Concerns over Ukraine, inflation and rising interest rates have continued to weigh on the market and cause negative stock market returns. In this month’s episode Dave and Steve attempt to give some perspective on the current decline. How has the market reacted to past geopolitical shocks? How often does the market recover from a decline and still produce positive year end results? Is this the start to the next bear market? Tune in to find out!
[pdf-embedder url=”https://www.capitolretirement.com/wp-content/uploads/2022/03/Intrayear-drops.pdf” title=”Intrayear drops”]
Transcript:
Steve:
Welcome to plan for life. Now, episode number 89, Dave, I’ve already got the, the title of this one plan. The last podcast was titled “An Ugly Start to 2022”. I was going to say an uglier or no, I’ve got to work on it. An uglier start to 22. Continue ugliness.
Dave:
You know what? Honestly, you didn’t work. You didn’t work very hard on the title of this podcast, But
I’d rather you worry about the financial stuff. More titles of the podcasts are way down on our list. So that’s okay.
Steve:
No, that’s, that’s what draws people in, you know, I’ve noticed you have a, a snazzy title. It, it draws ’em in then our, our listeners that’s usually when we crack over a hundred listeners.
Dave:
I was about to say, that’s why we’re in the triple digits right now of listeners.
Steve:
The triple digit club comes when you, have a snazzy title, draw people in.
Dave:
I thought we were consistently hitting triple digits at this point. Do we have times when we don’t hit triple digits?
Steve:
No, I think we’re pretty consistent in the, you know, the low, like one tens, one 30s somewhere in that range. Of course, depending on how good the title is, right.
Dave:
Are we on Apple and Spotify?
Steve:
We are anywhere, anywhere that anywhere that you like to get your podcast, you should be able to get it there.
Dave:
Okay, good. So, you know, I’ll let you get into everything, but it is rare when you go back and look at all the podcasts, regardless of what their title, it’s rare that we start to have two in a row where the market is down. Like, we’ll say, Ooh, it’s down. But by the time you listen to this, it may be up again. Right? And often by the time you’ve listened to this, it’s up again. But this time, by the time you’ve listened to this last time we did it. It was not up again. Yeah. And by the time you listened to this, it’s not going to be anywhere near its all time high.
Steve:
It would be difficult for, but it depends on how long compliance takes to review this. Right? If they take, they take two or three days, then no chances are not going to bounce back. But if they take a week still, probably no. All right. So let’s set the stage, where we’re recording this here on March the eighth, and just give you a snapshot of where we are, at least as of the market closed yesterday. S&P 500 down 11.6% on the year, international stocks down about 15%, small cap down about 13% and emerging markets, 11.7%. Those, I don’t want to say are kind of fallen expectations, but yeah, markets down stocks around the globe. We know how interconnected everything is now. The one that kind of jumped out at me as I was preparing these numbers, was the bond market bonds, the broad bond market down over 4% so far this year.
Steve:
Now, remember when we talk about investing in bonds, the whole idea is that bonds are there for that stability. Bonds are there as that anchor in the portfolio. Now I will say when it comes to the broad bond market versus the bonds that we tend to invest in with clients the broad bond, market’s going to have a lot more government bonds and lot longer term bonds. So if you’ve been a client for a few years, you’ve heard us say this, that we’re very short term in the type of bonds that we own. But that said, you know, some of our bond strategies are down one or 2% on the year, which is, you know, that’s, that’s clearly not what we hope for from bonds there. Now that’s year to date. I wanted to step back and take a look and say, okay, well, where are we a little bit longer term?
Steve:
Beause obviously, you know, any of these declines, they feel lousy. And I I’ve said this so many times before to people. I say, you know, I’m in the business. Obviously I look at these statistics and numbers and charts. I love to read these reports on emotion and psychology, the behavioral finance aspect of our industry. I know all these things and it’s still hard for me to see the market go down, right? That’s, that’s the human side of all of us. That there’s very few people who can just say, nah, I don’t care whatsoever. You know, in the moment there, you know, I, I know we can all step back and take that more intellectual view, which is obviously what you’re hoping that we do to say this is natural part of things. But in the moment, you know, I agree it hurts. It’s painful. It’s not fun to watch there.
