SPEAKER_01 0:07

The primary point, the primary reason we do this podcast at all, is not to gain new clients necessarily, it's to actually coach and educate the clients that we have. And to that end, what we try to do is really look at what's out there, what's in the media, what's kind of the narrative that's that's you know fermenting um that can throw you off off track. Because what what what we should know by now, if you follow this podcast at all, is we believe markets work, we believe they're efficient, we believe that nobody can predict the next 20% movement. It might be up, it might be down, we don't know. But we do know the next 100% movement is always up. In other words, markets double. Uh, they have many times, but they've never dropped to zero. So in a year like this year, this is a midterm election year, um, I decided in January, in fact, it was January 19th, if you want to go look up uh the pod, um, I decided to speak about what happens in midterm election years. Because generally speaking, you'll see an intra-year decline in markets. Um, I'd say up to a couple weeks ago, I was wondering myself, like, wow, is this going to be a year where we just we we buck that trend? It obviously is possible. And we might still, you know, markets are up for the year, uh, considerably so. We'll cover that in a little bit. But, you know, I am starting to hear from media, from social media, uh, and even from some of you. I'm getting some emails, I'm getting some some phone calls about um, Joe, is this time different? And that's the phrase I laugh at, but I'm not laughing. I'm not making fun of it. Um, I laugh because I just I can't even count how many times I've heard it. It's very natural for anybody to think that, you know, that the that the time we're living in now is is different because it is for us if we weren't alive in the 70s or the 60s or the 50s or the or even the 80s, when maybe some of this stuff has happened before. So, what I want to address today is will rising rates, will high rates and a midterm election, you know, those two things combined, is that going to crash the market? Um, we've had a bad week, you know. So, this is a this is a podcast that we're it's timely. We're gonna put it out uh as soon as we can, as soon as we can get compliance approval. We're recording on uh, what is this, uh Thursday, the 24th of September. And right now, as I record, markets are red again across the board. It's not just the SP 500, it's everything. But today, what I want to do is I want to talk a little bit about rates, what with like treasuries, what's going on, uh, discuss a little bit about midterm elections, look at where we are historically, meaning, is this different? Is this a unique circumstance where we have midterm elections and we have rising interest rates and inflation? Like there's that mix. Have we had it before? If so, how many times have we had it? And if so, what's been the result? You know, how has this worked out before? I feel like putting context around anything that's scary or unnerving is very helpful. Uh, and then finally, we're gonna look at, well, where are we year to date, you know, with all this stuff going on? Okay, so let's dive in. A lot of data today. Um, not unique. A lot of times we'll we'll do uh a lot of different numbers if you're listening in the car. Don't worry about retaining the data, just you know, get the context of it. So to begin with, let's just talk about where we are with the treasury. So all the rates are up. Uh the two-year rates are about 4.9%, five-year treasury yields are 5.03. Again, this is as of recording today. 10-year rates are 5.13, and 30-year rates are 5.35. These are high. These are high relative to recent history. Okay, these aren't necessarily high historically, but they are certainly high relative to recent history, definitely over the last decade, let's say. Um, by the way, that is why we don't, we've talked about this before. You know, fixed income and bonds, it's not sexy, it's not fun to talk about, but it's a lot, it's a big part of a lot of your portfolios. Depending on your standard deviation that you can deal with, you know, your risk tolerance and the volatility you're willing to accept, we may have a lot more fixed income in your portfolio. And we don't buy and place long duration bonds inside your portfolio. We stick with high quality, short-term fixed income because in a rising rate environment, those long-term bonds get hit pretty hard. And we don't want that. If we're looking for return, if we're looking for yield and return, we're gonna put your money where return comes from, which is equities. Okay, so um, I'm not concerned about rates in terms of your portfolio, but I am gonna look at it in terms of, well, what does it mean for the market as a whole? Okay, so it's not different this time. Let's not bury the lead. Uh, I I've all this information is gonna come from Yahoo Finance as it normally does because it's so easy to collate the information. There have been six times since 1966 that we had both a U.S. midterm uh election uh and treasury yields were rising into that. Now, in every instance on record, so so as my as my 10-year-old daughter used to say when she was little, hear me. In every instance on record, the SP 500, we're gonna use that and then we'll talk about some other markets. The SP 500 was higher one to two years after it's low, meaning stocks were being sold into a uh midterm election year with rising rates. So let's look at some of those time periods. 