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Remarkable Market Resilience

Published on January 30, 2024

Peter Mallouk
President & CEO
Jonathan Clements Headshot

Jonathan Clements
Director of Financial Education

As we witness unexpected market resilience and experience all-time highs for the first time in two years, many investors find themselves uncertain about their next steps. Join Peter and Jonathan as they dissect the driving force behind our recession-free status and explore not only the impact of political elections on markets but also the challenges of forecasting in an efficient market. Plus, discover why you might want to consider adjusting your home and auto insurance deductibles. 

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 with Creative Planning. Speaking with me today is Peter Mallouk, president of the firm and we are Down The Middle.

We’re just one month into the new year and it’s already been a fascinating one. After a sluggish start, US stocks have notched modest gains while the economic numbers have been surprisingly good. One measure of inflation, the personal consumption expenditures price index climbed just 2.6% in 2023. Meanwhile, the economy grew at an inflation adjusted 2.5% and the unemployment rate remains at an historically low 3.7%. Remember all that talk about recession and a return of 1970s style inflation? Once again, the pessimists have been proven wrong. But where do we go from here? US stock market indexes have been notching all-time highs for the first time in two years. That’s prompted lots of chatter about whether we’re due for a pullback.

Peter, what would you say to people who are nervous about the stock market now that we’re at all-time highs once again?

Peter Mallouk: Well, I’ll just start with what you said about the predictions about a recession. You hear people say, “Oh, people predicted a recession.” It wasn’t some people, the bond market. Just the entire bond market basically priced in that we were going to go into a recession. Almost all of the major pundits said we were going to go into a recession. And so it’s actually remarkable. The scenario that we’re having play out right now was based on all of the data that you could have. Or if you were watching the news, we are going through the least likely scenario, which is a relatively soft landing.

And I think the biggest part of that is the resilience of the American consumer, which is 70% of overall economic activity is coming from the average American consumer, and they’re actually sitting on a reasonable amount of savings. Their credit scores have never been higher than they are right now. Not a lot of that’s probably because of all the low rates. They were able to refinance that coming out of COVID. But we have a pretty strong consumer, and so it’s truly remarkable to see that we were able to navigate tremendous mismanagement of the economy, like too much money put into the system, interest rates driven too low, created over inflation with all the supply chain issues, and then to be able to recover from that without major side effects is very pleasantly surprising. And it just shows that betting against the markets is very, very dangerous, very dangerous. We saw one year pull back in anticipation of recession. Oh, the recession didn’t happen, and boom, all those losses got erased in just a couple of months.

Jonathan: But I think one of the important points, and I’m sure this is where you’re going, Peter, is that the market actually hits all time highs all the time. We may not have seen one for two years, but we should in fact be seeing them much more regularly. Isn’t that the case?

Peter: Yeah. I mean, to your point about all time highs, I think people were like, “Oh my goodness, we hit an all time high. Maybe I should sell my stocks now.” Well, this is one of the longest periods in history without hitting an all time high. And we went truly two full years before the market hit an all time high. In reality, on average, the stock market hits an all time high about once every 19 days. So it’s a very, very common thing, hitting all time high. Then the odds that tomorrow, whether the market will be positive or negative is 50/50, which means there’s 50% chance you’re hitting an all time high again. So it’s really not a time to take money off the table. The probability of the stock market is going to be positive. You’re going forward is almost exactly the same whether the market’s hit an all time high or not. And it’s very normal for markets to hit all time highs because a big component of earnings is inflationary. And so we expect companies to have a little bit better earnings than they did before.

As they grow, we expect to continue to get our dividend, but we also expect the prices of the things that they are selling to go up, which is then reflected in the stock price. And a lot of people go, “Well, I mean, you’re not making real money, you’re just keeping pace with inflation.” Well, that’s part of investing in stocks, is to keep pace and stay ahead of inflation. That’s true. If you had a year where the stock market just went up 3% or 4%, you would only be keeping pace with inflation, but that’s better than falling behind inflation. And I think people are not surprised when they see the price of everything they buy, every trip they want to take, everything they want to do. They’re not surprised when the price of that hits an all time high, but they tend to be surprised when the companies that sell those products and services hit all time highs, and those two things really go hand in hand.

