The Invested Dads Podcast

The Markets Are Rough... Here's Why!

October 06, 2022 Josh Robb & Austin Wilson Episode 147
The Invested Dads Podcast
The Markets Are Rough... Here's Why!
Show Notes Transcript Chapter Markers

Unless you've been living under a rock, you may have noticed the markets have been pretty rough this year. But do you know the exact cause of this current economic downturn? In this week's episode, Josh & Austin are discussing a few reasons why. This includes what The Fed is doing to aid inflation, current data, what investors should do, and much more!

For the full transcript, links, and show notes, visit theinvesteddads.com/147

Sign up for our exclusive weekly newsletter here!

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

 Austin Wilson:
All right. Hey, hey, hey. Welcome back to The Invested Dads Podcast, the podcast where we take you on a journey to better your financial future. I am Austin Wilson, Research Analyst at Hixon Zuercher Capital Management.

Josh Robb:
And I'm Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin how can people help us grow this podcast?

Austin Wilson:
We would love it if you would subscribe, if you're not subscribed, so you get new episodes to your device every single stinking Thursday, ever. We haven't missed one yet.

Josh Robb:
That's right.

Austin Wilson:
And, we would also love it if you'd visit our website and sign up for our weekly newsletter to get notified, which also comes out on Thursdays, which gives you a direct link to listen, as well as some highlights and a brief summary of what we're going to be talking about.

Josh Robb:
Yes.

Austin Wilson:
So today, Josh. Wow. Yeah, we're going to be talking about what's going on, because let's just say, this year's rough.

Josh Robb:
Ruff. It's like a dog.

Austin Wilson:
Like a dog. Stocks are down.

Josh Robb:
Yes.

Austin Wilson:
Bonds are down, interest rates are up, inflation's up. So let's talk about it.

[1:07] - Timely Data of The Current Markets

Josh Robb:
Yes.

Austin Wilson:
So we're, just as a point of reference, recording this using timely data.

Josh Robb:
Okay.

Austin Wilson:
So I want to data stamp this. This is through the end of 9/23 data.

Josh Robb:
Okay.

Austin Wilson:
Recorded on 9/26. Okay?

Josh Robb:
Yep.

Austin Wilson:
By the time this comes out, this will be plus or minus, hopefully, where we're at. But it may be slightly different than the numbers you know. The markets are bloody, is one way to put it.

Josh Robb:
Yes.

Austin Wilson:
Red, a lot.

Josh Robb:
Yes.

Austin Wilson:
They're like, what? A penguin reading a newspaper. What's the...?

Josh Robb:
Black and red all over.

Austin Wilson:
What's black and white and red all over? So, the S&P recently...

Josh Robb:
Yes.

Austin Wilson:
Again, I'm using 9/23 data, closed just above its bare market low. 23.7% from all-time highs. Now, as a point of reference, this is still 9% above pre-COVID highs.

Josh Robb:
Okay.

Austin Wilson:
So, February 2020, which, if you take a line from that point to now, is about 3% annualized, which is below average.

Josh Robb:
So still positive from the...

Austin Wilson:
But barely.

Josh Robb:
Yes.

Austin Wilson:
3% annualized is well below historical long term averages. Now the Dow, so Dow Jones Industrial Average, 30 companies.

Josh Robb:
Yeah.

Austin Wilson:
The S&P is roughly 500. The Dow is 30. It just now closed down into a bare market officially at the end of that week. 20.3% off all-time highs and is now actually down versus pre-COVID levels by 0.7%, or marginal 0.3% annualized. But down from the February 2020 highs. Small caps are down 32%. 32, that's like a third from the closing high, which was actually last fall. And they're 2.5% below pre-COVID highs. So substantially off of that. As a matter of reference, bonds are down double digits as well.

Josh Robb:
Yep.

Austin Wilson:
That's not good. That's also very rare.

Josh Robb:
Yep.

Austin Wilson:
What's driving this? Well, A, hawkish Fed.

Josh Robb:
Hawkish Fed.

