm sorry, I got it wrong. Give me another shot next time. I don't know.

[00:07:51] Chris Versace: Bob, you know, my favorite quote. In response to that is right. They didn't tell me, right. There are folks out there who just say management teams didn't tell them what was really going on.

My response to that in the era of post reg F. D. Is you're supposed to do your own homework like you were always supposed to do, but instead , management teams aren't allowed to kind of give you the old wink, wink, nudge, nudge type of thing that, you know, they used to do in the past before Reg FD was there.

So that's, you know, you just have to be and I say this all the time. You have to be an active investor. That doesn't mean you're trading every day, but it does mean that you're reading the data points paying attention to what, not only what your companies are saying, but what the customers, competitors, suppliers are saying as well.

So you can continually update your investment mosaic. Having said that, there are some of these strategies out there that come out with these ridiculous multi year decade long calls. And I think that's the one Bob that kind of set this whole conversation up. Goldman Sachs said they see just 3 percent gains in the S& P 500 over the next decade.

And my response to that is, wow, look at that glory hound looking for headlines.

[00:09:06] Bob Lang: You set the bar low like that, and you know, how do you set yourself up for failure? You can't, you know, you almost, you almost can't lose.

[00:09:13] Chris Versace: How do you juxtapose that against Tom Lee, who's got some number north of 6, 000? Go, Lindsey.

[00:09:19] Lindsey Bell: I mean, it's a, it's a pure guessing game, right? And they can tell you what, drivers they're using to get there, right?

But the reality is neither Goldman or Tom Lee are going to. Be absolutely right. You know, to pinpoint that point in time, like you said, is practically impossible. JP Morgan assets management Dr. David Kelly, he was recently asked by journalists, like you know, what's the greatest risk to your forecast for the, your S and P 500 target.

And he kind of like laughed and was like, well, the greatest risks is the risk that we haven't thought about. Right. Because the market and the economy actually can Adapt and react to real time information, like interest rates going lower or higher or whatever, or inflation, this, that and the other thing.

But it's, it's the, it's the events that we don't anticipate or don't see coming, like, all pandemic or, the financial crisis, things like that that that's where we get into trouble. And so it's hard to predict that. And nobody has that on their bingo card in the year that it's going to happen, or very few people do.

it goes to show that we're we're investors for the long term. If you look at the chart of the S& P 500, which we're trying to make target prices for over a very long period of time, it's up into the right, you know, even with big drawdowns so I agree with Chris, I don't think it's set it and forget it because some of those drawdowns take a while to get back to even.

 , I think you need to be active out there but you don't need to be trading every day or even every week. You just need to be aware of where your money is, why it's there, and if your thesis for that investment strategy, if anything, is causing it to change. And if so, then you need to make adjustments.

[00:11:00] Chris Versace: Lindsey, you just did a wonderful job of wrapping up that first topic without even trying.

[00:11:06] Lindsey Bell: That's what I'm here for.

[00:11:07] Bob Lang: Well done. Well done. Yeah, Bob. Well, Chris, I would say that over the years I've, had, like you, I have my share of, of reading some strategists and analysts. And I do have to say that in all honesty, I'd have to say that Lindsey is right up there at the top with her predictions and her forecasts.

for markets short term and long term. So we're lucky happy to have her with us and sharing her knowledge.

[00:11:29] Lindsey Bell: We are back the checks in the mail. Don't you worry, Bob,

[00:11:32] Chris Versace: you know, Lindsey, when I hear that we used to, on a different podcast, we used to joke that or joke and use the language that Anthony Mackie uses whenever he finishes a cut.

In a movie, you know, so they film the scene. They yell cut and he yells cut the check. So if you want to just say cut the check to that, that is fine. But let's let's move on. And I'm actually going to take our topics out of order because I think. As we were talking about the first topic, I think the third topic for today should really be the second one.

So that one is, is the economy good for earnings bad for rate cut expectations? And the setup for here is this. Really over the last couple months, really since July, second half earnings expectations for the S& P 500 compared to the first half have been coming down. So, you know, if you were to look at it, back in July, the second half was expected to rise just over 11 percent compared to the first half.

