What bear market?! Join Josh and Austin this week as they discuss the shortest bear market in U.S. history. They’ll walk through a timeline of the bear market and the recovery process. They also discuss how this bear market compares to others historically, where we go from here, and some key takeaways from this unprecedented series of events. Listen now!
Main Talking Points
[2:59] – What is a Bear Market?
[4:15] – Timeline of 2020 Bear Market
[12:28] – Congress Signs CARES Act
[18:40] – U.S. Opening Back Up
[20:29] – Historical Bear Markets
[22:29] – Dad Joke of the Week
[23:10] – Recovery: The U.S. Government
[25:23] – Recovery: What Led?
[30:37] – What’s Next for the U.S.?
Links & Resources
016: Who Wants A Stimulus Check?
019: What Is Going On With Oil?
Visual Capitalist – The Stocks To Rule Them All: Big Tech’s Might in Five Charts
Free Guide: 8 Timeless Principles of Investing
Social Media
Full Transcript
Intro:
Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts Josh Robb and Austin Wilson.
Austin Wilson:
All right. Hey, hey, hey. Welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today it is pretty good time to be alive in the US stock market. We are going to be doing a timely episode where we talk about the recent COVID-19-induced bear market and the recovery that really has taken us out of the bear market.
Josh Robb:
This is great timing, by the way, because I was actually just in the market for a bear, but I’ve had a hard time finding someone to sell me one. All I wanted were the limbs, but no one would sell them to me. And I was getting so frustrated. I could not understand why no one would give them to me, because I know I have the right to bear arms.
Austin Wilson:
Okay. That is a dark and funny joke.
Josh Robb:
Some bear arms.
Austin Wilson:
It’s pretty gross, if you just-
Josh Robb:
It’s amendment joke.
Austin Wilson:
… think about it. It’s an amendment joke. It’s a bear parts joke.
Josh Robb:
It’s everything.
Austin Wilson:
He checked a lot of boxes there.
Josh Robb:
It’s a good joke.
Austin Wilson:
But no, Josh. No, just no, just no.
Josh Robb:
Okay. We’re talking about bear markets and let’s look back on this. Let’s say you are a bear and you’ve been hibernating for the last five or six months. And you woke up today and you looked around and like, “Oh, look, market’s at all-time highs.” Seems like it’s going pretty well. S&P is up about 6% for the year. Things are going. What did this bear miss throughout the last couple months?
Austin Wilson:
Well, first of all, they missed me having a bunch of hair.
Josh Robb:
That’s right. That’s the first one.
Austin Wilson:
Bear hair. I actually made a bet. If anyone is listening, may have seen the video on Facebook or YouTube. I made a bet. I think it was about April or May, that until the S&P 500 reached all-time highs again, I would not cut my hair. And it got a little hairy.
Josh Robb:
It did. It got hairy and it made our bosses a little nervous.
Austin Wilson:
Yep. Historically speaking, bear markets are not quite this short, as we’ll talk about. There was potential for a full-grown man bun.
Josh Robb:
Could have been a bit of braiding involved.
Austin Wilson:
Yeah, or Rapunzel.
Josh Robb:
Yeah. Could have been braided.
Austin Wilson:
So anyway, I have a haircut now, and everyone is happy. What have we missed? If you had been hibernating the last five months, a lot. A freaking lot is really the summary, the high level, to 30,000 feet. But to clarify, when we are going to be talking about the bear market and subsequent recovery and all that right now, we’re going to be referring to the S&P 500, the most well-known US equity index. And that’s the measure most people are familiar with. Now, the tech heavy, NASDAQ, another index, already hit all-time highs much earlier. And the Dow, so more value-oriented, has yet to hit it.
Josh Robb:
So-
Austin Wilson:
But we’re going to be talking S&P, because that’s generally what people are going to talk about for the bear market.
[2:59] – What is a Bear Market?
Josh Robb:
Right. Just to be clear, so there’s bear markets and recessions. We’re going to talk a little bit about what a bear market is. But a recession is talking about our economy. So there’s only one definition there. Two consecutive quarters-
Austin Wilson:
Negative GDP.
Josh Robb:
… of negative GDP means we’re in a recession for our economy. But a bear market could be, you could have a bear… Like you said, a bear market for the S&P 500, a bear market for the bonds. I don’t know. Maybe if it drops far enough, you can have a bear market for the NAS. We’re clarifying, we’re talking the S&P 500 today. Okay.
Austin Wilson:
The bear market definition is actually, so a 20% drop from a recent high. And then, you really can’t say you’re not in a bear market until you’ve eclipsed that high again. From the all-time high for S&P 500 closing was on February 19th, and we’ll go through a full timeline of everything that happened. But February 19th, all-time high. March 23rd was the bottom. And we were down about 33, 34% on the S&P 500. So that is the trough. And so, that was the bear market.
But you’re not really out of the bear market officially until you’ve eclipsed those all-time highs as we just have. But it technically started at the bottom. That’s an interesting way to look at it. I think it’s probably helpful to go through a timeline of exactly what happened.
