Steve:
Welcome to Plan for Life. Now, episode one 19. Dave, what’s the title for this one Going to be? Because the last one was March sadness.
Dave:
March Sadness was the last one. Well, it’s going to be something more positive than what it actually is, like the abyss. It won’t be that. And we’re going to make an argument that it’s not the abyss, but it’s kind of interesting that we’re, I haven’t thought of the title yet, is the bottom line. I have to come up with something snazzy that has to do with tariff, which I have not thought of yet. Okay,
Steve:
Well, one day post liberation day here,
Dave:
I was going to say one of my things, it would just be too negative in retrospect was liberation and then in parentheses from your Money day. I’m not going to do, because remember, these things don’t age well and hopefully I’m really hoping that doesn’t age well, but whatever it is, it’s interesting that we’re recording this, and again, hopefully when you listen to this, it’s not where we are because right now I’m just looking at where we are at 1110 in the morning, the day after Liberation day and where all the taxes tariffs were announced, and right now I have Nasdaq down 5.37% s and p down 4.09%, Dow down 3.4% and other things down to Wow, Russell 2000 down 6.58%.
Steve:
Yeah, it’s not pretty out there. So let’s set the stage. Let’s back up for half a second here and set the stage as to what has happened. Obviously we’ve seen this play out over the last two months, six weeks or so where Trump was elected. There was some euphoria after the election, everything was going up, and then somewhere around mid-February, the market seemed to wake up to this idea that maybe Trump is serious about this tariff thing. Maybe he’s actually going to do this. And I know it’s on the back burner right now, but the market also woke up to, Hey, maybe this Doge thing, while good in the long run could lead to higher unemployment and lower government spending in the short run. So the market sort of peaked out and I don’t know, I haven’t even done the calculations as to what we’re down off the highs now. I would guess maybe 13, 14%, something like that.
Dave:
Yeah, well check with us at the end of the podcast. We’ll figure it out.
Steve:
Let’s see. No, maybe more like 12% somewhere in that range. Trump had announced this liberation day was coming, but nobody really knew exactly what it was going to look like or frankly, even if it was going to happen, because in the past he’d said, okay, tariffs coming kick ’em down the road. And didn’t happen. At first when the announcements started to come out, there was this announcement, Dave, about a blanket 10% tariff, a blanket 10% on everybody. And the markets actually initially rallied a little bit on that news saying, okay, 10%, we can handle that. That’s no big deal. And then Trump trotted out. He looked like a game show host trotting out his big board of tariffs and had all of these tariffs listed. And I went down the rabbit hole a little bit of trying to understand where some of these, because what he had on the board, if you haven’t seen it on the left hand side, he had, these are the tariffs that they’re charging us.
And then on the right hand side, here are the reciprocal tariffs that we in our kindness are only going to charge half of what they’re charging or blah, blah, blah. And it’s interesting because when you go down that rabbit hole, it’s where he comes up with these tariffs that they’re charging us is a combination of trade imbalances and currency manipulation, and it’s not nearly as straightforward as it’s laid out there. Then as those details started to come out, that’s really when the market started tanking and saying, oh my, you’re talking about, I don’t have it here in front of me now, but 97% tariffs on Vietnamese goods. That’s not going to be good for anybody.
Dave:
I went to just, and again, this is a kind of a complicated economic thing, these tariffs, but I immediately went to one of my favorite things. Coffee, as you know, I’m a big coffee guy. The problems with, so the Trump, the theory and part of trying to analyze it, I always like to, I don’t analyze things for me manipulating my own accounts based on my own analysis. I just analyze things when they’re bad, just as a try to thought process. And one of the things I want to think is why, what are the positives or what’s the thinking behind Trump? Well, one of the thinkings for Trump is he’s always been in favor of tariffs. As a younger man, before he was in politics, he just thinks that trade is really unfair. The tariffs are one thing, and then there are other things within trade that I don’t know exactly, but that are also, that I think has been proven a little bit not to be fair for as far as us selling our goods in various countries.
There’s some truth to all this stuff regardless of what side you’re on. But he is always been a big favor of these tariffs. It’s been a big thing for him. He did some in his first term, and this is a huge thing. So part of my thinking is, Hey, is this going to be short-lived or as far as these tariffs, or is this going to be like a policy? And boy, although I think Trump also has a tendency to change his mind on things pretty quickly, but I would say this feels like it’s going to be a policy that’ll be negotiated up and down as time goes on, would be a theory that I have. Now, the other thing I think about is purely how are we going to avoid some negative economic things here? Well, I look at my coffee as a good example. Well, we’ll, you’ll just drink coffee that’s made in the us. Well, last time we checked, we don’t make coffee. We don’t make coffee. I’ve had Hawaiian coffee once. It’s not that good. No offense, Hawaii. Hey, try this Hawaiian coffee. I said, okay. It was a long time ago. So really we don’t make coffee. And so I would think certain things, and today if you were to look, Starbucks is down a lot. For example, we don’t make coffee and coffee’s going to cost more. I mean, there’s certain truths to this that are going to be, as long as they’re in place are going to be a new normal, I think.
