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Good morning everyone. We wanted to welcome you TO Wealth Crossing’s 2026 Mid Year Market Review. I’m Mitchell Crowder, an advisor at Wealth Crossing and head of the investment committee. We’re excited to have everybody join us today.
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We’re happy to be welcoming Apollo Lupescu. Apollo is a vice president at Dimensional Fund Advisors, where He started in 2004 after finishing his PhD in economics and finance at the University of California, Santa Barbara.
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During his tenure at the firm, Apollo has gained experience in a wide variety of practical subject matters. He’s currently dimensional secretary of explaining stuff. In his role, he frequently presents around the country and the world at financial advisor professional conferences and individual investor events.
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Apollo has, the unique ability to convey the technical aspects of investing in a manner that is both understandable and relatable to investors with varying levels of financial knowledge. Before we got started, want to go through a few logistical items.
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We’re trying to make this as conversational as possible and kind of a bit of a town hall. So please ask your questions as we go and put them in the, in the chat at the bottom and we’ll try to get to as many as we can. Another piece is in the top right of your, your screen.
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You should have some view options. We recommend doing speaker and full screen so that you can see all the, all the items Apollo’s sharing, without having to click through and make sure everything’s visible for you. So, I think with that we should be ready to get started.
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Apollo, I guess, just wanted to start with, kind of give us a quick recap of markets in 2026 and what we’re seeing so far this year. Well, first of all, thank you so much for the invitation, to be part of the webinar. And thanks to everyone for, taking the time to attend. And the first half, I it’s been, it’s been kind of interesting because Mitchell, we had so much going on.
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I we had, we started the year with, you the US Taking a president out of Venezuela and bringing him to the US and then we had a war and then we had a Fed chairman. And there’s so much that happened. We had decisions by the Supreme Court. So much that happened over the first half. And if you go back to the end of the first quarter, I think a lot of market participants were disappointed.
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In fact, The S&P 500, which is a measure of the US stock market, Was down by about 4.3% through the first quarter. And if you remember there was a lot of anxiety. There was just. The war was just started, inflation was picking up, gas prices was going up.
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So a lot of investors were a little bit nervous about what lies ahead. And what’s interesting is that, that if you go back a year before, in 2025, we had a situation with tariffs and other anxieties that came at the time. And first quarter of 2025 it turns out, had an identical performance to 1Q26.
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Negative 4.3%, which is quite remarkable to have the first quarter in both years, identical. But what is interesting is that last year, second, third and fourth quarter were all positive and we ended up 2025, well above the historical average of the US stock market.
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And for this year in 2026, it is interesting to see a similar pattern where with all this anxiety and negative, performance and then in Q2, it was significantly positive. So we overcame all the losses from the first quarter. And as an investor I can tell you that there is a lot to celebrate because mid year, halfway through 2026, the market is up about 10.2%.
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So what’s the idea here? If you started the year with a hundred right now, you would have $110 in your account invest, in the market, which is really good because the long term average in the US stock market has been about per year and we got the 10 halfway through.
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So again, a lot of good news to report. But what is interesting is that if you look and say great, it seems it was a very good year for the market. It has been a good year. It’s just, it’s been a pretty uneven year because not every single stock that comprises The S&P 500 went up in value.
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In fact, what you can do is just look at a simple metric. Well, how many of these stocks in the S&P 500 went up versus down. And what you see is that roughly about 62% of the stocks in the S&P 500 went up in value. You made money on them and 38 went down, you lost money on them.
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So not every company went up and not every company went down. And obviously the question is, as an investor, how can we sort of avoid the negative performing companies and just put the money in the ones that make money. And I got to tell you folks, it’s not a Productive endeavor.
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It’s, I don’t believe that, at the beginning of the year was possible to tell which company might fit in which bucket. And just to give you some examples, Mitchell, if you look at, two, let’s say banks, you take bank of America and Wells Fargo and you ask, well, how are the banks going to do?
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Well, it turns out that bank of America was in the positive category and Wells Fargo was in the negative. You look at Lowe’s and Home Depot, they’re both home improvement stores. Home, Depot was positive. Lowe’s was negative. You look at Verizon and T Mobile, Verizon was positive, T Mobile negative.
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And probably the ultimate example, Coke versus Pepsi. Coke was positive, Pepsi negative. So, you know, one of the big lessons is that instead of asking, how did the market do, or sectors? And it’s, it’s actually much more about the company itself.
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And that’s a really important lesson because, you get the question, well, what sectors did. Well, it’s not about the sector. The banking sector includes both, bank of America and Wells Fargo. Beverages include both Cokes and Pepsi. So it is much more about the individual company.
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Now you can dig a little bit deeper and ask not only, how did these companies, do positive or negative, but by how much did they change in value? And if you actually are taking a bit of a deeper look, what you find is out of the 500 stocks in the S&P, 594 of them, 94 of them, had results, performance that was in between 10 and 20%.
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So that’s kind of the most frequent range of returns for a stock. Performance for a stock was 10 to 20%. And then next one was 80 stocks went between 0 and 10%. So you have about 174 stocks. So more than a third, of the S and P stocks were in the range of 10 to 20%.
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That’s the, that’s the, the range of performance we saw the most companies, falling, into. Now, the more you go to the extreme performance, let’s say extreme negative performance, what you find is that there were 16 companies, 16 stocks that went down in value more than 40%.
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So what were those companies? Some of them were software. Adobe, we all know Photoshop, and Intuit, we know, heard of TurboTax. Those were down 40 to 60%. But it wasn’t limited to software companies. You have, Laidos, if you go to the airport There’s a security machine that’s likely made by Lados that was down over 40%.