Austin Wilson:
And don't fight the Fed, is what the markets are saying right now. So let's talk about the Fed. So the Fed, Federal Reserve, they set monetary policy in terms of interest rates, and obviously they manage a balance sheet as well, for liquidity within markets. The Federal Reserve recently gave us the second 75 basis point, or three quarters of 1% interest rate hike in a row, which followed a 50 before that and a 25 before that.

The last three meetings alone have hiked rates by 200 basis points, or 2% total, which is the fastest pace since 1981, where, also in response to inflation during the Volcker era, we had a 400-basis point hike season within that short of a timeframe. But still, we haven't had that fast of a hiking cycle in a very, very long time. So it's very unknown. The interest rate decision, 75 basis points, was really as expected. The market expected us to get a 75 basis point interest rate increase. That's exactly what happened. What caused the harsh market reaction? Three letters. It's an acronym.

Josh Robb:
Okay.

Austin Wilson:
S-E-P. And I'm not talking September, even though that coincidentally is...

Josh Robb:
That's where it is.

Austin Wilson:
Where we're at right now.

Josh Robb:
It's the SEP-IRAs, everybody.

Austin Wilson:
The SEP-IRAs. It's not even that. It's the Summary of Economic Projections. The government loves reusing acronyms. Summary of Economic Projections is the Federal Reserve forecast, and in that forecast that just released, showed lower economic growth forecast, higher inflation forecasts, and higher unemployment forecasts than the prior meeting. Bad news all across the board.

Josh Robb:
Yep.

Austin Wilson:
The year-end Fed funds rate expectations for the year end is now expected to be, again, they use a range, usually. 4.25 to 4.5, we usually use that upper end of the range kind of to say where we're at.

Josh Robb:
Except for...

Austin Wilson:
Except for when we're at zero.

Josh Robb:
We say we're in a zero...

Austin Wilson:
Interest rate environment, but we're really at a quarter percent.

Josh Robb:
Use the low end. And then they switch to the high end while it's going up.

Austin Wilson:
You're right.

Josh Robb:
Sneaky people.

Austin Wilson:
You're right.

Josh Robb:
Watch them.

Austin Wilson:
So that 4.25 to 4.5% range is 100 basis points more than the June meeting, which really includes at least another rate hike expected this year, and showing a terminal rate of at least 4.5 To 4.75%, which is again, higher than before. So the Fed is planning to hike faster and keep rates higher for longer before easing, meaning lowering interest rates, which is not good for the markets.

Josh Robb:
Market does not like...

Austin Wilson:
And we're going to talk about why.

Josh Robb:
Yep.

Austin Wilson:
We're going to talk about why. So essentially the Fed is okay with slowing the economy drastically, even to the point of enforcing an economic recession, which is going to bring higher unemployment, all in an effort to bring down inflation. They're okay with that.

Josh Robb:
That's what they've said.

[5:31] - Why Are Stocks Lower?

Austin Wilson:
That's pretty much what they are saying. Their projections are for higher interest rates and higher unemployment, so that is what they're saying. So, the question you're going to ask me, Josh, is why?

Josh Robb:
Why?

Austin Wilson:
Are...

Josh Robb:
Are...

Austin Wilson:
Stocks...

Josh Robb:
Stocks...

Austin Wilson:
Lower?

Josh Robb:
Lower?

Austin Wilson:
Why are stocks lower? What does that have to do with Federal Reserve at all, right?

Josh Robb:
Yeah, yeah. They're just affecting monetary policy.

Austin Wilson:
Right, what does that have to do with stocks? Well, first and foremost, it comes down to valuations. Interest rates are used to place a value on future earnings, cash flows, dividends, for stocks when you're compiling a discounted cashflow evaluation. So when rates are low, future earnings are worth more today because they're discounted less. Makes sense. The bigger that percentage number, the less it's worth today in future dollars, right?

Josh Robb:
Yep.