Steve:
Yeah, and I mean, if you listen to people who say the tariffs are bad, and really I don’t understand all of this well enough to say, this is good, this is bad. It’s a black and white issue. I don’t think it is. But when you listen to people who say, who point out the negative aspects of tariffs, they say, look, if there are other countries that are better at manufacturing and producing certain goods or services at a lower cost and they’re willing to sell us cheap TVs, cheap coffee, cheap, whatever, that that’s a good thing for our consumers. And it’s not necessarily desirable or the right thing to force coffee production to be domestic coffee production. Maybe we’re just not equipped of that, don’t have the right climate, whatever to make good coffee. So that’s what people are going to point out as the negative there. Now, if we go from the,
Dave:
Well, they’re more negatives, I mean other positives. So when you look at today, since this has been happening, I decided to, instead of my normal morning watch, CNBC, which I don’t recommend you do people, clients today, you’re not listening, thank goodness you’re not listening to this today, but I was watching, there was really a debate between one guy who was truly pro-Trump on these tariffs and the other panel that were against it. And at the end of the day, one of the arguments is that we’ve relied too much. We consumer economy have relied too much on cheap goods
And that this change, which would be obviously making more stuff, building more stuff, being more within our country, is going to be help us I guess with in the future with earnings or being able to earn money or make stuff. But at the expense of this reliance on cheap goods, which to me is an argument that I really does not resonate with me with people because simply because we incomes for the vast majority of people have not gone up to the point where you can’t rely on those cheap goods. That to me is an anti inflation. It’s like, don’t worry about, oh, well, we’re going to have to deal with inflation to fix this problem. I don’t see that working. So I look at that as another. So a lot of this is thinking, is this going to be a long-term issue or is this going to be a short-term issue? We can’t predict it regardless of this little conversation right now, but I would prepare for a long-term issue. It’s always prepare for the worst.
Steve:
I think that’s the number one question that people just don’t know. Is this a negotiating ploy? And are those numbers on the game show board just a starting off point? And Vietnam will call up and say, Hey, we will change this and you change that and it won’t wind up being that bad, or is that what it is? Is that, are we seeing the final numbers there? I’ve seen numbers all over the place on this, but one report that I read that I trust a little bit more, I think it has some validity, said that this could be up to an 8% cut in earnings on the s and p 500. So an 8% cut in earnings, that’s significant, but they were laying that out as if everything held the way that it is right now, the market could be 8% decline in earnings. If you had valuations, decline a little bit from there, you could see a total decline of 20%.
Now, that’s not laying it out there as the absolute worst case, but it was something where I had seen this thought through and kind of detailed out with some numbers behind it. Now, before we get into the financial planning aspects of this, because that’s always where we’re going to take everything back to Dave, I don’t know why, and I don’t know if I can really put my finger on it, but this reminds me of the sequestration debt ceiling downgrading of the US debt rating issues back in 2011. And for all of those of you who don’t remember that at the time, this word sequestration was just all over the place, and it was basically, well, if we’re going to keep raising the debt ceiling limit, we’re going to have to cut some government spending. And because of all that wrangling back and forth standard and pores downgraded the US credit rating, which in theory should have made it more expensive for the US to borrow money. Now in practice, it kind of did the opposite that people said, well, gosh, if the US is not aaa, then nobody’s aaa, and we still think the US is the best. So I don’t know if I can really put my finger on why it feels like that, but when I go back and I look at all of the different reasons why the market has declined, and I know I’ve showed this chart to some clients, but here, this does not help our listeners at all, but let me share this one with you, Dave.