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Accenture, the consulting, company, down about 50%. And Lululemon, the clothing company, down over 40% as well. So it wasn’t limited to, I can, I can. I know what sectors went in that bucket. It’s not clear at all. Now the really good news for investors that when you go to the extreme on the good side, there were 48, three times as many companies that had extreme positive, returns of over 40%.
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And that is really good news again, much more, much more on the positive side in, in terms of extreme outcomes. But what I found interesting is to look at, who are some of the best performers for the first six months. And the very best performing stock in The S&P 500 is a company that you might know from the days when you put a memory card into your camera, and that is SanDisk.
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And they make a lot more things than that. But SanDisk, which, is quite interesting, that company for the first six months was up not 10% or 20 or 40 or 50. It was up 850%. That’s a whopping return.
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850% for that company. For SanDisk, Intel, the chip maker, was up 270 plus percent. And again, he wasn’t limited to semiconductors or chips. You had Moderna. Moderna, the vaccine maker, it was up 137%.
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My dad, had, dialysis done at DaVita Centers. And DaVita, which is a dialysis company, was up about 95%, almost doubled in value for the six months. Caterpillar, and United Rentals, they’re all up over 40%. So once again, it’s the same kind of lesson that we’re seeing is that, it wasn’t, market wasn’t driven by any one sector.
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It’s much more about company by company. And some had outstanding results out of nowhere. You davita, I it seems like it’s a fairly stable business. You have the dialysis patients, they come twice or three times a week, and that’s your business. But in this case, somehow they had a phenomenal growth.
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Now from these 500 numbers, Mitchell, we somehow get to that one single one, the performance of the entire market. And the way you get to that number is by looking at the performance of each individual stock. But there’s one more consideration. Professionals, when they measure performance, they also account for how significant is the company in the market.
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In other words, how big is it? And by big we mean how many shares of ownership does a company have and what’s the value of each share? And when you multiply the two, you get a size of the value of the ownership. That’s called market capitalization. That’s the technical jargon, but basically means, how much is this company worth?
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It. And it turns out that the larger the company, the greater the emphasis. That, not just the emphasis, but the greater the impact of its performance on the market as a whole. And I’ll illustrate because you might have heard of a group of stocks called the Magnificent Seven.
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And these are stocks that are really important to all of us and to the market. Not just because they make AI and technology and we’re all know and use their products, but because they’re some of the largest in the market. And these Magnificent Seven also had an interesting year because, you remember the first quarter the market, the S and P, was negative by about 4%.
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While these companies are also negative, but not by 4%. But rather a, much more severe 11%. So they significantly underperform the market as a whole. And for the second quarter, they came back, not as much as the market. Not 15, but about 12%.
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So when you look through the first six months through the, end of June, the Magnificent Seven, the storied big, tech stocks, were actually flat. They basically did pretty much nothing. There was a pretty flat for the, for the year. Now, they left a hole in the S and P.
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So if you look at the S&P 500 minus the 7. Let’s call the S&P 493. What you see is that the rest of the stocks in the market, went up really nicely, 15.6%. So the market actually without these magnificent seven did very, very, very well.
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Remember that the performance for the entire group that includes the two of them, was, was 10.2%. So you what you’re seeing which is so interesting is that that, that somehow, these seven, stocks detracted significantly from the performance of the market without them.
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And the reason for that is that when you add them Together, these Magnificent Seven amount to roughly about 32% of the value of the entire S and P. Index. In other words, about a third of the performance of the US market comes from these seven companies.
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Seven stocks. And the same exact seven stocks are also part of NASDAQ. But not at 32%. But they’re a whopping 47%. That’s, that’s a lot. That’s almost half of NASDAQ is in seven stocks. And then the same exact seven stocks would be part of a global allocation.
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And a lot of advisors these days are not only looking at the US but they also have this, the global perspective. And if you have that global perspective, you’re certainly going to have exposure to these seven stocks, but not, at 47 or 32, it’s probably around 18% or so.
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So you’re reducing a bit that concentration risk and you still, partake into the potential upside. On the other hand, you’re not overdoing it. So to us, that’s actually a very reasonable way to think about it. Have exposure. Don’t miss out on that.
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Just make careful not to overdo it, just in case we have periods like this year. And that’s why if you look at a global portfolio for this particular period, for the first six months, it outperformed the US Market. So that’s a really, important element to know.
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And the last, MITCHELL The last point that I want to make here is that if you’re an investor and you are looking at the news and you’re saying, well, how did my investments do? How did my portfolio do? How did stocks do? And you’re looking at, NASDAQ or you’re looking at, the S and P.
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I would keep in mind that if you are invested globally, your performance almost by design, is not looking, is not seeking to match the performance of nasdaq, because if that was the case, then about half your money would be invested in seven stocks.
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And I’m not sure that’s that prudent. So to me, it’s also a little bit about managing expectations. Yes, for the first six months, the global allocation did better than the S and P. That’s great. They’re going to be times when perhaps these magnificent seven are going to fly high. And you look at NASDAQ and say, oh, look how well NASDAQ did.
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I look at my portfolio. It doesn’t match. It’s exactly what you would expect. You would expect that to happen because nothing went wrong. It’s just that you are invested in those stocks, but you also have a lot, a lot more others. And because of that, the performance is not really likely to match because it’s not designed to, to match.
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So, what are, what are some of the stories kind of looking ahead for that, for the, for the second half is just, you the, the market is, is much more driven by individual company performance rather than necessarily sectors. And, and, and, and stay optimistic.
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And just because we had a negative quarter, in 2025 or 2026, it turns out that, things work out. Nobody knows what’s going to happen for the rest of this year. But we can tell is that being disciplined and spreading your bets, is a really good strategy.
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Yeah, that’s a great story. And kind of off of that, a lot of the conversations have been about AI and the concentration in those big stocks in the US does investing internationally, do you think spreads that out as well in terms of maybe not the concentration that the US Has?
