{"id":29,"date":"2024-09-17T17:50:03","date_gmt":"2024-09-17T17:50:03","guid":{"rendered":"https:\/\/www.1911trust.com\/blog\/?p=29"},"modified":"2024-09-17T19:39:58","modified_gmt":"2024-09-17T19:39:58","slug":"ignore-the-noise","status":"publish","type":"post","link":"https:\/\/www.1911trust.com\/blog\/2024\/09\/17\/ignore-the-noise\/","title":{"rendered":"Ignore The Noise"},"content":{"rendered":"<div style=\"font-style:italic;font-weight:400;\" class=\"wp-block-post-date\"><time datetime=\"2024-09-17T17:50:03+00:00\">September 17, 2024<\/time><\/div>\n\n\n<div style=\"height:17px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p><em>We are trying something new here at 1911 Trust \u2013 a real time, short form blog to share our insights and thoughts on the market. These will vary in length and topic, and we hope you find these pieces to be informative as you follow the markets and make investment decisions. If there are specific topics you are interested in hearing more about, please let us know and we will do our best to incorporate into future posts.<\/em><\/p>\n\n\n\n<p><em>Today&#8217;s post: lessons from Bill Belichick that can be applied to investing, and 5 key data points to watch in today&#8217;s market.<\/em><\/p>\n\n\n\n<!--more-->\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p>With summer now turning to fall, and football season now in full swing, today\u2019s post will feature a key lesson I learned in my first job. Before I embarked on a career in investing over a decade ago, I was very fortunate to spend 4 years working for Bill Belichick and his staff in Football Operations for the New England Patriots (followed by one year as an assistant coach for Harvard).<\/p>\n\n\n\n<p>Despite being one of the lowest people on the totem pole in the Patriots organization at 22 years old, I learned a lot from spending so much time in the most successful professional sports franchise in the country, and many of these lessons have paid dividends in the investment world.<\/p>\n\n\n\n<p>Each day when we entered the facilities at One Patriot Place, we were greeted by a sign that laid out four requirements when you work for the Patriots:<\/p>\n\n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n<p style=\"font-size:18px\"><em><strong>When you come here:<\/strong><\/em><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<ol class=\"wp-block-list\">\n<li><em>Do your job<\/em><\/li>\n\n\n\n<li><em>Work hard<\/em><\/li>\n\n\n\n<li><em>Be attentive<\/em><\/li>\n\n\n\n<li><em>Put the team first<\/em><\/li>\n<\/ol>\n<\/blockquote>\n<\/div><\/div>\n\n\n\n<p>Great lessons to live by for anyone working on a high functioning team in any industry, and pieces of advice that I have shared with countless analysts that I have coached and mentored over the last decade.<\/p>\n\n\n\n<p>While Coach Belichick is perhaps best known for the phrase \u201cdo your job\u201d, what I want to talk about today is the sign we read when we left the building each night:<\/p>\n\n\n\n<p style=\"font-size:18px\"><em><strong>When you leave here:<\/strong><\/em><\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\">\n<ol class=\"wp-block-list\">\n<li><em>Don\u2019t believe or fuel the hype<\/em><\/li>\n\n\n\n<li><em>Manage expectations<\/em><\/li>\n\n\n\n<li><em>Ignore the noise<\/em><\/li>\n\n\n\n<li><em>Speak for yourself<\/em><\/li>\n<\/ol>\n<\/blockquote>\n\n\n\n<p>I will start with \u201cspeak for yourself\u201d, partially as a compliance disclaimer \u2013 the opinions set forth in this post, as well as all future posts, are solely my own opinion and do not necessarily represent the opinions of The 1911 Trust Company.<\/p>\n\n\n\n<p>In today\u2019s investment world, the 3<sup>rd<\/sup> requirement from Coach Belichick, \u201cignore the noise\u201d, is becoming ever more important to achieving one\u2019s financial goals. We are inundated daily with more data points, more media coverage, more \u201cexperts\u201d calling for the next financial crisis, and more reasons to abandon a disciplined, long-term oriented investment strategy in favor of repositioning for the risks and opportunities in front of us at this very moment.<\/p>\n\n\n\n<p>Over the last 5 years, we have not been short on near-term noise and volatility in markets. COVID lockdowns, a mini-bubble in \u201cstay at home\u201d beneficiaries, the 2020 election, the reopening trade, inflation, rising interest rates, calls for a recession, Russia\/Ukraine, regional banking crisis, commercial real estate crash, Israel\/Hamas, and more calls for a recession.<\/p>\n\n\n\n<p>After all of this, we now have another tightly contested (according to the polls) presidential election in November. The hype machine is heating up, and we will hear from both sides why one candidate is better for the markets and economy than the other candidate.<\/p>\n\n\n\n<p>Investors will be well served to ignore the noise and stick to the plan. <strong>Over the last 5 years, despite all of the risks laid out above (including the 2020 election), the S&amp;P 500 has returned +83% and the Nasdaq has returned +137%. <\/strong>None of these \u201cblack swans\u201d derailed the market for any more than a year.<\/p>\n\n\n\n<p>We get paid to analyze the markets and have opinions, and simply saying \u201call of this is noise\u201d can feel unsatisfactory. While our team analyzes hundreds of datasets and viewpoints (some of which we will share in future posts), I will lay out the top 5 indicators that I am watching to determine the near-term path for markets and the economy, and what these indicators are telling us now. We can place others (including election rhetoric) into the \u201cnoise\u201d category for the time being (of course, this can evolve over time).