Josh Robb:
Yeah, let’s do that.
[4:15] – Timeline of 2020 Bear Market
Austin Wilson:
Last year, 2019, seems like a long time ago.
Josh Robb:
Man, that was just a year ago
Austin Wilson:
I know. Late in December, we started hearing the term Coronavirus, and it was really talking about a new virus that was starting in China.
Josh Robb:
That really confused me because a lot of people called it the novel Coronavirus, and I was like, “What book is this?”
Austin Wilson:
I know.
Josh Robb:
I didn’t know what was happening.
Austin Wilson:
Well, I was thinking like, “I have a novel. Do I have a virus in my novel?” But that’s a naval.
Josh Robb:
Naval, and that’s a boat. So I don’t know where we’re going.
Austin Wilson:
It’s a whole other thing. So yeah, that started at the end of last year, but it really did not spook too much of US equity market and all that. So the stock markets, in the US anyway, closed the year up more than 30%, generally speaking, following the last year, the fed-tightening sell-off that we had in December made for a really strong 2019.
Josh Robb:
Yeah. 2018 was almost a bear market.
Austin Wilson:
Correct. It was 19.8% of revenue.
Josh Robb:
Yeah, really close.
Austin Wilson:
So lots of movements over the last few years. But 2019, really, really good year. End of the year, started hearing this news. Really didn’t affect the markets very much. So ended the year strong. Then mid January 2020, so this year, President Trump signed the phase one trade deal that had been anticipated for a while with China, and that took some uncertainty off the table.
Josh Robb:
Yep. It was a good thing. Yep.
Austin Wilson:
It was a good thing, and answered some questions anyway. It took some uncertainty off the table and that boosted markets even further. Come end of January, January 21st, specifically, the US registered its first COVID-19 case. And that was actually business traveler from China. He had been in an area where this was more prevalent.
Josh Robb:
What happened to him?
Austin Wilson:
Yeah. He fell off the record, like, “You were the first one in America…”
Josh Robb:
I mean, is it like if you think back to the Chicago Cubs and you have, what’s his name, who caught the foul ball that caused him to miss out on the world series.
Austin Wilson:
Right. But he had like death threats and stuff.
Josh Robb:
Yeah. I was like, “Is this guy’s forever life going to be tainted with this, or is he anonymous for his safety?” We’re like, “Yeah, we do know there’s a case, but it was inadvertent.” Obviously, he didn’t know, otherwise he would have-
Austin Wilson:
True.
Josh Robb:
… taken precautions. I just was wondering if anybody is tracking that.
Austin Wilson:
Yeah. I actually don’t know either. That was January 21st. Flash forward a little bit, early to mid February, the virus started spreading further and there was concerns that it was really going to start picking up the pace in the US. On February 19th, the S&P 500 peaked at a level of 3386.15. So that was the peak, February 19th. Now mid-March, so in about a month later, cases really started picking up and the market had already started to sell off.
Josh Robb:
Yep. The market peak was the day after my birthday, just as a reference point. So really, my birthday was the highlight of the year up to that point, and it was really downhill right after that.
Austin Wilson:
It’s all down hill from there. So remember that, Josh’s birthday, peak.
Josh Robb:
Then it was down.
Austin Wilson:
The fed reacted really quickly to the market selling off not just equities, but fixed-income markets and everything. The fed, in the middle of March, cut short-term interest rates back to zero, where they were really, coming out of the global financial crisis, for the first time since then. And they reinstated quantitative easing, which at a high level, we should probably do a full episode on this at some point.
Josh Robb:
Yes.
Austin Wilson:
But at a high level, it’s the fed going into the fixed-income open market and buying fixed-income securities in various different types, various different asset classes, to instill some liquidity and continue to bring together buyers and sellers when there really weren’t any buyers. People wanted cash. They were dumping.
Josh Robb:
That was part of the problem, is in March, when things started to slow down or shut down, banks and people who were lending money started holding onto that money. They did not want to get rid of cash. There are businesses that have these rolling lines of credit that need a flow of cash. They pay it back and then get some more and pay it back. And when that cash freezes up, it really hurts our economy. So that’s what the fed was stepping in for, is they said, “This fixed-income market is in danger of really freezing, which then will cause a rippling effect all through our economy.” If there’s not that certainty that I can get the cash that I need to borrow when I need to borrow, especially from businesses, that causes problems.
Austin Wilson:
Yeah. That’s the reason for the interest rate cut. It was what, 150 basis points off in one cut. Emergency cut too. This was not a planned meeting. So what happened was, between those two parts, you have quantitative easing, which is really the fourth round of quantitative easing that we’ve ever gotten from the fed, and three were coming out of the global financial crisis. And then we had the fourth, QE4, what we had here. Between that and the interest rates down to zero, the fed stepped in really, really big. But the market’s still free falling at this point, right?
Josh Robb:
Well, so the fixed-income market-
Austin Wilson:
Is stabilized a bit.
Josh Robb:
… more or less stabilizes.