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Absolutely. I mean, I think that what’s interesting about that. I’ll give you a couple of perspectives. What’s interesting about, the US Is that if you look at the world, we are, a special country, of course, but it turns out that economically we are only about 4% of the global population and only about 6% of the global landmass.
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So we’re not dominant in terms of how many people we have in the country or the, the size of our country. But what is interesting is that when you look at what we produce, this year or any given year, that’s the value of the economy. We are about a quarter of the global economy.
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So about a quarter of what gets produced and consumed is coming from the US and we are the largest economy in the world. China, is the second largest economy now. But it is interesting because the economy is not the same thing as the stock market. The economy is simply looking at what is being produced.
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But the stock market reflects the value of these different companies in which you can buy ownership, because that’s what the stock market allows you to do. And the value of the companies reflects not only what they’re doing today, but the expectation of future profits that you will get as an owner into that company.
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And, and because these US Companies are so global and they sell everywhere. What’s really interesting, Mitchell, is that if you look from a perspective of the value of companies, the US is not 26, but 62%. 62% of the value of all companies, in the world is in the U.S.
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market. We’re by far the largest. I mean, forget about being a big economy. As a stock market, if you redraw the world map, you do see that we are, very, very, very, very, significant part of the market. Now it’s also interesting that, that, if you decide to invest only in the US you can simply say, okay, if I only want to invest in the S and P because you were so big and global, then you’re saying, well, I’m going to put money, let’s say, in car companies like Ford, gm, Tesla, which are great, great, American car companies.
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At the same time, whether it’s in Virginia, whether it’s in Jersey, you’re going to find, or California, you’re going to find some Beamers, some Mercedes, some Porsche BWs. And those brands are owned by German companies that trade in Germany. Even great American brands like Jeep and Chrysler, they are owned by Stellantis, which is an Italian company trading in Milan.
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You have, you the Hondas and the Toyotas, really, well known Japanese companies. Ironically, Land Rover and Jaguar, British brands are owned by an Indian company today, Volvos. My kids drive Volvos. And that brand is owned by a Chinese company. BYD is the largest maker of electric vehicles in the world.
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And then you also have the Korean shops. They’re making inroads. So ultimately the idea, the intuition behind this global, diversification is that, hey, we want to own, Ford and gm. Great. Why not consider buying BMW, Toyota and Jeep for that matter, because that is, international, investing.
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And when you do this, and coming back to AI, I think the really interesting thing is that people not always understand how global even AI is. It seems like the US is dominant, is crushing it in AI.
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It is, for sure. And as an example, you take Nvidia. Nvidia is a company that designs chips, the best in the world when it comes to AI. And think of Nvidia as a baker, who came up with a recipe for the best cookies in the world.
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They have the recipe. The trouble is they don’t have a kitchen. Nvidia has no manufacturing facilities. And it turns out that in the entire world there’s only one company, that can manufacture their most advanced chips. And they have to fight for factory space there with Google and Apple and all the other companies.
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And that, is an investment in an emerging markets country. And that company is called Taiwan Semiconductor Manufacturing Corporation. And that is, that is again, it’s an emerging market investment. And in that factory there’s a machine, there’s almost science fiction.
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Mitchell, if they were to shoot a laser beam from Virginia to the moon, it would hit a ping pong ball. It is that Precise. And there’s only one single company that it took decades to perfect that machine. And they’re the only ones who can make it. And that is an investment in the Netherlands and the company is called asml.
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So in this global AI value chain, the question is, who holds the cards? It’s not obvious to me that Nvidia is the only investment. In fact, if you think about this and Nvidia being part of the U.S.
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market, it is a big part of the U.S. market. The U.S. comprehensively with large and small, all the companies, not just the S P was up about 11%. ASML is a very big part of the Dutch market. And that stock market was up about 38 for the first six months.
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And Taiwan Semiconductor is certainly part of the Taiwanese stock market. And that is now, that was up 61 for the first six months. So clearly to me there was a benefit this year, from being globally diversified.
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But it’s also intuitive folks. I mean if you limit yourself and say all I want to do is put money in. The US is not just about what we sell to foreigners, it’s what foreigners sell to us. And I think that this AI is a very interesting question because it seems like US is dominating.
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But I can tell you Nvidia could not really sell any of their high end AI chips if it wasn’t for tsmc. TSMC could not produce any of those chips if it wasn’t for asml. So it’s a very integrated global world.
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Yeah, I think that’s a great point and kind of keeping on the AI theme, but how do you see that affecting the kind of broader US Economy in terms of labor markets and will it shrink labor markets and how is the Fed going to kind of manage that in terms of how it affects the broader economy?
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Yeah, and I think that AI is a new revolutionary technology. And frankly the, in my lifetime the closest that I, that I, that I can sense, this technology is related to is the Internet.
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In the early days when you had something that you had a feeling that is definitely going to change things, you will have an impact on the way that companies do business and the world as a whole. And the Internet did have, that might not have been immediate, but it did take that, take some time, but eventually did permeate in our everyday life.
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And with AI right now, the question is what’s going to be the impact on the economy, on jobs and so forth. And at the moment there are two very distinct camps on one end. You have folks who are really, really pessimistic and they’re saying, look, this is terrible.
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This is going to kill jobs. A.I. is going to take a job, replace, and you’re not going to, they’re going to be mass unemployment, there are going to be a lot of deep fakes and other social issues and it’s a very negative outlook of the world. With AI on the other hand, you have a CAM that is incredibly optimistic.
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And they’re saying, look, we’re going to be able to be a lot more productive to the point where maybe we’ll have a four or three day, work, work week. We’re going to be able to create medications and solve problems that we could not.
