Welcome to stock market volatility. Today the market clawed back some of its big losses from last week’s correction, now what’s in store tomorrow or next week or next month? What should you be doing with your portfolio, and how will this affect your retirement? These declines can be unnerving, particularly in the face of sensational headlines and rabid news coverage. With that in mind, Joe Anderson, CFP®, Al Clopine, CPA and Brian Perry, CFP® Director of Research provide a brief explanation of recent market movements and what can be blamed for the cause.
- (00:28) Joe and Al on Last Week’s Market Correction
- (11:00) Brian Perry, CFP® on Why It Happened and What You Should Do
- (20:20) Market Volatility for Millennials and How To Make Sense of the Market’s Wild Ride
Welcome to stock market volatility, today on Your Money, Your Wealth®! By today’s close, the market had clawed back some of its big losses from last week’s correction, with the Dow Jones rising 1.7% and the S&P 500 up 1.4% – but what’s in store tomorrow or next week or next month? What should you be doing with your portfolio, and how will this affect your retirement? Here with some guidance are Joe Anderson, CFP®, Big Al Clopine, CPA, and Brian Perry, CFP®.
00:28 – Joe and Al on Last Week’s Market Correction
JA: Well, the year started out good, until February.
AC: It did. January was great.
JA: January. All-time highs. Then all of a sudden we’re in correction territory. So correction is what? Down 10%?
AC: 10%. Right. And hopefully, your portfolio is not down 10%, because you had some safety. That’s the reason why we recommend globally diversified portfolios, and some of that’s really safe money. Short term, fixed-income type investments. Bonds, which, with interest rates going up, they haven’t exactly killed it either. But at least they’re staying somewhat stable.
JA: This is interesting to me though. Because it’s not like really bad news that came down the information wires, it’s not like it’s like a geopolitical mess, or heading towards a recession. What happened is that all of a sudden we kind of take a look at wage growth. Wage growth spikes a little bit, people are making a little bit more money. Corporate profits look pretty good, and they’re paying their employees a little bit more. But it was higher than expected. And so this is where it always boils back to. You hear news, it doesn’t matter if it’s good news or bad news. Is it as good or as bad as the market expects?
AC: Yeah I think that’s a good way to say it. Because the news actually is pretty good right now, but we sort of, now in retrospect, maybe we got a little ahead of ourselves. But here’s the crazy thing: there’s no way to know that after it happened. And so now that that’s happened, now people are crafting things like saying, “well, it’s the spike in the interest rate and people are concerned about inflation,” and yeah, those are logical reasons, but it’s a little bit more basic than that, at least in my opinion, which is, I think we were hoping for this tax law, in terms of investors, because then there’d be less corporate tax. And so then corporates would have more profits, and if they had more profits, more money goes out for dividends, hence the stock is worth more. And so the market kind of got built up in anticipation of that, and then, actually, we did get the tax cuts, it did happen. The market in January said, “this is great,” but maybe now we got a little ahead of ourselves. But when you look at a correction like we’ve had, you also have to realize how much it’s gone up in the last month or two, and people that got out of the market in the middle of last year, they’re still way lower than they would have been had they stayed in.
JA: Sure. And this is interesting because this run we’ve had since 2009, for the last couple of years, people have been anticipating it. It’s just like, “I know it’s going to happen, I know it’s going to happen.” So they’re not necessarily enjoying it. It’s like when you’re on a diet, and you eat a fatass cheeseburger? (laughs) It tastes so good but you feel guilty eating it. I think that’s where some people were. It’s like, “man, this market is good, it feels good but I know it’s going to correct, I know it’s going to do something here.” So people got jittery, and then now it happened, and there’s a lot of investors that never probably experienced this before because, over almost the last 10 years, we’ve had nothing but a great run. The volatility to put in perspective, we’ve seen fluctuations of what 5% maybe, over the last I read 200 some odd days? It was 3%. So you’re looking at all-time highs, drops 3%, all-time highs, drops 3%, if you go back even further, it was only like a 5% variation. 14% is normal.
AC: Yeah and in fact, I have it right here, last 400 days, the S&P 500 went without losing over 5%, which is almost unheard of. The last time we’ve done that, that long a period, was in the 1950s.
JA: Yeah. So then you hear the headlines. The Dow is down 1,000 points. 1,200 points. 600 points. Those are huge numbers. But if you put it in perspective of percentage, the Dow is not at 10,000. When you lose 1,000 at 10,000 that’s a big deal. But at 26,000, losing 1,000. That’s four percentage points. So it’s like, “man, what do we do? How do I get out?” And it’s funny, because we manage a couple of bucks, and we got a few thousand clients. And you know, there wasn’t a lot of panic. But the robo-advisors, they kind of blew up. The whole thing crashed.
