Jackson Cantrell (2:35)

Vehicle. Yeah. So at that 37 cents per kilowatt, if I were to drive say 400 miles, it would cost about 40.

Jack Howe (2:43)

Bucks. It's like a Tank of.

Jackson Cantrell (2:45)

Gas. Yeah, like a gas car. So I'm not really gaining anything there. And if I charge during on peak hours, it's like I'm driving a Hummer or.

Jack Howe (2:54)

Something. That's a lot. Now I say you're an anomaly because you, you pay. When we talk about your total dollar bill, almost nothing. I really don't know how you've managed to do this. I mean, you've explained it to me. Why. Why is my electricity bill more than 20 times the size of yours? I. It's just you and your wife and so you have this bungalow. But I still don't understand. What are you doing there to avoid using.

Janice Henderson (3:19)

Electricity? I'm trying to.

Jack Howe (3:20)

Think. We.

Jackson Cantrell (3:20)

Have. No. Yeah, we're. First of all, we're not Amish, but we do have a utility.

Jack Howe (3:28)

Wise. You're basically.

Jackson Cantrell (3:29)

3/4Amish. Yeah, yeah. We have no washer dryer, so we get that done at a Laundromat. So I guess that that electricity is paid.

Chris Heisey (3:38)

Indirectly.

Jackson Cantrell (3:39)

And. And also it's really temperate here. So we're about two miles from the ocean. So it only ever ranges between say, 50 and 85 degrees. And our heat is gas. We don't have.

Jack Howe (3:51)

AC. And you've rigged a peloton to power the lights, is that right? You have to pedal.

Jackson Cantrell (3:55)

Constantly? Yeah, that's the.

Jack Howe (3:57)

Ticket. Well, congratulations on your savings. This episode will not be about unlocking the mysteries of the electricity bill that is beyond my brainpower. But we do want to unlock one mystery. PG and E Stock is down 22% year to date, as I speak. That compares with about a 5% increase for the S&P 500. This is at a moment when utility stocks are investor darlings. Right now look at the Utilities Select Sector Spider fund that tracks a basket of blue chip utilities. It's up almost 6% this year, more than the S&P 500. Why? Because investors have gone bananas for all things artificial intelligence. And one thing you need for artificial intelligence is a lot of power to run your data centers. So electric utilities have become AI plays. Gosh, I hate the word play when it comes to investing money, but there, I've said it. Now PG and E covers Silicon Valley. What's a bigger AI play than that? So why is this stock falling when much of the rest of the utility universe is rising? It has to do with those disastrous LA fires in January. Even though that's a different utilities territory. Jackson, that's where you are. La, that is Southern California Edison.

Jackson Cantrell (5:18)

Correct?

Jack Howe (5:19)

Correct. The city has its own municipal utility, but the surrounding area, that's. What do you call that for short? Southern California Edison. SoCal.

Jackson Cantrell (5:28)

Ed. No, I think it's just SC if you see the bills. But SoCal Ed sounds like a guy I surf with.

Jack Howe (5:36)

Sometimes. He's a nice guy, Ed. He'll teach you how to goofy foot a barrel wave and then you can go out for Acai bowls afterward. Have I got that.

Jackson Cantrell (5:45)

Right? Oh.

Jack Howe (5:46)

Yeah. All right. Well, let me give you just the briefest of backgrounds on these California utilities and wildfires and what regulators have done there. There are three big publicly traded utilities in California. Pacific Gas and Electric covers, I want to say, like the northern two thirds of the state. That's not exactly right, but it's close. Then there's Southern California Edison to the south of that. And all the way downstairs is the San Diego utility. San Diego Electric and.

Jackson Cantrell (6:21)

Gas. Gas and.

