Episode 43 – How AI is Powering the Current Market Rally

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Announcer 00:00:01 This is Blue Money, a finance podcast made for cops by cops with us. You know, your money safe. Retired Lieutenant Jim Donnelly of the Bensalem Police Department and co-host Kevin McGarry of Valley Financial Group come together to help protect and serve your financial needs. This is Blue Money.

Jim Donnelly 00:00:20 I want to welcome everyone back to the Blue Money podcast. This is your host, Jim Donnelly. I’m here with my co-host, Kevin McGarry. What’s up Jim? Nothing much care for this episode. I mean, springtime, everyone cleans out the garages, the sheds. I figured it’s time. Maybe look at the clean out, some of the portfolios and some other stuff going on in the news. I know what’s going on with you, Kevin. It’s hot. It’s been a lot going on.

Kevin McGarry 00:00:40 Right?

Jim Donnelly 00:00:40 It’s a lot. Tons.

Kevin McGarry 00:00:42 You got the Sixers in the playoffs. Flyers in the playoffs. Just got done the Kentucky Derby. But there’s a lot going in the market I mean you think about five weeks ago everyone’s panicking think we’re going into bear market.

Kevin McGarry 00:00:52 And just like that everything’s turned around right.

Jim Donnelly 00:00:55 Turn it around real quick I mean the S&P 500 for years. It’s slightly over five at the mark is running today, so who knows what’s going to end up today. But with everything going on with the war, you know, the cuts not happening. They were priced in. Now they’re looking at maybe one or none for the year and the market is still driving. It’s still running. So what have you got on it?

Kevin McGarry 00:01:15 I mean, first of all, just take it. Take a step back and say, you know, you know, April has finished up over 10%. You know, that’s the second that’s the second highest since 1950. And that’s happened actually 13 other times since 1950 and 11 out of the 13 times 12 months later, the market was positive on average, a little under 14%. So think about that. Like is there some there’s some headwinds out there, but there’s a lot of tailwinds. So I, I don’t expect things to really change.

Jim Donnelly 00:01:46 No I don’t see anything. You know that’s that the the war looks like it’s getting worked out right now. especially going into this podcast today with everything going on. I mean, I think everyone’s surprised anyone in the financial industry is surprised how well the market has held up. I think one of the main reasons is why it’s holding up is because the earnings, everyone’s beating the earnings. So 84% of the top 500 companies in S&P 500 beat earnings. Yeah. Usually the average is like 76. So the earnings are strong. They’re driving everything. If earnings are going good stocks are usually going wrong.

Kevin McGarry 00:02:18 Right. I think the other big thing really really driver out there is you know big tech’s I mean the CapEx that they’re spending is massive. expected spending around $725 billion. Man. And, you know, one company spending is another company’s revenue. Like you mentioned, earnings. I mean, think about that. You know, right now, if you look at AI and this is what the spending is being done in in is hardware, right? hardware spending in AI is is up about 43%.

Kevin McGarry 00:02:49 Analyze. You know, the last five quarters has been 31% from 2010 to 20, 24% of 6% spending. And you look at, you know, look at software. Annualized spending from these big tech companies is up 23%, you know, over the last five quarters is up 15% between 2010 and 2024, up 9%. So there’s tons of spending going on here by AI, which is driving it. I mean, AI spending in real GDP is almost 45% of it. You know, that’s massive. So there’s a big component here in AI spending.

Jim Donnelly 00:03:25 Yeah, I mean, in the beginning of the year I was struggling a little bit. Middle cap, small cap. They were driving the market. Bonds were doing well. But recently, like you said, starting in April, the second quarter, the the tech is just going through the roof once again. I mean, the beginning of the war. Yeah. The market dropped about 8 or 9%. But right now right. All time highs again, the market before we start this podcast today is an all time high.

Jim Donnelly 00:03:45 So it’s running. I mean the future looks bright to me. That’s what I’m thinking. So I mean, you.

Kevin McGarry 00:03:49 Know, and think about it Jim too. Like there’s some things out there really impacting the markets. What are some, some headwinds meaning, you know, housing. It’s declining. It’s been down like 7 or 8 quarters in a row. And consumer goods spending is down two. And a lot of that has the driver to that higher inflation higher interest rates. So you know to buffer the that’s been big tech companies spending on AI and has really been countering that and making this market go right now. I mean people are concerned right now typically historically, you know, you hear people always say, you know, go away in May, you know, come back later, right. With the markets. people get concerned because usually from May to October, you know, the market’s down, you know, it’s not down. But historically it’s been the worst, you know, period of the markets throughout the year and up on average 2.1%.

