Dave and Steve help listeners make sense over the recent decline in stocks and rapid rise in interest rates. What does it all mean? Why would rising interest rates be bad news for stocks? Is it normal for high growth stocks to be declining so much? Tune in to find out!
Steve:
All right. Welcome to Plan for Life Now, episode number 77. Dave, how are you doing?
Dave:
I’m good. We are doing a podcast ahead of schedule.
Steve:
Ahead of schedule?
Dave:
I will not call it an emergency podcast, because it’s not an emergency, but it is one that I basically said, “You and I should do a podcast off-schedule, just because of what’s going on right now. It’s interesting and worth talking about.”
Steve:
Yeah. I mean, sometimes we do a podcast, and we have very little to talk about. So why not go ahead and do an extra one when you have something worth talking about? I think that makes a lot of sense. Hey, first of all, before we dive into all of this, I wanted to apologize to our listeners for my audio quality in the last podcast. For lack of a better term, it really sucked. But when you don’t realize the audio quality is not good until after you’ve done a half-hour podcast, there’s not a whole lot you can do about it. Not that everybody really cares, but what happened was my microphone that I use wasn’t picking up the audio. So it was my laptop, which is several feet away from me, picking up the audio. So if you’re wondering why Dave sounded so good and I sounded so lousy, that’s it. That’s why it was last time.
Dave:
Right. If these podcasts cost people who listen to them any money, any subscription fee whatsoever, I would be more upset about it, but the fact that they’re free makes us allowed to … or at least I feel a little better having an occasional … In all fairness to you, because you’re the engineer, you’ve had very few technical glitches over the years doing these.
Steve:
Yeah. We’ve had one or two. But then again, I will say when we did the actual radio show and we had our professional engineer, Ken, who was a really good engineer, I would say there was at least two or three times when we did a segment and he waved at us at the end of it and said, “Guys, I’m really sorry. We weren’t recording there.” I remember that happening.
Dave:
Oh, yeah. It’s happened. It happens to the best. So no, you’ve been an awesome engineer.
Steve:
Well, okay. So here’s the reason for our semi-emergency, not really emergency, but just something to talk about podcast that we thought was worthwhile. If you’ve been paying attention to the stock market the last two weeks, it’s taking a little bit of a breather, a little bit of a pullback, whatever sort of euphemism you want to use. The stock market has done more going down than it has going up in the last two weeks or so. We’re sitting here on March the 5th, Friday, March the 5th, and actually kind of … As you said, Dave, before we were recording, it’s been a wild day on the market. Started off negative. Now as we sit here, we’re a couple hundred points positive. So who really knows where it’ll end up by the time you listened to this?
Steve:
But here’s what’s happened over the past couple of weeks. The NASDAQ, which if you know the stock markets, the NASDAQ is a very tech-heavy, technology-heavy index. The NASDAQ crossed over into that correction territory yesterday, March the 4th, and correction territory means a decline of 10% off of the high. So yesterday was down more than 10%. As we sit here right now, it’s down about 8.3% off of its high, and you’ve certainly seen a lot of the high-flying technology stocks pull back quite a bit. I know Tesla is off its high by I think over 20%. Companies like Zoom and Facebook and Airbnb, all of these things that were the darlings of 2020 have pulled back a little bit. Of course the questions that everyone should be having is, “Why is this happening? Is this normal, or is this the start of something bigger, a bigger decline? No one’s going to sit here and tell you they know the answers, but let’s put this all into as much context as we can.
Steve:
First of all, why is this happening? Well, there can be some arguments as to exactly why, but I’ll give you a couple of the good reasons. First of all is simply the fact that the NASDAQ, the technology-heavy NASDAQ, was up 43.6% in 2020. Now, that’s not a number where you can say, “Yeah, we’re up 43.6% last year. We expect to do it this year. We expect to do it the year after,” and so on and so forth. That’s a number that should jump out at most people and say, “Wow, that was nice. I hope I got a piece of that, but I certainly don’t expect that to continue forever.”
Steve:
So going back to our last podcast, if you managed to suffer through some of the poor audio quality on my part, I talked a lot about growth versus value. One of the discussions that we had was growth stocks getting overvalued potentially compared to their earnings. So I think there’s an element of that, that people basically said, “Okay, great. My Tesla stock was up 1,000%,” or whatever it was last year. “Maybe I’ll take some of the profits off the table there and hope that I can hold onto some of that before it goes down.