Jack Howe (6:22)

Electric. I was so close. So think about this business for a minute. PG&E, it has more than 100,000 miles of high voltage line. California is a humongous state. It's a woodsy state. And it's becoming hotter and drier. Basically, there are going to be fires. And in the past, PGE pleaded guilty or settled or paid fines for its involvement in fires that were so fierce that they have their own names. The camp fire in 2018, the Kincaid fire and Easy fire in 2019. One called Zog in 2020, Dixie in 2021. Okay, so Patty took over in January 2021. And that was six months after the company had emerged from bankruptcy. If you look at the company's most recent quarterly report, it touted a, quote, second consecutive year of zero major wildfires caused by the company's equipment. It doesn't sound like a bragging point, right? Only two years without starting a big fire. And what do we mean when we say major wildfires? But it is an accomplishment compared with where the company was. Considering that, the conditions have not gotten any easier, they've gotten harder. As you will hear in a moment, Patty estimates the PGE has reduced its fire risk by more than 90%. They've covered power lines, they've buried power lines, they've taken down some trees, they put up stronger poles. As you will also hear, there are pretty much always fires when you run a big utility. Little brush fires. The key is to put them out quickly before they become major problems. And PG and E has invested in that, too. If you put fires aside for a moment, business is good. Core earnings per share rose 11% last year. Operating cash flow jumped to $8 billion from $4.7 billion. There's been excellent growth from data centers. PG and e is predicting 10% earnings growth this year and at least 9% a year over the next few years. For a company that was recently trading between 10 and 11 times earnings, that's excellent growth. That utility ETF I mentioned earlier, that trades at closer to 18 times earnings. Jackson, do you remember the money manager we had on who recommended PG and E.

Jackson Cantrell (8:36)

Stock? Yeah, that was Richard Taft of Columbia Threadneedle. And that was in October of.

Jack Howe (8:42)

2023. Right. So there are investors out there that have recognized this discount for the stock and, and there was a solid recovery going on for the stock for about three years until this year. So what's going on? What we call the LA fires, it's a bunch of fires with different names. Two of the biggest ones were Eaton and Palisades. Those are probably going to be among the most expensive fires in history. They were incredibly destructive. And these are pricey places. Edison International, that's the parent company of Southern California Edison, which is directly exposed here, that Stock is down 34% year to date, so about 12 points more than PG&E since 2019. All three of these companies, PGE Southern California and San Diego Gas and Electric, they've been part of what's called the California Wildfire Fund. It collects funds from utilities and from their customers. And it currently has the ability to pay $21 billion in claims. No one knows what the claims might look like for the LA fires. It depends in part on who's at fault and even what we mean by at fault. Southern California Edison has said that it has found irregularities with some of its equipment near the origin of the Eaton fire. It doesn't say that its equipment caused the fire. It's still investigating. As we'll hear from Patty, this California Wildfire Fund is really a first of its kind in the country. One of the key things that it does is establishes a safety standard that companies have to meet ahead of time. There are also liability caps for companies that are related to the size of their equity rate base. That's an industry measure of assets. For Southern California Edison, the cap is just over $3 billion. It seems to be. And you don't always know what's in the mind of investors, but it seems to be that investors aren't so much worried about the direct exposure for the utilities as they are about the depletion of the California Wildfire Fund and how much that would cost utilities in the future to replenish it. I did see One estimate on that from J.P. morgan. It is bullish on PG and E. It estimates the gross liabilities related to Eaton. Keep in mind that liabilities are not the same as total costs. Gross liabilities related to Eaton could come in at $16 billion according to JPM. And after settlement reductions and other adjustments, the hit to the California Wildfire fund could be $8 billion to $9 billion. It's way too early to do anything but educated guessing on that figure. J.P. morgan writes about PG and E shares. We anticipate a policy and or regulatory response could catalyze a return to prior levels. In other words, if I read into that a bit, regulators don't really want the local utilities to fail. And if they come up with a response that is comforting to investors, the shares could bounce back. JPM says it prefers PG and E shares to Southern California Edison because of PG and E's lack of direct involvement in the LA fires. BMO Capital Markets recently initiated coverage of PGE with an outperform rating. Its price target recently implied about 50% upside for the stock. It calls the company a quote rare deep value opportunity with premium visible growth. That's their thought on the stock. I don't have any recommendation either way, but I was pleased to recently have a chance to speak with Patty about the work she's done there at PG and E and the path ahead. Let's jump into that conversation now. What do you think it is that investors are most interested to hear from you? What's top of their mind about your company right.

