August'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.

And happy Friday to you. It's especially a happy Friday this Friday because we get to spend time with Scott Mitchell, our Chief Investment Officer. Scott, welcome.

Hey guys, thanks for having me.

This is one of those weeks, John, that Scott's glad to be back. Every now and then when we send him the reminder of it's time to sit down together, I think sometimes it feels like the worst possible time. But this week, really even the last couple of weeks, I should say, probably this month, Scott actually has some good things to talk about. So I'm excited to jump into it. Scott, one of the questions that I've gotten recently, and I'm sure Tate has as well, is really talking about— we've been on a bit of a hot streak of late. The market's been on a roll recovering some of the losses from earlier in the year. And so I'm just curious, kind of to get the ball rolling, what your thoughts are on kind of the rally.

I'm glad to be here when I don't have to sound like Dr. Doom or something like that. We've recovered a little bit more than half of the downside in the S&P 500. Not sure about the NASDAQ, but that sounds about right there too. And that's really where most of the gains have been, is in the really high-growth stocks. The ones that did particularly poorly early in the year have done really well over the past 4 or 5 weeks. So it's been a nice change. And you're right, I'm glad to be on here when we're not looking at a 20% deficit in the S&P 500. I think we're down closer to 9 or 10% now. So been a nice recovery.

Yeah. And it's been, John, I guess, validating for lack of a better word. One of the things that we talk a lot about is time in the market versus timing. Quincy, our Chief Compliance Officer, I've heard him say that probably a million times. And we've talked here about the roller coaster. And so it's one of those things that times like these do remind folks that the stock market can also go up. And in recency bias, when things are going down, it feels like it's always going to be that way. But again, nice to have some relief to remind ourselves that there is some reward sometimes for risk.

And it's a little bit of a pendulum, you know, swinging back and forth. Sometimes you go too far one way and then you have to swing back the other way just as far. But, you know, I think what we got ourselves to from a problem standpoint at the beginning of the year was expectations versus reality. Where the market was trying to price in the expectation of what the Fed might have to do for the remainder of the year based on the lack of transition of inflation. You know, we were told for a period of time that this was all going to be here and gone inflation, and it looked like at the beginning of the year that this inflation was going to be here for longer than expected. So the Fed might have to raise rates more aggressively than expected. And even if you look back to April of this year, after the Fed had raised rates by only 25 basis points, in their March meeting, the Fed funds futures were pricing in another 50 basis points in May, another 75 in June, another 50 in July. And all of a sudden, between that expectation and June, really, it looked like the Fed was going to have to do a whole lot more than that. And so, I think it's all about pricing in what the expectation is versus reality. And now, after we've finally seen a CPI core price inflation print that was somewhat less hot than expected. It's still not all rosy and great, but less hot than expected. Now the market is saying, well, okay, so maybe we priced in the chance that the Fed was going to have to be much more aggressive than they're actually going to have to be between now and the end of the year. I mean, I've even seen some estimates out there that the Fed would have to potentially start cutting rates again in 2023 at some point. So Maybe the market's trying to price that in. I'm not sure, but so far this year, expectation versus reality has been a big theme, I guess is my point.

Transitory, right? Inflation was going to be transitory.

It was so long ago, I've almost forgotten what the definition of that word is.

Yeah. Well, and it makes you wonder if they knew what the definition of the word was or maybe their expectation of transitory versus the reality of what transitory really is were two different things because we've seen inflation's been a lot stickier. That's the other word they used was sticky inflation than anybody expected. And even if you adjust out energy costs, which obviously have been rising rapidly, inflation's still going at a pretty good clip. And interestingly, you know, stuff like used car prices, which I think was one of the things that they pointed out would be transitory, used car prices, I don't think have come down very much at all. I don't think it is headed that way. And anyway, some of these things that were supposed to be transitory have not been at all.

They're here.

There still seems to me, Scott, like there's a supply problem, particularly going back to autos. I mean, I drove past 3 different dealerships here in Florence yesterday, and it's slim pickings out there in terms of new autos. Now, I also, on my morning walk this morning, had one of those new Ford Mustang electronic vehicles or whatever sneak up on me because it sounds about like a golf cart, not a Mustang. So those are out and roaming around. So be careful out there. I mean, if you're walking, those EVs will sneak up on you. I thought it was just a golf cart, but anyway, it's slim pickings on cars. So I do think we're still dealing with, particularly in that market, we're still having some supply issues. So Scott, what's changing? John's talked about expectations versus reality. Where do you feel like we stand right now?