Austin Wilson:
But the equity market was still free falling-
Josh Robb:
Yes. Equity market was going down.
Austin Wilson:
… until March 23rd was the bottom. The S&P 500 went from, remember, 3386 down to 2237. Was at the bottom on March 23rd when it closed.
Josh Robb:
Quick math in my head, that’s about 33% down.
Austin Wilson:
It’s like a third.
Josh Robb:
Yeah.
Austin Wilson:
That’s a third of the S&P 500 market cap was lost, and that took a span of 33 days. Yeah.
Josh Robb:
We’re talking about it bottoming. But on March 23rd, if you can think back to that day, no one knew that was the bottom. And that’s part of this whole discussion on bear markets. We can’t say it’s the bottom until we officially come out of it.
Austin Wilson:
Exactly.
Josh Robb:
Because we could go back down again and say, “Oh, there’s a new low,” which becomes the trough, that bottom part. So you can’t define the bear market until you’re looking backwards at it and say, “Here’s the top, here’s the bottom, and here’s the day when we recovered.”
Austin Wilson:
Yes.
Josh Robb:
Yep.
Austin Wilson:
Yep. So, yes. We are back in what’s called bull market now. Now that we’ve re-eclipsed the all-time high before, we have a bull market that we can date back to the bottom. So very interesting the way it’s calculated-
Josh Robb:
33 days you said though.
Austin Wilson:
33 days we fell 33%. And let me tell you, it was not 1% per day as you could do the math there. There were some days where things just went… There was one day where things were down like 6%, 7%, 9%, I think I remember one day. Really rough time. So fell 33% in 33 days, March 23rd was the bottom. By the end of March, the US and most of the world was really on some form of stay-home order. People were losing their jobs at a rapid pace. And that really culminated when we saw unemployment numbers come out for April, 14 plus percent, almost 15%, which is horrible.
Austin Wilson:
Then we got a Q2 GDP reading, which is an annualized quarter over quarter number, so keep that in mind, of minus 33% as well. If you take out the fact that it was annualized quarter over quarter, it was more like a quarterly reading of negative nine. But still, really, really bad.
Josh Robb:
They annualize that for whatever reason. Who knows? But there’s a reference point. In ’08, ’09, that didn’t even get to a 10% drop at the worst point of that. And so, just to compare the two, the worst annualized reading in the last recession that we had was about just under 10% drop in GDP. We had a 33% drop in GDP.
Austin Wilson:
The first quarter was also negative, which is what made it a recession. And that was like a negative five. So two negative quarters made it a recession. Those are bad readings, and those are readings that we’ve not seen anything close to in our lifetimes, but not really at all since the Great Depression. We’re not talking recession.
Josh Robb:
Yeah. Great Depression.
Austin Wilson:
We’re talking back to the ’20s and ’30s, which is bad.
Josh Robb:
Yeah. And even the unemployment rate. You think back to ’08, ’09, the Great Recession-
Austin Wilson:
The peak was like, what, 10%?
Josh Robb:
… it peaked right under 10%. And now we went to 15% and we did it in a couple months, not through 2007 through 2009, a year and a half really of downward trajectory. It was a quick drop.
Austin Wilson:
We’re recording this in August. This will be released in August. The latest reading we have was from July, and it was still 10%.
Josh Robb:
Yes. Yeah. We’re still higher than we were at the worst part of ’08/’09.
Austin Wilson:
It’s crazy. It’s crazy. So that’s-
Josh Robb:
And we’re all-time highs in the market.
[12:28] – Congress Signs CARES Act
Austin Wilson:
Yeah, we’re getting to that. On March 27th, so we’re working our way through March. March 27th, Congress signs the CARES Act into law, which is really the Coronavirus Aid and Relief Act of… There’s a lot of other acronyms.
Josh Robb:
I know we’ve talked about it before, but I think my retirement job, something to do to keep me active, will be naming bills.
Austin Wilson:
Acronyms.
Josh Robb:
Yeah, giving good acronyms to bills. I’ll just be one of those lobbyists that just shows up and does something like that for them.
Austin Wilson:
Exactly. What that-
Josh Robb:
You’ve got to be creative there.
Austin Wilson:
At a high level, Josh, what are some of the major provisions in that?
Josh Robb:
The CARES Act, the big things they did is it had enhanced unemployment benefits. So you get unemployment from the state, each state has their unemployment system. The federal government said, “We’re giving some additional unemployment money on top of your state unemployment.”
Austin Wilson:
Not really –
Josh Robb:
And it was $600.
Austin Wilson:
Yeah. A lot.
Josh Robb:
Depending on what you were earning, it could really move the needle on what you get from unemployment. Most state unemployment will provide you 50, 60% of what you were getting prior to losing your job. You add additional 600 a week on top of that, then you may be earning as much or more than you were taking in before. But the whole point of doing that was, one, for ease, calculating how to just get you back to 100% would be just impossible. It was hard enough for states to enact this 600 flat dollars per week, more or less to having some crazy calculation. So that was ease for them to implement it as quick as possible.