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And life as a whole is going to be a lot better, with AI. And right now I’d have to say it’s a little bit early to tell. It’s too early. My guess is that the answer is going to be somewhere in the middle. What is interesting though is that whenever a new technology comes along, there’s a bit of a, time for the society, and the economy to adjust.
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You look at electricity. Electricity did come around and it was a game changer. But it took about 50 years to get implemented. Why? Well, because companies had already made investments into those factories without, electricity. So for them it took some time to amortize the existing machines and to you reconfigure the factory space.
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And I think it’s going to be similar to AI. It’s not going to be like, oh, tomorrow everything’s changed. No, people have already spent money years ago on infrastructure. Whatever they spend now, it’s for years down the road. So there will be an adjustment time and hopefully in that adjustment time, there will be systems put in place to kind of address perhaps imbalances that this might create, perhaps, how do we change the education system, how do we retrain workers so there’s time in which us as a society can mitigate this.
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But yes, it is something that needs to be addressed sooner rather than later. And that’s a political question. I’m not sure that the biggest threat to the US economic future, is a, foreign country and the fact that they make shoes over there versus what AI might do to really high paying good jobs in the US So if you’re going to say what do I pick a fight with and what do I focus on?
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You could focus on making shoes abroad or you can focus about, on, on how is the ad going to impact this. So hopefully the, you the folks who are in a position to make these decisions, they’ll, they’ll, they’ll consider it. But there’s another element to this, Mitchell, that has to do with investing and that’s a little bit different because when it comes to investing, what, what is interesting is that the technology that comes out quite often is more beneficial to the users of that technology rather than the creators.
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I mean, if you think of the supermarket, there is a scanning technology. And who benefits more from the technology, the company making the scanner or the supermarket itself. And in the case of AI, it’s quite possible that, you great beneficiaries might be pharmaceutical companies, logistics companies, airlines, folks who are not necessarily involved in AI as a creator, but as a user.
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And because of that, we still recommend that you ought to be, you widely invested and not necessarily hyper focused on this one particular, area. The second thing to know about investing in AI is that it is not a website, that you put up a website and great, you make money.
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That’s Facebook, whatever. No, that’s not the case. AI requires significant investments. And interestingly enough, the Wall Street Journal had an article not long ago. They looked at the size of these investments relative to other investments that we’ve made in the country going back to the origins to 1776.
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And what they found is that if you take four companies, not the whole AI industry, but four companies, Facebook, Amazon, Microsoft, and Google, and you look at the amount that they will invest this one year and you compare to other investments relative to the size of the economy at the time.
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Obviously it’s fascinating because what you’re seeing is that this investment in AI, is this in one year is basically five times greater than the investment that we made as a country in the interstate highway system over 15 years.
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It’s greater than the railroad, 10 times more than the Apollo space program, but it’s second only to the Louisiana Purchase. It’s nuts. There’s a lot of money that’s being invested in these by these companies. And these are only four companies in this AI, and at the moment the investments are being made, but they’re not really monetizing it.
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They’re not bringing in money hand over fist. In fact, they’re not, but they are expected to do that down the road. So what does it mean for an investor? Well, let’s just make it real. The word that’s being used out there is valuation. The valuations are very high. What does it even mean?
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What it means is that the company might not make money today, but the stock price reflects that. Hey, we expect that company is going to make money down the road. So let’s just make it real. At the beginning of this year, you can look at Tesla. Tesla has bet its future on AI. They’re not going to even make cars anymore.
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They’re not making the Model X, and the Model S, which are the, the big money makers. So they’re going to focus on, AI. That’s kind of what they, they’ve said. And at the beginning of the year, the price per share of Tesla was about $450. So what it means is that if you had $450 in your pocket, you can take your better half to a great dinner or weekend somewhere.
[27:59.3]
Or you can buy one share of ownership in Tesla. What do you get for the share of ownership? You get to partake into the earnings. And the ownership of Tesla pretty much, exactly like Elon Musk. Not as much as Elon Musk. So the question is, okay, so if you did partake into the earnings, what were the earnings associated with that one share of ownership?
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And when Tesla stock was selling for 450, the earnings associated with that ownership were $1.50 per year. So if you reframe that question, okay, I just spent 450 bucks and the current rate of earnings, Tesla, will come and put a buck 50 per year into my piggy bank.
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Then the obvious question is how many years would it take for me to make that initial investment back? And the answer is quite a lot. It’s 300 years before you make an investment back at the current level of earnings. That’s what valuation reflects. And the technical jargon for this is price earnings, which is what’s the ratio of the price for the money that the company makes.
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And you can compare that, you can go to good old Toyota, which is still, making regular hybrid and gasoline engines. And when Tesla was selling for 450, the stock price was less than half. And, but the earnings of Toyota were not a $50, but closer to $20.
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So it was roughly about a 10 years, payback. So that’s what basically valuation means. It’s you look at the price right now and what are you Seeing and the question is what would anybody buy Tesla? Well the reason that people buy Tesla is because listen, the expectation is that they’re not making money right now but when they turn on the money spigot, just you wait, they’re going to make money hand over fist and you’ll be glad that you only paid 450.
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And that’s what’s happening right now with these AI investments. They are very highly priced relative to the earnings they have currently. But the expectation is there will be a time when these companies will make money. Could that happen? Absolutely.
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It just doesn’t have to. So you want to make sure that you’re searching above beyond just the AI stocks. And if you look at the other magnificent seven Meta, which is the parent company of Facebook, is the only one that is close to long term market average.
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Apple, Microsoft, Google and Amazon, they’re about 50% higher than the long term average. And then Nvidia is about two times higher than the long term market average. So all of these companies at the moment if you combine them they have this, this valuation metric, price to earnings which is the sort of a payback period is intuitively that’s quite high.