Well, one of the big expectations versus reality sort of divergences was with corporate earnings. I think the market and investors had priced in really bad earnings reports from corporations for this quarter, and they've largely been sort of okay. Which isn't awesome, but it's better than that. So there's sort of been that readjustment of now of, okay, well maybe corporate earnings aren't going to be that bad. I think there was a lot of short selling based on those expectations for bad corporate earnings. So we had some speculators betting against stocks. And as those results came in better than feared, the stock prices started to go up. And as the stock prices go up, the short sellers are forced to buy back in. And when they buy back in, it pushes stock prices up even more. So you kind of squeeze prices higher. And then the other big thing has been interest rates. They've moved down so much, and I'm talking about the long-term interest rates generally, or specifically the 10-year Treasury bond. It peaked at about 3.5% nearly on June 14th. As of a couple days ago, it was somewhere around 2.6%. I think it might have bounced up a little bit since then. So as those rates have come down, stocks, it makes them look more attractive, especially the high-growth stocks like the, the NASDAQ and technology sorts of stocks. They look more attractive. And of course, the lower long-term rates helps other things like mortgage rates, which have come down a pretty good bit from their highs back in June as well. So those things, all the expectations were largely different than what the reality turned out to be. And I think those things are the major contributors to why stock prices have moved back up so much over the past month.

John, when you look at the reality of where we are. If we're looking at today's market, what are your thoughts? One of the things we still hear a lot about— I read an article this morning talking about kind of a recession, not so fast. Where are we, and does it matter in terms of the recession?

It does, in that it matters what kind of recession we get. When we look at all the different indicators that might help us figure out whether we're headed into a recession or not, one of the indicators that we look at is the yield curve. And when you have shorter-term rates higher than longer-term rates, that is usually what's called an inverted yield curve. And it's not that just simply one point on the yield curve inverts that can be indicative of an upcoming recession. It's how many different points on the yield curve are inverted. And I think right now It's about 30% of the points on the given yield curve are inverted at this point, which is not an alarmingly high number, but it's still much higher than, than it was a year ago. And then you look at time, how long have some of the points on the yield curve been inverted? And so when you look at some of them, like the 3-month to 10-year or the 2-year to 10, some of those have been inverted for going on, you know, more than a couple days, more than a couple weeks. Some of them have been inverted for more than a couple months. So, the longer points on the yield curve are inverted and the more points that are inverted give us an indication of how likely a recession is to happen. The normal definition of a recession is two consecutive quarters of negative GDP. And when you look at what we've had, which is two quarters of declines in real GDP, the second quarter decline was, I think, a negative 0.6%. So, we're still talking about relatively small numbers, but in every other instance going back to 1947, so basically since the end of World War II, anytime you get two quarters of declining GDP, you did go into a recession. There was not a single time that you didn't. And so, I think the question that consumers are asking is not whether, but how long will it be and what will it look like?

Gotcha. And if we don't like being in a recession, we can just change the definition. That's one of the things, and I get a chuckle.

Make it what you want it to be, Chip.

I've told you before, John, you're the one politician, or former politician in your case, that I do like. Just not a big fan of most of them in terms of the fact that if we don't like where things are or the optics of something, we'll just change what things are to let it suit us better. And I think both sides of the aisle do enough of that. I think that from my standpoint, I'd rather just let's call it what it is and deal with it from here versus trying to put a lot of window dressing on it. Let's just deal with reality versus what we wish things would be or what is politically acceptable or expedient. Speaking of politics, Scott, one of the things that I get a lot of questions about is this being a midterm election year. How do you think that plays either into where we are or where we're heading?

Historically speaking, midterm years are not great until after the election. I've come across a study that showed that 12 months prior to a midterm election, the S&P 500 is up an average of only 0.3%. Now that's a lot better than we've done over the past 12 months, but on average, that's fairly low. Whereas for every other year in the cycle, the average return is 10.7%. So midterm years tend to lag, or, or the 12 months prior to the midterm— lag by about 10%. Now what's interesting though is after the midterm, you see a completely different story that flip-flops. And so for the 12 months after a midterm election, the S&P is up on average 16%, whereas on a non-midterm year, it's only up on average 6% a year. So it outperforms by 10%. You can see how it sort of balances out from underperforming by 10 to outperforming by 10. But that's interesting. And it'll be a real catalyst. This year reminds me a good setup, like 1994, midterm year, you know, recessionary period, economy was sort of languishing. It was also the last time that the Federal Reserve had raised interest rates by 0.75% at one meeting prior to 2022. The market languished. I don't remember what it was, down or flat, but it had not done well. Midterm elections happened the end of '94, and the Dow Jones Industrial Average was up 33% in the 12 months following that. So I certainly don't want to predict that that's what's going to happen this time because that was a long time ago and there were some different circumstances. But nonetheless, the setup reminds me a lot of that. So I think there are some reasons to be hopeful that the election could be a catalyst for a change in the direction of the stock market for the good.

