#15 Midyear Market Analysis with the Propel Team
In lieu of hosting a webinar this quarter, Emily, Amanda, and David recorded a special midyear analysis. They reflect on events in the markets so far this year, as well as how we're thinking looking forward.
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Links mentioned:
- Amanda's ESG article - Is ESG Over? Not So Fast
- Danielle's Roth IRA article - Roth IRA: How to Maximize a Wonderful Tool Before Congress Acts
- Connecting the Dollars Episode 14 - It's a Bonds Bonanza!
- Wall Street Journal Article - How to Peek at Your 401(k) Without Freaking Out
Full transcript below -
Emily Agosto (00:08):
Welcome to connecting the dollars, a personal finance podcast. I'm Emily Agosto, a CPA and financial advisor.
Amanda Vaught (00:16):
And I'm Amanda Vaught, attorney and financial advisor, both Emily and I are co-owners at Propel Financial Advisors.
Emily Agosto (00:25):
Propel Financial Advisors is an investment management and financial planning company. We are fee-only fiduciaries and independent registered investment advisors. I'm based in Chicago and Amanda is in New York city, but we work with clients nationwide.
Amanda Vaught (00:40):
The purpose of our podcast is to explore personal finance topics, including budgeting, investing, behavioral, finance, current events, and other helpful information. We also hope you'll get to know us along the way.
Emily Agosto (00:54):
Thanks for listening.
Emily Agosto (01:01):
Hello everyone. Welcome to a special episode of Connecting the Dollars podcast. My name is Emily Agosto. I have with me, my cohost Amanda Vaught. We are both financial advisors at Propel Financial Advisors. As if, if this is your first time listening we're doing something a little bit different this time. We're also recording a video version and we're gonna put that on YouTube so you can watch us in action. Or you can just listen to the audio as usual. And with us today, we also have David Vaught. He is a financial advisor along with us at propel financial advisors. He's also a CFA which is a chartered financial analyst. It's a very high designation in the financial industry and he has a wealth of knowledge, lots of experience in the industry. And so we're glad to have him back.
Emily Agosto (01:58):
He's been on a few podcasts recently talking about the Fed specifically. So you can go back and listen to those, if you are interested. And our fourth financial advisor, Danielle Woods, couldn't join us today. But we have a few comments from her that we're gonna bring up on this mid-year outlook for 2022. So I'm first going to ask David a few questions or just throw it over to him. How did we get to where we are in the market currently and what, what should we think about in terms of volatility and uncertainty?
David Vaught (02:36):
That's a mouth full, Emily, but this bear market. It's, it's it, it, it's got a pretty simple characterization in the investment world. You know, when, when the market drops 20% or so off it's high, that's generally considered a bear market. And that's exactly what we've seen in two fairly substantial steps, one in the first quarter of this year. And, and then another one in the second. Bear markets then often face the question: will there be a third drop? We've had a period of relative stability since the middle of May where the market's not moved a lot. It's been volatile lot up and down a lot, but it's not moved a lot. This is brought on by a number of factors. Inflation is certainly one of those factors, and then the Fed beginning to raise interest rates to fight inflation. That's one of the main things it does is certainly a second one. There's lots of other factors that people point to: the supply chain problems in the economy, geopolitical instability in Europe with the Russian invasion of Ukraine. But I think just calling it a bear market is the best way to describe it.
Amanda Vaught (03:54):
Yeah, I would just also chime in with the uncertainty we always see in a, in a midterm election year happens every four years, the second year of a President's term, we see increased volatility throughout the year until the election.
David Vaught (04:14):
It's different too, because the the labor market has been pretty strong, and that you know, later in these economic cycles that may change, but that's been a very positive factor. That's kept corporate profits you know doing pretty well, although they're expected to contract a little bit as we get further into this. But that makes it a bit different along with the fact that we had a lot of stimulus. There's still lot of cash out there in consumers' pockets. And, you know, in businesses have a lot of cash that they're continuing to reinvest at the, as the economy changes. So there are some positive factors that are moderating the whole thing a bit as well.
Emily Agosto (05:00):
Great. Yeah. And so you had mentioned the Fed and the response to inflation. We just did Amanda and I just did a podcast all about bonds it's episode 13 [correction: it's actually it's Episode 14] and that's up right now and you should definitely listen to that. We've been getting good feedback on it, and we've also got a question specifically about the Fed's impact on the bond market. So what has their raising of rates done to affect the bond market?