Steve:
But what I did was I backed up and I said, okay, let’s not just look at this one year or this year to date return, let’s go back and say, you know, where have we gone over the last two years? So last two years, we’re going back. We, we still, if you remember your market history here you’ll know that the market did not bottom out from the coronavirus till March 23rd. So going back two years, we’re still getting some of that dip there. But if we go back two years, S&P 500 up 45%, bonds up 14, small cap up 37 somewhere I lost international stocks, still up 20 something emerging markets up 20 something as well. So, you know, when you take that longer term view, the last two years, you’d certainly say, Hey, I’m doing pretty well.
Dave:
So, if you happen to in take a two year view and make it three weeks from now, and you invested in oil, I remember looking at CNBC when it was negative something. And I’m like, yeah,
Steve:
Do remember
Dave:
The barrels of oil. Are they going to give us money? And now I didn’t understand. I asked you, I mean, I do ask you questions, but I don’t get it. It’s negative seven. I get $7. If I get a, I didn’t understand it now, it’s one. What is the second I’m looking at this thing on CNBC 1 23 and sixteens. That’s a, that’s a precipitous, right?
Steve:
Oh yeah. So you know, just taking that this longer term view where, you know, if I had, have told you two years from now, okay, you’re going to be up 45%. You know, you’re not going to bicker with me and say, well, you know that that’s no good. I don’t like that. You would’ve been thrilled with that. So I, I think it always helps because the fact of the matter is we don’t get to enjoy years, like 2020. And even though there was a lot of volatility, 2020 was a good year and 2021, which is a great year without times, like, like this, you know, without these declines. You know, everybody who, who listens and our clients know that I love, I love charts. I love data. I love statistics, all these things. I dug up this chart. I’ve seen this one many times before, but I, I don’t know why this particular time it resonated it with me. I’ll try to post this along with the podcast here. So it’s this chart that shows annual returns in the stock market. So that’s pretty straightforward. And then it shows intra year declines. So what intra year decline basically means is what’s the biggest draw down the biggest decline during the year. So to use rough numbers.
Dave:
So that’s not going to be, and they might be totally different. You might have, well, you’ll tell us soon a year, January one to December 3rd, first, what is, what was the biggest cliff there? Is that what you’re
Steve:
Well, yeah, so, I mean, let, let’s, let’s take an example you know let’s peg the S&P 500 at a hundred dollars. It goes up to 120 and then during that the year, so it’s kind of midway through the year. It’s at 120, it pulls back to 105, right? So we’re still up 5% on the year, but we just had, you know, forgive me on the exact math. We’ll call it roughly a 15% draw down there. Right. But then it goes back up and finishes the year at 120. So we had a 20% gain, but intra year we had a decline of 15% there. So what this chart shows us is, you know, what all of those intra year declines were. And basically what it does is it looks back over the last 42 years and says, on average, we have intra year within year declines of 14%. So that’s normal, that’s a normal year to have a 14% decline. Now it just so happens in this case, it seems like the 14% decline is occurring at the very beginning of the year. Right. You know, which feels a little different than if it occurred, you know, midway through the year there.
Steve:
So you know, we talk about all these statistics and everything, but, and I mean, Dave, do you want to give some thoughts on, you know, the actual causes of all this decline you
Dave:
Well, prior to the actual causes, it just felt like the market was ready to you. It can’t just go up and up and up. So you have some minor causes of the decline, like talk about interest rates going up. That would be a minor. Yep. Didn’t even lead to much of a decline, but you know, the more it was talked about, you know, the more it was sort of baked in that we were to, to have these declines, that’s one thing. And then you had something that’s really more of a thing, the inflation. Yep. Right. And really we’ll call it record inflation for this era. Modern era, not the, when Dave was a kid and didn’t care about money era, that’s different era, but the modern era sort of record inflation, which was making the market go down anyway, those two factors really, we we’re starting to drift away from our all time high.
Dave:
And then you have one of the black Swan events, right? Yeah. I’m not going to say nobody was predicting it. I would say the United States government was very good at predicting it. Yeah. But yeah. So we go through this and, and it is a volatile event who the heck knows what, how is all going to play out? One way it’s playing out though is I’ve never seen prices like this at the gas pump that I can recall. That’s one way it’s playing out. Right. I was on vacation, you know, I was on vacation and every time I go on vacation, the market tanks, that’s just something that happens when I’m on vacation. Like, what are these that is basically a black swan. They’ve gone on vacation. All right. Well, yeah, something’s going to happen.
