The Federal Reserve recently lowered interest rates despite the market remaining near all-time highs — something that’s occurred only 20 times previously. Peter and Jeff discuss the potential reasoning for this move as well as the outcome seen 100% of the time historically. Plus, Peter shares the news of Jonathan Clements’ recent passing.
Creative Planning President & CEO Peter Mallouk and Director of Financial Planning Jeff Stolper host Down the Middle, a monthly podcast series where they discuss recent market events, share Creative Planning’s investment philosophy, give monthly tips and more.
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Transcript:
Jeff Stolper: Hi everyone. My name is Jeff Stolper, Director of Financial Planning at Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down the Middle. So I know I have big shoes to fill, as I’m the new host of Down the Middle with Peter. I briefly just wanted to say a little bit about Jonathan — that I have so respected the work that he has done for a long, long time, from his days at the Wall Street Journal, where I followed him. And then of course got to know him since he joined Creative Planning, which has been really enjoyable for me. He had an amazing ability to break down complex topics in a way that were easy to understand for so many people, and that’s certainly going to be the legacy that he leaves.
A little bit about me: I’ve been with Creative Planning for about 10 years, and before that my career started in public accounting, where I was doing taxes for all sorts of people and companies and helping them make sure that they had the best advice there. But in my time at Creative now, I’ve been leading the financial planning team, helping clients with financial planning advice, and then educating people as well. So I really look forward to taking this journey with Peter to educate a lot more people. So Peter, thanks so much for thinking of me to lead this with you.
Peter Mallouk: And I’m very happy to have you with me, Jeff. I’m going to just update our audience that has not heard yet about Jonathan Clements. For those of you that follow either myself on X, or Facebook, or LinkedIn, or you follow Creative Planning, you have already heard the sad news of Jonathan’s passing. If you go to any of those pages on my personal X, Facebook and LinkedIn pages, I posted Jonathan’s obituary, which, in classic Jonathan style, he wrote himself in advance of his death. Kind of outlined the highlights of his life and the challenges of his life. And he’s so eloquent and he’s so stoic around the whole thing, just literally exactly the way he lived his life and the way he communicated to his readers, viewers and listeners over his entire career. I mean it was one of the highlights of my career was spending 10 minutes with him a month on this podcast, and of course, the banter we’d have back and forth in between.
As he wrote about in his obituary, his greatest joy in life was providing financial education to Americans and people around the world. This was literally his favorite thing to do. I also posted a link to the favorite episode I did with Jonathan. I’m sure there’s some recency bias there, but it was one not around finance, but around happiness, also posted on all my pages. Then finally, there’s a separate podcast called Signal or Noise that I do with Charlie Bilello. And a few months ago we had Jonathan Clements as a guest, where we went through the wisdom we saw Jonathan write about and talk about over the many decades of his career, and he commented on each one. If you really want to get a sense of Jonathan, you can view that one as well. He is dearly missed by me, I know by you, Jeff, and by everyone at Creative Planning and many of his listeners.
Jeff is also, as he said, the Director of Financial Education here at Creative Planning. So the essence of his day is around educating people around anything that can improve their quality of life via getting themselves in a better financial position. And so that touches all of Creative Planning’s clients one way or another, and he leads one of the largest teams here at Creative Planning. I’ve enjoyed working with Jeff very, very closely for many years, and he was the first choice and only choice to sit in this seat going forward. There’s also no natural way to segue over into financial topics, but that’s exactly what we’re going to do right now.
Jeff: So last week we saw the Federal Reserve cut the borrowing rate by a quarter of a percent. And at the same time, we’re also seeing markets near all-time highs. Typically, what you would see if markets are running hot is actually the Fed raising rates. So, Peter, where do you see markets going from here?
