Rising Interest Rates, AI Volatility and the Case for Bonds

Peter and Jeff break down why interest rates and oil prices are rising, what’s behind the recent shake-up in AI stocks and why bonds are looking more attractive to investors. Plus, get their tips of the month.

Hosted by Creative Planning’s Director of Financial Planning, Jeff Stolper, 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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Transcript:

Jeff Stolper: I'm Jeff Stolper, Director of Financial Planning at Creative Planning, and with me is Peter Mallouk, President of the firm, and we are Down the Middle.

My grandfather was a pretty frugal man. He would get receipts for everything and review them at the end of the day. He'd closely watch CNBC for what was happening in the markets and with rates. And yes, he added water to the end of the ketchup bottle to make sure he got every single last drop. So if today he were looking at things, he'd see the receipt from filling up his old Pontiac is way higher, rates are higher, whatever in AI stock is down and, yes, the price of ketchup has gone up. So today, we're gonna be covering what those increases to oil and rates means for you and why if my grandpa was watching CNBC still ... he'd see tech stocks are down.

So, Peter, let's just start with costs and rates going up. Break down for us a little bit what's going on.

Peter Mallouk: I mean, there's so many things that are just different than they were a few years ago. Hundred-dollar oil, conflict all over the world, AI revolution and bond yields were low and now they're higher. If we look today, what's going on with interest rates, interest rates are high and getting higher relative to the last 10 years. I think this is really surprising to a lot of people, but it's happening because the economy is hot. Unemployment remains low, prices keep going up. They're partially up for artificial reasons like war creating supply chain issues with oil. I mean, oil would not normally be at 100. It should normally be about a third lower. If we ever get peace to break out in this world, that would happen again.

But all of the strong earnings, AI revolution, all the money that's sloshing around the economy that's been spent and printed since after COVID, it's been hard to get prices under control. So the Fed is raising rates. When we raise rates, it makes it more expensive to do things. It makes it more expensive to buy a house or to finance the purchase of a washer or dryer, or the purchase of a car, or one business to finance the purchase of another.

And a lot of people would look at all of this and say, "Well, isn't that negative for stocks?" Because it does seem like if everything else was equal, if a company's borrowing rate goes from 5% to 8%, well, that must be taking from their profits. Well, that's true, except all things aren't equal basically ever. So the reason that the Fed's raising rates is, like I said, the economy's strong, which means companies are doing really well. And that's why it's a surprise to a lot of investors that when rates rise, stocks actually historically have performed better than when rates decline. And if you take the extra step and think about why, think about when does the Fed lower rates, when they need to stimulate the economy. After '08, '09, they couldn't get anybody to buy cars and washers and dryers and houses. They kept lowering rates until people started doing it. And now they're gonna keep raising rates until they get prices under control.

At the same time, we have everything with AI happening. And I think everyone basically looked at AI and said, "Look, AI is revolutionary. It's going to change the world. It's gonna drive a lot of the economy. These AI companies are gonna make a ton of money, and every other company's gonna be more efficient because AI is gonna make them more efficient." Well, that's true. But what we started to see in the market is some discernment.

So if we go back to railroads or the automobile or the internet, in all of these instances, it was a revolution that made the economy more efficient, the economy exploded because of these things, but most of the early entrants went bankrupt. All companies don't win. So AI can win. The thesis can be right. AI is gonna change things. It's gonna be amazing. There's gonna be huge winners. That's true, but there will be blood. Most of the companies are gonna be losers. And what the stock market is looking at now, and we saw this over the last couple days, is the slightest hint that something might not be going perfect with AI, you see stocks really getting hit.

This is a big deal to investors because the anchor of a good portfolio, in my opinion, is the U.S. stock market. That should be the anchor of every portfolio is large U.S. companies. It's the anchor of my portfolio, everyone in my family's portfolio, and what I always recommend to the clients I personally work with. Well, the anchor of the portfolio has done incredibly well for the last 15 years, but because the tech revolution, and in particularly AI revolution, is happening not exclusively, but almost entirely in the United States, a very large percentage of the S&P 500 is AI-related, more than half, or very focused on AI, which is almost a third. So when AI does get hit, it will have implications for this, which is why investors should have money in other places as well.

Jeff: Going back real quick to the rates discussion, you brought up the fact that yes, it makes things more expensive, yes, it makes it on the oil front and then also the borrowing front for businesses more expensive to do things, like get the product to the end location. But one thing, it also increases short-term Treasuries. For the individual investor, they might look and see, okay, Treasuries I can now get around 4%. How do you think that part plays into it, either keeping that cash in a money market account or buying a short-term Treasury versus let's say the bonds you were just talking about?

