November'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, how are you, sir?

I am doing great. Happy Friday to you. And of course, it's always a good Friday when we're joined by our good buddy Scott Mitchell. Scott, what's up, man?

Hey guys, good morning. How are you?

So far so good. We got a day like we got yesterday and then goes right into a Friday and then right into a weekend.

Absolutely. That sounds good.

The only thing that might have been better is if yesterday had been a Friday and we could have ridden that right into the weekend.

Speaking of Fridays, I'll mention since we're recording this on Veterans Day and just give a quick shout out and thanks to the veterans and the folks who are currently in the armed services. Let them know I appreciate what they've done for us.

Absolutely. Yeah, we definitely appreciate the freedoms that their service grants us. There are very few things that I regret. Actually, probably not true. There are probably lots of things that I regret as a young person, but as I have gotten older, one of the things that I do regret is having not served. So it's an amazing thing that folks have done and are doing. And I'm like you, Scott, just incredibly grateful. So, Tate, let's jump in. So it's been a pretty wild few weeks in the market since the last time we got together. Lots of things have changed. So give us a little bit of recap. What's happened over the last month?

So the midterm election came and went on November 8th this week. We had a Fed meeting last week, which was one of the crazier Fed meetings to me. And it was, I was listening to, I don't always listen to podcasts. When I do listen to podcasts, I listen to Coffee with Cool People, but when I don't listen to podcasts, I listen to a mixture of different music. But this morning coming into work, I was listening to the Grateful Dead and their song Unbroken Chain, which is a good one if you've ever heard of it, but it, one of the lyrics in there was that reminded me of kind of what this past couple weeks have been like. It's, um, out on the mountain, it will drive you insane listening to the winds howl. And that's kind of what I felt like last week's Fed meeting was about and a little bit like what yesterday was with all the different Fed governors speaking and making comments and everything. And if you look back to Powell's presser, last week, which was on, I believe, the 2nd of November, you know, the market initially spiked up and then it started to go down. And then during the question portion, it started to go back up again. And then there was that AP reporter that in the middle of it, I guess, didn't refresh his screen and said something to the effect to Powell of, hey, the markets are all up on your comments. What do you think about that? And at that point, his commentary changed into the most hawkish comments of the entire press release and the market dropped another 2 to 3%. So it's just kind of crazy. And then yesterday we had from the Philadelphia Fed to Dallas to the San Francisco to Kansas City, all the Fed officials were out talking yesterday about nothing that was really said last week. But oh yes, all of a sudden after yesterday's CPI print that it's appropriate to slow down the pace of rate increases, maybe the terminal rate is not what we thought it was. And is this not data that we received yesterday? Is this not something that they get a sense of in their meetings, in the data that they gather together, Scott, for their meetings that they have? Is this not something they would have already seen?

They have an army of economists, right, and boots on the ground everywhere. But it does seem like for the past at least year, they've been 3 months or 6 months behind on things. And a lot of the Data they look at appears to be backwards looking. And when you look at the more kind of real-time info, it's apparent that a lot of prices are coming down, which would lead you to think that inflation will come down. So it's hard for me to imagine that they don't know all that, but it certainly looks like they're not incorporating any of it into their formulas.

I think those guys probably buy gas at the convenience store down the street for me because gas there has been like $3.29 for the last 8 months. It doesn't matter what all the other gas stations are, but there it's $3.29 no matter what. So maybe, Scott, they're using some sort of stable data like my friend at the convenience store that allows him to keep his prices the same.

Tate? Yeah, I mean, it seemed like last week the terminal rate was going to be a lot higher, and then all of a sudden Yesterday, it's kind of like all the language out of these Fed officials is that maybe it's not as high as we thought it was, or we said we wanted you to think it was last week. It just seems like a lot of the language at this point is about managing expectations and trying to manage what the market does, and it's not necessarily tied to reality. And so is it important to continue to listen to what they say, or should we take it with a grain of salt and just assume that they're telling us what they want us to hear? And hope that we act on what they want us to hear instead of what is actually happening. I don't really know anymore. I guess maybe I'm a little insane.