Peter: You’re right, Jeff. So, normally, the Federal Reserve does quite a few things, but a big thing that people can think about is when the economy’s slow, the Federal Reserve lowers interest rates and kind of entices people to go spend money. “Hey, the interest rates are lower, so it’s less to finance a washer or dryer. It’s less to finance a car. It’s less to finance a house. Go spend money.” And then people start spending money and it invigorates the economy and people become employed again and things get better. And usually when the economy is overly hot, like there’s a real estate boom, and everything’s too high, and there’s high inflation, and low unemployment, they go, “Well, this is getting too hot and we don’t want there to be rapid inflation. We don’t want things to get carried away, so let’s raise interest rates.” That suppresses the activity: less buying of cars, less buying of washers and dryers, less buying of houses.
So this is an interesting position. Here we are at an all-time high. The markets exceeded literally everyone’s expectation this year. No one expected U.S. markets, foreign markets to perform this strongly. The economy is very, very strong. Unemployment remains low. Markets at all-time highs. And what does the Fed do? They say, “Okay, not only do we have all that and inflation higher than normal, we’re going to lower rates.” So you usually don’t see that. It’s really, really interesting. Now, why would they do that? Well, one reason, some people believe it’s political, that President Trump’s put a lot of pressure on the Federal Reserve to get them to lower rates because he wants there to be a very strong economy because he’s the president and he wants everything to be awesome while he is the president. Or because we’re going into the midterms and he wants the economy to be strong going into the midterms. Or because we have all of this debt that needs to be refinanced, and he wants to refinance it at lower rates because the deficit spending is absolutely crushing.
The national debt continues to increase rapidly, and one of the only ways out of it is to have inflation or lower rates. There’s another group of people that think, “well, no, the Federal Reserve’s not influenced that at all.” And they really think we might be heading into a recession or a mild recession, and they see signals of that. They see a slowing of the economy and maybe they want to get in front of that. Regardless, this is a rare combination. And it’s happened though 20 times before. Now, if you think about, well, 20 times doesn’t sound rare. Well, the Federal Reserve has moved on rates hundreds and hundreds of times, so 20 times is rare. What’s interesting is all 20 times that the Federal Reserve has lowered interest rates while the market has been at or near all-time highs, all 20 times the market has been positive over the next 12 months.
That’s a staggering statistic, because you and I both know in a normal world or anytime, whether markets are high or low, the odds the market will be positive over the next 12 months are 75%. So for it to be 100% over 20 times of rate cuts near all-time highs shows more than just correlation. And not only positive over the next 12 months, but positive with an average return of 13.9%. So if history is a guide, and look, sometimes it is, I would not bet the farm on this. If history is a guide, the odds are pretty good, probably more than 75%, but definitely less than 100% that the market will be positive a year from now. Because when rates go down, it’s easier for people to borrow money and go buy stuff, and the value of those things inflate — including the stocks that own all of these things. So if the price of everything is going to go up, it will eventually be reflected in the stocks. Usually this is a good signal for the stock market in the coming 12 months. We’ll see.
Jeff: Yeah, it really perpetuates itself. You also see the cost of borrowing for those corporations goes down too. So that they’re spending more money, hiring more people, and employment continues to remain strong. So the Fed rates is one thing that certainly impacts the market. What considerations may drive market performance over the next year or so in addition to those rate cuts?
Peter: So it’s interesting because we always want to take one thing. Okay, well, the thing this week is rate cuts, and so, oh, what happens with rate cuts? Well, 20 out of 20 it goes up, an average return of 13.9, hooray, let’s just go all in on the market. But, you know, the markets don’t work that way. There’s always hundreds of factors going into the market. And really, ultimately, the market only cares about one thing. We talk about it all the time on this podcast, that’s future earnings, expected future earnings. And so, lower rates lowers the cost of borrowing of companies, which automatically makes them more profitable, right? If you are a company and you’re paying 7% on the money you’re borrowing and all of a sudden you’re paying 6.75, you now have more profit where you’re going to invest it in growth.