Patty Poppy (12:17)

Now? I'd say wildfire risk and investors exposure to wildfire risk in California. You know, these Southern California wildfires that occurred in January have nothing to do with our equipment or our company. But there's a legal construct in California and that legal construct has a wildfire fund from which victims are paid in the event that utility equipment was involved. And so as a result of the Southern California wildfires, the degree of exposure in the event that one of these fires is the cause of a utility, which we do not know yet, but if it were, it could take the whole fund or a large portion of the fund and it leaves investors concerned that there is no backstop in the event of a fire. If it were to occur in 2025, investors are worried. But in fact there's no other state in the nation that has this kind of regulatory protections for investors that also protect and provide for people who have had a loss as a result of a.

Jack Howe (13:23)

Wildfire. How would you quantify and describe for people what you have done since you got there to reduce risk, to bring down risk. I mean, I was kind of struck by the company has more than 100,000 miles of power lines. It's an enormous state. One third of it, I read somewhere is wooded. And, you know, it's becoming hotter and drier. And you put all these things together. I don't want to oversimplify the past issues, but you have power lines that come in contact with trees. It can start fire. So you've had to address that and cover some lines, put some lines underground, trim some trees, put up some stronger poles. Have I got that right? And if I asked you, how far along are you in that job of risk reduction, what would you tell.

Patty Poppy (14:07)

Me? I would tell you that we've reduced our wildfire risk and exposure of a catastrophic wildfire by over 90%. We have layers of protection, some of which you described, like this. The fundamental hardening of the system, doing better inspections. We've increased our inspection frequency by 600% with the use of drones and new technology. We have invested billions and billions of dollars into strengthening and making our system hardened and safer. And we also can proactively de energize lines in very targeted areas. So, for example, in January of this year, we had three public safety power shutoffs. So my hazard awareness center could see the incoming weather. We could enable our system, and we have it sectionalized. So in this case, we had a couple transmission lines and a couple distribution lines affecting about 50,000 customers total that were de energized proactively to make sure that our lines were not at risk under really risky conditions. And then you layer in. One last layer of protection is in the event that there is an ignition, because electric equipment, by design, sparks. That's how it's designed everywhere in the world when there is a spark in an area that has the risk of fire. We have AI enabled cameras that can notify first responders automatically within an instant of the ignition. It is most routinely first notification, but sometimes the only notification. So the situational awareness, the technologies, the tools, plus the system hardening our system has never been.

Jack Howe (15:44)

Safer. I want to ask you about the business, but one last question on this. This is just a nitty gritty thing, but on the earnings announcement, it said something about no major wildfires that were caused by your equipment for two consecutive years. Which, you know, that's great, but when you say major, is that related to this? Like, are there minor incidents all the time and you catch them quickly, or have there been a few minor incidents or what does that look.

Patty Poppy (16:08)

Like? Yeah, Every utility has ignitions, and we do everything we can to minimize that risk. But by design, it will spark. There are something we called cpuc, our California Public Utilities Commission reportable ignitions, and we report those anytime there's an ignition that results in the spread of a fire of more than one linear meter. So you can imagine that's small. That ignition rate is down over 75%. The ignitions on our highest risk days, in our highest risk areas are down about 25% since prior to when we were putting in all this.

Jack Howe (16:45)

Equipment. You're the CEO of a power company. You do not, to my knowledge, put on a fire helmet when you get up in the morning. But conversations, I mean, to your point earlier, people want to talk to you about fires and liability and risk. And meanwhile, there's, like, the business of distributing power and gas to your customers. Are there days where you say, boy, I wish somebody would ask me more business questions. I want to talk about how the business is going. And part B of that question is, how's business.

