Stocks of memes like Bed Bath & Beyond Inc. and AMC Entertainment Holdings Inc. could go wild again, but that doesn’t mean investors should avoid them altogether.
That’s according to Jeremy Siegel, professor emeritus of finance at the Wharton School at the University of Pennsylvania, who says such volatile stocks are gambling vehicles more than anything else, although speculative bets can still represent a small part of the portfolios of young investors.
Siegel, along with Jeremy Schwartz, global chief investment officer at WisdomTree, joined the latest “What Goes Up” podcast to discuss this, as well as the state of the economy, inflation and markets.
Below are the condensed and slightly edited highlights of the conversation. Listen and subscribe on Apple Podcasts or wherever you listen.
Q: In recent years we have seen the growth of retail traders as a significant force in the markets, what we call meme stocks. How do you think about that?
Headquarters : Take AMC, Bed Bath & Beyond, GameStop. What is their total market value? Half of 1% of shares or less. And even if you throw in a few more memes, you’re still getting an absolutely infinitesimal slice of the market. Now they can make it look like there’s a lot of fireworks – there’s a lot of movement. If you like the game and you like it, fine, go for it. A year ago, I said, somewhat cautiously, that I don’t think they will benefit long-term investors. They are game vehicles more than anything else.
But I still recommend for young people, if you want to play with 10% or 15% of your wallet in these games, fine. But put the other 85% into some sort of long-term indexed fund that will make sense to you when you finally grow up.
I don’t mean to minimize that when I say finally becoming an adult because some of them are adults. And besides, some people know how to play in these markets. I say, when you’re retired like me. Like I said, it’s fun to play with a serving. I tell my son to play with a portion. But don’t make it a big part of your portfolio unless you have an incredible surplus of money and can afford to lose 80% of it.
Q: What do you expect from the Fed for the rest of the year?
Headquarters : What they do and what they should do are not necessarily the same thing. At this particular point, I think what they should do is a little less aggressive. Given the data we have so far – again, as the data comes in, things can change – I don’t think it should be more than another 100 basis points through the end of the year.
Now a lot of people are surprised at my recommendation because I was definitely a super hawk and warned about inflation probably earlier than any other forecaster or economist. The reason I’m recommending the light side here is that when I look at inflation on the ground – not in the official statistics released by the Bureau of Labor Statistics, but in fact what’s happening in active markets, in markets where prices are determined every day, commodity markets, energy markets, and especially even the housing market — I see prices going down. I don’t really see a price increase.
That doesn’t mean we won’t see price increases in the consumer price index because the way it’s constructed is way out of step with what’s actually going on there. Nonetheless, I think the increase that has taken place so far and what the market is anticipating and being priced in has slowed the money supply considerably. In fact, the money supply has shrunk since March, which is almost an unprecedented event. And therefore, while there is inflation in the pipeline, my feeling is that we shouldn’t be too aggressive at this point. I see inflation peaking in the real world, although we will remain high in the statistics.
Q: You said recently that we are already in a mild recession — can you elaborate on that?
Headquarters : A sort of rule of thumb, a recession is two quarters of decline in real GDP. According to official statistics, we had it in the first and second quarter. And that’s what I meant. Now, I don’t think it’s going to be called a recession. The National Bureau of Economic Research, which is a private research organization, not the government, makes the official decision months later. And they look at much more than GDP.
But I was saying that it looks like we’re in an actual recession, if not an outright recession, a growth recession, which, by the way, appears to be continuing through this quarter. The estimates I get are between zero and one. Now we really only have data for July. Nevertheless, we have experienced an unprecedented decline in GDP while having robust labor market growth, which is absolutely unprecedented in history.
If we added 3.2 million jobs to the payroll and GDP fell, how is that possible? What are these people doing? Are they twiddling their thumbs or pretending to work from home eight hours when they work from home for four hours? I do not know. But we have something we never had before. And I mean 75 years of statistics, we’ve never had labor force growth and GDP decline before, and the magnitudes are absolutely staggering. And I think the Fed and the Biden administration should work on this problem of how do we have all these people, new hires, and yet a declining GDP. It’s a data productivity slump that’s unprecedented. And I mean, by almost orders of magnitude, we haven’t seen anything like it.
Q: Where do you think is the best place to invest right now?
Schwartz: One of the things that is getting a lot of interest is floating rate treasury bills. I would always be cautious over time. We might think that rates don’t have a long way to go, but with the curve inverted, you could get very good short-term rates and not take that duration risk. For example, our USFR Floating Rate Treasury Fund is now our largest ETF at over $7 billion. And that, I would say, is for the best play for the Fed and the bond market.
Within stocks there has certainly been a huge factor rotation from expensive growth stocks to value and no better than one of the original WisdomTree ETFs launched 16 years ago – DHS, high dividends – was significantly positive over the year. And that’s compared to shares of equal value. Value outperformed growth. Growth has lagged. The most expensive growth is the most lagging behind. But high dividends being positive – obviously energy is one of them, but it’s not just energy, it’s less than 20% energy – and so high dividend stocks in every sector outperform lower dividend stocks in each sector.
I think commodities and the dollar are very attractive. Because there was often a negative correlation and you thought you needed a lower dollar for commodities to do well. You could say that one of the things that’s suppressing gold is the very strong dollar and the higher interest rates you’ve had this year. But the dollar continues its momentum. It’s partly a rate swap.
When you look at, say, the pound and the euro, it’s actually trading more with the energy crisis. If you look at the pound specifically, its rates were going up and the pound was going down. And so there are a lot of interesting things in the dollar. We were one of the first to offer currency-hedged ETFs. You still haven’t seen any significant flows to these. You have seen flows to the dollar. Even this week, we’ve seen flows coming into the dollar, back to highs. Currency hedgers are still betting on Euro, Yen and all their traditional international funds, which surprises me. But the dollar has been very, very strong on higher Fed rates.
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