The middle-class is really getting crushed: Peter Mallouk

What do you mean now? Creative planning CEO Peter Malouk and innovator Capital Management's Tim Orbanowitz. Peter, if there is red on the screen, it's in retail, both high end and low end today. But if you buy that, the consumer is pulling back. How do you interpret it for investors? Well, I think we have two different economies happening now. And I see it in our client base. The affluent are doing better than ever. They're still spending like crazy. Their assets have inflated, their homes, their real estate, their equities. But the middle class and it used to be just people struggling and it's no longer the case. The middle class is really getting crushed here. I mean, if the cost of everything is up dramatically, the the report around inflation was laughable. They showed healthcare costs declining like everything else, they're soaring. So the cost of going out to eat, the cost of of shelter, the cost of healthcare, the cost of education, all the things that really impact people are soaring. And so I think we're finally seeing that in the data coming through as people are not able to spend as much as they used to. And you know what else is soaring? Obviously equities and specifically those chip makers. Tim, you've been watching this very, very closely. Is this starting to look? You know, it has this three months ago, six months ago, but a little toppy now. Well, Liz, bubbles form when investors get too far ahead of themselves. And I think that's what we're seeing right here with NVIDIA. When I look at this stock and now you see it surpassing the market cap of Microsoft, even if NVIDIA hits the targets that investors expect next year, their revenue is still going to be half of what Microsoft is generating today. That's important to keep an eye out. Again, it happens when they get too far ahead of themselves. So I think we're starting to see that show up when we talk to advisors right now, really the most important thing they're looking to do is manage risk around those big tech stocks. Their clients are asking for more of it. They're seeing the gains, they're seeing these things run up. But it's all about how do we manage risk around it. That is the main focus right now. And so, Peter, when Tim talks about that risk and it's understandable because we are seeing record after record for the NASDAQ and the SP. And again, when when you talk to investors, they're worried about investing in equities, but you're saying there is false security in parking your money in cash. What do you mean? Well, I mean, investors coming into this year, it was interesting to see analyst expectations from the big brokerage houses and bank at the banks. At the beginning of the year, the top 15 all made predictions. A few weeks ago, the market had passed all fifteen of their predictions, including negative market movement for places like JP Morgan. Now they're adjusting. 1/3 of the S&P 500 return is from NVIDIA. I agree. NVIDIA is just so far ahead of itself now. That does not mean it can't stay ahead of itself. The AI revolution is real. You can't you can't argue with it. When people say how long it's going to go on, I say it's going to go on for their entire lives. The difference between Microsoft, Apple and NVIDIA though is the sustainable sustainability of revenues and profits. Microsoft, Apple, these companies have moats. People are locked up in their ecosystems. NVIDIA has a very big head start over its competitors, but I would argue it's not a Moat. So it might eventually and it's quickly on the path to becoming the most valuable company in the world. I I do think in the long run, though, competition's going to catch up with it. Well, those moats, Tim, make them the large cap, sort of a home for so many investors. That's what they want to do. And yet we kept hearing, oh, small caps are going to rear their heads. You are not saying that right now. No, I think you got to stick with what's worked. And, and really when we look at this environment, the the key risks that investors are facing right now, you really have risks on both ends of the spectrum. Investors have put this inflation issue in the bag. They put the Fed in the bag. It's a done deal. I think it's a mistake to think that we still have, you know, some work left there. And on the other side, you also have the ability to see how are we going to slow this down? You look at corporations, they have increased prices, they've they've maintained margin through increasing prices. Now if we do see this disinflation narrative play out, we have to think what happens to those profits? Do we have to start seeing layoffs take place to maintain those margins? So you really have risks on both end. You look at these large cap stocks, the MAG 7:00, they have actually done very well in the face of rising rates that baskets up over 75% since the Fed started their cycle. So we want to stick with what's working. But again, it's all about risk management at this point. But let's talk about risk management. How do you do that, Tim? What are you buying for the portfolio? Well, we're seeing a tremendous amount of our advisors gravitate toward buffered ETF strategies right now. The biggest one is, is focused on getting cash off the sidelines and into the market. Those are 100% principal protected strategies, one year caps right now on those right around nine to 10%. So pretty attractive way to be able to get back into the market, but have the confidence to know that you have that principal protection in place. A new way to invest, really sweeping through the ETF market. Yeah, it's true, Peter, you, you look at all different areas and ways to invest with so much money, billions, more than 100 billion in assets under management. Tell me where you see the best opportunity right now. Well, I like having it be diversified. I like leaning towards the United States. Large cap investors have been rewarded because interest rates are an influencer, but they don't drive everything. They have a much bigger impact on smaller companies which are carrying debt that can really get dangerous with higher rates. In the middle of the tech revolution, the AI revolution, a lot of that is in the big cap, big cap space. I like owning the ETFs or those individual securities outright. I think that if you have insurance as part of the product, that tends to drag returns over the long run. So I, you know, 100% of the time, always advocate for clients to own those positions outright. Yeah. But again, cash, when we're talking about the trillions that are on the sideline, Tim, many people are parked either in treasuries or in 5% or 4.8% money market funds for their banks. Do you recommend they move that? You have to be in the market at this time. This is actually the number one conversation we're having with advisors right now. And specifically, there's a lot of concern about investing at an all time highs. What we continue to remind our clients is that an all time high is not a catalyst for a sell off. In fact, it's exact opposite. It tends to be a very good time to be invested in the equity market. Those all time highs, they tend to come in bunches. Right now we're hitting one every four trading days or so. You look at the stretch from 1989 to 2000, we hit one every nine trading days, 2013 to 2022, every eight trading days. So it tends to be a very good time to be in the market. You have to get off the sidelines. You have to be in this equity market. Momentum begets momentum. Yeah, except, you know, we know about musical chairs. Somebody's left without a seat. I will say though, folks, as you look at say for example, the six month yield, 3 month yield 5%, but since the beginning of 2024, right, Peter, the S&P returning 14%. So yeah, equities have outperformed. Yeah, equities outperformed and tax less, right? Your cash in the bank, you own ACD, you own a treasury, you're paying the highest tax rate. You own equities, you're paying no taxes till you sell, then you're paying the lowest tax rate. So you got to look, when rates are high, the expected return should be better. People. People get tempted by owning cash and bonds. People that have been tempted by that have really been punished this year. They haven't even really kept up with the 12 month inflation rate. So they've gone backwards. Well, at least for the moment, the music is slightly slowing down the down when the NASDAQ just turned negative. But we've been a very narrow trading range all day long. Tim, Peter, great to have you both. Thank you so much.