Steve and Dave delve into all of the predictions and theories about where this volatile stock market is headed. Have you heard the one about what stocks will do after the Midterm elections? Steve and Dave have…many times! If you’ve been wondering if our 95th podcast will lead to the market going up 9.5% in 95 days, then this episode is definitely for you!
Right. Welcome to Plan for Life. Now this is, Which episode is this, Dave? Gosh, I had
It, Um, how would I know that? But it’s in the nineties. I know that one.
90, 95. I’ve got so many tabs open on my computer here. It was hard to find it. Episode number 95 sort
Of feels like this may be the, I hope I’m not a delay because this is the first one we recorded on Zoom.
Yeah. Uh, <laugh>, I, I don’t think we need to go behind the scenes with everybody on how we record them, but No, I don’t, I don’t think there’s a delay. You can hear me right?
Hear you just fine, but I don’t wanna talk over you, so we’ll see.
Okay. Um, no, I was just gonna say, my computer feels an awful lot like life right now, just with a whole lot going on. Things are kind of chaotic in the stock market and the investment world and uh, you know, that just all bleeds through to life and, and, uh, makes things more interesting though. We don’t want to sit around, be bored. So,
Yeah. Well, I’ll tell you, that’s why it felt like it was time to do another podcast. But besides that, this morning, today is Thursday and I don’t know the results of my commander’s game tonight, even though I’m the, I think I’m the only person who still cares about that, by the way. Oh, yeah. <laugh>.
Um, any strain of caring that I had at the beginning of the year is long gone.
Yeah. That’s you and everybody else. This is my problem. But anyway, so this morning, um, I said, let’s do a podcast. Cause I saw the numbers came out and the s and p, all the markets were down to really close to, you know, we were about to push in the 34 hundreds there for the s and p. So I figured since it was time anyway, we should, we should talk about that as well. And then I was driving from Washington, from Potomac where I lived to the beach place. And in the time of that drive, I believe the market went, The s and p went from down 80 to up 80.
Yeah, I mean, just an in incredible reversal. And I mean, we’ve, we’ve seen a lot of these reversals, you know, lately, but usually it’s been where the market kind of gets off to this tepid positive start and then it just crashes down. So this is kind of interesting to, uh, to see a reversal on the other side where, where everything turned positive here. Um, but Dave, you wanted to talk about, you know, the, the theories we’ve been hearing from people about why the market is up or, or why the market is down, when it will go back positive, you know, how it’s linked to certain external events there. Cuz I, I agree with you. I feel like we’ve been hearing that from people, you know, more and more lately.
Yeah. I don’t, maybe it’s because it’s a down market or wishful thinking or what other people are reading all of a sudden, every, not every theory under the sun, but some of the traditional theories and then some weird ones. The weird ones would be, Oh, you guys, I, I, what do you think about a Halloween? I think every Halloween on every odd year, what do you guys think?
Um, but, and then there’s all these weird ones, but the one I think we’ve heard the most is it’s an election year. It’s a midterm and you know how the midterms go if Republicans win or you know, how midterms go if the Democrats, a lot of these theories are out there about connecting events that, you know, off the top of your head you don’t think are connected to the stock market, to the stock market.
So <laugh>, we heard this one yesterday from a, a client and it was something a, you know, to the effect of, oh, going in, you know, after a midterm election, but before, you know, a presidential election year. Those are really positive quarters. And I thought that was oddly specific, but it also rang a bell in my mind that I said, I feel like I’ve seen this chart somewhere. So I went and I did some digging and I was thinking that it was the JP Morgan guide to the markets, but I couldn’t find it in there. Um, so I went and, and looked at the ClearBridge anatomy of a recession and Dave, I, I found the chart <laugh>. And this one, this has gotta be what the client, you know, he is, he, uh, was meeting with his mom’s advisor and I guess this other advisor showed him this chart.
And I mean, this is one that, it just seems so random and, and subject to whatever. Um, but it basically highlights and it says, you know, it’s got years 1, 2, 3, and four of a, you know, presidential election cycle and then broken down into quarters. So obviously the third quarter of year two, that’s what we’re coming up on here with the, the midterm elections or we’re in the third quarter. And what this shows is that on average Q4 is 6.6% return, uh, q1, which would be, you know, starting in January is a 7.4% return and Q2 is a 4.8% return. And you know, I’ve done read the fine print here, but I’m guessing they’re going back and looking at all of the midterm election cycles and then showing the, the results after that. And I’m sure I’m gonna trust them on the data that the data is accurate. Right. I’m not gonna second guess their data there.