Dave:
Okay,
Steve:
Crap, this doesn’t really help me if I can’t find it, but I’ve got this chart here. Here it is. So this is all of the 5% declines that we’ve experienced going all the way back to 2009. And when I’ve shown this client my point,
Dave:
Wait, oh, these are declines. I could see this, and they can’t. These are not declines in a day. These are basically short term though. They look like declines,
Steve:
Right? Declines, peak to trough. So the biggest one that we’ve had was in 2022. So of course that was we were afraid about inflation, rising rates war in Russia and Ukraine, worried about a recession from January 4th through October 13th, we had a decline of 27.5%. Now, of course, we know how 23 and 24 went, big bounce back, everything recovered there. But if I go back and I look at 2011 from May the second through October the fourth, we had this European debt crisis. We were still at this point worried about these double dip recession fears, and then ultimately we had that US debt downgrade, and that bottomed out there in October and recovered from there. So I’m not sure what my point is in here, but it feels like one of those things that we’re going to look back at and say, man, that was bad at the time. It was scary. Weren’t really sure how it was going to get better, but at some point I think that it will. And that’s not
Dave:
The, yeah, it feels like that. Again, I put these in context of my lifetime of scary, truly scary downturns, number one, I swear, even though it was worse, far worse. I have a tie between 2008 when Lehman’s crashed and everything was going to heck there, and I tie that with Covid because both were an unknown factor that it just felt worse emotionally, covid sitting there stuck in your house, spraying your bags of food that were delivered to you with disinfected, and the world was upside down, and 2008 was truly, I mean, if the government doesn’t come in and bail out everybody, wow, this feels like we’re heading to a depression to this is nothing like that. This is also weirdly, even more than what you’re alluding to, even though I agree that it’s more similar to the 2011 downturn. This is a very, like I said in the last podcast, very manufactured crisis. It’s happened because we have decided to do the tariff thing. This is an action that we’ve taken that’s led to a reaction of it’s very clear why this has gone down. It’s not something that just sort of happened because of Covid, for example. Covid was out of everyone’s control. This is quite controlled in what’s going on,
Very different than Covid. I mean, those are the easiest two to say. Wow, the opposite of that, a manufactured crisis versus, oh, well, gee, shoot. Oh, well, gee, what’s going to happen now? Crisis.
Steve:
Yeah, I mean, maybe you hit on it right there. Why I feel like it’s similar is I feel like it’s almost a crisis of our own making in the sense that we have some control here of yes, we want to do these tariffs. We had some control of, okay, do we want to raise the debt ceiling limit and impose these restrictions versus the Coronavirus or Lehman Brothers just out of nowhere, not out of nowhere, but out of the blue,
Dave:
Right? So then you go, let’s transition into how you played this out. One thing I play it out is emotionally as a client of myself, but very similar to a lot of people listening to this as far as what they might be doing, I play it out to the long term and the long run. Part of the long run is in some way, shape, or form, which I cannot predict. This will work itself out
When I don’t know how. I don’t know. Part of this is this strategy works and we start to make trade. It becomes a different animal than it currently is before liberation day. And that animal is working out in different ways. There’s winners and losers. There’s always winners and losers. The winners outpace the losers, things become stabilized, and that’s that. And we move forward. The s and p 500 is just that. It’s the s and p 500 of the top performing companies. Do we know the top performing companies 10 years from now versus now? You never know. Just ask Kodak. So it’s like the winners come to the surface. The losers are the losers, and it plays out. What’s hard to predict is when it’s going to play out.
Steve:
And I mean, you’ve got this, I mean, we’ve talked before about why a financial planning podcast a daily or imagine doing four hours a day of a financial planning podcast would be pretty boring and repetitive. And I think we even talked before about they have shows about doctors in the ER and about lawyers, and even once in a while, there’s a show about Wall Street and investment banking and blah, blah, blah. But a planning show would be so boring because every week it would be the same advice. You could have a different crisis, and then the main character would come in and say, well, okay, you maintain a properly diversified portfolio with adequate liquidity. And
Dave:
It would be like, there’s like a TV show. There’s conflict, but the resolution’s always the same,
Speaker 4:
Right?
Dave:
It’s not like conflict. Oh, the resolution was exciting though. The resolution is always the same in our business. It’s so clear that you have to resolve these issues of today. Today, today is such a great day today, needed to be resolved a long time ago. Can you resolve today? Yeah, you can deal with it. In other words, someone comes to us, they’re not our client. I’m freaked out. Help me. Yeah, we’re going to put something together. But that’s something together is for the next time today happens. Today’s resolution is we already dealt with
Steve:
This, and that’s why we’ve started in the past couple of years, adding, in addition to traditional financial planning, retirement projections, blah, blah, blah, adding in that time segmentation or bucketing illustration that I think on days like this times this is really powerful. And the idea behind time segmentation, the bucketing is we’ve got money to cover the next couple of years, so maybe years one through three and years four through seven, that is not tied to the stock market. This can be money in cash, CDs, bonds, fixed annuities, fixed index annuities, all of these things where if the market tanks, you’ve still got that money there. And I think that’s really powerful, even though people kind of know, okay, I’ve got a broadly diversified portfolio, blah, blah, blah. But when you’re able to look at it with those different buckets and say, oh, yeah, this stock money that’s down 10, 15, 20%, yeah, that hurts, but that’s money I’m not going to touch for eight or 10 years. So what do I think is going to happen eight or 10 years from now? I think this stuff will all play out, and I think eight or 10 years from now, stocks will be higher. Well, yeah,
Dave:
I think it goes even a little deeper than that. It would be like I’m in a diversify portfolio and I don’t know who the winners and the losers are, but what if the losers are the United States and those growth stocks are the big time losers and they take long to recover super long, but the international and the emerging markets are the winners we don’t know, and they are going to do recover faster or just do well for a long period of time. You need to be involved in a situation like now where you are part of the winners, and ultimately the losers might be the losers, but they’ll come back longer down the road. Neither of these winners are losers. Do you need to touch for a long time anyway, as far as living on, but yeah, when they say it’s dead, it’s alive. The diversified portfolio, oh, is it
Steve:
Alive? I mean, diversification is working very well.