Kevin McGarry 00:04:46 But you know, the last the last decade that hasn’t happened. Yeah the market’s been running. Good morning. It’s been up nine out of list. Ten. You know, summers, if you really dive into those numbers, Jim, if you really look at those numbers. mazepin up over the last 12, 13 years, June spin up, nine out of ten. In the last ten years in July it’s been up 11 straight years in a row. So you know it hasn’t worked out. It is you know historically, you know, the lowest returning time period in the markets. But there’s a lot of things right now that you would think the market is still driving. Yes. There’s concerns right.

Jim Donnelly 00:05:22 Yes. Yes. Inflation is probably the biggest one right now. War looks like it’s getting worked out I mean but I also think it’s a it’s a great opportunity to look at other things of your portfolio right now. Like you know that was a little recap of how the market’s been doing. But what other things out there right now could you recommend police officers, anyone that listen to this podcast, you know, right now in May, what’s a good thing to look at portfolio wise? Make sure it can still contribute to the 401 if they haven’t in January.

Jim Donnelly 00:05:48 Give me some. Give me some tips.

Kevin McGarry 00:05:49 Yeah I just think a few things. Number one you know, if you’re looking at your portfolio, make sure they’re aligned with your goals, right. Make sure to diversify properly. They’re not overrated. It’s a good time to rebalance your portfolio or speak to someone and look at options to rebalance your portfolio if you’re over weighted or unweighted in certain areas. You know, right now, you know, it all depends on your your goals, your long term goals and your risk tolerance. if you’re in retirement, listen to this. It’s also factored into your income needs. So number one, that number two, look at your your cash flow your monthly cash flow. Right. See if you’re working right now. See if you can give yourself a you know, pay yourself a little bit more in your retirement plan. So it’s a good time to look at it. You’re getting to that half year period. It’s a good time to say all right. Am I in in my in the positive or negative.

Kevin McGarry 00:06:45 Going into, you know June.

Jim Donnelly 00:06:48 Yeah. No, absolutely. I think a lot of times we always preach January, these police officers are getting raises. You know, maybe try to put 1 or 2% more contributions. A lot of times that don’t happen. So you’re almost halfway through the year. It’s a good time to hey, listen man, did I do. Did I take that step that I keep talking about? If you haven’t do it, I mean, maybe you’re making a lot of overtime this year and your income is getting higher. Are you saving more? Like, that’s the most important thing. Or are you getting more in? You’re spending more. That’s what usually happens. So I look at how how’s your overtime rate going. I mean, another thing is like, you know, a lot of these guys are doing, like, brokerage accounts these days. They’re, you know, on the Robin Hood. That’s what you’re really talking about a lot when you’re telling people, are you overweight of what you’re trying to do because a lot of police officers are out there.

Jim Donnelly 00:07:30 You guys are being target funds. It’s getting rebalanced for you. You don’t really have to worry about it right now. But if you are in, you know, brokerage accounts or you’re in these other ones and you’re handling stuff yourself, exactly what Cavs talking about, make sure you’re not getting overweight. One sector. Make sure that you know it’s it’s kind of like where your portfolio what you’re looking for.

Kevin McGarry 00:07:48 Yeah I think I think the even the other thing, the target date funds are great for him. It’s being professionally managed by great companies. But I think also like, hey, as you get closer to retirement, you know, your stock portion of the portfolio is being reduced and your bond portion cash portions being increased. Maybe, you know, you can take a little bit more growth exposure and you want that. So it’s even good to look at that. I think the other thing to look at is be aware of the headlines. You know, you know, you’re going to hear about how bad historically the market’s done during the summer times.

Kevin McGarry 00:08:21 But right now they’re going to start pounding the news with the midterm elections. And historically over just to know this over the last ten years. Okay. midterm elections during the summer. The market’s been down five of the last ten years. So there could be some volatility historically. but at the end of the day, I think that’s something to realize. You get some headline risk out there as well.