Patty Poppy (17:09)

Going? Well, you know, I was the CEO of another utility, and I will say, in retrospect, it seemed a lot easier than this one. I didn't have to talk about fire. So I have learned a whole new language and techniques, and. And I'm proud of the team for everything that we have learned. And we're still dissatisfied. We know that there's more that we can do. We're super curious every day about how do we mitigate this risk that our equipment can cause. We gotta make sure we can keep our communities safe. And we really have taken a stand that catastrophic wildfire shall stop. So transitioning to the business, I like to tell people we're out of the triage phase post bankruptcy, when we had to really put in all of these safety measures and have our emphasis on safety. And now we're into a phase of our company where we can actually deliver for customers something we call our simple, affordable model. We can invest in infrastructure that helps keep our communities powered, prosperous, safer. We happen to serve the Bay Area, which includes the headquarters of the major tech companies in the world. They're growing. That helps us grow in such a way that we can actually reduce costs for the rest of our customers because we're more fully utilizing our existing.

Jack Howe (18:16)

Assets. I hear those folks are putting some money into data centers, and I hear that those data centers use a good few watts when they're up and running. How's. How's that affecting.

Patty Poppy (18:26)

Things? So we have new applications for 5.5 gigawatts of new load to serve large data centers. And in fact 5.5 GW number one is a big number, but it's a big number even relative to our peak here in California. PG's peak is about 20 gigawatts. So you're talking about 20% of additional demand on top of our system is very beneficial when done right. For our residential customers as well, there's probably 1.4 gigawatts that are most furthest along in our engineering studies. And those customers have agreed to go to the next stage which moves towards construction phase. That 1.4 gigawatts will enable us to reduce all of our other customers bills 1 to.

Jack Howe (19:10)

2%. You have nuclear assets, correct me if I'm wrong and you know I'm in New York. I live in an area where we shut down a big nuclear power plant here. They shut it down earlier than it had to be. And I read these headlines about in some places they're powering them back up to you know, co locate them with data centers this and that. What do you hear about your nuclear power and what people are saying about it and its, its, you know, prospects going.

Patty Poppy (19:33)

Forward? Yeah, we have a 2200 megawatt two unit nuclear power plant at Diabell Canyon. It provides about 17% of the clean energy, carbon free energy here in California. 17%. And it was scheduled to close last year. One of the units last year and one of the units this year. The governor really realized what a benefit that plant was to the state, that kind of baseload greenhouse gas free energy. And he directed the legislature and they followed suit and they passed legislation to extend the life of that plant by five years. We're in the process of filing for an NRC extension for 20 years because they only do them in 20 year chunks. You know, I think we would advocate that. It's a very valuable resource to the people of California. When you, especially when you think about greenhouse gas carbon free emissions to serve this growing load of our large data.

Jack Howe (20:22)

Centers. When I look at your stock, it's down significantly year to date. Not as much as that other California utility that's more in the direct area of those LA fires. But it's clear that like it's falling in tandem or sympathy or maybe it's just investors, you know, concerned about that. That Wildfire fund that you mentioned. Do you view that as, as an overreaction on the part of investor? Do you think that they really understand your story right now or do you think there's something else that you know you need for them to know about.

Patty Poppy (20:51)

It. Right now my goal is to make sure that our investors can see all the reasons to believe in California policymakers and that California policymakers will provide the important legal construct so that their investment is safe. And it's important for my California policymakers to trust that investors intentions are well placed. Is their concern overstated? I don't get to define their concern levels, but I do think once you pass that threshold and we get the fixes that are necessary that I'm confident we'll see in the next year, then you layer in the rest of the story. There's not a higher performing utility. We have the highest earnings growth, rate based growth. We have a real reputation for operational excellence. We reduced our operating maintenance expenses again this year by 4% against a target of 2%. We, we have growing load. We have more efficient financing as we continue to improve our credit metrics, our balance sheet. We did a $3 billion equity issuance end of last year, fully funding our five year capital plan. The fundamentals of the story are extraordinary, best in breed. But you got to get past the safety threshold first. And so we'll work closely with policymakers and our investors to make sure they can trust one.

