Welcome to Prof. Hold on. Sorry, sorry, sorry, sorry, sorry. This is our cold open.
Welcome to Prof G Markets. Scott is still out. He's on spring break, but we have a very special episode for you today. Today we are discussing the market's reaction to the US-Iran ceasefire. And we're also looking at an update on big tech and also the halo stocks with the man who actually invented the term halo. This has been all the rage on Wall Street recently. It is the new investment trade, the new investment thesis in the world of AI. And the guy who created it is here. He's in the building. Josh Brown. Josh, thank you for joining us.
I am not in the building.
You're not in the building.
I am in the Hyatt Regency in Coral Gables.
Coral Gables. That's fun. You're on spring break, too.
Sort of. But I like to work as much as possible when I'm on vacation. So this is me vacationing on a podcast.
Yeah. Is this really work for you? I mean, you love this. No, you love joining this podcast.
I love you. I love you. That's the truth. I got to tell you, I say no to I don't know, a hundred things a month. But anytime you guys need me, Scott, Prof, Ed, I'm just I'm in. I love you guys.
We always need you and we really appreciate it. And you and I had a lovely dinner the other week as well.
Yeah, we had. What did we have? We had some ribeye.
I think we had the whole menu.
Very on brand.
It was a very good time. Well, we're very glad to have you on the show, Josh. And we want to get right into it because we know that you have some jet skis to attend to probably. Maybe you're doing some...
I have things to do, people to see. So the jet skis can wait.
Fair enough. All right. Well, let's start with our first story here. Last week's developments in Iran left investors trying to make sense of a rapidly shifting situation. First, President Trump threatened to wipe out the country. Then came news of a ceasefire, which was supposed to include reopening the Strait of Hormuz. The markets rallied in response, but within 24 hours, the strait was still jammed and confusion emerged over the scope of the deal, specifically whether it applied to Lebanon, where Israel had continued to strike Hezbollah. By the following day, stocks were retreating and oil was climbing again. So the details remain unclear, and the situation is still fluid, but one thing is clear. Trump has escalated dramatically again and then he has again stepped back from the brink. So all of this raises a key question for investors. How do you navigate an environment like this? Josh, stocks rose. People thought, okay, maybe the strait's open now. Maybe we have a deal. Maybe we have a ceasefire. Wasn't totally clear. What do you make of how the markets reacted? What do you make of the situation in Iran? What are we supposed to do about it as investors?
So paradoxically, you think about a professional hedge fund manager, someone who, as a stated premise, tells their clients, 'I am going to specifically navigate all of these geopolitical macro issues. I'm going to be on top of currency movements, commodity movements, oil price spikes, volatility spells, and stocks. I'll be involved in the rates market. I'm going to have a view on global GDPs by country, etc., etc.' That person is collecting a fee of two and twenty. They are professing to have the ability to do this on a consistent basis. Putting aside the madness of how impossible that sounds, I suppose there are a handful of people who have demonstrated that they can make these calls repeatedly or not lose too much money when they make a call that goes wrong because they know how to hedge and it's their life's work. It's a 24-hour, 7-day-a-week profession. Most of your audience, Ed, are not sitting in that seat. Most of the people listening to us right now do not have that responsibility. They haven't told a third party that they are managing money for and charging a lot of money for that privilege that they can do that. So my answer to your question would be, why try? So the paradox of the individual investor is that by not having that responsibility, they actually are in a pretty good position to ride this out and not react to everything that happens because no one's watching. No one's paying attention. You have a brokerage account, maybe you have a joint account with your husband or your wife, you've got an IRA, you've got your 401k, maybe you have a portfolio somewhere where you're a little bit more active. That's fine. You're not being graded. You're not being judged. No one is expecting you to know the next move that Trump will make, the next 15 points up or down in WTI crude. It's not part of your purview. You don't have to do it. You obviously can't do it, but it's not the type of thing where you need to act like you have any