AC: Well they did, and that’s where, a robo-advisor is kind of a computer advisor, if you will, kind of figure out your allocation via computer algorithm. And the problem with that, as we know, is the investors are human. And when things like this happen, the human touch, having an advisor telling you “this is normal, this is what’s expected. And so, let’s not worry too much about it.” I mean, I know it’s easier said than done. But the point is, don’t make any rash changes right now, just because we’ve had a couple of pretty good declines this last week.
JA: This is actually very healthy for the overall market. And I think it’s healthy for us individuals to take a step back because complacency is a real thing. And there was overconfidence in people’s ability to take on a little bit more risk than they might have should. It’s like, “hey, I’m a little bit behind in my retirement goals. I’m not getting the returns that I need, I need higher returns. Let’s get into more stocks.” And there are some individuals that now, right at that time, it’s, “oops, I probably shouldn’t have done that.” August 2011 was the last correction. The S&P lost 6, almost 7% in a day. But at that time, the European debt crisis was in full swing. Remember when we had the downgrade of the U.S. Treasury, from AAA to double-A-plus. But it swung back, and things like this will happen. We just haven’t experienced it, and I think that’s why people might be – I don’t even know how many people are actually freaking out. I think it’s the media that wants to play this noise, to potentially sell newspapers and magazines and get the headlines.
AC: I think, Joe, most of our clients, and hopefully most of our listeners, realize this is normal stuff. This is the reason why you get paid more by owning stocks, by owning equities. They are more volatile, it’s not always a straight ride. A straight ride is a bank CD, but that pays half a percent interest. If that, depending upon the term. I just went to a larger bank to get their CD rate. It was 15 basis points. A 100 basis points is one percent. But at any rate, the point is simply this: this is expected. It’s normal. This is not a time to panic. In fact, there are some opportunities. It’s a chance to perhaps rebalance your portfolio when stocks are down. It’s a great time to be buying a little bit more stocks. Might be a time to tax loss harvest. It’s probably also a good time, Joe, just to just to make sure – it’s a little bit of a wakeup call – make sure you got the right portfolio for you and your goals.
JA: Take a step back, put things in perspective and say, “what are my timeframes, what are my goals? How should my portfolio be allocated?” Because volatility is back. And volatility is actually a really good thing for people that are saving money. Because when the market dips like this, it’s a great time to buy. It’s a great time to do, like you said, some tax strategies. I did a small Roth conversion. Tax loss harvest your accounts.
AC: Yeah there’s some real opportunities right now, but it does amaze me with the press. Like I just read an article that, I forget who is quoting who, but they said, “these two analysts got it right. They predicted the correction.” And it’s like, really? The last 10 years, people have been predicting a correction every single day. So finally it happens, these are the two guys that got it right?
JA: Wage growth, people are making more money. So what does that mean? It’s like OK, people are making more money. Companies might have to increase prices to pay for the additional labor costs, and then that means inflation. And then, oh well, wait a minute, then interest rates are going up, so now we have inflation and interest rates because if we take a look, we’ve almost been in a zero interest rate environment. Interest rates need to go up at some point! So sometimes it hurts a little bit to get things back into balance. But don’t abandon ship. You have to look at, how much stock allocation should I have in my overall portfolio? How much bonds should I have? What income am I trying to derive from the overall portfolio? What is my frame in regards to the goal of when I need the cash flow?” But I think more importantly when you look at retirement, it’s not necessarily your retirement date, it’s end of life. So that could be another 20, 30, 40 years. So you absolutely need to continue to have growth in the portfolio. If you’re younger, if you’re saving money into your 401(k) plans, I’d want this thing to crash even more, because then you’re still buying these really good companies. Corporate profits are good. If you look at the S&P 500, fourth quarter estimates, a lot of them beat expectations. So things are really good in that aspect. So if the market goes down another 5%, keep buying.
AC: Yeah. And people will ask, “well what’s the bottom? When should I be buying?” And the truth is, nobody knows when the bottom is, so buy a little bit now. If it goes down some more next week, buy a little bit more next week. If it goes down the next week, buy a little bit more. In other words, you’re getting better prices than they would have been had you bought in January. And it’s like, any other time, Joe, when a store puts their items on sale, we flock to buy them. When stocks go on sale, we would flock to sell them. It’s like, come on, let’s just think about what’s going on here. Things are cheaper now.
