In this month’s episode Dave and Steve start (1:10) by recapping the market over the past year. After that the discussion turns (2:45) to politics, and what effect certain candidates might have on the stock market. To finish up (10:10), they discuss an online guide to uncertain markets published by American Funds. Listen now to find out how soccer penalty kicks relate to how you manage your investments!
https://www.capitalgroup.com/advisor/tools/guide-to-market-volatility.html
Episode Transcript:
Steve: All right, thank you for joining us. Welcome to Plan For Life Now, episode number 58. We are now in October, Dave.
Dave: Yes we are in October
Steve: Doesn’t really feel-
Dave: Let’s just start this thing off easy and then we’ll work our way in the more complicated intellectual thoughts.
Steve: We’re just going to tackle the date and the time first.
Dave: Let’s start easy.
Steve: Then we can move on from there. It’s been an interesting year in the markets, right? I mean we’ve come through the fourth quarter of last year, which was very negative to remind everyone. So you had the fourth quarter of last year basically from late September through Christmas Eve down over 19%. And then you had the markets bounce back quite a bit.
Dave: Right, first quarter was definitely up.
Steve: Yeah. January was big bounce back. August, pulled back a little. September back up. So now here we sit through the end of three quarters. I probably should have pulled this up, but I’d say the S and P 500 is probably up 18, 19% on the year or something like that.
Dave: Right. A very good year. Although I don’t know if people feel that way. As a matter of fact, the last quarter that just end, if I had to guess, just how it felt, it felt like it was down. It has nothing to do with looking at the numbers every day or anything. Then I actually looked at the numbers and I think it was up a little bit.
Steve: Yeah. I think that was because of August pulled back and people always feel those losses more sharply than the gains. But okay, let’s dive into the topics that we have today. The first thing you wanted to talk about is political.
Dave: It is, and it can change. So if you’re listening to this thing, the tide may have changed, the tide changes a lot with political stuff. But yeah.
Steve: But what we wanted to about is obviously … Well, I don’t always want to say obviously. I would think the Republican nomination’s pretty clear, not going to have any contenders on that side of things other than President Trump. But on the Democratic side.
Dave: You have not been that experienced in politics. I wouldn’t say it’s an absolute foregone conclusion, but yes, chances are President Trump will be the nominee.
Steve: Okay, when was the last time? In Ford and Reagan contested convention? Or did he actually contest it? Or no, he backed down in the late 70s.
Dave: I don’t know. But, none of those guys were being impeached while they were running again.
Steve: All right.
Dave: So the reality is, even with that reality, I think you’re right that Trump will be the nominee for the Republicans.
Steve: But on the Democratic side, I don’t know how many candidates are in it now. I can’t keep track, but what at one point, what did they have? 23, 22 candidates?
Dave: Right. I thought the Republicans the last time in 2016 had a crazy amount. I think the Democrats have more. It’s been winnowed down now to 10 maybe. And of the 10 there’s really only how many really who are contenders? I would say probably three, but some people might throw in four, but it’s really Biden, Elizabeth Warren, Bernie. And I can’t even think of a fourth. Like I know who these people are. I just don’t think anybody’s close in the polls besides those three.
Steve: Yeah. So there was an article … Well, there’s a couple things that came out in the last week. I saw something last week that came out and it was a bunch of Wall Street banks saying, “If Elizabeth Warren is the Democratic nominee, we’re either not going to contribute money or we’re going to contribute to Trump.” And there was an article on CNBC today and it was saying that this new Raymond James, I don’t know if it’s a poll or prediction, but basically they expect, they say, “We believe that the market under-appreciates Warren’s ability to capture the nomination and win the presidency.”
Steve: And this is basically looking at a lot of polls that say Elizabeth Warren is going up quite a bit. If you look back in June, the expectation for Elizabeth Warren was at 7%. Now it’s up at 39%. And I don’t … What this is based on, a survey of equity investors. And Biden’s gone from 69 down to 53, so this has a lot of people a little nervous.
