In episode 109 of Plan For Life Now, Steve and Dave give a detailed overview of what happened in the markets in 2023 (Good Stuff) versus what happened in 2022 (Bad Stuff). All of this as a data point for what may occur in 2024. But regardless of market results, their hypothesis is to buckle up for an election year like no other!
Steve:
All right. Welcome to Plan for Life now, episode 1 0 9. Welcome to the year 2024.
Dave:
Yes, the year of noise is what I’m calling it.
Steve:
Okay. Is this in anticipation of the election this year or?
Dave:
Yes. Yeah, that’s exactly what it’s anticipation of.
Steve:
Probably a good prediction.
Dave:
Yeah. My feeling is it’s just going to be a lot of noise. There’s always a lot of noise. We always tell people not to listen to the noise, but this year, boy, the noise is going to be apparently all year long when it comes to this election. Let’s assume Trump is going to be the nominee since he’s already won the first two primaries and that’s the way it is. And we’re going to have this election back and forth and we’re going to have tons of drama and it’s the year of noise. So always as hard as it is to contain your emotions when it comes to your money, you have to just contain your emotions.
Steve:
Yeah, that is easier said than done though, right? I mean, I feel like we’ve been through a lot in the past couple of years between Covid and the high inflation and 22 and big recovery last year, which we’ll talk about. And every time I’m reminded of how difficult it is when stocks go down, when the market is crashing, it is not doing it because everything seems rosy and it’s great. And oh yes, they’re on sale now and let me buy because stocks are on sale. It’s doing it. There’s a lot of bad news out there. It seems so obvious, but stocks don’t go down for no reason. They go down because there’s bad news and it’s hard to ignore that. It’s hard to tune it out. Well, let’s actually, before we go into that, let’s dive into some of the numbers here. And I just want to go through what the market did last year, some of the forecast and all of that. So let’s talk about last year, 2023. I’m still struggling, Dave, to say last year and refer to 23.
Dave:
I know
Steve:
You’ve corrected me in a couple meetings.
Dave:
Some of our meetings, you’re already thinking of 2022 is the previous year. Now the last year is, and it’s also been the dichotomy of the two years, 2022 horrific. 2023. Pretty awesome when it comes to your money.
Steve:
Yeah, well, I mean, let’s talk about that. And I mean this is how we’re starting off a lot of our meetings here is 2022 is a pretty bad year. I mean the stock market, the s and p 500 was down 18.2%, so that was bad. But then bonds were also down 13%. So what you had was the third worst year in history for a 60 40 portfolio. So to see a worse year than that year for a balanced portfolio, you had to go back to the 1930s. So that’s how bad 22 was. And I also wanted to set the stage here. Going into 23, what was the discussion going on? The discussion was foregone conclusion, we’re going to have a recession. It wasn’t a whole lot of debate. It was how bad is the recession going to be? Is it going to happen in the second quarter, the third quarter, the fourth quarter, but it’s going to be a recession.
Dave:
It was more about how bad it was going to be, I think how bad is this recession going to be? Not like are we going to have a
Steve:
Recession? Right? And because that was basically consensus. A lot of the Wall Street analysts for whatever that’s worth, were pretty bearish. And I wrote down, this was a, Bloomberg had this great article where they talked about how wrong all of the analysts and projections were for 23, and they said the big themes for 2023 coming into the year, the big themes were sell us stocks that we were going to go into this recession, stocks were going to be down again, that treasury yields were going to go way down. They didn’t, they went way up and that China was going to have a big resurgence because what you had in the end of 22, beginning of 23 was China easing up on a lot of those lockdowns. And so if everybody said, oh, well, this is what we went through, or we eased up and the economy reopened, and all three of those things were just dead wrong. US stocks finish the year large cap US stocks up 26%. Now, I don’t think that tells the full story because that 26% gain was fueled by a lot of those big technology stocks and what are they calling ’em now, Dave, the
Dave:
Magnificent, it’s a tough word for me. Seven.
Steve:
I kind of like it when they were calling ’em the Fang stocks better. I
Dave:
Like that better. Very easy word,
Steve:
The magnificent seven. And of course, you know what? This is a little aside here. I don’t like calling Facebook. I don’t like calling it meta. I don’t like calling Google Alphabet. I like sticking with the old school name.
