The Yeah But Bull Market (EP.356)

Episode Summary

Executive Summary: This episode covered market volatility, inflation persistence, the strange resilience of the U.S. economy, and how investor behavior has changed over time. The hosts argued that today’s pullback is a modest correction inside a broader “yeah, but bull market,” explored why auto and home insurance are driving inflation, and discussed how demographics, indexing, and consumer spending patterns continue to shape markets and the economy.

Main Topics: Market correction and the “yeah, but bull market” (Priority: 5/5): They framed the recent drawdown as a minor correction rather than a true bear market, noting how resilient equities have been despite geopolitical risks, sticky inflation, and higher rates. Inflation’s last mile and insurance costs (Priority: 5/5): A deep dive into why inflation remains sticky, especially in auto and home insurance, with causes including higher car prices, repair costs, distracted driving, bigger vehicles, and climate-related losses. Investor behavior, indexing, and asset allocation (Priority: 4/5): They discussed how passive investing and better advice vehicles may have stabilized household asset allocation, while criticizing index-provider announcement practices that invite front-running. Demographics, spending, and economic resilience (Priority: 4/5): The hosts argued that millennials and boomers may be key demand drivers, helping explain strong spending, travel, and overall economic activity despite higher rates and inflation. Housing market bifurcation (Priority: 4/5): They noted that high mortgage rates are still freezing parts of the housing market, but low-supply areas can still see bidding wars and sharp appreciation, creating a more segmented market. Wealth perception and complaints culture (Priority: 3/5): They reflected on how social media and constant comparison make even high-income households reluctant to feel rich, and why complaining has become a personality trait. Recommendations and media notes (Priority: 2/5): The episode closed with streaming and entertainment recommendations, including Civil War, Steve Martin’s documentary, and Ripley, plus comments on theater and streaming trends.

Key Arguments: The current market pullback is mild compared with a real correction or bear market; investors are still largely in a constructive long-term trend. Complaining about inflation has become socially rewarded, but the economy is still growing and many people are better off than the rhetoric suggests. Auto insurance inflation is not just corporate greed; it reflects higher vehicle prices, repairs, labor costs, bigger cars, riskier driving, and more severe accidents. Home and auto insurance are likely to remain elevated because the structural drivers—technology, vehicle size, climate losses, and behavior—are not quickly reversing. Passive/index investing may improve long-run outcomes, but public index rebalancing creates predictable front-running opportunities that could be reduced. Household asset allocation has become more stable since 2009, likely due to fee-based advice, ETFs, model portfolios, and target-date funds. The U.S. consumer remains surprisingly resilient: retail sales, travel demand, and spending on services remain strong. Many affluent households do not feel rich because wealth is highly relative and social media expands the comparison set. High mortgage rates are keeping housing unaffordable for many, but local supply conditions still matter, so housing performance will diverge widely by market.

Data Points: S&P 500 drawdown: Down 3.7% from recent highs - Described as the biggest drawdown seen so far in the current pullback S&P 500 from highs: Down 3.4% from highs - Used to argue the correction is still modest 10-bagger in the index: Starting in 2009 produced about a 7x total return; starting in 1997 produced a 10x total return - Illustrated how even broad index investing can eventually produce major gains Nvidia 10-bagger timing: About since spring 2020 - Demonstrated how quickly a mega-cap growth stock can compound Oil production ranking: U.S. #1, Russia #2, Saudi Arabia #3 - Highlighted U.S. crude output strength versus global concerns Oil price move since 2022 peak: Down 30% since hitting about $120 in spring 2022 - Used to show macro surprises despite wars and geopolitical risk Equity allocation in U.S. households: Rose from about 30% to 62% in the run-up to 2000; later fell to 40%; then back to 63% by 2007; down to 36% after the crisis - Vanguard discussion of household asset mix Current household mix stability: Roughly steady around a 60/40-like mix since 2009 - The hosts argued this reflects a structural shift in investing behavior Inflation expectations vs actual CPI: Expected 3.3%, actual 3.4% - Used to argue that calling it “hotter” is often just a small miss Inflation expectations vs actual PPI: Expected 0.3%, actual 0.2% - Used to discuss how small misses are treated as major narratives Auto insurance inflation: At a 40-year high in 2023 - Part of the explanation for persistent core inflation Insurance profitability: Many insurers losing 3 to 15 cents per premium dollar - A listener email explained combined ratios and insurer losses Home insurance costs: Average annual home insurance rose 20% between 2021 and 2023; another 6% increase projected in 2024 - Cited from Wall Street Journal reporting Retail sales: Warmer than expected - Interpreted as evidence of resilient consumer demand Foreign vacation intent: More than 1 in 5, nearly 1 in 4, plan a foreign trip in the next six months - Torsten Sløk chart on travel demand Two-year Treasury yield: Back near 5% - Used to show bond market expectations for stubborn inflation Ten-year Treasury yield: Around 4.7% - Part of the rates discussion Rich-household threshold: $400,000 income line; 2.6% of households earn this much or more - Discussed as a tax and identity issue State examples of $400k earners: Michigan under 2%; DC at 6.1% - Illustrated geographic concentration of high incomes Retirement number survey: $1.5 million overall; millennials $1.65 million - Northwestern Mutual survey on perceived retirement needs Church attendance discrepancy: Survey says 1 in 5 attend weekly; phone data suggests closer to 1 in 20 - Used as an example of survey response bias Movie theater performance: Civil War opened to about $26 million - Discussed alongside the value of IMAX/theater premium Housing finance stress: 30-year mortgage rates around 7.4% - Used to explain why housing affordability remains strained

Pivotal Quotes: "This is the yeah, but bull market." — Michael Batnick: A label for a market environment where every positive trend is paired with a reason for caution "Sometimes you just have to play the hand you’re dealt." — Ben Carlson: Used in a discussion about handling life, markets, and complaints without constant grievance "I don’t think of myself as rich. I think of myself as having worked really hard." — Unnamed Wall Street Journal interviewee: Example of how high earners reject the label ‘rich’ and frame income as labor rather than wealth

Implications: Listeners should expect continued market resilience but also persistent inflation in pockets like insurance and services. The episode suggests investors should stay disciplined, accept structural changes in household finance, and recognize that local housing and spending patterns will increasingly diverge.