1966, Joe, that was forever ago. I wasn't even born then, yeah. Neither was I. Um, don't worry, there's some more recent data. Uh, in 1966, the federal funds rate uh went from four and a half to 5.75. The peak was February 9th. That was the market high. The trough was October 7th, right around this time frame. Uh, and that totaled a negative 22%. So we lost 22% of the value of the SP during that time period. Now, one year after that, so from the uh in 1967, January through December, SP up 23%. The year after that, it was up another 11. So scary time, 1966, midterm elections. We had high rates, negative 22%. The you know, the earth is the sky is falling, this time is different. Sell, sell, sell. Don't sell. It rebounded with a plus 23 and then a plus 11. What about 1974? Now that year I was born. 1974, the Fed pushed short-term rates into double digits, double digits, short-term rates, double digits. So the peak was uh January, the trough was October. We had a 38% drawdown in the SP 500. That's interesting because in 2008, the global financial crisis that everybody says is the worst ever, we were down about 38% for the year in that year. Well, here we had that intra-year, right? So not January through the end of December, but at some point in the middle of the year in 1974, the year I was born, they were down 38%. The SP was. What happened in the following year? Well, the SP rebounded in 1975 plus 37.2%, 1976 plus almost another 24%, 1978. Fed hikes, uh trying to defend the dollar against, as we all probably know, massive inflation. Um, the peak was September 12th, so pretty good year for most of that year in 1978, but then it violently dropped from September 12th through November 14th, about two months. It lost 14% of its value. The SP did just over two months. It's pretty scary. Um, but you didn't want to sell because in 1978 the SP was up 18%. Uh, I'm sorry, 1979, the year after it was up 18%. 1980, it was up 32%. That's why I should leave these glasses on because I can't see, I can't read if I don't have them on. All right, 1994. This might be more recent history for a lot of you guys. I know I was in high school. The Fed hiked six times, increased rates six times in 1994. Um, some refer to this as the year of the bond massacre. Sounds scary. Sounds like, oh my gosh, this time is different. The peak was late January, so it was a tough year in the market. Um, the trough though ended in early April. So it was sort of a violent crash down eight and a half to 10%. Violent because it was a short-term period of time. Bond massacre year, certainly you should sell, right? I mean, that's this time is different. No, you shouldn't. Because from 1994 in that bad year, 95, SP rebounded with a 37% up 1996 plus another 23%. 2018, the Fed hiked four different times. Um the bottom line is the SP lost almost 20% of its value intra-year in 2018. Um, if you hadn't didn't sell in 2019, we were up 32%. In 2020, the pandemic year, we were up 18%. So that's, I mean, if you just look at it, it's amazing. Uh, even in the midst of a pandemic, we've done podcasts on that. 2022, this is the last one. So pretty recent, right? Like just very recent. This is the fastest Fed hike since the 1980s. The 10-year uh rate went from one and a half to about four and a quarter very, very quickly. The peak was January, the trough was October, uh, SP lost 25%. Thank goodness you didn't sell. If you were my client, I know you didn't because I wouldn't let you. Um, and I wouldn't let you in 2018. In 2023, you were up 26%, and 2024, up 25%. Okay, great. So, okay, but what does that mean for now? All right, let's look at some let's look at some data for like right now, live data. Again, using all Yahoo finance data. The last six uh times where we had both midterm elections, so media narratives, one way or the other, doesn't matter where you are, left or right of the aisle, you know, you're going through a midterm election. Um, it it plus the Fed increasing rates and treasury yields going up, you're gonna hear all kinds of scary stuff. Like, oh, the you know, the international markets aren't buying our bonds anymore because we're junk, because we've got so much debt. Look, that's true. We have a lot of debt. Again, I am not saying that 40 trillion is not a lot of debt. And 40 trillion might not even be the real number because it doesn't even include things like Social Security and Medicare and Medicaid, et cetera. So I'm not saying I'm not rubber stamping the the uh fiscal policies of our politicians. What I am saying is we've had this before. We've had increases, significant increases. We've had intra-year declines in some cases upwards of 38%. I think that was 1974. I have to go back and check. Um, but in every case, on record, the next two years were both positive. And year to date, so if you're getting unnerved, you know, and because I'm seeing this out there, I