David Vaught (05:33):
Well, the Fed likes to affect the bond market. It mainly raises short term interest rates, but they, they sort of like the base of the curve and, the yield curve, which is how we express the rate between maturity of bonds and what you, what interest rate they pay. Those tend to go up in what we call a steep yield curve when the fed starts to raise rates more aggressively, which has just started doing in its last meeting. First, it sort of tapped the brakes and did some 25 basis point moves. But then when it jumped up to that three quarter, three quarters of a point, 75 basis points they say in bond land, that that took us up to, to where the short term rates went much higher in the, the longer term rates in the 10 year left us in a situation that's called an inverted yield curve where short-term rates are higher than the longer term rates.
David Vaught (06:31):
That's not normal. It often predicts a recession, and it's just an indication of how the Fed has affected those, those bonds in terms of changing the normal relationship of a steep yield curve to an inverted yield curve. At the same time, the Fed is doing what's called quantitative tightening. It's bending to reduce the size of its balance sheet by selling some of the bonds that it accumulated onto its balance sheet in the response to Covid and the stimulus that it was undertaking earlier. So it's unwinding that earlier stimulus as well as raising the short term rates.
Emily Agosto (07:14):
Okay. Thanks. That's really helpful. I wanted to ask Amanda, if she had anything to add, in terms of like what we've been seeing in the uncertainty volatility slowdown in the economy recently, or any other factors there?
Amanda Vaught (07:31):
Oh, well one thing I've been looking at is I don't know, maybe people who know me know, I love talking about ESG issues in the markets, but one thing we, we saw this this year's is what worked was commodity prices, commodity prices were going through the roof. We're recording this in mid-July and they they've really fallen off lately, but for the first through what mid-June or so they were really high and especially like oil prices, right? And so a lot was a lot of noise and the media like, oh, oil's really high. That means ESG is over because a lot of people conflate ESG with green investing, which, you know, there is overlap, but that's not always true. Because the way we think of ESG is that it's more a measure of a risk factor.
Amanda Vaught (08:25):
And I did a blog post on this in May where I analyzed the numbers because oil stocks are getting an ESG rating also. It's not just like green companies get ESG ratings. And so what we saw there was that the oil stocks who had better ESG scores were outperforming oil stocks in general. So for me, that was a good way to look at it and see how is ESG performing when there's this big change in the market. And I haven't written it up or updated my blog post, but I did rerun the numbers recently since oil stocks have fallen off significantly since then. And the the better-scoring ESG oil stocks have fallen off less than the oil stocks in general. So for me, I feel like that's a sign that the ESG type of metric is working still in the market. Even if everything else seems, you know, it's going off the rails.
Emily Agosto (09:28):
Yeah. We'll definitely link that blog post in the show notes, and then hopefully we can get an update in the next, we'll do another podcast on it in the next few months to see
Amanda Vaught (09:38):
Sure. See what happens. Yeah. We'll keep our eye on it
Emily Agosto (09:41):
For sure. So anything else that either of you want to discuss just about the situation we're in where the market has gone in the last six months in 2022. Before we talk about what we're doing as financial advisors, any other points you wanted to make?
David Vaught (10:00):
He, I might mention that thing I put in the Rearview commentary that the Fed in its regulatory function likes to talk about stress test on banks. [Propel Financial Advisors provides a quarterly market analysis to its clients called "Rearview: Market Insights."] Those are hypothetical exercises to see if market conditions change, banks financial condition is gonna deteriorate greatly. And in terms of investing for the future especially in stock market we've just been through a big real stress test. So it's a good time to look at portfolios and look at objectives and engage in a reconsideration of whether current portfolios and approaches that we're using have survived the stress test, you know. For instance, long term, we think the emerging markets are a place to have some of your money. But early in this bear market, the emerging markets didn't survive the stress test very well. They were caught up in the supply chain issues.
David Vaught (11:02):
They were caught up in the strength of the dollar and the weakness of their currencies. They were caught up in uncertainty about China because China is the biggest emerging market in the world today. So, you know, that was important to see, and lead to a decision whether you should have more or less emerging markets in the future, based on what you saw in that market action the bond, market's another one we've looked traditionally as the bond market, as a buffer against losses in the stock market. In this bear market, they've both suffered because the Fed was raising rates, which causes a loss of principle in bonds. That's the way it works. When interest rates go up and you already own the bond, then your bonds value goes down because you have to compete with those newly issued securities that are gonna pay a higher coupon. So, you know, those examples of looking at what's happening and how is that is reflected in your portfolio or your approach creates a good time to reconsider a lot of things.
