If you’ve been asking yourself lately, what the heck is going on with the market? You’re not alone! But don’t worry, Josh and Austin are here to help ease your mind. Discussing everything from corrections, headline inflation, discounting, and the stock market – the guys have got you covered! Tune in now to find out why you should turn OFF your TV!
Main Talking Points
[1:13] – What is a Correction?
[1:43] – Average History of a Midterm Election Year
[3:09] – The Federal Reserve
[4:37] – Headline Inflation
[5:49] – What do Interest Rate Hikes Have to do with Volatility in the Stock Market?
[7:26] – Discounting
[8:31] – Normal Stock Market Returns
[11:23] – Dad Joke of the Week
[12:24] – What Does the Investor Need to Know in this Volatile Environment?
[12:53] – Your Plan
[14:07] – Dollar Cost Averaging
[14:47] – The Importance of an Advisor
[15:18] – The Phase of Life You’re in Can Impact Your Feelings
[18:47] – Closing Thoughts
Links & Resources
Invest With Us – The Invested Dads
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 at The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. Today, we are going to be answering the question… What the heck is going on because it seems like the market is falling apart?
Josh Robb:
You know, spoiler alert, we’re still within the long-term average of a drawdown intra-year. So, yes it feels different-
Austin Wilson:
I know, but this hasn’t happened forever.
Josh Robb:
It does. Right? Three years in a row of 20% returns in the market, this downturn just is not fun.
Austin Wilson:
I know. So, here we are today-
Josh Robb:
Let’s talk about it.
Austin Wilson:
We’re recording this on the 25th of January, and actually, as of yesterday, intra-day, in the middle of the day, the S&P 500 officially, in the middle of the day, went through the-
Josh Robb:
-especially intra-day.
[1:13] – What is a Correction?
Austin Wilson:
Yeah. It went through the 10% threshold into what would be considered a correction, an official correction. So as a reminder, a correction is a 10% drawdown from an all-time high, and that is opposed to what we also call a bear market, which is then 20%. We don’t have 20% bear markets all that often. The last one we had, was in 2020 due to COVID. We do, on average, have about one, not quite, but almost one correction per year, historically. And we just haven’t had one in so long that it just is not cozy.
[1:43] – Average History of a Midterm Election Year
Josh Robb:
So not only that, but we are in a midterm election year.
Austin Wilson:
Yes, we are.
Josh Robb:
Now, what’s the average draw down in a midterm election year?
Austin Wilson:
Isn’t it 17-
Josh Robb:
17%. So not only are we within the norm of what we normally see, but in a year like this where there’s midterm, there is even more volatility and you could expect even more of this going forward.
Austin Wilson:
And couple that with the fact that on average midterm election years have a lower performance than non midterm years. So therefore you technically have… There’s three out of every four years, is not a midterm year. Three out of every midterm years is a midterm year, or one out of every four, you know what I’m talking about?
Josh Robb:
Yeah. I gotcha.
Austin Wilson:
So you have more non midterm years than midterm years. But anyway, during midterm years average US stock market performance… I think this is going back to 1901 or something like that, is 5%. And it actually almost all occurs in the fourth quarter after the election’s already settled.
Josh Robb:
Yeah, so you’re kind of just hanging around, maybe slightly down and then the elections have-
Austin Wilson:
A little bit of a rally.
Josh Robb:
… And then you have a kind of end of year-
Austin Wilson:
Compare that to long term, overall stock market average for the same period, that’s over 10%-
Josh Robb:
For non-election-
[3:09] – The Federal Reserve
Austin Wilson:
For non-election years. And then in total that’s about eight, kind of in the middle there. So it’s not unusual to have ho-hum or not so great stock market performance in a midterm year. But I think what is also driving a lot of this uncertainty in the markets, is the inflation factor that’s driving the Fed to do all kinds of things and let’s talk about that a little bit. So talk about the Fed in general, so the Federal Reserve has two mandates. Yep. Those mandates are-
Josh Robb:
You know, speaking of mandates, we need to hang out more
Austin Wilson:
We need to go-
Josh Robb:
Yes, sorry to interrupt.
Austin Wilson:
I went to Fort Findlay, on a Saturday morning and they were closed.
Josh Robb:
Closed? No way.