Steve:
I mean, I remember, I can’t think of all of them, but I remember going back to when the US credit rating was downgraded from AAA TOA and you were an Italy, or
Dave:
That’s how I remember. I mean, I’ll never forget that. When, when did that, if people say, when did the S&P downgrade the United States, I would say I believe it was August on 2011. That was our Italy vacation with the family. Right. But no, I was in California and basically the Los Angeles area. And I had to get gas from my rental car. And it was there when I pumped at $6.07 a gallon.
Steve:
Oh, wow. I’ve been shocked driving. I mean, I, I will, I’m driving an electric vehicle, so I don’t care quite as much, but driving by the gas pumps and seeing, you know, $4.70, $4.80, wow. $6. I’ve never seen that.
Dave:
Yeah. But look at where we are here. It’s still incredibly high. Yeah. And we don’t remember these prices for a long, long time. So, you know, you all this still up together, and this does not a recipe for a great market condition, but you know, the way you and I look at things you know, and we were, you and I were both a hundred percent wrong about the COVID crash
Dave:
Coming back. So soon. Mainly I looked at the COVID crashes, one of these things where it was harder in my mind to play out what’s going to happen in the future. Just like what the market’s supposedly, always playing out, what’s going to happen in the future. That’s like, Hmm. I don’t see a good ending. At least I don’t see the end of this playing out well in the near future when this is all happening two years ago, almost. Right, right. Like right around now, two years ago with this, and again, the thinking could be illogical. Maybe I’m a hundred percent wrong. The market’s humble us always when you start predicting. But with this, these global war things these, these things usually to tend to, from a market, I’m not talking about a humanity. Oh my gosh, no horrible. But from a market point of view, tend to work their way out over time. Right? In other words a military, a war, a skirmish, whatever you want to call it, that involves military usually works its way out and doesn’t affect the markets over a long period of time.
Steve:
By the way, I love the way you summarized things because I a hundred percent agree with you, you know, as far as the way you ordered things there saying. Okay, first of all, market was probably a little bit overheated coming into the year over bought whatever you want to say interest rates, you know, kind of first factor inflation, little bit bigger factor and war. I did think it was interesting. You avoided saying Russia or Putin, anything like that in specifically,
Dave:
That’s just because I’m in favor of those just for the rest.
Steve:
I wasn’t implying that.
Dave:
I’m not trying to, like, I’m not trying to upset this person. Oh, I’m trying, I’m not trying to work around it. I just didn’t mention
Steve:
It. No. but you’re right. And that, that kind of leads me right. To some of the data statistics that I love so much. When we go back and take a look at, you know, past big geopolitical events and I dug up, because of course all these fun companies, investment companies, as soon as all this stuff happens, they start to pump out these materials that show us his history and, and what’s happened. So I’ve got this one chart here, goes all the way back to 1928 takes us through a whole bunch of wars that a lot of them, I don’t even know. And frankly, I’m, I’m relatively good with history. But it takes us through, you know, war, war II, the Korean war, you know, Vietnam war six day war, Arab, Israeli war, you know, Iran, Iraq war, a Gulf war, Afghanistan, you know, all of these things and just showing us how the market has in the short term.
Steve:
A lot of the time declined. But then if you look at that 12 month, 24 months, you know, five year time horizon you know, things, things certainly look pretty good over those longer time periods. And this is of course, you know, the conversation that we’ve had with many clients many different times is do we worry about what stocks are doing in this short term? We worry about it, you know, to the extent that anybody who pays attention to this stuff and is in the industry is kind of hard not to pay attention to it and worry about it, but we don’t worry about it in the context of a client’s plan and how they’re going to take, come and survive through this crisis survive financially. Because whenever we set up a plan, we’re always taking this approach that, you know what we could think that we’ve got this great plan and we’re going to put you in this 60, 40, 70, 30, whatever it is portfolio, but then the next day, the stock market crashes, okay, what are we going to do? Well, we’ve got to have money in things like annuities, things like bonds, things like cash, you know, things that we can access and not be forced to sell stocks if they happen to have a, a down year of 30 or 40%.
Dave:
That is not out of the question. I mean, this is, these are the times when, you know, honestly for our clients, the, the more familiar they are with their own plan. And I’m always of our job being like the mechanic. My auto mechanic has some clients who are also people who have the rolling thing that goes under the car and they know how to look at what’s under there. And they have an intelligent conversation with those people, but most of their clients, or many of them don’t know much about a car at all like me. Right. And I’m just relying on the mechanic, you know, to do what’s right for me. And more, the more educated our client is and the concept of what we’re doing and most of our clients are. You know, in other words, during this, you get field a few more of these calls than I do, but I’m assuming you haven’t had a lot of calls.
