Bearish Signs and Antitrust Tensions

It's a short week here on Industry Focus, so we're gathering up all the hosts for some roundtable investing discussions. Today's talking points: why you seriously might want to keep some extra cash on the side these days and what the snowballing antitrust crackdown on big tech means for Alphabet's Google (GOOG -0.75%) (GOOGL -0.77%), Facebook (META 0.16%), Apple (AAPL -0.69%), etc. Tune in to hear some of the many recession indicators that have rung the warning bell lately and what long-term investors can do about it; why the big tech antitrust concerns are unlike antitrust debates of yore and what that means for the companies involved; and more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 27, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's the week of July 4th, so we brought all the Industry Focus hosts together for a roundtable discussion of what's been going on in the market this year. I'm your host, Nick Sciple, and today I'm joined in studio by Industry Focus host Shannon Jones, Dylan Lewis, and Jason Moser. How's it going, guys?

Jason Moser: Hey, buddy!

Shannon Jones: Hey!

Dylan Lewis: Great!

Sciple: It's great to have you guys here! We did one of these back in December, so I thought it'd be fun to come back around again and see what's been going on in the markets. It's been a big year so far.

First thing I want to talk about is where the market's at today. We first did one of these roundtable shows back in December. The market was at a very different point than it is today. The market was down as much as 20% off its highs. The Fed had just raised interest rates another 0.25% to 2.5%. There seemed to be a general belief that the U.S.-China trade dispute was starting to wind down, and calmer heads might prevail. But today, the market has made a new high, we're pricing in a 100% chance of the Fed rate cut this year, and we're as strained with China as we have been. As y'all look at the market today, what are your thoughts on where we stand and where we're going forward?

Moser: I feel like we've been talking about the market being overvalued now for seven years. We really have. We've been talking about this for a long time, and it just seems to keep on going up. Now we're in the face of talking about actually rates being cut, which we would not have even imagined just a year ago, probably. It's a weird place.

Lewis: Yeah, I subbed in for you on the Financials show and talked Fed rates.

Moser: I heard! I listened to that show!

Lewis: I had a great time!

Moser: You sounded really good! You did a great job there!

Lewis: I did my homework, what can I say? But we were talking about rates, and the idea of a rate cut when rates are as low as they are is baffling to me, especially when you look at some of the other economic data out there. Unemployment 3.6%. The labor force participation rate isn't as strong as unemployment. It's about 63%, which hasn't recovered from where it was prerecession. The inflation rate is like 1.8%, which is not that crazy. And yet this is the conversation that we're having.

Sciple: Yeah, it's one of those things where you look at some of those indicators and the market seems to be flying high, but there are some areas you can look at and the indicators aren't quite as positive. If you look at something like layoffs, the first quarter of 2018, we had the highest number of layoffs in a first quarter since 2010. We've got layoffs up through May this year, up 39% year over year. In the industrials sector, it's been particularly pronounced, with layoffs up 671% year over year. We've seen some indicators -- RV sales have been a predictor in the past few recessions of the market starting to turn over. We saw RV sales in 2018 decline about 4.5%. That was a predictor of both the .com bubble as well as the 2008 recession. We've seen other parts of the industrial market -- about six months ago, Nucor -- one of the largest steel producers in the U.S., has traditionally been very in touch with the cycle -- was talking about investing large amounts in new plants and new steel capacity. Just this month, they've announced they're going to be idling steel plants. So we have this disconnect between interest rates and unemployment rates with, in the industrial sector of the economy, there appears to be a slowdown in some of those metrics. What are y'all's thoughts about this disconnect between the bending metal part of the economy versus the valuations we're seeing in the market?

Lewis: I think part of the reason people are thinking about this stuff is, we see this flurry of IPOs. We're going to touch on this later in the show. When you see a lot of companies [laughs] trying to get liquidity after enjoying all these private rounds of funding for such a long time, that's where you start to wonder, "OK, why are you trying to cash out?" Yeah, the tech side of things, the software side of things, has been absolutely gangbusters. It doesn't seem like everyone's participated in that growth, though.

