AIPIS 161 - Investing with the Fed, Maximizing Your Portfolio Performance by Following Federal Reserve Policy with American College's Dr. Robert Johnson

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It's my pleasure to welcome Dr. Robert Johnson to the show. He is president and CEO of the American College of Financial Services, author of the book invest with the maximizing your portfolio performance by following Federal Reserve policy, which by the way, investors, that is a great topic. You know, we talk about aligning our interest with the powers that be quite a bit on the show. So I can't wait to dive into that one with him. He's also author of a book that gained a lot of notoriety because Warren Buffett recommended it and that is entitled Strategic Value Investing. And he's author of the new study with what to expect when you're electing. So I think we're going to talk about the election and what our new administration means to us. Bob, welcome. How are you?

It's great to be here. I really appreciate it, Jason.

Yeah, it's good to have you. So, boy, a Trump presidency. A lot of us just don't know what to expect, do we?

We certainly don't. And the conventional wisdom, it's really interesting. The conventional wisdom going into the election was that a Clinton victory was impounded into stock prices and that a Trump victory would lead to a lot of volatility and a fall in equity prices. And I think the October surprise was really a November surprise. And we got just the exact opposite. You know, Jason, it's really interesting. I have a good friend who was one of the few people I know who predicted a Trump victory and he adjusted his portfolio. He sold out of equities the Friday before the election. He was looking pretty good early in the morning on Wednesday when the futures were diving. And we all know what happened since.

Yeah, yeah, we sure do. So this is our first billionaire president. It's our first real estate president, which a lot of our listeners are real estate investors. I mean, Trump is a total outsider. He doesn't owe a lot of favors to people. What does that mean to investors? What does it mean to Fed policy? You know, certainly on the trade angle, I think a lot of us can make some predictions as to what it means. I think there will be some inflationary pressure if we have more protectionist trade policy. Certainly, you know, your next iPhone's gonna cost you more money, probably, but what else does it mean? Let's dive in.

I don't think we should just limit it to Trump being elected either. It's that the Republican Party controls the House, the Senate, and the presidency. And, you know, when there's political harmony, I think there is a greater likelihood to have policies enacted that are change agents. And I think what we're seeing with Trump is certainly a belief that there's going to be some fiscal stimulus, there is going to be some reduction in taxes. And what that combined, what that's going to mean certainly is an inflationary environment. I think it all but cinched the fact that the Fed will raise rates at their December. After their December meeting, they meet. I believe it's December 14th. There will certainly be a rate rise. And, you know, I think we're going to see some, you know, significant. A significant upward movement in inflation. What it means to me is that, you know, interest rates are going to move up, bond yields are going to go up, and there will be a point at which bond yields are going to start again looking attractive to yield investors, and that's probably going to have a negative impact on the stock market over the next few years.

Okay, so here is the interesting thing, and I don't know that these always move lockstep. I'm only a hack economist.

But, you know, to me, Trump, he's so kind of like pro America that it seems like Trump will mean a strong dollar and maybe not feel free to disagree. But at the same time, more protectionist trade policy, which will bring. The idea is it'll bring more jobs back to the US and bring higher wages. Certainly if you build the wall, you're probably going to see wages inch up a bit, which is good news for American workers that are here already. And higher prices of goods imported from especially China, but other countries, too. Can we have that at the same time? Can we have that inflationary pressure in our goods and higher wages and services, which is also inflationary, and have an even stronger dollar at the same time, or is that not even possible?

Yeah, I think that there's a lot to be determined. One of the interesting aspects of the recent move in the markets is I'm convinced that one of the reactions in the markets has been that the US Equity markets have been strong at the. At the cost of some of the foreign equity markets. In other Words, I think that what a lot of international investors have done is that the trade has been from, for instance, some foreign markets into the US Perhaps Trump's strategy is going to be make America great again by weakening some of the foreign countries. But I think there have been inflows into the US markets from foreign markets in the recent days.

Okay, so what is this going to mean in terms of investment strategy? What should someone do?

Well, I think what we in invest with the Fed, what we looked at is we looked at how different asset classes and different equity sectors in particular, how they performed during different interest rate environments. That is, how did they perform during a rising rate environment? How did they perform during a falling rate environment? And we had some really interesting findings. First of all.

The overall market, the s and P500, had a return of approximately 15.2% from 1966 through 2013 when interest rates were falling. So a robust return when interest rates were falling, when interest rates were rising, that the Same S&P 500 only returned 5.9%. So rising rates are bad is bad news for investors, for equity investors. And what I think most people agree on, I think the consensus of the markets is that interest rates are going to rise. Now that doesn't mean all sectors are affected equally in a rising rate environment. The best performing sectors in the past have been energy, food, utilities and financials. So those sectors have done reasonably well in rising rate environments. Some of the sectors that have performed particularly poorly in rising rate environments, autos, durable goods, retail. So and if you think about that, it actually makes a lot of sense, Jason. When money is cheap, when money is easy, a lot of the non discretionary, or I should say a lot of the discretionary spending increases. People buy new cars, people buy expensive suits of clothes, people buy a new washing machine, they delay those purchases when interest rates are rising and money is a little more dear. So I think that you are going to see some of that over the next few years because I think we are going to have a what I would call more of a normalization of rates, that rates are going to rise. But you know, they have been at such historically low levels that they just can't stay at those levels for forever.

