Why do many feel this year’s stock market volatility rivals much worse declines of the past? And why are the market’s moments of weakness such a gift for the individual investor? Peter and Jonathan answer these questions and provide their tips for the month.
Hosted by Creative Planning’s 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!
Important Legal Disclosure:
creativeplanning.com/important-disclosure-information/
Have questions or topic suggestions?
Email us @ [email protected]
Transcript:
Jonathan Clements: This is Jonathan Clements, Director of Financial Education for Creative Planning. I’m talking to Peter Mallouk, President of the firm, and we are Down the Middle. This year’s stock market roller coaster ride shows no signs of ending. While we’d all like to see less volatility, perhaps what we really need is more perspective. So far, this year’s stock market decline pales next to the 57% plunge in the S&P 500 we saw in 2007 to 2009 or the 34% drop we saw in early 2020 or the 25% decline in 2022. Yet to judge from all the hand-wringing, many folks seem to think this year has been just as bad as those earlier declines. Why do you think that is, Peter?
Peter Mallouk: I think a big part of this is the news cycle. So if you think about some of these bear markets that have happened over the years, 9/11, the tech bubble, I mean we barely had the internet, right? Then you have ’08-’09, I mean the iPhone came out in late 2007, 2008, didn’t have widespread adaptation until after the ’08-’09 crisis. COVID was the first one where we had social media, phones, around-the-clock news — and that felt incredibly intense for people. This has been a 14% drop, or something like that. It happens on average every 12 to 18 months. Very pedestrian correction in the grand scheme of things, but you have social media, around-the-clock news, and you combine money with politics where people already come with very strong opinions, and you have a recipe for maybe a lot more fear and uncertainty and anxiety around something that, if you’re 40 years old, this is going to happen approximately 40 to 45 more times in your life. And so I think it’s a perfect storm of things.
Jonathan: And if you’re 40 years old, this sort of decline, you should get down on your knees and give thanks, because it’s a great opportunity to buy at cheaper prices. You want to see these sort of declines if you’re in the midst of your career and you’re saving money on a regular basis.
Peter: That’s right. You’ve got two groups of people. I mean you have people that are retired going, “Well, I can’t afford this, and I can’t have the market be down.” Well, even if you are 70, you’re going to see 15 more corrections like this. You’re going to see three bear markets. This is normal. This is kind of the price you pay for investing. But the good news is we know how this story ends. We know how it plays out, and you should never be at the mercy of the market. That’s why you have short-term bonds in your portfolio, or you have a lot of income from your portfolio to meet your short-term needs. And to your point, Jonathan, if you’re younger, I mean, you don’t want the market to go straight up. You want there to be very, very long prolonged corrections in bear markets. So really there should be nobody that is at the mercy of this market or is making withdrawals in weakness or selling things while they’re down.
Jonathan: So Peter, even as the S&P 500 has tumbled, we’ve seen relatively strong performance from foreign markets, from value stocks, from bonds. If someone has a well-diversified portfolio, shouldn’t they be doing notably better this year than the major U.S. stock market indexes suggest?
Peter: Yeah, I mean we basically had a 15-year run of large U.S. stocks crushing everything, and it really accelerated in the last five years with the AI revolution taking place largely in large U.S. companies, where the initial tech revolution happened. So you have the Amazon and the Apple and Facebook and Microsoft and all these companies. Everyone thought, well, now they’re trillion-plus companies, 2 trillion, 3 trillion, they can’t possibly get bigger. Yes, it’s justified because the tech revolution happened there and they run the world, and then the AI revolution happening inside the same exact companies. And those companies lifted up the large U.S. stock market index before the tariff thing even started. Year-to-date, those companies were in bear market territory.
The Magnificent 7, these very big tech companies where the AI revolution is happening, were down more than 20% on average. Some very, very badly like Tesla, some just pretty soft. But as a group in bear market territory, if you took the rest of the S&P 500, the S&P 493, it was positive year-to-date before tariffs started. So was international. So were small U.S. stocks. We’d already seen that rotation taking place. And then you threw in the tariff issues. We saw the U.S. get hit much, much harder. Small caps got hit very hard. They can’t withstand the higher prices for very long, and the barriers to entry very long. Large companies hit but not as much. And we’re seeing international do much better. So the globally diversified investor who has wondered for years, why in the world do I own anything besides U.S. companies, this is the reason. This is more normal to see rotations happen every now and then.
Jonathan: What doesn’t seem quite so normal is how richly valued the U.S. stock market remains, despite all the economic uncertainty and despite the fact that the bond market is offering a pretty attractive alternative to stocks right now. Peter, why do you think the U.S. market remains so richly valued given the situation?