Sciple: Sure. SoftBank has been talking about raising another big Vision fund. They've been behind a lot of this increase in valuations, but they've seen some trouble in raising funds for a second fund. I think Saudi Arabia and the United Arab Emirates have both said they've been reluctant to add funds. When you see that private capital desire to invest in those markets starting to slow down, just as we see this push into IPOs, again, there seems to be a disconnect between the valuation that the market is placing versus what's actually happening behind the scenes in some of these areas.

Jones: Yeah. I think, with the IPO market, there is definitely some cyclicality. I do think we are at a peak. We were talking about a number of different leading indicators. Of course, we never know that the market is truly in a recession until after the fact. But if you take some of those leading indicators, the Federal Reserve Bank of New York right now has a 27% likelihood that we will enter a recession within the next 12 months. That's the highest it's been since about 2007. They're basically basing that off of the spread between yields for the 10-year and 3-year Treasury yields. So, when you take all of those factors into play, you've got a very frothy market, you've got valuations astronomically high. I think it's not a matter of if a recession is coming, it's more matter right now of when. Of course, with us being long-term Foolish investors -- we'll probably get to some of the things that we should be doing with all of this -- I don't think it's a time for panic.

Moser: Do you feel like maybe this frothiness of the market is due, at least in part, but it seems to me a lot in part, there probably is this feeling at this point that whenever things get a little bit shaky, the government will come in there and rescue things by altering interest rates or doing something to keep things headed in the right direction. It's almost like they're trying to postpone the inevitable. You said it, recession's a matter of when, not if. We're going to have another one. It doesn't matter when it is. And who cares when, I guess. If you're prepared for it, then it gives you the opportunity to buy good companies at good prices.

We had a tweet that came in a little while back from Tom @Cashflow_fool, who asked, "If a weak economy will always be hedged by low interest rates, but a strong economy will be fueled by strong earnings growth, besides war, what could actually turn this market on its head?" It's a fair question. At this point, this thing almost seems bulletproof. But there are things out there. To my mind, one of the things that's a big shoe to drop is this $1.5 trillion in student debt. Ninety percent of that's guaranteed by us. It is unsustainable. People can't afford those bills. And when you get out of college, and your first job is waiting tables, or a low-paying job in the service industry, which it often is, it's very difficult to overcome that mountain of debt that people are accumulating just to go to college, when they're not even certain what they want to do in the first place.

Jones: Unless Bernie Sanders flies in with his red cape and saves us all by eliminating all student debt.

Lewis: I love that we have all independently prepared notes, and many of the things that you guys have talked about are in the notes that I've prepared. So many of the stats.

Jones: We all just took from you, Dylan!

Lewis: It wasn't even a Google Doc! I don't know how you did it! Yeah, I homed in on that too, that $1.6 trillion in student loan debt. I was looking at that over time. That has doubled in the last decade. That's incredible!

Moser: It's a lot of money!

Sciple: Yeah. There's some indications where you can look at comparisons between, say, my parents' generation and our generation, our student loan debt is much higher than theirs, but our credit card debt has actually been lower. It's a question about how those factors shake out. But to that Twitter question, though, to me, that sounds as very much of a "this time is different" argument. As John Templeton famously said, that's the four most dangerous words in investing. I'm still a net buyer of stocks. I don't know about you guys. But I think there are some signs to be concerned and to not be maybe as aggressive as you might be at different times in the cycle.

Jones: Typically, I'm at about 10% cash in my portfolio. Right now I'm up to about 15%, only because I want to be opportunistic. If it's more a matter of when it's going to happen, I'm ready to load up on some names, which I'm sure we'll talk about at some point as well. But I'm actually just starting to boost my cash to be able to dive into some of my top picks.

Lewis: I, too, have a little bit more cash than I normally do. That's not from having sold stuff. It's from just not having put as much into the market recently. I will say, if nothing else, this is a great reminder of why 401(k)s are awesome. There are many reasons to love 401(k) programs. You have pre-tax contributions. You have people that wouldn't normally be investing getting into the market via mutual funds and the diversification that comes there. But the reason that I love them so much is, if you're getting paid twice a month, over the course of the year, if you're participating in your 401(k) program, you're buying 24 different times. That is the mindset that you should try to have with your portfolio. Realize that you need to capitalize on those dips, but you're never going to catch the absolute height; you're probably never going to catch the absolute bottom of a market. Just buy in regularly.

