May'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, I'm having a great day. How is yours?

You know what, so far so good. I am leaving this afternoon for the second phase of the graduation gauntlet at my house. So this is the second graduation. First two, the one last weekend and the one this weekend, are both from college. So that is a very exciting time for me. We got clear to graduate notification yesterday, so no questions as to whether or not there'll actually be a diploma in the little thing they give you when you walk across the stage. So it is an awesome day at my house. Equally awesome for me is today we're joined by our partner Scott Mitchell to give his market update. So I'm excited to have Scott, uh, probably more excited than Scott is to be here and talk about the stock market of late. But Scott, welcome.

Hey guys, how are you doing?

Doing good. Doing good. Scott, one of the things that you do for our clients is you send out an email at the beginning of each month. And when John and I talked about show ideas, one of the things we thought would be helpful was to bring you on each month. You were here last month to give a little bit of color, even for our clients who are listening, but especially for folks who aren't clients, to give a little extra color. And for John and I to be able to ask some questions about some of the things that you shared in your email. So to kick off, why don't you give us your thoughts on where we are in the market right now? It's been a crazy time.

Chip Munn: Yeah. We started, I think, a blended portfolio, like a 60/40 balance between stocks and bonds. The January through April period was, if not the worst period ever, then one of the worst periods ever for a blended portfolio like that, because usually when stocks go down, bonds go and vice versa. That's why you put them together to make up portfolio just hadn't been anywhere to hide this year. They're all down. S&P, as of the date that we're recording this, is down somewhere around 17%. Bonds are down 9% or 10%. And depending on what kind of stocks you're in, if you're overloaded towards technology stocks, you could be down considerably more than that. So yeah, it's just been a tough few months, to say the least.

So John, I'm curious because you worked in the research department at Raymond James, what's your take on things lately?

Just like Scott, it's been tough sledding out there for everybody except for anybody investing in stuff stocks. If you've been invested in food stocks or oil or energy in general, or even some of the metals, silver and gold have not held up all that well this year. So there have been very few pockets of strength that you can even hang your hat on, but it's been really tough. If you look at the NASDAQ, which is down 20% or more this year, depending on what day of the week it is, More like what hour of the day it is. What hour of the day it is. I mean, it has fallen 20% in 30 days. The only other time that I can look back recently and look at a percentage drop like that was surrounding COVID. So we've had another major drop in the market in a relatively short period of time. So when you look at drops like that, one of the common questions we get from our clients is, does this indicate that we are going into a recession. And if you look back through history at drops like that in the NASDAQ, you can kind of compare it to the rumble of thunder following every bolt of lightning in the sky. When lightning fills the sky, thunder almost always follows, but not always. You can do the same thing with the NASDAQ. When you see a drop like this, there is a higher likelihood that the US economy would enter a recession. But it doesn't always happen. And notable time periods where it didn't happen was the 1987 crash. We did not enter a recession then. And then the Russian debt default. Those were two times when the Nasdaq dropped a percentage similar to what we're seeing today, but we did not enter a recession. So hopefully, the Fed can do what it's doing without having their activities result in a recession. But I think probably the best talking point or the way we can frame that is that Recessions, while not positive for everyone, historically, they have been relatively short-lived on average over all the recessions that we've seen since the turn of the 1900s. So these are things we can plan around, and then we do put these types of events into our goal planning and monitoring when we're creating the Signature Life Plan that we so often talk about on this show. We have these instances in there. So it's not quite as worrisome as some would think, but it's still a question on everybody's minds. Is it something that you're hearing a lot of, Scott? Recession talk?

Scott Nations: Yeah. Yeah. Not only from clients, but of course from analysts, the folks on CNBC and whatnot. I think that's probably the biggest thing that they're talking about is, will this cause a recession? Can the Fed avoid a recession, really? And there's been some talk recently that, is the Fed intentionally trying to cause a recession to slow down inflation? So We'll see. To your point, recessions don't necessarily have to be terrible for the stock market. I don't think anybody wants that because it indicates just general slower growth, which maybe isn't what we want economically, but they can have varying impacts on stock market returns. So just because there might be a recession doesn't mean that you got to get out of stocks, but I think it probably does mean that you have to adjust the sorts of stocks that you're in, as we've seen so far this year.