End of August, that fell to 7. 8%. September, 6. 9%. And now as we get into October, 5. 3%. So, you know, you think about some of these targets and you see these SMP revisions, you're kind of like, I'm not really sure what's going on here. But I would posit to both of you that perhaps these downward revisions are overdone.

When we take a look at the Citibank Economic Surprise Index back in positive territory, that means the economic data is coming stronger than expected. And again, we take a look at that Atlanta Fed GDP now estimate that I just mentioned that's at 3. 4 percent up from, you know, mid twos in August. So the economy performing better than expected.

And as we're talking today, we've started to see earnings come in better than expected, not just from the financials recently, but in other markets sectors as well. So first question in this part of the podcast. Do you guys think That those downward revisions might be overdone. Or am I crazy?

[00:13:37] Lindsey Bell: So I'm going to go first because I like you.

I dig into these earnings estimates during earnings seasons pretty deeply. And 1 thing I'll say about the 3rd quarter. Usually you see what are we in the 2nd or 3rd week of earnings now? The second, second, second

[00:13:50] Chris Versace: real week,

[00:13:51] Lindsey Bell: second real week. And you start to see, you know, the estimate can come down a little bit at the beginning, but then usually you see companies beat because us ex company analysts like to set the bar low enough for these companies to beat.

Hang

[00:14:04] Chris Versace: on, Lindsey. Let me, let me just stop you right there because I think you're right, but I also want to quickly just sidestep and talk about a Wall Street analyst trick. Okay. If you like a stock, what do you do? You keep your earnings low and your price target on low side. Why? Oh, they beat my earnings.

I have to raise my price target. On the other hand, if you don't like the company, what do you do? You keep your earnings estimates just out of reach and your price target high. Why? Oh, I can't believe these guys missed my earnings. Oh, this confirms my negative stance on this company. I have to cut my price target back to you, Lindsey.

[00:14:47] Lindsey Bell: I can't believe you just spilled the tea. Chris

[00:14:50] Bob Lang: giving up the magic trick. You know, it's like,

[00:14:52] Chris Versace: nah. You know what? I love our listeners and from my perspective, I'm gonna pull them behind the scenes and put them in the know.

[00:15:00] Lindsey Bell: Okay. Well, I'm going to do the same thing. And what I noticed, and I keep asking myself, you know, I look at S& P, capital IQs, not estimates I'm looking at third quarter and I'm like, geez, the growth rate has been lowered to 2. 1%. And again, cap IQs numbers for the third quarter. And that reduction is largely coming from the industrial sector. Okay. Believe it or not. And so the expectations going into the earnings period just on October 10th for that sector was a negative 2 percent growth rate.

And now it's at a negative 12 percent growth rate. And what's driving that when I dug into it is CSX. Because again, this is the S and P 500. So it's weighted by market cap. So you have to consider how big the company is when you're looking at it. CSX reported, they missed on top and bottom lines and they, they trimmed their outlook because of lower oil prices and the hurricane impact.

Right. But then, then there's the impact from Caterpillar, which I find so fascinating. Caterpillar. They. Who was it? Morgan Stanley downgraded them last week and they said that their earnings might be at peak and destocking of dealer inventories could offset any benefit from infrastructure spending in the U.

S. Now, JP Morgan came out to counter that and the earnings estimates for the 3rd quarter were cut slightly, but it's a huge weight in the industrial sector. And so I think the industrial sector is actually what's weighing. On the estimates for the 3rd quarter, my numbers for the 4th quarter are stable to down slightly.

I mean, they've moved since July. You mentioned July. They have moved lower since July. So it's going to be interesting to see how the rest of the earning season unfolds. Tech's going to be obviously a big component coming up here. We got Netflix. It was a lot better than expected, which is a good sign for the consumer to, by the way the banks have done really well health care.