I think they're trying to talk it down, right? As much as anything. And with a great deal of proof being in that press conference last week, you're right. When Powell learned that the markets were doing well to come out and get very hawkish about raising interest rates and then have the market— I don't remember what we closed down for the day, but it was a lot. They're trying to talk it down, trying to talk people into being less aggressive with their money in order to sort of bring down inflation that way. In addition to all, you know, raising interest rates and reducing money supply and all the other things they're trying to do to combat inflation.

So are they just doing their job? Because their job— and again, I admittedly don't always understand sometimes what these people's job is, but their job is to get inflation down, right? And so part of that is utilizing their press conferences being a little more hawkish to try to get people to be less aggressive with their money. Maybe that's just part of the deal.

I feel like what's different maybe this time is, is that every day there's a news blurb about a Fed governor speaking. It's everywhere. And I heard a joke recently that, you know, Fed governors are the new influencers. They need Instagram accounts. You know, I feel like that, that's different than what we've usually had. But certainly the Fed chair since at least Greenspan's time, right? You know, the famous irrational exuberance comment in the late '90s from him. So yeah, they've been doing it for a long time. It just seems kind of one voice coming from the chairman.

To give a little context though, John, so for anybody listening, we typically release these episodes about a week after we record them. Yesterday, just to give some context for somebody who's listening, yesterday was a big day. Talk a little bit about yesterday and kind of it in context of history.

I mean, yesterday the expectation was for inflation to still have peaked back in June, the year-over-year increases, but the expectation was for it to continue to slow but at a much slower pace. And instead we got, I think, a month-over-month decline of about 0.4%, which was almost 2 or 3 times as large as what was expected. And so what we're seeing, or what the market reacted to, was the expectation that yes, we've seen peak inflation. Yes, interest rates at such a significant pace is starting to have an outsized effect. It's starting to do what they want it to do. And so that may mean that they could slow down the pace of increases going forward. And whereas last week at the end of the press conference, the market was pricing in a significant percentage that the Fed would raise another 75 basis points. In December, they're now pricing in a high percentage that the Fed will only raise 50 basis points. So that is the difference that a week apparently makes, and that's the reaction in the market. Because as you pointed out, Scott, we were down big on Fed Day, the 2nd of November. And so yesterday was a little bit get back from that, plus expectation that the Fed will not have to raise rates as long, and that if the month-over-month pace continues of what we saw in the October report, then we would reach a 3 to 4% year-over-year growth in CPI by April or May of next year. The Fed funds rate would peak out around 4.9%, and whereas last week the terminal rate was 5.1 to 5.2, it's now looking like it's 4.9. So that's a big difference in a week for both the bond market and the stock market to digest. And that's why we saw such a big explosion in prices yesterday. And to your point, Scott, you pointed out that, you know, a lot of the high growth stocks did very well yesterday and they did. That group had outsized returns. The group that had low P/E multiples, high dividends, and low price to sales, that was the other group at the other end of the spectrum, almost the two opposites. Those are the two groups that did the best overall yesterday, and everybody else was kind of stuck in the middle. And so to answer your question, Chip, that's what happened.

And looking at the market side of things, yesterday we were up, what, 5%? I mean, it's one of the top 15 best trading days since 1953. One of the things I think, John, that you shared is that a lot of times after a day like that, there are really positive statistics looking out 6 to 12 months. So again, I'm an eternal optimist, so I, I don't watch the news for the purposes of like— my life's generally pretty good, so I'm not watching the news because it can only bring bad stuff into my life in a way. But one of the things I enjoy about some of the stuff that you share with me is the good news of what times like these, both some of the rough times that we've seen, and, and Scott, you've shared some historical perspective before that's been very helpful for me. And that was going into the things about the midterms and the months of November, December, typically in a midterm year, but also now further information, we'll say, to promote an optimistic outlook is kind of what happens after big shifts like this.

