Listen to a special market update from President and CEO Peter Mallouk and Director of Financial Education Jonathan Clements.
Transcript:
Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning. I’m talking to Peter Mallouk, President of the firm. It’s Monday, April 7. We just came off a rough week for the U.S. stock market on Thursday and Friday alone. The S&P 500 fell 10.5%, clearly a big number and a scary time for a lot of investors. So Peter, Donald Trump was talking about tariffs six months ago. Everybody knew this was on the agenda, and yet suddenly now the tariffs are reality. Investors are freaking out. What’s going on here?
Peter Mallouk: Well, we’ve got two big things. First, the markets were somewhat unstable before this. This is a minor part of it, but it’s worth noting. The S&P 500 was negative year-to-date led mainly by the Mag Seven, which were in bear market territory already. They were down as a group over 20% after an epic decade run where they literally outperformed everything in the world, emerging market stocks, international stocks, bonds, the rest of the S&P 500 and small U.S. stocks, and they really had a major pullback and taking a breather, lots of reasons.
We had competition coming out of China and other things, but the main thing was the market was generally priced to perfection. Now, President Trump had been talking, as you pointed out, Jonathan, about these tariffs even during the election. He was very clear he was going to do this, and even the days leading up to it, he was clear he was going to do it. So why did the market really get hit hard during the announcement? When I say during the announcement, I mean actually while he was announcing and showing a chart of the tariffs on different countries, the market started to implode. And the reason is, up until that moment, he had been very specific about what the tariffs were going to be.
First he said they were going to be targeted, and then he said they were going to be reciprocal. This was the theme through the election. This was the theme during the first few months in office. This was the theme the day before he announced the tariffs. But when he announced the tariffs, they were not targeted, they hit everybody, and they were not reciprocal. They were based on deficits, which makes, look, I don’t care what side of the aisle you’re on, that makes zero sense, no sense whatsoever to base it on the deficit. So that really resulted in enormous tariffs on almost the entire globe, which means every single thing coming into the United States, everything, no exception, there might have been one or two very minor windows of exceptions, were going to have higher taxes imposed on them, which, the market immediately said, “Well, the consumer is going to get hit very hard. They’re going to pay more for almost everything, and corporations are going to get very hard because they’re going to pay more for almost everything.”
So you saw the market take a big, big hit on Thursday and Friday while it soaked that in and while people debated what the outcome was going to be. If people really believed this is the game plan and that these are going to stay in place, we’re not going to have negotiations, people are going to move their factories — Nike, Lululemon, all of these companies are going to move their factories, Apple, to the United States, and we’re going to do all of these things here, and that’s going to take a couple of years to get done, and then that’s all going to happen — the market would have been down 30%, 40%, 50%. So it didn’t totally buy that, but it also did not buy there was going to be a quick resolution either, which is why we saw the two-day very, very big hit.
Jonathan: And it looks like the hit is not over. Here we are early on Monday morning, it looks like foreign markets are down sharply, and it looks like the U.S. stock market is going to be down sharply again today. Why is this carryover effect, Peter? Why didn’t this end Thursday and Friday?
Peter: So over the weekend, we’d had a couple of things happen. So, first, we had Vietnam and some other countries immediately reach out to the Trump administration offering to waive tariffs 100%. Many, many other countries came to the table as well, India and others, major countries. And there was some school of thought that, okay, well, we’re going to negotiate with these countries one at a time. And Trump basically said, “Thanks for calling, we’ll get back to you.” So the market’s taking this as a, well, we can take the quick resolution piece off the table, and then the camp that believes that there’s not going to be negotiations, that camp was solidified quite a bit.
Now, there’s basically two general outcomes here in terms of what the plan is, lots of outcomes of how the market’s turned out and the economy turns out. But in terms of what the plan is, one of those outcomes is that we can take the Trump administration at their word. We had people from the administration on TV today saying, “Look, all these jobs are coming back to the U.S.” And I’m seeing people saying, “Well, what do you mean all the jobs? What about people putting screws in the iPhones?” And the answer was, “We’ll bring them back to the U.S. and eventually robots will screw together the iPhones and the other things Americans are going to do.”
So I mean they’re selling this hard over the weekend. So really sticking with that position, even seeing that the markets are getting hit pretty hard. Now, if that were really to happen, let’s play this scenario out. Think about a rational CEO of a major U.S. corporation that does most of their manufacturing overseas and then brings to the United States. Is that CEO calling a meeting today and saying, “Hey, everybody. Well, these things, these are the new rules. So let’s build a plant here. Let’s shut down all our operations overseas as quick as we can. Let’s make everything in the United States. Lay out a game plan for me. Okay, that’s going to take 24 months. That’s okay, because this is how the world’s going to be.”? There’s not a single CEO in the United States of any company that’s going to do that of any major company.
What they’re going to do is they’re go, “Well, let’s wait and see. Well, I don’t know what’s going to happen. Maybe it’s a negotiation, maybe it’s not a negotiation. Maybe it’ll go a week. Maybe it’ll go a couple of quarters, maybe it’ll go a year.” But you are not making this huge capital investment and huge strategic change based on a couple of months of this. You are going to wait quite a while. And the reality is, how much of that can the economy take? Because when you have uncertainty, what any reasonable individual or corporation does is they stop deploying capital because they don’t have certainty about where it should go. And that causes not just the markets to collapse but actually the functioning economy.