Scott, what do you attribute, if anything, and perhaps not one thing, What do you attribute the action of the first quarter to? Is it inflation? Is it war? Is it— I mean, because we see so many headlines right now, and one of the things you mentioned in your email is we kind of get beaten over the head with negative headlines. Is it a combination of the things? What are your thoughts on what has brought us to here, if we want to call it that?

My simple answer is Tina. There is no alternative trade, and there actually is an alternative now. You can buy highly rated corporate bonds and get more than a 4% yield on them. Maybe it's not what we're used to historically getting on a 10-year corporate bond where it might have been closer to 5% or 6%, but it's not bad, especially considering how low rates have been. So I think it's been an adjustment to higher interest rates is causing portfolio managers, and I'm thinking largely of pension funds and things like that, to say, "Look, I've got to meet certain obligations going forward as far as payouts of retirees." That was hard to do when a 10-year Treasury was paying 0.5% only a year or so ago. But now a 10-year Treasury is somewhere around 3.2%. Maybe I can move some of my stock money from over there and put it into bonds and help me meet my future obligations. What's made interest rates go up? I mean, lots of things. Obviously, the Fed has raised short-term rates. They're going to continue to raise short-term rates. They're going to run off their long-term holdings of bonds, so that should push up longer-term interest rates. The war, obviously, to your point, has caused— Yeah, anytime there's uncertainty, markets don't like uncertainty. So I think that's an easy reason to sell off stocks right there. The fear of recession, another easy reason to sell off stocks if you're a hedge fund manager or a pension fund manager or something like that. So yeah, it's probably not any one thing. It's just the combination of all the things that go together towards creating the environment we've had in the first quarter.

Yeah. And I would have to think, John, to some extent, at least part of it is a little bit of a cooling off of what has been otherwise otherwise over the last couple of years, particularly after that first quarter of COVID uh, a really solid performance. To some extent, would you agree that perhaps a little bit of it is profit taken from folks, particularly some of those institutions that Scott was talking about, that have had really good performance over the last couple of years?

Yes. And you look at the way that the world changed with the onslaught of the COVID pandemic, Businesses were forced to digitize, to go online, similar to what we're doing right now. We're on Zoom, which is a tool that I use so much more often now than we did pre-COVID. Consumers were able to save at historic rates, primarily because of stimulus monies that were coming from the federal government. The federal government, the Federal Reserve flooded the economy with cash. New hobbies were picked up at a faster rate than historical averages. Consumers did emerge from the lockdown financially stronger than ever, which allowed them to feel more confident in spending some of that money. Some of them felt more confident in even starting their own businesses. I think some of those, if new businesses go the way that we normally see, some of those are obviously not going to make it, but that was then, and this is now. The economy, we've come out of COVID the cost of inputs has skyrocketed, the buying power that we enjoyed in 2020 and some of the years before 2020, has diminished because inflation has pushed prices higher, supply chains have become strained. I don't necessarily know that that's going to change. It is changing slowly, but I don't know how quickly that is going to get back towards normal, although we've seen some signs of it. Geopolitical tensions are much hotter than they were prior to COVID. So there are more headwinds now than there were previously. So to Scott's point and to your point, Chip, I think some of the benefits that we enjoyed in the past 18 to 24 months are coming to a close. We're seeing a structural shift at the Fed level, at the economic level. So it's going to take us a little bit of time, I think, us as consumers and then businesses to adjust back from what we enjoyed to something new and how that change occurs and over what period of time That's kind of what we're all struggling with right now. Obviously, we all sympathize with the Ukrainian people, but I, for one, the longer that struggle goes on between Russia and Ukraine, the more I tend to worry about the strain on the global economy, the global supply chain. The longer I see that drag on, it just makes me less confident that we can come out of this unscathed. I think that's kind of what we're all hoping for in the background, is to be able to come out of this unscathed, but to say it live and in person, I'm having some doubts. I don't know about you, Scott.

I heard something interesting this morning, actually on a podcast, and they were saying, is this the end of the V-shaped—

Wait, wait, wait.

You listen to another podcast other than this one?

I had to fill up my time. Saying, is this the end of the V-shaped recovery? Since the great financial crisis, we've basically had the Fed being a buyer providing liquidity with few exceptions. And now in this case, they've proved to not be providing liquidity. I think they'll continue to not do that. So maybe all those quick bounce backs, the V shapes that we're accustomed to in stocks, bonds, the economy, whatever, maybe this time it'll be a little more U shape. So we'll just have to bear through a little bit longer period of readjustment before we can head back up. I don't know. I'm not necessarily calling for that, but I thought it was an interesting perspective that we certainly don't have the tailwind that we've had over the past 10 or 12 years.