11:00 – Brian Perry, CFP® on Why It Happened and What You Should Do
JA: We got Brian Perry on the line, Director of Research, Chartered Financial Analyst, Certified Financial Planner. Brian, it’s been kind of a rocky week here in the markets.
BP: Yeah, that’s saying the least. We’ve had some of the highest volatility we’ve seen, at least going back since the financial crisis.
JA: So, what the heck is going on? Al and I put our spin on it and I’m sure you can correct us. I don’t think you’re going to even close to our analysis.
AC: I was actually reading your e-mail, so I think I’m pretty close. (laughs) But what would you have to say about this market? What’s going on?
BP: Yes. By way of kind of preview, stocks were really highly valued, economic fundamentals are good, corporate profits are going higher. We’ve got tax rates that have gone down for corporations, so that’s all good. But stocks, if you look at long-term cyclical P.E. ratios, which is a good way of looking at them, we’re in the low 30s, right around 32 or something, with a long-term average being more in the mid to upper teens. And so stocks are at high levels, and it doesn’t sound good, but sometimes stocks go down just because they go down. Particularly when they’re overvalued. People find an excuse to start selling, and then they look around and see that we’re fairly fully valued, we’ve had a really good run since Trump was elected, and even going back further than that to 2009, and let’s just take some profits. But the more proximate cause that’s being blamed for the recent selloff is really, inflation fears. And inflation fears have kicked into the bond market, where you’ve seen the 10 year Treasury go at the end of the year from a2.4 to around a 2.85 or so. And when interest rates go up, oftentimes the stock prices fall. And so we’ve seen that. And then stocks begin falling, and that fall has been exacerbated by something, to get a little bit technical, called risk parity funds, which essentially are a class of investors that are short volatility. So they’re betting that volatility will stay low. And when you see a spike in volatility like we’ve got in this past week or two, it becomes self-perpetuating, where these funds and these investors are forced to sell, and the more they sell, the more they have to sell, and it becomes a bit of a snowball effect running downhill. So that seems to be the proximate cause of it. But at the end of the day, it could just also be good old-fashioned profit taking, due to high valuations and a really good run that we’ve seen over the last several years.
AC: So Brian, why would it happen now, versus two weeks ago or a month ago or two months from now?
BP: You know some of the immediate causes, nothing’s ever a worry to the market until it is. And so you saw interest rates creeping up throughout January, and the market was like, yeah, interest rates are going higher and so on and so forth, they’re watching, watching, and then all of a sudden it became a concern. And I think what really led to that was, about a week ago, we had the unemployment report that comes out each month, and you saw in that a tick up in average hourly earnings. And that’s good news for the American worker, the fact that wages are going up, and the fact that unemployment is very low. But from an inflation perspective, if there are not that many people out of work, it means that employers have to work harder and pay up in order to get employees. And in general, if you look at a historical relationship, the more money people make, the more that’s in their pocket, the more they spend, and the higher inflation. And so the market kind of saw that, got a little bit panicked. You also, just in the last week, have a new Federal Reserve Chairperson coming in. So Janet Yellen went out, and Jerome Powell came in, and so there’s a little bit of uncertainty around exactly how the Fed – there’s been a lot of turnover on the board – how they’ll approach monetary policy going forward. And I think it all just came together. And again, turned into a sell-off, which then got exacerbated by some forsellers. You know, the most important thing to do, of course, is to not panic, and keep it in historical perspective. And so, although the amounts that we’ve seen on some of these declines have been very large, a thousand points or more, we started this past couple of weeks ago the Dow at 26,000. A point move of 1000 points off of that base is very different than if you look back 10 or 15 years when the Dow was at 7, 8, 9,000. And so, although we’ve seen large point moves and reasonably large percentage moves, we’re still down about 10 or 12% since the all-time highs, and we’re still up quite a bit if you look at a 12 month horizon – we’re still up almost into a close to 20% depending on what market you’re looking at. So keeping it in perspective I think is important. But the other thing is rebalancing a portfolio. And so it’s never popular to sell stocks when they’re going up, we hear a lot of people that want to buy more when times are good. But a disciplined rebalancing process, like we’ve been looking at over the past couple of years, of every time stocks move a little bit higher you sell a little bit, take some profits, and reinvest it into maybe what hasn’t gone up as much, positions you well for fall like this, and then you do the opposite. If stocks fall enough so that now you’re a little bit underweight, you should go out and buy. And one of the most difficult things there is to do is to buy when things are falling. But that’s when you make money. You don’t make money necessarily by selling at a high price. You make money by buying at the right price, and having that disciplined rebalancing process, I think that’s one of the things that people can do that can really help them meet their financial goals, and then help them stay the course. Warren Buffet said, and you know, sometimes this gives me nightmares just thinking about it, but “when the tide goes out, you see who’s swimming naked,” and sometimes that’s a scary thought, but yeah, nobody thinks about these things as much when times are good. They’re making money, their balances are going up, house prices have been going up, people are feeling good about their finances, and then you get something like this. It’s time to step back and look at it: are you still on track to meet your goals? Is this too much risk for you? Are you up at night worrying about your portfolio? Do you think you’re going to be OK? If you answer those questions is no, or you’re not sure, it’s time to re-evaluate and make sure that you are on the proper track, and you do have the right planning in place, and your asset allocations where it’s supposed to be. Because the people that have an appropriate 50/50, 60/40, 70/30 stock/bond mix, whatever their right allocation is, they’re doing OK right now. They may not be having fun, but they’re cruising along. It’s that people that had been up at 80 or 90% stock allocation because times are good and thought everything was going to stay good, that now they’re panicking a little bit I think.
