Transcript:
Caroline Woods
Just as stocks hit fresh all time highs, geopolitics are back in play. The U.S. seized an Iranian cargo ship over the weekend, sending oil higher and stocks lower. So now the question is is this rally built to last or just a relief bounce? George Seay is founder and chairman. Annandale capital joins us now. George, great to have you back.
George Seay
Thank you Caroline. Always great to be here.
Caroline Woods
So what’s your call George. After that double digit move in all time highs. Is it built to last or is it fragile?
George Seay
You know, we’ve had a big move here in about 10 or 11 days. A historically dramatic move. I think it’s only been that fierce five times in the last century or so. So it’s quite a move. But the market is really rational the way it perceives these things. Iran is 0.5% of the global economy. And yes, it’s really messy over there.
George Seay
And yes, the price of oil is much higher than it was three months ago. But the market is looking at earnings and looking at the U.S. economy and saying this is a juggernaut. It just can’t be stopped. It keeps going up. The data we’re receiving is is almost universally, optimistic and positive and strong, and it’s going to stay that way.
George Seay
And the market just really wants to go higher overnight. You saw oil tick up 7%. You saw stocks tick down about 1%. Yeah, we opened near flat on the market. And oil is only up about 3%. So the market the investing community is very comfortable that the U.S. economy is strong will remain strong. And they want to buy stocks. Yeah.
Caroline Woods
Has the market officially disconnected from geopolitics politics then. Because to your point we are seeing red arrows right now. But they’re pretty modest given the fact that we did see that tick up in oil and also that we saw an escalation over the weekend.
George Seay
Yeah. You see, the historical data is pretty decisive. The geopolitics long term have almost no effect on the markets. It’s all about earnings and growth and and the prosperity of various economies around the world. In particular the U.S.. So although it can affect the data and probably will affect the data from an inflation standpoint, a commodity price standpoint and a rate of economic growth standpoint, the market’s got to see that data, anticipate that data before it prices it effectively.
George Seay
And I think the market is anticipating it’s not going to be that big a break or friction cost on the economy, because it just doesn’t influence the US that much. Now it’s going to it’s going to influence Europe and Asia much stronger because they’re much more affected by this, because they don’t have such dynamic oil and gas production like we have here in the U.S. but the market is basically saying, yeah, this is bad, but it’s not that bad. Let’s keep buying stocks.
Caroline Woods
The only issue, though, is you’ve been on multiple times before, and you’ve said that we kind of have to reset our mindset in terms of what feasible returns on the market can actually be, saying maybe more like 6 to 8% versus 20% like we’ve been used to. And the S&P 500 is now up, what, almost 4% year to date. So are are the gains from here pretty limited?
George Seay
Well we’ll find out I think it’s going to really depend on earnings growth and then projections of earnings prospectively and how strong that is. If it continues to be really strong we can definitely march quite a bit higher from here. But it’s got to be really, really strong. To your point 4% in the first quarter, which is basically what we’ve got in plus a couple of weeks is is an annualized rate of about 15%, which is close to what the market’s then the last 15 and about 50% above the historical mean of around 10% a year. So it gets a lot harder from here. It’s a valid point.
Caroline Woods
So what’s the play here? Do you buy any dips. Do you sit tight. Do you start trimming. What do you do.
George Seay
Yeah I certainly would chase the mag seven here. They’ve had an explosive move to the upside and probably it’s a sell the news reaction on earnings. Unless they beat expectations and projects higher growth than anticipated going forward. But I would buy some stuff that’s kind of gotten beat up a little bit. I don’t think the oil and gas stocks have fallen far enough to be super enticing, but they’ve fallen enough to maybe nibble at them a little bit.
George Seay
And I also think financials have really lagged the market pretty much. So I’d be looking hard at quality financials, especially in the insurance space. But this is a time to kind of reflect and watch and make sure your allocations are what they should be and adjust accordingly as necessary. But if you’re at the right allocation, this is a good time to just kind of watch and see what direction the market takes from here.
Caroline Woods
So dig into that a bit more. What financial stocks do you actually like? What are some names that are on your shopping list or that you would scoop up right here?
George Seay
Yeah, I bought JP Morgan about two weeks ago because I thought it had been beaten down about 10%, and I wanted to buy quality if I bought a bank. And then I really like Berkshire Hathaway. And here it’s kind of been left behind the market rally and in a significant way, because markets haven’t decided whether they like Greg Abel or not yet.
George Seay
And they’re decisively saying they really don’t like Warren Buffett retiring. So I think you’ve gotten a Warren exit, detriment to the to the valuation place on the stock. I also like a reinsurance company called Arch Capital Group quite a bit. It’s an incredibly run company. Its return on equity is off the charts. So those would be examples of two really high quality insurance companies I’d want to be nibbling at here.
