December'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?

Good morning. Happy December to you.

Well, thank you very much. It'll be Christmas time before we know it. It is, whether you like it or not. Listen, all you got to do right now is go outside. You'll at least know it's not July. Let's just say it that way. And I noticed on video today you're wearing a sweater, so it must be equally chilly where you are.

It is National Ugly Christmas Sweater Day, although it might be ugly, but it's not a Christmas sweater.

So there you go. It's that time of year and it's that time of month. Where we're joined with Scott to give us some magical insights on the markets and where things are. Scott Mitchell, good to see you.

Hey guys, what's up, Chip? How you doing, John?

Bringing the magic.

Exactly. I feel like Santa.

As we're kind of getting into the end of the year and, and looking towards next year is that we do things a little bit differently. Normally we, for our regular listeners, normally we end the show with a traffic report, but we decided we'd do it a little different here at the end of the year. We're going to start with the traffic report. Scott, kind of kick us off with kind of where we are now and what you feel like the outlook is. And then we're going to work backwards, I think, today to how we got there.

Throw everybody a curveball starting off with the traffic report. So for me, I, you know, and I've spent some time thinking about this, I think it's a flashing red light. When you come to the intersection and it, there's a stop sign, they got the flashing red light on there and you gotta come to a complete stop and check both ways before you go. And I kind of arrived at that by saying, what's the rush? Why wouldn't you just come to a stop right now? If you look technically at the stock market, we've challenged the 200-day moving average 4 times now, I think, John Tate, to the upside. Every single time we've hit it, bounced down, including just a few days ago. I think twice in the last month we've done it. So technically, you know, what I mean by that is from a standpoint of buyers and sellers, when we get to certain levels, there's just more sellers that step into the market, which keeps stock prices from going higher. And then fundamentally, obviously we're fighting against the Federal Reserve that is not only raising short-term rates, but also reducing the size of their balance sheet on the longer end, which sort of depletes the amount of money in circulation in the financial system. So that's a headwind. And you've also got what's likely going to be the next few months of corporate earnings releases that are going to come out and going to be reducing expectations going forward, possibly even not meeting expectations that they had already set forth. That's usually not a great setup for stocks. Usually, you know, it makes sense that investors want to own stocks of companies who are growing earnings, not whose earnings are decreasing. And I think we'll have fewer of those companies going forward. So again, I come to this flashing red light by saying technically things don't look great. Fundamentally, I don't think things are awesome. So I'd say stop, look both ways, don't be in a rush to move forward.

I think that's fair. I think 2023, you come to this time of the year and I'm reminded, you know, I think it was on an advisor call, Chip, I think you said one of your big wins for 2022 was getting together the group for the UNITE conference. In Charleston, and it was a good time. We had some good presentations. I do remember one of the activities we had was answering trivia questions, and one of the trivia questions was what company's slogan or motto is "think different." And of course the answer is Apple, but I think back to another company that you're fond of, Chip, and one of their advertising slogans, the pause that refreshes. Do you remember that one, Chip?

I do not. I am not that familiar.

It's for one of your favorites. It's for Coca-Cola. And it came out in the, in the late '20s, you know, when the economy was coming to the end of their rip-roaring time and everybody was hectic and busy. And so the ad agency at Coca-Cola came up with the pause that refreshes. That has somehow stuck with me. I feel like we're in that, not only that time of the year where people kind of pause and refresh themselves. Around the holidays, but it's also that time in the market, as you just said, Scott, where we're kind of pausing, refreshing our expectations for the new year. And while 2022 was volatile, I don't think 2023 will be any less volatile, but it might just be volatile for the exact opposite of reasons as 2022. I mean, I think in 2023 we are going to see inflation moderate. It's not going to be as high as it was. You know, I think we peaked in June. I think you'll continue to see those readings come in lower than normal, which should allow the Fed to also pause their rate hikes going forward. When that's going to happen, we don't really know. I know they want to jawbone and pretend like they're going to raise rates, uh, forever and ever, but I, I just don't think that's going to happen, especially when we start to see inflation come back down. And if consumers are changing their spending habits because they do think we're going into a recession, then you should see savings naturally rise as they pull back on above-normal spending levels following the pandemic and build up those savings levels again that they've depleted in the past 12 to 18 months. And so there will be some things we have to work through, but I do think there are going to be more uptimes for the market coming than we saw potentially this year. We just have to wait and see.

