Episode 42 | Markets in Motion: Understanding Today’s Market for Long-Term Investors

In Episode 42 of “Market News with Rodney Lake,” Professor Lake, Director of the GW Investment Institute, provides a broad overview of current market conditions, emphasizing the significant influence of tariffs and trade tensions, particularly involving the Trump administration's policies. Despite short-term uncertainty and volatility, with companies like Apple and Nvidia receiving tariff exceptions and businesses like Walmart and Amazon grappling with rising costs, the U.S. economy shows underlying resilience with strong employment and moderate GDP growth. The conversation emphasizes the importance of focusing on long-term investment strategies, such as investing in high-quality companies with strong management teams that can adapt to challenges.

Transcript

Thank you for joining “Market News with Rodney Lake.” This is a regular program for the GW Investment Institute where we talk about timely market topics. I'm Rodney Lake, the Director of the GW Investment Institute. Let's get started. Welcome back to “Market News with Rodney Lake.” I'm your host, Rodney Lake. Today's episode is coming from Duquès Hall in the, you know, showroom here.
We're going to be talking about what we talk about in class, a general overview of market news, because there is so much going on and we record these episodes and then they come out. So for this, you know, it could be ancient news by the time it hits. However, that said, there's so much happening. And again, this is a GW Investment Institute program.
This is educational informational only. All right. What's happening in the news. And so we're going to talk about a few specific companies. But overall the tariffs continue to dominate. You know Liberation Day was announced. And all the reciprocity of this calculation, that the Trump administration did for these tariffs, you know, I think surprised even the people who thought you know, okay, it could be very aggressive, even much more aggressive than that.
Then there's been some back and forth. There's a pause put on some exceptions made for Apple, for Nvidia. So these things are very relevant and have helped, you know, on certain days in the market. But the market has really been all over the place and really trying to find its footing. Now, what do you think the lows are? That's going to be difficult to know.
But these negotiations are ongoing ongoing. Today is April 22nd when we're recording this. And so the World Bank and IMF meetings are right here, in town, right close to campus, right across the street, literally from us. And so there's certainly, you know, negotiations happening around what's Europe doing with the U.S. and what, you know, everybody is focused on is that, you know, all these bilateral trade negotiations need to happen in pretty short order to calm the markets down.
And they are not. Now, you know, what's the Trump administration's agenda? It's obviously a couple fold. They're trying to bring back manufacturing here to the US. That is a long term effort. That's not going to happen in the short term. Certainly not going to happen in a couple of days. And so you're definitely hearing business leaders and you had some of the biggest retailers, including Walmart, as an example, visiting the White House recently, you know, and the administration is listening to them about what's going to happen on these tariffs.
So that is very important. And but if you listen to what's happening, with companies and their announcements, you know, it is a mixed bag. People are definitely concerned. But the underlying fundamentals of the economy still remain quite resilient. And you have people like, for example, United Airlines effectively giving two sets of guidance, saying that, hey, you know, under a recession scenario, this is what we look like under and under a regular scenario.
This is what we look like. And so that absolutely helps, you know, people try to understand the environment but also puts in uncertainty to say like, look, we're not going to give a single set of guidance. And some companies are suspending guidance and they're saying, look, we're not going to talk about guidance all right now because it's too uncertain that, you know, our sort of, you know, hit from these tariffs.
We don't know exactly what that's going to look like right now. Is there going to be a deal done before we get to the finish line? For, for all, you know, for the pause here, that's going to be difficult for us to know. And so you have these companies suspending guidance. And that's not helping the markets really trying to find a footing here.
And so you've actually seen interest rates tick up a bit, the ten year number. And you actually seen markets equity markets go down. Now that tend to tend to not happen. And you see the dollar weakening. You typically see when there is a flight to quality that's into the bond market. But you're actually seeing the reverse, you're actually seeing all these things.
