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Lemons Into Lemonade

Published on September 30, 2022

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

This month, Peter Mallouk and Jonathan Clements discuss how we ended up with high inflation, how stocks and bonds might fare in the decade ahead and how investors can benefit from today’s market turmoil.

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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Email us @ podcasts@creativeplanning.com


Jonathan Clements: 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. We all know 2022 has been a rough year for stocks and bonds, but what does the future hold? Fear not, we won’t be guessing where financial markets are headed in the months ahead, because that is what it would be, guessing. Instead, we’ll be talking about potential returns over the next 10 years. But first Peter, let’s talk about how we got here, to record low unemployment, high inflation, and double digit stock and bond market losses. How did we end up in this situation?

Peter Mallouk: So just an unbelievable history, I think they’re going to be studying it in econ books for hundreds of years. And that’s not even a little bit of hyperbole. I really think this is going to be a case study that’ll be studied a long, long, long time to come. So first, we have low unemployment, the economy’s very strong, and then COVID happens. We go into complete lockdown, the entire country and most of the world is shut down and inside and some stimulus is put into place to keep everybody from going to the unemployment lines. And we had to have stimulus in the beginning. The issue was, it was much like a blizzard, everyone was inside. Blizzard’s over, everyone wants to go outside, but that’s not what the economics textbooks say. The economic textbooks say, hey, all these indicators are down. No one’s buying anything. We needed to do what the textbook says, which is monetary and fiscal policy are the two levers.

And fiscal policy is what Congress does and the president, and they did a lot of giving money away to every type of group of people you could imagine, from corporations, to small businesses, to individuals. And then fiscal policy, which is the Federal Reserve’s ability to affect the money supply or the purchasing power of money. I think what a lot of people know, the fed can lower interest rates, which then causes the marketplace, which is to lower interest rates, which makes it cheaper and easier to buy a home or a car or washer or dryer or anything you have to finance.

So the issue was, it was a blizzard, everyone was going to come outside and spend anyway, but instead we kept giving them money and lowering the cost of money, making it easier to borrow. So what did people do? They bought a record number of homes and cars and planes and boats and bikes and everything else. And we had high inflation. And of course, if you have more money chasing the same amount of things, you’re going to have inflation. But it wasn’t even the same amount of things. The supply chain, which we all thought would probably be fixed by now, never got fixed because while the United States is open for business, lots of China still goes into rolling blackouts. We still have all kinds of supply chain issues.

So more money chasing, less supplies equals high persistent inflation. And now what’s the Fed going to have to do? They’re going to have to raise rates to slow that down. They’ve been doing that very, very aggressively. They’ve got to get rid of inflation because inflation erodes people’s confidence in the dollar and encourages speculation. It encourages people to borrow and buy things that they can’t afford, which results in bubbles. It’s all kinds of problems. So they really want to get in front of this and control it. They had a lot of catching up to do, so they raising rates very aggressively, which is going to bring housing to a screeching halt. It’s not shown up in the numbers today, but it’s already fallen off a cliff.

And I think we’re seeing major purchases go off a cliff too. I think we’ll have a minimum or a mild recession out of this. And the stock market and bond market see that, stock market’s suffering because of that. Bond market is suffering because when interest rates go up, bonds go down. If you’ve got a 3% bond and new bonds are coming out at 6%, guess what? No one wants to buy your 3% bond. And so we’re seeing both stocks and bonds suffer together, which is pretty rare. It’s not unprecedented, but it’s pretty rare. And also all of this happened to start in January. And so when you look at it from a calendar year perspective, it looks like quite the debacle.

Jonathan: So that is the history, but where do we go from here? So Peter, I mean, what is Creative Planning expecting from bonds over the next 10 years? And how has that changed given what we’ve seen happen in the bond market in 2022?

Peter: So if you’re a bond market investor, many Creative Planning clients have bonds. If you’re a bond market investor and you have longer term bonds and you need to take the money out before those bonds mature, well, this is a disaster. But that’s not any Creative Planning clients. So we know with our clients what their duration, like how long they need this portfolio to last, and the duration of their bond portfolio is less than they need this money in their portfolio to work for them. For a long term investor, like the Creative Planning client, this is actually very positive.

So think about the bond yields you’re collecting, whether it’s 2%, 3%, 4%, well, as those bonds mature, they’re getting replaced with higher yielding bonds at 5%, 6%, 7%. So it’s no different than if you went to a bank, you bought a CD at 2%, six months later they put a sign up that says, hey, we’re selling new CDs at 5%. You wouldn’t be upset. You go, this is great. When my CD matures, I’m going to get a new 5% cd. So for the long term bond investor, your bonds are coming due, you collect them and you go into higher yielding bonds. It makes it much more likely for you to achieve your goals because it takes the pressure off the stock side of the portfolio to do all of the performance by itself.

So for someone who’s got a long time, and if you’re retired and you expect to live more than 10 years, you’ve got a long time, this is fantastic for the bond investor. So the expected return for bonds going forward has almost doubled because bond returns, believe it or not, for all the market boom and everything else, 99% of what you get from the bond, the expected return is just the interest from the bonds. So when the interest on new bonds goes up and you start to buy those, when you replace your old ones, very, very positive for the long term bond investor. The price you pay for that is watching your current bonds go down in value while you wait for them to mature.

Jonathan: So what are we talking about for bonds? High quality bonds go from here, maybe 4%?

Peter: Yeah. I think we’re clearing 4% now. And I think the treasury is at 4%. And so I think we’re going to see the rest of the market follow and we might even start to see 4.5%, 5%.


