April's Live Market Update with CIO, Scott Mitchell

If you could have a candid conversation with financial advisors who have decades of experience helping professionals, business owners, and families just like yours plan for their financial future, what questions would you ask? I'm Chip Munn, financial advisor, author, host, and CEO of Signature Wealth Group. For decades, my partners and advisory teams have had the opportunity to answer the tough questions for hundreds of our clients. Now we want to do the same for you. On the Signature Life Show, you'll hear answers to your burning and most perplexing finance, investing, and retirement questions from our Chief Investment Officer, Senior Wealth Advisors, Certified Financial Planners, and more. We aren't just financial advisors. We're parents, children, community leaders, and entrepreneurs with a passion for helping empower our clients to live life intentionally, what we call a Signature Life. John Tate, what's up, man?

Chip Munn, happy Friday to you, sir.

It is a happy Friday. You know, one of the things that I'm happiest about is that today we get to do one of the things that, at least for our clients, is one of their favorite things, is to hear from our Chief Investment Officer, Scott Mitchell. You know, Scott and I have been partners for going on 24 years now this summer, and one of the favorite things that we do for clients is Scott sends out a monthly market update every month, and it's one of the things we get most positive comments about because it's actually readable and understandable. And so, John, we've finally been able to talk Scott into coming on the show with us. He's going to become a regular guest and talking us through kind of what's been going on and what he thinks might go on in the market. And so I'm excited to have Scott. Scott, welcome to the show.

Hey, how are you guys?

Doing great.

So far so good. I have just a quick question before we get started. How much is Chip paying you to be here? I just wanted to compare and contrast.

Not enough.

I hear that. I hear that. Okay. I was just checking if he was paying you more than me because I've never really been able to get a straight answer out of him on that.

Well, I've got a different question, Scott. Yeah. If the two of us were to get in a fistfight, Who would win?

You and John, or you and me?

No, you and me.

We were to get into a fist fight, who would win? I don't know. I think I could maybe get him one quick hit and then run.

Well, if you're counting on me to run after you, that counts enough as a win. Anyway, speaking of fist fights, the old saying from— I think they at least attributed to Mike Tyson— is everybody has a plan until they get punched in the mouth. And I think, Scott, for 2022, The first quarter for a lot of people kind of felt like that. Like they had really good plans. Everybody was really excited about what '22 was going to bring. And at least so far, the first quarter with the stock market, maybe they kind of feel a little bit like they got punched in the mouth. What happened in the first quarter?

Yeah. Investors have had a lot on their plates, obviously with Ukraine and Russia. That's been a big thing. Inflation has been a concern. That's sort of started middle of last year, that people were talking about inflation really for the first time in a long time. So right now I think it's just a case of investors are having to come to terms with how do they position their portfolios given this climate, one that again, we're not accustomed to between war and inflation. Yeah.

And inflation has obviously been a topic of frequent conversation in no small part because of what's happening at the pump. I think that that ends up being the thing, at least it gets publicized the most. Of course, it fades over into everything, but it kind of all starts there. What are your thoughts, Scott, on— is the inflation that we've seen, is that something that we should continue to expect? How do we begin to address that?

Do you mean is it transitory? That, of course, was the buzzword for inflation last year. That's what the Federal Reserve kept telling us. You know, a lot of these things, they are transitory, right? I mean, you know, we saw used car prices just go to the roof. That'll eventually correct. Oil and gas prices probably come back down at some point, but other things like wages have really gone up a lot. And that's something that doesn't really come back down, at least not quickly. Once you pay people higher wages, it's hard to get them to accept lower wages. So yeah, I think inflation's going to be something that at some level we'll have to deal with for a while. And as you mentioned, with oil prices going up, that feeds down into everything, right? Almost anything you do relies on crude oil at some point, whether it was getting delivered to you or the production of it or whatever. And so, those higher costs of production are going to get passed on to people like you and me when we have to get to the gas tank or buy food or whatever it is. So, some of these things are going to be around for a while.

Well, and one of the ways that you see the government trying to have some intervention kind of in the overall inflation rate, right, is by making changes in interest rates. John, you've been doing this for a long time. On kind of the situation as it begins to play out, because we've seen one rate hike from the Fed, what are your thoughts or expectations on that?