[30:42.9]
It’s three times the long term market average. But we talked about the rest of the market excluding these, these AI max 7s. And what you see is that that that valuation is a lot closer to the long term average. So not every company in the market is, is so highly valued.
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And in the US market we talked about another group, small companies that are in trading in the market but they’re not part and their valuation is even below the long term market average. And within that you can further look for a category of stocks called value.
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And those have even better valuation. So ultimately you the point is that you want to have exposure to AI, you just don’t want to go nuts. I think you want to be a little bit careful. Now some of you might have also heard the notion of a bubble.
[31:31.7]
That we’re in somewhat of a bubble. And the last time we saw this bubble was the Internet days. And what if the market’s going to come crashing and what if companies go out of business? A lot of people make fun of pets.com and companies like that in the Internet boom that ended up disappearing.
[31:49.3]
And that’s a legitimate question. We’ve looked at this and what is interesting Is that if you go back to the Internet days, in the early 90s, there was no entity called the Internet, there was no monolithic investment called the Internet. But rather what you had are a bunch of companies and you can think of them as horses in a race.
[32:09.1]
They’re all competing, they’re all the, the race is getting going and it’s, you at the time it’s not really obvious who the winners will be. So if I took in a time machine back to the 90s and all I told you is look, there’s a website that sells toys, for kids.
[32:25.3]
There is a website that sells books for reading and then another one that sells pet supplies. And I asked you, well, which one of these will obviously become the future of Internet retail? I’m not sure it was obvious at all. It was the bookseller.
[32:41.4]
So one of the things that you have to kind of accept is that in order for you to get Amazon, you also need to own eToys and pets.com. and if you hyper focus on the fact that eToys and pets.com went out of business, you miss the fact that Amazon became Amazon, you miss the fact that the Internet produced some of the largest, most successful companies in human history.
[33:03.7]
They changed everything. Google, Netflix, all of these really reflect the fact that the Internet was a tremendous success. And if you focus on what didn’t work, you missed the forest in the trees. This is an amazing success because the companies that made it more than made up for all the ones that didn’t.
[33:22.6]
And we are in a similar moment with AI when AI is not this monolithic entity, but rather a bunch of horses in the race. And at the moment it’s not obvious at all which ones are the, the winners will be. But what I can tell you is that some of these companies are going to blow through billions of dollars, create nothing, go out of business.
[33:42.5]
I’m not bothered at all by that because what I, what we know is that the companies that do make it will, will certainly have enough Runway, to make up for everybody else. And that is not just in the AI space or or tech.
[33:59.2]
If you look over the long run in the US market, this is remarkable. If you look over the past almost 100 years in the U. S Stock market at the beginning of a 20 year cycle, they’re roughly about 3, 000 companies at the beginning of that cycle. And this is just AI non AI.
[34:14.7]
This is just a, the beginning of a 20 year cycle. And if you look 20 years later, about 60% of them disappear. Only 41% of stocks survive a 20 year cycle. Think about that 6.
[34:30.7]
Almost 60% of the companies disappear and out of the ones that survive, only 18% of them actually outperform. So it’s a handful of these high flyers that really drive the the long term market performance. And it’s something that, that, that you ought to consider because it’s similar numbers that you see with AI with Internet.
[34:54.0]
And I do expect companies that will go down but again the ones that make it though 18 are going to make up and certainly over the long run they’ve delivered some, just fantastic average returns for, for investors. So because of that, what’s the punchline? AI is here to stay.
[35:11.1]
I, I still think you need to own companies around the world because is not just about the using but also the creation but also the user. Be aware of these high valuations at the moment. And the way to hedge is to own as many companies, and not just AI, not just large, but maybe put some small international and that will help with the what if question.
[35:32.7]
What if things don’t pan out? You are hedged. Yeah, I think that’s great and I think AI was a big theme of the year so far. So good to focus on it. But I think another big theme of the year so far has been kind of geopolitical risks. Right. And what that means for markets and potential impact kind of moving forward.
[35:51.9]
How do you view that? Yeah, and I think what’s really interesting about it’s the geopolitical risk and even politics to some degree. It is very emotional. I mean whether it’s politics, touching our deeply held beliefs, our core identity as individuals, or a war like this geopolitical risk that he mentioned.
[36:12.0]
It’s hard to watch these images and think boy, it’s 20, 26 and you know there’s still war. There might be maybe friends, or family members of, of some of the folks on the call who have relatives deployed in the Middle east. And that’s scary.
[36:28.1]
So it’s very, very emotional and I think it’s, it’s important to acknowledge this. It’s, it’s, it’s unpleasant. And and and it’s something that, that, that you know, it makes us human. I mean we have to care. What I also find interesting is that two things. One is that successful investors are able to Disentangle, emotions from investment decisions and not make decisions on how we feel, but rather, much more pragmatically on data and evidence.
[36:56.2]
And second of all, what I found really interesting is that markets don’t really price morality, but rather something much more pragmatic and fundamental, which is when an event like this happened, like the geopolitical risk, whatever it might be, the war in Ukraine, the war in Iran, whatever it is, the fundamental question that the mark is asking is, listen, in the market, in the stock market, you have some people who have exist shares of ownership and they want to get rid of them.
[37:27.1]
How does the value of the ownership change because of this event? In other words, what’s the impact on a bottom line of a company, caused by this, geopolitical event? So when the war in Iran began, it was over the weekend.
[37:43.4]
When the market opened on Monday, the value of airlines that had flights in the Middle east decreased because if they had flights, operations got disrupted. Well, they’re not going to make as much money. If I’m a buyer, I would like this price to adjust down because I don’t want to overpay.
[38:00.0]
And that’s exactly what, what happened. On the other hand, if you, want to sell shares of, defense, contractor, well, likely you’re going to get more orders. So that value increase said, I don’t want to get short, stayed. So in other words, the market’s really reflecting the impact of this event on company by company and the impact on the bottom line.