I can I can almost predict how the media wants you to react and how they want you to be fearful. Okay, fear sells. We know that. Fear always sells in my industry. I always say fear and fancy sell. So any kind of exotic product, you know, this is a new product, this is different, that sells. If you scare people that sells, I'm not gonna do that. We don't need fancy products, we don't need to be fearful. We just need to let the capital markets do their thing. Capitalism is going to do its thing. So let's just talk a little bit about where we are this year so far. Uh, we'll start with the SP. Okay, one month the SP is basically flat, okay, not up or down. But year to date, the SP is up almost 12%. Now, the SP, incidentally, if you're a client of mine, of your US money, that's one of the smallest holdings that we that we keep because we're overweighting to things like small and distressed stocks. Uh, and then we factor in things like profitability and momentum and all this kind of stuff, which we can talk about in our one-on-one meetings. But um, that that's why I want to look at some of these other uh markets as well. Because when I say, will it crash the market? If you're a client of mine, you should immediately say which market? There's there's there's many markets. You're you're in 17 to 22 individual markets around the globe, uh, depending on how you're allocated. So let's look at what about US small cap value? So I'm looking at the dimensional funds, US small cap value, very high allocation in our portfolios, by the way. Uh, over the last month, that's down almost 5%. That's a lot of red over a month. Year to date, it's up almost 15%. Uh, continuing on, international small cap value for a lot of you, this is actually, if you're an aggressive uh uh uh investor with me in the way we allocate our portfolios, say you're a 95% equity investor, upwards of 18% of your portfolio is in international small cap value or you know, another moniker for value is distressed. The last three months, I'm sorry, the last month, that's down only about 2.76%. Not really, really that bad. Year to date, it's up 13%. US large, or I'm sorry, US small growth. This would be like the Russell 2000. Over the last month, this is down 6%. That's a big number, you know, negative six in a month, but year to date it's up 12%. Uh, just a few extras here. Let's see. Let's look at how about international small cap, large, uh, one month, down 3%, but year to date up nine. So really we're seeing the same thing across the board. The only difference is uh really the SP is essentially flat over the past month. But all of these other markets that we're looking at that we use, you know, all these different allocations, whether it be international, large value, international, small, small value, same thing domestically. We've got micro, we've got small, we've got value. All of these things over the last month are basically down, with the exception of the SP, which is essentially flat. But year to date, almost all of those are up double digits. So we have to put things in context. Short-term movements and short-term really, and when you're talking about as an investor, it can be a couple months, it can even be a couple of years. A one-year time frame in context of a hundred years of data is really nothing statistically. Now, I know as an individual investor, we don't have a hundred-year time frame. We're not looking at that. But I want to end with this. When you when you have your portfolio, whether it be in retirement accounts, whether it be in non-qualified accounts, this is your equity positions. And you're hearing your friends, your golfing buddies, your brother-in-law or sister-in-law, or your or maybe your current advisor, or maybe it's the media, social media, this narrative that this time is different. And whether it's AI or whether it's uh inflation or whether it's stagflation or whether it's rising rates, or whether it's the political uh establishment, whatever it might be, whatever they're doing to try to make you fearful, I want you to think about your portfolio as if it's a company. It's your business. Okay. I don't care if you're a W-2 employee, if you're a surgeon, or if you're a business owner and you own a small business, your portfolio should be thought of as another business, as an entity. And you wouldn't sell a business, a dentist office or a car wash or anything. You're not gonna sell anything because it had a month of poor cash flow or poor returns. You're just not. And so we have to look at this the same way. We're not gonna tie markets, we're not gonna speculate on what's gonna happen in the future. Nobody knows that. Certainly not me. We're not gonna gamble with your money. And don't let any of those other people get a foot in the door and do the same. So that's it for today. The answer to your question is will the market crash because of high rates and midterm election? The history suggests that it may have an intro-year uh correction. You haven't seen it yet, but the next year or two, everything's gonna be fine. This time is not different. Stay the course, you're gonna be okay.

SPEAKER_00 15:49

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