Dave: It has a lot of people nervous. But I think it’s certainly a possibility. Momentum builds up for these people regardless. And I mean, Trump’s a perfect example because there’s no way Trump will win. There’s just no way, he’s too this, that, or the other thing. Well, it doesn’t work that way nowadays in politics. It’s all about momentum and being a populist. Elizabeth Warren definitely has a populist message for a lot of people. But I can tell you anecdotally, two of my friends who are, I wouldn’t call them Republicans … Or, I mean I think they’re … But they’re not like hardcore on either side. One of them has called Elizabeth Warren quote … Well, this what he said, quote, “She’s crazy.” The other one said, quote, “She’s scary.” These are the two responses I’ve heard from most people.
Steve: Okay, but I understand that.
Dave: When I have these conversations with people.
Steve: I understand that as-
Dave: And I’m not saying I think she’s crazy or scary, but I’m just saying anecdotally and in the public media, there’s nervousness, especially when it comes to the stock market about Elizabeth Warren.
Steve: Yeah, I mean, I understand as an investor, as a capitalist, the nervousness because she has certainly gone after big banks, big pharma, big oil, all of these things, and been very critical of their business practices. But I guess I would take a step back and say, let’s think of all the changes and all the things that President Trump talked about doing, and then let’s look at what he’s been able to get through. Even with Republican control of both houses for the first two years there. And there’s certainly a lot that a president can do, but I don’t think anyone who says, “All of a sudden we’re going to be a communist country and blah, blah, blah, we’re going to be totally socialist.” I just don’t think that happens in our system of government here. You don’t go to that extreme.
Dave: Well, I think part of if you have a portfolio and you’re prone to panic about who’s the president, starts with are you a believer in how the system works or not? I think Trump is a good example of believing … I personally think it shows believing in the system because here’s someone who, if we had a different system, hey, he’s not a regular president. He’s going to do what he’s going to do. And at the end of the day, if I had to predict this impeachment thing, I would predict he’d be impeached but not convicted in the Senate. And that would be that.
Dave: But still, you go through the rule of law and it’s not … This is not something that’s a positive. I’m sure president Trump does not want to be impeached. No one wants to go down in history of that, whether you’re Clinton or Trump or Andrew Johnson. I’m sure he doesn’t care. He’s not really Andrew Johnson, whatever. But the bottom line in all that is, if you’re a believer in this stuff, I’m with you 100%. I’m a believer in whatever the agenda is. It’s never going to be completely fulfilled. Things would tilt that way, just like Obamacare. Okay, that was, I mean, we’ve never seen a healthcare reform before. It was highly contentious. At the end of the day, it wasn’t Bernie’s Medicare for all either.
Steve: And I mean people were talking about, think back to that Obamacare discussion and debate and people were talking about, “That’s it. I’m going out of business.” All these small businesses are going to disappear, go bankrupt. I mean I talked to a guy here in Gaithersburg, he said, “I’m firing all my employees the day that Obamacare goes in force because this is ridiculous. I can’t.” Okay, I mean it had some-
Dave: Some people were taking and did take all their money out of the stock market the day Obama went in force.
Steve: Yeah, well that was obviously a big mistake, just on the timing.
Dave: And what’s this thing you’ve heard about Obama, Trump, and Elizabeth Warren? There’s one word that anecdotally you hear about all three of them. They’re scary.
Steve: Scary.
Dave: It’s scary.
Steve: Well, each side views the other as scary, sure.
Dave: So every president is scary.
Steve: Yeah. On that note of being scared and people feeling scared about market declines, I came across a guide that American Funds put out. Now, I wish they had hard copies of this guide, something we could print off. But as I always do, I’m going to put a link to this down below the podcast here and it’s just got a lot of really cool charts. And any of our clients know that I like cool charts just cause I think they convey the information really well.