In a previous life, so to speak, I research in the Raymond James Equity Research Department, and we did write research on major car dealers in the United States. And one of the pieces of information we watched on a monthly basis was Manheim's monthly report on used car prices. And we've seen used car prices as a part of core CPI increase significantly since the start of the pandemic, mostly due to shortage of new cars from chips to whatever the supply chain issues we were going through at the time. Most recently, as of this week, they published the Manheim Index, which did show a large percentage drop month to month in the price of used vehicles. So you think about how new cars are being produced, taking some demand off of the used car market. And while transitory may not be the right word to use because higher prices overall may be here to stay, I think the pace of the price increases will be seen to decrease over the coming months. And we're seeing that in used car prices, like I just detailed. And we're also seeing it in front-month crude prices, which oil prices are coming back down, which should alleviate some of the pain at the pump, so to speak. And to get back to your question on inflation and higher interest rates, some of these factors, if they can slow down the pace of price increases across not only used car markets or the oil market or whatever it is, but across many different points in our budgets, it may help the Fed by allowing them to have more flexibility as they do increase interest rates over time. And increased interest rates to us, to you, to me, to Scott, you know, it can increase the cost of borrowing, which could mean reduced investment. You know, it could mean higher mortgage interest payments, which we've heard on the news. That would reduce consumption. In times of uncertainty, what do we as consumers do more of? We save more. And so increased saving— if we're saving it, we're not spending it— that can also reduce consumption. And so higher interest rates just overall can lead to lower economic growth because of changes in our behavior and lower inflation because of that reduced demand. Overall, I think the pace of interest rate increases is still in question and something we can talk about, Scott. I'm sure you've got some opinions on that, but I don't think anybody on this show at this time is going to argue that the Fed is not on pace to continue raising interest rates for the rest of this year.

It appears that the Fed word of the year this year is expeditiously. I've seen it used a couple times. So we went from transitory to expeditiously, and that was from the Fed Chairman Jerome Powell, who suggested that they may have to raise rates expeditiously, meaning that maybe there's more rate hikes coming. And rather than a quarter of a point at a time, maybe a half a percent at a time. And you asked about my opinions on this. I mean, I suppose I have an opinion, but what I really do is, you know, look at the markets and see what they're predicting. And if you look at what the futures are pricing in, they are certainly predicting that there will be an increase in interest rates by half a percent at both the May and June Federal Reserve Board meetings. Interestingly, they're pricing in a year-end target price for the Fed funds rate at nearly 2.5%. And that's remarkable when you consider that just a few months ago, we were basically at zero. It's obvious that people who are putting their own money at stake are betting on considerably higher interest rates between now and the end of 2022.

Well, one of the interesting things that I saw recently was what it doesn't seem to be doing, at least as of yet, is translating into increased rates on things like cash equivalents, savings accounts, and, and things like that. It doesn't appear to have moved into that yet. And one of the things I think that's difficult for a lot of people is I saw a chart this past week, it was put out I think by JP Morgan, and I won't quote numbers just because I, I won't get them exactly right, but the spread between what you're making on a cash savings type account and the rate of inflation, like over the first quarter, the difference was greater than 5%. And so it's one of those things, Scott, that for a lot of people, a big way that they combat or try to keep pace with inflation is investing in stocks. So what do you feel like all these factors mean for stocks right now?

Well, it's a lot to put together, right? And some things are definitely better inflation fighters. Some sorts of stocks are better inflation fighters than others, and we've largely seen those sectors do quite well this year. Generally, when the Fed starts to raise interest rates like they're doing now, it's because the economy's strong. They see a lot of growth. So I think a lot of market participants, when they get over the initial shock of the rate having gone up, and maybe reallocating some money due to higher rates. Then they come to realize that, hey, look, economic growth is good. Things are still strong. Stocks are probably a good place to be. Historically speaking, at least, when the Fed starts to raise interest rates, the stock market has done pretty well for the next year or 18 months. I think it's usually when the Fed stops raising interest rates that you see stock prices kind of start to slow or fall. And I think the way that people look at that is that, hey, the Fed thinks that they have done enough to combat growth that maybe now the economy's going to start to cool off, so stocks don't look as attractive anymore. Plus, by that point, also presumably interest rates would be a good bit higher. So I like to say it's not the first rate hike that gets you, it's the last one. But the trick is knowing which one is the last one. You don't really ever know that until several months after the fact. So I doubt it's anytime real soon. I think as we've discussed, they'll probably be raising rates for a good while through the end of this year. But you know, at that point, you know, once it looks like maybe the Fed is going to stop raising rates as quickly, it might be time to start to reevaluate what sorts of stocks people are in.

Well, one of the other things, talking about things that have been, we'll say, on a tear, one of the other things has been housing. Yeah, I get a lot of questions about that. Is this going to continue? At some point, is the— again, I'm quoting other people— is the bubble going to burst? What do you think right now, Scott, with regards to housing?