Caroline Woods
And it sounds to me like you think that the tech bounceback that we’ve seen is starting to look stretched. What about defense? Because that’s been a major outperformer over the past year. Names like GE aerospace, Raytheon, Boeing are all reporting this week. Is there still an opportunity there. Do you think that trade is getting crowded?
George Seay
It’s pretty crowded. They probably go higher from here, especially if the Congress passes anywhere near Trump’s requested $1.5 trillion defense budget, which would be historical and more along the lines of the Reagan defense buildup in the 80s. The ironic thing is, President Trump’s been very pro military, very pro defense. He’s obviously ordered quite a few global engagements in Venezuela and in Iran and around the world.
George Seay
Since his second term started up. But he really hasn’t raised defense spending that much yet. He’s he’s had a lot of rhetoric. Pro defense, pro increase the military budget in size but didn’t really do anything till now. And this is a big move in that direction. So if that passes there’s more room to run with the defense stocks. But yeah they’ve run pretty hard. It’s a crowded trade.
Caroline Woods
So what does the right allocation actually look like today.
George Seay
Well if you’re a perpetual, endowment and you’ve got hundreds of years to work with your 70% or more stocks in 20 or 30% or more private equity and alternative investments, and you probably hold very little bonds because you’ve got plenty of time to grab the highest returns you possibly can. If you’re a retiree turning 85 and you barely got enough money to make to make it to 100, if you’re fortunate enough to make it 200 with your health and your mind intact, you’re probably 80% bonds, 70% bonds of the rest equity. So it really depends on your circumstances. To a great degree.
Caroline Woods
But break down the equity exposure. As you know, you talked about tech being stretched to your defense maybe being stretched. But potentially, seeing some opportunities in financials and energy. How should we be thinking about our portfolios overall in terms of what, sectors were allocated to?
George Seay
Yeah, that’s that’s the right question. And I think people have just crowded into the Mag seven trade for a good five, six, seven years now. And it’s, it’s although they do business all around the world and you’ve got immediate global diversification just from owning them. I don’t think that’s a really wise way to to move forward. I think that you want some international exposure, you want some emerging market exposure.
George Seay
You probably want something, whether you’re active or passive, that kind of models, the MSCI, which is around 60 to 65% U.S and 35 to 40% the rest of the world. So for for a portfolio’s equity allocation, I would I would model the MSCI in terms of the components and you could tweak it here or there, whether you have a 6% energy weighting instead of 3% like the S&P 500 index has. So you tweak it somewhat, but that’s a pretty good model to follow going forward.
Caroline Woods
The only issue if you didn’t have exposure to the mag seven, you’d have missed out on an 18%, monthly return so far for Amazon, meta, alphabet, Nvidia and Microsoft are up about 14% so far in April, so should your exposure there just be you should have already been holding them, or should you have exposure through the S&P 500? What are your thoughts there?
George Seay
I would say your latter two points are you be holding them or holding the S&P 500 index, which is about 40% weighted to those securities, is definitely the way to go. If you don’t have any exposure whatsoever. I’d be nibbling at the ones that have lagged a little bit recently and not done quite as well as the others, but I certainly wouldn’t chase Meta and Amazon in the video.
George Seay
After they’ve gone up probably about 18 out of the last 20 days on the market and gained 15, 20% short order. I’d wait for your for your for your moment. And also, I think it’s a good reminder that about a month ago, these stocks all dove anywhere from 2025 to 30%, and you had an opportunity for the first time in probably 3 or 4 years to really buy Microsoft at an unbelievable multiple.
George Seay
So when those things happen, when the market panics, that’s when you want to be decisive. You don’t want to have a FOMO trade and just lunge at these things after they’ve already run significantly, because your prospective returns are likely to be light and disappointing if you do that.
Caroline Woods
Okay, so you talk about at earnings, really this is a market that’s kind of looking past geopolitics and focused on earnings. We’ll hear from 20% of the S&P 500 this week alone. Do you think earnings will actually have what it takes to keep this momentum going. And really I should say guidance. Do you think the guidance will surprise enough to the upside to keep the momentum going?
George Seay
I think that’ll be security by security on on a security by security basis. You know, like they say, it’s not a stock market. It’s a market of stocks. And the expectations now are so high. And we do have a lot of geopolitical sturm und drang. So I think that investors are wise to kind of take it case by case because some some companies are going to announce and then they’re going to get knocked down because they don’t hit their their guidance as well as I’d like.
George Seay
JP Morgan went down after record earnings last week for an example. And you’re going to have it. Some stocks outperform to such a degree. Keep they keep going up and some not so much. So that’s back to the point of the market gets a lot harder here because it’s not an automatic reflex. Buy everything and it’s all going to go up. It’s going to get much more selective going forward.
Caroline Woods
So harder to move higher. But do you think the worst is behind us?