Dave:
Yeah. So there’s an argument that basically when something’s that hot, the market’s just looking for an excuse to have a correction. It doesn’t matter what would happen, but it would be an excuse, which would … An excuse correction to me is a short-lived 10% correction. Not saying that this is an excuse correction, just saying to me that’s an excuse correction.
Steve:
Yeah, no, and I think you’re right. I think that’s reasonable that the markets kind of look for any excuse. Actually, I sort of cut myself off earlier when I was describing where we are in the market right now. So this is a snapshot as of Friday, March the 5th, NASDAQ down 8.3%, the S&P 500 down 2.6, international stocks, kind of interesting to me, only down 1.4. Just because I was curious, I looked at gold, gold down 6.3%, and bonds down 2%, the broad bond market.
Steve:
Okay. So why is all this occurring? We just threw out there that possibility. It’s just technology, investors taking some profits off the table, saying they’ve had a good run. “Maybe I’ll sell some of that.” But if you look at some of the more fundamental issues, I think it really goes to this spike that we’ve seen in bond yields. So the spike in particular, what most people refer to is the 10-year treasury, so 10-year government bonds. As of yesterday, they hit a high yield, high yield for the last year or two, of 1.62%. Now, to give you some perspective on that, I went back and I was looking. As of August the 4th, the yield on the 10-year treasury was 0.51%.
Dave:
Wow. So that is several hundred percent higher.
Steve:
Yeah, that’s about roughly 300% higher.
Dave:
[crosstalk 00:08:00] whatever, whatever. That’s a huge jump. Now, it started incredibly low.Steve:
Yeah. You have to understand-
Dave:
Like those TV commercials that you see when banks are basically saying, “We offer the highest rate on your savings account.” Okay. What would that be? The lowest rate is 0.01%. So your highest is five times higher. So you’ve got to put it in perspective.
Steve:
Yep. Yeah, because back in August, we were talking about 150-year lows for the 10-year treasury. So it was really no surprise that the treasury yields had increased, but this is always the interesting thing for me. So let’s get into the psychology of why the treasury yields have increased and done so pretty rapidly. Part of the reason for that are some of the signs that the economy is improving. So we start to have these signs that the economy is improving, and whether that’s in terms of unemployment or businesses opening back up or GDP growth and things like that, so we have this sign that the economy is improving. So yields go up, and the stock market goes down. Doesn’t that seem a little bit counterintuitive that the economy is improving, so the stock market will now go down?
Steve:
But really if you get into why that is, it’s basically because if the economy starts to improve quickly, then the Federal Reserve’s concern is going to shift very quickly from being accommodative and buying these bonds every month and keeping interest rates low. It’s going to shift to all of a sudden being more worried about heading off inflation. If they do that, they would of course cut off those bond purchases that they do every month and increase interest rates.
Dave:
Right. Then increasing interest rates seems to be … To me, the market is like a crack cocaine addict that just wants the Fed to do everything to make it go up, no matter what. So when the markets are a little choppy, even though they’re due for a correction, what are you going to do, the Fed?
Steve:
Right.
Dave:
The Fed is like, “Nothing because our job is to see the economy actually do well, not make knee-jerk reaction moves or cut interest rates that are already at zero for no reason,” which is, to me, the first time I’ve ever not … Who knows what’s going to happen? We never know. The market is resilient. The market is when they had Tom Brady New England Patriots of always winning.
Steve:
Right.
Dave:
But the reality is this looks like the kind of scenario where the market, the economy really is going to take off. This is not a political comment at all. I feel like maybe there’s a little too much stimulus going out there if you were to only look … Pretend like you’re the stock market. Forget about jobs and everything else. I’m the stock market. All this 1.9 trillion stimulus, by the time you hear it, it may have been passed, and we don’t know what it’s going to be exactly. That to me is adding fuel to the fire of the notion that interest rates are going to go up with the economy being supercharged.
Steve:
Yeah, yeah. I mean, when you add in that government spending to the economy already starting to recover, I think that’s where the rate increase fears come from.
Dave:
Today’s jobs report was overweighted. It was a good jobs report, and it was overweighted on the hospitality, restaurant industry, to me, looking like ramping up for an opening that certainly is going to come and whether it’s in a month or in three months.
Steve:
Now, to play the devil’s advocate there, on the flip side, we are still below the employment numbers that we saw pre-pandemic, and we’ve also heard a lot of talk about the inequality of this pandemic on affecting certain segments of the population more so than others. So Dave, you and I might say, “Hey, things look pretty good to us,” but there’s certain people who are still unemployed, who are still really hurting there. So I don’t know the right answer for the stimulus or not or how much we need or any of that.