JA: Yeah but I think too, it boils down to age timeframes. If you’re in your 40s and it’s in your retirement account, you still have 100% stock portfolio, I don’t think you make any changes there. But if you’re 65, looking to retire at 67, if you have a full stock portfolio, then maybe you might want to re-look at things. But I think the problem is, when things like this happen, it shocks people to maybe make the wrong choices and change at wrong times. And there are two points to this: one is that some individuals might just jump into cash. Other people that should maybe have a 60% stock portfolio, 40% bonds, just hypothetically, but they may be 100% stocks, they might not go to that portfolio, even though they should go into that portfolio because they’re down a little bit now and they want to get caught up. But who knows? The markets could fall another 30%, and if you need the money in the next couple of years, you have to really re-look at that, and sometimes you’ve got to say, “if I had a 100% stock portfolio I should be in a 60/40, I was at 100% because I was complacent, and I liked seeing these big returns. But there’s no way I’m going to sell now, I’m going to ride this thing out.” Well, it could take you a long time just to recover.
BP: I agree 100% and certainly that what they’re trying to accomplish on their time horizon is going to determine, some people do belong in a 100% stock portfolio, but regardless of what the appropriate mix is, you always want to look at it with a fresh ledger. And so, going back to my days as a bond trader, we would always say, “if you’ve got a position you want to evaluate it every day as if you didn’t have that position in place.
In other words, you want to sit down and say, “Does what I’m doing makes sense in a vacuum? Is this the right approach?” Regardless of what happened in the last week or the last day or the last year, you need to constantly re-evaluate that, and I think this is a good opportunity for people to sit down and say, “is the approach I’m following the right one, doesn’t make sense,” because to your point, yes, if you’re in that 100% stock portfolio and now you’re afraid to move out, well yeah. It’s could turn into a major bear market and we could go down another 30%. The flipside is, for the person that should be 90% stocks, that’s only 50% stocks, and now is afraid to move in, well that could be the bottom. I mean maybe people move into cash now or something like that, this could be the bottom, it could be a temporary stopping point on the way to much higher levels. Nobody knows. So it’s all about what the appropriate mix going forward, and setting that in place and then trying to stay as close to that as possible.
JA: Awesome stuff Brian. I appreciate your time. I know you got a busy day ahead of you. All right. That’s Brian Perry folks he’s our Director of Research there at Pure Financial Advisors. The show’s called Your Money, Your Wealth®.
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20:20 -Market Volatility for Millennials and How To Make Sense of the Market’s Wild Ride
AC: I have one more observation, as a follow up on what Brian Perry just said about the market. For those of you that are millennials, maybe you’re in your 20s, maybe in your 30s, you may not have even seen a down market – at least in your investment experience. Maybe you did with your parents when you were teenagers, but it’s a time when there could be a thought, if you’re not used to a volatile market, or a market that corrects, it’s like “well maybe the market doesn’t work anymore, and so I should just stop putting money into my 401(k)” when the exact opposite is what you want to do. You want to keep funding your 401(k) because now stock prices are cheaper. You’re not going to need your money for decades. So this is actually really, really good news for you. It allows you to continue to increase your investments while stocks are cheaper. So don’t assume now that stocks don’t work anymore, just keep your investment strategy, additional investments, going.
