June'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.

Welcome back to the Signature Life Show. I'm your solo host this week, Chip Munn, and it's a little bit weird for me, frankly. Uh, for regular listeners, you know, normally my co-host John Tate is with me, and it's a little bit weird not talking to and seeing John. But luckily, I am joined this week by our Chief Investment Officer and my partner, Scott Mitchell. Scott, welcome to the show.

Hey, Chip, how are you today?

I am a little bit tired, frankly. Scott and I went to the gym this morning and he wore me out on that. Luckily, I feel like we've given enough time, Scott. I'm a little bit recovered.

Good, good. Yeah, I'm moving a little slow myself, so I definitely know what you mean.

Again, we both missed Tate, but this is our opportunity, kind of our regularly scheduled chance to kind of catch up and do a monthly overview of the markets. So I'm glad that you can be here and that we could— talk things through. Got a little bit of a break in June. It felt a little better for those who are on our email list and get your market commentary. I've read through that. It felt a little better in June. Tell me a little bit about kind of what went down and what your thoughts are.

Yeah, I'm not sure what the official number closed at, but I think the S&P did manage a sort of modest gain in June, and that felt like a big victory after the first few months of this year, which has not been real fun. And As again, we discussed in the email and kind of as an aside, if anybody's not getting that email from me and would like to, Chip, can they get in touch with you? Or maybe they can just email me at scott@signaturewealth.com and I can get them added to the list.

Absolutely.

Yeah. Last we discussed in the email, it's just been such a weird year because both stocks and bonds are down and both fairly considerably somewhere in the 10% range, give or take, depending on what hour of what day we're talking about. And usually the reason you would have bonds in a portfolio is to offset the volatility of stocks. And the reason that you might have stocks in a portfolio is to provide growth that bonds don't usually provide. So again, this year just being unusual, there haven't been many at all over the past 100 years or so that both stocks and bonds have been down. So it's just been tough. It's been a tough year for most investors, I think, to look at their portfolios. And then on top of that, Doesn't seem like we're getting much good news from anywhere with the war in Europe. Oil and gas prices haven't risen so much. Food prices have gone up a lot. I was talking with someone this morning who said that they saw an Egg McMuffin meal down at the beach, the breakfast meal that I guess comes with a drink and hash browns for over $7. And that's tough. It was a thing, and I haven't heard it referenced in a while, but it used to be called the misery index. Some sort of combination of inflation plus the stock market and general sentiment. And the misery index feels like it's getting higher and higher all the time because all those things that we look at, whether it's our portfolios or gas prices or food prices, they all seem to be heading in the wrong direction.

Yeah. And it really is frustrating. I usually just call it yucky. Maybe the misery index is probably more formal, but there are certainly times that when it comes to, again, the financial markets and all these things that we're talking about, sometimes just feel yucky, and this has definitely been one of those times. It's certainly, if nothing else, because I had a conversation this week with a reporter actually was asking me about why people do certain things and what goes into some decision-making. And one of the things that he and I talked about was the fact that it's important to be mindful of what it is that you buy. And I think that A lot of times we see a lot of the headlines, if you will, that talk about one thing or another. So for example, I personally do not currently use long-term care. I don't have anybody in a long-term care facility. So if I saw a headline about long-term care costs going up, while as a professional I have to pay attention to that for my clients, it doesn't personally affect my pocketbook. And so I think that for a lot of people, The tough part right now is all those things that you mentioned are all things— food prices, gas prices. I mean, you got to eat and most of us are going somewhere. And so right now we seem to be getting hit on a lot of the areas that all of us participate in. And probably, you know, maybe even more so now that we're headed into the summertime. I mean, from my reading your email, but also just personal observation, people starting to travel more. So we're starting to see people get out and be a little bit more mobile than we have been, say, in the last couple of years. And I feel like that probably contributes to it, even just the demand for things that are already expensive. Obviously I'm not an economist, but my brother is. So it pushes things in what we would feel like, because we don't sell it, right? The wrong direction.

Yeah, it's interesting the point you made about feels like people are kind of getting out and about again. There were a couple of major retailers that had earnings reports out within the past month, and one or both noted that their inventory of TVs was too high, that people were not buying TVs now, but that their inventory of suitcases was too low, that people are, are buying a lot of luggage now. So that certainly is supportive of your observation that people are getting out and doing things again. And that's at least in the near term going to drive up the cost of, well, you would assume gas, hotel rooms, restaurants, all that. And it ought to drive up the cost even more in the short term, at least. So yeah, I think you're right.