Not so much. But yeah, I think I think it's gonna we're just getting into really the heart of it. Overall 80 percent of companies have beat on the bottom line. Stock reactions have been mostly good to those beat rates. So you know, it's it's a it's a. It's a interesting time because it's two weeks to the election.

So the companies like that report before are probably going to be a little more conservative when they talk about their outlook than the ones that maybe were report after, you know, depending on their outlook on who's in office and what that can mean. So I don't know.

[00:17:31] Chris Versace: You know, that's that's actually a great point, Lindsey, because we are less than 2 weeks away from the election.

It also means we're less than 2 weeks away from a lot more economic data for how we start off the final quarter of the year. , we're in, the tail ends of October, and we really won't start to get that data. Really till , November 1st, which I think is a Friday. So maybe not even till November 2, 3, 4 the following week.

And you're right, that could influence a lot of what folks say as they kind of revise their GDP forecasts for the balance of the year. But are you thinking, Lindsey, that there might be some room for those negative revisions to the S& P 500 consensus earnings? Maybe to be a little overdone. What do you think?

[00:18:14] Lindsey Bell: Yeah, I do. I think the bar was lowered. I mean, we're going from a double digit earnings quarter in the second quarter to 2% in the third quarter. And I know you, I like to look at it year over year versus quarter

[00:18:26] Chris Versace: mm-Hmm. me too

[00:18:27] Lindsey Bell: of a quarter progression. But you know, sure. Some of the comparisons get a little more difficult and there's, there's.

You know, sector specific stuff like oil, lower oil prices, impacts, industrials, impacts, energy, impacts, materials and and a weak manufacturing economy will impact those sectors too. But you know, the consumer has shown strength and resilience. So really interested in seeing what that looks like. I will say early stages for consumer staples and consumer discretionary.

The top lines are not getting big beat rates for those two sectors. So that's something to watch, but earnings still have been good. So we'll see early, early, early. And I know we'll dive into retail earnings. Once that those come out, they come out late in the quarter reporting. Lindsey,

[00:19:08] Chris Versace: that's like you going home.

The Retail. I mean, Bob,

[00:19:12] Bob Lang: you

[00:19:12] Chris Versace: have anything to add?

[00:19:14] Bob Lang: Yeah. So I think next week is going to be a pivotal week for the markets. It is a huge week of, tech earnings. I think Amazon comes out on Halloween Apple alphabet and so forth. And were coming up at the end of the month as well, too. I put a note out this morning and I said, Okay.

The hunt for red October is on because we've had a green month of October. So are we going to finish in the red? With only about a handful of days left of trading in the month. So I think it's kind of interesting to see some other groups, not just technology have been doing well, Chris, you know, we saw a good strength in a name that we both follow a Morgan Stanley, which is in the street pro portfolio.

That one did real well as did a bank of America. So it's not just the financials that are doing well. It's also some media stocks and Lindsey mentioned Netflix. So I have to think that Lindsey's onto something here with the low bar that was set here, that we're going to see some good earnings coming out of this quarter.

[00:20:10] Chris Versace: Excellent. Excellent. All right, let's move on to the second part of this topic, which is the following. First part being, is a good economy suggesting earnings might be a little conservative? I think we all agree. Yes. But the 2nd part is, if the economy is that strong, does it mean that the market's expectations for rate cuts.

Once again, ahead of themselves. And I say that, let's not think about what the Fed might do in November and December. Of course, you know, a lot of folks are thinking about that. I understand that. But if we look at the Fed funds rate today, 475 to 500 bps. By June three 50 to 3 75 is what the CME Fed Watch tool shows.

So on average, that's about another 125 basis points or potentially 5 25 basis point rate cuts. You know, we look at the data from the economy that GDP forecast and we look at the 10 year treasury yield. Last I looked, Bob, 4.2% up from about 3.65 in mid-September. Is the bond market saying, Hey folks, slow down.