I think you're right. I think that one of the key things is going to be that the, the fear of inflation is going to be replaced by the concern over earnings.. And as we sort of come to terms with that over the first and second quarters, then all of a sudden you're going to start to hear about green shoots, right? There's some signs of positive change where maybe you'll hear a company start to say, well, we have better expectations for the third quarter or the fourth quarter. And at that point you might see money come back into the stock market. It's also possible by then that longer-term interest rates, so not the stuff that's controlled by the Federal Reserve, the overnight rates, but the longer-term rates that are controlled by the market, you could see those decline in 2023, next year, as people sort of pour money into bonds thinking, well, I can lock up money at a pretty good rate for 5 or 10 years, I'll do it. So interest rates will start to come down, which will make them less attractive, which might make stocks more attractive again. So I, I do think you're right. I don't think you can abandon the stocks altogether because you just never know when things are going to turn. They turn on a dime. Look, this year, no one, no one had predicted the things that were going to go on this year. I think we all thought there would be some inflation, that wasn't a surprise. But you know, the war in Europe, energy supply shocks, all those sorts of things just created so much uncertainty this year for the market that again, no one knew. There's going to be the same sorts of things next year, right? And they might be to the upside. So I don't think you can abandon stocks altogether. We've talked before, I believe, about Morgan Housel, who wrote The Psychology of Money. He has a really good interview series with Chris Davis on right now from the Davis Funds on their website. I would encourage anyone to watch it. Where they go through and again, talk about the idea that volatility is not a fine. It is a fee that you pay. It is an admissions fee that you pay to own stocks, which will outperform over time. If you want to make money over the long run, you have to pay the fee of the admission of volatility. And Chris Davis goes on to point out, you can look at it even further. There's actually a door prize waiting for you too on the other end of this admission. And the door prize is exponential wealth growth over the long run. So I, that's just a thing we're going to have to deal with. We want to dampen it as much as possible, for sure. I'm not one for adding volatility unnecessarily, but I think that to get out of stocks altogether would be to ignore what has been an enormous wealth-building asset for at least a century.

One of the things that struck me, and at least for me, if we look at all the things that you guys have been touching on as far as this past year, The word I've used repeatedly is yucky. There have been plenty of times when it— that's a technical term, yucky.

We don't like to use that term a lot because it's so technical. Like, people don't understand.

Yeah, some people might not understand. I like to, you know, again, as a former 6th grade teacher, I like to explain it like a 12-year-old can understand it. Pretty much everybody, whether you like it or not, you understand what yucky feels like. But if I look at it in light of all the things that we've experienced this year. It seems to me like— and I'm curious what you guys think— under the circumstances, with all of the changes, it seems to me like the market has been relatively resilient considering all of the changes, the, the severe move in interest rates by the Fed and the inflation that's been above and beyond typical. It just seems to me like while it has not been fun. It has been challenging. It does seem to me like— I'm not a real big fan of saying it could have been worse, but it does seem to me like there's been some bright spots in terms of just being resilient despite the fact that we've had a ton of inflation and dealing with that. So much so that the government gave retirees about an 8% raise in Social Security, and at one point gas being $4 a gallon and I mean, despite all those things, it seems to me like we've been fairly resilient. I mean, would you guys agree?