Maybe it's not even reverse. You're seeing these things be correlated with each other on the downside, that's not typically the case. Weakness in the dollar, weakness in the bond market. And to take the ten year going up and weakness in the equity markets, that's not what has happened in the past. Now, these are unconventional times, to say the least.
And so maybe we should expect some unconventional things to happen here in the short term. But if you look back and you say, okay, well, hold on a second. At the GW Investment Institute, we're training investors to be long term. We're training investors to be focused on what's going to happen, not tomorrow, not next week, not next month.
But what do we think is going to happen in the next 5 to 10 years? Right. It's hard to think really past five sometimes, and it's certainly hard to think about ten years. But their client is the University endowment and their client is certainly focused on five and ten years out. We're not we're not focused on, you know, trying to day trade these portfolios, their endowment portfolios.
They're here to support the Institute and the mission that the Institute does, which is to support our students, to help the next set of students learn about the investment business. And so let's try to really draw back. Let's try to think, if you look at some of the underlying, you know, characteristics, the fundamentals of the economy. So we have a quant class which is running this semester.
Our pitches are happening today. We'll see what those come out. What's happening? The unemployment numbers still remain fairly you know good 4.2% for example. That's nearly full employment. So you're talking okay, there's certainly a lot of mix happening. But that that's good. You're seeing growth numbers being okay for the the forecast. So you know GDP in the US obviously is not going to grow at 5%, but 2% is not a bad number.
You know, positive growth in general is good. And if you look at, you know, to the other parts of the world, you know, Europe is going to be below that, there certainly, you know, can't get out of their own way in certain, aspects. And so US is going to continue to be the main place where you're going to get long term growth at scale, right?
20 trillion plus dollar economy, you know, very challenging to get scale economies to work in Europe. You know, you know, there are certain great things there. And I'm not trying to pick on Europe, but Christine Lagarde was just speaking, as head of the ECB at the IMF and World Bank meetings here. So the US continues to be the place to be for the long term.
So as an investors, we sit back, we think, okay, well, what are these, you know, some of these companies that we've been thinking about? Some of the Mag seven that we talked about and I, I do think that, you know, there's going to be some opportunities, if you're really considerate, if you really thoughtful to think, okay, well, some of these companies are going to be hit.
Some of these companies are going to have a real issue with what's happening with the tariffs, and they're going to be impacted. And you hear companies like Verizon say that effectively, they're going to pass on any increase in the phones to the consumer. So the consumers are going to feel this. And, and some of these companies are going to get hit.
You know Apple got an exception Nvidia got an exception. And then we think about a company like Amazon, you know, their products, many of which can be that are sourced from China, you know, that's going to have an impact on the purchasing power for their clients. And saying, well, I love the free shipping, but the prices of these products have gone up much more dramatically than I expected, much more dramatically than I'm ready to pay for.
And so you could see a reduction in consumption. You could see a pullback in the demand in the short and intermediate terms here. And so that could hurt a company, like Amazon. But one of the things that's also important as investors to think about these management teams are not gonna stay on the sidelines and say, well, you know, this is just what's happening to us.
They're going to be out there hustling. They're going to be out there trying to talk to the administration. They're going to be out there trying to work on their supply chains. And you can see that with Apple. They're trying to move some of their production to India right now. JD Vance for example, is in India. And Apple is trying to move some of that production into India, to have, you know, some of the help with the tariffs and to diversify their production.
And I think that's going to be a big help for Apple. And Apple have has obviously, along with others like Nvidia committed a lot of capital into the US to build things right here. Nvidia for example, mentioned the supercomputers being built right here in the US. So we have to pay attention to those things. Those things are important.
And again, when you're thinking long term, you really have to sit back and think, okay, well what do I want to be invested in? So we're going to go over the framework. But not to a specific company today, but to talk about, okay, when we're thinking about the long term investing, you know, we want to think about the business.