It's rare. This is only the 23rd move of more than 5% in the S&P 500 since 1950. So it happens about a tenth of a percent of the time. In the short run, right after you have a big rally, like 5% or greater, returns are kind of mixed. But if you look out longer term, over a 12-month period, the stock market has been up about 28% on average in the 12 months following a 5% upside day. And it's positive 91% of the time. So 9 out of 10 occurrences, it's higher a year later by an average of 27%. So. You have to be careful with sort of extrapolating a very small data set and making broad predictions on that. Because some of these times that you look at some of the big up days, October of '08, or actually, I think the two biggest up days ever in the stock market, both over 10%, and there was a lot of short-term pain after that. You know, the market didn't bottom until March of '09. So, Like I said, short term, not always great, but the long term, you know, if you look out 12 months, track record's awfully good on this indicator.

Well, and days like yesterday are the reason why we don't recommend market timing and getting in and getting out and going by feeling, because there are plenty of statistics to show what happens when you miss the best days in the market. And even at current rates, right, if you'd missed yesterday, at current CD rates or whatever, if you had put the money in CDs day before yesterday, you'd have had to leave it there for a couple of years, I think, to make up for missing out on yesterday's return. So, I mean, it's just a good example to me of why we don't try to get all in or all out at any given time. You follow a strategy.

Correct. And usually these type of data points, I mean, they're uplifting to read and to say, this number of times, we would expect positive returns. I use them more as reasons to stay in rather than reasons to try to time things, get in and then get back out. So you have things like what Scott just mentioned, and then you have seasonality for the S&P 500. And so this goes all the way back to 1928. And if you only own the S&P 500 from November to April, your cumulative gains since 1928 is roughly 5,000%. So it's a good time seasonally to be in the market, and that has a longer track record. November itself posts positive returns 70% of the time. So you take a data point like that previously, the 5% or more up days, combine it with some of these other longer-term statistics, and it gives you a reason not only to stay invested, but to potentially just have a good, less anxious feeling about what's going on in the market and what your money is expected to do. Over the next couple of months. So you can just use these as maybe a point to not have to focus on what your money is doing as much in the background.

I'll amplify that a little bit about staying invested longer and not trying to time short term. And probably a lot of us have heard the longer that you stay in, you know, the better your odds are. The stock market as measured by the S&P 500, I mean, it's up 94% of all rolling 10-year periods. And it's even up 87% of all 5-year periods. So those are pretty good odds. But if you were to have a blended portfolio of about 60% stocks and 40% bonds, and this is the broad stock market, not just the S&P 500, and the broad bond market over a 3-year period, you have a 93% historical chance of a positive return. And that blend has never had a negative 6-year. Return. So not to say it can't happen this time, but you got to put the odds in your favor. And the odds are, over any 3-year period of time, you're going to have a good chance of success in a broadly diversified portfolio.

Scott, I've heard you say before, sell in May and go away, and talking about kind of the dichotomy between two different halves of the year. John, November through April, I think it is, has roughly— again, going back to that same period, Scott, you were talking about since '28— roughly 18 times the cumulative return that May through October has. And so a lot of times what I find in more of the planning side of things rather than investments is that it's easy for people to get nervous and to want to make changes. And so looking at all these incremental, like stacking all of this information sometimes we make a lot of decisions based on emotion. And if we go back to that emotional roller coaster that we talk about so much, you need a lot of facts sometimes to even hope to overcome negative emotions. And so that's one of the reasons that I always like to kind of keep a lot of these handy, is because it's hard to take an emotional feeling and all of a sudden feel better, particularly if again, regardless of what side of the aisle you're on, we just finished and still technically still not finished because we don't know the results of some of them. You know, if you're red or blue or purple or how your color did over the last week or two or how it's doing, you know, again, that can just bring a lot of emotion into this. And one of the guys we used to work with used to call Mitchell the Vulcan because he's just so unemotional. Now, they've never seen him watch Wake Forest football. Or probably basketball, more likely. But one of the reasons that we share a lot of this stuff is because it's what gives us a firm foundation or some firm footing for understanding kind of some of the cyclical nature of some of these things.