John, what do you think?

I'm in agreement on that.

And I think we've talked about the midterm election year in previous calls, so it is from my standpoint, a big item to remember when you look at those years, like Scott just said. And even if you look at the 12 months prior to the election, it's weaker than normal. July to October of that period of time is not a particularly strong point in that weak part leading up to the election. So, when we're looking at what the market has done since 3,666 print on the S&P 500 back on June 16th, which was the low, If you look at what the S&P has done since then, it's certainly done something different than most periods in midterm election years prior. And so, I think that brings to mind some amount of caution, not only in committing new money to the market here. I think sticking with the plan, staying with your current investment allocation is what you should be doing. But a lot of calls we're getting now that the market has done what it's done and people are feeling a little bit more confident. Asking, "Should we commit new capital here?" So far, my answer has been no. Let's still plan on getting it in prior to the election, but let's see if the market doesn't pull back a little bit first. My thought initially is that it might have gotten a little bit ahead of itself here given all the potential headwinds that we have and all the unanswered questions. I know the market is a discounting, forward-looking collection of investors, but we might have gotten a little ahead of ourselves here. So I am counseling patience to all the new phone calls that I'm getting at this point in the year.

Yeah, this looks like classic bear market rally to me. You know, we've come, we've run up right against resistance for the S&P 500. It just has all the makings of a rally within a bear market. And, you know, hopefully I'm wrong and we change trend and this is the start of a new bull market. We kind of deal more with percentages and odds than we do with certainties, right? So it's not 100% certain that this is a bear market rally, but the evidence sure looks that way. And if you go back even to the recession talk, I don't know that we're in a recession now or not, and I'm not sure that it matters a great deal, but the evidence sure points towards a recessionary environment within the next 12 months. And maybe that's because we're currently in one, but like you mentioned with the yield curve and, and any other number of things that you want to look at that are sort of leading indicators for the economy, indicate a recession. My guess is, like you, John, it's probably pretty mild and we'll get through it fine and it won't be nearly as painful as some past recessions. And I'm thinking, of course, of the financial crisis in '08. But nonetheless, there's a lot of evidence that A, points to this being a rally within a bear market, and B, that there's likely a recessionary environment or at the very least a slowdown in economic growth over the next year.

What I'm hearing, guys, is caution and patience, but also a little bit of historical optimism, because I, I think, John, you shared with me one time a statistic about after the midterms, the majority of the midterm election years, I think you shared 80% of the return tends to come from November and December. So we have some historical reasons to be optimistic, but also what I'm hearing you guys say is kind of a don't believe the hype. In terms of this isn't a rocket ship to the moon. All of a sudden, all of our fortunes have changed. It may be one of those times to just reassess and be diligent, kind of in, like you said, John, staying with the plan, but also picking your shots, right? And being smart as to when we talk a lot about the emotional roller coaster and it's easy to be driven by that. I think a big part of where it seems like we are now is a lot of our job sometimes is to keep people on the ride. Remind folks to be that bar when we're on the downward side of the roller coaster. But it's also important for us to pay attention to that click, click, click, click when you're going up those old school roller coasters, like up towards the top of the hill, knowing that there could be a little bump after that. You don't necessarily know that for sure. Again, it'd be easy in our position to want to sell the idea of everything is great, everything's going to be great. You guys know I'm an optimist. I prefer a glass half full and a super rosy picture, and I only like to talk about good news. But in reality, I think you guys have done a good job of giving clients some reason to be optimistic. There's plenty of historical precedent that things will get better as we're looking towards the end of the year. But also, yeah, with a measure of don't feel like you have to jump in with both feet, which is what people tend to do. You've been waiting and it's finally turned around and it's finally getting better, and what you want to do is stomp the gas. When in reality I think we're in a situation from what I hear for you guys, like this might be a time to— I'm not a racing fan, so I may get the analogy wrong, but you may want to save some tires for later in the race. There may be a more opportune time. John, you're chuckling at me. Are you a race fan? Did I miss that one?

I mean, I've been to a few NASCAR races in my day, but you got it exactly right. I just like to hear you say you might not know everything because I just always think of Chip Munn and Scott Mitchell and that they know all the things and I'm just here to participate in a great conversation.

I think that the best thing I've been able to think of while you guys were talking is maybe you save some tires for later in the race. It's not to suggest that it's so hazardous out there on the track, but there may be a more opportune time to press down on the gas where the conditions are a little bit better.