Dave:
That is, we are old school. Most of our listeners are too. I think we took a poll. Everybody, most of our listeners would be and clients would be with you on that. I don’t call those things anything but Google and Facebook,
Steve:
Right? Okay, so you got Google, Facebook, apple, Amazon, Tesla, Nvidia and Microsoft. Those are your magnificent seven. Those drove a huge percentage of the returns in the market last year. So large cap up 26, international Up, 18, mid cap, small cap up, 16 bonds were up about five and a half percent. So bonds had a pretty nice year. What have we talked about many times? 60 40 is not dead, right? 60 40 certainly wasn’t dead last year. We don’t think it’s dead going forward either.
Dave:
Well, nor do you have to be a genius statistician to start to look at numbers that were so bad, say for bonds two years in a row, they actually lost, which is very rare to even have one year where they lose. But to have two and one be really bad like 22, you don’t have to be a historical genius statistician to figure, you know what? I’ll bet you this next year when I flip the card, even if I was on another planet for a year, it’s going to be pretty positive for bots.
Steve:
Yeah, you’re right. I mean, statistically speaking, you’re probably not going to have three down years in a row there. But I think we should also point out how quickly, if you remember the way that the market played out last year, it had a great first half to the year sort of muddled through the summer there. And then September and the first part of October were pretty bad. The market pulled back and around mid-October, if you looked at certain indexes like small cap and mid cap, they were flat, no gain on the year. And even large cap I think was only up about 10% on the year at that point. And then all of those things just ripped through the fourth quarter. And like I said, small cap finished up 16%. That entirely came in two and a half months there.
Dave:
That quarter had to be, and I haven’t done any research on this fourth quarter, had to have been one of the great, when you go across the board, equities, bonds, stuff like that had to be one of the great quarters we’ve had quite a while.
Steve:
Well, because right, because bonds did the same sort of thing. The bonds, if you recall last year, the 10 year treasury went up almost, I think it was above 5% at one point and then pulled back and finished the year around 4%. So that was a pretty big swing there. Now let’s do another aside, just while I’m thinking about this. When we’re putting together retirement projections and we’re talking to people about long-term rates of return, you’ve got to make some assumptions about what returns are you going to get in stocks, in bonds, in cash, in all of this. And we know the long-term returns in stocks are somewhere around nine or 10%, but usually we’re going to be a little more conservative and say, okay, stock returns are probably going to be seven or 8%, somewhere in that range there. When we were looking at bond investments, fixed income investments, fixed annuities, CDs, things like that, where we’re getting five and a half or 6% on that investment.
I think you’ve got to have this certain amount of thinking of why are we trying to take additional risk above and beyond these things to potentially get seven or 8%. If we can lock in something like five and a half or 6%, what’s the end game here? Are we trying to die with millions of dollars and pass it on to our kids, or are we just trying to make sure that we’ve got enough money, we don’t have to worry, we’re not going to run out? I think for most people it falls in that second category there. And I think the current interest rates, they come down a little bit, but it still provides you with that opportunity to say, you know what? I’d take five and a half percent guaranteed than the potential for seven. But I mean, that’s not everybody’s philosophy, but I think it’s worth considering
Dave:
When things come crashing down again, even for a short period of time, you appreciate that move. So when things go up, that’s the psychology when things are soaring like they were November and December, I missed out on something. But yeah, certainly opportunities to temper greed.
Steve:
So just to dissect the market decline and recovery, because I don’t know if we’ve mentioned this yet. The market hit new all time highs as of January 19th. So the previous all time high was back on January the third, 22. It was kind of unique that it was the first trading day of the year and then everything from there was downhill. So if we go back and take a look at previous declines, and this analysis I was looking at is only looking since 1950. I think sometimes some of the market data gets a little skewed by including the Great Depression. And I would make the argument that the market and the mechanisms in everything have changed so much since then that it is not always great to include those numbers because things are pretty different a hundred years later now. But my point is with the market decline, we went 746 days from one high to the next. So just a little bit over two years. And since 1950 there have been, how many are here? 13 different declines. I don’t have this numbered. I think there’s been 13 or 14 different declines. And this one has been almost exactly average as far as how much it declined, how long it took to get back to normal. So my takeaway from this is I thought it felt pretty lousy at the time. Do you agree that it?
