Ep # 79: Midyear Investment Outlook 2022

Benjamin Haas |
  • Bear Market Historical Data (4:41)
  • Bonds (7:35)
  • Inflation (9:12)
  • Mid-Term Election (19:08)



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Full Transcript:

Benjamin Haas  00:02
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!  Podcast day. How are you doing today?

Adam Werner  00:28
I'm doing great. It's my pleasure to be here. 

Benjamin Haas  00:31
We're here to talk about your favorite topic today - investments.

Adam Werner  00:34
Oh, okay.

Benjamin Haas  00:38
We make this comment a lot on this podcast, this is a financial planning podcast but you know, it's our job also to talk about what's out there. We've been talking a lot more about investments lately because this environment is not comfortable so like many institutions, we're halfway through the year - hard to believe. What we'd like to do is just kind of give the mid-year investment outlook and I'll give one disclaimer. This is not our outlook. We are financial planners, there are people way smarter than us whose job is to put these things together, make projections and talk about why they think certain things will happen the way that they will happen. So, we're really just going to share some of the things that we are reading.

Adam Werner  01:23
Yeah, this is an aggregation of different projections, different outlets from these huge institutions, all names people are going to know. But yeah, ultimately, they are predictions but they are at the end of the day, just the best guess on where these different institutions see things going. There is not necessarily a consensus which leads us to do all of this research, aggregate all this information and really try to distill it down to, okay, what does this mean for our clients? And part of what was interesting to me in going through this exercise is that the range of outcomes from an investment and economic standpoint for the rest of the year are incredibly wide which makes it even more difficult to really feel overly confident that any decision or making a change or feeling like you're making a bet one way or the other is probably not the prudent path forward. I think that fits with our investment philosophy in general but it was just very interesting to me to see very different outlooks on the economy and from an investment perspective, from big institutions that like you said, this is their job to manage assets solely and having seen such a wide spectrum.

Benjamin Haas  02:53
Yeah, and I think, what does that mean for our clients as we are our listeners, anybody listening as we start to go through some of those themes. If the smartest minds in the business don't agree on how things are going to go, then how should you respond to that? Don't make big bets, right? Stay diversified, stay neutral so I think that's kind of the first takeaway. The second takeaway I'd want people to have before we maybe go into some of those specifics. It's not to belittle it, right. This is a difficult environment, inflation is real. Portfolios are down. People may be fearful of jobs. It's not a great environment but this is just a point in time. Right? This too shall pass. We've been through bear markets before. We've gone through recessions before, this is all part of the normal cycle so staying invested, staying diversified is still to us the best recipe for long-term success. Anything we're going to say today is not to change anybody's mind on, well then, I need to do this. 

Adam Werner  03:50
It is more just to give the perspective or the context of the first half of the year, what kind of transpired potentially and then where do we potentially see things going? Again, wide range of outcomes but being able to kind of pinpoint some of those pressure points and again, just hopefully being able to navigate that in a prudent manner. Ultimately, at the end of the day, it is staying invested for the long term. We are long-term investors. I want to say, everybody we work with should have that same mindset. 

Benjamin Haas  04:24
Sure. Yeah. 

Adam Werner  04:25
So yeah, I think that framing certainly makes it easier to ride the roller coaster that we're seeing but that doesn't always remove the emotional component of being on that ride. 

Benjamin Haas  04:41
Yeah, so let's, as you said, kind of start with how did we get here and then let's quickly move to what do some of these outlooks tell us about what they're thinking for the second half of the year. I mean, we're throwing out the term bear market. We're there. As of June, middle of June we hit a bear market and that's defined by a 20% fall from that recent high, which was January 3. Just give people context. Again, you've been through this. If you've been a long-term investor, there's been technically 11, but we got really close 16 times that 20%, like in that 19% range over the last 70 years. That's a little more than one every four years. That's like every presidential election cycle, right? It's probably more frequent than you even think.  So, again, part of that context is we know it's not comfortable. We know it's emotional but you've been here before. Don't try to time your way in and out. The average drawdowns have been ugly. You can get as low as 30% on average over an 11-month period of time. Luckily, if there's not a recession that goes with the bear market, it's only 23% over five months drawdown. So, we're a little on the long into that five months now. It's month seven. But again, I hope that's helpful context for what's going on in the stock market, not abnormal.