And then, two, even if they are paying you extra, the hope is that you will be kicking that into the economy. You will be stimulating the economy, because our economy is driven by spending. So that was the other reason for that. On top of that, they gave the stimulus check. So 1,200 bucks a person, varied based on-
Austin Wilson:
For adults.
Josh Robb:
… income and stuff. And then you’ve got some additional benefits for kids. But for adults is 1,200 a person. Those were the individual things that were part of the CARES Act. Then they did some large corporations, they did some loans in some… I don’t want to call them bail-outs. Some additional money for large corporations. And then the big one, which you heard a lot in the news, was small business support. So the PPP loan, and there was a couple other grants you could get. Those were there to provide for smaller businesses with fewer than a couple hundred employees, giving them the ability to keep them running, because they’re the ones impacted the most.
Austin Wilson:
PPP standing for Payment Protection Program.
Josh Robb:
Yes. The idea there is you’re not supporting the business, you’re supporting the employees. They may have had to lay off or furlough or something, where they can provide them that paycheck and ongoing income while we’re trying to figure out what’s going on.
Austin Wilson:
Yep. That totaled two trillion from the CARES Act. Now you combine that with what we talked about with the Federal Reserve’s actions, and that was about four trillion. So combine-
Josh Robb:
Six trillion.
Austin Wilson:
… out of our back pocket of being able to print our own debt, really, we came up with $6 trillion in a couple of weeks. That’s a lot.
Josh Robb:
Yeah. Obviously, interest rates being super low. When we talk about the government printing money, what they’re doing is creating money and then creating treasuries or bonds that they will sell to generate that revenue. The reason that the US is still able to do this is we are a very secure place to borrow from. So if another country borrows or buys our debt, there’s a good chance we’re still going to be around and be able to pay back that obligation. And so, especially at super low interest rates, it’s great for us, from an interest standpoint. It’s great for them because we still have higher interest rates than most of the world. We don’t have negative interest rates or anything like that. So we created, like you said, about $6 trillion to help us get out of this self-made recession.
Austin Wilson:
Correct.
Josh Robb:
Because that’s really what it was. We shut the economy down. We did that to slow the curve of the virus. And it wasn’t like some part of our economy did something or was faltering. We just said, “Pause.”
Austin Wilson:
That is why the government stepped in, in such a big way, is because even very much unlike ’08/’09 where that was clearly… There were faults in the financial system and the banks were making bad choices, this was a total, “No one made a bad choice. This is us the government saying, ‘Hey, we’re shutting things down.’ And you’re not going to let anyone from paying your bills or eating or whatever, or your business isn’t going to fail. And the markets aren’t going to fail.'” All of these things, the government saying, “It’s not your fault. We’re going to let it slide. We’re going to get things by,” is what they’re saying.
Josh Robb:
Yep. On top of the CARES Act, some of the things we didn’t mention, but they postponed repayments of student loan. So you don’t have to pay student loans. Now I think they pushed it through to the end of the year-
Austin Wilson:
I think so. Yeah.
Josh Robb:
… or right around there. In a sense, it’s pushed down there for you. You’re not accruing interest on that. It’s just paused. Then the same is true with the renting. They put some protections for people renting, so they wouldn’t get kicked out. They’re trying their best to say, “We know there’s an issue here caused by us trying to prevent the virus from overwhelming our healthcare system. We will do our best to help alleviate some of that pressure.”
Austin Wilson:
Exactly. And so, we talked about the CARES Act. That is, we actually have others. If you want to learn a little bit more, we have a full episode we’ll link in the show notes where we talked about that when it actually happened. Another episode that ties in with what we’re going to talk about next is oil. You may have heard back in middle to late April, oil prices “went negative”. Well, based on the future’s trading is how we got negative oil prices. But that is another thing that we have a full episode on you can check out.
We’ll link those below if you want to go into more detail, but that caused, on April 20th, when oil prices went negative, that caused oil companies to look increasingly risky and unprofitable overnight, which put even more pressure on that sector of the market. Craziness that we just never thought we’d see all of this stuff.
Josh Robb:
Yeah. Who would thought that businesses were getting paid to hold the oil for an additional amount of time because there was nowhere to deliver it to?
Austin Wilson:
I thought you filled up your shed.
Josh Robb:
I’m still holding it.
Austin Wilson:
Yeah. Still holding that.
Josh Robb:
Playing the long game. I still have a lot of olive oil, but apparently that was not part of this whole thing. So I don’t know what to do with that.
Austin Wilson:
You pushed the wrong ticker.
Josh Robb:
I guess.
[18:40] – U.S. Opening Back Up
Austin Wilson:
That is pretty much as all of the negative things were happening. So after that point, things started opening back up, slowly, and it’s still slowly opening up around the country. But people have gone back to work, the unemployment rate has come down, these kind of things. People can go back out and do more things, and travel’s picking up, and spending money is picking up, and those kinds of things.
Throughout all of that time, the stock market bounced really hard off that bottom. And since then, on August 18th, so five months pretty much to the day from the bottom, the stock market is up 51%.