Obviously in the short term, the tariffs, all the uncertainty are going to impact the quality of the business. So if we have to pass on these prices to the consumer, that's really going to hurt us, right. If we don't have a lot of pricing power and even if we have some pricing power, some of these tariffs, you know, 145%, on Chinese products effectively embargo right now.
And 125 for them on on the other side, this is very challenging, even if you have pricing power. Tough to price that. In that said, if you have a long term view, if you have a high quality business like Apple, like Amazon, like Nvidia, like Microsoft, these are some of the Mag 7. But we can talk about Walmart, for example.
These are high quality businesses and Walmart is absolutely going to be impacted because they source a lot of their products from China. Right. Always low prices. That's the deal at Walmart. And people appreciate that. If people go there for the deals, that they can get at Walmart and for their sourcing and for their expertise in the supply chain.
But also Walmart's not going to sit on the sidelines and say, look, you know, hey, we give up, we're done. Pack it up. That's not what's going to happen. These management teams are exceptional. When you think about the business. We want to be involved with these high quality businesses. But at the same time this is really where it shows okay.
Pay attention to management. And so for our analysts, one of the things that we try to tell them is that during these extremely intense periods is a fantastic time to learn. And sometimes you pay tuition to the market, but it is a fantastic and fabulous time to learn. Pay attention to what these management teams are doing during this period.
The highest quality management teams are going to try, and they're going to work very hard to position themselves to have, you know, the least amount of impact that they can from the tariffs or possibly be opportunistic, or there are things that they can do on the upside. So it's really important as an analyst, of course, we got to pay attention to the quality of the business over time.
You know, what are the gross profit margins? What are the profit margins? What's the return on capital? You know, the Joel Greenblatt Magic Formula. That's part of that. So pay attention to what's happening there. And of course, some of the things that we talk about, look at the return on equity, the DuPont formula. You know, it's a pretty simple equation.
You know, profit margin times asset turnover times the equity multiplier. Think about those things as part of the business. Now those are calculations. Those are numbers that you can grab. But then you think about management. There's some qualitative things that you have to pay attention to. And over time what's their M&A track record. But specifically right now what I'm encouraging our analysts and anybody that's watching the show on YouTube or listening to it on, you know, the podcast is to think about what these management teams are doing right now.
And I encourage you to pay close attention to the actions that they're taking during this really intense period, because that is going to highlight their acumen around, you know, how to deal with difficult situations. And so if you rewind back to what happened in Covid, if you rewind back to what happened in the 2008 and even further back, for those of us that were in the markets during the .com boom and bust, you're trying to figure out how these teams are going to, you know, navigate these challenging circumstances.
And so it's going to give, you know, you more confidence or less confidence, in these teams. And so you know we're encourage our analysts pay, you know, pay attention. You're going to find high quality management teams. They're going to figure out ways to navigate through this. Some of these teams you might not be invested with. You know I think Tim Cook has been particularly good at navigating these these waters before.
And, you know, time will tell. You know, maybe, you know, it'll be different this time. If you look at this, one of the surveys that just came out for people that are looking to upgrade their iPhones, it's over 50% in the next year. So that's a pretty high number. People seem, you know, confident that they're going to stick with their Apple devices and they're going to get the next version.
And so, you know, that is loyalty to the brand that is brand and that it's going to be some pricing power there. Again, not infinite pricing power. Certainly at 10% or 20% or maybe even 30%, 145%. Yeah, maybe not, but it shows some confidence in the brand. That's high quality business. Look at the management team. Now the valuation.
Some of these companies have been selling off. And if you look at the valuation and we'll pick one in particular here. We'll pick Amazon and maybe we'll talk about a couple. But let's talk about Amazon first. You're absolutely seeing a dip in this valuation. And so this is a time to high grade your portfolio. Again not investment advice.
But what we encourage our analysts to do is let's think about what are the highest quality companies that we can own during this stress period. So let's make sure that we get out of these things where we have less confidence in these management teams. Let's get out of these things where we think like, well, these were okay businesses.