Steve: But it’s basically it’s called Guide to Uncertain Markets, and it’s nothing specific to what’s going on right now. It’s basically going back in history and looking at all of these times that the market has gone down. So it’s got a lot of good stuff in here. But let me try to go through a couple of them that I think are pretty powerful. And this is one that I’ve seen done before. It’s where you take a look at the stock market, and the first view on this graph shows you monthly returns of the stock market. And Dave, you can see even from where you’re sitting, it’s a lot of ups and downs.
Dave: Yup.
Steve: You look at those monthly returns in the stock market from 1998 through end of 2017, and man, there’s a lot of volatility in there. I mean you’ve got a lot of negative 10% months, you got a ton of negative 3, 4, 5% months. You look at thatm and it looks pretty volatile. And then you switch the view to say longterm view. And the longterm view shows you this mountain chart, and you guys have all seen these stock market charts that it doesn’t go straight up. We’re talking about stocks here, but it kind of gradually goes up, has some declines, and then the end of the day or the end of the 20 years in this case, you’re up significantly.
Steve: And not that we don’t all know that or haven’t heard this before, but sometimes I feel like viewing the data in a certain way helps reinforce what you think you kind of know is that in the short term, the stock market is a gamble. But in the longer term you’re generally going to come out ahead.
Dave: Right. And that brings us back to Elizabeth Warren.
Steve: Well yeah, that’s why there’s-
Dave: And what I always like to do for myself and clients, let’s play out the worst case scenario.
Steve: Yes.
Dave: What should we do? So the worst case scenario is if you’re not in favor of Elizabeth Warren when it comes to your money is that she’s elected. She puts in all these regulations. Whatever happens, happens. A lot more paperwork for you and me. That’s guaranteed. For all you guys worrying about your money, one thing’s for sure, Steve and I, it’s worse for Maureen and Amy. It’s going to be-
Steve: They’ve got to process all the paperwork.
Dave: The real person who should be worried about Elizabeth Warren is Amy.
Steve: No, that gives her job security.
Dave: Our office manager, Amy. That’s right. But it’s also … She already had job security, she’s just got more work.
Steve: You’re going to have more work, yeah.
Dave: But anyway, no, but so there’s all this regulation. It is a negative and whatever is going on is a negative pull on the stock market. Negative let’s say for years, and we go into recession. So your markets, your stocks are in a bear market for awhile. But you know what happens, this is how I play it out. That presidency is not going to last very long. A new president will come in, probably a Republican. Well, definitely Republican, and then all of a sudden there’s hope. There’s renewal, there’s coming out of a recession, there’s less regulation.
Dave: And if we were to look at 10 years from when Elizabeth Warren were to be elected and things go poorly with her, we would see the stock market wherever it is today, wherever it is, it’s near 3 thousand. Or well, actually today it was a bad day, but wherever it is in the S and P is going to be, in my opinion, much higher 10 years from now. And this is how we think you should look at your stock portfolio when you’re in these years of retirement slash going to have to live off your money now or soon. You have to look at your stocks on a longterm perspective and maybe even play out some of these negative scenarios to their long game conclusion.
Steve: Yeah, and that’s another graph. And I know I’ve looked at with clients before is does the stock market do better under a Democrat or Republican? And you go back, and you look back in history and historically speaking, the market has done better under Democrats. I know a lot of Republicans, we don’t want to hear that. We don’t believe it. It can’t be.
Dave: I wouldn’t even guess that. I would not have guessed that.
Steve: No, most people wouldn’t even guess it. But it’s true. I mean, it’s not a huge difference. I mean, it’s not … In a sample size of 80 years, who knows if that was just random or what. But the larger point is, it doesn’t mean that Democrats, you get zero returns in stocks and Republicans, you get 15%. It’s just not like that. They’re very similar returns in there.
Dave: Well, the evidence is clear that if you’re making emotional decisions based on who the president is, you’re going to be a loser in the long run.