Jim Donnelly 00:08:45 In two things I want people to look at. One is a lot of people. We get a lot of phone calls or emails about the Roth conversions. A lot of police officers are interested in that. And the one thing I would tell you if, say, if you retire 56 and you’re going to be jumping on Medicare at 65, you know, there’s a Erma, there’s a Medicare Erma that you have to be careful when you’re doing these rolls conversions. So if you’re 56, it’s a great time to hit it to 63. Do a lot of these conversions because with the Medicare Erma they look back to years.

Jim Donnelly 00:09:12 So you don’t want to do it when you’re like 6364. Because then your Erma is going to be a lot higher for part B. So it’s just one thing to consider when you’re in there. Talk to a financial planner. That’s when they really could help you out. The other thing is, I mean, I can’t preach this enough and we see it happen. Not enough officers have it’s life insurance. It’s just such, such an important tool. Even before you’re maxing out these 401 K’s or 457 or your Roth, like, you got to have some life insurance, a couple for your family. I constantly preach it, but I couldn’t tell you how many times I talked to a police officer or something. I got cancer, they have something, they can’t get coverage, and now they’re worried and it’s too late. But so a lot of those young cops out there right now that you can get a million, $2 million life insurance policy for probably $100 a month, it’s nothing. Get a 30 year term, get locked up.

Jim Donnelly 00:09:55 So if I can’t preach that enough, please look at it. Even if you’re a little bit older, maybe you only need a policy for ten years or 15 years. Give us a call, man. We can help you out with it. Tell you what your situation is and how much coverage you should have. But that’s one thing I constantly see. And even when the police officers will call and they know they need to get it done, they just don’t handle it. You know, we have some people from the office trying to walk them through steps, and they drag their feet with it a lot. And God forbid something happens. They’re going to they’re going to, you know, be sorry about it.

Kevin McGarry 00:10:21 I think I think the thing is, you know, when you see a gym, right, when people come in here, you know, nine out of ten people don’t have a will, don’t have a state plan, especially law enforcement or, you know, people out there doing service they’re protecting, you know, society, protect your family.

Kevin McGarry 00:10:39 I think the one thing with this, with this podcast we’re really trying to get through to everyone is like, hey, listen, going into summer, you know. Understand? Protect your portfolio. Protect your family and protect your future. And that’s what spring cleaning does. You know and understand what’s going on out there, you know?

Jim Donnelly 00:10:56 Absolutely. And I think a lot of the police officers, a lot of people that we talk to, I got coverage to work. And but it’s probably 100g or less. It’s not much. But meanwhile they should have like a $1.5 million policy or at least a million. So they’re so underinsured. Yes, they do have it, but they don’t realize how much they should have.

Kevin McGarry 00:11:12 And the other the other thing is to Jim. Right. Like when you ask them, hey, why do you own this amount of insurance?

Jim Donnelly 00:11:19 I have no idea.

Kevin McGarry 00:11:20 No idea. Yeah. Because someone told them. Yep. So I, I think it’s really important to go through that whole planning process.

Jim Donnelly 00:11:26 Now, how do you see the summer plan active? I mean, you hit upon it a little bit. How do you see your plan out the rest of the summer?

Kevin McGarry 00:11:31 Like like I said, you know, historically, you know, the summertime has been not the best performing time for stocks, but the last decade, you would have lost out if you went away or pulled out of your portfolio. Nine out of ten. Summers made October if finished positive and listen when the market’s up over 4% okay. The remainder of the year finishes up over 4%, so it’s pretty strong time to be in the market. I think there’s some things you got to realize. You know stocks are doing well. Corporations their profits their earnings are through the roof. they’re beating expectations. And you’re seeing economic growth out there. You know, I don’t think this is a market rally. I think it’s, you know, basically a capital wave reshaping the economy with AI.

Jim Donnelly 00:12:20 Yeah, that’s a great recap. Kevin probably went out there.

Jim Donnelly 00:12:23 Just remember, stay diversified. Stay invested. Stick to your plan. It’s a marathon. It’s not a sprint. Make sure you got enough coverage for your family. I’m really preaching that these days. I just want everyone to make sure their families are covered. So I want to thank everyone for listening to the Blue Money podcast that’s going to wrap up the show and be safe out there.

Kevin McGarry 00:12:38 Be safe.

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