[00:21:13] Bob Lang: I don't think so, Chris. I, I think to a certain extent. The bond market is saying that growth is strong, and we have evidence from that from the jobs market and the earnings that we just talked about for this quarter and the previous quarter. I think what the Fed is trying to get to, Chris, is a normalized.

yield curve. That would be if we held longer term rates like the 2 to 5 and the 10 and the 20 rather static from where they are right now. And the Fed funds rate comes down to that 3. 5 3 75 level that you just mentioned, which I believe 3. 5 percent is about the neutral rate that they've been talking about.

So we're only talking about another five rate cuts between now and then. That brings the short end of the curve down, and we have an upward sloping term structure of interest rates. And that's where the Fed really wants to get to. They would rather actually see Long term rates stay higher. I think they're satisfied with a premium on the 10 year yield of about 4.

2 to 4. 4 percent. If we were in that range, I think the Fed is certainly going to be much more comfortable being right there.

[00:22:18] Chris Versace: Lindsey, what do you think?

[00:22:20] Lindsey Bell: Well, I don't know. I feel like the market doesn't like that range, Bob, based on recent action as we approach the, you know, 4. 2542 area in the 10 year, but as far as, like, a strong economy and what it means for Fed rate cuts, you know, I do think that we're gonna, the market's gonna be disappointed.

Again, we're gonna have to recalibrate, and just like Wait a minute.

[00:22:40] Chris Versace: Wait a minute, Lindsey. You said recalibrate. Gotta drink.

[00:22:43] Lindsey Bell: I know this was my word before with Jay Powell's word. Bob and I talk about this all the time.

[00:22:47] Bob Lang: You need to copyright that.

[00:22:49] Lindsey Bell: I do need to copyright it, but no, I think that the investors are gonna, they are gonna recalibrate just like we did at the beginning of this year. And so I do think that we will have fewer rate cuts, but , I think also a play here is too, is. You know, inflation, it has been sticky inflation expectations will get consumers perspective of that later this week.

It's it's ticked up a little bit their expectations, but I mean, it's still range bound anchored anchored as we like to say, right at the Fed. But so I think inflation is going to. Is going to matter and I think that the market overall, the trend is up. Because rates are moving down to probably remaining stable.

[00:23:30] Bob Lang: Yeah, well, I would say something about about interest rates is this is that it's about the speed of the expectations of the speed of which the Fed is going to cut interest rates. And I, I've, recently, I talked about this for a while, and we kind of agreed that I don't think the Fed is going to be done cutting interest rates until 2026.

the spring of 2026, where the market is saying June 2025. So we've got this Disconnect there in terms of time of about seven to eight months and once that gets reconciled that is what's juking the markets these days Lindsey And I think that when the market declined like it has been when long term interest rates like the 10 and the 20 year start rising I think this is the problem that the markets have right now when there's this disconnect going on We had that back in april and may of this year and we had that huge disconnect there I remember when the Fed funds futures were looking for seven rate cuts and the Fed was saying no, not so fast.

We had a big reckoning at that point in time. But like I said, it's Chris and I were talking about. We think it's maybe. Early of 2026. Once that's reconciled. I think the market gets gets back on track.

[00:24:40] Chris Versace: So Bob just to be clear. You're saying that Even though you think the neutral rate is around that three and a half percent rate You're agreeing with lindsey and myself that the speed the cadence to get there May not be as fast as the market thinks it is

[00:24:55] Bob Lang: That's

[00:24:56] Chris Versace: correct.

That's right. Okay. All right. So what does that mean, though, for the market? I mean, if, you know, if we have to recalibrate Lindsey and we have a stretched, , P evaluation, even though earnings might be a little better than expected. , investor sentiment. Thank you. CNN fear and greed index knocking on extreme greed.

There's room for disappointment, right? So is it markets a little frothy and perhaps the smart move would be sit on the sidelines and let stock prices come to you.

[00:25:24] Lindsey Bell: You could do that, or you can just stay invested. But understand that, like, Bob laid it out pretty clearly that Until the economic data, the Fed and interest rates are all aligned again, there's probably gonna be some volatility and, and tough sailing ahead.

But I think, I think you just stay invested.