Josh Robb:
Wow.
Austin Wilson:
51%. Now, if you understand how stock market price changes go, you’ll know that that equivalent drop was only 33%, but that rise was 51. And that’s because of your starting point, which is what you’re dividing by. So that 33% drop is the same amount of points as a 51% gain off the bottom.
Josh Robb:
An easy way to understand that is if we use a simple number like 10. If you drop it down to five, that’s a 50% drop. But to go from five to 10, that’s doubling it. That’s 100% to get back up. So that’s just a quick way of thinking how percentages work when you’re going down and back up, so if you ever need to think of it that way.
Austin Wilson:
August 18th, we not only hit the record intra-day close at 3389.78, which was greater than 3386.17. I think it was, was the prior record close. But we also eclipsed the intra-day, which was a few points higher. It’s just amazing that in only five months, that happened.
Josh Robb:
That’s crazy.
[20:29] – Historical Bear Markets
Austin Wilson:
It’s one of the fastest recoveries we’ve ever seen. That is just crazy. But that’s what happened. That is the last five or six months of really highlights of where we got to be where we got today. Talk about some historical bear markets, Josh.
Josh Robb:
Yeah. Again, like we mentioned, a bear market is a drop at 20%. Now, there’s a lot of debate. There’s no hard line about this rule. Is it 20% intra-day, 20% at the end of the day closing? How do you do it? So, depending on what you read or who you look at, they may have a couple more or less bear markets, historically. Like I said, 2018, 19.8% drop.
Austin Wilson:
Near bear market.
Josh Robb:
Yes. Do they count it? Do you round it up? Depending on the person, though, it’s different. There was Associated Press article, and they had, since 1945, there’s been 12 bear markets. All right. That’s a reference point to give you an idea of how often it happens. Since World War II, the average bear market has been 14 months with a 33% decline on average throughout-
Austin Wilson:
Got you.
Josh Robb:
So, again, five months was this one, with a 35% decline. It was very fast, very quick to get there. But that’s interesting to think about how it compares. Also, there’s a Yahoo finance article we’ll link in short notes that has the same data as well. So how does this compare? It was the fastest decline-
Austin Wilson:
Yeah. 33 days.
Josh Robb:
… to get there.
Austin Wilson:
From peak to trough, it was less obviously to the 20% mark.
Josh Robb:
Yep. It’s also one of the shortest. There’s also one in the 1990s that was about, I think, three months long. So it was pretty quick. But again, it’s unusual to be that quick. Usually, like I said, it takes over a year to get back out of this. So it’s really interesting to think that we went from the longest bull market. We were in the longest bull market, and that was followed by the one of the shortest bear markets.
Austin Wilson:
Right. And now we’re in a bull market.
Josh Robb:
And now we’re back in a bull market. It’s just, our economy in our markets have experienced a lot of firsts recently, and we’re not sure going forward will be, but it’s fun to participate in it.
[22:29] – Dad Joke of the Week
Austin Wilson:
Josh, I am so excited. I get to tell you the dad joke of the today.
Josh Robb:
Okay.
Austin Wilson:
I’ve been preparing this one since I decided to put together notes for this episode.
Josh Robb:
So when you found it, you wrote it down.
Austin Wilson:
Yes. Exactly. All right. All right, Josh. What do… I can’t say it without laughing.
Josh Robb:
He just knows the answer. He’s going to laugh.
Austin Wilson:
What do you call a cheese… No. What do you call cheese?
Josh Robb:
What do you call cheese…
Austin Wilson:
Without any friends.
Josh Robb:
Without any friends? I don’t know. What do you call it?
Austin Wilson:
Provolone.
Josh Robb:
Provolone? I like it.
Austin Wilson:
Also delicious cheese.
Josh Robb:
That’s good cheese. I-
Austin Wilson:
Makes great sandwiches.
Josh Robb:
That’s my go-to at Subway. So Subway.
Austin Wilson:
You eat fresh. You eat the fresh Provolone.
Josh Robb:
I do.
[23:10] – Recovery: The U.S. Government
Austin Wilson:
So Provolone. So Josh, now that you’re lightened, your mood is lightened-
Josh Robb:
I like it.
Austin Wilson:
… talk about what drove this recovery. What’s the main drivers that you can think of?
Josh Robb:
Yeah. Overall, the big driver of this recovery was the government stepping in, because, really, if you think about what happened, in a sense, closing down our economy for five months, without government intervention, it would have been a whole lot worse. If there wasn’t any support for people as they were sitting on the sidelines with no income, or not enough income because of unemployment, due to no fault of their own. Because if you get unemployed, you can go out and hunt for another job.
Well, when everything’s shut down, there’s no jobs anywhere. So yeah, without the government intervention, that was a big part of the recovery. Monetarily, like we mentioned, $4 trillion in stimulus went through from the fed. The largest fed balance sheet as a percent of GDP, it’s around 33%. So 33% of our GDP is being held on the Fed’s balance sheet.
Austin Wilson:
That’s crazy.