I mean, if the question is at some point is the bubble going to burst, I think the answer is yes. Is it soon? I doubt it. You know, there's a lot of different data out there, but most of what I see seems to suggest that there's a pretty severe housing shortage. And we need to house people. We got to put them somewhere. Not only are house prices high, but rents are high too. So, we have a lot of people maybe that say, "Well, rents are also high. I'd rather own the house than just rent an apartment or rent a house." So, I think the demand for housing is going to be there for a good long while. Will home price increases keep up at this pace? I don't know. It's a little more in doubt now that interest rates having moved up has pushed mortgage rates higher. So a person could afford a $300,000 house a year ago, maybe it's only a $250,000 house now based on what their monthly mortgage payment would be. I could see it maybe cooling off from the pace that it was at. But again, just from a demographic standpoint, there really— we went for a long time without new homes being built, but we continued to add population and we just got to house those people. So I think the housing market's probably going to be okay for a while, at least now still.

I agree with that. I think the demand is there. I think maybe the increase in interest rates impacts some of the price increases that we've seen in existing homes in some markets similar to what we saw with the price of used vehicles in the new car market. People couldn't buy new cars because they couldn't get finished on time, so they dipped into the used car market. I think we're seeing that the prices of existing homes increasing at a pace that is probably unsustainable. And so, If interest rates increase and if the amount of home that somebody could purchase or borrow to purchase decreases, then you might see some of that come back. But recently, and anecdotally, I was on a bus ride around the town of Leland with the economic development committee that I'm on, and we were looking at all of the new development going on here. And there are 1,500 individual units of multifamily homes going up right now, yet to be completed. And that includes single-family homes for rent that seem to be something that maybe it's private equity firms are, are putting up because they've seen indications that people want to rent single-family homes instead of apartments. And so we've got a little bit of both going up here, but it is a pretty significant amount of new rooftops going up. And if you look at the pace or the time it takes to complete a new home right now, I think the average across the United States is around 10 to 11 months to complete a single-family home. And around 23 to 24 months to complete a multifamily housing project. And so with those times that it takes to complete some of these new projects, while you do see the inventory increasing of new homes across the United States, most of that inventory is yet to be completed, meaning the inventory that no one can live in yet. And so that's something that I certainly think we have to fix. Before we see housing completely fall apart. And so I kind of agree with both of your comments on that.

Well, I had lunch yesterday with two business owners, and both of them really savvy guys. And one of the things that they were talking about is the difference between commercial and residential real estate in terms of what they felt like were opportunities and how difficult it was to feel like they could make numbers work on a commercial space, but that the residential, they felt like provided them with more opportunity in terms of kind of the foreseeable future in terms of inventory. And I, I think, Scott, that you're right, that we underestimate the long-term effects from the Great Recession. We got through the short period of time and the banks were starting to lend out money again, but it's hard to catch up from the things that didn't get done over that period of time. When you think about whether it's replacing or building new in terms of just having enough inventory. Scott, one of the things that you always do, or usually do in your email, and I'd like to make that kind of a monthly feature of this show because I think it's a helpful illustration, is you like to talk a little bit about the technicals of the stock market and compare them to a traffic light. And so I'm curious where you feel like things have been and where things are, because I think it's a good way to take all of these complex things and for the average investor to try to simplify them into something that they can understand. So give me a little bit of a feel for where we are in terms of the traffic right now. Scott Mitchell traffic report.

Well, sure. And I'll, I'll take us one step back and talk about the— you mentioned the technicals of the market and And that's basically what do the charts look like. And I think the reason that that's important, and while it might be more interesting to talk about what interest rates are doing and the home prices and corporate earnings, all of course extremely important fundamentals as to what goes into determining stock prices, but you have to remember too that stock prices are a function of supply and demand. When you, Chip, buy a new share of stock for yourself, The company did not create that share for you to own. You bought it from someone else who was selling it. Like anything else, price is determined by supply and demand. If there's more sellers than buyers, all other things being equal, you'd see prices go down. So that's why I like to look at the charts, the technicals of the market, to see what they might be telling us. So yeah, for the traffic report, you know, we had gone to a flashing red signal for sure in February with regard to the charts, and we did manage to cross back above that technical level. And so now I guess I'd put us at like a flashing yellow. So if before we had to come to a complete stop— think of an intersection where you've got the flashing red light and you got to come to a complete stop and make sure there's no traffic coming from anywhere else before you can proceed— now maybe we're at a yellow, a flashing yellow. So obviously you want to slow down, you want to look both ways, but you don't have to come to a complete stop. So I think that what that tells me is, is that we can be patient and we can buy stocks on pullbacks. So it just seems like the smart thing to do right now. It's not like it was a year or two ago, even when we felt like stock prices were just generally going to be going up in a nearly straight line. Now it's probably going to be a lot choppier. So yeah, why not take advantage and slow down, look both ways, and buy things when they're cheaper?