Jack Howe (22:06)

Another. Thanks, Patty. Coming up, we'll answer a question about equal weight S&P 500 funds and we'll hear from the chief investment officer at bank of America Private bank and Merrill. That's next after this quick.

Jomana Selehin (22:21)

Break. Vanguard's Jomana Selehin, head of Investment Strategy Group Europe and chief European economist, believes the 60:40 shouldn't be thought of in such a literal.

Janice Henderson (22:30)

Way. I think it's important to just say what is 60 40? Because it actually means means different things to different people. For some people they actually use it as a shorthand for a broad index portfolio. It's not necessarily 60 40. You might think it's a target allocation. It could be 100%, could be 80% equity and the rest in.

Jack Howe (22:50)

Bonds. Hi, I'm Kelly Cavagnaro, Managing director.

Janice Henderson (22:56)

Head of North America Institutional Distribution at Janice Henderson.

Patty Poppy (23:00)

Investors. We believe working together is the.

Janice Henderson (23:02)

Way to work better, like combining your portfolio plans and our in depth strategy.

Jack Howe (23:08)

Your valued assets and our valuable insights.

Patty Poppy (23:11)

Your mission and our vision working in.

Janice Henderson (23:14)

Harmony to seek the right investment.

Jack Howe (23:16)

Opportunities. JANICE henderson, investors Investing in a brighter future together welcome back, Jackson. How was your your vacation? You took a trip recently. I hinted about it. I didn't want to blow your cover and tell people exactly where you went. You want to tell us anything about.

Jackson Cantrell (23:32)

It? Well, you did kind of give it away. You said it rhymes with.

Jack Howe (23:38)

Bratemala. It was a strong hint. I'm not going to lie. For people who guessed Guatemala, they were correct. And how was.

Jackson Cantrell (23:44)

It? It was great. We went to a wedding. We spent most of our time in Antigua and in and around Lake Atitlan. So it's a lake surrounded by volcanoes. And we went on lovely hikes and great food, nice people, a ton of.

Jack Howe (24:01)

Fun. Sounds great. Guatemala is the first country I ever went to outside the US Many, many years ago. Lovely place. Now I have a listener question. Matt.

Jackson Cantrell (24:12)

Right? Yeah, we have Matt from Greensboro, North.

Jack Howe (24:15)

Carolina. My wife and I are traditionally S&P 500 index investors and I'm just wondering if there is going to be future volatility in the IT space, would it make sense for us to reallocate into The S&P 500 Equally Weighted Index fund? Love the show. Thank you Jackson, for keeping Jack out of trouble. Thank you, Matt. Jackson, is that what people think of us, that I would turn to a life of crime if it weren't for your positive influence on me? Is that where we're at.

Jackson Cantrell (24:49)

Now? You're just a huge troublemaker at heart and I'm keeping you away at every.

Jack Howe (24:54)

