In this week's episode, we are going to be doing a special market update. A lot has been going on in the world and we thought it was necessary to provide some insight between our normal quarterly market webinars. Many topics are being discussed in the news like bear markets, recession and inflation. In this episode, we are going to break down each of those concepts and also talk about some principles that investors can adhere to in volatile markets.
This podcast is for informational purposes only. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. StatonWalsh and Founder’s Financial Securities do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
Ryan Staton is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.
Devin Walsh is an Investment Advisor of, and securities offered through, Founders Financial Securities, LLCMember FINRA/SIPC and Registered Investment Advisor.
Check the background of this firm on http://brokercheck.finra.org/
Hello everyone. And welcome to this week's episode of wealth builders presented by StatonWalsh. On today's episode, we're gonna do a special market update. A lot has been going on in the world, and we felt it was necessary to reach out in between our normal, quarterly market updates. And give you some perspective on where the market is today and where we're headed for the remainder of 2022. Many topics are being discussed in the current news cycles like bear markets, recession inflation. And in this episode, we're gonna break down each of those concepts and also talk about some principles that investors can adhere to in volatile markets. We hope you enjoy the show.Speaker 2:
This is wealth builders presented by StatonWalsh, a show designed to pull back the curtain of the financial industry and bring true transparency to the forefront of conversation. On the show, we cover topics like financial education, current events, and interview business leaders and industry experts with the ultimate goal of helping listeners discover their own path to financial independence.Speaker 3:
Hello everyone. And welcome to this week's episode of wealth builders. We're doing a special market update. Usually we do these market updates every single quarter, and our next one's gonna be coming up at the end of July. But as of market close on June 13th at S and P 500 officially entered a bear market. So we decide we'd do a , a little in between market update for everyone. So Ryan say, let's , let's talk about what a bear market is, what it means. And we keep hearing this word recession. We did our podcast last week on financial news and who we should listen to, but almost every single station, every single publication we're looking at, we're heading to recession. We're heading to recession. Watch out here comes the recession. So what is a recession? What is that? And are we going into one and this bear market, like what's going on right now?Speaker 1:
Yeah. So as far as a bear market is concerned, you hear the terms bull or bear markets tossed around in the media. And so for, for the layperson, or just like your average everyday individual, that is an indication of good market conditions or bad in the context of a bear market, the way that's measured is that an index has fallen more than 20% from its most recent peak. So you talked a little bit about bear market territory and the S and P 500 traditionally is one that we look at as a barometer for us markets on a broader scale. So as of this month, it is dipped below 20%, which is that's our threshold for cracking into a bear market. So since we are in that territory, just like, I think we see, and on the opposite end of the spectrum, when we break through into what would be considered bull market territory, it becomes a huge topic of conversation. The market is down it's way down from its peak. What happens next? What's causing this? What can we expect? I should say, moving forward with that, can it go down more? And those are natural questions that most investors have. It's it's questions that on an open-ended basis kind of get asked on in financial media a lot of times, and you mentioned the word recession gets thrown around. That's a big, hot button issue right now. There's a lot of things that go into determining what a recession actually is. And I think for most people they remember 2008, 2009. It , it was a long time ago from a calendar perspective, but it , it could probably still be fresh in the minds of many. So, you know, I think what recession means and what we interpret that word to mean can, can be two very different things. And, and I think that's the challenge for investors is they hear recession. And when you think recession in recent history, there was a recession actually at the beginning of COVID , you know, in the , the very beginning stages of COVID very temporary, obviously in the market market, downturn was also relatively short, but what it means in their mind, they can most closely relate the idea of recession to a 2008, 2009, which was a , a very bad economic period for the United States and really for, for much of the world. But I don't believe based on what we know and the data that we see that the two are the same also what happens to the markets in relation to any economic contraction, which is kind of a , the in between , and not exactly a recession, but a slowing of growth in the economy, what that ultimately will do to this bear market. Will we continue to dip deeper on these major indexes? Or is there a potential that some good news could create a turnaround in the markets by the end of this year, even?Speaker 3:
Yeah. Cause historically barrel markets outside of recession tend to be shortlived, you know, a little less severe last about, I think, nine months on average, without usually about 25% market draw down , we've seen. So, so we have that then what are the odds? We talk about odds like here . So what are the odds we actually are heading into recession? We're talking about a lot of different things right now. Uh , I know the , the federal reserve board, the fed has recently announced a , uh , three quarter of percent of rise in short term interest rates. We're really trying to combat inflation with that. So what are the chances that are we just in a bear market, you know, nine months, we're not in the nine months yet from the end of the year. So that's towards the end of this year. It feels like a long time, but you know, relatively it's nine months, isn't that long. So with everything going on with us, raising rates kind of right in the middle of this bear market right now, what are the odds that this has actually headed into a recession?Speaker 1:
Yeah. So I think the important thing first is to define what is a recession. So you're the national bureau of economic research defines a recession as a significant decline in economic activity. That's typically spread across the economy and it lasts more than a few months, I think, in, in the world of research and analytics and the way that economists look at this , it usually is interpreted to mean that there are two consecutive quarters. So really a six month period of time where there's negative GDP growth. So we don't want to crawl down this rabbit hole and getting into a intense economics lesson here, but basically what we produce and sell and create goods and services in the United States affect a metric called GDP gross domestic product. So in that world, we like to see that grow every year. When you talk about the economy that typically becomes the metric of a growing economy. So when we look at GDP growth and we look at what's happened over the past almost six months now earnings have slowed for sure, as far as like corporate earnings and growth has definitely slowed, but it hasn't really broadly declined to a rate yet that would be considered a recession, a recessionary levels, even though it has contracted or declined a little bit based on our measurements or, or the various institutions that measure things like GDP, looking at that, they have not been able to determine that we are in a recessionary period at this point. So what does all that really mean? LikeSpeaker 3:
What does that , yeah , so what's that number look like? He's talking about, you know , we're not necessarily , everything feels doom and GL . Now a lot of people seen all that stuff. Like , so what does that a GDP that going down decline? What does that number look like? What does the negative 5% GDP, what does that number look like?Speaker 1:
Yeah, so there's not really defined metrics. So similar to, we just talked about bear markets declining by 5%, for example, or I'm sorry, excuse me, 20% that indicates that we're in a bear market. When we talk about GDP specifically and economic growth in the United States, they're really looking at trends. Recessions are based on, or , or the call to say, we are heading into a recession, or we are in fact, in a recession, it's more specific to growth metrics. So it's not a percentage per se. It's more that we've contracted consistently for the past 6, 9, 12 months looking at it on a quarter by quarter basis. And if that's the case, then we can safely agree that we are in fact in not a contraction, but maybe in a full blown recession. So contractions and we talked about bull markets, you know , lasting about nine months in length. Contractions are , are typically shorter term. They happen over the course of maybe a few months or maybe not even two quarters. And then we turn the corner into some form of growth or expansion, and those are all relative, right? Like those words, expansion and contraction can have broader meaning. Some people look at those as the exaggerated versions of those, but really it just has to do with seeing consistent pullback, consistent contraction, consistent decline in some of those metrics for then there to be a consensus to say, yes, we are officially in a recession. So the point is, it's hard to predict number one, when that's going to happen, even though all the things that we see going on in the world right now, it's hard to say for sure, even though we may see some slowing of growth, there may be some slight contraction. You can't say for certain that, that we are going into recession. What we're seeing in the market right now is all the talk of, of recession and all the talk of things to come and, and what people are trying to predict, looking into their crystal ball and saying, this is what we see by the end of the year, how financial markets work as people vote with their dollars, they believe something is going to happen. They're more inclined to cash out or move money outta the market. And when that happens, creating larger selloffs, that's where we start to see pullbacks in the market. So at the end of the day, it's gonna be a volatile market when news is volatile and we see that day to day right now, that's the world that we're living in one day. It's great. The next day. It's not, I mean, you talked about the federal reserve hiking rates. There was I think belief that that would have a negative effect on the market. It didn't ring true immediately. In fact, that day, the market finished in positive territory. Now the next trading session looked drastically different. So we're seeing drastic swings back and forth. I think the reality is that no one knows what to believe. At this point. We talked about mixed messaging in our last episode , but there's a lot of people out there that are trying to digest a lot of different things and sometimes the knee jerk reaction prevails. And so we get out of the market. And if everybody does that at the same time, typically that means that we're gonna see pretty big draw downs and potentially even force ourselves because of a lot of selling activity force ourselves deeper into a bear market, whether economic conditions agree with that or not.Speaker 3:
So historically how often do recessions occur? Is this something like once every 30 years or once every 10 years, when was the last one? And how did we recover from that?Speaker 1:
Well, in theory, the last one really, and brief in nature was in 2020 because of COVID . And that ultimately was just shutting down an economy, stopping on a dime basically is what happened there. Now, what we saw beyond that was unprecedented fiscal stimulus with the government stimulus checks, approving monetary support for businesses and the market supported that significantly. And so, you know, at that point, when we re relate that in market terms, there was a pretty significant decline in the S and P 500, you know , that came back almost, it was down 34% at one point. And it came back pretty significantly for the following year and a half, almost two years, and, and grew by 90% post recession . So beyond that, if we go back to recessionary period prior, that was oh, 8 0 9 . And I think most of us know, or , or remember what that was, what that was like, you know, that was caused by a financial crisis directly involving real estate. And there were some other things going on on there. And I think financial regulation has prevailed there where a lot of the things that happened in oh eight and oh nine are unlikely to happen again, just because of the way that, for example, mortgages work. Now they're much more difficult, not necessarily completely difficult, but not as easy to obtain. And so the chance of default and mass default, which is what happened in oh eight and oh nine, I think is, is significantly less likely prior to that there was the tech bubble and then we had nine 11. So this a period from really 2000 to 2001 into two was a recessionary period prior to that. And so what you'll see here is that there's no specific pattern. And if you go back in history , if we go all the way back to 1926 and look at the stock market from that point forward, there were several recessionary periods along the way, some lasted more than others. Interestingly enough, the market did not always correlate with those recessionary periods. And so what I mean by that is that those recessions happened, the economy pulled back a little bit, but the market didn't necessarily reflect that we were in a , in a significant recessionary period. So there were during a rapid growth period, a 15 year period through the fifties, into the sixties, the S and P 500 grew by almost a thousand percent over that 15 year period. But there were actually coming out of one recession. So let's say three to four recessionary periods built into that almost thousand percent growth. What does all that mean? I mean, ultimately that the two are not one in the same, just because we are in a recession or in an economic contraction, doesn't always mean that the market is gonna react in the same way that the economy does. They often get coupled together, which is why it gets confusing. People are believing that there's a potential that because we are heading into some form of economic contraction or a recessionary period, that that ultimately means that there's gonna be major, major draw downs in the market over the course of the next couple of years, for example. And that's not always the case, the data shows us that history has shown us that that's not always true. There have been recessions that have been a couple years apart, and there are some, as we could see from oh 8 0 9 into 2020, that there's a much longer prolonged period of economic growth. There's a lot of different reasons why they can be spread out or they can be closer together. I think we certainly don't have enough time today to dig into that, nor would we want to, but I think that the major highlight that you want to take out of that conversation is that the market does not always react in the same way that the economy does. The two can go hand in hand COVID . And the , the brief recession period that we saw with that is one example, but we also saw on the , on the backside of that, that the market rebounded pretty favorably in a short period of time. So it's important to maintain your perspective on that. But I think most, if you were to turn on the news and watch, you would assume based on the news that you're seeing and the market choppiness, that we're seeing, that the both are directly related to one another, and that's not always the case. It's not always a one-to-one relationship.Speaker 3:
That's interesting. And as investors like, nobody has a crystal ball. Nobody knows when the next bear market are gonna come, the next bull market, the next recession. But the one thing we do have is discipline and our behavior around marketing. So let's talk a little more about, you know , investment principles, some of the things that people need to do during volatile times like this, and trust me , it's, it's not easy. We can say all day, we posted something the other day talking about Warren buffet said , just don't look at the stock market. How easy is that to say that just, Hey, don't look at it. You lost I I hundred thousand . Yeah, sure. No , no problem guys. Yeah, of course. You're saying that. So what are some of the things we're talking about? The principles, the core principles. Cause it's always interesting when we come through these bare markets and these recessions, and we look back in history, you just talked about that. The cumulative returns during bull markets have far outweighed the losses incur during bear markets. And it all comes down to behavior. So let's talk about some, like I just said some of these investment principles that people need to focus on Ryan as we go through this very uncertain time. And one of the things we always keep hearing is, well, this time's different. It's different this time.Speaker 1:
It's always different. Right?Speaker 3:
It's exactly. So let's talk about that. What can people do in their portfolios today that keep their pattern where they want to, where they wanna retire and their portfolios moving forward? What are some things that they can do?Speaker 1:
I mean, it's funny that one of the sayings, more traditional sayings that you often hear is like, as much as things change, they remain the same. So a lot has changed in our world and the way we do business and the way we interact and transact with one another. But I think there are some core principles, traditional principles that ultimately lead to success. When we talk about investing in financial markets and you talked about don't pay attention to the market, I think naturally as human beings, we're just not wired to be able to do that. We're naturally risk averse , creatures, even the riskiest of us, maybe people that do things like skydiving and crazy stuff that not all of us would do, especially me, but people don't like losing money. And I think the hard part with investing is it's not a tangible activity. You can't see it. You can't feel it. You're putting your money into something that has no immediate reward or return potentially. And so that's a challenging thing to begin with and that drives sentiment. So when other people are, are dripping on you, that's your sentiment. And you know, we talk about media and news and, and all the noise that's out there saying that you should be worried. Well, naturally, what are you gonna do? You're gonna be worried. As far as investment principles are concerned. I think the best way to navigate markets ultimately is to maintain some kind of perspective. So when we say perspective in our practice, we're talking about understanding what you're doing in the financial markets . So why you're investing for what purpose and staying focused on that particular purpose. So investing ultimately ends up being a long term vehicle, you know, investing in a , in a stock bond, mutual fund ETF, whatever it is, it all has to be long term to some degree, occasionally people get lucky and they make money in the short term on specific investments. But when we look at long term focus and not, and not making emotional short term decisions, I think that history proves that if you can maintain a long-term perspective, that you'll be rewarded for kind of stick it out and maintaining some level of patience. There's some data out there that, and some of the data that we use as part of prep for this presentation, you know, there since 19 37, 1 in three year periods have often shown meaningful volatility, but a 20 year rolling average have been one positive 100% of the time. So let me break down that statement and make it really simple and easy to understand if you intend on investing in a one to three year period, you can make the case that, yeah, there's, you're not always gonna win. There's gonna be winners and losers. What the data has shown us is since 1937, if you maintain, you maintained ownership in some kind of investment vehicle, specifically the stock market, let's say the S and P 500 on a broader scale. If you had held that for 20 years in every 20 year period, since 1937, no matter what year you got in every 20 year rolling period, you've had a positive return, 100% of the time. That's pretty significant. That means that all you had to do was get in the market, stay in the market. And if you had done that, you would've finished ahead of where you started now, what that percentage is, is gonna change the time that you got in and how long you were in and what 20 year period will certainly affect . Is it 5% positive? Is it a hundred percent? Is it 500%? Those are all, all factors that get taken into consideration. But I think the more meaningful piece here is that if you had stayed focused on the long term you got in and you stayed in, you were positive, you had a positive rate of return, 100% of the time. It's a big deal. I mean, I , I think that the hard thing is navigating those 20 years and maintaining your perspective. So understanding what the purpose is and , and making sure that you can keep your focus and maintain your composure in times of volatility. Another thing that I think most people have to pay close attention to is diversification. It gets lost in the shuffle, especially in periods of bull markets. We saw that from March of oh nine through, you know, March of, of 2020, there was a massive period of growth in the S and P 500 more specifically, it was about 450%. And so you didn't require a ton of diversification, necessarily. There were periods of, of Chos and volatility in between. But as far as diversification is concerned, you may have been able to make money regardless of how your , how your portfolio was comprised. I think most important in all market