No, let’s go with that being accurate.
But to me it’s just such a random, I mean, not entirely random, cuz yes, I understand that, you know, elections can have some, some short term influences there, but it just seems to me like one factor among dozens of factors that could influence the market at any one time. So, you know, when you talk about, you know, different things that can impact the market. Yeah, sure. Midterm elections, they, they could have an impact. Uh, but I’m not gonna bet the farm on, uh, on everything just because of historically it’s shown this,
Right? Because situations are different. I doubt we had the Fed raising interest rates 75 basis points every, you know, of their month, one of these midterm elections. Yeah. There’s, there’s things going on that, you know, it’s always different. Not to mention when you start to look at things statistically, sometimes that statistical thing is broken and you can always tell those when they’re the theories that no are just statistical. Like when stocks are high sell in July,
<laugh> sell in May and go away.
That’s literally, you just saw something like that and you had to come up with a run,
There’s nothing to that. So I’m not saying there’s nothing to this, but with every situation being different and who knows, you know, the reality is we’ve been down for quite a while. Who knows that that scenario won’t happen again, where it goes up again, but, Hmm. I don’t think I would bet my retirement on it
<laugh>. No, certainly not. Um, you know, and, and we’ve talked about this before, you know, when the markets do turn around, you know, whether that’s the, the, what they call a bear market rally, um, you know, bear market rally basically from mid-June or so through, uh, mid August, I don’t know if anybody noticed the stock market was actually up off of some of those lows, 17%. Um, and you know, that’s, that’s uh, you know, a bear market rally and, and those tend to happen quite a lot. Um, but you know, that that doesn’t necessarily mean that the overall bear market is over. You know, you, you could, you certainly have those cycles within there. So Dave, what I wanted to talk about, and I, I talked about this in that market update video that I did, um, in that market update video, I, I talked about the predictions of Wall Street going into 2022.
So in 2000 and, you know, this was December of 21 and they went around and, and everybody has to have an opinion. All of these major banks, um, and Wall Street firms, they’ve gotta have some sort of opinion. So they went around and asked all of these different firms, you know, what do you think is going to happen next year? Because I, I feel like we’re sitting here in October and man, so much of this seems so obvious, you know, wasn’t it obvious that inflation wasn’t gonna go away quickly and wasn’t it obvious that the Federal Reserve was going to be very aggressive and raised rates very quickly? You know, I isn’t that all so obvious that, that we should have reacted to that,
Right? Good old hindsight
<laugh>. Yeah, and I mean that, that’s exactly what’s called, you know, the hindsight, um, you know, hindsight bias is in hindsight, everything, you know, all these things seem obvious. You know, you go back and talk about other declines and, you know, the tech bubble in the, the early two thousands, gosh, wasn’t it obvious that, you know, pets.com wasn’t making any money? So it, you know, why was it trading ridiculous values? You know, wasn’t it obvious in 2007 that home prices were, you know, overvalued and, and you know, the mortgage market was, you know, uh, basically a house of cards there. Um, you know, in hindsight those things seem really obvious. Um, or to turn it around, you know, doesn’t it seem obvious that when everything crashed down with C because the Fed and you know, and the government came in with such support, doesn’t it seem obvious that the market went up, you know? Well, yeah, sure. With the benefit of hindsight it does.
So let’s go through here and just to, to anchor you to where we finished the year, um, you know, 47 96, that was the high for the s and p 500 on January the third. Um, so I, I guess I shouldn’t say finish the year, but that was, um, that was where the market peaked. Just a few points shy of 4,800, right? Um, if we go down all of these, these different, uh, projections here, Barclays 4,800. So they basically said there was gonna be no growth on the year DWS 5,000. Um, yeah. So what is that? That’s a, a single digit growth there, right? So, uh, JP Morgan five, uh, 5,050, uh, Ardini research 5,200, uh, Bank of America, this is the only one that had the market negative 4,600. Um, and I should say <laugh>, let me give you another anchoring data point. Um, we peaked out right around 4,800.
