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Bearing Up

Published on October 31, 2022

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

This month, Peter Mallouk and Jonathan Clements discuss investor sentiment 10 months into the current bear market, share why midterm elections aren’t cause for financial worry and provide useful tips for fraud prevention.

Hosted by Creative Planning Director of Financial Education, Jonathan Clements, and President, Peter Mallouk, this podcast takes a closer look into topics that affect investors. Included are in-depth discussions on financial planning issues, the economy and the markets. Plus, you won’t want to miss each of their monthly tips!

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Jonathan Clements: Hi, this is Jonathan Clements, Director of Financial Education for Creative Planning in Overland Park, Kansas. With me is Peter Mallouk, president of the firm, and we are, Down the Middle. The 2022 Bear Market has now been dragging on for 10 months and many investors it seems, are growing increasingly glum. Based on the emails I’ve been receiving and the comments I hear, many folks think this bear market is fundamentally different from earlier market declines, that the bear market won’t be over anytime soon and indeed that there could be another leg down. So Peter, is this sort of despair typical of bear markets?

Peter Mallouk: People always say, Well, this time is different and it’s always different. I mean, the set of facts is always different. It’s like every generation says they live in unprecedented times and every generation is right, but somehow civilization marches on and every bear market has a different villain, a different set of circumstances, a different plot, but we get the same outcome, which is, the world doesn’t end. Corporations find a way to move on, restaurants find a way to sell their food, and shoe companies find a way to sell their shoes, and Apple finds a way to sell its iPhones eventually. So the set of circumstances that created this bear market is different. We’ve talked about it in the past.

I mean, here the Fed is really trying to create it by raising rates and pulling money out of the system and it’s working. And their goal is to soften housing and increase unemployment a little bit, and that’s going to work. But what’s not different is the probable outcome. And the probable outcome is, that like the last 30 plus bear markets and a hundred plus corrections, this will eventually subside and the market will move on to new highs. And so if you believe in that as an investor, you take very different actions then somebody who believes this outcome’s going to be different.

Jonathan: So of course when people grow fearful, the big worry is they’re going to start selling stocks and they’re going to tell themselves, Oh, I’m going to get back in later. But Peter, doesn’t a history tell us that it’s awfully hard to time the market and that when this bear market ends, the gains are going to come with surprising speed?

Peter: I think people think that, Oh, I’m down 20%, I’m down 30%. Of course there are people out there down 70 or 80%. So let’s stick with people who are invested in quality things. So let’s say they’re down 15, 20% and they think, Oh my God, at 6%, 7, 8% a year, it’s going to take me three, four years to break even. That’s generally not how this usually works. When we look back at COVID, it went down 34% and all the losses disappeared within months. That’s actually pretty normal. It doesn’t take years usually for the market to come back, whatever cloud is hanging over to the market, once that cloud is removed, you see the recovery pretty quickly. I would look at it like a restaurant and the restaurant’s not doing well because there’s construction in front of the restaurant and then the construction is removed.

It recovers pretty quickly. The impediment, the psychology, the real problems with the market, when you have those removed, there’s a quick recovery. And so if you think of the average bear market, and a bear market’s a 20% drop or more, which is where we are now, an average bear market is a drop of about 34, 35%. We haven’t even come near those levels yet. But from a bear market to recovery, on average, the three years following a bear market average each year about 14%. If you look at five years from a bear market, the average return per year each year for five years is 11%. So this is really a great time to be taking the income from your portfolio and buying things that are down that you believe in. If you’re not retired yet, contributing your new dollars to the sides of the portfolio that are down the most, which is the equity side, it’s a time to be really taking advantage of the situation and not panicking.

Jonathan: So we’re days away from the midterm elections. Another reason that some investors are in despair, they’re worried the results are going to be contested, they’re worried that their favorite party will come up short. But Peter, when it comes to our portfolios, should we allow our political views to guide our investment decisions? This is a question that’s come up over and over again in recent years.

Peter: I like to tell people the market’s not blue or red, it’s green. All it cares about is money and profits. That’s it. I remember a call with somebody, a client, when President Obama was elected that couldn’t talk him out of going into cash. The person made a huge irrecoverable mistake. Same thing after Trump won, had a call with a client, couldn’t stop them from going to cash. Huge irrevocable mistake. We’re talking about the midterms here. The midterm elections, the market does do very well after the midterms. On average, it averages 16% the six months after the midterms, averages almost 19% over the next year and averages about 33, 34% over the next two years.

And that’s usually because the midterms result in a swing in power that creates paralyzation and nothing gets done. And the markets like knowing what’s going to happen, which is nothing. Also, if you go all the way back to World War II, there has never been a time following the midterms where the market has not been up. Now, I would never say that’s the case here, especially with what’s going on with the Fed and everything else, but certainly the election’s not a reason to be exiting the market or going to cash or really having it influence any kind of decision around your portfolio.

Jonathan: So perhaps among investors today, the biggest question is when will the bear market end or what will it take for the bear market to end? There are all kinds of speculation. According to the talking heads, we need investors to capitulate. That seems to be one of the favorite words right now or for inflation to show signs of slowing or for the Federal Reserve to stop raising short term interest rates. Do we really need any of those three things or anything else in particular for the bear market to come to a close?