I mean, the only time I've ever seen Scott emotional is when somebody wore jeans to the office. Other than that, I haven't seen him play basketball or football. I have seen you play pickleball, have I not?

No, no, no, no. I threw axes with you though.

You did throw axes. That was pretty good.

Not at you, but with you.

With, standing next to. But yeah, the Vulcan is fitting. That is absolutely true. Absolutely true.

So we framed what's happened recently. We framed how we got here and some of the things that have gone on over the last month. Let's kind of turn the table and start looking at what we should expect kind of going forward. So here we are. Big day yesterday. Lots of crazy stuff with the Fed. 30-year mortgage rate fell pretty substantially here in the last little while, making things not as affordable as they used to be on things like the housing front, but better. Where do we go from here?

So I think it's important to gauge all these different metrics. I do think there are some tailwinds that are behind us going forward. I think watching inflation come down, I think what we saw yesterday should continue. I think we should get more data points that inflation did peak in June. I don't think that's a real question anymore, but still an unknown until we see it go back down to where the Fed wants it. And I also think that we need to see some signs that yes, the higher interest rates are impacting the economy in ways that would reduce inflation on a continuing basis, but we also need to see evidence that what the Fed is doing from here forward is not overly aggressive to make the economy go into a recession. And that is still a big question, I think, on people's minds. And maybe that's something that we get into Scott's traffic report coming up, because that's usually pretty forward-looking. So Scott, maybe you're better answering that question.

I've thought about it a lot recently. I know that. And so my base case is a recession next year. I think It's nearly unavoidable, but I don't think that has to be a, a terrible thing. I believe that stock prices have largely taken that into account. And in reality, if we have a recession, you would expect longer-term interest rates to come down even if the Fed is still raising on the short end. So my point on that is that bond prices could actually also have a very good year next year. So you take in all these things that we've talked about, the big upside day, the, the elections. We've mentioned this a few times, but there's, since 1950, there's never been a 12-month period following a midterm that has been negative. And on average, we're up 15% in the, in the following 12 months. So you take all that in and, and blend in my expectation for recession. And I think that probably means we have higher stock prices over the next year. I doubt it's plus 27% or plus the 15% because the recession might put a lid on that. Bonds though, could stand to have a really good year. I mean, they've had a miserable year this year. The bond index is down ballpark 15%. So there, there's a lot of room that bonds could make up next year. So I think maybe the 60/40 portfolio might be back next year and you might get more of that return from bonds. So I would say I'm cautiously optimistic. You mentioned some tailwinds and there are for sure, John, but there's some headwinds too. So. I said, cautiously optimistic. And I think that given everything that has occurred recently with the market, there's a good chance that we're higher a year from now, but I'm not expecting a huge 15% or 20% or 30% rebound from this.

That makes sense to me. And I think when you talk about the year following the midterm election of 27%, I think if you also look at the relationship between the normal S&P year and the post-midterm election year, it's usually about a 2-to-1. So midterm election years return twice the amount of an average normal non-midterm election year. So if you think with all these other things we have going on that potentially we would have a normal year of 5.5 to 6% returns, then a post-midterm election year would get us to somewhere around 10 to 12%. That might be more in line with what could possibly happen. Obviously these are all guesses. We're giving you our best guesses on this call today, but I think the important thing to point out about yesterday's rally and what we may see continue is in the Russell 3000. I mentioned that we saw the highest volatility names outperform, but we also saw the names that have stable earnings, a good stable amount of earnings growth, low PEs, low price to sales, low price to book. Those were the other names that performed almost just as well as those high growth, high volatility names. And so I think going forward for next year, yes, you could see some of those outsized returns that we just talked about out of those high growth names. That did so well in 2020 and 2021. But I do think there is just as good of a chance to get those same kind of returns out of the companies that pay dividends, have less risk, lower volatility. And so if you can build a portfolio around that and potentially get the same kinds of returns, why would you not do that?