Josh Robb:
This is quantitative easing. Low interest rates helped as well. Low interest rates, again, they don’t show up as a dollar term, but what they do is help everybody with the cashflow. But what it does do is it reduces the amount of income the fed or the government gets when they are lending money overnight to the banks. The fiscal policy is the other piece, $2 trillion, like we mentioned in the CARES Act. That’s I think, in my mind, the bigger piece that actually… Because our economy, again, is built on-
Austin Wilson:
Consumers.
Josh Robb:
Consumer spending.
Austin Wilson:
Two-thirds of the economy is from consumer spending.
Josh Robb:
Yes. If it wasn’t for that money coming in to individuals, where they could buy their food, continue to pay their utilities, and kick that money into the economy… We joke about this here. If you ever visited a Home Depot, or a Lowe’s, a Menards during the shutdown-
Austin Wilson:
Oh my goodness.
Josh Robb:
… man, it was crowded. But that was part of it, is people got some extra cash and they were forced to sit at home. And as you’re sitting home looking around-
Austin Wilson:
What are you going to do? Paint a room.
Josh Robb:
Be like, “Man, you know what? I need to fix this place up if I’m going to be stuck here for a while,” or you needed a little extra space to get away from some of your family, so you added on to get… “My man shed really needs picked up so that I can stay out there a little longer.”
Austin Wilson:
The he-shed?
Josh Robb:
Yes. So those are the two big pieces that drove the recovery.
[25:23] – Recovery: The Stock Market
Austin Wilson:
Yeah. I think another one is how the market is built, so specifically talking about the S&P 500 is what we’ve been referring to mostly. But we did mention that the NASDAQ, so I think mostly large tech companies hit all-time highs earlier in this recovery.
Josh Robb:
Yeah. Well over 20% for the year.
Austin Wilson:
Yeah. Oh yeah.
Josh Robb:
Regardless of what happened through that.
Austin Wilson:
Right. Exactly.
Josh Robb:
That’s crazy.
Austin Wilson:
So tech is what has driven this recovery. And if you think that big techs, I think Apple, Microsoft, Amazon, Facebook, Google, that’s the big five that I’m thinking of in my head, their business models are pretty impervious to this kind of shutdown. So, obviously, people were still… You were probably still paying for your Office 365 subscription for Microsoft, or businesses were, or investing in cloud because everyone is working from home. Facebook.
Josh Robb:
Yeah. You need to communicate. You need to have this stuff at home. So you need the subscription.
Austin Wilson:
Facebook. Everyone is still using… They are probably using Facebook… Well, they were using Facebook a lot more because that’s how they’re communicating with people and keeping up to date.
Josh Robb:
Instagram.
Austin Wilson:
Instagram, those kind of things. Everyone’s on the internet Googling still stop as much, lots of YouTube watching while things are shut down. Amazon became more important than ever, and the stock price shown that.
Josh Robb:
Yes, if I can’t go to the store-
Austin Wilson:
You’re just going to order to your house.
Josh Robb:
… I’m going to have to shipped to me.
Austin Wilson:
Exactly. In one or two days, and it was a little longer when we were-
Josh Robb:
They did stretch it out, yeah.
Austin Wilson:
But still, crazy, and Apple. You’re still using your services that you’re paying for on your Apple phone, or you’re buying a new phone, or whatever, because you’ve got more money in your pocket from stimulus. So those kinds of business models were kind of impervious to the shutdown. And because they are huge market weighting in the S&P 500, because the S&P 500 is a market cap weighted into-
Josh Robb:
Explain that to me.
Austin Wilson:
There’s 505 companies, which doesn’t make sense. There’s 505 companies in the S&P 500
Josh Robb:
That’s like the big 10 having more than 10 things-
Austin Wilson:
Exactly.
Josh Robb:
Yeah. Okay.
Austin Wilson:
So there’s 505 companies in the S&P 500. The top five stocks combined, that I mentioned, Apple, Microsoft, Amazon, Facebook, and Google, those top five in terms of size, market cap is share price times number of shares out there. So how big your company is in terms of how big it’s traded. Those represent one-quarter of the index. Five companies out of 505 represent 25% of the index. What that means is that their business model’s being doing well, which means their financials did well, which means their stock prices went higher, sent the markets higher because they represent such a large portion of the market.
Josh Robb:
I know, over this timeframe, because I see it on the news all the time, Tesla did really well. Their stock price has gone crazy.
Austin Wilson:
Berserk.
Josh Robb:
But they’re not as big of a company as these are.
Austin Wilson:
They’re also not in the S&P 500.
Josh Robb:
Right. So a price move like that, though, doesn’t have as big of an impact because they’re a-
Austin Wilson:
Correct.
Josh Robb:
… company. So if they were in the S&P 500, but they’re only however many billion-dollar market cap, they’re 260% growth, whatever, would not have as big an impact as if Apple had a 5% growth on it, because overall they make a bigger piece of it.
Austin Wilson:
Yeah.
Josh Robb:
So I got this cap weighted thing.
