TDI Podcast: Hidden Boosts (#949)

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1:27Howard Silverblatt:This episode of The Disciplined Investor is sponsored by Horowitz & Company. If you're looking for a portfolio manager, look no further. Horowitz & Company, from seed through harvest, cultivating financial success.

1:45Short week, low volumes, lots of action. The Fed has a change of attitude again. NVIDIA, scrutiny on the rise. And our guest today, Howard Silverblatt, Senior Industry Analyst for S &P Dow Jones Indices. All this and much more on episode number 949 of the Disciplined Investor Podcast.

2:22And welcome back. It's a great week. Thanksgiving this week. And we're on the home stretch here. Andrew Horowitz. I'm in the hot seat here in the studios of Horowitz and Company, downtown Fort Lauderdale, Florida. We have this great office, great studio. All things, well, great, I guess. I enjoyed my Thanksgiving. Had a 15-pound smoked brisket, three turkey breasts that we put on the smoker as well, and enjoyed all the other fixings that come with it. A good time with the family. It was a short week. Lots of interesting action. Lower volumes, especially as we progressed through the week. But that is to be expected.

3:06What was most interesting is that just one week after that was, we had that collective sigh of concern. Oh, oh, you know, ooh, a sigh of concern. All of a sudden, there's a total change. And what I'm talking about is not necessarily about the market per se right now, but what I'm talking about is what we had with regard to the Fed. We went from a 30 % probability of a rate cut in December because of a lot of reasons, which we'll talk about, to a 70 % and now almost an 80 % likelihood probability of a Fed fund's rate cut by 25 basis points in December without the data. Damn the fact that there's limited data.

3:56Who cares? and the data that we have, that we do see and have seen, sticks to relatively sticky inflation. And you know, okay, why? Treasury Secretary Besant, he says that it's not the tariffs, it's the service economy. It's the service economy that's causing prices to increase. Sir, whatever way you need to spin it to make yourself feel better, have at it. Because we know you also said that you're going to be removing tariffs on what? Over 200 food products to reduce costs. So which is it? At this point, who cares? Who cares? And I think that's what they really want. They want us just to ignore it and just move along like good little sheep and soldiers.

4:53The fact is that when it comes to the data There is a hole The reason that the Fed was holding off Last week, one and a half weeks ago Was that they didn't have enough data And because of the government shutdown Where we had limited data from both inflation issues for the next month And more importantly for the jobs numbers that weren't going to come out to after the Fed rate decision, people got nervous. The Fed was talking time and time again about how, you know, December's not a done deal. That's what Powell said. And then all the other Fed speakers came out and echoed that. Markets got upset.

5:37Things got tight. They had to do things like reaffirm and restate that, don't worry, we're going to start buying bonds again, and the QE engine is revved up. However, right now, markets did an about-face in light of all the news that we saw, whether it was NVIDIA being maybe upseeded by Google in the chip area. Some of the earnings that we saw that were a little bit concerning. The valuation issue that has been bubbling under the surface. But again, as investors, we need to focus. We need to recognize that the important things are not necessarily the things that happen each and every moment. Every time there is a conversation about a tariff, a war, pick whatever it is, big or small, we don't have to react.

6:44I had a lot of client meetings over the last, I would say, probably the last two weeks. And you know what we talked about? We talked about the need to understand that what is going on now. And we talked about how we need to look at what the real goals are. Because people are generally concerned. They're upset. They're confused. So many people are confused. why are the markets going up or down when we have all this good news or bad news, you know, put in whatever you want. But why is it that no matter what seems to happen right now, the markets have a desire to continue moving higher? We get bad news, things sell off, and then they move back.

7:34And there's kind of an absence of anything other than a flow of money in. because a lot of people get caught up in this day-to-day, the news, I guess it's minutia. Why? I'll tell you why. It's because that's the time frame that we all live in. We don't take a breath once a week or once a month. We're not like a whale. We actually breathe four times a minute. Did you know that? 21 ,600 breaths per day on average. That is our time frame. In and out. In and out. But that's not the proper way to look at our investing. That's not the way you want to look at things in order to make a good future for you, make a good fortune for you.

8:29That is not the outcome by looking at every single second of every single day. Unless you want to be a day trader and that has a totally different discussion that's attached to it. 21 ,600 breaths per day on average. Can you imagine having to focus our time frame on that all the time when we're dealing with our future? You're not thinking about your future when you're breathing in and out. You're thinking about right then and there. Your brain is conditioned right then and there. And that is what happens a lot of times when we get caught up in.