Dave:
Well, it’s alive and well, but I read it was, yeah, you read when as soon as you read that you should have called us and said, am I a diversified portfolio? I hope so, because I just read it was dead,
Steve:
Right? Yeah. I mean, there was a lot of talk after the election about American exceptionalism and about how no companies can really compete with the earnings power of the US and blah, blah, blah. And don’t get me wrong, we still think the US is the best economy in the world for the long term, but at some point, if US stocks are trading at 20 times earnings and Europe is trading at 12 times earnings, it’s not surprising that the US is underperformed some of those other countries significantly this year. So that’s our bottom line message there. We’ve often talked about the riff Holts Financial Group and some of the stuff, the material they put out.
One of their analysts, Michael Batnick, he put out this quote, and I liked this. It said, we’re in a storm now. It looks like the storm will intensify before it weakens. The sun will shine through eventually. Just make sure you’re there to see it. And that’s the key is we’re in a storm. It could get worse before it gets better. Not going to sit here and say, oh, yeah, we know it’s done. Certainly could get worse, but eventually the sun is going to shine again, and you’ve got to make it through to the point where the sun shines and be there when that happens. And if you sell your stocks and you panic and you put everything in cash and you wait until it gets better, you’re going to miss out on the sun shining eventually,
Dave:
And you should go back and listen to our last podcast, March sadness. If you’re looking at the titles by the titles, what’s going, we went over that list that they put all these reasons why you can’t time the market.
That was a brilliant list that was put together because it really covered all the bases. That’s not what you do. But what you do do, and I think this is a great test. I mean, I’ve tested myself on this so many times that I’m personally good with how I do my thing, my personal money, but I think most of our clients are good with it. But for those who are very heavily invested in stocks at an older age and stock, whatever, ETS, it’s all stock based. It’s a good test. Right now, if you’re panicking, I don’t care if you’re panicking, oh, I don’t know. Whoa, why are we doing this and that? Well, maybe because you’re a hundred percent in stocks and you’re starting to worry about that where maybe you shouldn’t be. See, this is a risk tolerance test.
Speaker 4:
I
Dave:
Know I’m a 60 40 guy in general. Now, that doesn’t mean this is well diversified, but I’m just saying in general, 40% of my personal money is not in stocks. It’s in other stuff that we do, and I feel good with that. I feel good right now about the 60%. I know at some point A, I don’t need to touch it for a long, long time. And B, the sun will shine through the clouds like that quote. And quite frankly, here’s another example of this is just testing. This is a personal mental test, but I think it works for a lot of people. I have, the way our job works, we pay estimated taxes and we have a SEP ira I do, and at my age, 63, I can put a lot in that set by. It really helps my taxes each year. So I always put a big chunk of money in right around. Now. How am I feeling about that big chunk of money that I’m putting in my portfolio right now? Well, honestly, I’m feeling really good about it. Things are down.
I know the money I’m putting, the stock portion of what I’m putting into my SEP now is going to be, which will arguably be the last thing I ever touched, is going to be way higher than it would if we were at an s and p high. That’s how I feel. That’s my true feeling right now. That’s a good, I’ve done a test on myself and you’re saying, well, Dave, you passed your test, but you’re in the business. Yeah, well, yeah. But the bottom line is you got to start thinking that way when you’re older and how, what makes you feel comfortable. I mean, this is a good test of that. It’s a good, doesn’t mean now that things are low, you’re going to sell off if you don’t pass the test. It means as things get better, and when we get back to looking at things, maybe this will teach you more about your own risk tolerance. You only learn it in times that are bad. It’s impossible to learn about your risk tolerance when times are good.
Steve:
Well said. All right. As always, feel free to reach out to us with personal questions about your situation, what’s going on, how this all impacts you. But thank you for listening, and we will check in again with you real soon.