Turn. Well, thank you for that, Matt. Let me give you a quick response to your question and then we're going to hear a little more about it when we hear from Chris Heisey at B of A in just a moment. The regular S&P 500 index that so many investors are exposed to, including in their 401ks and such that weights companies according to market value. The biggest companies have the most sway. A February report from B of A points out that passive investing just tracking index funds, that's reached critical mass. It's 54% of listed U.S. stock funds. It's crowding out active management. And when you have these passive flows of funds, in other words, people just putting money into index funds without regard for company fundamentals, B of A says you can get more concentrated markets and higher risks. It can magnify both the upside and the downside. Today, B of A writes, new economy sectors make up 53% of the S&P 500's market value. That's the most in 60 years. You've heard of the Nifty 50, a bunch of large cap stocks that everyone piled money into in the 60s and 70s. Those ended up falling from 40% of the benchmark down to 23%. So in other words, we're higher now than those were all those years ago. A similar thing happened during the dot com stock bubble in the late 1990s. A handful of companies making up a disproportionate share of the index and then falling. Now B of A also writes don't sell just because concentration and valuations are high. These things are really difficult to time. One thing you could consider, as Matt suggests, is AN S&P 500 equal weight fund. Not for all of your money, not for most of your money, but maybe for a slice of your money to diversify against that market value weighted fund. BofA writes that the equal weighted index, and by the way, it's just what the name sounds like. It's got an equal amount of money in each of the 500 stocks that gives it different sector weightings than the regular S&P 500 index. It's less loaded up on tech and these new economy stocks. In other words, that equal weight index has outperformed the regular market value weighted index by about a percentage point a year since 1958. There have been five periods where the regular S&P 500, the market value weighted index has outperformed and these periods typically last 16 quarters according to B of A. It writes that today the market value weighted index is 2 and a half standard deviations overbought relative to the long term trend. In other words, the Regular S&P 500 index is much more expensive relative to the equal weight index than usual. And that is about all I have to say on the subject. Let's hear from Chris. Chris Heisey is the chief Investment officer at bank of America Private Bank Ann Merrill. He's the guy who advises the company's advisors on what advice to give. So I like to check in with Chris now and then to hear what investors should make of the market and where he thinks we're headed from here. Let's hear part of that conversation.

Chris Heisey (27:58)

Now when we are coming into this year. Like many others, I don't like to use the word constructive because that has a lot of different meanings to it. But we were overweight equities relative to fixed income. We still are for three primary reasons. Number one, economic resilience. The consumer's been through a lot through the pandemic. Came out the other side. Yes, there was a lot of stimulus, you know, 11 trillion in total if you include what the central bank did. But now that excess savings has been wound down, we're back into a normal cycle again where you point to your job, wage growth, you manage your Household a certain way, even though rates have risen, that hasn't impacted the consumer as much. It has impacted the companies that had new maturities coming on, that had to issue new debt, but not the consumer, generally speaking. So the consumer's been resilient, the economy's been resilient, and corporate America has been able to produce earnings to feed into that high multiple. The other second point is, is that we are in an asset light era. Companies are becoming less labor intensive, number one, in general. Number two, they have less fixed cost, heavy fixed costs in relationship to prior decades. And number three, the US and the globe has less heavy assets. What I mean by that is more and more companies are in the world of innovation, the world of tech, in the world of copyrights, in the world of software patents, and that by itself has less heavy costs. If that's the case and you buy that argument, then having a higher multiple makes sense. Even with a rate structure that's very similar to what we had in the 1990s. That doesn't mean the vulnerability is not there. You're still vulnerable if you don't get that earnings momentum. So you got high vulnerability. But it makes sense in a world that's increasingly becoming asset light. Here's my last point on this, Jack. The next decade, we have high conviction that could be one of the best bull markets, first, second, or third than we have witnessed in the past three or four decades. And the question is why? Well, because the supply of assets is dropping. Less public companies, less ability to invest in certain assets, but the demand for assets is going up. More people need to retire comfortably. There's worries over Social Security and other things, and people are starting earlier with new structures to enable them to advance their wealth. So if you've got a higher demand for assets and the supply of assets is dropping, that's where you get your prices staying sticky and your valuation staying higher than what people think they should.

