The U.S. stock market has had a rocky start to the year, with some indexes falling more than 10%. Peter and Jonathan discuss what triggered the decline and whether share prices are likely to struggle in the months ahead. Plus, each gives their tip of 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: This is Jonathan Clements, Director of Financial Education for Creative Planning. With me is Peter Mallouk, President of the firm, and we are Down The Middle.
The U.S. stock market has had a rocky start to the year, with some indexes falling more than 10%, what Wall Street considers a correction. Where do we go from here? Peter, what triggered the decline in the U.S. market, and do you think share prices will continue to struggle in the months ahead?
Peter: Well, you can never actually pinpoint exactly what happened unless there’s a crisis. So, for example, when you see 9/11 or COVID, it’s very easy to point to this one singular event and say, “this is what happened, and the market’s dealing with only this one issue.” And one thing that makes that very clear isn’t just that an event happened, because events happen all the time that the market shrugs off — it’s that the market reacts swiftly and severely. That’s not really what happened here. Part of the reason could be we’re just overdue. I posted on LinkedIn and Twitter at the beginning of the year, “Hey we’ve gone since 2020 without a correction. That’s exceedingly abnormal. Usually corrections, which are a drop of 10% or more, happen about every year. When it happens, people are going to get stressed out because that’d be a 5,000-6,000 point drop, and we just haven’t seen one in forever.” And a correction started a few weeks later.
But I had no idea what was coming. I just knew we were due for one. So, part of it that’s built in is, we may have been due for one. Second was the market was priced to perfection. I think everyone agreed on that. We had expanded multiples, and why would you have high valuations? Well, unemployment was very low, earnings were going up, a lot of government spending, which, in the long run is very bad but in the short run helps the economy. All of these things were basically 10/10s, right? So, if anything changes at all towards the negative, you would expect a contraction. And of course, things weren’t totally perfect if only uncertainty was added to the equation. So, one of President Trump’s tactics, and just styles, is to introduce uncertainty into every conversation. I’m going to create chaos and then negotiate something out of that. One would hope, right? That’s the conclusion. So, uncertainty I think was unpleasant, but of course, I think all our listeners are going, “Well, what about tariffs? What about tariffs?”
Jonathan: Right? Everybody’s blaming tariffs.
Peter: Yes, that’s of course a very big part of it. Tariffs are inflationary. Tariffs are just a tax on things coming into the United States. And so if a BMW coming in from Germany is going to have its tax go up 20%, the cost of the consumer is going to be 20% higher. And Trump’s answer is, “Well, BMW should just build that car in America, and they won’t pay the tariff.” But to build it in America, it would cost more or they would’ve built it in America in the first place. So one way or another, it’s inflationary. So, I do think part of it, part of what’s happened is that. Lastly on this, and I think this is a very big point that didn’t get a lot of media attention because it has nothing to do with politics, most of the performance in the markets over the last few years has really been around seven stocks that we call the Magnificent Seven, that people are familiar with. Nvidia, Amazon and so on.
These stocks make up over 30% of the S&P 500. The other 493 stocks are the other 65%, 70% of the market. If you took those seven stocks out of the market, the market didn’t do that well over the last couple of years. It really was those seven stocks. And what we started to see was some cracks inside some of the key companies there, like Nvidia. We started to see real threats to the AI revolution by other companies that have introduced some doubt. And I think that was a very big part of it too. We are seeing this year that those stocks are struggling. Many of them are in bear market territory, they’re down 20% or more, and so they’re hurting relative to the rest of the S&P 500 and to the rest of the global markets.
Jonathan: So, as you stated, Peter, investors don’t like uncertainty. There has been a lot of uncertainty through these initial months of the year. Do you think we just have to get used to the uncertainty, or do you think that uncertainty is going to go away?
Peter: There’s always some degree of uncertainty, but definitely your question is, “should we expect heightened uncertainty going forward?” And I think the answer is yes. I think that’s just what we should expect. Although I would say with tariffs, there’s uncertainty around, “Is Trump serious? Is this long-term? Is he really trying to bring these manufacturing jobs back to the United States? Is he not really serious?” Nobody knows with certainty the answer around that. But the rest of the uncertainty is around, well, they’re going to cut back regulations. How much? They’re going to cut corporate taxes. How much? They want to cut income taxes for people with less than $150,000. How much? That’s a different kind of uncertainty.
All of those have a favorable spectrum to the economy, and the question is just how far he is going to go. Tariffs, and I would also add maybe war, are the two things that we have real uncertainty around. I think people really expected that Trump would be — he always talked about being very, very anti-war, and that has not really been the posture we’ve seen thus far. He has shown a willingness to drop bombs that we didn’t see in the first term to this extent. I think between war and tariffs, that is the uncertainty that I think we should expect to continue, at least for another year or two.
Jonathan: So, while it’s been a rough start for the U.S. stock market this year, we’ve seen strong performance by international stocks, especially in Europe. Do you think this rally overseas is sustainable?
Peter: Can you only imagine if it were sustainable? I mean from 2000 to 2010, it’s so long ago, international stocks had an amazing run, huge returns, and the S&P 500 earned zero. It was called the lost decade. But from 2010 to 2020, large U.S. stocks did better than everything. Better than international, emerging markets, small companies, everything else. And everyone at the turn of this recent decade, half a decade ago now, said, “Oh, that’s going to change. We’re going to see a rotation back.” This is one of the few things that Goldman Sachs, BlackRock and Vanguard agreed on, was that this decade international will do better than the U.S., but that’s not been the case. First half of the decade, large U.S. has crushed everything else. There have been moments where it looked like it was international stocks’ time to shine, but it eventually subsided. We’re only one quarter into the year, but boy, international’s having an incredible year, and the U.S. is slightly negative.