Austin Wilson:
Yep. Apple moving 5%, that’s a huge move for the market in general. So when we’re talking about the S&P 500, if you think of those five companies really being the bulk of the gains, because in general, if you look at those 505 companies, well over half of those 500 companies are still down here to date. They’re below zero, negative returns.
Josh Robb:
Yeah. They’re till caught back up.
Austin Wilson:
But their market caps are much smaller. So that negative has meant the market overall has now back to where it was.
Josh Robb:
Which is what-
Austin Wilson:
That is crazy. But I will link a really, really cool article from Visual Capitalists that describes this visually in market caps and all of this stuff of these companies. I’ll link that in the show notes. It explains it really, really well. We’re not sponsored by Visual Capitalist. Hey, shoot us an email if you guys at Visual Capitalists is interested, but a super good way to look at this. But overall, big tech has driven this rebound. It’s been amazing.
Josh Robb:
So, as I think about that, I remember seeing, like for instance, energy was down like 60 to 80%, depending on some of those holdings. But because they’re a smaller grouping there, they didn’t pull the S&P 500 down 60%. And the fact that these were doing well helped cushion that, how bad energy really was, because no one was driving anywhere. No one was flying anywhere. It was bad.
Austin Wilson:
I think the S&P 500 energy sector is like 3% of total weighting, but technology is 20 some percent.
Josh Robb:
25% or something.
Austin Wilson:
The technology moves obviously drive the market up a lot bigger than… Like you could cut energy in half-
Josh Robb:
And no one knows.
Austin Wilson:
Yeah, it would make a lot less of an impact. So, overall, those are the two things that I’m thinking drove the recovery. Yes, the opening is going okay, the virus numbers are going well, but the government was huge. That’s a lot of money being flushed into the economy from the government and the fed, as well as how the market works together in being that those large weighted companies really have done exceptionally well through that. The two main factors I would say are those. Now people are out spending more money, but those are what really got us to where we are today. So-
Josh Robb:
Yeah, because the spending still isn’t what it was before.
Austin Wilson:
No, it’s not. And it’s going to take some time. But the question, Josh, is what happens next.
[30:37] – What’s Next for the U.S.?
Josh Robb:
Well, good. I actually, speaking of Amazon, I was waiting, it was delayed. But I got my crystal ball now.
Austin Wilson:
Ooh good.
Josh Robb:
So I could tell exactly what’s going to happen next.
Austin Wilson:
Is that when you rub and talk at it?
Josh Robb:
Yeah. You’ve got to like look right at it and shake it. Here’s the deal, though. We don’t know, obviously. We can’t tell you where the market’s going to be.
Austin Wilson:
Speak for yourself.
Josh Robb:
But I do know, historically speaking, given enough time, the market will be up and our economy will continue to grow, because, again, the market’s driven by the innovation and growth of individual companies. And regardless of what’s going on around them, there’s innovation. In fact, in times like this is actually where you see the most innovation. 2007 through 2009, when we had the last big recession, there was a lot of new ideas and new companies that came out of that when they saw opportunities. So if you ask me what’s happening next, given enough time, I would say we have a stronger new growth in our economy because there’s new innovation.
Austin Wilson:
If someone were to say to you today, their financial situation out of the picture, and their exact timing with retirement, is it a good time to invest in the markets considering what you just said? You would say?
Josh Robb:
If you have a long time horizon, yes.
Austin Wilson:
You would say yes?
Josh Robb:
Yes, especially knowing that compounding overrides and defeats timing every time, that I would say. If we’re talking retirement, if we’re down the road, years from now, yeah, now’s a great time because we know, over the long run, historically, the market over five, 10, 15 years, the times it’s positive far outweigh the times it’s down.
Austin Wilson:
Exactly. I think another thing that we need to keep an eye on of things that happen next is it seems likely that we’ll have some sort of additional fiscal stimulus bill, probably in September. Now there’s an election coming up. Don’t know if anyone knew about that. But I think that’s causing a little bit of the headbutting that we’re seeing in the wait on what this bill’s going to look like.
Josh Robb:
It’s a good thing I’m not a bettor, because I probably would have bet money they would have had something figured out before their August recess.
Austin Wilson:
I know.
Josh Robb:
Because it just seemed like, from a political standpoint-
Austin Wilson:
It’s the best bad politics.
Josh Robb:
I don’t know. So don’t bet on people making sense.
Austin Wilson:
Like we’re go home and go on vacation, and we’re going to leave you guys also being here with your money.
Josh Robb:
I was surprised. But I do agree. I think the need is still out there for some sort of relief or help for a large percentage of our population. So yeah, I would agree, that there’s a good chance for some sort of fiscal stimulus or some sort of… Even if it’s just a continuation of some of the programs already enacted to help along the way, because we still aren’t… Again, we’re still not back to where we were. There’s still need.
Austin Wilson:
And those details are constantly changing. So we’ll have to see what things look like in September. But stay tuned and we’ll have an update when that happens. I would also just say that it’s probably safe to expect continued choppiness, continued volatility to remain pretty high, pretty elevated, at least into and probably through next year. But probably until we have some vaccine and some level of hard immunity from the virus, because that’s really what caused this, and combine that with the fact that there is an election in November. There’s just a lot of uncertainty.