Peter: The math for an investor has really dramatically changed. So, you know, some people look at this and go, "Oh, the stock market's done nothing but go up since COVID nonstop, you know, little tiny breaks like the tariff war and so on. But for the most part, I just blink and my account goes up. Why would I own any bonds at all?" And of course, you know, at Creative Planning, we talk all the time about, well, you better have bonds to cover about five to seven years because something none of us are thinking about happens every now and then. Most recently, COVID, 25 years ago, 9/11, and a bunch of stuff in between. So you always wanna make sure there's money available to you no matter what happens in the market.

Well, that was very hard for people to stomach, not only because the market went straight up, but also because interest rates are so low. Like, "Gosh, you want me to own bonds paying 2%, 2.5% when the stock market just goes bonkers every single month?" Well, now, we're starting to see that stock market diversification might be a nice thing. We're going to get at some point a correction or bear market as we always do. And bonds are now paying a lot more. You can be very, very conservative and get 5% out of your bonds. And so for the investor that's really hesitated to have that safety net to make sure they've got five to seven years covered, the bond market's now paying you to have that protection and it's something people should more strongly consider.

Jeff: Yeah, I totally agree. I mean, it's much easier if you can actually see some kind of return out of the fixed income portion as opposed to just equities.

Peter, let's move on to our tip of the month. What do you have for us?

Peter: All right. Going into the Thanksgiving season, there's a lot of research around that happy people are grateful people. You know, there's all this stuff that everyone thinks, "Oh, I need this big thing to be happy, I need the car, I need the trip," or whatever. But the research says that happy people are happy because it doesn't take a lot to make them happy. They're happy to go to lunch with a friend, they're happy that they get to watch their favorite show, they're happy they get to walk their dog, and they have this attitude of gratitude. They're thankful for those things.

And we also know that the research shows if you tell people you're grateful for them, that you become a happier person, and of course, they do, too. Who doesn't wanna hear that? And so I would say for some of us it's hard to do, for some of us it comes naturally, but think about the people that you care about and tell them that you're grateful for them. Today, I was able to have lunch with our former CIO's wife, our former CIO, Jim Williams, passed away a couple years ago. And one of the things I don't regret is I told him quite frequently how grateful I was and gave him hugs that he absolutely hated.

Um, but he knew, you know, he knew. And I think that to the extent that we can do that with people we care about, I think it just makes for a better life. And you know, we're always talking about investing, but the only reason anyone's investing is to achieve their goals and dreams, which leads to a better life, right? And this is an easy way to pick up a little bit more there, too.

Jeff, I'm grateful for you. This has been a fun podcast to do with you. You've got a big birthday right now, so happy 40th. And what's your tip of the month?

Jeff: Oh, thank you very much, and thank you for the kind words, and I feel the same. Incredibly fortunate to do this with you, too. I had this realization about this actually last night. I called a friend to wish him good luck. And his response to my call was not like, "Oh, I'm so glad you called” initially. He said, "Well, this is weird.” It was a — it was a weird interaction, but made me realize I should do that much more often.

Peter: Right.

Jeff: I couldn't agree more.

My tip of the month is to start your year-end planning now. A lot of opportunities do have a December 31 deadline and can take a couple weeks to set up. Whether that is taking your required minimum distribution, you can also do so via a qualified charitable distribution, a QCD. You can give that directly to charity if you're over 70 1/2. You could look at your gains and losses for the year and look for opportunities to recognize some losses. If you're charitably inclined, consider donating appreciated securities or setting up a donor-advised fund or Roth conversions. There's just a lot of opportunities, and I think the single best way to make sure you're capitalizing on all of those is to check in with your advisor or CPA or whoever in your life helps give you advice.

Peter: That's good advice because I mean, a lot of people wait till December 20. And the issue is not only are you busy but everyone you're working with is busy. The accountant, the lawyer, the — they're all getting hammered at the end of the year. But even if everybody gets it perfect, which is gonna normally be the case, custodians struggle to keep up with things that involve moving money. So you're taking that distribution or making that charitable gift. Every year, there are people that are disappointed because the custodian couldn't get something done in time. Get in front of it while you're relaxed and make these things happen in the month of November instead of December.

Jeff: Absolutely. Put it on the calendar this week, get it done before the holiday rush, no doubt.

I'm Jeff Stolper, Director of Financial Planning at Creative Planning. With me has been Peter Mallouk, President of the firm, and 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.