I know I would. I mean, I, I'll say it if you won't, that it, it could have been a lot worse. Consumers and corporations, their balance sheets are pretty good. So we're not approaching this period of weakness from as bad off as we were, say, in '07, '08 when consumers were really tapped out. Corporations were overleveraged. So thankfully, I think we've come at this from a much stronger position. And John, you know, you probably saw the retail spending numbers that have come out over the past couple of days. Retail spending on products has decreased, but retail spending on services has not. It's gone up a lot. So people are out there, they're still enjoying being able to be back out, maybe some less fear over COVID and whatnot. And they're spending money at restaurants and, amusement parks and any sort of service that they can kind of get their hands on.

Yeah, I think bars and restaurants have been a pretty resilient part of that retail survey to many people's surprise. I mean, there was a point in the pandemic where I think it was probably said that people would never go back to restaurants and bars again. And, and here we are. So you and I went back and forth a couple times in the past couple of weeks on interest rates and long-term interest rates, especially whether they were going to go down, which means prices would rise and I've been doing a lot of thinking about that, and I think I've come to the realization that you're probably right on that. And if you look at some of the long-term bonds, and even if you look at some of these preferred stocks out there, and for our listeners, those are the securities that are in between equities and bonds in the hierarchy of company securities. And not going to name any specific companies, but there are some out there that are trading at 70% of par value. They're currently yielding between 5.8% and 6%. And if you assume that maybe within 10 years that company calls them back at par, or even if they go out to 20 years and call them back at par, your internal rate of return is somewhere between 6% and 9% over that time period. And that's pretty hard to beat. And so some of those things I think will take the place of stocks, and it's not necessarily that stocks are bad. It's just that there's more competition now for money, for new money going in. And some of that competition is going to be something that has less volatility than stocks. It has a lower fee of admission, like you were mentioning before. And of course the door prize is going to be smaller. You might get a pen with a flashlight on it instead of noise-canceling headphones as the door prize, but there still is going to be one. And so I think that's a lot of what people are struggling, including myself as an investment manager, but struggling with right now over how to allocate their money, not only new money going in, but what they have invested currently.

And I will, I'll add to, from your and my standpoint, when we're building portfolios, but also for our clients, from their perspective, when we put together their financial goal plans, often the assumed rate of return is 5 or 6%, right? It's always pretty conservative because you'd rather err on that side. Well, now if you could get 5 or 6% in something that's either guaranteed or pretty safe, I'll use that term loosely because safe means different things to different people, but something with less expected volatility, like a bond, a corporate bond, or a preferred stock, that in a lot of ways will make financial planning a lot easier for people to say, huh, yeah, I can lock up a good bit of this money into something that's going to provide me a fairly steady rate of return. So I think for a lot of investors, for their standpoint, now's actually a, a really good time to say, yeah, let's reallocate, look at what's out there, what's available, and go from there and have a better chance of meeting our financial goals.