Adam Werner  06:03
Yeah, I think what makes this feel from the investment experience, feel a little bit different than others in very recent history is the more prolonged volatility. I mean, you go back to March of 2020 as the most recent example of a bear market, or I guess, even technically, that was a recession, where it was a three-and-a-half-week period when the market was down 30 to 35% of the S&P 500. But you kind of got to the other side of that in a month or two and things started to feel like they were rebounding and there was at least positive momentum. It felt like you were headed back in the right direction. The worst of the investment losses were kind of behind you. That has not necessarily been the feeling so far this year. It's been this just steady decline and we've had a month or two here and there that were either flat or maybe slightly positive but there hasn't truly really felt like there's been relief at any point in time. Part of that has been driven by I mean, so many different things. I think for the people that are not just fully invested in stocks, it's the bond side of the portfolios that really have kind of thrown an extra wrinkle into the process here.

Benjamin Haas  07:26
I'm not going to call it a wrinkle, call it like a hard crease. Like I like a kink toes. 

Adam Werner  07:33
A slash? 

Benjamin Haas  07:34

Adam Werner  07:35
Yeah, people expect their stocks to be volatile at points in time. I think that is ingrained for anybody that's been an investor. They understand there's going to be volatility in stocks and as long as you hold them for a long enough period of time, they've always gone up. It's the bond side that you think is kind of your more stable side of the portfolio. You don't think of that in volatile terms but there are factors at play here. It's the interest rate side of things. It's the Federal Reserve that have really set up the bond market. I don't know exactly what the statistic was, but I think this is the worst start to the year for bonds going back to 1970. So, 50 plus years that we've had a bad bond market like this to start the year. That on top of stock market volatility and stock market declines, I think really adds fuel to the fire of portfolio performance to start the year feeling just feeling awful these first six months.

Benjamin Haas  08:42
Yeah, and let's maybe then move that to where do we see things going? And unfortunately, the themes that, you know, kind of come out of these outlooks are a lot of those same headwinds that started the year; high levels of inflation, slowing growth, the Fed policy really being quite aggressive to now try to tackle inflation. The war that's going on. These things are still kind of head winds. None of that has really subsided in a major way. 

Adam Werner  09:12
Yeah, and ultimately, I know we've said this in different iterations. But in terms of the markets, stock and bond, the volatility is usually driven by uncertainty and until there is any clarity on any of those items that you just listed, we're probably going to be in this range of volatility until we kind of get more clarity on inflation. We expect inflation to peak at some point between now and the end of the year. We hope, but that is the expectation and having some data to show that being true, will go a long way towards the market. I don't want to say becoming calm because I don't expect calmness at any point this year, but to at least, the volatility to subside and for investment assets to act more, I'll use air quotes "normal" moving forward. So, as I talked about bonds earlier, the downward pressure on bonds in the first half of the year has absolutely led to negative performance. But the silver lining there is because interest rates have now risen as far as they have in a very short period of time and the Federal Reserve is going to continue to be very aggressive with raising rates, that actually sets bonds up to be a better diversifier to start with now a higher level of dividend and income moving forward. So, in that sense, now owning bonds moving forward is probably not a terrible thing. It's just having to accept that I've already felt this pain. Hopefully, that now sets me up to be in a better position now moving forward. But I guess, again, we'll kind of see clarity on a lot of these different areas for the market to start to be able to turn the corner a little bit and focus on some of the fundamentals again.

Benjamin Haas  11:03
And I guess that’s what I want to kind of say in a follow up to that and why you make the disclaimer at the beginning that the smartest minds in the business don't agree exactly on where things are going. I think it's because the range of outcomes is really dependent on so many different inputs. When you say some of these things are data dependent, which one of these things is going to come first, is that a more impactful data point and something else? It's just really hard to make predictions on exactly what's going to happen and the more ingredients you throw into that, the harder it is to isolate what kind of impact will that make. Because, I think the overriding thing when we make a lot of comments about where we're going economically, it's to recognize that a lot of that is lagging data. The market, we need to understand that the market always kind of knows first and it's really trying to predict where things are going to be 12 months from now, 18 months from now. I think that's an important thing to recognize. 