sort of edge. And so I think this is the type of market where regular investors are in a much easier position than the type of investor who is claiming, 'I'm going to get this stuff right all the time. I'm going to be at the forefront of all these trends and changes and juxtapositions and I'm going to figure out the puzzle.' Don't bother. So I know it sounds glib. So then, like, what do you actually do? I think there's a couple of things. The first is set the rules in advance. Now is not a good time, right? In the heat of the moment, now is maybe not the best time to decide all of the things that you're going to do in your portfolio. But when things are calm, take that opportunity to say, 'Okay, things are pretty good.' Let's say January this year. I understand that every year there's a 14% decline in the market on average. There's some sort of a freakout. Last year it was tariffs. This year it's Iran. Next year it'll be an alien invasion. How do the rules of my portfolio work? When do I rebalance? When do I get more aggressive? Hopefully it's into a sell-off, not into a rally. When do I make decisions about global allocation or do I not make those decisions? How do I want to tilt my portfolio? Which factors do I want more exposure to and which do I want less? Has anything in my life changed where I have to revisit my investment policy statement? Do I even have an investment policy statement or do I just wake up every day and think I'm supposed to try to make money? So when you do these things in advance and then you stick to them, you stick to these rules, you can get through a period of time like this where every day is as uncertain as the last. So one day we're going to wipe out an ancient civilization and it will never come back again. And the next day, China steps in, urges Iran to agree to certain things so that the president has something he can tweet that represents a de-escalation. You get the biggest fall in crude in a really long time and an explosion to the upside in stocks. And then overnight, like minutes later, Iran is claiming that we're violating the ceasefire. And here we go again, and the whole cycle repeats. Why bother? You have no edge. So I think that I have spent most of the last 15 years aggressively counseling people to not pretend that they're in the seat and that they have this responsibility of nailing the crisis, calling the top, calling the bottom. It's unnecessary. The returns of investment markets have been spectacular. None of this sort of tap dancing has been necessary. And it does seem especially ridiculous in this context where not even the people closest to him can make any predictions or understand what's going on in his head. And this is something that I said last week, like when it comes to what's happening in that guy's mind, and yes, he has a lot of power and it does matter, and if you did know what was going to happen, you'd probably make a lot of money, but no one knows more about what he's thinking than you do because he's a complete bowling ball. Like, there's no way to actually really predict it. Perhaps unless you're in the room with him like 10 minutes before he makes the decision, in which case there might be a lot of people who actually are making a lot of money on that, and we can get to that in a second, and we probably should, because there was some kind of sketchy trades that we saw during the week in the buildup to the ceasefire quote deal.
But just to push back on your point a little bit. So I'm totally with you. Like, no one knows what's going to happen here. And the idea that you have an understanding of what's really going on in the Strait of Hormuz, you really know what Trump's going to do, and I'm going to trade on that, that seems a ridiculous premise. However, it is possible, and this is I think the thing to consider, or I guess this is the question. Is it possible that the events this week have structurally changed something that may adjust your longer-term investment strategy going forward? Maybe it's that you now believe that we live in an extremely volatile world, that there are now threats of or implicit threats of nuclear warfare, and that wasn't really the case before. Or maybe you believe that we now do live in a world where oil prices are going to be extremely volatile, more so than we've seen in the past, or at least that maybe the insurance premiums and the risk premiums to get oil into your nation, into your car, into the tank, that those are going to go up, and therefore this is just we're paying a higher premium for energy in general. Do you believe that we are at this point that we must contend with the possibility that something has structurally changed here, or are we living in more or less the same world as we were last week?