Peter: Well, I think before tariffs happened, basically look at the market and say, “We’ve got structurally low unemployment.” No one really sees a path to high unemployment. So that’s always a great foundation. If people are working and making money, they have money to spend, and that’s a great foundation for an economy. We have relatively stable interest rates. Corporations have had a pretty friendly environment for the last 10 years, and the indications early on from the administration is that would at a minimum continue, and corporations are posting record profits despite the political de-globalization, there had been economic globalization happening, where McDonald’s selling more burgers overseas, Walmart opening more stores overseas, all these very, very positive trends that were driving high valuations.
Now that we have the whole tariff issue, that reformulates everything. And if the market really believed this was going to go on for two years, we were going to repatriate all these jobs, well it would be down 50%. The market would be devastated. And if it thought this was going to get resolved tomorrow, it’d be up thousands of points. I think it’s priced precisely where it’s supposed to be. It’s got just enough uncertainty to wonder what in the world is this administration going to do in the next 60 days, but it’s probably not going to have this go on for years. It’s probably not going to get solved tomorrow. And so it’s still priced as if we’re going to get a resolution to this and we’re going to return to this, frankly, Goldilocks world we were in with low unemployment, moderate interest rates, high corporate earning, I mean, like, all of these fundamental things that allow for a thriving economy.
Jonathan: But in the meantime, of course, you know we do have this market turmoil, and when markets are in turmoil, people tend to freeze. But market declines are also moments of great opportunity, Peter. What should people be doing right now?
Peter: Well, if you think of business owners, business owners are frozen, and it makes sense. If you’re running a big company like Nike or you’re running a small business that makes clothing and imports to the United States, you are not going to make a big strategic decision now about where your next plan is or who your next supplier is because you know it could be a huge investment waste of time and policy could change tomorrow. We’re literally seeing policy change in real time every 48 hours or more. But if you’re an investor, you should be ignoring all of that, literally all of it. And if you’ve been contributing in the market, you should continue to contribute. If you have cash on the sidelines, you should be investing it. You should not be hoarding cash. You should be investing with certainty and a lot of aggressiveness. That doesn’t mean we’re at a bottom. It could go down another 20%. I have no idea. But these cycles of weakness are the periods of time that are the gift to the investor.
Jonathan: Absolutely. And as you say, if you’re an individual investor, you are, in a sense, accountable to no one. So if you’re a little bit early, so what. The only person you have to blame is yourself, and the only person you’re accountable to is to yourself. So take advantage of it, and if the market keeps going down, invest some more, save some more. It’s a great moment to be an investor. So, Peter, it’s that point of the podcast, what’s your tip of the month?
Peter: So most of our listeners probably have an estate plan, a will or a trust. And we know if you don’t have one, that the state you live in will decide your estate plan. Basically that means the state will decide who your executor is gonna be. They call that person an administrator. They might divide your money in a way you don’t expect. Like a lot of people assume things will go to their spouse or their kids, but really in many states, it’s split between the two of them or it goes according to beneficiaries. So most people say, “Well, I don’t want that.” So they have a will or a trust in place. That is not enough. You have to have the beneficiaries and ownership of your accounts correct. And I’ve seen too many times where somebody is very ill, and they’re spending time signing beneficiary forms.
So if you have life insurance policies, 401(k)s, IRAs and so on, whether you have a will or a trust, it’s important these beneficiary designations and ownership designations are correct. If you have a trust, things that you own in your name should instead be owned by the trust. An attorney or your financial advisor could help you with that. If you have a will, you could still have a lot of your assets avoid the probate court system if they’re titled and the beneficiaries are correct. Make this a priority while you don’t have anything to worry about.
Jonathan: I would just add to that, Peter, while everybody emphasizes the importance of getting a will, probably for most listeners of this podcast, their biggest asset are their retirement accounts, which means that the beneficiary designations on those retirement accounts are going to determine where the bulk of their assets go upon their demise. So those beneficiary designations are really more important than having a will though, of course, you should have both. So check those beneficiary designations and just make sure that you’re not about to leave all your money to your ex-husband.
And so for my tip of the month, Peter, just in case you’re hit with a financial emergency, think about the various ways that you can access cash. That doesn’t mean you need to have a heap of money sitting in a savings account. Instead, what you want to think about is the various ways that you can access cash, whether it’s through a home equity line of credit or through a margin account at your brokerage firm. What counts when there’s a financial emergency? Is it how much cash you have on hand? It’s how much cash you can access quickly. So think about how quickly you can access cash and how much you can access at short notice.
Peter: Good advice. A lot of people think that they need to have cash, and they really just need liquidity. You need the access to cash.
Jonathan: So that’s it for this month. This is Jonathan Clements, Director of Financial Education for Creative Planning. I’ve been talking to 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.