[38:20.3]
And what we saw on that Monday, based on what we knew, we bombed Iran, the vast majority of the market. In fact, the market that Monday, was pretty much unchanged. That’s not because they missed the fact there was a bombing over the weekend. It’s just that, the idea is that, listen, at the time, based on what we knew, Apple, likely not selling many iPhones in Iran, I’m not sure how many Starbucks are in Tehran.
[38:46.5]
But the assessment was that most American companies will not be impacted even as we drop bombs on another country. Now, a few days later, the Iranian strategy became more obvious, which is the, the Strait of Hormuz. And the closing. Everybody became a geography expert.
[39:03.1]
And the markets adjusted, saying, hey, oil is going to be more expensive. That means consumers might not have as much money for burgers. And maybe there were some adjustments in prices of different companies. But again, folks, this geopolitical event is one of the many Variables, because an investor might say, yes, there’s a negative impact coming to any one company, from the higher price of oil and the uncertainty.
[39:27.4]
There’s also great benefit coming from the use of AI. So in balance, the market’s saying, if I look 1, 3, 5, 10, 15, 20 years down the road, perhaps the benefit from AI significantly outweighs the uncertainty and the high oil prices that we might see in the short run.
[39:45.4]
So don’t hyper focus on any one, event because it’s unlikely that any of them is so big to change the entire dynamic of the market. So that’s the first, consideration. There are too many variables at play. This is one of them. And it tends to be short term. There are a lot more longer term trends that might have a bigger impact.
[40:03.1]
And that’s why perhaps we saw the market going up. But the second big one, and maybe I don’t want to take too long on this, but it’s the idea that whenever individuals and companies and countries for that matter, are facing a challenge, that’s when they tend to innovate.
[40:20.6]
That’s when human creativity comes. And none of these folks, as they have a challenge now with the, Strata, Hormuz and oil, none of them are going to say, oh, I’m done closing shop, there’s a problem with oil. No, what they’ll try to figure out is how do we move forward, how do we navigate this?
[40:38.7]
And over and over, Mitchell, what we see is that, at the back end, individuals, companies, countries perhaps come out stronger. Even though the challenge might seem so big at the moment, if you look at the pandemic, it was a challenging time and you companies figure it out.
[40:55.4]
Well, we cannot meet in person. We’ll do zoom. I cannot sell you a margarita to drink in the restaurant, taking the cup, and hopefully you won’t drink and drive, but you take it to go. You we start, a lot of things that the supply chains were not as robust. We made them stronger. So I do believe that that period in a way strengthened, and, and the US and as a whole.
[41:17.7]
And the big example to me is from the last time that we had a major energy crisis, and that was in 73, 74. So if you go back to 7374, OPEC, the Organization of Petroleum Exporting Countries, they decided not to send oil to the US and the result was a huge energy crisis.
[41:36.8]
And what might be interesting for all of you to visualize is what if you are in the back of the slide and you’re saying, boy, I’ve never seen anything like this. This is as different as it seems. We are doomed. Our whole country requires oil to function and we don’t have any.
[41:54.4]
And, and I’m standing here for maybe hours or days, and it is so easy to get anxious and say this is it. I mean we are in big, big trouble. And and start being very pessimistic. And it was not easy.
[42:10.2]
What emerged out of that, and this is where I’m going at, what I think it’s really important to acknowledge is what emerged out of that was a stronger country because that was the very first time that we start talking about energy independence. And 50 years later we are energy independent.
[42:27.4]
We produce our own oil, we don’t require, any foreign, in fact we export oil. And that it came from that challenging period. Instead of having those gas guzzles of the 70s, we start making much more fuel efficient cars in the 80s. So to me when I look at this instance with the straight of hormones, yes, it can be very pessimistic.
[42:48.1]
Gas is more expensive than I want it to be. But what if this challenge creates something that over the longer might be better? Maybe there is a different way to bring oil. Maybe we rely more on solar or things that, that, that are produced domestically.
[43:06.1]
And maybe we have a lot more electric cars rather than, than than these gas gauzes, who knows? But the point is that I don’t think that, that this, this ingenuity and creativity is accounted for as much as it ought to be, when a challenge comes around.
[43:22.1]
So I have no doubt in the short run, yes, it might be challenging, particularly for folks who are on the edge of their salary and they’re this is not good because I have to spend money on gas that I otherwise would spend on food and I, I don’t want to minimize their pain. I just think for most people it’s more of an inconvenience rather than a devastating event.
[43:42.2]
In the long run though, I do think that it’s going to make us stronger. Yeah, that’s great. And you made a great point in there. I thought of the best investors are the non emotional investors. Yeah. How do you, how do you train yourself to not be emotional when, when kind of events happen in markets?
[44:02.3]
Yeah. And it’s, it’s so interesting because we can talk Mike Tyson had that famous line, everybody has a plan on, they don’t get punched in the face. And to me the only way to do it is not to try to deny human nature and say, I can do it.
[44:20.5]
Because the reality is that what I found is that most people cannot. But a much better way is to actually have a financial, advisor like Wall Crossing and when a situation like this comes up, to talk to them.
[44:38.2]
And the best way to kind of not be emotional is to understand that when they develop a plan for you, they took account that something like this could happen. In other words, I live in LA and I know at some point there’s going to be an earthquake.
[44:54.0]
And predicting the earthquake is not product, but rather I plan for it, I prepare for it. And it might not be pleasant, but it’s not going to be devastating if I’ve done it right. And I think that’s what Wealth Crossing is trying to do is saying, we’re not going to try to predict the next geopolitical event, we’re just, we’re going to prepare you just in case.