Austin Wilson:
Okay. When rates are higher, which, we're saying much higher today, much higher than they've been in a while, the opposite is true. So future earnings are worth less in today's dollars. So people are less interested, investors are less interested in future earnings, which is what's driving stocks and markets forward over time, is earnings. Right? Well, those earnings are worth less, so stocks don't look as good.

Another factor is impending economic weakness is almost a certainty, and that is probably going to pressure corporate earnings. Estimates for both this year and next, are dropping by the day. And notably, though, they are still positive year over year. So this year versus last year, and next year versus this year, are both expected to still be positive by about 8% for the overall S&P 500.

Josh Robb:
And you mean the estimates are dropping by the day, that's when they come out and do their update quarterly when they have their earnings calls and all that, and they give kind of what they expect to have by end of year and next year. They're lowering their own expectations because they're saying, hey, it's costing me more to borrow. And so at that point...

Austin Wilson:
That is happening too, but what it's really...

Josh Robb:
The analysts are the ones readjusting...

Austin Wilson:
Analysts are lowering the earnings estimates for the market as a whole.

Josh Robb:
Okay. So, they're just looking at broad saying...

Austin Wilson:
Correct.

Josh Robb:
It's getting more expensive.

Austin Wilson:
They are, also, this can be compiled with bottoms-up analysis. But generally speaking, for what this purpose is, analysts are looking at the S&P 500, and saying the S&P 500 earnings are going to be less than they were.

Josh Robb:
Okay.

Austin Wilson:
Still positive year over year, but less than they were. Now, another factor of why stocks are lower is higher US interest rates compared to other areas of the world, as well as economic and geopolitical uncertainty are making the dollar, the US dollar, greenback, more attractive. So this is causing people to buy and hold dollars and sell other currencies, which strengthens the dollar in comparison, while weakening other currencies.

Josh Robb:
I saw the pound...

Austin Wilson:
The pound, yeah.

Josh Robb:
Is pretty low.

Austin Wilson:
It's like a one for one.

Josh Robb:
Yeah.

Austin Wilson:
Lowest since the early 80's or something like that.

Josh Robb:
Crazy.

Austin Wilson:
Crazy. So, a stronger dollar makes international companies' earnings worth less when converted to US dollars, as well as US goods abroad, more expensive.

Austin Wilson:
Now, multinational companies, so these are US companies that have a lot of business abroad. Their revenues and profits when they're in, translated back to dollars, because it's a US company from foreign currencies, are being very negatively impacted by the strong dollar because those currencies are turning into less dollars.

Josh Robb:
I'm getting few dollars...

Austin Wilson:
Yep.

Josh Robb:
For my foreign currency. Gotcha.

Austin Wilson:
So those are a handful of reasons of why stocks are lower.

Josh Robb:
Yep.

[8:34] - Why Are Bonds Lower?

Austin Wilson:
Okay, so that handles one, 60% of a balanced portfolio. Let's talk about the other 40%. Why are bonds lower? Well, the notion of fixed income is really just that, the income is fixed, right? Fixed income.

Josh Robb:
Yep.

Austin Wilson:
So when inflation is higher, bonds become relatively unattractive because the fixed interest payments won't go as far. So, people sell bonds. What does selling do? Selling causes prices to go down, which sends yields higher. Well, that's what we've had, really, this year, very, very sharply.

Also, the increasing of the Fed interest rates does this as newer issues of bonds, they have higher rates, they're more attractive than older bonds. So, people are selling lower yielding bonds, which is also putting lower prices and higher yields out there. So statistically speaking, bonds are having the worst year ever.

Josh Robb:
Ever.

Austin Wilson:
In a long time. Not only due to how much the Fed has hiked rates, because they've hiked rates this much before, but how fast.

Josh Robb:
Yeah.

Austin Wilson:
They're hiking rates.

Josh Robb:
It's very steep.

Austin Wilson:
It's all about the speed there. And generally speaking, the longer your maturity on your bonds, the more interest rate risk you have. And those ones, the longer you are out, the further your price is down. There are some bonds that are down, like a tech stock, like 30%. That's crazy.

Josh Robb:
Yep.