9:05That is where many of us fall short in providing for our future selves. That is when you may say things like, is now a good time to invest? You know, the market's really high. It's very volatile. Is it a good time to invest? The fact is, truthfully, it's always a good time to invest when you think out 20 or 30 years from now. That's the way I see it. Now, is it the exact moment of the exact day of the exact week of the exact month that is right right now? So you're 2 % off on your 20-year cycle. You buy a little bit high. The truth of the matter is that you have to think about the future rather than the right now.

10:01And maybe it's not a good time, 10 ,000 breaths in the future, but that's not your goal. And if you think it is and if you can't focus and do what is right for yourself now, maybe you need to do one of these complete makeovers of your understanding of what exactly you're doing, listening to this show, are you even becoming disciplined? Yes, I'm sure you are. The guests that we've had over the years, the conversations that you and I have had. But sometimes it's tough to pull that trigger. I get it. I understand 100%. Do you know how many times that we have looked at the markets from a dollar cost averaging standpoint?

10:38We do a two-part dollar cost averaging approach for people. One is an opportunistic. So for those people that say, you know, I really can't functionally accept the fact that I need to put all my money to work right now. It's been in cash for the last two years. I can't do it. I don't want you to do it. What we do is we get you in slowly but surely, right? One foot in, one foot out. We've talked about that a hundred times. What we do is with that is specifically a two-part DCA, dollar cost average. And the opportunistic leads us to when markets take a hit or a sector takes a hit or an area and we believe the valuation is right, we'll push money in.

11:18But what happens if that doesn't occur for a few weeks, a few months? If we have committed to a dollar cost averaging program, we have to make sure that if the market continues to move with us and away from us, we are going to grab some of it. So what we do, we have a time-based dollar cost average that goes along with that. We have to force ourselves to get in the market. What's the point of missing 10 % in the market because it was lower back here, but we thought it was too high and we didn't put our money to work. And therefore at the end of the year, it's now 10%. We're looking for a 5 % pullback to put money in.

11:56We're still 5 % worse off because we didn't get in the first 5%. So we do it a tandem approach, dollar cost averaging with opportunistic and time-based. That's how you control your emotions. So let's get to it. And if you can't do this, if you functionally can't do this, don't beat yourself up. If you're sitting in cash going, oh, I missed on the last two months, two years, two hundred years, you know, 40 years worth of whatever. I wish I could have had this or could have had that. if you have the sense that you can't give it up, but you can't do it either, may I suggest you give it up? If you can't do it, give it to somebody else to do it.

12:44Let someone else manage your money. Seriously, this is a great time right now during these holidays. You know how that feeling comes over you? It's Thanksgiving. Now all of a sudden the Christmas trees are going to go up. Now the light's going to go up. It's going to be Hanukkah soon. It's going to be all the end of the year. It's going to be New Year's. It's a great time, just the way we are set up, to start to think about how we can change for the better and make ourselves better and make our future selves proud of where we are today. Right now, for those of you that are kicking yourself that five years ago you didn't invest in X, Y, Z, that I should have, could have, why didn't I?

13:24The five-year future you is still going to be even more pissed off than the 10-year past you, if the five-year past you, which is now, still hasn't done anything, why haven't you learned your lesson? Do something. Get off the fence. Put your big boy pants on, your big girl shoes on, and let's get going. That doesn't mean you have to be reckless and stupid and just throw it all out there. What it does mean is that you have to be in the game to win. If you're not in the game, you're never going to win. You're never going to lose either, by the way, unless there's something that behind the scenes is going to eat at your potential.

14:08And what is that when it comes to investing? What does that come when it comes to money? The difference is that if you're in a game and not playing, you can't lose, you can't get hurt. In the investing game, if you're not in it, you can't win, but you could still lose. And you can still lose because you have something. What is it? Inflation. Inflation eats at your money day in and day out. It's kind of like constant. And what happens is sometime in the future, your money's worth a lot less and you're losing the game. So make sure you're playing the right game. Make sure you're in it. You don't have to be, you know, crazy about it.

14:55but you at least have to give yourself a shot. And by sitting on the sideline, it's not going to do anything for you. That's my words of today. And I hope you really, you know, take it to heart that I want you to win. I want you to succeed. I want you to be disciplined. I want you to learn. I want you to do what you got to do and give you that motivation to do so. Especially for those that have been sitting on the sidelines for a long time. And again, I'm going to state this point again. If you can't do it, let someone else do it for you. Good time to do it. All right, let's get into our discussion of our guest.

15:36Our guest today is Howard Silverblatt. He's a senior industry analyst, index investment strategy expert for S &P Dow Jones Indices. In addition to the general market research and commentary, he's responsible. He is the guy that's responsible for the statistical analysis of the S &P Dow Jones Industrials family of U.S. indices, including the world's most followed stock market, the S &P 500. He's been with Standard & Poor's, get this, since 1977. He's held various analytic, business development, and product positions. He joined S &P Indices in 83 as an editor and has since received numerous corporate and industry awards, most notably for his work in the area of creation development of Standard Poor's core earnings and global industry classification systems.