Inflation, deflation, you know, just sort of a nothing like a stagnation type of environment. I mean, it seems to me like Trump is going to be good for the economy. I mean, better than Hillary, at least. I don't know. You know, I mean, that's probably a partisan statement, but you know.

Well, I don't know I don't know necessarily. It's a partisan statement. I just don't know what. We certainly aren't going to be able to compare it because the Hillary administration never happened. But I think what you're going.

But we knew that. We knew the gist of it. I mean, you know, it's a Democrat. It's a, you know, Democrats traditionally aren't as business. Well, I think that's a little high on regulation.

That's a little bit of a misnomer. If the stock market is any kind of indication as to whether a particular political party is good for the economy, bad for the economy.

During Republican presidents, since 1929.

The stock market has advanced about 7% when a Republican has been in office. When a Democrat's been in office, it's 15 and a half percent. Right.

But you also have to take into account Congress, of course, because, you know, that's.

No, absolutely. And that's my point. Point is, my point is that political. And the funny thing is, Jason, there's this old adage out there that gridlock is good for the markets. I don't know how many times I've heard that, and I always, my head wants to explode every time I hear that, because that's simply not the case. Political harmony historically has been better for the markets. The markets have performed better. The equity markets have performed better in political harmony. The bond markets have performed worse under political harmony. And if you think about it, that makes sense too, because under political harmony, typically a party can get their agenda passed, and in gridlock, it's more difficult. So when there is consensus, there is an agenda, and it typically involves, it typically involves some fiscal spending and markets have performed. Stock market has performed.

So if that's any indication, and by the way, these analyses, when you simply look at the party of the president and how the stock market returns, those are univariate analysis that assumes that's the only variable that matters. And of course, there are all kinds of variables that matter. All I would take from that statement, though, is, you know, in the words of Lee Corso, the, the football analyst, when you say the Republicans are the party of business, not so fast, my friend.

Okay. So is business the stock market? You're kind of begging for me to ask that question. I mean, are those one and the same?

I think over the long term, they certainly are.

Yeah. Okay. All right.

I mean that, you know, I think when you take a long term perspective, there can be certainly times at which the economy and the stock market are moving in different directions. But.

Warren Buffett is always the person that I've looked to for wisdom in investments. I grew up in Omaha, Nebraska. I grew up in the shadow of BERKSHIRE Hathaway and Mr. Buffett.

And we do have to note that Buffett is a raving Democrat.

Absolutely. But over the long run.

I think when you look at how markets perform, I think they are a reflection of the underlying economy. And long term market returns have been pretty good when there have been Democratic presidents. So, you know, I think that kind of. And I think that what's interesting, Jason, is how markets react to elections. Both Obama elections, his initial election and his reelection, the markets reacted very negatively the next day. Well, what happened during the Obama years in the stock market? Stock market performed very well.

Oh yeah, very well. But remember, I mean, that's such an anomaly though when you look at the Great Recession and how the stock market just tanked.

Jason, we were out of the Great Recession in 2012.

Right, right, right. But I'm talking about the first Obama. Okay, okay.

But the second Obama, it big negative what's happened in the last few years. In other words, the stock market is basically random over short term time periods.

Okay.

And I wouldn't take too much, I wouldn't pay too much credence to the Trump, what people are calling the Trump rally. I'm not suggesting that the markets won't do very well, but I'm suggesting that if history is any guide, short term reactions to markets are almost a random variable. There's a much greater long term.

Element in this and you know, wait and see. I certainly hope things.

Turn out very well under Mr. Trump and that he's very good for the economy, but a lot has to happen.

Yeah, right, right. Okay. So what would you be doing now given, you know, where we are here we, here we sit just very shortly after the election. A big surprise to many. What's the best strategy?

I think the best strategy is that if you had an investment plan the Monday before the election, that investment plan should not have changed at all as a result of the election. You know, I think that, that people need to take a real long term perspective in their investment strategy. So many people want to game things in the short run and attempt to time the markets and do things that they think are going to improve their performance. And what we find is that the typical individual investor underperforms the markets because they can't get out of their own way. The best strategy in my opinion, Jason, is to just do dollar cost averaging into a.

Low cost index fund and enjoy the ride.

Nothing better than that, than just good old dollar cost averaging.

You know, if you can, if you can earn returns to the markets, you're going to do just fine for the average investor. Now, there are folks who, you know, want to attempt to outperform, want to be very active investors and you might want to do some of these things, sector rotation and so forth, but, you know, too many people, too many people are their own worst enemies.

Yeah, well, you know, it's human nature. We all want instant gratification. That's not a new phenomenon. And that's what I do love about the Warren Buffett philosophy is, you know, buy quality, hold it. As a real estate investor, I basically follow that strategy, you know, as it applies to real estate.