These are all very real risks, but risk is the reason why you get paid, right? If there's no risk in the markets, then the multiple on earnings would be 100 times earnings because, you know, why just pay 90 times earnings? You could pay 100 times earnings. There's no risk. So the risk is the reason we get paid. And I would argue a couple of things. A lot of these risks are in the process of being baked into the cake and have been for quite a long time. It's not as though every stock is at an all-time high. A huge... when you think about the Russell 3000, so this is the preponderance of all US stocks. Basically, if you're not in the Russell 3000, you basically don't exist. So that is the Russell 2000, which is small caps, and the Russell 1000, which is large and, you know, mega-large and some mid. So this is the market. A huge portion of the Russell 3000 is negative year-on-year. We have a gigantic percentage of stocks that are in 20% plus drawdowns, or what you and I would refer to as a bear market. We've had multiple compression in the market this year. So most of the mega-cap tech stocks peaked in November. Market overall didn't peak until January, and since then we have seen the forward earnings multiple fall from 23 to 19. So we were 23 times earnings, which is, you know, fairly rich. I wouldn't suggest 19 is cheap, but what I would suggest is a lot of risk is being baked in. How is it possible that the S&P 500 is only down slightly on the year, but the multiple to earnings has fallen almost 20%? Because earnings have been growing while stocks have been treading water or falling. And so, arguably, it's less risky now than it was three months ago. I know that sounds insane, but, you know, we're selling at a lower multiple from an investment perspective, right? All right. From an investment perspective, I would also point out, and this is really the key thing, earnings are growing, and not just for the seven tech stocks that everyone talks about, earnings are growing in most sectors in the S&P 500. And really, like, the war, whether it goes on for three months or three weeks or three days or three years for that matter, the war is going to resolve itself. There's nothing as an investor that you can do to speed that process up. And there's no possible way that you can truly understand the depth of it, the extent of it, the duration of it. If you have earnings growth, which is what we have, and you have interest rates that are not rising, you've got, like, supportive interest rates. Many people think that they're too high. Some people think they're just right because of the threat of inflation being passed through the prism of higher energy prices. But if you have an interest rate picture like the one we have and you have an earnings growth outlook like the one that we have, once this war does come to an end, stocks probably resume their upward trend. That's been the history. So now you think about a global portfolio away from just the US market. Year-to-date, as of the close yesterday, emerging markets are up 5%. Developed markets ex-US, so the way to think about that is Europe and Japan, up 2.4%. Europe itself is flat. The S&P 500 is negative 3%. Now we look at things on a rolling one-year basis, which is more important. Year-to-date is arbitrary. On a rolling one-year basis, developed markets ex-US are up 48%.
48%. Emerging markets are up 55, the US is only up 34. So investors with global portfolios looking back at their rolling one-year return, they're probably like, 'What crisis? Like, what is everyone carrying on about? I'm making tons of money still. I feel pretty good.' I think the US underperformance is the externality of what you're talking about. The political instability, the uncertainty about Trump's next move, etc. I think that's already being reflected in the fact that international stocks are now outperforming US stocks on a one-year basis. I know it sounds crazy, but it's been a really long time since we've been able to say that.
We'll be right back after the break. And if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts.
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We're back with Prof G Markets. This does put Europe in a more vulnerable position than the US. But it is interesting to your point, like the way that multiples have expanded in other markets compared to the US would kind of say a different story. Everyone's saying, oh, the US is insulated from this. But actually if you look at the one year, what we've seen in terms of multiple contraction in the US versus multiple expansion in other markets, it might say a different story.
To just put a button on that, it's systematic. So, of course, there are risks to Europe. There are risks to the United States. Some of those are risks in common, some of those are idiosyncratic to the particular region. But I want people to understand this because I know the average person, like, they'll look at the Nikkei, they'll look at maybe the FTSE, like, they'll look at a European index, Japanese index, but they won't really understand the extent to which this is happening. When you look at international stocks versus US, every version of international stocks are beating US stocks. This is year-to-date. Okay. Low volatility international up 8.5%. 3.7% in the US. International growth up 5.5%. That's versus -2% in the US. Momentum international 9.2% versus 2% year-to-date versus 1.3% US. Quality, so the best companies, international plus 7.1%, US plus 1.8%. Shareholder yield, this is a factor where we take dividend plus buyback, 6.6% international versus 3.3% US. That's a double. Value, international value stocks plus 6.4 versus US plus 4.5. It almost doesn't matter what stocks you buy, what style, what strategy, if you are in any way at least equally weighted globally relative to the benchmark to US, your portfolio looks amazing right now.