Austin Wilson:
And my wife and I-
Josh Robb:
What weekend was it?
Austin Wilson:
Couple weeks ago.
Josh Robb:
Okay.
Austin Wilson:
There was some COVID thing on the door. I was bummed. But anyway, Fed. Two mandates-
Josh Robb:
Mandates.
Austin Wilson:
So one is full of inclusive employment and with unemployment at 3.9%, we’re almost where we were pre-pandemic levels, which were lows all the way back to the sixties.
Josh Robb:
So we’re at real-
Austin Wilson:
We’re going to say long term, full employment, we’re there.
Josh Robb:
Yep, because you don’t get to zero.
Austin Wilson:
You don’t get to zero. And we still have more job openings than unemployed people, so very tight labor market. Fed gets a check mark on the-
Josh Robb:
Yep, that’s good.
Austin Wilson:
… On that mandate. The other mandate is stable pricing. Well, that’s measured by inflation and the Fed uses core PCE and they want to see around 2% long term averages. Have we seen 2% inflation this year?
Josh Robb:
Yeah, we have. Twice. Yeah. So core PC is about five-ish so we’re seeing higher than what they’re mandating-
Austin Wilson:
And core takes out food and energy, and what do you and I buy on a daily basis?
Josh Robb:
Yes. Everybody’s budget consists of food and that’s a big piece of it.
[4:37] – Headline Inflation
Austin Wilson:
So looking at what they call headline inflation, we’ve talked about this many times, we’re seeing 7% as of December, year over year headline inflation. So what this is doing is, it’s prompting the Federal Reserve to say, “Okay, labor market looks really solid. No worries there. We’re essentially good to go.” Inflation… I think we’re a little behind the eight ball on inflation, because it’s crept up also on us. It’s pretty hot.
Josh Robb:
It’s not transitory anymore.
Austin Wilson:
Yeah. They took that word off. We’re not talking transitory. The Federal Reserve is saying, “Hey, we really need to slow down our bond purchases.” Which is one thing they were doing, they were using quantitative easing to go add stability and liquidity, the fixed income markets, by buying fixed income assets. Well, they’ve slowed that dramatically and that will be gone in about March.
Josh Robb:
Yep.
Austin Wilson:
The other part of that, their other lever… So that’s one, their other is interest rates. And short term, overnight lending rates is essentially what they can control, and then all interest rates extrapolate from there. But what the Fed has said is that they’re open… Interest rate hikes, for one, once the tapering is done. So that puts that on the table in March. And that they are, because of where we’re at, seeing three plus interest rate hikes through the remainder of 2022.
Josh Robb:
Okay.
[5:49] – What do Interest Rate Hikes have to do with Volatility in the Stock Market?
Austin Wilson:
So Josh, the question is, what the heck do interest rate hikes have to do with volatility in the stock market?
Josh Robb:
Yeah, so there’s a couple pieces in there, but the biggest one that the stock market is looking at is, the stock market generally is trading on forward guidance. In other words, they’re looking forward to the future. And so, one of the things that they have to do is factor in what… If I’m a company and I’m reporting my earnings, one of the things I do is, I say, “Here’s what I expect to have happened in the next year or so.” And so to do that, I have to put in some assumptions and one of my assumptions is my cost for lending. And if the Fed is raising interest rates on their piece and all interest rates are going to follow suit, which is what they do, and my costs go up for my lending, for my borrowing, for all my debt, then my future chance to grow is limited. If I’m thinking I was going to go 5% when it was 0.25% federal funds, and then now they’re going to say, they want to get to two-ish in the next couple of years, then my 5% growth is probably not going to happen. And so what I have to do is then change my results, which then if my price was already reflecting what they think I was going to do, that then is going to have to adjust my price potentially. And that’s what we’re seeing as a big piece of it, is if the Fed is raising rates, then for companies who have some sort of connection to that debt, will then have a harder time earning the same amount that they had anticipated at the current rate.
Austin Wilson:
Right. So yes, there’s the debt burden will be higher as interest rates go higher.
Josh Robb:
By obligation.