Could it also be that some of this is similar to the adjustment that got made at the beginning of COVID Again, not being the analyst, I'll use the term sector rotation, but I'm not sure if that's exactly right. You guys can tell me. But we saw the tech stocks, the tech sector get really hot as we all had to go through the close down. And they stayed that way seemingly for a long time. And now we're starting to see them cool down. And what struck me is when John said something about stuff stocks having done better, that seems like, again, kind of a rotation back towards some balance between the cloudlandia world that we lived in a lot for a while and the pre-COVID world that we were in prior to 2020. Could that be part of it? It is kind of more of a normalization of the merger between the mainland and Cloudlandia?

Somewhat for sure, right? There's definitely the idea that we're not going to be doing the same work from home or play from home or whatever sorts of things. So we've seen companies that did really well during a lockdown do very poorly at this point. Chip Munn: I mean, it looks to me like it's more of a— we've had an adjustment to the possibility of recession. What sorts of things hold up well in a period of either inflation, which obviously we've had, or recession? Those have definitely been the beneficiaries this year. So yeah, to your point, it is kind of like the adjustment, like we had to adjust to what stocks would hold up best during COVID Now we're trying to figure out what stocks, sectors are going to hold up best in periods of inflation, stagflation, Maybe next time, Scott, I'll get you to bring the economic dictionary to define things like stagflation.

And one of the things that I hear in my conversations with clients, because they aren't normally as specifically market related, is a lot of these terms that get thrown around that for folks like you and John have very technical, very specific definitions as to what is a recession and what isn't, what is a bear market and what isn't. Maybe someday we'll do an episode on just some of these terms because I think the media throws them all out in a lot of cases, kind of like they're all very similar or the same. But in reality, things can feel yucky and we could still not have a recession. I think that they use technical words just to describe a yucky feeling. And so again, for listeners, I think that's important to know that in these situations, words have power. And I wouldn't necessarily think that everybody uses them exactly correctly. One of the things, Scott, I've talked a lot about with our clients recently is that there are completely different agendas between journalists and news folks and financial advisors. Journalists have a completely different agenda of having people continue to watch every day. If it bleeds, it leads. And we as advisors, our job is to look at things in terms of decades and lifetimes and really long-term perspective. And if you look at those two things, even if you looked at a chart of month, the way that that chart looks compared to when you zoom out over the course of a more historical period, it makes a big difference. But a lot of times I think the headlines on TV are often evoking feelings. They are designed to evoke feelings, and that's the opposite of what we want to do as investors.

I won't spend time on defining all these things. I will say though, on a recession, That is defined by two consecutive quarters of GDP contraction. So the economy going backwards, slowing down for two consecutive quarters. And I mean, that's not the sort of thing you can know until you're already in it because GDP data is backwards looking. Yeah. To be clear, there's no evidence that we are in a recession yet, but we could be beginning one and not know it just yet too, because that won't come out for a while. You mentioned emotions. I did want to hit on that because I'm going to borrow something from you, and that is the roller coaster, the emotional roller coaster. And I think it's important to remember that the reason why you get good returns in stocks, historically speaking at least, is because there is risk involved. Things that there's no risk involved offer little to no return. So I did some digging on the historical returns of stocks, bonds, and cash. Going back to 1928, stocks have averaged almost 10% a year, bonds about 5%, and cash, which I assume they mean things like CDs and T-bills, at about 3% a year. So anything, say, above that 3% rate, which I'd call risk-free if it's just cash or T-bills— I mean, if it's not risk-free, it involves risk. Those risks mean that sometimes it's going to be higher and sometimes it's going to be lower. But when you're in stocks, as you have said with the roller coaster, you're on the roller coaster, right? So sometimes you've got the slow climb uphill, and everything's pretty easy. Sometimes you're on that fast descent and your stomach moves up into your throat and you feel queasy. I mean, maybe that's where we are right now, but it's important to realize that you have to take the downs with the ups. The only way that you can get a higher-than-average return is to accept higher-than-average risk, and it's okay. Now, you have to figure out if that's worth it to you as an investor to do that and at what rate, because you can certainly blend these things all together, right? You figure out what rate of risk is okay for you, and then you'll know what your portfolio ought to look like. And then the other thing that I would say that I advise people when they look at their statement and they'll see whatever it's going to be down from last month, all of a sudden it's like to them that they've never had a down statement or they can't understand why it is down. I tell them, "Look, you're looking at a snapshot. This thing's a movie. We can't just pick out one frame from it." and say, "Oh, I know what happens in Saving Private Ryan because of the one scene that I just happened to watch." You don't. You got to experience the whole thing. So again, keep that in mind too. It's a movie. The returns have been great over the past 5, 10 years. Sometimes we go through periods like that, but again, we've got to deal with these in order to get the above-average rate of return. So as John mentioned earlier, check with your signature life plan, your financial plan, What does that number look like right now? It's probably not a whole lot different than it was 6 months ago. If it is, and that concerns you as a client, then give your advisor a call. Let's figure out how to rebalance the portfolio. There might be options out there that offer you some sort of less risky roller coaster. Maybe we can get on the kiddie coaster instead of being on the crazy one at Carowinds that does all the corkscrews and stuff. We don't have to do one or the other. We can choose. So that's kind of what I would want to say about this is that in order to get good returns, you have to take risk. And it's not just a snapshot, it is a movie. So look at the whole body of work, not just one scene.