And the interesting thing about real estate, you mentioned real estate early on in our conversation and what we have found that during rising rate environments, the returns to equity real estate investment trusts are very robust. In fact, equity real estate investment trusts do very well during rising rate environments. So for your real estate investors, that's pretty good news, right?

Right. But you're talking about real estate investors that are doing it through funds and Wall street type vehicles. What about just real estate in general? I know it's not your beat per se, but you know, you, I'm sure, have some opinions on it.

It's just hard to get data on that. I'm an empiricist. I look at what, what has happened, I look at what relationships have been in the past and it's very difficult to get any real estate data other than real estate investment trust data. So that would just be pure conjecture. But if you think about it, if you own real estate and rates rise and you can, if there's a way to pass along, you know, rent increases to the occupants of the rent to renters, then real estate should have pretty good returns during a rising rate environment.

Yeah, and I agree with you. You know, it's a, it's a multidimensional asset class. So you're either in the booming economy, when rates are low and prices are increasing, you hope to be a capital gains investor. And then in the, in the higher rate, tighter money environment, you hope to be a cash flow investor. And you're just constantly adjusting your strategy as, as, as time goes on through those different economic cycles. Also, you know, what are your thoughts about small business, about kind of Main Street America, if you will, and a Trump administration? I wonder if, I mean, this is all such a wild card. We just don't know. But for example, will small business financing become More plentiful or less plentiful or just be about the same, you know what will happen there?

Well, I think the cost of financing is definitely going to go up.

By the way. You've mentioned that a few times. And sorry to interrupt, but I just want to ask you why again, just make sure we drive that point home. Why do you believe rates are going to rise? And I know that a lot of people think that at the moment, but just because they've been so low for so long or what?

Well, I think that's one element, but a big element is that.

President elect Trump has stated that he is going to increase infrastructure spending. So I think there's going to be a lot more fiscal spending which is very inflationary.

Okay. And just explain that relationship if you would. Why, why is, why is infrastructure spending inflationary? Because it creates more jobs and there's more spending and more money cycles through the economy. If it's, you know, this trillion dollar infrastructure.

It's kind of the economics 101 idea about there is another big demand for funds. And when there's another big demander of funds, the federal government interest rates are going to have to go up to have supply meet demand. So it's a pretty simple relationship in terms of you've got another big borrower in there, the US Government, so it's.

Financing the infrastructure project, obviously, right?

Oh, exactly.

And you know, you got to float bonds and you got to sell those bonds at the auctions and that's what happens.

If we take him at his word, it's going to be exacerbated by the fact that the tax rolls are going to decrease. That, you know, if tax rates are lowered, at least initially.

You know, the.

Government revenue will decrease initially.

Right.

So you're not, you don't, in other words, it sounds like you don't completely buy into the theory that it's just a zero sum game where you decrease taxes, you decrease revenues. It sounds like you're open to the supply side or idea that you reduce taxes and ultimately, but it takes some time to trickle through, you may increase revenue because there's more economic activity to tax. Right?

Yeah, that's a tough argument to make, but I think definitely if you couple, couple that with increased infrastructure spending, you know, I just don't know how that can happen and at least in the short run, how that can happen.

Yeah. Okay. Okay, good. What else do you want people to know? Maybe just anything. I haven't asked you.

Well, I think that it's really interesting to focus on.

You know, the election and that a great deal of change is taking place. And. But there are four words in the English language that I believe are the most detrimental words to investors. And those four words are this time is different.

I love that. I say that all the time.

I just don't.

And I'm going to go back to a golf analogy I always make. There was a very famous golf pro, Harvey Penick. Harvey Penick was Ben Crenshaw's golf pro. And Harvey Penick died and Ben Crenshaw was at Paul Bear at his funeral. And then Crenshaw flew immediately to Augusta, didn't even play any practice rounds and won the Masters that year. You know, it was a famous.

Golf event. But Harvey Penick used to say that when you take a golf lesson, take an aspirin, don't take the whole bottle. In other words, don't change everything. And I don't know how many of your listeners are golfers, but when you're a golfer and they say do something, you kind of tend to over exaggerate it and then it really damages your swing. I would do that with this election.

Politically, it may be a seismic event, but for the financial markets, assuming this time is different and wanting to make wholesale changes in your portfolio I don't believe is a prudent strategy and one that I'm not advocating and that I'm not doing with my own portfolio.

And Bob, I am going to agree with you on that one. Stay the course. Overall, that wins the game. That's the Buffett philosophy and it sounds like it's yours too. So that's fantastic. Give out your website. Tell people where they can find out more about you.

Www.theamericancollege.edu we are a nonprofit, accredited degree granting organization. We're based in Bryn Mawr, P.A. we deal with in financial services and we have about 26,000 students in our various designation and degree programs.

Excellent. Bob Johnson, thank you for joining us.

I really appreciate the chance to talk to you. It was great.

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