[45:13.4]
And because of that, quite often if you are closer to retirement and you don’t have additional income or a pension, it’s possible that your money might not be as invested in the market. So you might have more in bonds or something else. And so to me, the best way to, do it is not by, trying to deny you the human nature.
[45:38.2]
And even in my case, I get emotional. It’s just rather work with an advisor and have a plan and understand what’s in that plan, understand that the plan might have some money put aside for the next three or five years in case you need to, take money out so you don’t have to sell at the wrong time in the market if something like this happens.
[45:58.6]
So that, to me is the best way. It’s harder to train yourself. I think it’s the best and most efficient ways to have an advisor have a plan and truly understand your plan. Make sure that you understand, how the plan is accounted for, situations like this.
[46:16.7]
Yeah, I think that’s a great point. And we’re running up on time here, so if anybody has more questions, please just put them in the chat. I’ll go back to the, the oil piece while we still have time. And kind of the inflation that that may cause, how do you see the Fed reacting to that?
[46:33.0]
And then, you know what? For an investor most concerned about inflation, where do you Recommend the, I won’t say safest place to be is, but for, for an inflation sensitive person. How do you, how do you invest around that?
[46:49.0]
Yeah. So when it comes to the the Fed, I mean we talk a lot about interest rates and, and the Fed and all that. I, I do think that before we go there, just to quickly demystify the idea of interest rates and where they come from. If, if the government, let’s say the U.
[47:04.2]
S. Government wants to borrow money, they don’t go to a bank, no bank is big enough to sustain what they need to borrow. But rather they come to us as investors and they say, listen, if you are willing to give me, let’s say $1,000, we’ll write up a contract and we’ll specify an interest rate that you get. And for how long get the interest rate before I give you the money back, the principal back, and then we call the day and we walk away.
[47:26.6]
So one of the major considerations for interest rates is the length of this contract and that’s called maturity of the contract. So when you think about the maturity of the contract and you relate that to the interest rate that he get as an investor, you have the government borrowing money for 30 days and after 30 days you get your money back plus interest.
[47:47.6]
And because it’s only a month and you get your money from the government and it’s so quick, the interest rate historically hasn’t been that high that you get as an investor. Now if you are willing to give the money for a year, your money is there for longer. Historically investors have said you gotta pay me a little bit more.
[48:04.7]
If you lock up your money for five years, even more. And then if you go to 10 to 20 years, boy My money is going to be there for quite a while, so you got to compensate me. So you know, the interest rate is really dependent on the the length of this contract, or the what’s called the maturity of the bond.
[48:23.5]
So what’s interesting is that when you think about the Fed, the Fed really controls interest rates that are 30 days and even below overnight rates that a company might use to borrow just to kind of make payroll. That’s what the Fed controls.
[48:40.0]
This is the Fed’s sweet spot. And and, and, and, and, and and you also have this 10 year interest rate and it turns out that it’s not really controlled by the Fed. So I’ll come back to this because I think it’s really important, when you think about what the Fed’s going to do.
[48:57.3]
The Fed has a mandate to make sure that, that inflation doesn’t get out of hand, or, and there’s good economic activity. So they’re trying to change the interest rate. But the interest rate that they look at and the the ones that they are able to influence directly is the very short term rate.
[49:15.0]
And if you look for the first six months out of this year, the federal funds rate, which is the rate that they control, was unchanged. There was no change. So the very, what’s called short end, like 30 days and below, the Fed basically said, we have these two mandates.
[49:30.5]
One is to maintain, strong economy, the other one is to maintain price stability. And given everything that we’ve seen, I don’t think it’s worth moving the rates up or down, just, just kind of balancing these two mandates that they have.
[49:45.5]
Now what’s interesting is that if you look for example at the 10 year interest rate, that one actually had significant movement even as the Fed made no changes. In fact, in this time frame we saw an increase of about 0.7%, a huge increase in interest rates at some point, during the first six months of this year even though the Fed made no moves.
[50:10.5]
So what’s the idea here? The idea here is that this 10 year, the longer term, is influenced by things that are not necessarily Fed related to and I would say primary among them is the expected inflation.
[50:27.0]
In other words, if I lend my money to the government or anybody for a few years, well, I want to be able to at least buy the same things. If the expected inflation went up, I need to kind of be compensated and I’m not going to accept an interest rate that might not make me whole.
[50:44.6]
So as expected inflation went up, so did these rates. Now there are other things like how much the government borrow, what the riskiness is. But one of the things, so we talk about inflation, the Fed is trying to balance the economy with inflation, and he hasn’t made a move.
[51:01.0]
However, these longer term rates have reflected the fact that the war has generated higher inflation expectation for the future. And folks, I got to tell you, this 10 year interest rate is relevant to you because if you look at the the the 10 year treasury, which is a 10 year interest rate for the government bonds and you overlay the mortgage rate, boy do they feel like they have something in common.
[51:24.8]
The, the ten year is the backbone of the mortgage rate, not what the Fed does. So the inflation, this is the interesting part. So the inflation basically, that we’ve seen this year, was balanced by the Fed’s desire to keep the economy humming.
[51:43.9]
So they made no change. However, the same inflation had an impact on your mortgages. And that’s what the trouble is, that this expected inflation and the war and what’s going on right now in the Middle east might not only impact your grocery bill and the gas pump, but could also impact the interest rate that you pay, on a mortgage rate, which might stay with you for a long time.
[52:10.8]
So that’s sort of, what’s interesting about the Fed is that the Fed is going to have to balance the dynamic. They do want to keep the economy strong. On the other hand, they don’t want inflation to get out of hand. And their decision is between these two, let’s just keep the rates where they are. However, the inflation did impact a lot of you maybe who are looking to buy a home because the mortgage rates have fluctuated quite a bit.