So that brings us the same pair of questions about stocks. I mean, what is Creative expecting from stock returns over the next 10 years and how has that changed, given what’s happened to the market in 2022?

Peter: So what’s easy about bonds, is bonds is really math. We know that you buy a bond, you’re going to get the interest, and in the meantime it fluctuates based on whether rates went up or down. Stocks can fluctuate for all kinds of reasons. I mean sentiment or earnings contractions and all kinds of things. But in general, we do know that this is not the first bear market in the history of the United States. This is the 30th bear market, and we know the previous 29 gave away to a bull market. So we know if you own quality stocks, the odds are pretty darn good, you’re going to be okay. Now, what’s the expected return when you see a bear market? So it’s just drop a 20% or more, which is where we are now. The expected return over the next three years is over 50%, very, very high.

So you can expect, if you look forward three years from now, your average return will be in the low teens per year. Now is it start today? No. Is it perfectly spaced out? No. Are there any guarantees? Definitely no. But we know that when the market recovers, there’s this, every now and then a client says, well, peter, it’s going to take me five years to get back where I was with the market going up 6%, 7% a year. That’s not how it works. Almost always, when the cloud is lifted, whatever the cloud was, when it’s lifted, the market rockets and recoups most, if not all of its losses, and goes on to new highs.

And so at some point we’re going to see that probably happen. We’ll probably see double digit returns over the next couple years. People thinking about going to cash now, I mean, you’re not an experienced investor if you’re thinking about that. Now, we’re not even an average bear market, the average bear market is a 34% drop, we got a long way to go to get there, maybe we will. But the expected return, even from these levels is very, very strong based on history.

Jonathan: Of course, even though the drop in the stock market so far this year has barely been more than 20%, people have given up another 8% or 9% to inflation. So if you add those together, we’re starting to look like losses similar to what we saw in 2020. And it’s indeed similar to what we’ve seen in the typical bear market.

Peter: I think also, what we’re talking about is high quality like S&P 500 type stuff, MidCap 400 type stuff. The average investors getting slaughtered. I mean if you bought cryptocurrencies or meme stocks or specs or NFTs or small cap stocks with no earnings, all of these things as a group are down on average of 70% to 95%. So this average person that’s been speculating, I mean, is never going to recover probably, most of them will never recover. But for the kind of discipline investor with high quality, yeah, you’re exactly right.

Jonathan: So if we look out beyond this potential snapback in the stock market over, say, three years, once we hit bottom. Beyond that, what’s the sort of good baseline number of what people can expect from stocks as a result of dividends and earnings growth? Where are we keeping that number?

Peter: Dividends, earnings, growth, inflation. We look back in history, the stock market’s average about 10% a year. We have different opinions on what it’ll do over the next five years based on where a market is at any given point. I think most would agree double digit returns over the next few years is reasonable, but who knows what’s going to happen in the next 6 to 12 months. But I think for the very, very long term investor, if you’re very pessimistic, you’re thinking six, you’re very optimistic, you’re thinking more than 10, and the answer’s probably somewhere in between there.

Jonathan: So supposing those numbers are right and they certainly sound reasonable, 4% plus for bonds going forward, something close to 10% a year from stocks. What if you’re an investor and you’re sitting there and saying, that’s nice, it’s certainly a hell of a lot better than I’ve had in 2022. But it’s not enough for me to meet my financial goals. What sort of steps should people be taking to make sure that they do indeed hit their financial goals if those sorts of returns aren’t high enough?

Peter: We have to have some sort of plan that lays out where are you today and what do you want in the future? What other income sources will you have? I think people underestimate the impact of social security. Even if you’re getting $30,000 for social security, that’s like having $500,000, $600,000. It’s very significant. Maybe you have a rental property, maybe you’re going to get an inheritance. Maybe you need to push out your retirement, maybe you need to save more, maybe you’re missing the match in the 401(k), maybe you’ve got a bunch of subscription services that you can cancel that you don’t use. So you kind of back in from, hey, can the return get me what I want? Have I really accounted for all the assets available to me to get me what I want? If I can’t do that, do I have to change what I contribute to my retirement date? And if I can’t do that, can I discipline my way to a better budget that allows me to save more?

Jonathan: All right, Peter. So that’s it for this month, except our financial wellness tip of the month. So what do you have for me this month?

Peter: Look, if you’re a dollar-cost averaging, if you’re still in the saving phases and you can up your game a little bit, contribute more, accelerate. Boy, is this a wonderful time. I’m not saying this week, it could be this way for a year, but what a gift. If you are retired and you’re very, very nervous about your portfolio, this is a great time to take your temperature so that when you get to the other side of the bear market, when we’re in the bull market, maybe you make an adjustment so you’re not suffering from needless anxiety the next time there’s a bear market. There’s a bear market on average every five years. They don’t evenly space themselves out. We had 9/11 and the tech bubble back to back. Make sure that you got a portfolio that’s not going to cause undue rests. So kind of a double tip depending on where you are in life. How about you, Jonathan?

Jonathan: So I’m sort of doubling up like you are, Peter. My tip of the month is to do something constructive in response to the market decline. Maybe you should rebalance, maybe you should take tax losses, maybe you should do a Roth conversion, maybe you should step up your savings rate as you suggested, Peter. When we have a sense of crisis, action is always more comforting than inaction. You’ll feel better if you take steps to benefit from this year’s market turmoil. But for goodness’ sake, make sure it’s constructive action, not panicky decisions. As they used to say in that 1980s TV show, Hill Street Blues, let’s be careful out there. So that’s it for this month, Peter. This is Johnathan Clements, Director of Financial Education with Creative Planning. With me is 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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