[00:25:42] Chris Versace: Ride it out is your advice.

[00:25:44] Lindsey Bell: Yes.

[00:25:45] Chris Versace: Okay. All right, Bob, wrap it up.

[00:25:47] Bob Lang: what I found fascinating was the low bar that it seems like earnings estimates have for this quarter. And I guess it's normally the case.

An old investor told me many, many years ago. posited this question to me, rhetorically said that, do you really want to be short during earning season? And obviously the answer is no because these sort of things happen when they lower the bar for earnings So I I'm fascinated about the earnings and i'm optimistic that this is going to be a good quarter

[00:26:12] Chris Versace: All right. Let's move on. Etfs, you know, these have been a revolutionary instrument I think for investors giving you more affordable away compared to mutual funds the ability to trade like stocks and You In the beginning, a lot of the strategies were, I hate to say it, kind of cookie cutter. You want to invest in the S& P 500, you want to invest in homebuilders or industrials or tech, fine, great, broad based exposure, but really, over the last several years, we've seen a lot more interesting, niche y, targeted strategies come about and surprisingly, now, Overall ETF assets in the U.

S. have passed that 10 trillion mark, huge, with the S& P 500 SPY ETF surpassing, holy cow, 600 billion. Lindsey, what do you think of this?

[00:27:07] Lindsey Bell: it's amazing, and I think that 600 billion mark was hit like a month ago. After it hit 500 billion. mm-Hmm. . So it's growing quickly. It launched in 1993. And by the way, just a quick story on the history of the first ETF, which is the SPY, is that Jack Bogle, who even up until the end, he kind of wasn't so into ETFs.

It kind of goes against his business model. Right. But he turned out he had the opportunity to. Own that product the SPY at Vanguard. The guy that that invented the ETFs came to him first and he turned it down because he was worried about the active trading aspect of it on a daily basis because remember mutual funds can only trade once a day and this you were going to be able to trade frequently and he thought it meant that it was going to really Push retail investors to speculate and to do, kind of, , not so great trading strategies, not be invested for the long term.

It was going to sort of entice them to do that. But anyway, he turned down this opportunity to own the S. P. Y. product and so State Street got it. And I think up until the end, he was just like, it's I never had any regrets. I never talked to anybody about it. I'm

[00:28:24] Bob Lang: This is like one of the first investors in Apple who sold all his Apple stock back in the seventies or something like that. So I'm sure. Jack Bo will probably, you know, rest in peace. He probably regretted not taking that offer up.

[00:28:36] Chris Versace: Yeah, he might have he but for all we know, you know, I I never met him for all we know though He might have been a guy whose glass was half full thinking about all the other things he did Not necessarily focusing on the one thing that he missed So but so, you know, it is interesting about the adoption of ETFs And it really it is kind of different depending on the market that you're in right?

so Here in the U. S., we actually think of them more as a retail product individual investors but we, we do see RIAs use them. We do see money managers increasingly using them, whereas if you go to Europe, it's actually the other way around, right? It's more the institutional market. That uses ETFs, not individuals, which, , we've got some indices over there for some work that I do over at Tematica that I was kind of surprised a few years ago when we first saw this.

And in some respects, it's almost as if the ETF market is, I won't say, you know, 5, 6 years behind, , what's going on in the US, but, but definitely a slower rate of adoption. And if you go, , the further, got to make sure I get this right, the further east you go the further behind it seems to be, but you think about those numbers here in the U.

S. And then you take a look at the fact that the original ETF started off as passive strategies, meaning they were really tied to an index. They mimic the index, but now we've seen another shift in the ETF market towards active ETFs, where it's really, you know, the ETF is a wrapper that houses the strategy.

And I think. Someone was telling me that active ETFs in the U. S. have crossed 800 billion in assets. So that's not quite 10%. Sorry, way less than 10%. Doing my math wrong here. It's still a small piece of the overall market, but it sounds like it's the fastest growing piece so far this year.

[00:30:28] Lindsey Bell: Yeah, it was. It was just 5 years ago, the active ETF business was only 100 billion dollar business.