Jack Howe (30:38)

Be. I appreciate what you said at the beginning that, that you avoid using the word constructive. People tell me they're constructive on something. I always wonder, what does that mean? I should build it rather than buy it? Do I need tools? What's going on here? I just want to know whether I should buy something. So I do. I do appreciate that. Now, the US because of all this innovation, some of these, you know, share prices here have raced up. And some of these companies, they look like, you know, they're ambitiously priced, some of them, let's put it that way. And as you point out, that's justified by great Earnings growth. When we look overseas, it's just been a long, long time that the US has outperformed. But if I kind of squint and look at the numbers just so I can kind of see Europe starting to come around, is that a head fake? Is that a blip? Or, you know, what do you think about valuations overseas relative to the US Right.

Chris Heisey (31:31)

Now? Another financial term overused. It's a relief rally. It might be a horse race this year with Europe and the US Largely speaking because of enthusiasm over potential end to Ukraine, Russia, war, the fact that oil prices are coming down and the fact that China's growth is coming back up because of stimulative measures there lending itself to better economic wins for Europe because they're large trading partners with each other. But in order for that to continue, you're going to need much greater movement towards what I would say, better economic growth, better economic resiliency and how that feeds into the corporate sector. What's interesting here, Jack, is in the last 12 months and so far, to start the year, two or three of the top stocks in Europe happen to get a majority of their revenues and earnings outside of Europe. That's pretty telling to me. And when we talk to investors that are there or global investors, they too want to see that economic dynamism, and they just, they can't see it. So relief rally is what comes to mind for.

Jack Howe (32:39)

Me. Okay. Not enough to be cheap. You need some more growth to get excited about Europe. What about if you're an investor in the US and you hold an S&P 500 fund, so you know that the fund has been led by this, you know, small group of very large tech companies. Is it enough to just stick with that fund right now and stick with that, you know, cap weighting here in the US or do you want to be doing some things different from what has worked in the recent.

Chris Heisey (33:06)

Past? There has been this call on the part of Wall street and a lot of us in our profession to the rotation. The rotation, the rotation. It's coming, it's.

Jack Howe (33:17)

Here. I'm watching for it. I keep watching. I don't see it.

Chris Heisey (33:20)

Yet. And I think a better way to think about it perhaps, is it's a rebalancing of money. So if you're an asset manager and you're an investment manager, a chief investment office, you're always looking for the next dollar of investment to be in something that gives you a little bit more better reward given the risk you're going to take. So with that as the Backdrop equal weighted S and P in our opinion, should either be added, not replaced, but either added to anyone who is investing and just a cap weighted S&P 500. And it's because a blend of those two is a nice way that if you're wrong and the leadership doesn't ultimately change, which we're starting to see some of it, you know, some are saying the Mag 7's the Lag 7 right now, I'm not going to get that cue on that. But certainly when earnings momentum starts to wane and slow down just a little bit, the asset management community has their next number of companies they want to own in their portfolio and they're slowly adding money to those areas. Financials are the leading sector to start this year. Parts of utilities have nothing to do with tariffs, so you're going to start to see some of that. But it's very quiet, it's sneaky. And it's not just one big button that someone pushes and all of a sudden you wake up and the rotation's gone. So I would say think about equal weighted S and P to be added to.

Jack Howe (34:40)

That. I'm going to guess that about half of people who are hearing this conversation are going to know what that is. The normal S&P 500, it's weighted by market capitalization. So the biggest companies get the most oomph in the inde. The, the equal weight index. Like the name says, every company gets an equal weighting. So you tend to have different sector weightings, different tilts in the portfolio. If you look at that portfolio, what do you like about those tilts? Is it cheaper? Is it, you know, is it different, different sectors that you think are going to come on strong. What do you like about that? Equal.

Chris Heisey (35:16)

Weight. Yeah, I apologize for saying another overly used term, the second derivative. The second derivative in that area of the marketplace and their earnings, they're now starting to get more relatively attractive. What does that really mean? They went from having collectively a majority of the S and P companies over the last couple of years were not earnings attractive. They're slow growers, some of them unprofitable. And when you change that narrative to becoming slightly positive to becoming attractive again, that Delta is very attractive to an investment manager. And that's why they start to add more money to those areas. And that's when those prices start to climb, relatively speaking, to those others that have high multiples. So they're now becoming positive earnings.