Or maybe this didn't work out on the investment thesis that we thought, and let's high graded our portfolio on our highest conviction ideas, where we think these management teams are rock solid and we're in great businesses again, like Apple, like Amazon, like Microsoft, like Nvidia. And let's make sure that we find the capital within our portfolio, even if we don't have new capital and deploy that against these names, make sure we're high grading the portfolio whenever that we can.
The year to date number on Amazon is almost -21%. It's again, it's been up and down all over the place and the one year return is -2%. So when you look at the valuation for an Amazon and again not investment advice, you're talking about 24.5 times forward earnings. Historically this is fairly you know, reasonably priced. And certainly for a company that has a place to at scale invest capital.
One of the biggest things as a reminder we've talked about this before is you have to have a good business and a good management team. And we're talking a little bit about the valuation. And we'll get on to the balance sheet here. But one of the things that is a sign of a business that you want to be part of is that it has a place to redeploy capital for a long period of time at scale.
Amazon has that right. So they can redeploy that AWS continue to dominate retail, continue to get, you know, delivery more and more focus. If you hear Jeff Bezos talk about, you know, some of the questions that people ask, are the obvious questions. How do you stay ahead? But some of the questions that he talks about, or a question that he talks about, is that what are the things in the next ten years that will not change about the business?
Right. They're certainly trying to work their way into AI. We talked a little bit about that, but what are the things that won't change? And Jeff Bezos talks about this. Some of the things that are not likely to change. People don't want to pay more. They want to pay less. People want their products quickly. He goes on to say, you know, people are not saying, you know, gee, I really love Amazon, but I wish you would, you know, charge more and I wish my products would get to me slower.
That's not the case. And so what you can know is that getting that next day delivery, getting that faster delivery, getting those lower prices, building a better supply chain, you know, more automation, through robotics, through AI. Amazon has a enormous platform to reinvest at scale, for not just in the US, but around the world in some of the places they're working.
But we could just take the US for right now and say, well, they have enormous places, for capital deployment. And that's fantastic. So as a, as an investor, if they can redeploy that capital, it's much more tax efficient if we're taxable investors. Again, not investment advice, but it's critical to think about that. If a company doesn't have redeployment options it becomes very difficult.
They got to get that money back to you. And then you have what's called reinvestment risk at that point. Amazon has that as a quality as well. And so you're absolutely looking for that. And you compare that to a company like Microsoft. What they've been doing they're sending some money back. They're paying a modest dividend for example. And so if we look at the dividend yield, it's just under 1%, 0.91% right now in mid April of 2025, but what they have done is say we're going to, you know, acquire companies.
And certainly Amazon did that, for example, with Whole Foods. And there's some other big acquisitions we could talk about. But Microsoft you know obviously has redeployment options too with Microsoft Azure, just like with Amazon on AWS. But Amazon also has that on the retail side as well. And so you think about okay, well where can this company redeploy capital?
As an analyst you should be thinking a lot about that as part of the business and as part of management. Those things are interconnected. Right. Are you in a business that has these redeployment options? And are you with a management team that can see those things and actually get it done? It's not enough to say, well, we're in the business and these are options.
You have to have it both. You can't just say, well, you know, it's out there. It's got to be a combination of you're in the right business and you're with the right management team. They can see those things and seize those opportunities and make sure that they can redeploy that, you know, capital at scale. Now, when you're talking about smaller companies, obviously it's the same just at a smaller scale, but you definitely need to have those options.
And as an investor, you want those because it's very challenging to find great management teams. And so when you find a great management team, you want to keep backing that management team. You want them to keep working. You want them to keep finding new opportunities, and you want them to keep redeploying that capital. And again, some of the metrics of return on equity, return on capital, gross and net profit margins.