So in 5 years, it's grown pretty quickly. And strategist put out some data on this it, it accounts for 30 percent of year to date fund ETF flows. It's huge. It's growing very, very rapidly. And what you're seeing too, I think is the trend is some of these big mutual fund houses are turning our mutual funds into ET active ETF.

[00:30:57] Chris Versace: Yeah, but it's pretty interesting that they're doing that, though, because when you think about the the fees that are charged for a mutual fund compared to some of these fees that are charged for an ETF, like, they're not making up, you know, the, the drop by pushing over to the ETF wrapper. And I, I suspect it means that there's a fair amount of internal cost cutting going on.

Dare I say even adoption of AI to help drive

[00:31:24] Bob Lang: I was going to say this, Chris, I know you teach a lot of people about investing and have done in, , in years past. I do as well too. And for a lot of people out there, they're really scared to jump out there and try and find individual names.

To select because they're afraid of missing out. So I tell people, look, find an ETF that you like and create your own mutual fund. You don't have to necessarily buy the S. P. 500. That that's certainly fine if you're a passive investor. But I think, you know understanding and learning about what you buy, like you say all the time, Chris, know what you own and if you're able to select some groups in areas that you, that you covet, that you like, that areas that you're familiar with, whether it's restaurants or materials or Residential construction technology, whatever you can build your own little mutual fund around and not have to select one or two names.

Just, you know, even cyber security, which we have in the street pro portfolio, you can put together building, construct a nice little portfolio for yourself. That could probably You know, beat out the S. P. 500 beat out the passive investing tools that are out there too. And the most important thing is about learning and education and understanding what you want,

[00:32:36] Lindsey Bell: I

 agree with that too. It's about education, but to tie something into, as you guys know, I'm on the board of a nonprofit called better investing. What better investing does is it teaches individuals through creating investment clubs, how to invest in stocks. And we've got really great tools that teach you what to look for rising earnings per share, rising rising sales.

Look at the balance sheet, look at the P E and it simplifies everything very, very nicely. But we as an organization are like, okay, if. People, you know, ETFs have done this amazing job of democratizing investing for individuals, making it a lot easier because it is a basket of securities rather than individual securities.

You, do get the benefit of diversification, right? But so we, as an organization, we're all about picking individual securities and building your own portfolio or mutual fund, whatever you want to call it. And so we, we have to like contemplate, like, what does that mean? For a business like better investing going forward too, because you have seen the retail investor.

We've seen more people come into investing, especially it was happening before the pandemic. And then the pandemic happened. There was a lot of technological trends happening. It was helping individuals. Commissions getting cut, things like that, that makes it a lot easier for the retail investor to invest.

But now it's like, you know, everybody's time strapped. And so is the ETF the easier way for, if you're just, you don't have a lot of assets and you just want to get your money in the market, is it the best way? Way for you, is that the best approach? ,

[00:34:10] Chris Versace: What if there was a better way?

Like what? Great answer. Great answer. So before I, I kind of share my thinking on this I, I will say that, you know, ETFs are a good vehicle, but like anything, there are some shortcomings that you have to be mindful of. Right? So you do need a certain number of constituents. Right, in order to have and utilize the ETF wrapper that tends to give rise sometimes to filler, right, for liquidity purposes, you know, and when you're thinking about a strategy, particularly when you move past some of the sector based strategies, when you're trying to refine something for more targeted exposure, you have to be mindful of, you know, filler in there, right, so some examples would be like, you know, there are a couple space ETFs that at one point had Netflix or John Deere in them, right, And you would sit there and you'd go John Deere Ag construction equipment.

Why are they in a space ETF? Just because they happen to have their own satellite network, right? For GPS mapping along with precision ag. So you would say, okay, that makes sense. But from a business perspective, does the having that satellite business really push on their revenue push on their profits? I think all 3 of us can say, no, I don't think so.