Dave:
Yes.
Steve:
Yeah. I mean it
Dave:
Felt lousy at the time. It felt lousy in end of September when things were going down. This is in the midst of this incredible year.
Steve:
So my takeaway is, okay, this was not an epically bad market decline and recovery. It was sort of an averagely bad one, but it still felt really lousy. It still felt like maybe we’re not going to recover. How could we ever possibly get back to new all time highs? But then when you look back at it and in the future, people are looking in the history books and they go, ah, yeah, that one is a little over two years, no big deal.
Dave:
It’ll be a blip. It’ll be a blip on the screen. And what is your, because I have to let you give this. It’s a great statistic, but you’re the one who’s pointed it out, so I’m not giving it. So when you hit a new all time high, what’s the deal for the next year statistically?
Steve:
Yeah, so this is a question that you commonly hear is, Hey, I knew I shouldn’t now, but I panicked and I got out of the market in 22 or the first part of 23. All the news was so terrible, I couldn’t handle it. I got out and I’m sitting in cash, and now I hear that the market has just made a new all time high. I think I’ve missed the boat. I screwed up, I missed the boat. I’m out of the market. What should I do? Well, I saw this statistic the other day, and a little bit counterintuitive, but maybe not, is that 92% of the time when the market hits an all time high, it’s positive a year later. So that actually means that generally speaking, you don’t have a big decline, a big recovery, and then a big decline again right away. Right?
Dave:
But it goes to set up my whole premise at the beginning of this podcast, the year of noise. That statistic is a compelling statistics because you and I deal in statistics all the time where we’re dealing with our clients. Most of the people listening to this podcast have been in one of our meetings where we go over projections. We use software which ends up going into high powered computer calculations. And we all know that 92% is a very high number. That’s nothing to be messed with. But in the year of as everything that is the markets, you don’t get from point A to point B in a straight line. If it’s up 4%, it’s not like, oh, it was up every quarter, 1%. So my point of the year of noise is just that what a year of noise, and I am going to skew this time for if we’re in a state where Biden is the president right now, and you have the stock market at an all time high, and now we might have another president who’s Trump, and we all know the noise of Trump, and you see the ups and downs of this, and maybe Trump will win the presidency, you’re going to see reactions that are going to be negative, not just emotionally, but like you said earlier, physically in the markets potentially.
But at the end of the day, it doesn’t pay to react to that noise when it comes to your money. Your money doesn’t really care if Biden or Trump is president. Statistically, it doesn’t. And if the 92% holds true, that meant there was probably a lot of ups and downs along the way. But boy, when it comes to money, paying attention to these trends and to the very long term really pays off and succumbing to emotion regardless of how turbulent that emotion will be. And I predict it will be this year does not pay
Steve:
Well. How about this, I dug up this chart that looks at, and I love these statistics and data, but I also understand how they could drive some people nuts because I dunno what the expression is. If you torture any data long enough, you can get the answer you’re looking for. But this is basically looking at since 1950, looking at the returns in the first year or first term of a president. So it’s not looking, Barack Obama got reelected, not looking at that second term, just looking at that first term. I don’t know why they broke it out like that. And not surprisingly, at least to me, midterm years, midterm election years tend to be pretty bad historically speaking. And that lined up this time, right? Yeah. In 22, historically midterm years, you get a flat return, or actually average negative 1.5%. The average return in election years is 12.2%. I mean, I’m sure any statistician would say, okay, what are you talking about here? 10 or 12 different first term presidents since 1950, statistically, maybe it’s not significant, but every one of them, the election year has been positive since 1950.
Dave:
Right? And when it comes to stocks, even if, even if the trends are broken that we just described, your money in stocks and equities for the long term, at least you do if you’re with us anyway. And you don’t need to panic about that.
Steve:
Yep. Alright, let’s end it there. I think the concept of this is going to be the year of noise is a good one to keep in mind because I think it’s only going to ratchet up from here through the rest of the year. So thanks for joining us. We will check in with you again real soon.