Moser: We were talking about that at Fool Fest a lot. That's one of my favorite things. David Gardner and Tom Gardner both have done such a good job through the years of teaching us to never stop investing. We want to make sure that people understand, we're not saying you can just buy any stock anytime and it's all good. There are times when, like we're talking about, it does seem like maybe it's a bit frothy, and you're not as confident in some of the valuations out there. But if you have a 401(k) plan, like we do, then every paycheck, you have money that's dollar-cost averaging into your fund of choice. In my case, it's an S&P 500 index fund that I'm investing into in my 401(k). So, while I'm not buying individual stocks right now hand over fist -- I'm raising a little bit of cash myself -- every paycheck, I'm still investing. To your point, that's happening all throughout the year. The highs, the lows, and over time, it really does smooth out the lumpiness there. Those charts, the 10-, 15-, 20-year S&P charts, they all go one way.

Lewis: Up and to the right, baby!

Jones: That's a great way, too, to take the emotion out of it. You've got all of these fear mongering headlines out there. "A recession is coming!" But when you're doing it on a consistent basis, when it's scheduled, you're taking not only the thought out of it, but the emotions. You're not making these knee-jerk reactions.

Sciple: Yeah. I think it's also a humility thing, too. You can see all these numbers lined up in a row for a long period of time, but you're never going to know when a recession is going to hit. The market can stay irrational for a long period of time. Continuing to invest, even in times when you're a little bit skeptical, is part of maybe having some humility. You might not always be right, and over the long term, the odds are in your favor, so if you can continue to invest steadily, things will work out for you.

Another story that has been in the news this year, like the idea of "the economy might start to slow down," the idea that big tech, antitrust is going to come for them, has been rumbling beneath the surface for the past several years now. In the past six months to a year, we've really seen things start to pick up pace. Presidential Candidate Elizabeth Warren took some first shots announcing that big tech needed to be broken up and announcing a plan to do so. Even more recently, we've seen the FTC and the DOJ carve out their zones of influence when it comes to enforcing antitrust law. Reports indicate the Justice Department has staked control over antitrust investigations into Google, while the FTC is going to handle investigations into Amazon and Facebook. As you see big tech, finally the antitrust bell starting to ring for them, what are your thoughts when you look at these companies and where they could go moving forward?

Jones: I'm going to say here, this antitrust, the focus on it right now, is so different than in the past. It's not about price at this point. Many of these tech companies are offering their services completely free of charge. This is much more about data and about privacy. It's a very different environment that we're in. I would say that I don't necessarily agree that they should be broken up, because they are providing services that are actually helpful and useful. I will say there needs to be more regulation, especially when it comes to data and privacy.

Lewis: Yeah, I think with those names that are in this conversation -- you hear Google or Alphabet, you hear Amazon, you hear Apple, you hear Facebook -- with Facebook and Alphabet in particular, it's much more about influence and the reach of the platforms and the desire to possibly break them up because they haven't done a good job policing themselves. With Amazon, I do think it's a bit of an economic thing. There is an unbelievable advantage that they have by basically owning all their cloud infrastructure and then being able to work that into their e-commerce systems. But how you do that is difficult because, if you think about it from an investment perspective, there's an idea that some of these businesses, the parts may be worth more than the sum of the whole; there are efficiencies gained there, but you break them out and there might be some shareholder value there. You look at a company like Amazon, well, would you want to own their American e-commerce business? I mean, single-digit margins. It's not growing nearly as fast as AWS, which is like 30% margins. I think you'd wind up with some very weird investor decisions that would have to be made if these got broken up.

Moser: Possibly. I probably would want to own their retail business, just because the point of saturation now. Maybe 10 years ago it wouldn't have been quite as obvious. But, yeah, it's very difficult to argue that consumers aren't getting an awesome deal with these businesses. The services they provide are stellar. In most cases, we don't have to pay for them. Now, when it comes to Amazon, again, they're not turning the screws price-wise, and frankly, Walmart is considerably bigger still from a revenue perspective. The market's just telling us they know where this ball is headed. That's why it gives Amazon the benefit of the doubt there.