Yeah. Again, a lot of life and a lot of, they call it personal finance because it's personal. And a lot of it, I think in times like these, none of us can control the stock market. We can control a lot of things. And so now we're just in a place where It's really important as part of our planning to make good decisions. And sometimes that good decision is riding out difficult investment markets. But the other part is making solid financial decisions about the things we choose to buy, places that we choose to go. There are still, always will be a lot of arbitrage opportunities in terms of where you're going to travel, how you're going to travel. I mean, there are lots of options. Sometimes, and I forget who it was that said the quote, democracy wasn't perfect, but it was the least bad option. Sometimes the same is true with a lot of other things, with travel and with, again, how you're gonna handle everything from eating out versus staying at home. I mean, and so it's a very personal thing. And so I think right now, a big focus of a lot of my conversations is controlling the things that we can control. One of the things that we can't control, and I'm curious your kind of take on it, is interest rates. Again, it's a lot like the stock market. We don't have any control over that, but it does sometimes have an impact on us, both from an investing standpoint and a spending standpoint. What are your thoughts right now on interest rates?

I think that's part of the reason why we had that small rally in stocks in late May was because the 10-year Treasury bond, which is sort of the rate that I think that most investment folks look at, It's sort of indicative of the overall rate market. Anyway, the 10-year Treasury, it got up to close to 3.2% in early May and then pulled back and was down below 3% for a while. So whenever you see yields come back down like that, then money can feel better about going into stocks and bonds for that matter. Bond prices are rising at that point. So I think that we've probably seen a peak in interest rates for now, that roughly 3.2% on the 10-year Treasury. And that number's important because that's really what like mortgage rates are based on and other sort of longer-term interest rates, borrowing rates based on that 10-year number. And it also has a lot of investment funds. I'm thinking things like pensions, the yield on the 10-year Treasury sort of dictates their strategies a good bit too. If they can get higher yields in bonds, they'll put money in bonds. So it's essentially risk-free. And if yields are lower, then money comes to stocks. And we saw that really almost consistently starting at the end of the financial crisis in '09. Interest rates were so low. They would every now and then creep up just a little bit, but not a whole lot. And with interest rates that low, the acronym TINA came about, TINA standing for There Is No Alternative. Really, if you're an investor, you can hardly put money in bonds. Yields were just too low. But now there's a choice. And so as we see those, especially that 10-year Treasury yield tick up like it has, money will move towards bonds more and more. The good news is though that I do think there's a better than average chance that we've seen the high, at least in the near term, on that Treasury bond, on the yield. So maybe we'll start to see things like mortgage rates not move much higher than they have, which could help the economy a little bit. But it also could help stocks because they won't have so much competition from bonds at sort of higher yields. So generally with interest rates, I think at least the long-term rates have peaked. Now, short-term, right? The Federal Reserve controls those overnight rates and that does— banks often will base their prime lending rates on what the Federal Reserve does. So I think we could certainly see short-term rates continue to move higher. And the Federal Reserve does that in an effort to slow down the economy. They've been pumping way too much gas into the engine of the economy over the past, I think you could argue, decade or more, but especially since the COVID lockdowns. So they're going to pull back on that some. And furthermore, they've been buying bonds over the past few years. And when they do that, that has the impact of keeping longer-term interest rates down. Well, now they're done with that. They're not going to be buying any more bonds and they're going to let all the bonds that they own just kind of roll off their balance sheet as they mature. So that ought to have an impact of not keeping interest rates sort of artificially lower than they were. I don't know as though that means that they're going to go back a lot higher. Again, these would be on longer-term bonds, but we won't have that sort of cap there on longer-term interest rates. So generally speaking, I think that we're looking at more of a flat on the longer term to higher on the shorter term on interest rates. Maybe if you're a saver and you have money in CDs or you just want to keep ultra safe, ultra liquid, that might be good news for you, right? Because that's money that before you were earning roughly nothing on, and that you might be able to earn a percent or two depending on what sort of deposit instrument you use to earn some more interest on. So from that standpoint, maybe that's good news if you do have short-term safe money.

Yeah. It's also a reminder, again, whether it's a pleasant reminder or not, that interest rates can go up. I mean, for the last 5 or 10 years, to your point, some would say artificially low. They certainly have been really low. And for most of our clients, if they had a mortgage, they've been refinanced before now. There was no sense of urgency, I guess, is what I'm saying. And now hopefully it will go back to closer where it was for borrowers, at least. But it's a reminder that for folks over the last decade who haven't seen interest rates go up, that they can and they do. And, you know, it's one of those things that when you have an opportunity to do that, you should take advantage of it. I know for me, Scott, it has played into some of the decision-making with people who are buying property, whether it's commercial or residential or primary or secondary. The fact that mortgage rates or the cost of funds has gone up pretty significantly over the last year or so has at least— I don't know that it's had much of an impact on the housing market. I don't know if you've seen anything on that. It doesn't appear to have. But at least for some people, I know it's certainly something that they're thinking about more, the cost of borrowing, a lot more than they used to.