[7:26] – Discounting
Austin Wilson:
Right. The other component that interest rate increases affecting stocks, is called discounting. So like you had mentioned, stock prices today are reflecting what we think the company’s going to do in the future so we’re looking forward. Well, the more growth built into these numbers going forward, when you have to look at that, what it’s worth today, because things get more expensive over time, you have to make it in today’s dollars. So what do you do? You discount it to today dollars based on interest rates. And-
Josh Robb:
Yeah, so like cash flow.
Austin Wilson:
Exactly. Cash flow, dividends, profits, all of these things, you’re looking at 10 years of dividends, earnings and cash flows and saying, “What are they worth to me today?” To get the intrinsic value of what a stock is. Well, if you’re using a higher interest rate to discount that back, if you left all those numbers the same, they’re a lot worth less in today’s dollars.
Josh Robb:
So then if they’re worth less today, then that’s the value of the company that you’re pricing-
Austin Wilson:
Then the stock prices needs to go down.
Josh Robb:
… Then the stock price needs to adjust.
[8:31] – Normal Stock Market Returns
Austin Wilson:
So, that is what’s happening there. Another thing to consider is that… Like you had mentioned earlier, we had three years of 20% stock market returns.
Josh Robb:
It was nice.
Austin Wilson:
Is that normal?
Josh Robb:
No, definitely not normal.
Austin Wilson:
No. What’s normal?
Josh Robb:
Eight to 10.
Austin Wilson:
Yeah. And that’s like-
Josh Robb:
That’s the long term-
Austin Wilson:
Long term. So we’ve had above trend stock market performance for years, which in some ways can be justified on certain things, but with interest rates being exceptionally low during this time, multiples for what people are paying for some of these stocks, has gotten a little out of hand. We were due for some sort of reevaluation as the free money, the discount rate being zero is no longer a reality. Couple that with the fact that what side of the market’s getting hit the hardest? Tech, the Nasdaq specifically. Well, those are the ones that are trading at the highest earnings multiples, which means they are having the highest on the future growth side of things built into their evaluations-
Josh Robb:
Getting adjusted down-
Austin Wilson:
… they’re getting adjusted more. So all of this has kind of set up a perfect storm for a correction here in January. And I don’t really see… The uncertainty isn’t gone, we’re still having… We don’t know exactly what’s going to happen on the 26th, which is the day after recording this, the Federal Reserve is going to release their minutes and talk really, they’re going to lay out what they’re going to do in March probably. For all intents and purposes, it seems a 100% likely you’re going to get an interest rate hike in March.
Josh Robb:
Yep. They’re going to start that process-
Austin Wilson:
And that would be, usually… Lately it’s been a quarter of a percent or 25 basis points, which lifts it a little bit. But in fact, the bond market is pricing in, actually about a 5% chance for a 50 basis point or half a percent-
Josh Robb:
Double that.
Austin Wilson:
A half a percent rate hike and March, and that might shock the market… If you only have a… The thing that the market dislikes is uncertainty and shocks and changes and things like that. If you’re anticipating a 25… If there’s a 95% chance of a 25 basis point hike and you get a 50 – that’s a surprise, and that’s a surprise the wrong way for discounting of future earnings and stuff like that. So if that happens, I think we’ll probably see a little bit more uncertainty. On the flip side, what could happen is, the Fed could come out as seeing how the market’s reacting to all this uncertainty that’s going on and selling off, the Fed could be like, “Ooh, maybe we we’ve sounded a little too aggressive. Maybe we think that this inflation thing will transitory itself out a little bit more and we won’t have to be as hawkish.” And in that case, they may have a 25 basis 0.1 in March and then give some guidance to say, “Okay, well now we’re going to wait and see, we’re going to take a wait and see approach, see how inflation works out and then make a move.” And in that case, you probably get a little bit of a relief rally because maybe things were overdone at this point.
Josh Robb:
Yeah.
[11:23] – Dad Joke of the Week
Austin Wilson:
So, Josh, before we get any further.
Josh Robb:
Yes.
Austin Wilson:
I have a dad joke of the week-
Josh Robb:
Oh, you have one?
Austin Wilson:
Because I know the next part of the show is where Josh is going to shine.
Josh Robb:
Yes.
Austin Wilson:
But I want to make you laugh first. And that dead joke of the week comes from Reddit. It’s more of a dead phrase. Are you familiar with the movie Back to the Future?
Josh Robb:
Yeah. Yeah.
Austin Wilson:
I’m looking to sell my DeLorean.