Dave:
Well, I’ve been on vacation, got people panicking, not yet, but you know, the longer someone’s usually been a client, the more they understand we’ve sort of put this fortress around their retirement income, right? So that when times like these happen and times like these right now might get worse than they are today, when I’m staring at this for, you know, all the reasons we’ve already discussed, but you know, that you’re retirement income has been planned for and is not tied to this down. So ultimately you don’t have to sell your funds or stocks that are when they’re low that’s goal one. The other one is to simply let the rebalancing process occur to be in a position where now that’s 60, 40 portfolio or 70 whatever. I’m not even, you know, that’s not part of my everyday scenario. It’s not something I have to, to touch.
Dave:
Right. And I can let you know the rebalancing, let these guys rebalance it the right way. So I am in fact, buying low, you know, in some of these scenarios. Yeah. and which again is obviously enhancing your overall scenario. The problem is without a really specific game plan, some people have a lot of our clients have a game plan. It’s an awesome pension, Hey, here’s my game plan for that day. So they need us like, you know, I have all this stuff I want to work with you guys. One of them is not retirement income because my wife and I are combined pensions $220,000 a year. Right. Cool. Then this part of the conversation, you’re right. You’re not worrying about more, but for many of our clients, it’s, it’s just simply that being in a position I’m losing my voice. I’m back being in a position where, you know, we can actually sort of take advantage of this a little bit. Yeah. instead of going the opposite end, which is freaking out about it.
Steve:
Yeah. And I mean, that’s, you know, when people have been concerned that, you know, some of these particular us based stocks, the valuations had gotten a little bit rich, you know, which if you’re not familiar with that term, it basically means the price you’re paying for the stock relative to the earnings of the company. And, you know, I, I should also point out that, you know, something that, that we’ve maintained is that we need to have this balance between growth oriented stocks you know, growth oriented ones are, are those ones that are growing faster than average versus more of those value oriented stocks. You know, some of those lower PE ratios sometimes tend to be the higher dividend payers as well. And I, I think we’re seeing some of that, some of that shift from just all growth to more of a balanced approach or, you know, for right now more of a value oriented approach. So you know, that that’s another just fundamental diversification, you know, why do we not all put our money into growth stocks when they’ve done really well? Well, probably because they’re not going to do really well every single year in a row. You know, it’s, it’s probably going to be one of those things where they do well for a few years, they underperform for a few years. And that’s of course how we’ve set up all, all of these portfolios here.
Dave:
I’m, I’m going to remind people because again, right, the second we’re looking at this, I’m not going to say things are great, but you know, had a really bad day yesterday, which was Monday, one of the worst days in the last couple years today, things apparently are bouncing back a bit, but who knows? But when you listen to this, they might not be the way they are now. They might be worse. When we talk this way, Steve and I talk kind of like a surgeon, we’re the surgeon, but you’re the patient kind of thing. So the surgeon’s calm the patient’s yeah. I, I am calm. I do trust you guys, but I am slightly worried about the tumor in my brain. Right. So I would always say no matter what, during times like these call us or email us, if you have a question, concern or comment or anything.
Dave:
Yeah. You know, just to, to really relate what we’re talking about to your own specific portfolio that we work on. And then I would say to the other people who listen to this as more and more, we’re trying anyway, we’re trying to get our podcast out and other stuff. And you guys, you regular listeners send it to your friends and stuff and say, Hey, you should listen to these guys. So some of you are not client and you might be saying, well, that all sounds good. Except I done any of that. All that sounds good yet. I haven’t been paying attention at all. So if that’s you, you can contact us also. And we’ll, we’ll talk to you as a potential client or someone who might be interested. As I decided now, at the end of every podcast, you know, in, in, I do know something about podcasting you want to here is that most people don’t make it through an entire podcast.
Dave:
I read this stuff. So by the time you get to this part of the podcast, you tend to be the people who like to listen to the whole podcast. So I figure the commercial for us. If you’re passing this on to someone or you’d be recommending us, well, if you listen to the whole podcast, you obviously are. We’re the same philosophical place and a lot of your clients then maybe you’ll actually do that. That’s why the commercial part is always at the end.
Steve:
Okay. I like it.
Dave:
You’ve learned something about podcast marketing now, as you’re strolling around outside doing your retirement. So it’s been a, a fulfilling day.
Steve:
All right. Thanks for tuning in and stay calm and carry on.