Peter: A lot of bear markets end with capitulation, which is when the last reasonable person you’re following says, You know what, I’m throwing in the towel and I’m going to cash. When the retail investor has finally given up and gone to cash, we saw that in ’08, ’09. March 9th, ’09, the market just massive, massive drop. And you could just feel the blood in the streets. The last person who had hung on that was going to sell, had sold. And what capitulation does is, all the sellers are gone. All it’s left is the buyers. And it allows the psychology to shift. We see that in some markets, sometimes you just need the situation to be resolved. Like with COVID, the Federal Reserve came in and said, Okay, you’re worried about these markets collapsing, we’re going to back them up. And then you saw a vaccine and the combination of those things, the market said, Okay, we can go about our business.

So capitulation is not a requirement to get out of the bear market. We need the cloud lifted. The cloud here is the market sees reduced earnings and higher unemployment and less people buying homes and big purchases because interest rates are going up. And I think once the market feels like the Fed is done with that, the Fed has said they’ll be done with that around the first quarter of 2023. I think we’ll see the market start to look to the future further and begin to recover. The issue with that, that means all things being equal and all things are never equal, right? Russia could pull out of Ukraine in the next couple weeks. Peace could break out and the market would soar. Things in Ukraine could get worse and the market could tank. There could be a cyber attack, a terror attack, something we’re not thinking about.

There’s always that added variability. And so it’s kind of a fools game to even say, Well, if the Fed does this then that, because there was a time where the Fed wasn’t doing anything and you always had to worry about anyway, the thing coming out of nowhere. So I think an investor should just step back, look at their portfolio and say, If I need money in the next few years, it should be in conservative investments. If I need money five years out, I can look at stocks, 10 years out, I can even do some illiquid things and they should really bring the portfolio back to their needs. The market is going to work itself out, whether it’s due to capitulation or the Fed gets done, or earnings wind up stronger or peace breaks out in Ukraine or whatever is going to happen in the short run.

Jonathan: So one thing, the caveat we should throw in here is, the Fed may be done in the first quarter or the second quarter of next year, but if investors think that that is indeed the case, they’re going to jump the gun. Stocks are going to start rallying long before the Fed actually says, All right boys, we’re done for now.

Peter: Yeah, you’re exactly right Jonathan. I think a lot of people go, Well, when this happens then I’ll invest. But the market is forward looking. So the market is basically betting on what’s going to happen in the future. If I’m looking at buying a restaurant and I see that this big office building with 2000 people is going to open right next to the restaurant, I’m probably going to pay more for the restaurant. I don’t need the office building to be fully occupied, I know what’s going to happen. If I’m looking to buy the restaurant and I see that there’s a big office building and it’s going to be evacuated because that company’s going remote and no one’s going to take it over, I might pay less for the restaurant. I don’t need to wait for the event to happen. I’m a forward looking investor. We’re all forward looking and the stock market is no different.

Jonathan: All right, Peter, it’s that time of the podcast. Time for your financial wellness tip of the month. What have you got for me?

Peter: All right, so I know you have a fraud prevention tip, and I’ve got one as well. I think fraud’s becoming a bigger and bigger issue, and I think it’s really going to get scary here in the coming years with deep fake videos and people copying and recording voices and so on. One thing I encourage people to do if you’re able to afford it, is get yourself a separate laptop or a separate computer to deal with your financial transactions. So if you’re logging into your bank account, you’re logging into your custodian, have a completely separate computer for that, that that’s all that you do. And that way when you’re on your regular computer and you’re on Facebook or Instagram or doing your email or whatever, and somebody hacks into your computer and is following your keystrokes, they’re never going to get to certain information. They’re never going to get to your financial passwords and things like that.

Jonathan: So my tip is even less costly than buying a separate computer. It’ll actually cost you about $2. And my tip is to buy yourself a fraud prevention pen. These are special pens where the ink can’t be easily washed off. And I learned about these through personal experience earlier this year. I wrote one of the rare checks that I write, I stuck it in a mailbox, some scammer fished it out of the mailbox and took this check, which was for $123, changed the name of the recipient and changed the sum to $7,000 and cashed it. Couple of months later, my bank made me whole.

But in learning about this, one of the things I discovered that you could do to avoid what’s called check washing, is to use a fraud prevention pen. So I bought a couple from Amazon. As I said, they cost less than two bucks each, and then I now take the added step that whenever I have to mail a check, which I almost never do, but when I do, I actually walk to the post office and mail it at the post office. So you take those two steps, use the fraud prevention pen and walk to the post office to actually mail checks. You should be able to avoid this problem with check washing, which has become a national problem. I mean, it’s cropping up all over the country at this point.

Peter: Well, I learned something new today that I was not aware of that. That’s a great tip.

Jonathan: All right, Peter, Well, that is it for this month. This is Jonathan Clements, Director of Financial Education at Creative Planning. I’ve been talking with Peter Mallouk, president of the firm, and we are Down the Middle.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.

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