conditions, as you want to have some level of diversification, because the reality is there's always gonna be winners and losers, even in phenomenal economic conditions, phenomenal market conditions, the S and P 500 will be the best place to own investments or , or stocks, equity exposure in one year. And the next year, it might be the worst. So if you have that diversification and that mixed exposure to multiple asset classes, you can actually create a smoother ride for yourself. One concept that I know we talk about quite a bit is the lost decade, which most people, if you've worked with us before, you've , you've probably heard this story, but if you haven't, the lost decade was a period from, you know, 1999, 2000 through 2008, 2009, where the S and P 500 during that decade was virtually flat earned nothing. If you put a thousand dollars in on day one, and you finished on that last day of that decade, you had a thousand and maybe $1, it was a pretty brutal time to own that index. Now, the reason why is there were two recessions during that period, there were also multiple years of market downturns, three straight years to start the two thousands. And then obviously the oh eight and oh nine financial crisis also created a little bit of a challenge in markets specifically. So had you just owned that index, you wouldn't have done very well during that period of time. However, if you had owned asset classes, let's say in Europe and developing countries, what we call emerging markets in Asia and Southeast Asia and, and other parts of the world, that portfolio would've yielded about a 200, 220 5% rate of return over that same decade. So if you had no exposure to that, you got the share in , in none of that. If you had some, you at least got some upside from your portfolio during that period of time. So moral of the story is it's impossible to pick a winner for every decade or for every year. It's really hard to do that. It's virtually impossible. Nobody does it well, even in professional asset management, and maybe they do year to year, but not consistently. So if you can achieve broad diversification, you can create a better experience for yourself when there are volatile times, like right now, you may still be down, but maybe silver lining is that you may not be down as much as someone who was overweighted to some specific part of the market. I think the last thing I , I already kind of touched on this. So just briefly maintaining your discipline through these periods of time, getting out in and outta the market has never yielded great results for many people over that same 2000, really 20 year period of time using a , I think using a broader example probably makes a little bit more sense here. If we look at 2001 to 2021 and an investment of a hundred thousand dollars during that period of time, if you had got in and stayed invested through two pretty rough recessions, two pretty rough market environments, really three, if we include the brief decline in 2020, you would have about $616,000 at the end of 2021. However, if you had pulled out of the market at various points in time, you would have significantly less. So if you missed just the top 10 days, the top best performing days in the market during that same period, your account value today would only be $282,000. That's significant 10 days over a 20 year period of time. If you miss 25 days, it's 134,000 . So that's the cost of waiting. That's the cost of moving to cash. Sometimes that that is an appropriate move depending on your circumstances. But I think the point to wrap that up is to make sure that you maintain your perspective so that you understand what your long term goal is and where you need to be as far as market performance, making sure you diversify to create a better experience over the long term for yourself, and then sticking to your philosophy, sticking it out in volatile times and maintaining a level of discipline that's really hard to do. And that quite honestly, a lot of people around you may not ever do. You are gonna hear a lot of noise and a lot of different opinions. Think ultimately if you pay attention to your plan and what's important to you, ultimately you will be successful in doing that. I mean that , that's the moral of the story. And I think that's the biggest piece to take away from this. Again, I say this all the time, but probably sounds like a broken record. Just reality. If you can, discipline and consistency are the two most important traits in being successful in, in market performance. That is what I believe. That's my own , uh , personal philosophy. And it's not always something that everyone agrees with, but in our experience and the experience of many others and, and all , I think more importantly, and what the data shows us, that's what, what leads to success long term ?Speaker 3:
No , it's , uh , wrapping it up, Ryan . There's a great point. Obviously, you know , discipline is everything. We know how hard this is right now. We have money in the market. So we know what it's like, just like you all going through tough times like this, but if we can just continue to stay disciplined and diversification, like Ryan said , it' key. But as always, we're here for you have any questions at all, do not hesitate to reach out, schedule some time with us. And we hope you enjoyed our episode today. And don't forget to like, and subscribe to wealth builders. I want whatever platform you listen to, whether it's Spotify, apple, or one of the many others , um , Ryan, thanks to always for your insights today and have a great week , everybody.Speaker 1:
All right . Thank you .