16:29So good stuff. Let's get right to it and bring him right on the show. Howard Silverblatt, how are you? It's been a while. It has been, and it's been a lot to talk about since then. So much. I want to start. We're going to dive right in because you sent me a spreadsheet like you always do, you know, about what's going on with a variety of things with the various indices and their constituents and, you know, the underlying, the totality of it, all that. So one thing that I found very interesting right off the bat. So I'm going to start right with the first page that I looked at and I kind of did some calculations was the tax rate trend.

17:03And we all know that there was a change in tax rates with President Trump the last time around. Right. But that really stuck out because this is what I got. The average in 2000, the year 2000, was about 35 percent for S &P 500 companies. In 2015, it was 24 percent. And the latest is 19 percent. That's pretty amazing. It is. But it's going to get lower at that point. Just a couple of numbers just so we can know. If we look back beforehand, it was about a 32, 33 percent before the Reduction Act from Trump 1.0. Now we're dealing 18, 19 percent. The last quarter, full quarter, Q2 was 1865 as compared to if you go back Q2 2000, OK, it was 33.7.

17:58So that tax rate has considerably gone down over time. And that money has added to the companies. Remember, a dollar saved in taxes is$8,$10 in sales if you have a decent margin. More if you don't. What's happening now and happened for the third quarter, which we don't have a final on yet, but the numbers that we do have show it. First of all, the tax is paid by the companies for their third quarter have significantly declined. Most of this is from the One Big Beautiful Bill Act, which gave$190 billion in tax credits and write-offs, depreciation schedules, amortizations. So it's a write-off that you're getting as well as credits.

18:42So that$190 billion was saved for 2025. They did part of it in Q3, and we claimed, and they'll do part in Q4. So that is increasing third quarter earnings significantly. I mean, well beyond anybody's projection. OK, and there's other reasons why the earnings are high, but that's a major one. And since they've got all this tax credits, the tax rate's going down. So you may be looking at a 17 % number, effective rate going across. Some companies already have to worry about that 15 % minimum rule. Imagine the difficulty math compared to when you were paying in the 30s, you know, decades ago. So, again, the tax rates have gone down.

19:27I do stick them on that EPS file put up weekly, and that has going back current rates. So it only shows Q2. Q3 will go after the quarter in January. But that 1865 rate, you know, 18.65 % is coming down. So we've already seen it. You said the third quarter numbers are going to start showing this one big, beautiful bill act, the OBBA. Oh, yeah. But is that going to be a one-time? No. Well, you'll get more in the third quarter because you can do some catch-up depreciation credit. But it goes not just Q4, but into next year. It also incentivizes and permits companies to buy some short-term capital expenditure equipment.

20:13We're not talking about the AI trade now, but regular ranking files of companies. So they're doing it, and they can write it off a lot quicker. So their cash flow is better. Did they increase the 165 deduction, you know, where you could just write it off in one shot? Yes. The amenization, depreciation, health care of purchase research and development, okay? Equipment can now be written off a lot quicker, okay, on there. Some of it literally within the year. It depends on what you have. There's a lot of paperwork there. So I'm saying short term, the government's underwriting you. Yeah, yeah, clearly.

20:55And again, Q3 was catch up because it was retroactive for the year. So you've got the biggest hit in Q3. You're going to feel it in Q4. But depending upon what you want it to, the verbiage should be, you could say, well, Q4 is going to be less than Q3, but a heck of a lot later than any other quarter previous to that. Which explains why there's the constant under the undertone or maybe the overtone, I don't know, of just bullish buying under any circumstance because the realization is that there is this. Now, some people say, well, that's artificial. It's not artificial. The bottom line is this.

21:33If you make – if you have gross sales of a million dollars and you have a million dollars of expenses, you have no profits. That's a problem for a company, of course. You have a million dollars of sales and all of a sudden there's something that goes on with the books and records and how there is this, you want to call it artificial something, and now you have$500 ,000 of net profit. That drops right down and that's good for everybody. It is good for investors. Obviously, government gets a little bit less money, but they're hoping to make it up as companies do better than it. There's more sales, but you're exactly right on there.

22:05And it's not just a short-term situation. Again, what we're seeing right now with the tax credits are corporations. You and I as individuals, okay, will get it starting February, March, and April. That's when the tax cuts hit for the individuals. The holding schedule has not changed for 2025. So when you go and file, you know, in general for 2025 taxes, your refund starting in February is about$150 billion for individuals. I'll take$150 billion. It was the year before. Well, that's not going to help the highest, highest earners, are they? No, it's not. But it's going to help the majority of people.