Jonathan: So of course, another reason, Peter, the people are nervous is that 2024 is a presidential election year. At this juncture, it seems like we’re going to get a Biden-Trump rematch. And folks are worried about what the result will mean for their portfolio, especially if their favored candidate loses. But Peter, are presidential elections results all that important when it comes to market performance?

Peter: The answer is a emphatic no. Presidential election results rarely have any impact at all. Sometimes there’s a psychological impact, it can be a little bit of a turning point, but the data bears out that whether a Democrat is president or Republican is president, the odds that the stock market are going to go up is about the same thing. Same thing whether it’s Republicans or Democrats in charge of Congress. And same thing if one party holds all power or the powers are split. There’s no question that policies have impacts on the economy over time, and they tend to be incremental. But if we’re looking at, “Hey, this person got elected and therefore the stock market is going to do A, B, C over the next four to eight years,” the answer is the correlation is borderline non-existent. If you were making a list of things to pay attention to, to make stock market investing decisions, this wouldn’t crack the top 100.

Jonathan: Yeah. Well, one of the things that people complain about all the time is political gridlock in Washington, but the fact is, thanks to political gridlock, the changing of Congress or the White House in terms of one party or the other really doesn’t have that much impact. And even if you end up with one party controlling the House, the Senate, and the White House, what happens at that point? They start fighting with each other and all the horse-trading results in not big policy changes. So I think that if people are worried about the 2024 election, they need to find something else to worry about, like for instance, the Super Bowl.

Peter: That’s right. We’re spoiled in Kansas City. I mean, just completely spoiled. It’s been a hell of a run.

Jonathan: Right.

Peter: Tough for your Eagles. Tough for your Eagles.

Jonathan: Yeah. Well, that was a… We’ve forgotten all about that. We have short memories around here. So anyway, when people talk about presidential elections and they talk about market all time highs, the implication is that it’s possible to forecast the direction of the financial markets and which individual investments are going to win. But I for one, believe that markets are reasonably efficient, which means that it’s awfully hard to pick the winners. Peter, where do you stand on this issue of market efficiency? Do you think that the markets are efficient?

Peter: I do think the markets are efficient enough, is how I put it. And just to explain that word is that idea, can you beat the market? Can you beat other managers in the market in a given space? So for example, if you are trying to trade mid-company US stocks or trying to time your way in and out of the market, are you going to be more successful than someone that just buys a group of mid-sized US stocks? The data answers the question, which is that the overwhelming majority of professionals cannot beat the person that holds the basket of securities.

Now, there are ways to increase your odds about performance by tax managing the portfolio in a way to get a better after tax outcome or owning maybe investments in different spaces that have a better expected return. Just like stocks have a better expected return than bonds, other investments have a better expected rate of return than stocks. And even if you look at the data historically, the last decade doesn’t show it, but over the long run, mid-size stocks tend to do better than large. Small stocks tend to do better than mid. So there are things you can do to beat the market, but one of them is not actively trading day-to-day or week to week individual securities. Everyone has the same amount of information available in real time thanks to the internet. Ever since the internet, we saw the market become even more efficient. Not perfect, but close enough that it’s wasting resources to try to beat it, especially if you’re in a taxable account.

Jonathan: Yeah. To your point, if you look at the data for any particular sector, like large cap value funds or mid-cap growth funds, the data that comes out of S&P Global shows that in any one of those categories over a 20-year period, more than 90% of the funds in that category are going to fail to beat their benchmark index. So if you’re out there trying to pick the managers who are going to beat the market, it really is a loser’s game and you have to be awfully smart, or I would suggest awfully lucky to come out ahead.

Peter: Right.

Jonathan: So anyway, Peter, it’s that time of the podcast. Time for your Financial Wellness Tip of the Month. What have you got for me?