Well, and I think that it goes to the point of continually making sure that you're taking as little risk as possible to do the things that you want to do. I mean, Scott, you and I talk about that a lot and Warren Buffett can put all of his money in a checking account. He doesn't need to, in order to live and, and to get his value meal on the way to work every day from McDonald's with his lifestyle, he doesn't need to have outsized returns. Now he has other goals. He wants to give a lot of money away and he has shareholders to take care of. But the point being, he doesn't need a lot of personal risk necessarily. And so our, our advice, Scott, I mean, the reason that we started with the Signature Life Planning the way we did back in the early, early 2000s was from watching people take more risks than they needed to, and to be able to say you can actually be more conservative and have a higher likelihood of a successful outcome. And I, I think that you hear interest rates are going up and this, that, and the other, and, and a lot of times you'll look at your bank statement and your checking account where a lot of people I, I find still keep a disproportionate amount of their, their kind of short-term money is just in a checking account. It's still not paying you anything. You may not know that there are money market type instruments paying somewhere between 3 and 4% or better. I, and so one of the things, I forget who it was, Barron's maybe, that I had a conversation with, and we were talking about the fact that not all money markets even are created the same. We use it as a very generalized term. However, I forget, you guys may know off the top of your head how many money markets we have access to. But it's a lot and not all of them pay the same and not all of them have the exact same kind of underlying investments. But again, it's fascinating to me. There are lots of opportunities out there and I, I think that's the biggest thing. And one of the reasons that we do these conversations is to just remind folks of all the different opportunities that there are out there. I can't remember the last time we had a, an open conversation about preferreds. But you know, again, that's our job is to take the goal of a client or a prospective client or anybody that we're trying to help and say, what's the shortest path to get there? Right? How can we get from point A to point B with as little risk as possible and to flesh out all the different options? And again, I find it encouraging despite all the headwinds we've had this year. You look at coming into the year, I don't know that January 1st was the high of the market. Historically, but it was way up there relative to now. It was pretty close. And to be off, call it 15%, despite inflation being way high, relatively speaking, interest rates being increased 4 times off the top of my head that I can think of, 3 of those being 75 basis points and one most recently being 50 basis points, and we're off 15%. Even if you were looking to invest in equities, if that was your choice, there's a lot of reasons to be optimistic. I'm curious, Scott, going back to the conversation about the Fed, you know, you talked about them shrinking their balance sheet. Again, if I'm looking at it from an optimistic standpoint, we've already established just a flashing red light. There are lots of options out there, but it seems to me like one of the things, despite the fact that all these things happen, the Fed has raised rates, 3%, give or take, just this year. That's if I'm doing the quick math in my head. It's pretty close to that. They've raised rates 3%. Inflation's been high. They've shrunk their balance sheet, so they've stopped kind of the bond buying that they had been doing, right? That's what that means. And so now it seems to me like, if I was looking at it from an optimistic standpoint, it means that they have dry powder on the other side of this we're not down 40%. This isn't 2008. The Fed has historically bought more bonds than they are right now. So at least theoretically, they could go back to what they were doing, which would increase money supply again someday. Don't know when, but 5 years from now, down the road, there's a case to be made that they've kind of freed up some room, both in terms of the ability to eventually lower rates again, but also to go back to buying bonds at some point if they needed to that really could make for a really positive case at some point for equities.

Am I wrong? No, no, you're absolutely right. And I, I think that is part of the reason they do what they do, is to reload, you know, for next time that they, that they would need it. Again, they can look at the economy from all these signs of strength that we have that are out there. As I said, consumers, corporations are in good shape, and say, yeah, we can afford to be tightening monetary policy right now with the idea that we can loosen it later if we have to. So it's tough. And John Cash, I think it's closer to 4.5% or so, right, that they've raised rates this year. It's, it's been a lot. I don't want to mess this up too badly, but I think it's the most that they've raised rates since the late '70s.

All at once.

Yeah. Yeah. Right. We were battling 18% inflation, right? So, and, you know, interest rates were 20%. So we're obviously nowhere near in, in that situation. So, and that's why I said Chip Munn, we'll start to talk about green shoots at some point where earnings are going to go back up, where the Fed is going to stop being so tight with monetary policy. That'll come and that'll be the big catalyst, my guess, for the market. But to your point, we don't know when that's going to be. And I think that's why you can't get out of stocks because it, I mean, it might be next week, right? I mean, it could be any time that things start to turn. So again, I think you can take steps to reduce volatility and still own stocks. That's what I would be trying to do, and that's what we will be trying to do in the portfolios that we manage.

Yeah. John, I'm curious, when you look at client portfolios now repositioning into 2023, are there any opportunities or changes that you see that folks should be paying attention to? You mentioned preferreds earlier, but I'm curious what else, if anything, you're seeing that, that people ought to be paying attention to going into 2023.