Adam Werner  12:06
Yeah, and when you say the market knows first, sometimes it's, again, it's a best guess on where things are headed. We often say, you know, that pendulum swings too far in either direction and this very well could be that situation where all of these negative events or variables are kind of already baked in to some degree. That any clarity or just resolution in any of these areas, if I hope for the sake of the world, that there is some resolution in Ukraine and the Russia conflict here, that should go a long way to easing some of the fears and volatilities not just in the investment markets but it's the commodities, it's the supply chain, all of the fallout that we're now experiencing from that. Again, the market tries to predict, it tries to be very forward looking and taking all of these different moving pieces and pricing that into today. That is an imperfect science to say the least, so as I said about bonds earlier, I kind of feel the same way on the stock market that we've experienced this pullback, the stocks are still down 20 

Benjamin Haas  13:21
Close to 20. 

Adam Werner  13:21
Yeah, percent. The flip side, the silver lining being now looking at the second half of the year, we do hope some of these things to look a little bit better and that should lead to some stock market returns heading back in a positive direction. Maybe we don't get back to where we started the year at the all-time highs on January 3 but to recoup some of the losses and feel like we're headed back in the right direction, we believe that at some point between now and the end of the year. Hopefully that gives some relief to just what feels like just the ongoing barrage of you know, negative headlines and negative returns. 

Benjamin Haas  14:01
Yeah, so I think listening to you say that it comes back to the point we really want to make is that it's not to make a bet one way or the other. Let's try to keep a balanced approach between stocks and bonds because over time, these two different asset classes, there should be some reversion to the mean. 

Adam Werner  14:21
Yes, yes, that is well said. 

Benjamin Haas  14:24
So, knowing that you looked much deeper into these outlooks than me, was there anything in any of those that you really were taken back by from any of those institutions? 

Adam Werner  14:35
Yeah, so Blackrock is one of the institutions that we follow. I think they are the largest asset manager by dollar amount. Assets that they that they manage and it was interesting to me because typically what we see when they're coming from these institutions, there's always a positive spin on things. Maybe we fall into that camp of trying to put a positive spin on everything but it was interesting to me that they were one of the few, if not, the only one that really had a pretty negative outlook in the short-term. But they couched that, again, for long-term investors and they categorize that by as anybody with, that's investing for more than five years.

Benjamin Haas  15:25

Adam Werner  15:25
Five years out, they're still optimistic on both stocks and bonds but in the short-term, they don't feel as optimistic. Even just some of the things that they say, the terminology, they use the verbiage that they use just felt very negative and very dour in the short term. But they, also like we shared earlier, that range of potential outcomes in the short-term is so varied that even they are not making huge bets one way or the other. So that was certainly eye opening to me to see an asset manager of that size really start to kind of sound the alarm a little bit of this is not a, we all know, this is not a normal market environment where we're going to see some quick, you know, snap back and we've been saying that for a little bit here to it. At some point, inflation being the main driver right now of volatility because of all the fallout that it has and how it's now backed the Federal Reserve into a corner from a policy standpoint. We do believe that inflation will peak and that it will start to come down but that moderation of inflation is going to probably take a little bit longer, maybe not a little bit, it may take a lot longer than anybody has anticipated, especially the Federal Reserve. So ultimately, that's all to say, yes, keep a balanced approach because at this point, it is somewhat completely unknown of where things may fall because as you said, there are so many different variables right now. It's hard to isolate any single one that is the main driver and I guess ultimately, maybe there isn't one that's the main driver. Maybe I'm just countered, contradicting myself because I just said like 30 seconds ago, I think inflation is the main one. But there's just so many moving pieces to be able to say this thing that we're going to focus on, this one area. We're going to make a decision off this one variable that is in our experience that usually does not bode well, right. You can certainly stumble your way into the right decision but the wrong way. I think we are believers at this point; it feels anticlimactic to say stay the course and stay down but that is that is our philosophy. I think you had noted, staying invested as long as you stay invested over a long enough period of time, the market has always made new all-time highs at some point.