Peter: There’s a lot of advice around emergency reserves. I think it’s just a little too generic. So for example, one of the things you’ll see the most is you should have six months of money in emergency reserves, which means whatever your annual salary and bonus is, you should take six months of that, have it sitting in the bank, and that way if you lose your job or something happens, you’ve got that money sitting there. I really think emergency reserves should be very tailored to the individual person’s situation. So if you don’t have access to capital and you’ve got a job that like most jobs is tenuous, you really should have enough money that gives you time to be able to go find another job without panicking and rushing into something you don’t want or at lower pay than you want without having to sell your house or your car, something extremely negative.

But for people that have capital, that have money, so for example, if you have an investment account, it’s a taxable investment account, it has $500,000 in it, well, if you lost your job, you don’t even need to spend the money. You could, I’m not recommending this, but you have access to capital. In the worst case scenario, you could always borrow against the account. But in the meantime, that money’s working for you. So then rather than spending the next 30 years of your life with dead money sitting in cash earning nothing, you have it invested in a diversified portfolio. Let’s say you just earned 7% on 500,000, plus 35,000 a year for 20 years. You add in the compounding, it’s over a million dollars. It’s a very, very big deal.

So having your money work for you is key. You should really only have an emergency reserve what you truly need. So if you don’t have a lot of capital, yes, build up that six months. But if you do, you can probably get by with two months or three months knowing that in a worst case scenario, you could always go to the, well, yes, you’d have to pay interest to borrow that money from your account, it’s called a margin loan. But paying say 7% for a few months is very different than paralyzing a large account for decades. What’s your Tip of the Month, Jonathan?

Jonathan: Well, before I get to that, let me just add to what you just said, Peter. What you said essentially is the big financial emergency is losing your job. So I would argue, I don’t know whether you disagree with me, Peter, but I would argue that once you’re retired and your livelihood is no longer dependent on a paycheck, there is no need to have a separate emergency fund. I hear about retirees who continue to hold substantial amounts of emergency money. I just think it’s completely unnecessary. Just like you say, once you have a substantial taxable account, that gives you sort of permission to hold little or no emergency money. Similarly, once you’re retired and you’re covering your expenses anyway, why do you need an emergency fund? The other things that we think about emergency, well, buying a new car or replacing the furnace, that should be possible to do out of your portfolio. It shouldn’t be necessary to have a separate emergency fund.

Peter: I think that’s a fantastic additional advice because I do see that a lot of people in retirement, they maintain that, they were either used to it, or they want to have that cushion or they feel like it’s theirs. Your portfolio is yours. You can get money from your portfolio wherever you need to. And the way to look at it is as a repeatable decision. If every single year you’re going to have several hundred thousand in cash instead of the portfolio, well, that’s 200,000. That’s 14,000 a year of missed earnings that’s happening over and over and over again, just so that you have money that you think is yours. It’s already yours. The portfolio can give it to you. I couldn’t agree more. I think that’s one of the biggest mistakes in all of financial planning, is people miscalculate how much they need to have sitting in a bank account.

Jonathan: Anyway, Peter, for my tip of the month, I would encourage listeners to take a look at the deductibles on your homeowners and auto insurance. If you’ve amassed a decent amount of savings, you’d likely have no problem paying for $5,000 of storm damage to your house or $2,000 of damage to your car. In fact, you might not even file a claim out of concern for what it would do to your insurance premiums. If that’s the case, if you can easily cover one of these financial emergencies, hey, we’re back there again, Peter, if you can easily cover one of these financial emergencies, just like you probably don’t need as big an emergency fund. So by the same token, you probably also ought to raise the deductibles on your auto and on your homeowner’s policies.

So that’s it for me for this month, and that’s it for Peter. This is Jonathan Clements, director of Financial Education for Creative Planning, and I’ve been talking to Peter Mallouk, the president of the firm. We are Down The Middle.

Disclosure: This show 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 on this show, will be profitable or equal any historical performance levels.

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