Josh Robb:
There’s a lot of unknown.
Austin Wilson:
If the market were to be smooth and up into the right between now and through next year, I’ll be surprised if it’s that smooth. I’m not saying it won’t be up into the right, but I’m saying there could be some dips and choppiness and whatnot.
Josh Robb:
And again, looking back now, like so the S&P is up about, what, 6% for the year. That includes a 35% drop. And so, again, choppiness is there, but we’re still up 6%. So it’s still up into the right, but it had a little-
Austin Wilson:
Huge dip.
Josh Robb:
… trip there along the way.
Austin Wilson:
Exactly. Also something that I’m keeping an eye on from an economic and research standpoint is that at some point, all of these trillions, with a T, not billions, we’re talking trillions now, all of this money is going to have an impact on the overall economic landscape of our country. There is potential for real inflation at some point. Not for a while probably, because things are still slow to open. But that’s a lot of easy lending, easy borrowing, and that is going to cause some inflation at some point.
Austin Wilson:
Also, we just want to keep in mind that this is a cycle. So, like Josh said, we had this really, really short bear market. We had a long, long, long bull market, a really, really short bear market, and now we’re back in a bull market. But these things are cyclical and we’re technically still in a recession.
Josh Robb:
Till we get positive growth.
Austin Wilson:
So, until we get positive GDP growth, so we just know that these things are going to come and go. These bear markets are going to happen. Bull markets are going to happen. Recessions are going to happen. Expansions are going to happen. And we need to be able to keep the long-term focus here.
Josh Robb:
Yep. And then, what’s always interesting too is when you look at the stock market performance in a recession, it’s really positive a lot of times because of that trail. So usually you’re out of the bear market before the recession ends because you need two quarters of growth, which is six months. Well, normally your stock markets has recovered by then. So bear markets and recessions aren’t always hand in hand and nor do they follow suit. So you’re right. But both are cyclical and both have a tendency to have longer positive sides, shorter downsides, because, again, as we innovate and grow, there’s more of that timeframe. But it’s always, like you said, keep in mind that that’s normal.
Austin Wilson:
Also keep in mind that the stock market is not necessarily a reflection of what’s going on right now. The stock market is forward-looking. Every single stock in the stock market that’s publicly traded, investors or managers are looking forward at what all of these holdings and what all these companies are going to do in the future and saying, “This is what I think this company is worth today.” This was a big dip, but this dip we’re in, in 2020, it’s less valuable to them than the next 20 years or whatever of growth and innovation that the company is going to bring. So that’s why the stock market is up right now, despite the fact that we have 10% of America unemployed.
Josh Robb:
Yes. It’s looking forward past this saying, “Okay, where are you heading? How are you doing?” They pay attention to balance sheets. They pay attention to where you’re currently at, but they put more weight into where you’re going. You’re right.
Austin Wilson:
Wow.
Josh Robb:
That was good.
Austin Wilson:
That was a lot. It’s been a crazy year, Josh. I got some more gray hairs.
Josh Robb:
It is. It has definitely been stressful. For you and I, this was the first major downturn we’ve experienced in this industry. We were both alive through the last one, but we weren’t in the industry yet. And so, for us to experience it, it was definitely new and different. And also to do it from home, for part of it.
Austin Wilson:
Yeah, it was-
Josh Robb:
You and I were working from home and doing the podcast virtually together.
Austin Wilson:
It was a learning experience.
Josh Robb:
It was definitely different. So it’s good to be on the other side, looking back, and learning from it. And that’s the other key, is how can we as advisors and investment professionals say, “What did we learn from this last one? How can we improve our business, our industry, and how we manage our client’s money based on what we learned from this experience?”
Austin Wilson:
Exactly. Yep. I think we all learned a lot, and hopefully this bull continues for a while before we have another bear. We will have another bear. We’re fully confident in that, but let’s enjoy the green while it’s green. As always, check out our free gift to you. It’s a brief list of eight principles of timeless investing on our website. These are overarching investment themes meant to keep you on track to meet your long-term goals. It’s a nicely done PDF you can download for free, just to check up on where things are on that. Josh, how can people help us grow this podcast?
Josh Robb:
Yes, first of all, subscribe. That way you know when we push out a new episode every Thursday. If you’re on Apple Podcasts, please leave us a review. That just helps us rank higher so more people see it, and we can hopefully help them as well. If you have any ideas, have any thoughts, or questions, something we brought up, you want more detail on, shoot us an email. Go to our website and there’s a spot there to contact us. You’re emailing us at hello@theinvesteddads.com. And then, also, if you know somebody who was asking about these bear market, share this episode with them. Make sure they get a chance to hear it.
Austin Wilson:
All right. Thank you. We’ll talk to you next Thursday.
Josh Robb:
All right. Talk to you later.
Austin Wilson:
Bye.
Outro:
Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.
Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecast provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