[52:32.9]
With this 10 year rate I’ll maybe this last question kind of on maybe the, the last big theme we’ve seen so far this year and that’s IPOs and SpaceX and OpenAI and anthropic to come.
[52:48.9]
How should, should everybody rush out to buy as soon as they can? What’s your view on those IPO stuff? Yeah, I mean, so let’s take SpaceX and I’ll kind of extrapolate from that quickly. I think SpaceX is an interesting one because again, it’s emotional. People either really love Elon Musk or really dislike him.
[53:06.2]
So he’s a very polarizing figure. And the, the reality is that we do have to celebrate entrepreneurship because he was an entrepreneur who built two big companies in a relatively short time frame in about 20 years or so. And also the system in which we operate in the US because the capital markets allowed for these companies to grow as much as they did.
[53:26.5]
Now should you run and jump and get SpaceX? Well, I’ll give you a few perspectives. The first perspective is that when a company is private, there are all these existing owners of the company who are private owners. At that magical moment when the company becomes public, the company itself decides, well, how many of these existing shares of ownership are we going to release for the public to buy?
[53:52.1]
And it turns out that in the case of SpaceX, what you saw is that only about 4.2% of all the shares were made available to the public at large. So very tiny sliver. So you think of a big block of cheese, they cut a small slice, they dangle in front of screaming fans and they created this feeding frenzy because they released only a, a very low number of these shares, at IPO at the moment when they become public.
[54:21.6]
Now it turns out that, that it’s not unique. Other companies who are also releasing shares for ownership, they don’t let them all out at once. But the the, the percentage of the shares available, on average, for these companies going public, it’s a lot greater on average after the first month.
[54:42.4]
Now the reason that, that that, that, that this is happening is because some of these shares might have a provision called a lockup. And a lockup means that that particular owner who of private shares might have some schedule, there might be different schedules on when they can sell.
[55:05.5]
So it might be a month or two months or six months or certain provisions and company metrics before they are allowed to sell. So the more time you give, the more these lockups expire. So in the case of a general average IPO at about six months, because enough lockups expired, more than half the shares are available for sale.
[55:26.1]
And when you go to 12 months, so a year after, it’s almost, it’s 58% of the shares are available. Now if you look at the market as a whole, as these companies mature and they become part of the market, what you see in the US stock market, about 96% of these shares of a company are available for the public at large.
[55:46.4]
So all these private owners, eventually they, they get to put their shares on the market. And with SpaceX, at least based on what is publicly available, the projection is, is that by the end of September, about five times as many shares will be available because lockup expired.
[56:03.7]
These shareholders, can sell those in the on the stock market, which they’re not allowed to do at the moment. And by the time you get to the end of the year, it’s going to be almost 10 times as many shares and then a year out is going to be about 12 times as many.
[56:20.0]
So what’s the point here? The point here is that, that, that stock market is driven by supply and demand and right now it’s a very limited supply of shares, and a very big Demand. And as time goes by, you’re going to have more, a flood of new supply.
[56:37.5]
And unless the demand is gonna really, skyrocket along with it, the supply is going to keep increasing, increasing. And right now it’s very limited. So the first consideration in my opinion is you don’t need to, if I were to consider myself, I’m not sure that it’s really warranted to jump and say I need to get it right now.
[56:57.6]
All you have to do is wait a little bit and then you get more and more of these shares available, for, for an investor, that’s the first consideration. And the second consideration is that when you look at a company like SpaceX and you look at the valuation we talked about Tesla, well, Tesla had some positive, some, some positive earnings.
[57:15.5]
So at least you can examine the earnings relative to, the price. SpaceX and a lot of these IPOs, they don’t make money, they lose money. In fact, SpaceX lost billions of dollars. So then how do you value it? There’s an alternative metric that looks at how much does it cost you to buy, for example, a billion dollars of assets after liabilities are paid.
[57:38.1]
So whatever is left over after they pay what they owe, how much do you pay to own that company? And in the stock market, that ratio for, you all the stocks is about 2.7. A company that comes public, an IPO typically is more expensive.
[57:54.3]
The average is about 6.1, or so. And when you look at Tesla, what’s interesting is that, that in order to pay, in order to buy the billion dollars in assets, it’s not 2.7 billion for the market, or 6 billion for an IPO on average, but rather 21, it is magnitude more expensive.
[58:14.5]
So the valuation of Tesla is very, very, very, very high compared to the market, and compared to, other IPOs. So, so to me, again, it’s not saying it’s a good investment and a bad investment, but when you buy something, you have to see is it a good deal or not, what strategy might fit, how much do I want to buy.
[58:36.1]
And, but particularly waiting a little bit, in my opinion, is a really smart strategy. And IPOs are going to eventually be part of a strategy of some sort. You just have to be careful because what we see looking at data is not just, SpaceX, but generally an IPO a year, after they become public, by the time all the float, by the time all these lockups expire on average, they do go up.
[59:03.5]
The average of an IPO, for the past, 45 years or so has, been about 5.6. However, the market as a whole has been significantly higher. So, one of the stories here is that, that patient investors get rewarded.
[59:21.8]
You don’t necessarily need to jump and get it right away. Just be a little bit patient, let the new shares, the new lockups expired, and then, and then consider, in what strategy and how much to buy. Perfect. Great. I think that’s a great strategy.
[59:37.9]
And Apollo, I think we’re right at time. So we appreciate your time and we appreciate everyone joining us. If, if anyone has any additional questions, please feel free to reach out to your wealth crossing team and we’d be happy to, to walk through those questions with you. I hope we’ll have some clips and replay of the webinar for those interested.
[59:56.8]
And again Apollo, thank you for your time. I really appreciate the presentation. Really fun talking to you. Thanks for having us. Thanks everybody. Bye. Bye.