For sure. Mortgage applications, both for first-time purchases and refinances, those numbers are down from where they were. And again, that makes sense with mortgage rates being higher, and they are. It makes the payment less affordable. So what's that going to end up doing? Eventually, it'll bring the price of homes back down, or at least keep them from rising as much as they have. I think we've seen a pretty unusual real estate market over the past few years since COVID And so maybe this serves to cool that off some, especially in some markets where you've seen really hot prices. Again, you probably see some slowdown there. I think that we are in somewhat of a housing shortage though. So while short-term we may see a slowdown, long-term we got to house people and whether that be in apartments or homes or whatever, I think there'll be a lot more construction going on. Which also over the longer term you would think would keep home prices from going up too much if we're building more supply. So short term though, I think maybe these higher rates will keep home prices from going up as much as they have, maybe even cause them to come down a little bit in some markets.

So before we get to the traffic report, because I'm excited to hear about that, I want to touch on two other things really quickly that again, I get a lot of questions about because I think they're in the news a lot. They're just terms that get thrown around. So one of them is inflation. So we touched on that a little bit. Chip, what are your thoughts as to where we are in terms of inflation? Have we seen the worst of it in your opinion, or is that something that we're going to continue to deal with moving forward? Again, not just the fact that prices have gone up, but continuing at the rate they have been, or is that something that we may see some easing on?

The number that usually gets the most attention is that the year-over-year price increase and the economist takes sort of a basket of goods and measure them on a monthly basis and then compare it to not only previous month, but the same month in the previous year. So when they tell you that number, if inflation's up 7%, say for example, that means that the price of that basket of goods is 7% higher than it was the same month a year ago. I think that the odds are good that we've seen that, that number, which may have started off at 4% and then moved up to 5% and then 6% and then 7%. I think the likelihood is good that we're going to start to see that flatten and maybe come down some. And for no other reason, it's just going to be a hard comparison to the same period a year ago because prices were already rising this time a year ago. So I guess it's maybe like thinking of accelerating your car. At some point you're going really fast, you're just not accelerating anymore. And the same thing is probably true with inflation, that the rate of acceleration isn't going to be as great, but we'll still be going really fast. So those headline numbers may come down from 7% to 6% or 5%, and eventually they're going to go negative. We just won't be able to keep up with the same price increases, but that doesn't mean that prices won't be going higher. They'll just be going higher at a smaller incremental level. So I do think that the rate of change is not going to be as great as what we have seen. However, I don't expect prices to come down anytime soon. I don't know what would cause that other than perhaps a recession. So I think we need to get used to paying higher prices for things. I don't think that's going away anytime real soon.

You touched on the last thing I wanted to ask about, which is the R word. There's a lot of talk of recession, and I think one of the things, and we may have even talked about this last month, is that recession is one of those words that gets thrown around without a whole lot of context. Give us a little bit of what does that actually mean, and what are your thoughts on whether or not we're headed into one and how that might play out.

So we measure the size of our economy by GDP, gross domestic product. I will skip the formal definition of it, but it's basically everything that we produce in the country. When we have a recession, it means that GDP has shrunk by 2 consecutive quarters. So again, our GDP may be strong, it may be higher than it was 3 years ago, but it's not as high as it was the previous quarter in the case of a recession. And again, that happens 2 quarters in a row. So it basically just means that the economy's just not growing. Uh, in fact, it's sort of retracting. It could be a very mild pace. Again, it doesn't matter whether the contraction is a 10th of a percent or 10%, it's still a contraction. So you can't really define it until after you've already been in it for at least 3 months since it requires 2 consecutive readings. So it's very hard to predict. It's very hard to know when you're in one. I doubt that we're in one right now. And if we have one, which I would put at a better than 50% chance, it's probably next year. And it might be what we need to sort of cool things down a little bit. You know, it sounds like a scary word, but I think if your choice is between having the economy slow down for a couple of quarters or having continued 6 or 7% inflation, you might prefer having the economy to cool down for a couple of quarters. Not all recessions are particularly sharp. Not all are particularly long-lasting. Again, it could be as quick as 2 consecutive quarters, or it could take 2 years. You just don't know. That doesn't seem very likely. Everybody's already sort of counting on it. We're seeing slowdowns in hirings at some of the major tech companies in particular. So I think lots of corporate managers are already planning on a recession and taking steps now I don't know where consumers are really. It doesn't appear as though they are. Credit card debt's ticking back up. I have a feeling that might be a function of people just wanting to get back out, like you and I have talked about earlier, just wanting to get back out and do things. And that maybe once that's over with, they'll start to not spend as much money, which also would cause the economy to slow down a little bit. So I guess what I would take away is that there might be a recession, but it doesn't have to be bad. And it might be really just kind of what the economy needs to slow itself down, And some people have argued that the Federal Reserve's actually trying to engineer a recession just to cool the economy down some. So not necessarily a bad thing. Not fun. I'm not looking forward to it, but as I said, it doesn't have to be all bad either.