The market is currently trading around 3,600 right now. Now, um, Jeffrey’s 5,000, uh, bnp 5,100 BMO 5,300, uh, Goldman Sachs, 5,100, Wells Fargo, 51 to 53. Um, Morgan Stanley, I guess I should have given them credit, they were down at 4,400 rbc, 5,000, ubs, 48 50 and credit suites 5,000. So, you know, you go down that list of all these people who, they’ve got all the research in the world, right? They’ve got economists on staff, they’ve got, uh, you know, mathematicians and they’ve got super computers and they’ve got, you know, all these data analysts. Um, and, and I actually started to go through all of these 14 different projections and I actually didn’t finish this, so my apologies, but I was gonna track, you know, who mentioned inflation and who mentioned the federal reserve tightening, because a lot of these don’t even mention those things. You know, there’s no mention of inflation, there’s no mention who
Did mention, who did mention that stuff? Anybody,
Uh, even in the, even in the most bearish one, what did I say? Morgan Stanley, um, you know, they said earnings growth would be slowing risk reward looks unattractive. They don’t even mention inflation and the federal reserve tightening, right? So the most bearish prediction in my argument didn’t actually nail the reason why the market’s gone down so much. Um, so, you know, that’s why I think it’s good to reiterate how hard it is to make these short term. I know sometimes people don’t think of one year as short term, but it absolutely is to make these short term predictions, right? And I guess I should say that, you know, to make even longer term predictions is not easy. Um, you know, I, I remember going to this presentation that, uh, it was hosted over in Tyson’s Corner, um, by a guy named Rob Anot. Um, and for those of you not familiar with Rob Anot, he runs, um, he runs a bunch of mutual funds, mainly a sim uh, associated with the PIMCO brand.
And, uh, he does, you know, a lot of research. He’s got a lot of really smart people and he basically, this was back in 2010, 2011, and I remember him, you know, showing these projections and it had really good data behind it. And it was basically how the market was only going to grow by, you know, 6% or so over the next decade. And, you know, he was doing one of these things. Yeah, I can’t predict the short term, but the long term’s, much more obvious, blah, blah, blah. Well, the stock market produced, I think over the next decade, 11 or 12% annualized returns. So, you know, to say that it’s hard to predict short term, It’s hard to predict long term too. You know, you, you can have really smart people with really smart arguments and just have them be dead wrong there.
Yeah. But, and it’s great that you can’t predict the market because if you literally could, then you wouldn’t have the opportunity, uh, that it presents. We could predict the market then why, you know, then the investing part of this, the risk reward part goes away. The risk goes away. Yeah. And then ultimately you don’t have the opportunity over a long period of time to make decent money on your money and in our case, be able to retire for many people. So it’s good, it’s good that you can’t predict it. This is all a good thing, not a bad thing, but people who say they can predict it not so good and which keeps coming me back. I like, you know, I get these things and it’s just like they bug me. It’s like the friend I have whose advisor is a definitely a market timer because he had Adam pull money out of the market that’s down, he has a, some sort of 10 point theory about a recession or something.
And when you hit the 10 bullet points, then you pull your money out and then at some point you put it back in. Hmm. Um, yeah, that what look at a day like today, get about long term that you can’t predict. Look at a day like today, it’s down percent in the morning and up from the morning, 4% in the afternoon. Add a couple of those together in the market we have now, and then you have a rise in this market. Let’s say the bottom of this market were to be whatever, 30 s and p 3,500. And in several days you realize the bottom’s over for whatever reason, it could go up, go up 300 s and p 300 points in a matter of a week.
Three or four days, in which case if your 10 point system for getting somebody out and putting ’em back in and then you put ’em back in, given up quite a few percentage points, which in the long run really hurts your return.
Absolutely. That’s when you time it.
Yeah. I, I mean I’ve seen those charts and I don’t have one up in front of me, but you know, the talk about if you miss the, the five best trading days in the market, if you missed miss the 10 best days in the market and it’s, it’s devastating. I mean it’s, you know, you basically can’t recover if you miss those big days. Um, so, um, did wanna go through Dave, a couple of, you know, what I’ll call, I don’t know, positive points or, you know, things to look on the bright side maybe. Um, because I feel like when, when I listen and I listen to a lot of different analysts and a lot of different, um, you know, fund managers and things like that, and I just, I, I feel like it’s hard to find anybody out there who’s being positive. You know, the, the best that you will hear is, well, the market’s gonna trade kind of up and down in this tight range here for the next, you know, year or two and it’ll go up 10%, 10 or 15% down 10 or 15%, but it’s kind of gonna be stuck in this, this range for a while.