I think it's a good time anytime you enter a new year. So a lot of our meetings at the beginning of the year are different from the ones at the end of the year. The ones at the beginning of the year, we're assessing what just happened and then comparing that to where we are in the goal plan and seeing what changes we need to make. So it's always good to reassess your situation and make sure the goals that you've outlined still work for you and your budget. And when you're going through that, as we talked about before, if there are things that you can do in the portfolio that will get you closer to your average annual rate of return with less volatility, then that's what you should do. So some of the changes that we've already adapted into the models for our next rebalance, which will be at the end of January, are to increase the number of either long-term bonds or preferreds or things that have a better yield to maturity or yield to maturity that are really close to what we're estimating in the goal plan so that we can hopefully achieve the average annual returns that we want to year in and year out, regardless of what happens. So we're trying to do what we can to take chance out of it. Now, we're always optimists in this job. I think we have to be. We're always secretly rooting, or maybe not so secretly rooting for the stock market to go up, but we're also looking for ways to win, if you want to put it that way, in our client portfolios without the stock market's help. Sometimes, sometimes you can't count on the stock market to do all the good things. So That's kind of what we're looking at. I think in recent trading days, I've seen a lot of the widely held large-cap stocks turn up in the relative strength screens that I do. So anytime a, a company has a relative strength of less than 40, it pops up as something that's kind of not holding its weight. And in that screen in the past couple of days and weeks, you've seen Alphabet, Microsoft, Apple, Amazon all start popping up in this. Lower, less relative strength than the rest of the market group. And when those market leaders are all turning up in that group, you know, I mean, it could at this time of the year be repositioning. It could be tax loss selling, could be a number of things. You don't really know why, but you do know when the usual market leaders are all turning up in the pot that's less strong than the rest of the market, it seems like there are things changing. Keep that in the back of your mind and be aware of it. So, you know, maybe when you're asking me about what we're doing for next year, it's counting less on those stocks that have been such winners in the past 2 to 3 years, maybe 5 years. I don't know how long you want to go back, and more on other things.

And again, Scott, I don't— a lot of those names are also the ones that are most heavily weighted in some of the indexes. Yeah, so I, I think that that's one of the things to pay attention to, is that the relative strength, again, compared to the market as a whole when you look at the index, 5 or 6 companies, a lot of which John just mentioned, are the ones that are most heavily weighted in the indexes, which means that if you're not overweight those, your portfolio could actually do better than expected despite what they say on the news. Because again, those things, in some cases, some of those companies have a disproportionate weight when we see the kind of headline things that get reported.

Yeah, the equal-weighted S&P 500 is performing a lot better than the typical market cap S&P 500, which is the one that gets reported on the news or by us or whatever. And John, I'll just revisit something you said about us being optimists in this business, but let's face it, we're also realists. The stock market goes up the vast majority of the time. When we've talked about this in past episodes over a 3-year or 5-year, and then you got the 10-year period, the odds are just so far in your favor. So yeah, I mean, it's optimism and we want it to go up. I, you know, I think we all hate to see stock values go down, but by the same token, it's also a very realistic look. I've had several clients over the years tell me that what we do is gambling. And I'd say, this is the opposite of gambling. In gambling, you always lose and the house always wins. In this case, as an investor, if you play long enough, if you're correct, if you play long, you're right. Yeah. And over the long run, if you invest again wisely, I'm not talking about taking speculations on things all the time, but you just stack the odds way in your favor in investing as opposed to gambling, in which case the odds tend to be way against your favor. And that's why the Bellagio has that big beautiful fountain out front.

So John, what's one thing that you would suggest people do or pay attention to going into the end of the year? So this will come out right about Christmas time. Most people are starting to look at whether it's a resolution or a, I mean, they're starting to look at the new year. Or maybe some people have resolved not to open their email till after the, you know, or look at YouTube until after the first of the year. Can't say I blame them. What's one thing that if you could just point to something to pay attention to, it doesn't necessarily have to— mine won't be specific to the market, but what would it be?

The questions in the beginning of the year have to do with where are things today? What do we expect for the year? And so, you know, for the clients that come into our office, Just be prepared to answer questions about where's your emergency fund dollar-wise today, because we always use the start of the year as kind of like that starting point so we can see whether the budget's working, if we have enough in reserves to kind of get you through the year without having to count on the portfolio for more than it needs to be counted on for. So a lot of those kind of just budgetary questions, keep an eye on your budget, take a look at the previous year, see what things surprised you that you might spend more on that you didn't expect.