Austin Wilson:
So that is why your stocks, and your bonds are lower in relation to the Federal Reserve. It is a tough market environment out there.

[9:52] - Dad Joke of the Week

Josh Robb:
Let me break up this very, very depressing podcast you're putting out for us Austin.

Austin Wilson:
You're not excited?

Josh Robb:
- With a dad joke of the week, so Austin, what kind of car do chickens like to drive?

Austin Wilson:
Oh man. I like Chicken Run, have you seen that movie, by the way?

Josh Robb:
Chicken Run?

Austin Wilson:
You've never seen Chicken Run?

Josh Robb:
Is that...?

Austin Wilson:
Claymation from the late 90's, I think.

Josh Robb:
Oh, okay, yeah. There's another one...

Austin Wilson:
Mel Gibson was the voice in it.

Josh Robb:
Okay. There's another one out there and it's all about Thanksgiving. I forget what that one's called.

Austin Wilson:
Oh.

Josh Robb:
But it's turkeys, but it's a pretty good one.

Austin Wilson:
I, to answer your question, Josh.

Josh Robb:
You don't...

Austin Wilson:
I love Chicken Run, but I don't know what chickens drive.

Josh Robb:
Okay. They like to drive yolks-wagons.

Austin Wilson:
Yolks wagons.

Josh Robb:
I love eggs, by the way.

Austin Wilson:
Yes, eggs are good. That's a good joke, Josh.

Josh Robb:
Thank you.

[10:34] - Another Cause: Upcoming Midterm Elections

Austin Wilson:
So I don't want to depress you anymore, but I'm probably going to. Other reasons the markets are less than favorable this year for investors.

Josh Robb:
Oh right, the Fed.

Austin Wilson:
Yep.

Josh Robb:
Interest rates. Inflation.

Austin Wilson:
Definitely a big portion of that.

Josh Robb:
We're heading into a season that could cause volatility. That's one more piece.

Austin Wilson:
The season...

Josh Robb:
Walk me through this.

Austin Wilson:
Of volatility. It can be attributed somewhat, not, now what we talked about earlier is going to handle most of the price movements we've seen.

Josh Robb:
Yes.

Austin Wilson:
Now it is also noteworthy that we have midterm elections coming up.

Josh Robb:
That's coming up.

Austin Wilson:
Midterm elections coming up has historically led to more volatility in the markets and worse returns in the markets then non midterm years.

Josh Robb:
Okay. Seems true.

Austin Wilson:
Now, we've had both of those by very wide margins this year. Actually, this year has been more volatile and worse than the typical midterm year. But it is holding true that it is much worse than a non-midterm year. So a lot of the reason this is that markets hate uncertainty.

Josh Robb:
Yes.

Austin Wilson:
And right now there's uncertainty as to the makeup of US Congress, as we enter the next couple years before we have...

Josh Robb:
So, because there's a chance one or both could swing party control.

Austin Wilson:
Correct.

Josh Robb:
In this midterm.

Austin Wilson:
Right now, both the House and the Senate are controlled by the Democrats, by majorities, that for a long time was forecasted very sharply to swing Republicans. And now it's actually looking like they might be...

Josh Robb:
Getting closer.

Austin Wilson:
Split.

Josh Robb:
Yes.

Austin Wilson:
You might, republicans might, I think gain the House, while the Senate is retained control by the Democrats. So again, the market hates uncertainty, until there is more certainty around that you're going to have more volatility naturally because Congress can place a lot of laws in place to change things like tax codes, all kinds of rules and regulations around securities, and what companies can do and the environment and all kinds of things. Just not knowing what that looks like can cause uncertainty in the market. And we're certainly seeing that already. Now there is a bit of good news around this. So, the bad news is that performance through the end of September, not good at all.

Josh Robb:
Not good.

Austin Wilson:
In fact, I think on average, slightly negative through the end of September on average on a midterm year, I'd say we're a little bit more than slightly negative this year, just a skosh. However, the fourth quarter typically, very strong, actually leading to, on average now, very unlikely this year, but on average leading to marginally positive returns.