Jonathan: You’ve laid out essentially the deep recession scenario. Is there a happier scenario where the economy keeps bumbling along, where the stock market finds its footing and perhaps recovers some of the ground lost? What would that scenario be?
Peter: Well, I mean that first scenario, I mean, just to be clear, that’s literally the stated objective of the administration at present. You know, the second scenario is, okay, this is just a really hardcore bluff. This is a big negotiation, big positioning. He’s willing to take a big, big short-term hit in the markets that he views as temporary in exchange for getting all of the countries lined up and negotiating better deals. So let’s play this one out. If that’s really the plan, then you don’t accept a deal with Vietnam today. You don’t accept a deal with India today because it signals to the markets and the rest of the world that that’s your ultimate outcome and you’re likely to get less concessions. And he’s trying, I suppose, to accomplish a couple of things at once, and I’d put them in three big buckets.
One is trying to get American goods into other countries without taxes placed on them. People are quick to say, “Well, tariffs are bad,” including me, because when you bring something in the United States and you charge more on it, you drive the price up. But it’s also bad when other countries do it, right? So one would be he removes the tariffs from other countries. This is amazing for the American worker because now they can produce more that gets sent overseas. So it accomplishes a great outcome for the American production, the American worker and American companies, because they’re able to sell more overseas. This will automatically happen if he gets tariff concessions from other countries. The reason we know this is there wouldn’t be tariffs unless it would automatically happen without them. The whole idea of the tariff that other countries place in the U.S. is to protect their internal production from U.S. competition.
Second, he’s been very clear that there are other things he wants. He’s never talked about them with tariffs at the same time. But we know he wants the Panama Canal control from China. He wants to take TikTok from China. He has things he wants from Mexico, Canada, and so on that have nothing to do with tariffs. I can see those being folded into these negotiations and quick settlements don’t give you the leverage to do that. And third, and this is interesting because he’s mentioned this twice during the market meltdown, including this weekend. He’s, on social media, stated and in public stated that he wants to see interest rates come down. He thinks the Federal Reserve should lower rates. This is a big story in the background. The national debt is catastrophic.
It’s catastrophic because under the last two administrations, under the Trump administration, the Biden administration, the national debt rocketed — this is the single biggest economic threat to the future health of the United States. It is absolutely crushing, absolutely crushing the working class because to get out of that you have to have, in some instances, you have to have high inflation. High inflation makes the rich richer because they own the things that inflate, stocks and businesses and houses, and it kills the working class that’s getting a paycheck and going home. The deficit is absolutely killer. And he talked in the election about trying to get that deficit under control. Well, we know that a lot of this debt is going to refinance later this year and next year, and if he can get interest rates lower, we can issue the new bonds at lower rates, make a bunch of Americans happier with lower mortgages at the same time.
So you see him pressing for that too. We’ve also seen the bond market tell us that it anticipates now multiple rate cuts this year based on where the markets are. The weaker the markets are, the less people are likely to spend because they don’t have any certainty about how things are going to look. And the more likely the Federal Reserve will lower interest rates to encourage people to go back to spending and buying. So these are three different objectives that he will have more leverage if he holds the line. Now, this is not what they’re saying they want to do. I think most people don’t believe this any longer. I think most people believe that what he’s saying is what he actually wants, which is to bring almost all these jobs back to the United States, leave most of the tariffs in place across the board, that would be a very, very bad outcome.
Jonathan: Peter, you mentioned this huge deficit. How are we going to unwind this deficit? Is there another path that can allow us to escape from this crushing debt load?
Peter: So if you think about the deficit, one way to get it under control is you lower interest rates. Just like lowering a mortgage makes it easier for a household to make those payments. You see somebody with a lot of credit card debt, interest can become the biggest payment. That’s what’s happening to United States with the deficit. So one advantage of lower rates would be issuing new bonds, as the old bonds roll off, issuing new bonds at lower rates. The alternative is much more painful, which is having very harsh cuts. And we know with the DOGE program, they’re trying to cut a lot of expenses, and that’s its own political hot potato that’s beyond the scope of our conversation here. But the cuts to get balanced without lower rates would be much, much more severe.
So if you think about an example of a household, they’re making $100,000 a year, but they’re living a $500,000 life. They’ve got a full-time chef and they’ve got a full-time nanny and they’ve got a full-time landscaper, and they sit with an advisor and the advisor says, “Hey, bad news, your credit card debt’s going up to live this $500,000 lifestyle on $100,000 paycheck. I need you to cut your expenses severely or you’re going to be bankrupt. So this is the way out for me to help you.” So how do they do that? They fire the gardener, they fire the chef, they fire the nanny. You’ve created this little mini recession in that household, right?