Steve: Right. Well, let’s run with that because I had written down here off of this American Funds Guide to Uncertain Markets things that I wanted to talk about. So, when we talk about investing and we talk about the psychology of investing, we’ve talked about errors that we all make just because we’re human and this is the way we deal with things. And one of the errors that we all make is a bias towards action. So people feel like, “The market has done something, I need to react. I have to do something.”
Steve: And we often get this phone call, “Hey, I heard Elizabeth Warren’s getting the nomination. What are we going to do?” Or Brexit. “Brexit went through, what are we doing here? Trump got elected, what are we doing? Let’s do something.” And I mean, the same would apply to any emotional situation that was going on. Whether it’s a crisis in your house or an emergency, you feel better doing something. And I like this study that American Funds put here with this. You don’t watch a whole lot of soccer, do you?
Dave: I don’t watch a whole lot of soccer.
Steve: But you know the World Cup.
Dave: World Cup time, I watch a little more.
Steve: World cup comes around every couple of years and you’ll watch that. And you know what’s the most exciting time in soccer? When they have to go into penalty kicks. Penalty kicks. Very exciting because they line up, you make it, you miss it. So they did this study where they took a look at whether the goalie, now the goalie in soccer has to react so quickly.
Dave: You’ve got to make a move as the goalie. You’re going to guess where that person’s kicking.
Steve: Exactly. So the goalie has to guess. He can’t just wait and see where the ball goes and then it’s too late. So what they did is they found that the goalies will move 94% of the time. So 94% of the time they’re either going to dive left or dive right, and they’re going to try for this save here. And they found that when they dive to the right, they save at 12.6% of the time. When they dive left, they save at 14.2% of the time. But if they do nothing, if they stay standing in the middle, which only 6% of goalies ever do, they save the ball 33% of the time.
Dave: Wow.
Steve: And they were using this study to illustrate the fact why don’t more people do this? Well doesn’t feel right. They’ve got to take some action. They feel like a dope if they just stand there and the ball goes left or right. And people say, “Well you should have at least dove for it.”
Dave: Aren’t they printing Moneyball in other languages?
Steve: I don’t know, because that seems like a Moneyball kind of thing where you know they would say, “Oh, yeah, your on base percentage is higher.”
Dave: There’s only so many of these Moneyball decisions to make in soccer. This would be one of them.
Steve: It seems like one of them. But whether or not that still holds true after they’ve printed these studies, because that’s the thing with these Moneyball type of things is once the data is out there, people adjust and it changes. But I think it’s a good illustration to show that we all have this bias to taking action. It feels better to do something than to just say, “No, let’s stand here and do nothing.”
Steve: And one of the recommendations that this guide had, they said, “You know what? I know it doesn’t feel good, but it’s much better if you have a checklist.” And I’m just kind of thinking of this, so we might come up with our own checklist here, but the checklist might look something like this. It says, “Okay, stocks are down. That hurts, doesn’t feel great, I’m not happy about it. But how much guaranteed income do I have coming in Let’s look at social security and pensions and annuities and things like that. How much money do I have in cash and bonds and all that other stuff. If I factor all of that in, do I need to sell my stocks in the next five years, seven years, 10 years? When do I actually … When am I going to be forced to sell? Because I can’t meet my bills unless I sell those stocks.”
Steve: And for most of our clients, that’s going to be at least five years, probably more like seven or eight years. And I think if we had a checklist like that, it might help people go through this and say, “Okay, yeah, it hurts. But I get it now. I’m not going to be touching this for eight years anyway. So, eh, I’m not really that upset.”
Dave: I think when we have our annual analogy of the year awards, your analogy of the soccer goalie and making moves was really good.
Steve: Not … I’d love to take credit.
Dave: I liked that one.
Steve: But I didn’t come up with that one.
Dave: Yeah, but you decided to pull that one and use it for this podcast.
Steve: Right, it does kind of stick in your head.
Dave: That was a good one.
Steve: Yeah. All right, thanks for checking in. Thanks for joining us. And we’ll check in again next month.
https://www.capitalgroup.com/advisor/tools/guide-to-market-volatility.html