JA: I got a couple more things: Jonathan Clements, he’s an author, I’m a big fan of his, and he wrote something in MarketWatch. Just a few thinking points or talking points of what you should be thinking about. A couple of things. He says, “I don’t know, you don’t know, nobody knows. The market turmoil over the past week feels like a sea of change. Our instinct is to try to dive in and figure out what’s going to happen in the months ahead. But in reality, no one really knows.” You want to keep things in perspective. We’ve talked about that. We’ve suffered so far 10% dip – a little bit more than that – after an astonishing run, the share prices of the S&P climbed 292% since March 9th of 2009. 300%. So there isn’t one strategy for everyone. So you might be listening to radio shows and trying to find that silver bullet. OK, well what are they doing? Let’s talk to my neighbor, let’s talk to my co-workers. You know that water cooler mentality? I think potentially that really blows people up because they might be talking to someone, and you need to dive in and ask a lot more questions of what that particular individual is doing, how much money do they have? How much money do they make? What’s their tax situation and what are their goals? Versus saying hey, I’m buying XYZ stock, or hey I’m buying XYZ mutual fund. Be very careful with that, because everyone’s situation is totally different. So if you’ve been sitting in cash, waiting for a great buying opportunity, well you don’t have to wait any longer, he says. A couple of other things here. Even if you’re happy with the portfolio you hold, you may want to take advantage of the market decline, assuming it continues, to rebalance back to your target portfolio. Pundits talk about the strength of the U.S. economy, including last year’s fairly decent economic growth in today’s low unemployment rate. With the recent tax cut layered on top of that, it’s all true. Problem is, investors look forward, not back. The economic news seems like to stay good for at least another year, but maybe investors sense it won’t be good enough to justify the current share prices. So who knows what’s going to happen tomorrow and next week and next month?
AC: That’s right. There’s actually virtually no way to predict. And so, I guess what we’re saying is, take a deep breath. It’s a chance to reflect. Do I have the right portfolio for me and my goals? Should I consider rebalancing right now, now that stocks are down and they’re cheaper? Maybe they’re down enough where I can take some of my safe money, my bond money and buy a little bit more so that I have the right allocation I want. Also, you want to be considering tax loss harvesting, which is, for assets outside of retirement accounts. And this is really important to be thinking about right now, because if you bought mutual funds, or stocks, perhaps in the last month or two, they may be in a down position. And here’s the thing: you can actually sell that position, if it’s outside of retirement, create a tax loss, and then that tax loss goes on your tax return, and it nets against all future capital gains. And if you don’t have any capital gains this year, that’s all right. The IRS says you can take $3,000 of that loss against ordinary income. You carry the rest over until next year. And then you go through the same test again. Do I have any capital gains? Yeah, I got $10,000 of gain, so I can take my loss, I can net that against the $10,000 of gains. Now these opportunities for tax loss harvesting, sometimes they don’t last very long. We don’t know. The market may come back quickly. It may not. It’s awful hard to say. But what we do know is, when markets do decline, and you have assets outside of retirement that have gone down, it’s a really good opportunity to sell, create the loss. Now I don’t want you to just go in cash – buy something that’s similar, so you’re still in the market. That’s probably one of the most important things. I’m not telling you to purposely lose money and feel good about it. What I’m saying is, you already lost money. Sell a position, let’s create a tax loss, now buy something similar, so that when the market does recover, you’re still in the market. So the integrity of your portfolio is the same time.
JA: Conversions is a really good strategy right now.
AC: Right. And why? Because with Roth IRAs, you want to put asset classes that have higher expected returns, like stocks. Stocks are a little bit lower than they were a month ago.
JA: Yeah, you know, I make IRA contributions, and then I convert them to Roth. And so I make that IRA contribution in the beginning of the year, and I totally forgot to convert it. And so I was like, this is a pretty good time. So the contribution limit is $5,500. So I think the balance on my account was probably like $4,800. So I did a little conversion there. And then when the recovery comes, I just have those more shares. The recovery is going to happen in my Roth.
AC: And that’s right. And the truth is, the market may decline further, but when you look longer term. So you’re in your early 40s, so you’re not going to touch your Roth for decades.
JA: Yeah. Well, might have to after this. (laughs) Thank God for FIFO tax treatment so I don’t get penalized for that! All right, that’s it for us – we’ll see you again next week. For Big Al, my name’s Joe Anderson. The show’s called Your Money, Your Wealth.
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