I think, Scott, to stay with the roller coaster theme, one of the things that occurred to me while you were talking about that, because you're right, normally when we do these kinds of things in person, I'm the one talking about the roller coaster, is that if you go to any, particularly the professional theme parks, if you go to Walt Disney and you get on a roller coaster, two things happen. Number one, you pull down the bar all the way to your lap. You have to have something holding you to the roller coaster. There has to be a reason why you stay there. I think that's what the Signature Life Plan is. It's the why we stay. It's the why am I on this roller coaster to begin with. So when we go through times like these where things are a little bit bumpy, you have to have that why, I think, to ultimately be successful. I think that's the biggest part of success of the clients, Scott, that you and I have had for 25 years. I mean, we have clients who've been with our firm or our team for more than 25 years. And I think that the biggest part of their success is having a why and having that plan in place. The second thing is somebody comes by and pulls on the bar every now and then to make sure that you have pulled it tight enough and that the probability that you could be confident that you could ride this ride. Somebody comes by and does that and it's somebody who does it every day. And while you're riding the roller coaster, somebody is watching whatever that— I don't know what the station is, but I know that there is one. And I know that the professionals stand at it. They stand and make sure that the things are going the way that they're supposed to on the ride. Somebody checks out the tracks. So you're right, regardless of how somebody or where somebody's investing, if you're in anything other than cash, you're taking some risk. And we could argue about inflation being a risk to cash, but that's neither here nor there for the purposes of this discussion., but it makes a whole lot of sense if you're going to be on the roller coaster anyway to have that bar to know why you're in there and to have some confidence in that. And ideally, I think there's a ton of benefit. You know, there aren't any self-service roller coasters. There's not a theme park or a carnival in the world where you can go get on the roller coaster, press a button, nobody looks at you, and you just ride the ride. And I think we've seen particularly in the last 27 or 28 months We've seen a lot of reasons why that's really important. And again, whether it's us or somebody else, John, any closing thoughts before I go to Scott and the traffic report?

I do. I just have a couple, but the most common comment I'm hearing from clients right now of a certain age, which are the majority of our clients, are, if I were younger, I would feel more confident about holding what I've got, but because I am the age that I am, I don't have enough time left in my life to weather a downturn like what we might have. And so what I try to remind them of is that bear markets, recessions, all of these things, they're still measured in days. Some of the times those days will add up into years, but since 1950, the longest bear market was in 1973, and it lasted about 5 to 6 years. Every other bear market that we've had since the 1950s on average has lasted about 1.5 to 2 years. And so if you plan on living, and most of our Signature Life plans are 20 to 30 years long, yes, you do have enough time to weather these downturns, not only, and make back what you've lost. And so what we usually try to do in these cases are as closely as we can, make sure or try to get the income of the portfolio, dividends, interest payments, all those things to match up as closely as we can with the expenses, the money going out to run our client's lifestyle. And the closer that you can get income coming in to expenses going out, and you're not spending down much principal, if any at all, the longer that portfolio's going to last, markets up, down, or sideways. And so some of the best things you can keep in mind are everything is still measured in days. Yes, you do have enough time left in your lives to outlast not only this bear market or recession, if that's what we're headed towards, we don't yet know, like Scott pointed out. You have enough time to not only weather it, but make back what you lost and then some. That's what we're here to do. That's why our clients hire us to do a job. We're here to do that job.