Um, and nobody’s going out there and, and really beating the drum saying, you know, here are some positive thoughts there. Um, so a couple that I have seen, you know, and these are a little more obscure, um, you know, different charts and whatnot. Um, so of course there’s the classic chart that, that we look at some variation of this in a lot of our meetings. Um, that basically shows, you know, when the stock market goes down, stocks tend to do really well, the one and two years after the stock market goes down. Um, and you can splice this different ways, but the one I’m looking at basically says from 1980 to the current time, um, average stock market decline, when we’re in a bear market about 30%. So, you know, we’re a little bit shy of that if we’re only at 25%, but you know, somewhere in that range, the average return one year after 30.2% average year, um, the second year after 37%. So, you know, that’s, i I don’t know when it’s gonna be the bottom, if it’s gonna be at 25%, if it’d be 30 or 35%. Um, but you know, once that turns, those recoveries tend to be really good and they tend to snap back quickly there.
Um, yeah, one other, I don’t know if you’d call this a positive, but you know, just something to keep in mind. This is a, a chart. This one is from JP Morgan, um, that takes a look at when the market starts to recover and what unemployment is doing at the time. And the big takeaway from this is that, you know, cuz so far in this economic cycle, we’ve seen unemployment continue to stay very, very low. You know, the labor market has been incredibly tight. Um, and it does take a while for all of these, these rate increases. Obviously they hit the stock market and the bond market right away, um, but for them to actually work their way through to, to the economy, most people say that takes, you know, six to nine months or so and unemployment can lag even farther behind those, those rate increases there.
Um, unemployment tends to be, you know, particularly sticky. Um, you know, where people, you know, their, their salaries just aren’t gonna go down very easily there. So, you know, what this chart basically shows is that we can still have unemployment rising and the stock market can start to recover. So, you know, some people have made the argument that, you know what, we haven’t seen the worst yet because unemployment is still very low. Um, yeah, maybe some areas of inflation are moderating a bit, but until we really see unemployment tick up there, um, you know, we, we won’t have hit the bottom. And you know, this chart basically refutes that and says, well no, typically unemployment can still be going up long after, I mean even a year or two sometimes after the market recovers there.
That’s good because then you can, while your stocks are going up, you could also have a job
You should have to have one or the other in that.
Yeah, that’s, uh, <laugh> for most people that’s much more important is just having a job. And, uh, you know, here’s one more, and this one’s the ultimate counterintuitive sort of positive indicator, and I went through this one in the market update last month as well. Um, but this one talks about consumer confidence in the stock market. And you know, this chart right here basically takes a look and says, Okay, what is the consumer sentiment index, right? How good do consumers feel and what’s the return of the stock market over the next 12 months? And you know, if you look at this chart, and I’ll include these, you know, right below, um, right below the post here, the, the podcast. Um, but if you look at these charts here, the average consumer sentiment readings 85.6, you know, and that’s, that’s kind of the average there. Um, I think it goes as high as 110 goes down as low on here is 58 or so.
And what we’ve found when you look over the past 50 years is that when consumer sentiment is high, so when it has peaked out, returns for the stock market are 4.1% over the next year. So not really great returns, but when consumer sentiment is near a low, so the lows in here, 1975, pretty low, it looks like about 50 58 or so, um, 1980, which, you know, a lot of people are comparing this to with, with big inflation and a recession. I guess actually actually the low there was around 52 or 53, 19 90 2008, um, 2020 of course with Covid. And then now we’re in that mid fifties range. The returns, the subsequent 12 month returns are about 25% coming off of those consumer sentiment lows. So no guarantee there. Um, but that to me is one of those things that, gosh, you know, everybody’s gotten so negative that that’s actually a positive. Um, and I don’t know if we’re totally there yet. It doesn’t feel like everyone’s totally thrown in the towel and given up and a lot of time that’s really what you need for, for the market to recover is, you know, that classic term they use is capitulation. People just give up and say, Oh, it’s never gonna get any better. I might as well get out. Well, that’s precisely the moment when it does get better.
Right. Got it. Well, I don’t know. For some reason that all seemed pretty positive to me, <laugh>. So
Yeah, that’s what it was supposed to be, but, um,
Positive, you know, we do, we can’t predict exact things, but we have an idea. We can’t predict that. At some point it’ll get better. Just like we were predicting at some point during this incredible bull market. It would go down.
Yeah, it would get worse. So. All right. Thanks for checking in. Thanks for joining us. As always, reach out if you have any questions or, or concerns. We’re always more than happy to, uh, to walk through your individual situation with you and, uh, hope everybody stays safe out there.