So you're kind of describing value stocks with all those metrics you just mentioned. And yeah, to me that seems like the part of the market that ought to do the best. If we do have a recession next year. The reason maybe that growth stocks might do okay, as you mentioned, is because they've just gotten killed so much over the past 12 months. You're looking at a lot of large-cap growth stocks down anywhere from 20 to 60%, or maybe even more on some of them. So if nothing else, they bounce back. But I'm with you. I'd rather probably be in the areas that where you're going to get dividends and less volatility and, and companies that have good balance sheets that won't have any trouble making it through an economic slowdown.

So Scott, uh, favorite part I really like to— as a former elementary school teacher, I'm a big fan of colors, as you well know. So I'm curious, kind of taking a look at your traffic report, what do you think as far as where we stand kind of here in November? What are your thoughts on the traffic out there?

Well, this is the trickiest one that I can ever remember having to give. And I hate to not budge off the yellow, but like I said, I think there's a lot of headwinds. Now, I do think in the short term, in the next 4 to 6 weeks, we've got a chance maybe to have a, a good rally through the end of the year. After that, again, I think the reality of a slowing economy will start to hit and stock prices sort of moderate. So again, I'm, I'm going to go yellow, maybe short-term green, but intermediate-term yellow. And then we'll see after that. Let's get through the reality of earnings expectations for companies coming down, the reality of a slowing economy. I think some of those things still may not have been reckoned with yet.

We share this out of interest, right? Because a lot of people want to have something to gauge their feelings on. I think that for all of us, particularly when folks have come up with orchestrated comprehensive Signature Life Plan, the long term is green. Yeah, again, we talk about these shorter term things, but in reality, the vast majority of our clients aren't investing for the short term. But I do think it's nice. That's the first time, Scott, since we started the traffic report that you've said the G word in any capacity. So that's encouraging. And so especially Tate for the Vulcan to even whisper the G word is a positive sign.

I think for our listeners, they'll notice that that was the first short-term green that we've heard on this show ever.

In fairness, I think we started this back at the beginning of 2022. Am I right? Is that when we started? So yellow and red have been correct.

Yeah, this is true. This is absolutely true.

Well, listen, I think that our goal in putting this together is to give it to people straight, is to share current information, but also to always lace it with optimism. And again, that long-term perspective of the fact that regardless of what we're going through today, history bears out that in the long term, which again, for the vast majority of our clients is what the focus is, that plenty to look forward to.

Chip, I think I can sum it up pretty well. Ben Carlson works for Ritholtz Wealth Management. He writes this great blog. A wealth of common sense. And he had a quote recently that said, bear markets tempt you into thinking that the days are more important than the years. So, you know, what he meant was that when you're in a bear market, you're more inclined to pay attention to the day-to-day movements in the market as opposed to looking at the longer term, which, you know, we've shown pretty unequivocally the track record's good over any 3 or 5-year period for investors' lives. So circling back to what you said about emotions, emotions do the same thing, right? Emotions make you want to concentrate on the short term, not on the long term. And in reality, of course, the long term is much more important unless you had a spending need you knew of in 3 months, which case your money probably ought not be in the stock market anyway. So yeah, let's keep perspective and not worry so much. Even the days like yesterday, let's inject a little Vulcan into all of us and say, we're not going to get too excited by the big up days, not going to get too worried about the big down days and know that over time, It takes care of itself.

We talked earlier about Veterans Day coming up about the time— won't be long after this comes out— is Thanksgiving and a time for just being grateful for where things are. And while this has been a challenging year, we've got plenty, I think, John Tate, to be grateful for.

Live long and prosper to both of you.

Have a great week. See you guys again next time.

Sounds great.

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