Dave:
Oh, no, I’m not knocking the stimulus at all. I’m taking it from the point of view the stimulus is … In fact, when you read most things I read is you’re better off having more stimulus in the long run to help the economy. If you overdo it, oh, well.
Steve:
Right.
Dave:
It’s still okay in the long run, anyway. So that’s not my point. My point is are we looking at an environment where we actually see some inflation in the next year and a half, between now and the next year, and some interest rates going up? That environment looks to me like it might happen, which doesn’t mean you sell all your stock, but it does go back to me thinking, “Hmm, all those value managers, fund managers who thought they were going to lose their jobs, maybe not.” They might be saying, “Hmm, I guess I don’t have to get my resumes out immediately.” But when we had last podcast’s discussion of value versus growth, sort of leading into this little podcast of at some point value is going to … If the long-term 20 year numbers are equal, at some point, that equal just has to occur. This seems like a good recipe for the value to catch up to the growth, not over a longer period of time for that shift to occur.
Steve:
I agree. I mean, I think you sort of touched on this a little bit with your crack cocaine analogy there, but I saw this one opinion of someone who said, “Okay, let me get this straight. So let’s imagine the economy is a patient and the patient needs some sort of medication,” and that medication could be the stimulus or the Federal Reserve action to keep it going. I think most of us can agree that it was right for the Fed to take whatever action during the initial phase of the coronavirus. So now the news coming out is basically saying, “Well, the patient is getting better, so we’re going to stop giving him as much of the medication.” It’s basically everybody freaking out, saying, “Oh, no, the patient is getting better. He’s going to be out of the hospital. He doesn’t have to be on these medications. Oh, this is terrible.”
Steve:
Well, no, it’s actually good. That’s long-term good. So you might not have that high of being on the medication or the whatever, but in the long run, that’s absolutely what we want, the economy being able to stand on its own. Frankly, just like we saw last time around, we want the Federal Reserve to be able to sort of reload with ammunition, being higher interest rates and no asset purchases, so reload with ammunition so they’re ready to go next time we find some way to crash the markets.
Dave:
Right. I think the big loser in all this, and then I want you to touch on how this affects our clients and most of the people listening to this podcast, but most of the people listening to this podcast are not who I feel are going to be the biggest losers in all of this, which may have already started. [inaudible 00:16:16] the people, so similar to the past that I can remember, but you were … Well, you can remember it, too. It’s like, “You know what? I’m sitting at home during the pandemic. I didn’t really realize this, but I happen to be one of America’s best daytime stock traders. I want to remain humble, but I’m great at this. I’m making a fortune.”
Steve:
Yeah, no. I mean, we saw an awful lot of that. It was pretty easy, certainly if you piled into one of those popular trades. They called it the stay at home trade, and you jumped into Zoom and you jumped into Peloton and things like that. Man, you were killing it there. You’re up 100%. All of a sudden, you come back down to earth a little bit and realize there’s a reason why it’s so hard to be able to pick stocks reliably, because you’re not in that environment forever. Now, I already forgot, Dave, what did you say … Oh, you want me to touch on-
Dave:
[crosstalk 00:17:22] perspective pulling back to our town and people who are listening to this podcast, for the most part.Steve:
Well, I hope this doesn’t surprise any of our clients that we’re basically going to say you don’t need to be making any moves, taking any action, doing anything immediately to be able to deal with a correction like this, because remember the way that we set up. Hopefully right now you’re sitting there, kind of rolling your eyes, saying, “Gosh, Steve, Dave, I’ve heard this from you guys so many times.” But it can’t hurt to hear it again. The way that we set up all of our plans is, first of all, we want to make sure that we have enough guaranteed income coming in. So we view this as income from pension, Social Security, annuities, things that we know is going to come in month in, month out, regardless of what’s going on out there. So you basically cover your essentials with that.
Steve:
The next step up from there, we want to make sure that we have enough money in short-term, high-quality bonds. So we don’t want to be risking it with emerging markets bonds or high-yield bonds, all that kind of stuff. We want to be in some pretty high-quality, shorter-term stuff so that if the stock market is down … What did I say? S&P 500 down 2.6%. Really, that’s nothing. Remember last spring, we were down almost 34%.
Dave:
Right.