George Seay
I have no idea, to be honest. I think you get you see on TV, see talking heads come out and they’ve got an answer for everything. And the more honest answer sometimes is you just really have no idea what’s going to happen. I mean, last week the Strait of Hormuz was open and we were going to cut a deal with the Iranians.
George Seay
And now today, we’re not even sure the Iranians or Iranians are going to show up in Pakistan to negotiate. And the Strait of Hormuz is not open yet, and the market’s still betting by the end in May. I think they give it a 62% chance in the, in the, in the gaming waging in the markets that it’s going to be open by then. But nobody really knows. That’s that’s a good example of why make sure your allocation is okay and just sit tight. Because you got a huge move in the last two weeks and nobody was looking for that. You just don’t know.
Caroline Woods
Well, I appreciate your honesty there and you’ve given a lot of good advice so far. But what do you think, given the potential volatility that we could be seeing given the uncertainty, what’s the number one thing investors should be doing right now?
George Seay
I’d say reading as much as they possibly can. Not getting consumed by the market’s day to day gyrations, which sometimes have rationale behind them and sometimes they just don’t. And make sure your long term game plan is spot on, that you have a you have a strong game plan, you’re executing on it, and you’re positioned the way you want to be for the next, not just month or quarter, but for the next five years.
Caroline Woods
Do you think that this could be a year where sell in May and go away will actually make sense?
George Seay
I actually do. I actually mentioned that to my team here at my company, last weekend, that this actually might be a sell in May year. A time will tell. And a lot of it’s at the end of the day, it will be completely dependent on earnings. And yes, the price of oil will impact earnings. So if all goes back over 100 bucks a barrel significantly and stays there, I personally think that oil doesn’t really start to affect the economy that much until it’s well over 120, so I think we can stomach what we’ve got right now. But it’s just going to be earnings earnings, earnings and how much economic growth we’ve got in this country.
Caroline Woods
And let’s just break down what that actually means. Because all too often the the they all too often but often the investment advice is stay invested. Yet if it’s a sell in May and go away year, what does that actually mean.
George Seay
Well that’s a great question. What it means as you trim it doesn’t mean you eliminate equities and try to time the market timing. The market is not tax efficient and it’s a loser’s game because you’ve got to get two things right. You’ve got to get the timing on getting out right. And you’ve got to get the timing on getting back in writing.
George Seay
Usually if you sell in May they say buy, buy back in, in October and November, but you’re still timing, you’re still incurring a tax bill for doing something like that. So I would look to trim things that have run too far. And if your allocations over your target allocation, trim back to that allocation right now, I think that makes an awful lot of good sense.
George Seay
But the great statistic they keep rolling out is that if you miss the best 30 days in the stock market in roughly the last 30 years per year, the best bit, which is basically about one day a year, your average return goes from 10% to 5% per year. And if you miss the best 60 days over the last 30 years, which is basically only two two days a year, your return, believe it or not, it goes from 10% per year to 0% per year.
George Seay
So you want to stay invested, but you want to make sure you trim it at points when you’re over your your target allocation and add when you’re under it. So that’s the discipline of maybe sell on the on the on the margins in May maybe add on the margins in the fall. If you drop below your target allocation.
Caroline Woods
Okay. I think that’s a good point to clarify there. And I think it’s a great chance to pivot to our rapid fire game of this or that. You’ve played with us before. George, are you ready? Quick questions, quick answers.
George Seay
Play ball.
Caroline Woods
All right. Yeah. No real, real rally or relief. Rally and.
George Seay
Relief rally.
Caroline Woods
Market strength or market confusion.
George Seay
Market strength.
Caroline Woods
Stocks higher from here or do for a reset.
George Seay
Temporary reset. Higher eventually. From here.
Caroline Woods
Momentum intact or exhausted?
George Seay
Intact.
Caroline Woods
War headlines. Ignore them or trade them and ignore them. Oil at 90 headwind for stocks are manageable, manageable level that they become unmanageable.
George Seay
135.
Caroline Woods
Fed cut soon or fed stays put.
George Seay
Bed stays put.
Caroline Woods
Safe yield high dividends or bank stocks.
Caroline Woods
Bank stocks U.S. resilience or international rotation. Both broad market exposure or biggest names. Broad quality growth or deep value.
George Seay
Quality growth every time.
Caroline Woods
Best bet best value play in the market right now.
George Seay
Small cap stocks.
Caroline Woods
More upside after the latest run. Alphabet or Amazon.
George Seay
Right.
Caroline Woods
Amazon Amazon or Nvidia. Amazon earnings high bar or ASB high bar. One word to describe this current market. Powerful sell in May or stay and play.
George Seay
Trim and stay in play.
Caroline Woods
Gerard C always a pleasure. Thanks so much for playing. Thanks for your picks and your perspective.
George Seay
Thank you Caroline.
Caroline Woods
That’s George Seay, Founder and chairman, Annandale Capital.