In our industry, the big T-word that we use a lot and throw around a lot is trust, and inflation is something that makes people question do the people in charge actually either A, know what's going on, or B, have any way to control it? I mean, the reason that we exist in this social environment, that we pay our taxes, we work hard, we participate in our communities, is that in exchange for all of those things, the powers that be give us in return a stable environment of spending and all that. And so, when you see inflation enter into the picture, people start questioning the situation, questioning the level of trust that they have in the people that are making the decisions. And so anytime you get people questioning what's going on, it can wreak some havoc. And we see that show up in stock markets. We see that show up in people's spending decisions, whether they're choosing to drive less or combine errands or delay major purchases, whatever that is. Inflation is causing people to ask all these questions, not only in their daily lives, but also of us. And so I do think it is something that we try to help our clients with is we try to give them trustworthy answers to the questions they're asking of, is this the best time to invest new money? Is it the best time to stay invested in what we've already got? Give us something to help us feel more confident that somebody is in control, making good decisions for us out there. Even if we don't think that the politicians, as you brought up earlier, Chip, might have our best interests at heart, right?

Look, they're people. Every now and then they get it wrong and they think it's going to be transitory and it's not. And I think a big part of, and you touched on it, John, and I shared this in a video recently with kind of an internal video with clients, is we control the things that we can control. And I think that in the conversations that I've had, people are doing a good job of that. I mean, I saw a study where people are driving less, they're eating out less. Most of our clients, it's not because they have to, it's because they choose to and they're just doing the next right thing. They're paying attention. We've talked about gas prices and paying attention kind of as you drive through town, combining errands and delaying some purchases every now and then. Again, just because it makes them feel better. Sometimes it's not even an economic thing. Most of the things that we deal with and do as people, and in our case as advisors, are emotional things. And we're just trying to, I think from our perspective, a big part of it is just doing the next right thing. And sometimes the next right thing is to deposit some money in your account so that it's available, but not necessarily feel like you have to rush out and invest it. Or in the case that we're in right now, sometimes it is to utilize short-term fixed income opportunities that are better than just having the money sitting in a checking account, for example, that may pay you more interest than that. But don't feel like you have to rush out and buy the next big thing. And I think that, again, a lot of that goes back to controlling what you can control. And do the next right thing. I think that's a big component of it. It's easy, like the weather. We can look out the long term and say 7 out of 10 days it's going to be sunny. But if you ask me next Tuesday what the weather is going to be like, it's really tough. And so it's easy to make good long-term decisions. It's easy to look out the window today and know whether or not I need to bring an umbrella. But in between can be kind of tricky. And so a big part of that is continuing to pay attention. To the forecast and kind of rolling on from there. Scott, we've touched on driving less and folks trying to save some money on gas. Segues for me into our traffic report. I'm curious, are we finally going to get a green light this month?

As we said, with all these, the recent kind of over— well, looks to me like overbought short-term nature of the market, I would actually probably move it to a flashing red light, you know, just come to a stop for now. And then I think we'll get a chance to put money to work So I would say for right now, hold off on new purchases. Well, we've talked before about the idea of dollar cost averaging, and that almost always makes sense, right? Where you just sort of add money in gradually over time and hopefully in equal amounts over equal periods of time so that you don't usually get the lowest price. You don't usually get the highest price. You get somewhere in between and it works out pretty well. It's not guaranteed to give you better investment results, but it might give you smoother investment results. And that's a lot of what we're looking for, right? Is just kind of a, you mentioned the roller coaster. It'd be nice if maybe the roller coaster wasn't quite as bumpy sometimes. So dollar cost averaging can do that.

Prefer a train to a roller coaster.

Yeah.

I've noticed that trains don't go uphill. And so maybe you want to try to build your situation a little more like a train and less like a roller coaster. John, any kind of parting wisdom?

No, I just hope Scott agrees to come back on our show next time and share some of his wisdom.

I'd love to. Thank you. Appreciate it. And Chip, I will leave you with— you mentioned being an optimist and seeing things half full. The US economy is back in a thousand, right? We've had a lot of recessions and we've come out of every one. So can't guarantee or predict, but I like our odds of whatever we're going through, of us getting out of.

Yeah. When in doubt, bet on America. If I was going to be a politician, John Tate, that would be my slogan. Or I could just go with— I think, Scott, you introduced me to Cloyd Rivers years ago on Twitter, and I'll close with this: 'Murica! Tate, let's do it again next week.

Bet on America fits real nice on a bumper sticker.

Amen. Who won't buy that? Russians. All right, let's do it again next week, Tate.

Yes, sir.

Hey, thanks, guys. Good to see you.

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