22:50$150 billion stimulus going in there, which people typically spend. They do not reduce their debt. They do not put it in the savings. They usually spend that money. Higher-end people, if they're getting something, what we call middle class, upper middle class, they'll use it for their Q1 estimate or something. But still, they have more cash. So this money is expected to stimulate the economy the same way that$190 billion, again, same bill, from the same bill, stimulated for Q3 and Q4. For that reason, plus Fed reducing, the end of QT, quantitative tightening that starts December 1, which is the equivalent of another quarter point cut.

23:36For those reasons, we're getting a lot of stimulus coming into the market between now and the first half of next year. That has a lot of people buying, saying even if we have headwinds such as tariff or a Supreme Court decision, whatever might come in there, all this stimulus is going to help sales and the economy. And that's adding to a lot of the buying in the market. You follow the money. And if there's a stimulated economy, there's a stimulated market, I'm in it. I may not be in it long term, but I'm in it for short term. You know, it's interesting. The One Big Beautiful Bill Act, one of the things that was talked about during this was, you know, back in the Biden days, it was like, oh, the Inflation Reduction Act, which we know was a terrible name on that, you know, because it was spending.

24:27Every time a bill is done by the Congress, there is spending. Everybody should really, I think, recognize that. I don't recall a bill maybe back when, but any bill that has come through and that is whatever is always stimulative. There's always money coming through, and that's why when these things pass, people get very excited. We're talking about just between the corporate numbers of$190 billion of tax credits and$150 billion of credits coming down. We're talking about close to$350 billion worth of, just right there, by the way, of credit. We're not talking about the stuff that's given to the farmers, they're given to this.

25:01that they're not talking about any of that. It's pretty amazing. It is an enormous amount. And again, that stimulus slides down and investors are going into the market. In addition to that, we've got sales. Sales with most analysts, I mean, I looked back to the third quarter. Second quarter, most analysts missed sales. They underestimated. Third quarter, everybody missed it. Third quarter, sales are enormous. They are a record. People are spending, whether the demographics is higher end, upper middle class, however you want to do it. OK, third quarter sales were fantastic. OK, that helped the earnings, that helped the margins and they're expected to increase.

25:45Again, if people are spending, the economy is stimulated, the market is going to react. At some point, though, you're looking beyond that and saying beyond six months. What about the second half of 2026? When the bill supposedly comes out, you know, for those things, when it starts reversing, you don't have the stimulus, but you have the cost factors coming in there. That's the concern. And that's when you'll see either policy and monetary and fiscal having to change or you're going to see the market have to change. It's going to be interesting. I want to dig down into something that I plucked out of your data.

26:24In particular, I want to talk about the comparison of sales and operating earnings. We're going to do that in a second. I'm going to take a quick break. We'll be right back. Let's talk about interactive brokers because they have key competitive advantages for sophisticated investors like you. IBKR's margin loan rates are from just 4.37 % to 5.37%. In fact, IBKR was rated one of the lowest margin fees by StockBrokers.com. Compare IBKR clients' low margin borrowing costs to other brokers like Schwab, E-Trade, Fidelity, and Vanguard, who charge hundreds of basis points above IBKR's low rates. The best informed investors choose Interactive Brokers.

27:08Margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. Interactive Brokers is a member of SIPC. Rate your subject to change. Get started today at ibkr.com slash compare. So Howard Silverblatt, I said I want to talk about this, something I pulled out of your very well-done spreadsheet that you do because you're the keeper of the numbers since forever with S &P. Well, it was S &P and now it's S &P Dow Jones and all that. Since 2021 for the S &P 500, I looked at this and I said, well, let me look at the sales. Sales have increased by your numbers 15%.

27:53Raw number, raw numbers. From 2021 to now, the gross sales for the S &P 500 constituents is up 15%. But operating earnings have increased 27%. And as reported earnings per share have increased 33%. Again, raw numbers, right? I'm not doing the compounding. I'm just doing the from then to then. Is that efficiency or and or? And or is that lower share count? Okay. It's not as much lower share count. Within the index, we go back and adjust. I'm adding up when we say it's 30-something percent higher. That's in actual aggregate, billions of dollars, how much it is, not per share. You can theoretically take your shares down to one.

28:42So whatever your net is, that's your EPS. So the actual dollars, some of that is productivity, not as much as is hoped to be going forward. There's a lot of productivity increased via AI built in going forward. But going backwards, again, up to the third quarter, there are some efficiencies. There is lower taxes, better margins, especially post-COVID. People are just spending it. Companies have, remember, in the third quarter numbers here, second and third quarter, even though it's a record amount, companies still absorb part of that tariff price. Countries did, government did, but individuals got some of that passed on, not full amounts, but some of it.