All of a sudden some people are out of work. The household people are spending less. In the short run, you have a recession. But in the long run, this household has saved themselves from bankruptcy. They recovered. Cuts alone are just too painful. So they want to have less spending, lower interest rates and cuts. That’s probably the least painful way out. So you see that one constant theme that we’re hearing in the background is the Trump administration trying to pressure the Federal Reserve to lower rates.
Jonathan: So Peter, we’re facing tough economic times. Individual investors are not going to be able to solve these tough economic times. What we’re worried about is our portfolio. So what should we be doing in the weeks ahead?
Peter: Well, first I can say that this is the number one thing on the minds of everybody at Creative Planning, which is to make sure that every single client comes out of the other side, not just in one piece, but ahead, whenever this thing has turned around. And I have a high degree of confidence that’s exactly what’s going to happen. So I’ll just say a couple of things that our long-term clients will be obvious, but to our new ones, maybe they’ve only heard it a few times before. First, the interesting thing about bear markets and corrections is when we look at them historically, they seem like, “Oh, of course. Of course, I’m going to hold through that. Of course, I’m going to buy into the weak market. If I’m buying every week in my 401k, of course I’m going to keep doing it.” It’s really easy to say historically, but when you’re in the middle of it, it’s traumatic.
And the reason it’s traumatic is because the storyline is always different. It’s a terrorist event or it’s COVID, or it’s the housing crisis. You know, this time, it’s tariffs. The storyline is different. It’s not the same story fed to us every time, which is part of what creates the panic, because we never — I put charts all weekend on social media around this — and people say, “Well, but this time is different.” Well, this set of facts is different of how we got here, but I think the story of the economy finds a way eventually is a pretty persistent, reliable story. The first key of being a good investor is don’t cause self-harm. Don’t cause self-harm. Don’t make a mistake. Don’t be like the thousands of people, probably soon to be millions of people, that are going to convert to cash. They are going to be severely punished for that mistake.
One of the most recent times with record movement to cash was the day before the COVID crisis turned around. So I remember, I was doing a video the night that the market hit the bottom talking about the same thing that I don’t know when the market’s going to turn. It’ll be a day, a week, a month, I don’t know when it is, but selling would be a mistake. The next day, the market rallied. We don’t know when that’s going to happen. This, “Oh, I’m going to sit on the sideline and wait for things to work out,” that’s not how the markets work. Right now, the way to think about this is there’s a roadblock. When the roadblock’s removed, the traffic is going to move again, and the market tends to spring back very quickly. “Oh, Peter, give me an example of that,” okay, I’ll give you a few. COVID would be one, and the ’08-’09 crisis would be one.
I remember in March 9 of ’09 — and I might be a day off, I believe it was March 9 of ’09 — the market rocketed, I mean rocketed in one day, and then the rest of the month went on an absolute tear recovering, and if you were on the sidelines, it’s over. You never saw those numbers again. So first, do no harm. Second, there could be opportunity here. If the market continues to decline, it depends very much on your portfolio, it can make sense to sell bonds and buy stocks. If you’ve been sitting on cash in your checking account, savings account, hoarding a little bit of it, this could be an interesting time to deploy it here. Now, the next week, the next month, I don’t know where the bottom is. Nobody knows where the bottom is, but you’re deploying into weakness is the idea, not trying to call the bottom, it’s impossible.
And let me say this about anywhere where you hear somebody telling you decisively, “Hey, this is when to get out and this is when to get in.” If there is any advisor or pundit that says with any degree of confidence, “This is when to get out and this is when to get in,” that person is one of two things: a fool or a liar. Either way, you don’t want to take advice from them. It’s the ultimate warning sign of who you should listen to. If somebody gives you conviction about when things are going to turn, immediately get your advice somewhere else. My message to investors: don’t make a mistake; stay strong and look for opportunity to deploy more capital or to even become more aggressive in your portfolio.
And I’ll say this to Creative Planning clients. A lot of clients go, “Why am I doing this financial plan? I’m already financially independent or I’m clearly on a path to financial independence.” The reason we do the financial plan is we’re trying to figure out how much money do you need for the next 3, 5, 7 years, and then we make sure that money’s not at the mercy of the market. That’s our advice to clients. So the whole idea is no one should be at the mercy of the market in the first place. When I see people saying, “Oh, well, what about people that are retired? What about people that are living on their portfolios?” Well, I mean, that’s a third of Creative Planning clients. None of them are at the mercy of the market if they’re following our advice. They have enough money to meet their needs.
Why? Not because we knew this crisis was going to happen at this moment in time, but because we know stuff happens all the time. On January 2, I posted online, “Hey, the last year the market went straight up, very little volatility. It’s not normal. What’s normal is corrections and bear markets. And it won’t surprise me, and it shouldn’t surprise you if we see one in the next year or two.” We always plan on something happening. That’s why you have a part of your portfolio that’s in bonds. The expectation of bonds is they’re going to underperform, but they’re there for times like this.
Jonathan: Peter, thank you for the words of wisdom. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to Peter Mallouk, President of the firm, and let’s hope for at least half-decent week ahead. Thanks for listening.
Disclosure: This is designed to be informational in nature and does not constitute investment advice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy, including those discussed, will be profitable or equal any historical performance levels.