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">#1 &#8211; People are spending money<\/h2>\n\n\n\n<p>Retail sales are growing at a 5%+ clip over the last year, which is meaningful as consumption is 70% of US GDP.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"562\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/retail-sales-1024x562.png\" alt=\"\" class=\"wp-image-30\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/retail-sales-1024x562.png 1024w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/retail-sales-300x165.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/retail-sales-768x422.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/retail-sales-624x343.png 624w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/retail-sales.png 1067w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">#2 &#8211; People can continue to spend money because America is near full employment <\/h2>\n\n\n\n<p>The unemployment rate, at 4.2%, is low by historical standards, albeit slightly above where it was 2 years ago when we had a severe labor shortage.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"502\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/unemployment-1024x502.png\" alt=\"\" class=\"wp-image-31\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/unemployment-1024x502.png 1024w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/unemployment-300x147.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/unemployment-768x377.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/unemployment-624x306.png 624w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/unemployment.png 1248w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">#3 &#8211; Corporate earnings remain strong which is a positive sign for the labor market<\/h2>\n\n\n\n<p>The S&amp;P 500, an index of the 500 largest publicly traded companies in the US, grew their profit by over 10% in Q2. This is the best growth rate in over 2 years, so there is not a lot of pressure for businesses to lay off workers.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"975\" height=\"534\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/sp-earnings.png\" alt=\"\" class=\"wp-image-32\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/sp-earnings.png 975w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/sp-earnings-300x164.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/sp-earnings-768x421.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/sp-earnings-624x342.png 624w\" sizes=\"auto, (max-width: 975px) 100vw, 975px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">#4 &#8211; Inflation continues to decline<\/h2>\n\n\n\n<p>Inflation has been a challenge to the global economy over the last 3 years, which has created concern among investors that the Federal Reserve would need to engineer a recession via higher interest rates to slow down the rise in prices. Over the last 18 months, inflation has declined from 9.1% (mid-2022) to 2.6% today. This downward move in inflation is allowing the Federal Reserve to finally lower interest rates, which tends to boost economic activity.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"683\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/inflation-1024x683.png\" alt=\"\" class=\"wp-image-33\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/inflation-1024x683.png 1024w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/inflation-300x200.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/inflation-768x512.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/inflation-624x416.png 624w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/inflation.png 1248w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">#5 \u2013 While corporate earnings are strong, the valuation of the market is fairly elevated<\/h2>\n\n\n\n<p>The S&amp;P 500 Price\/Earnings multiple, which is a measure of how expensive the market is relative to its profit level, is fairly elevated at 20.5x earnings. Before the dot-com crash of 2000, the NASDAQ (not pictured), which tracks faster growing innovative companies, traded at 80x earnings in 2000 vs. 25x today. The S&amp;P 500 traded at 24x forward earnings on the eve of the dot-com crash. The S&amp;P 500 would need to appreciate by 20% from here, with no earnings growth, to reach this level of valuation:<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"684\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/pe-ratio-1024x684.png\" alt=\"\" class=\"wp-image-34\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/pe-ratio-1024x684.png 1024w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/pe-ratio-300x200.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/pe-ratio-768x513.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/pe-ratio-624x417.png 624w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/pe-ratio.png 1298w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Additional context on valuations is warranted<\/h2>\n\n\n\n<p>Today\u2019s market features much higher quality businesses than the 2000 dot-com bubble. In 2000, 28% of large cap stocks were unprofitable vs. just 4% today, and other measures such as free cash flow, profit margins, and return on equity are much better today than in the past.