Steve:
We want to know, if that happens again, do we have enough money in bonds or cash or whatever it is that we can avoid selling stocks while they’re down? When we talk about while stocks are down, we’re not expecting the stock market to recover in six months like it did last year. I’ll just reiterate that. That’s not normal. You don’t normally expect to recover from big losses in six months. We figure it could take five or six years. Now, usually, it’s a little bit faster than that, but it could. If that happens, do you have enough money in bonds, cash, those kind of things to pull whatever income needs you might have?
Dave:
Right.
Steve:
Then when we actually … Sorry. I don’t want to cut you off there.
Dave:
Oh, no, you haven’t cut me off. Just finish, and then I’ll give you my thought.
Steve:
Okay. Then you want to actually say, “Okay, what about my stock portfolio? Am I in a good position here?” Just going back to the last podcast, we want to have a nice balance between growth and value, between large cap and small cap, between international stocks and domestic stocks, and even within international, between emerging markets in the developed international world. We don’t want to be betting on one particular sector or one particular country even doing really well and then we’ll be okay. We want to have these little bets spread out across everything. When you look at it like that, you’ve taken care of the guaranteed income. You’ve got money in bonds. You’ve got this nice diversified portfolio. Short of a really bad, Great Depression type of scenario, there’s not a whole lot that can go wrong with your portfolio.
Dave:
Right. I was going to jump in and say one of the headlines of 2020, besides, obviously, how hot the stock market was, would be this headline that would get lots of clicks on the Internet, three words, “Bonds are dead.” Why are we in bonds, guys? I heard they were dead.
Steve:
Right.
Dave:
First of all, whenever you hear a major asset class of anything, stocks, international stocks, bonds, anything being dead, chances are they’re about to be very alive soon.
Steve:
Yeah. Well, I mean, that goes back to that … There was a classic cover. I want to say it was Time Magazine, but somebody can correct me if they know. But there was this classic cover in 1982. It said, “The death of equities,” and basically it was talking about how stocks were dead as an asset class. You don’t invest in stocks anymore. You’re not going to get any growth. Well, what did you do from 1982 to 1999? Greatest bull market in history. Now, I wouldn’t expect the same thing for bonds. There are some definite headwinds and challenges, but they still can play a big role in the portfolio as far as capital preservation and having that safety there.
Dave:
When you’re listening to this and you’re in your late fifties, sixties, seventies, there is a role for short-terms or duration bonds in your portfolio for almost everybody, not everybody, but almost everybody listening to this podcast. That role is magnified during times like these and especially if we do go into a more prolonged. .. This has been a long time, Steve. I’m trying to think of our firm. You and I have been working together longer, but Capital Retirement Strategies has been around since 2010. So have we even had a long bear market in the history of Capital Retirement Strategy?
Steve:
No, because basically all along from the financial crisis up until the coronavirus decline, we had declines and we had some that even got to the point of 19%. We’re just talking on the S&P 500 here, but never actually crossed into bear market territory. So no, we have not had a bear market, let alone a sustained bear market, in the past 11 years.
Dave:
We’ve told our clients during these events, the latest being about a year ago, to not panic and sell things when they’re low and for all the reasons we’ve gone over a million times on this podcast and in person with people. Everybody … Well, I say everybody. 99% of people took our advice. Because the recoveries were so quick, there was never that emotional turmoil. “You said it was going to come back.” No one’s even saying, “Can you give me the speech twice?”
Steve:
Right.
Dave:
Because the recoveries have been, comparatively in history, very quick, but at some point, because we plan on having Capital Retirement Strategies around for decade after decade, and one of those decades, I’ll just be a picture on the wall, but you’ll still be around, and we’re going to actually have a prolonged bear market.
Steve:
Right.
Dave:
That’s going to be the ultimate test for every financial advisor who does what we do, is to keep clients on course. But like you said, you already said earlier the recipe to keep you on course. We’re always planning for that, and we’re not saying this is going to be that, but it is interesting, what’s going on right now. There’s is a fundamental kind of thing where a lot of these little blips on the screen have not been so tied to the fundamentals, I don’t think.
Steve:
Yep.
Dave:
I think others have been emotional.
Steve:
All right, Dave. So much for being a short podcast. That one’s probably average to above average length, but that’s okay. I think nobody will mind getting a free podcast that went a little bit longer than expected.
Dave:
They can turn it off whenever they want. That’s the beauty of podcasts.
Steve:
Yep. All right. Thanks for listening. We will check in again with you soon.