The Year of Disappointment (EP.303)

Episode Summary

Executive Summary: The episode mixed market commentary with personal banter, emphasizing that 2023’s market backdrop is calmer than 2022, with midterm-election-year drawdown patterns, low volatility, and a narrow set of mega-cap stocks driving returns. The hosts argued the labor market remains strong despite inflation, questioned the Fed’s rate-hike logic, discussed housing and commercial real estate resilience, and ended with reflections on vacation, aging, cars, movies, and popular culture.

Main Topics: Market volatility and midterm-year seasonality (Priority: 5/5): The hosts discussed charts showing midterm election years often coincide with corrections, but that markets tend to recover after uncertainty clears. They also noted the VIX is near a one-year low despite banking turmoil. Bear market status and index performance (Priority: 5/5): They reviewed drawdowns across major U.S. indexes, noting that the Russell 2000 and Nasdaq remain in bear markets while the Dow is only modestly below its highs, underscoring a still-boring and uneven market environment. Active management, concentration, and diversification (Priority: 5/5): A Wall Street Journal statistic showed many active managers struggled to beat benchmarks, while Apple, Microsoft, and Nvidia drove a large share of index returns. The hosts used this to reinforce the case for diversification. Labor market strength versus recession fears (Priority: 5/5): They argued the U.S. is not in recession, citing strong job growth and record-high prime-age employment. They also connected the rapid recovery to inflation as the trade-off for avoiding a prolonged downturn. Fed policy, wages, and inflation (Priority: 4/5): The hosts questioned why the Fed is focused on labor-market weakness when wage growth is already slowing and not the main inflation driver. They suggested fiscal tools, not just rate hikes, may be more appropriate. Housing, commercial real estate, and wealth concentration (Priority: 4/5): They discussed tight housing supply, stubborn prices, and the idea that commercial real estate stress is largely an office problem rather than a system-wide collapse. They also reflected on how wealth is concentrated among older households and boomers. Personal/vacation and culture commentary (Priority: 2/5): The episode included stories about Airbnbs, expensive food, car leases, a new Jeep, Succession, Dave, John Wick, and the Mario movie, providing lighter color and illustrating their everyday financial lens.

Key Arguments: Markets often react to uncertainty around elections and policy clarity can support a rebound afterward. A low VIX and lack of fresh shocks suggest markets are calmer now, even with banking stress still in the background. Diversification remains the most reliable risk-management tool because a small number of stocks can dominate index returns. The U.S. labor market is too strong to characterize the economy as being in recession. Inflation is the cost of achieving a rapid post-pandemic labor-market recovery; a slower recovery likely would have meant more prolonged hardship. The Fed seems to be using rate hikes to suppress demand and weaken the labor market even though wages are not the primary inflation driver. Housing remains supply-constrained, making a broad price collapse unlikely without a major credit event. Commercial real estate should not be viewed as a single monolith; offices are vulnerable, but most other property types are holding up. Wealth is heavily concentrated, so affluent enclaves and boomers can appear far richer than typical median household data suggest.

Data Points: S&P 500 level: 41.11 - Timestamped market level mentioned early in the discussion Russell 2000 drawdown: -26% from peak - Bear-market update Nasdaq drawdown: about -20% from peak - Bear-market update S&P 500 drawdown: down 12%+ from peak - Bear-market update Dow Jones drawdown: down 6%+ from peak - Bear-market update Active large-cap funds beating benchmark (Q1): 1 in 3 - Wall Street Journal stat on early-year performance Active large-cap funds beating benchmark (2022): 57% - Wall Street Journal stat on last year’s performance Active large-cap funds beating benchmark (2007): 71% - Highest rate since 2007 Apple, Microsoft, Nvidia share of S&P 500 return: about half - Bank of America statistic cited in the discussion Active funds underweight Apple: 40% underweight on average - Positioning explanation for relative underperformance European EBIT growth vs. prior year: 20% - Verdad comparison of Europe versus Nasdaq fundamentals Nasdaq EBIT growth vs. prior year: 5% - Same comparison European EBIT margin change: 12% to 11.7% - Mild margin compression in Europe Nasdaq EBIT margin change: 8.7% to 7.7% - Greater margin compression for Nasdaq companies US streak of outperforming international developed stocks: 14.2 years - Longest streak in the JPMorgan chart discussed International outperformance streak: 1.3 years - Current streak after the U.S. streak ended Reverse repo/financial plumbing discussion: $17 trillion in total deposits - Context for bank deposit migration Tail-risk fund hypothetical return: 3,600% - Claim attributed to Universa and then debunked as an overstated calculation Tail-risk fund assets under management: $6 billion - Used to show how impossible the claimed return would be if taken literally Hypothetical value if 3,600% were real: $217 billion - Illustrative math from the myth-busting segment Survey: U.S. in recession?: 55% yes / 45% no - Compound audience poll Prime-age employment rate: 80.7% - Highest rate since May 2001 Prime-age women employment rate: tied all-time record high - Highlighted as a post-pandemic recovery milestone Prime-age employment recovery timing: record time - Recovered faster than after the Great Recession, which took over 12 years Wage growth (3-month annualized): 3.2% - Nick Bunker labor-market update Production worker wage growth: 4.2% - Same labor-market update Inflation exceeding wage growth: 22 consecutive months - Used to question the Fed’s labor-market focus New listings decline: -21.8% year over year - Redfin housing supply data Homes going under contract within two weeks: about 50% - Evidence of demand absorbing scarce supply Commercial real estate investment mix: 12% offices, 4% malls - Bill McBride’s point that offices are a minority of CRE exposure Hotel occupancy recovery: back near pre-pandemic levels - Example supporting the idea that much of CRE is fine Average Social Security benefit: $1,825 per month - Wall Street Journal retirement discussion Median household net worth age 65-74: $266,000 - Used to illustrate that median older households are not uniformly wealthy Median household net worth age 75+: $250,000 - Same retirement/net worth discussion Median household net worth age 55-64: $212,000 - Same retirement/net worth discussion Top 1% wealth share: about one-third - Fed wealth concentration data Top 10% wealth share: about two-thirds - Fed wealth concentration data Car payments over $1,000/month: 17% of financed new vehicle purchases - Nate Karasi car affordability statistic Car payments over $1,000/month in Q1 2021: 6% - Comparison showing rapid increase Average car payment: $730/month - Car affordability discussion Big investor share of housing market: down 80% - John Burns data on institutional buyer retreat Big investor transaction review sample: 581,000 transactions - John Burns Research & Consulting review

Pivotal Quotes: "Diversification is the only true risk management in investing." — Ben Carlson: Discussion of how few stocks drove much of the market’s gains "Inflation is a price we paid for full recovery." — Ben Carlson: Argument that a rapid labor-market rebound came with an inflation trade-off "This is not a recession. Unequivocally, this is not a recession." — Michael Batnick: Strong stance during the recession debate

Implications: Listeners should expect a market environment still shaped by concentrated leadership, tight housing supply, and a strong labor market. The episode suggests caution on recession calls, skepticism toward simplistic Fed narratives, and a continued need for diversification and patience.