The one to me that just doesn't fit with the other ones is Apple. A lot of it has to do with -- I think, Shannon, you're right, in that a lot of this centers around privacy and how they control our data. They have to redefine antitrust from that perspective in order to make that fit. But to me, Apple is the one. ... Tim Cook's legacy, I think, is going to be his stance on privacy. And he takes a firm stance on it. I think he's great for the company. I do hope he continues to take that stance because, to me, that is something that will always define, ultimately, what is most important to Apple. I think people feel a lot more comfortable knowing that they are policing themselves a little bit more than companies like Alphabet and Facebook, and even Amazon, to a degree.

Lewis: I'd like to have Nick put on his lawyer hat here for a second. He likes to dust off that JD every now and then and take a legal look at things. I know you were thinking about this through the legal thought exercise of how people might approach it.

Moser: Listen, guys, heretofore...

Sciple: Yeah, let me think of a Latin word. To Jason's point, the way antitrust law has traditionally been set up, it's about market power and the power to raise prices. When you have companies that are selling their services for essentially zero to the end consumer -- people that are concerned about their privacy, that is an issue the law just wasn't designed to serve. These cases are going to be decided by how the market is defined. When you have an antitrust case, the first thing you do is define what the market is. For anybody who follows any of these tech companies, they like to define their market in a way that doesn't make them seem like a monopoly. Google doesn't come out and say, "Hey, we have a 90%-plus global share in search, giving us 90%-plus global share in search advertising!" No, they say, "We have a 2% share in global advertising spend." Likewise, Amazon, as Jason had mentioned, is going to say, "Hey, we're not even the biggest retailer in the U.S." Walmart has, whatever, double, some crazy amount, more revenue than Amazon does through their operations. So, the question is going to be, assuming these companies don't settle -- which I think is a real thing that could happen -- assuming this is something that goes to trial, it's going to be a battle of what the market is that these companies are operating in. It's to be determined how that is going to be defined. Obviously, these folks have really high legal budgets. They're going to do the best they can to protect their competitive advantage. We'll just have to see how things shake out. But assuming you define the market narrowly enough -- so, if you define Facebook's market as social media, there's no doubt that they have market power. They have, whatever, essentially, for all intents and purposes, 100% share. We'll just have to see how things shake out.

I think the odds are we might see some pre-emptive spin-offs just to get away from some of this litigation expense and this cloud hanging over the companies for a long period of time. I wouldn't be shocked if we saw some pre-emptive spin-offs. But we'll have to see. It just depends how much tolerance the executives at these companies have for litigation risk and having this be a cloud over the company for a long period of time.

Lewis: I think with this whole thing, it's a very natural lag that you experience. You have innovation, and then regulation ultimately catches up to it. It's never something that moves in lockstep. You always have to create rules around the circumstances that rules need to be created. All these businesses operate in a way that a lot of companies have not operated for. The scale that they're able to reach so quickly makes it a lot harder for legacy laws to make sense.

Sciple: Yeah. If you look back a couple of hundred years ago, you have the robber barons and Carnegie and Vanderbilt and all these folks, who consolidated these huge transformational technological industries, achieved large amounts of wealth, and then you had to have the early days of antitrust law to break these folks up and inject some life into competition in the U.S. 100 years later, we're seeing more transformational technologies, whether it's the internet, search, all those sorts of things. That's also led to an extreme concentration of market power, where it seems antitrust law needs to evolve to leave some breathing space for new companies to operate. It's not something that's unprecedented before. History doesn't repeat itself, but it rhymes a little bit. We'll see how things shake out.

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Sciple: All right, folks, it's the end of part one of our roundtable discussion with all of the Industry Focus podcast hosts. We'll be all here this week of Fourth of July with this roundtable discussion. We hope you'll enjoy our conversations.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For the whole Industry Focus crew, I'm Nick Sciple. Thanks for listening, and Fool on!