Josh Robb:
Okay.
Austin Wilson:
You know the car?
Josh Robb:
The DeLorean. Yes. Also, I want one. I think they’re really cool. They have a little-
Austin Wilson:
Terrible little French Citroen motor in them, or whatever. They’re very slow.
Josh Robb:
They’re all steel-
Austin Wilson:
They’re very heavy, stainless steel.
Josh Robb:
Stainless steel.
Austin Wilson:
But I think that with a-
Josh Robb:
The doors pop up-
Austin Wilson:
Oh, yeah. That with an LS swap. Perfect. Anyway, looking to sell my DeLorean. Good shape, low mileage, only driven from time to time.
Josh Robb:
Time to time. I like it. I like it
[12:24] – What Does the Investor Need to Know in this Volatile Environment?
Austin Wilson:
That’s the dad joke of the week. Josh, we kind of framed what is going on and t’s shocking, right? We’ve seen big moves. In fact, multiple percent per day. And sometimes you’ll go down a couple percent and then close up and who knows what’s happening right now? What does the investor need to know in this environment? How can they position themselves? What do they need to do? What do they need to think about?
Josh Robb:
Yep. The first piece of all this is, this is not new. Volatility is here and it’s been here before.
Austin Wilson:
It’s new if you started investing in 2020-
[12:53] – Your Plan
Josh Robb:
It’s not new to the world. It may be new to you. But the idea there is that this is part of a normal cycle. What we’re experiencing is within the norm, that being said, you need to have a plan because since this isn’t new and this isn’t something strange or unseen, this needs to be part of your plan to say, “Okay, this is going to happen. What will I do when this happens?” And what you need is a plan that you can stick to. The plan needs to factor in what your goals are, where you’re going, what you’re doing, your age and your risk tolerance, and figure all that together to say, “Okay, what do I need to do with my investments?” If the plan is sound and you used advisor, which is going to be my next piece of it, but if the plan is sound, then just stick with it. This volatility, the temptation becomes either trying to get out and avoid the downturn or say, “I want to get some cash ready and get it in right when it’s low so I get all this growth.” Can we do that? No, you really cannot perfectly time the market-
Austin Wilson:
The reality of that is you really can’t do that. Professionals can’t do that.
Josh Robb:
Even… Yeah. They’re just… Can you get close? Maybe, but to do that consistently is next to impossible. And what we’ve found historically is, when you miss the best days in the market, you really hurt your long term performance and those best days-
Austin Wilson:
And when do those best days occur?
Josh Robb:
… Happen close to the worst days.
Austin Wilson:
Right. It’s crazy.
[14:07] – Dollar Cost Averaging
Josh Robb:
And so it’s just hard to know. So our concept, our theory, and what I think most people need to do, is just stick with a plan, do the things you can do that you control, for instance, consistently averaging your money in by adding it at a set time, no matter what. Dollar cost averaging, that’s what that is-
Austin Wilson:
Oh, it’s a beautiful thing.
[14:47] – The Importance of an Advisor
Josh Robb:
It’s great. But what it does is it removes that temptation to try to just time when your money flows in. So just add it no matter what, get it invested and do a set schedule. And then the other thing with sticking with that plan is, you’re not looking to say, “What am I going to do between now and March?” Or anything like that. It should be long term. And in a long term concept, the short term volatility is really irrelevant. It does not matter. That’s first one. I mentioned advisor, if you have an advisor, I think that helps because you have someone else there alongside you to help you when you are maybe starting to get a little worried, starting to panic or starting to think through, maybe making some decisions that may hurt you. So an advisor’s there to say, “Hey, here’s our plan. Here’s how it works. Let’s do this together. I’m here. We’re watching it. We’re making those adjustments as needed, but we’re going to stick to this plan.”
[15:18] – The Phase of Life You’re in Can Impact Your Feelings
Austin Wilson:
We want you to work with an advisor, it’s a great tool. If you don’t have one, feel free to check out our website, there is an Invest With Us and you can talk to us, and we’re happy to talk to you and look at your financial situation. One thing I wanted to discuss was, it really has an impact on what phase of life you’re in right now, how you feel… Or how you should feel, maybe. Because if you are not within, especially 10 years, of needing any money at all, you should sleep well at night and have no worries at all. And continue to add. If you’re not adding, be adding. This is a great time to buy tech stocks, 20% off their highs.