And that’s a pretty big gap, and the first closing of the gap in performance between the two we’ve seen in a long time. “Is it sustainable?” I think it’s still a question mark. And I think that Europe has been undervalued to the U.S. because of real structural problems. They have real demographic problems, they have real pressure on their economies, as they run major, major deficits without the same hope for GDP growth that the United States has. I had one of the presidents of one of the largest money managers in the world was in the Creative Planning office last month, and he described Europe as a museum. On the other hand, I had one of the largest money managers talking to us on a Zoom meeting recently, telling us that they see all the value in Europe.
So, there’s a lot of division on if this is sustainable or not. I don’t know. I do know it makes sense to be diversified, and that I do think both continents are priced correctly. The U.S. continues to be priced at a much, much higher premium, and the outlook is generally better. European stocks, Asian stocks, they’re value stocks. They’re trading at steep historical discounts, but I think for good reason too. And because of that, I think it’s a level playing field. In other words, it’s a coin flip.
Jonathan: Well, maybe the stock market is always a coin flip, but one of the things that I detect is that there is, because of the strong performance by the U.S. stock market, so much home bias among U.S. investors. People will say to me, essentially, not only are U.S. stocks going to outperform European stocks and Asian stocks, but they’re also less risky. Which, is something going to be higher performing and also less risky at the same time? Is that actually true according to the finance books? I think that if this is a turning point, and like you, Peter, I don’t know, I think a lot of investors are going to be caught flat-footed. There are a lot of U.S. investors who are not only betting solely on the U.S. market but also solely on large cap growth, and I think at this juncture it’s a dangerous stance to take.
Peter: Yeah, I do think there are a lot of very large U.S. tech-heavy portfolios that have no expectation of anything else competing from a performance perspective, that if you saw a discrepancy in performance that was sustained for several years would be a very significant surprise to a lot of people. I definitely agree with that.
Jonathan: So one final question for you, Peter. Supposing, because of all the uncertainty because of tariffs, whatever the reason, we do see U.S. economic growth slow sharply. Should we expect a rapid policy response out of Washington, and do the politicians have the tools to revive economic growth?
Peter: I do think that’s what’s interesting here, is a lot of people are saying, “oh, well, I mean the market’s going to go down and we’re going to have a recession, and how will we ever recover?” All the stuff you normally hear when there’s a market pullback. But really, I’m more optimistic now than I was, say, in the middle of COVID or the ’08-‘09 crisis or after 9/11. With all of those things, the Federal Reserve had lowered interest rates very, very low — we started to approach zero. And basically, the gun is out of bullets. And the way this works is everyone stops buying stuff, either after 9/11 because they’re scared to go outside, who knows what’s going to happen? Or after the ‘08-‘09 crisis, no one’s got home equity values and record bankruptcies, there’s no money to spend. Or after COVID, because everyone’s cocooning, right? I don’t want to go outside and die. So, the government keeps lowering interest rates to entice people to buy refrigerators and cars and houses, and it eventually works. Well, when you’re going through a crisis like that and rates are near zero, the Federal Reserve has a gun with no bullets; they cannot lower rates. That’s not the case today. So, let’s say that there’s a misjudgment, we do have a mild recession, the market does go down a lot, the Fed has a lot of firepower to entice Americans back into the economy. That’s unique, and that’s a safety valve that allows for room for mistakes here.
Jonathan: All right, Peter, it’s time for your tip of the month, what have you got for me?
Peter: So, there’s a website, annualcreditreport.com, you can go to it every year for free and check your credit. You might be surprised at how many mistakes are made around your credit that impact your credit rating, which then impacts the rates you may pay for things, or things you’re eligible for. So, I recommend that everybody go do that today and then put a reminder on your calendar to do it every year. How about you, Jonathan?
Jonathan: A lot of people give you gifts when it’s your birthday, and we expect that, right? But if you want to give a gift that really has an impact, give it when somebody doesn’t expect it. Sure, you can give your spouse flowers on Valentine’s Day, but if you give your spouse flowers in mid-May, you’ll get a much warmer response, because it’ll be an unexpected gift. So, if you want to give gifts that have impact, give it when they’re least expected. Sure, you still have to cough up that birthday present, but give a gift at another time of year and you’ll be surprised at the warm reception you’ll get.
Peter: That is one of my favorite tip of the months I have ever heard, Jonathan. You know, my son is really good at this. One time I was going through, you know there was a lot of stuff happening, and work, and things like that, and he gave me a little plaque. It was probably a few dollars, but it was a little note. It was a reminder that, hey, struggles happen if you’re having some success. Or, I keep going to KU games and I don’t wear a sweatshirt that has the KU logo on it, because I like a certain style of sweatshirt. So he went and found that style with the KU logo on it and gave it to me, and I will tell you, those are much more exciting — to think that someone’s thinking about you outside of your birthday or a holiday or something like that. It is powerful. And I would say the same about notes, you know when you receive an unexpected note from somebody not tied to an event, it’s also nice. Great, great tip.
Jonathan: Talking about notes, I still think there is enormous value in handwritten notes. We are so used to getting text messages, it’s so easy to write an email that it’s really not greatly valued. But if you sit down and you write somebody a note and you mail it to them — and hopefully it gets delivered — it will be remembered in a way that an email or a text message never will be. Handwritten notes are super powerful.
Peter: Yeah, people don’t throw them away. They delete your email but the handwritten note, if it’s meaningful, it’s going to get kept.
Jonathan: All right, Peter, 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.