Josh Robb:
Oh, nice.

Austin Wilson:
So if history is any precedent, expecting hopefully some better news in the fourth quarter, then we had in the first three in terms of the stock market. Speaking of how these things work in terms of a calendar, there's something called seasonality. Seasonality is similar to what we just talked about midterms but looking at years and timeframes in general and what happens and what works and what doesn't work.

So, from where we are, the rest of the month, historically pretty rough. But one-month returns slightly better than average from here, so that's really looking through the end of October. Three-month returns, really looking through the end of the year. Those have been very strong historically from this point in the year.

Josh Robb:
Like 80%?

Austin Wilson:
Yep. Something like that.

Josh Robb:
That'd be nice.

Austin Wilson:
Well, 80% would be great. I'd take a hundred. New all-time highs, that'd be great. No, I'm not counting on any of that, but positive is the theme.

Josh Robb:
Positive movement. Yep.

Austin Wilson:
Let's get some sort of upward momentum anyway and stop the selling. And it's also just at a high level, really hard to deny the forward return potential for either stocks or bonds. From the levels we're looking at today, looking at 1, 3, 5, or especially 10 or more years, stocks and bonds, they're on sale, things are beat down. And, if history is any indication of what to expect now, again, we can't guarantee future returns because of past performance, but markets have cycles. And, we've seen cycles before, nothing's been exactly like what we're seeing. We've seen cycles before.

Josh Robb:
I've seen tri-cycles before, bi-cycles before.

Austin Wilson:
We've seen them all.

Josh Robb:
Uni-cycles before.

Austin Wilson:
Quad-cycles.

Josh Robb:
Yeah.

Austin Wilson:
Is that a thing?

Austin Wilson:
So historically speaking, the markets have recovered.

Josh Robb:
Yes.

[14:49] - Financial Advisor's Thoughts on What to Do

Austin Wilson:
Which would lead us to say that they will recover, it's not a matter of if, it's a matter of when. That's why we try to keep it long-term time horizon. And on that thought of keeping a long-term time horizon, Josh, this is where I talk to my financial advisor, Josh Robb, and I say, "Josh, what do I do?"

Josh Robb:
Yeah. So, lot of volatility.

Austin Wilson:
Lot of volatility.

Josh Robb:
Lot of uncertainty. And especially for young investors, this has, it's been a while since we've had this prolonged volatility. COVID.

Austin Wilson:
It was quick.

Josh Robb:
It was short, three months and we're back to all-time highs. Prior to that 2018, we had a downturn, about 19%, but within about four months we were back up to where we're... So, this is where reviewing your plan is always helpful to say, you got to remember the why. Why am I saving this money? Why am I doing what I'm doing? The why is going to help you stick with it?

Josh Robb:
Now is not the time to abandon your plan.

Austin Wilson:
Right.

Josh Robb:
If you are adding money and you are concerned, dollar-cost average. So, while the market's going down, you continue to add because every time you add, you're buying more shares.

Austin Wilson:
Yeah.

Josh Robb:
So continue to add your money in. If you're young and you're investing these downturns are actually the best thing that can happen for your long-term performance.

Austin Wilson:
Absolutely.

Josh Robb:
So as much as you hear on the news and are worried, as long as you have a good plan and you're investing in a well-diversified portfolio, historically speaking, it's always recovered. And we have to assume that that will continue. With that mindset, continue to add your money. If you have extra cash, I don't know where low is, I don't, I'm not going to be the judge of that.

Austin Wilson:
Not going to call that.

Josh Robb:
But when you're down 20 some percent, it's not a bad time to put some extra cash in.

Austin Wilson:
Yeah.

Josh Robb:
Could go worse. I don't know.

Austin Wilson:
It could.

Josh Robb:
But this is 20% on sale where you were at the start of the year. You mention the Fed's job is to watch the inflation, and the job market. Right now, they're really focusing on inflation. So with their goal of raising interest rates and continuing to do so and leaving them up for a while, avoiding high interest rate is going to be key.

Austin Wilson:
Yeah, and you have to incur that.