That's great. I just think, John, that's an easy way to boil it down.

Yeah. From last year, if you weren't wearing your seatbelt in the vehicle last year, you probably need to be wearing one this year. You tend to look at market technicals as a way to read the room, so to speak. So I agree with that. I think one of the best ways to counter a flashing yellow signal in the technical arena is to look at investments that pay dividends. So if you get the actual timing of it wrong, At least you get paid to wait with somebody else's cash flow until things are correct or things get better. And so I think that's one of the way we incorporate what Scott talks about in the technicals into our portfolio creation and into what we do for our clients, the ones that count on us to get them to the end of their plan without running out of money, the ones that count on us to give them the flexibility to take a trip, to have some unscheduled unbudgeted expenses come into their plan and not throw them for a loop or make them stop what they're doing. So we always take Scott's comments pretty seriously around here. We all stop what we're doing. We take notice, or at least we do in this office. Chip, I'm sure you do the same thing.

Well, any of my clients would know Scott manages all the portfolios, mine included. So I certainly take what he says seriously. And I think that equally important is to understand that your investments have to line up with your plan. We talk a lot about the Signature Life Plan, John, and the whole point of that is deciding where we want to go. And to take that car analogy, to some extent, depending on how far it is between point A and point B, some people need to go faster than others, and your allocation needs to be tied to how much growth you need to be able to expect to be able to make the things happen that you want. But I think the other thing about the Signature Life Plan that has been helpful for me over the year, you know, back the day, 20 years ago, it wasn't unheard of for folks. In fact, Scott and I worked with somebody one time who would just take whatever you had and assume 7% growth every year and figure out what you were going to have. Well, that's not how real life works. Like, it might work that way in a spreadsheet, but we don't live in a spreadsheet. And in reality, while historical returns might be X%, it wasn't that same amount every year. It's a variable rate of return when you're invested in pretty much anything. And so the key, and one of the reasons that we do the Signature Life Plans the way that we do, is that they're based on variable outcomes to try to determine how likely you are. And times like these are factored into what we do in the planning process, and I think that's a big part of why we do things, John, the way that we do.

Scott, do you ever feel like you live in a spreadsheet?

It's funny when you said that. Yes, I felt like that yesterday, in fact. But Chip, I'd like to add on something with regard to the Signature Life Plans too, because obviously what we do with portfolio management, it's designed to complement the guidance that's suggested by the Signature Life Plan. So what we do with portfolios feeds directly into those plans. It's calculated daily. And while all these things that we talked about today are really important input into portfolio construction, they don't necessarily have to change the overall asset allocation guidance that your Signature Life Plan gives you. So again, if your plan says that you need to be moderately aggressive, well, just because that there's inflation doesn't mean that we have to alter that allocation and potentially mess up your Signature Life Plan. What we can do though is shift the sorts of investments that are inside of that plan. And I think maybe a good example of that is to think back to the pandemic stocks that did so well in 2020. And you may also famously remember that the price of a barrel of oil went negative. So oil was literally worthless. And a lot of other stocks seemed like they were priced to where the pandemic would last forever. We were all going to be stuck inside using some sort of remote communications all the time. I mean, it's the right— 2 years later. And almost the exact opposite is true. Look how much a price of a barrel of oil is worth and now how undervalued some of those pandemic-era stocks look today. So my point is that even just within the construction of the portfolio, you don't have to have a major shift from stocks to bonds or cash or commodities or whatever. It's just trying to use all this information that we look at to construct a portfolio that is best suited for what the current environment is.

Yeah, minor tweaks. Once you set the long-term plan, the portfolio is designed to be able to make minor adjustments that keep it current with market conditions, but while also keeping an eye on the long term. John, I'm looking forward to seeing you again next week.

Yes, sir.

Next week we'll do it again, and we'll be back this time next month for, uh, Scott Mitchell and the market report— or the traffic report, I should say. Scott, thanks for joining us.

Well, thank you guys. I appreciate you asking me to be on.

All right, y'all have a great week.

You too.

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