If you don't live long enough to weather it, it won't matter to you anyway. You'll have gone home to glory, and that's not going to be something that's on your radar screen anymore. But the other thing, John, that I mentioned— when you mention '73 and the period of years, my guess is that we're talking about a period where it was particularly bad for the equity markets. And if you look at a lot of our clients— Scott mentioned a 60/40 stocks-to-bonds portfolio earlier— for a lot of our clients, that 40% represents 6 or 8 or 9 years of income that they need, in which case you can utilize those which are historically more stable to take your income from without feeling like you have to all of a sudden up and sell stocks during a bad period of time. So I think there's a lot of, again, emotional stuff going on and that we deal with right now. There are also, if we take the right frame, there are plenty of reasons to be able to remain confident. Scott, speaking of confidence, one of the now famous, or at least to me, sections of this podcast, and one that I've gotten great feedback on from listeners and readers of your email, is the traffic report, where we just kind of break it down. We're in a car driving down the road economically, market-wise. How do things look out on the street right now?

I would like to tell you that we're still at that flashing yellow light, but to me, it's a flashing red light. You got to come to a stop, check and make sure things look good before you cross the intersection. The damage is getting done to even some of the higher quality names. So there just are so few places to hide. And of course, it does depend on your time horizon too. I think if you're someone with a, say, at least a 3-year time horizon, The risks of downside look less today than they did. I don't think we're going to have the next 3 years look anything like what the past 4 months looked like. So I think you can probably buy quality investments and want to own them for a period more than 3 years. But if you're someone who does tend to get nervous or check your statements every month or go online and check the values every day, it's probably best to just take a pause. I think maybe it was Warren Buffett, but I may be getting this wrong, that said, "Don't do something, just stand there." You don't have to do anything. Like, you don't have to make an adjustment. You don't have to go in and buy something or sell something or whatever. You can wait this out and that's acceptable too. But at the very least, come to a stop, look both ways, make sure that there's not a car coming before you cross the intersection.

Scott, last question, just because I know somebody will ask me. And you touched on a little bit there in the traffic report, but if somebody's got money to do something with now, historically, every pullback, at least in the broad equity markets, has been a buying opportunity. Is it time to put money to work, some money to work? And if so, what kind of, again, broad big picture strategy is it? Dollar cost averaging? Is it time? And what would you do?

Yeah, we're on dollar cost averaging, especially for people who do say that they have longer time horizons. I think that we can start now, but maintain a good balance. I'm trying to buy names that are showing strength versus the market rather than weakness. Dividends have become really important, so trying to buy dividend stocks or dividend funds. They seem to have held up well so far. So yeah, trying to find areas of strength to invest in right now.

Trey Lockerbie: Well, Scott, I appreciate you joining us again this month. We'll look forward to doing it again in June.

Sounds good. I look forward to it.

Awesome. I think it was Mike Tyson that said, "Everybody has a plan until they get punched in the face." And every now and then, if you're on that roller coaster, if you're an investor, maybe you get that feeling. And it's different times for different people. Maybe you get that feeling, you feel like you got punched in the face. If you're a client of ours, I just want you to know we have a very proactive service schedule. But if you need us, that's when you call us. We don't want you to feel that way. You certainly aren't riding the roller coaster alone. If you're not a client, understand you can reach out to us. We're happy to spend a little time on the phone or in person with you. No obligation, no questions, and we're always here as a resource for our listeners, for their friends and family, colleagues, co-workers. Again, no obligation. We're here to give and to be of service, particularly in volatile times. John Tate, let's do it again next week.

We'll see you then.

Guys, in closing, I do think we're probably going to be the only podcast this week to mention Warren Buffett, Mike Tyson, and roller coasters.

Hey, you know what? Some other people are going to need to step their game up. And I can't wait to see when all three of us get back together, what kinds of crazy words we can mix in next time. Enjoyed it, guys.

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