<\/p>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"567\" height=\"337\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/profitability.png\" alt=\"\" class=\"wp-image-35\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/profitability.png 567w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/profitability-300x178.png 300w\" sizes=\"auto, (max-width: 567px) 100vw, 567px\" \/><\/figure>\n\n\n\n<p>While elevated valuations could lead to somewhat lower long-term returns, valuations are not a great indicator of returns in the near-term (in other words, selling stocks because the market valuation is high doesn\u2019t always work). There is a 7% correlation (out of 100) between the P\/E ratio and 1 year returns, and only a 26% correlation between the P\/E ratio and 5 year returns.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"688\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/valuation-correlation-1024x688.png\" alt=\"\" class=\"wp-image-36\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/valuation-correlation-1024x688.png 1024w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/valuation-correlation-300x201.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/valuation-correlation-768x516.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/valuation-correlation-624x419.png 624w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/valuation-correlation.png 1248w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p>Nearly every market participant has heard the phrase \u201cbuy low, sell high\u201d. While that is a good place to start (better than buying high and selling low), unfortunately it is not that easy as a long-term investor with real financial goals. Sitting in cash waiting for a market crash can lead to years of forfeited returns in one&#8217;s portfolio. Data from JP Morgan shows that investors historically have not needed to fear a market that is at all-time highs. Their analysis points out that forward market returns are actually higher when you invest at an all-time high than if you invest on any other day in the market. While we are not advocating that anyone \u201cback up the truck\u201d and pile into stocks at these levels, we are also not running for the exits either.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"575\" src=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/buy-at-ATH-1-1024x575.png\" alt=\"\" class=\"wp-image-38\" srcset=\"https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/buy-at-ATH-1-1024x575.png 1024w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/buy-at-ATH-1-300x168.png 300w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/buy-at-ATH-1-768x431.png 768w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/buy-at-ATH-1-624x350.png 624w, https:\/\/www.1911trust.com\/blog\/wp-content\/uploads\/2024\/09\/buy-at-ATH-1.png 1381w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\">Putting it all together&#8230;<\/h2>\n\n\n\n<p>The economy generally looks pretty healthy, albeit slowing from overheated levels 2 years ago. I remain fairly constructive on the market today, although slightly less bullish than I was 12-18 months ago when valuations were lower. If the unemployment rate rises from this level, corporate earnings disappoint, or if the downward path of inflation reverses, that would be a cause for concern. There is less room for error for the stock market given valuations, but as long as the economy remains stable, and absent any macro shocks, the market can continue to deliver at least average rates of return over the coming years.<\/p>\n\n\n<div style=\"font-style:italic;font-weight:600;\" class=\"wp-block-post-author-name\">Alex Raffol<\/div>\n\n<div class=\"wp-block-avatar\"><img alt='Alex Raffol Avatar' src='https:\/\/secure.gravatar.com\/avatar\/9b1170bbc2469a789d441625b05b843338f5d65bffdbd37b4521e10f819495c3?s=96&#038;d=mm&#038;r=g' srcset='https:\/\/secure.gravatar.com\/avatar\/9b1170bbc2469a789d441625b05b843338f5d65bffdbd37b4521e10f819495c3?s=192&#038;d=mm&#038;r=g 2x' class='avatar avatar-96 photo wp-block-avatar__image' height='96' width='96' \/><\/div>\n\n<div style=\"font-style:italic;font-weight:400;\" class=\"wp-block-post-author-biography\">Alex is the Chief Investment Officer at The 1911 Trust Company.<\/div>\n\n\n<div style=\"height:100px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>We are trying something new here at 1911 Trust \u2013 a real time, short form blog to share our insights and thoughts on the market. <\/p>\n<p>In our first blog: lessons from Bill Belichick that can be applied to investing, and the 5 key data points to watch in today&#8217;s market.<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5],"tags":[],"class_list":["post-29","post","type-post","status-publish","format-standard","hentry","category-insights"],"_links":{"self":[{"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/posts\/29","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/comments?post=29"}],"version-history":[{"count":35,"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/posts\/29\/revisions"}],"predecessor-version":[{"id":112,"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/posts\/29\/revisions\/112"}],"wp:attachment":[{"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/media?parent=29"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/categories?post=29"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.1911trust.com\/blog\/wp-json\/wp\/v2\/tags?post=29"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}