Josh Robb:
They’re on sale.
Austin Wilson:
They’re on sale. So if you have some time before you need to access this money, great, this is good for you. If you’re getting a little closer, it becomes a little bit more, maybe difficult to swallow, however, hopefully the thought is that you worked with an advisor to get a plan in place where it’s not all hinging on the stock market going up this year. And your risk tolerance would’ve brought… If it’s lower, you would’ve had some bonds to offset some of these things, and there’s a plan in place.
Josh Robb:
Yeah. The plan is key, and preparing for where you’re at in life is huge. If you’re close to a big life transition, then you need to be a little more defensive. That doesn’t mean you got to get out of stock market, but it may mean, “Hey, let’s build up that emergency fund a little bit.” And when I’m talking life transition, it could be something as simple as, “Hey, I think I’m going to do a career change.” Well, there’s some instability there in your life that will cause other things like market volatility to be more apparent to you. So ahead of time, if you can plan for those things, say, “Let’s build up that emergency fund. Let’s get some extra cash so this volatility won’t be as big of a deal to me.” And the other big transition obviously is retirement where you are going to be starting to draw. That’s the one where you do kind of say, “Okay, let’s get some extra cash floating around. Let’s get some kind of saving set up that if there is a downturn right when I’m transitioning, I’ve prepared for.” So again, it all comes back to a plan, just prepare for those scenarios and set up some things, whether it’s a new account or some sort of adjusting your investments or something to say, “I’m ready for those things that will cause me stress in my life.”
Austin Wilson:
And planning ahead is going to allow you to not make the big mistake of having to, or choosing to, sell your stocks when they’re down 10 or 20%, because that is how you lose money. You don’t lose money if you don’t sell. And the moment you sell when they’re down, you actually-
Josh Robb:
Locking it in. Yep.
Austin Wilson:
… Lose money. That’s why Josh has talked about having money set aside. And what we talk about in our world, is thinking of things like a bear market fund. So suppose you have a 20% draw down, you really don’t want to be touching your stocks. They’re down. Don’t sell them when they’re down. Have some cash or bonds or something on the side that is not down near as much, if at all, where you can then pull those cash needs from something like that. That is the way to mitigate some of this. So then when the stock market covers, you can proceed as you were and then refill that fund or whatever, as you go. So that is kind of where we like to encourage people.
Josh Robb:
Yeah. Or if… Like some industries, that when you retire, you have crude vacation days or all those things, you get kind of a big chunk, that’s a great way to just kind of-
Austin Wilson:
Set it aside.
Josh Robb:
… Push it aside, say, “This is just in case.” Type of thing. It’s great to have those opportunities. It’s all thinking ahead and planning. You do not want to make investment decisions on a whim. And that’s really the biggest thing to avoid, is have a well thought out plan and work with somebody to help you think through those scenarios and go that route.
[18:47] – Closing Thoughts
Austin Wilson:
Well, Josh, any other closing thoughts on what’s due in a turbulent time in the market?
Josh Robb:
You know, the best thing to do is just turn the TV off-
Austin Wilson:
Turn it off.
Josh Robb:
If you can just ignore it and do your job of adding that money in while you’re working, that’s the key, is don’t worry about the market. The long term market will work itself out, short term volatility, if you have a plan in place, especially if you have an advisor who’s looking at those underlying holdings, let them take care of that and you just do your job and don’t worry about the volatility. That’s huge.
Austin Wilson:
Absolutely. Well, as always, check out our free gift to you, a brief list of eight principles of timeless investing. It’s free on our website, check that out. Josh, how can people help us grow this podcast?
Josh Robb:
Yep. Make sure you subscribe, that way every Thursday you get our newest episode sent right to you. If you know somebody who is concerned about what’s going on, share this episode with him. But if you have questions about it or something popped up along with this, shoot us an email. We’d love to answer your question at hello@theinvesteddads.com.
Austin Wilson:
Well, until next Thursday, have a great week and turn off the TV.
Josh Robb:
That’s right. We’ll talk you later. 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 the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management, all opinions expressed by Josh, Austin or any podcast guest 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 principle. There is no assurance that any investment plan or strategy will be successful.