And.

And look towards the new year into things that you want to spend money on so that we can all see where it all fits in the budget and see if we need to do anything different in the portfolio to get you where you want to be.

Don, how about you?

Well, hopefully if people have listened to this prior to the end of the year, they've done a couple things. One is got their capital gains and losses where they want them. If you have multiple investment advisors or if you own real estate that you have sold over the past year, make sure that we know about that so we can account for it in your gains and losses. The other thing is if you're over 70, in most cases 72 in some, and you have to take a required distribution from your IRA, make sure that is done by year end. The penalties are very steep. It's a 45% penalty on the amount you do not withdraw, which I imagine is the steepest IRS penalty that there is. So I would say Make sure you got those things taken care of because on December 31st at 4 o'clock, it's too late for us to do anything about it.

No doubt. And again, you're right, Scott, there are a handful of things that can carry over. There are a lot of things, particularly as it pertains to taxes, that when the calendar flips, it's no going back.

So there are some things that you do have to do by December 31st. And among those are, again, capital gains and losses. And IRA distributions got to be done. There's no extension on that.

No. And, and so I'm going to have a couple of things just to kind of enclose in that I think are important. First is look back at 2022 and find something that you did right. Success is best measured when looking backwards. It's, it's easy to, I think I've shared with both of you guys and with some of our clients, the book, The Gap and the Gain, and it's always We've got this perfection, we've got our signature life in mind, and we're always moving towards this ideal. And like walking to the horizon, we never get there. The horizon's always as far out. Perfect is always as far out. We have to turn around and look back. And so I always encourage people this time of year to look back at the year and find something that you did that you're happy about, that you're proud of. I know in talking with both of you, you have some things, and I think that that's important. Because that's the building block for looking into 2023. And then the second thing would be to look at 2023 and decide something that's important to you to accomplish and commit to that, right? Because what I know is that if you commit, I think there's a saying that says, if multiple things are a priority, nothing's a priority. And so think about something in 2023 that you want to accomplish. It can be personal or professional. It can be financial or not. And commit to it and figure it out. And we'll help you, you know, whether that's a trip or doing something fun with family. Maybe it's leaving a bad job or retiring or whatever. Or if you work with a different financial advisor, maybe it's leaving a bad financial advisor. Who knows? But we'll help with all those things. But the thing is, think of something this year that can make your life better. Again, if you were looking back from 2023 to now, What's something you could accomplish that you'd be proud of and happy about and commit to that? Because if you focus on one thing, most of us can handle that. It helps us prioritize other things. And then finally, for me, I'm a big believer in finding first domino. And what I mean by that is when you stack up, if you ever see any of those competitions, you see all those dominoes and they make all the cool shapes, but if the first one never falls, neither do any of the rest of them. And so I think that for us, looking at 2023, is identifying some first dominoes that if you, you'll just do the first right thing. I mean, for me, guys, as you know, it was deciding to have surgery in March. Actually, the surgery was in March. I decided it in 2021, but that was the decision that was the first domino for all the other things that came after that. And it has dramatically changed my life in 2022. And so, you know, for our clients or friends, identify what a first domino is. Maybe I'll give you an example of one of mine is I'm ditching cable. That's one of the things I'm committed to ditching cable next year, switching my services. It's going to save me, I don't know, $100, $150 a month. At the end of the year, that's almost $2,000 that I could spend on something different. That I otherwise would have wasted on something that I didn't need. It's a very basic thing to do. But if you multiply that by 8 or 10 things that we could do, I mean, all of a sudden you've made real change. So identify some first dominoes and begin to knock those down so the rest of the process can kind of take care of itself. John, Scott, anything in terms of parting comments? Speak now or forever hold your peace.

Merry Christmas. Happy holidays. Happy New Year. Hope everybody has a good holiday season.

Likewise.

All right. Well, guys, I enjoyed it. See you again next year.

Yes, sir.

Bye, guys.

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