Benjamin Haas  18:02
Yeah, and I appreciate you taking it that direction because we have to also recognize these institutions, like are kind of forced to put these things out, do they really want to be on the record making a wrong call? So right, they're out there. Outlook is one thing, are they changing their allocations and what they're recommending is a completely other thing. So, I just think it's really important to recognize that side of it, too. Everybody wants to hear the opinion. Right? Ben, Adam, where do you see things going? Do you think we're getting into recession? Should I buy gold? You're going to get these questions. We want to speak intelligently about it. I think the only other thing I'd really like to throw out there because it is the way that people kind of think, I think sometimes and act. They get geared up for what is going on in the world of policy, politics and policy change, specific to economics, and the financial markets. We're going to have a midterm election here in the next couple of weeks so I've heard certain clients go, yeah, I'll be interested to see what happens to the market in November. Let's give a little context there.

Adam Werner  19:08
Yeah, it's interesting. Looking back at these midterm election years, historically, there's always exceptions to the averages, or to the experiences in any of these given years and data points. But historically speaking, in a mid-term election year since 1950, the S&P 500 has averaged a pullback of 17%. So, peak to trough 17% on average in years like this. This year, really, from a data standpoint is no different. Maybe we're down a little more but yeah, we're skewing the average maybe a little bit higher this year but we also have all of these different other variables at play. We had an economic shutdown two years ago that is leading to some of this inflation this year and there's so many. It's we often say, history doesn't repeat itself. It often rhymes. I screwed that up but that's the gist of it. 

Benjamin Haas  20:12
That's right. Yeah, and go ahead. 

Adam Werner  20:15
Well, I'm just going to put a bow on that. It's so the pullback is kind of in line with the historical averages but again, the silver lining, the positive spin on that is that once you get beyond that mid-term election year, since 1950, 12 months later, 18 out of 18 times the market has been positive. 100% of the time markets have rebounded from a down mid-term election year. 

Benjamin Haas  20:46
Yeah, and I know we threw this out there two years ago. No, I'm sorry, at the beginning of last year, when we had a new sitting president made that makes sense to me because I know I've thrown out the stat before. Historically, I think it's only twice in all those mid-term elections that a sitting president has picked up seats. People may be voting with their dollars. I'm not saying that everybody thinks or acts that way but if the market is going really down or things don't feel good, pendulum always swings in either direction. I put on top of that because I know we presented this a couple of weeks ago, 12 months after you hit a bear market, 80% of the time the market has been positive as well. That parallels your statistic and quite positive, I think on average, more than 15% is what LPL shared with us. So yeah, I think this is all to say, whether you want to lean on history as you said to be a guiding factor. Maybe it won't repeat but it often rhymes. We hope that maybe makes you feel better and puts things into context if you're still just kind of feeling this drudge that we're in. What else you got? 

Adam Werner  21:58
I don't think I have anything else. What else do you have?

Benjamin Haas  22:02
One more stat that I thought would be important to kind of and maybe it's a good one to wrap it up with. We're using historical context. You can pick these you quoted Blackrock saying long term investors or anybody, you know, five years or more. This is a point in time right now. It doesn't feel great but you can pick any rolling five-year period, any five years, you want going all the way back to 1950. If you've done the balance between stocks and bonds, 50% stocks, 50% bonds, you didn't lose money over any five-year period.  I again, I hope that's a little added comfort to know that doesn't feel great right now. We can't know when things will turn around. We're confident that they will and you need to be a long-term investor to participate in that. 

Adam Werner  22:50
Yes. So that is the key caveat I think to that statistic, is that you stayed invested over that five-year period in stocks and bonds. Because there is - we talked about it on the investment Q&A that we did not that long ago that the difference between the market returns of a balanced portfolio and actual investment and investor returns. There's a gap there and that's often driven by emotions and making decisions at potentially inopportune time. So, the key being stay invested to be able to actually realize those returns because we often see those. I don't know the exact statistic but missing out on some of those best days in a given year. Yeah, really lead to lack of performance if you're missing some of those best days and that's often where we see people self-sabotage by trying to time the market often leads to mistakes.

Benjamin Haas  23:56
Well said. So, thank you sir for all your input, all the commentary. For reading through everything that you did. It's a lot of information but hopefully to our listening audience, they got some good nuggets out of that. 

Adam Werner  24:09
Yeah, and if anybody has questions or wants to talk through it for their specific situation, let us know. 

Benjamin Haas  24:14
Give us a call. Thank you, sir. 

Adam Werner  24:16
All right, thank you. 

Benjamin Haas  24:35
Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening! Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.

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