Make sure you're looking at those things. On the management team cannot stress enough the qualitative pieces. You got to pay attention to those. Obviously, some of the metrics that you can look at, asset turnover, but you look at the metrics of return on invested capital, which are part of the business, but driven by the management team and return on capital.
So those things are interrelated, obviously moving on onto the valuation side, again, we're drilling down a little bit here on Amazon. You know, not historically cheap relative to the market. But you know, historically cheaper relative to itself. You know, let's say 24.5 times right now for Amazon. So you're not necessarily paying up, for a great business that has growth options at scale.
Then we move on, you know, to the balance sheet. You know, you're not you're not really worried about any of the Mag 7 companies we've talked about that, in the past, but maybe that speak broadly, about the man, the balance sheet. Excuse me? You want to be with companies that carefully manage the balance sheet? Now, this is where the components, business management, price valuation, balance sheet, they're all interconnected.
Management is running really all of these things, right. Management decides except for the price and valuation. That's where the market decides. The management team decides the business to be in along with the board. The management teams decides the capital structure. The management team decides you know, how to operate themselves and how do they deploy capital? How do they, you know, what's the dividend policy?
Again, some of these things are in conjunction with the board. But a lot of this is driven by the management team. So again these components are all interconnected. The business the management and the balance sheet. The price valuation is the factor that's determined by the market. Right. What's the market say it's worth. And then what do you think is the value? Now that even the the value the intrinsic value is also driven by the management that you have
Because a high quality management team is going to have a higher intrinsic value because they know what to do versus, and, you know, somebody else, the I guess the bifurcate that on the price valuation, it is the price, that is set by the market and the intrinsic value, the valuation. But you decide as an analyst is really, connected to those other components, including the management team as well.
But on the balance sheet, back to the the balance sheet piece, you know, look for companies that are well capitalized. You know, if you're an equity investor here at the GW Investment Institute where equity investors, we want to make sure that we're protected, the biggest risk for any company is going out of business. You got to live to fight another day.
And especially in challenging times, this is the importance of preparing for these periods. And that's again management's job and making sure that you have a balance sheet to live through this and not ideally, not only to live through this, but possibly to take advantage of these very challenging situations, pick up market share where it's possible because weaker companies that are weaker, with respect to all those components, but possibly have a weaker balance sheet and possibly even some of those might go out of business.
It's time for the stronger companies, the better managed companies to pick up that market share. So that's super important. Now just to overview here we went over just what's happening the market. And this is kind of what we do in our market news segment during class now. But we talked about each component: the business, the management, the price valuation and the balance sheet.
Super important for the GW Investment Institute. We want to keep, you know, focused again on the five and ten year time periods for our client here, which is the GW University endowment and the student funds that are that are part of that. And we want to encourage you also to do the same. If your time period is short term, you know, that should be cash, again, not investment advice.
But if your time period is 5 to 10 years, you should be stepping back. Try to get rid of all the noise that's happening in the market there. These a lot of these things are going to get resolved. Think about what's the long term. Think about the best businesses that you can be and think about the best management teams that you can partner with.
Think about, you know, what's the intrinsic value of these companies relative to the price. And then really high quality balance sheets get with those companies. Stay with those companies. Think that you're partnering with these businesses. These are not, you know, stocks that trade on an exchange. These are pieces of equity in these businesses that you get to partner with.
So do the work do the analysis. You know, really try to think five and ten years out, make sure that your capital matches that the asset liability matching, if you need that in the short term, you should have that in short term cash. Again, not investment advice. But if you can plan for the long term, if you can invest for the long term, you absolutely should be and you should be focused on asset liability matching 5 to 10 years out.
Let's find a great business. Let's find a great management team that we think is honest and capable. They can run this company. Let's find the intrinsic valuation where we're not overpaying. But we probably gonna have to pay for high quality business and let's find a high quality balance sheet. That's it for this episode. For “Market News with Rodney Lake,” we look forward to seeing you on the next episode.
Thank you for staying tuned.
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