And it is that global rotation that we were talking about last year. Everyone was saying it was the sell America trade, which wasn't quite right because the S&P continued to rise, but it was really like more of a hold America trade and then add some internationals into your portfolio.
JP Morgan has emerging market earnings per share growth for this calendar year at 40%.
And then you say, why are emerging markets outperforming or why are multiples expanding in emerging countries? Isn't the world a risky play? Yeah, everyone understands those risks and these stocks were too cheap anyway, right? And so you get the double benefit of earnings growth plus multiple expansion. I'm telling you, if EM can grow earnings 40% this year, we're going to be doing shows at the end of this year with people saying, 'Oh, why don't I own more emerging markets?' We're not there yet because the things I'm pointing out to you, nobody knows this stuff except for pros.
Your audience is going to look at their portfolio and say, 'What the hell did I miss?'
Well, to be fair, we have been making that claim for about a year now. And people said that we were US doomers and that we had TDS, etc., and we tried to push back on that as much as we can. But I mean it has been an incredible trade and it does make you consider the question, like, how would the US stock market be performing right now if we didn't have tariffs and if we didn't have a war with Iran emerging? You'd have to think that the stock market would be absolutely ripping because of that incredible earnings growth, which we will get to in a moment in our second story.
I just want to, as we wrap this up, get your reactions to another development in this insider trading saga that we continue to see here. $950 million worth of oil futures was sold just a couple of hours before Trump announced that ceasefire with Iran. I think that is probably less concerning because I think it's feasible that these traders were actually just thinking like he is going to taco, and I think that was maybe quite reasonable in the context of the other scandals that we've seen. It does raise some cause for concern. But then in the prediction markets, three accounts made more than $600,000 betting on the ceasefire. They are the same accounts that correctly bet on the date and the timing of the US attacks on Iran. We don't know who those accounts are because it appears that our law enforcement just has no interest in investigating this. In fact, we saw that actually over at the SEC there were attempts made to investigate this stuff and then the woman who tried to make those attempts was ousted, dismissed from the position. We saw similar things happening over at the FTC, but that's maybe a separate story. I just want to get your reactions to this insider trading issue because I mean as an investor it seems as though there is a growing number of people who are close to the president and we don't know who they are and we can't definitively say that it is exactly happening as the way that we are claiming, but it seems that there's cheating and I just wonder what you make of that and how it affects your faith in markets and this game of investing that we have dedicated our careers to.
I read the same articles you do. So I don't have any insight into what happened, whether or not it happened in the first place. I think one of the reasons you like me and I think one of the reasons I like you, we're a little bit of a yin and yang. I think where you're very idealistic, I'm extraordinarily cynical. And I think, and I'm just, this is like my 28th year on Wall Street. I just think this stuff goes on whether we're aware of it or not, everywhere around the world, all the time. Republicans, Democrats, old people, young people, it's human nature where people have an information advantage, they will seek to do something about it. And we have no idea.
Well, upset me to the point of like I can't carry on with my day? Not really. That's not what I'm saying. Does it upset you at all?
I mean, I would prefer it if it didn't exist, but I think we have to acknowledge, unfortunately, this is the world we live in. And the problem is this instantly becomes politicized. So there will be people that look at this and say the MAGA world, they're tipping each other off and they're trading on war developments. And maybe there'll even be congressional investigations. I have no idea. But the problem is the other side will say, 'Well, oh, you're talking about my team. What about your team? Why is Nancy Pelosi a better trader than Stanley Druckenmiller?'
So you almost like it. I don't want to say it's a waste of time even talking about it. I think the way I would phrase it is like, you're not going to, if you're on the red team, you're not going to convince the blue team that they've ever done anything wrong. And if you're on the blue team, you're not going to convince anyone on the red team. I'm on the green team.