Jack Howe (36:03)

Contributors. Sometimes I hear, sometimes I hear the words green shoots. When I hear that next two second derivative Meaning you're talking about the rate of change of a rate of change. And so maybe these companies aren't the fastest growing yet, but they're starting to grow faster than they have in the past. And that's worth paying attention to. Do I have that.

Chris Heisey (36:22)

Right? You do, you do. And some of that has to do with the fact that we just tilted back up into expansion territory in the manufacturing indices, which hasn't been the case for over two years. Longest stretch ever where you're now starting to see an expansion. Some think it's because of onshoring coming back. We're not quite there yet. But a lot of it has to do with the fact that outside the United States, which are very manufacturing heavy, has now started to do better, particularly China. And therefore some of the companies that are in the world of changing their better story are manufacturing intensive. We had a goods recession right after the pandemic for a while, so that has been wound down and now you're seeing inventory start to come up. Some of it may be because of tariffs, fear of, fear of tariffs. But expansion territory in manufacturing lends itself to more cyclical companies doing well versus a few years ago when they did.

Jack Howe (37:17)

Terribly. I wonder if there's a mistake that you see people making out there or when you talk with the thundering herd as they call Merrill's army of financial advisors, if they. Is there a question that's on everyone's mind or something? You know, what's out there that, that you think people are not seeing, that they should be seeing right now or something you think that the ordinary investor might be getting.

Chris Heisey (37:39)

Wrong? Well, it's, it's healthy to, to always be guarded. That's, that's a healthy way to think about. Okay, what am I missing? Well, what gets unhealthy as it relates to building wealth and and ultimately watching your dollars grow is again focusing on too many of the negatives. The likelihood of all the negatives we all talk about coming through and being a conclusion is very low. And you see it every decade, every two decades or so. The second principle is recessions are hard. They don't happen often. You need a lot of leverage, you need an event to occur and then behaviors to take over and a massive pullback. So trust the facts. Recessions rarely occur. Bear markets with. Recessions rarely occur. Overwhelmingly bull markets are there. And then of course you get range bound markets and that's where the dividend side of things pull through. So just be simple about it. Don't over bake everything you see and know this one last principle and I said it before, time in the markets is your most powerful.

Jack Howe (38:44)

Tool. Thank you Chris. And I want to thank Patty and Matt and SoCal ed. Keep that board wax, dad. We're going to hit dawn patrol soon. I'll bring the avocado toast, unless you're off gluten again. If you have a question you'd like answered on the podcast, just tape it on your phone, use the Voice Memo app and send it to Jack. How that's h o u g h@Barrons.com thank you all for listening. Jackson Cantrell is our producer. If your electricity bill is lower than his, you live in a tree fort. Say hi to the other Ewoks for you can subscribe to the podcast on Apple Podcasts, Spotify or wherever you listen. If you listen on Apple, write us a review. See you next.

Jomana Selehin (39:29)

Week. The beacon of the 60:40 is achieving a balance between the ups and downs in the market so investors can stay the course. That balancing act is still relevant for portfolios, but adhering to a strict allocation may not serve all investors. Here again is Vanguard's Jomana Salahin to.

Janice Henderson (39:52)

Explain. What we're talking about today is thinking about personalization, Thinking about where is the next frontier on balanced investing. It's talking about having capabilities to tilt your portfolio so that you can take advantage of your situation and the market situation. There may be some medium term changes out there on the horizon where you could actually benefit by tilting your.

Jomana Selehin (40:17)

Portfolio. Get more insights from Vanguard on how you can navigate an uncertain market@vanguard.com.

Jack Howe (40:23)

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Custom content from WSJ is a unit of the Wall Street Journal Advertising Department. The Wall Street Journal News Organization was not involved in the creation of this.