But this is not the only thing that impacts the economy: terrorism, war, tariffs, unemployment, technology, innovation, demographics, and also I would add usually the thing that impacts the economy the most is something no one is ever thinking about like COVID or 9/11 or ’08-’09. And so, we can’t just take one thing and make investment decisions over it. We have the usual array of all of these other ingredients that go into baking this cake, which is why an investor should always stop looking at what’s going on externally and focus on what you can control. What you can control, that’s your realm, the financial planning world. “Hey, what do I need for the next five years? What do I need for the next 10 after that? What do I need after that?”
And you make your investment decisions based on your needs and future goals. It’s fun to speculate and theorize about what’s going to happen in the next year or two, but the reality is there’s too many factors going into it to predict with any accuracy. And then we’re back to more historical norms, which is the odds you’ll be positive over a year is 75%; over three years is 93%; over 10 years is 96%; over 20 years very, very close to 100%.
Jeff: Yeah. Not that every single thing comes back to a financial plan, but certainly this one does. The more that you can plan, the more that you can consider all these external factors as part of what you can control. I think that it’s a very, very good thing. So next, we’ll move to our tip of the month. I know this was one of Jonathan’s favorite segments. Peter, we’ll start with you. Do you have something you can share with us?
Peter: So mine’s going to be a tribute to Jonathan Clements because he had a lot of tips and his would go from one end of the spectrum, which is kind of technical, and I don’t love the technical tips, like converting this much of a Roth IRA at this point in time, but he also had a very kind of an emotional side to things, and I loved those tips. And my favorite tip he ever had, it really changed the way I think about things. I would always argue about experiences that we should invest in experiences, and I would cite all the research around that and less on things. And he really reframed that for me because he pointed out to me, “Look, for many people, the thing is the experience.” The art on the wall. There’s an experience that comes from looking at the art on the wall. The car, if you love cars, and a lot of my friends do, then the experience of looking at the car, driving the car is a different thing. He really changed the way I look at that.
But his tip of the month that resonated with me the most is the idea of an unexpected gift. We all know that we get gifts for people at religious holidays, birthdays, and Valentine’s Day, and so on, but the unexpected gift is the best gift. And the last 10 years, the best gift I ever got was there was a lot going on at work, and a couple people had major health issues, a couple people passed away. And my son, he’s very observant, my oldest son, and he could tell maybe taking a little bit more of a toll on me than normal. And I came home one day and here was this thing, I don’t know what it costs, maybe $5. But it was basically just a message of like, that you could put on your desk that was real affirming, and I still see it every day. It’s the first thing I see before I leave.
But it was the idea that it came out of nowhere at the right time. And it kind of said, “Hey, I’m thinking about you.” And I’ve really started to think that way. I’m not talking about buying people even something that’s $30. That’s not what we’re talking about. We’re talking about just sending a message to somebody, “Hey, I thought about you and this made me think of you.” The idea of an unexpected gift, incorporating that into your life. That’s my tip of the day. How about you, Jeff?
Jeff: Let’s say that you do get a large, unexpected gift that actually ties in with my tip of the month, which is related to your property and casualty insurance. So this would be homeowners insurance, auto insurance, umbrella coverage. As you, throughout the year, maybe you purchase a watch or you make a major improvement to your home, like you remodel your kitchen or you redo your bathroom, or you get all new windows, something that increases the value significantly. The tip is don’t become complacent with your property and casualty insurance. You want to stay on top of that. Oftentimes people with their insurance, they just receive their renewal in the mail, they pay the bill, and they think, “Great, I’m set for the year.” Well, you don’t want to be underinsured, the replacement value of your home, or maybe you obtained something or acquired something more expensive throughout the year needs coverage.
If you were to have a claim, you don’t want to be in a position where you are not able to replace the value of your home because you didn’t just give your agent a call. So maybe once every couple years, reach out to them and say, “Hey, I had these major changes. Do I need to make any adjustments to my coverage?” I’m Jeff Stolper, Director of Financial Planning at Creative Planning. I’ve been talking with Peter Mallouk. Thanks for tuning in, and we are Down the Middle.