Right. So, so there are some shortcomings that you have to be mindful of. So. My answer to this is using an even smaller concentrated basket, right, called models. You can use 6 to 8 names to kind of capture something. The great thing about this is that there are a lot of platforms, you know, Schwab has this, Goldman has this and others.

That have fractional sharing capabilities. So Lindsey, if I've got, , 1000 and I want to spread it across, , 6 to 8 names, I can use the fractional sharing platform to do that. Whereas in the past, it just wasn't as easy. I would also say that there are certain things you might want to do.

That, you know, are too small for an ETF. Case in point, semiconductor capital equipment, right? Now, we at the StreetPro portfolio, we're invested in applied materials because of the CHIPS Act, because of increasing AI data center chip demand, pressuring Existing manufacturing capacity giving rise to incremental orders for semi cap equipment, but there's no ETF for that because there are not more than 20 companies that participate with high purity for that.

So, a model for that would be a very nice thing. So, I think that might be the way to go because you can get your 5 or 6 names have great exposure. You don't need to pick a litany of them. You don't get the hot dog filler that nobody wants. Right. And you can get easily invested. And the nice thing, Bob, is you had said you can kind of construct your own mutual fund.

Well, if you've got three or four baskets of six to eight names, bingo. There's your mutual fund. Mm-Hmm. .

[00:37:07] Bob Lang: That's right. And, nothing better than a little bit of diversification to eliminate some of that market risk and volatility in your portfolio.

[00:37:16] Chris Versace: I totally agree. And Lindsey, you, you gave a commercial for better investing.

All I'll say is over at Tematica Research, we've got about 20 models. So, anybody who wants to go take a look, go over to Tematica. substack. com. End of the message.

[00:37:29] Bob Lang: Those are my favorite ETFs, Chris. I love those ETFs. Those are great. Tomatica is great cocktail investing and great things. Hey, cut

[00:37:40] Lindsey Bell: the check, cut the check.

[00:37:41] Bob Lang: I appreciate, I appreciate the words. You and I are

[00:37:43] Lindsey Bell: gonna be, we're gonna be poor after this, all these. I had, I had to

[00:37:47] Bob Lang: be, I had to even it out, you know? I can't just, I can't just be nice to Lindsey and not be nice to Chris.

[00:37:53] Chris Versace: I know, I appreciate the word salad, Bob. No worries. Alright, folks, we'll be back in a minute to wrap it all up and put a bow on this week's episode.

Hang tight.

All right, you guys and listeners, we are back. Sorry, but all right, you guys, we once again covered a tremendous amount of ground. Lindsey, what was the one thing if you had to narrow it down to the one thing that kind of like, man, I really walked away thinking about this based on our conversation, what would that be?

[00:38:26] Lindsey Bell: What I would say is I'm going to tie it together that investment strategists, S& P 500 price targets don't matter, but earnings do matter. Maybe I'm biased.

[00:38:38] Chris Versace: Well, I think that's, I think that's right. I think that's right. Bob, you have anything to add to that?

[00:38:43] Bob Lang: I think that the discussion we had about the ETFs was fascinating, and I interesting data there about how much money is being attributed to ETFs and the growth rate.

is moving enormously. It's just a good sign that investors are starting to learn a little bit more about investing, becoming a little bit more educated and coming in with some knowledge about investing and putting money to work when they should.

[00:39:07] Chris Versace: I think that's right.

Lindsey, I'm gonna Dogpile on to what you had to say about earnings and such. And I would say that our conversation really across all of it today falls into the camp of you need to be an active investor. which means you need to know what you own. You need to know the positives to it, the shortcomings to it, whether it's an individual stock or perhaps you know, a shortcoming inside an ETF strategy.

Always, always, always know what you own. Do the homework. I hate to say it, folks, there's no easy way around it. And with that, that's a wrap for this week's episode. Be sure to check the show notes and the resources down below. Go look at explosiveoptions. net. See what Bob has to say. March on over and get Lindsey's The Shift.

And folks, you can always find me over at the Street Pro Portfolio. Thanks for listening. We'll be back with you next week.