I saw a statistic earlier today. I was looking at some things for today's discussion and margins are just really low right now. As investors, it's one of those things that in fact, it was in your email that companies with earnings are actually posting pretty decent results, but they're not necessarily coming from great margins. It's much more about revenue in those places than it is about the margin on the revenue, which is the opposite of what it was last year, 2 years ago. So it's been a big difference. It, it's one of those things where there's always opportunities, but I do think that the potential for a little bit of a slowdown for those of us who are investors can also benefit the fact that the companies that we invest in can actually begin to have some margins again, which right now they can't. Because if McDonald's is selling an Egg McMuffin meal for $7, you can almost bet they're not making any money on it. They're just trying to get you to keep coming to McDonald's. And not lose customers. So they're not necessarily making money. Same, frankly, with Scott. You and I have a good friend who runs convenience stores, and one of the things that he always said was, when gas prices are going up, we're not the ones making the money for sure, because yeah, all they're trying to do is keep people coming to the store, even if they're breaking even or only making a penny or two a gallon. So there's just not a lot of margin out there right now. But as investors, if we're looking for a bright side, and I tend to try to do that, I do think that as investors, the companies that we own will have an opportunity to increase their margins, potentially get more profitable. So there's a longer-term bright side as far as I'm concerned. So Scott, to wrap up, one of the things we like to do every month is your traffic report, which I find to be just a really simple way to understand kind of where we are right now. Anybody over the age of well, at least 15 can understand that. Where are we? What's traffic like out there?

I'm going to keep us on that flashing yellow light, but I will say that short term, maybe we've got a chance to have more of a continuation of that June rally. I think we're set up pretty well for short term. Things are a bit oversold, so maybe we get a bounce, we'll get a little bit of a break here. But longer term, I just think there's too many overhanging items. When I say longer term, I'm really looking at maybe 3 or 6 months. We've talked about with gas prices and food prices and the war, et cetera. There's just so much uncertainty and nobody really likes uncertainty at all, but especially not in the stock market. And I think until there's a little less uncertainty over some of these issues, then we still need to observe that flashing yellow light, slow down, look both ways, And as long as we've done those things, make sure there's not a big tractor-trailer coming to hit us, then we can proceed. And so I'll keep us in that flashing yellow light status for right now. We're also headed into the seasonally slow time of the year. The stock market historically slows down between Memorial Day and Labor Day. So people tend to think of the summer rally, which there are, but that's usually in the context of bigger downdraft that occurs during the summer. There's usually just less trading volume. People are off there enjoying their lives during the summer, right? The weather's pretty. They want to go do fun stuff. They want to go out and check out the new Buc-ee's in Florence. They're not trying to buy stocks. Things tend to slow down a little bit for the stock market. So maybe a rally during the summer, but we are headed into the slow time of year. So just be aware of that.

Also probably important to point out to buckle your seatbelt, because one of the things that I have noticed is that volatility seems to be up a fair amount. And usually during the summer it ends up being on relatively low volume, which means that the headlines have a much bigger impact on any given day than they might another time of the year. So as you're going through the flashing yellow light, just buckle your seatbelt. The summer is again historically a very slow time if you look at it from beginning to end, but on any given day it wouldn't surprise me to see additional volatility this year. But it's usually the case because whatever the headline is, whether it's good or it's bad, typically there's such light volume, comparatively speaking, in the market in terms of who's buying and selling, that any news in either direction causes a little bit bigger swing. One of the conversations I had earlier this week was the fact that if the broad market is up 1,000 points one day and down 800 points the next day, very little changed between those two days fundamentally. So it's an emotion-driven situation. It's a headline-driven situation, not the fundamentals of the underlying companies. So Scott, thanks for coming. I'm looking forward to do it again next month.

Same here. I hope our friend John Tate is back with us, and hopefully today he's out watching the new Top Gun Maverick movie or something fun like that.

Yeah, well, I think we both give that two thumbs up. So for anybody who hasn't seen it, if you feel the need for speed— Scott's talked a lot about traffic and engines overheating and things like that. At least if you're a child of the '70s and '80s, I don't think you'll be disappointed. So two thumbs up from Scott and I on Top Gun: Maverick for sure.

Although if you have not experienced inflation yet, you will at the movie theater because it is—

yeah, I'm not saying sneak in your own food, but if you did, maybe the Dollar Tree. There's a Dollar Tree right by the movie theater in Florence. So, but definitely worth checking it out if you need something to do this summer. Scott. See you next month.

Yep, sounds good. Thanks, Chip.

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