Josh Robb:
Yes. Because if the job market is going to suffer, you would be better off with as little debt as possible.

Austin Wilson:
True.

Josh Robb:
Floating rate with, again, if the Fed's going to keep that rate up, you don't want adjustable rates. Keep fixed rate as much as possible, and low as much as possible. I mean that's logical.

Austin Wilson:
Wait on taking on that until rates come back down.

Josh Robb:
Yep. And then as you're heading into the end of the year, depending on how you're investing, there are opportunities. There's selling things that are down, which wait a minute, you just told me never to do that.

Austin Wilson:
What!

Josh Robb:
But we're talking tax strategies here where you replace it with something else.

Austin Wilson:
You're still in the market.

Josh Robb:
You're still invested, but you're going to sell at a loss. Buy something right away that's similar but not the same. So, an example is if I own the S&P 500, I would sell that and buy a Russell or...

Austin Wilson:
Russell 1000.

Josh Robb:
Yeah, like a market cap thing. Still Invested, but I'm diversifying to something different. The idea there is when I sell it at a loss, I get to take those losses and apply them against gains on my tax return. So, all I'm doing is this tax harvesting things that I could use on my taxes. So you're still staying in the market. You're really relatively in a similar thing. You just can't own the exact same thing. So, you got to be careful with that. But use times when the market is down to make those adjustments. If you're looking at doing conversions and stuff, converting when the price is down, saves you taxes, and if you keep it invested, it will grow on the other end.

Austin Wilson:
Yep.

Josh Robb:
So there are some tax-strategy stuff you can implement that would be helpful for you to do while the market's down. So, take advantage of that while it's down by, continue to add money in, and look at opportunities from a tax standpoint are the two big things. And always-

Austin Wilson:
Always.

Josh Robb:
Talk to your advisor.

[18:21] - Invest with Us & Keep a Positive Mindset

Austin Wilson:
Always talk to your advisor. And if you don't have one, feel free to ask us because we would be happy to help you out or talk to you, see if we can help you out in any way. So there is an invest with us tab-

Josh Robb:
That's true.

Austin Wilson:
On our website. Check that out and we would love if you would send us an email, we would be in touch. This was not the most rosy episode ever, but we would just remind everyone that the best is ahead and to keep a long-term perspective and you're really going to be able to avoid getting down in the doldrums on the down days that we've had. Right?

Josh Robb:
Yes.

Austin Wilson:
Again, we're not saying the worst is behind us in terms of the markets, but given enough timeframe, we would say that things should recover and should get back to where we were over time.

Josh Robb:
Yes.

Austin Wilson:
So take out the noise of a day-to-day thing. Take the app off your phone, stop logging in and checking your statements, unless you have to. And just keep a long-term focus.

Josh Robb:
That's right.

Austin Wilson:
It's going to help everyone sleep at night. So, thank you for listening and being here this week. Please share this episode with anyone who may have been asking you, "Hey, what's going on with the markets?"

Josh Robb:
What's going on? I'm worried.

Austin Wilson:
Because, there's a lot of stuff going on and we don't pretend to know everything, but hopefully we can help explain a little bit of what's going on in a way that people can understand. And again, we'd love it if you'd subscribe if you're not subscribed already, and leave us review on Apple Podcast, Spotify, wherever you're listening, leave us review if we helped you out. That would be great. Until next Thursday, have a great week.

Josh Robb:
Talk to you later.

Austin Wilson:
Bye.

Thank you for listening to the Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn't have to. Head over to the Invested Dads.com, to access all the links and resources mentioned in today's show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don't miss the next episode. Josh Robb and Austin Wilson Work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guest are solely their own opinions, and do not reflect the opinions of Hixon Zuercher Capital Management. 
 
 This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.

Timely Data of The Current Markets
Why Are Stocks Lower?
Why Are Bonds Lower?
Dad Joke of the Week
Another Cause: Upcoming Midterm Elections
Financial Advisor's Thoughts on What to Do
Invest with Us & Keep a Positive Mindset