Emily Agosto (12:10):
Okay. So as financial advisors, what is the first thing you're looking at? Would that be asset allocation or risk tolerance, or what would be the first conversation you think you'd have with someone who might be worried about their portfolio decreasing?
David Vaught (12:27):
What do you say, Amanda? You want me to answer that or you wanna jump in?
Amanda Vaught (12:32):
Well, no, you can go ahead and I'll jump in.
David Vaught (12:35):
Well, I do, I think though you hit the name on the head, Emily risk tolerance and asset allocation are keys. If, and some people were, were pretty aggressively invested because the market had been going up and they thought they had an asset allocation or, or something that matched their risk tolerance. And then when the bear market hit and the reality of the losses and the value of their securities hit home, it caused a reconsideration in their view and thought, well, maybe their risk tolerance wasn't as high as they thought it was. And so that causes, or I think we think the proper response is to change the asset allocation and adjust the risk tolerance in those cases. In other cases, people that have a high risk tolerance, you know if you listen to Warren buffet, he would say, this is when you make money. This is when you get to buy things cheap. And so that's a, that's an adjustment that goes in the other direction, and it depends a lot on the objectives of clients and whether clients can sleep at night in the stress test of the bear market.
Emily Agosto (13:49):
Yeah. I like that analogy of a stress test.
Amanda Vaught (13:52):
Yeah. I would just add, you know, recently there was an article in the Wall Street Journal about behavioral economics, and I just think it brought up a lot of issues that is important to remind people of. We shared one of these on our social media page that said people who don't look at their 401(k)s have better performance in the long term. And, why is that? It's because they don't do anything. They don't worry about it. You know, if you're the kind of person who's logging in and checking your 401(k) balance every day, that's gonna make you worried. You're gonna see a lot of red. You're gonna get stressed and feel like you have to do something. And you know, that that should be a sign that you should not do something if that's what you're feeling. Because that's an emotional response, that's fear driving your decision. You know, there's a lot of psychology wrapped up in money, that's normal.
Amanda Vaught (14:52):
It happens to everyone. But this is when it's important to step back, think about, you know, have my financial goals changed? No, you know, I'm still going to work. I'm okay. You know, so you don't necessarily need to make a big change in your portfolio. You can just say, okay, this is something that's out of my control. I'm going to turn it over to my trusted financial advisors like us or whoever it is. And just let it go. I think that's also a good approach If you know, like David said, it's good to reconsider your risk tolerance. If you know, this type of downturn is really freaking you out, but don't make any big decisions right away is what I would say.
David Vaught (15:40):
I think what Amanda is saying is sometimes here the phrase stay the course. And in these difficult markets, if you've got a good approach, and you've got a good allocation. And it matches your objectives. Stay the course we know from history that these things correct, they, they change and the markets move back up long term. So that stay the course approach is really the one that's probably the most appropriate for most people.
Emily Agosto (16:09):
Yeah. I, we definitely encourage people to reach out to your investment advisor, reach out to us if you are a client. And definitely we can have these conversations, but we're always paying attention to what's going on in the market. So we're constantly positioning your accounts to be able to you know, withstand a little bit of stress. We're not just, we're not, not paying attention. When the market is going up, we're paying attention to all the different factors that point towards, you know, recessionary activity or towards uncertainty and volatility and positioning things to protect your assets.
Amanda Vaught (16:48):
So, and now looking with an eye towards recovery, right? Positioning portfolios for recovery, because we know that recovery, we don't know when it's coming, but we know that it is
Emily Agosto (17:00):
Exactly. So let me get a little specific here. I am someone who does not look at my retirement accounts very often. I'm in my, I'm clinging to my thirties and I'm not trying to take any money out of my retirement. I'm kind of in the stay of the course mindset personally, but is there anything I should specifically invest in, or what would you tell me as an investment advisor or yeah, if you were my investment advisor, what would you tell me to focus on if I wanted to say invest more in the market right now?
David Vaught (17:39):
I think profits are king Emily. The companies that are gonna be able to, I mean, the economy changing in, in talk of, or actual re you know, we've had two quarters where the economy is contracted. So, you know, if that's not a recession then it's certainly a slowdown in the economy. The companies that are well positioned to go through that and have pricing power. Some people are upset. The companies are raising prices, but from a investors point of view, companies that have pricing power that have good cash flow that have a good long term plan, that's still working are a good place to look. There are other things about sectors where some sectors can come out of these situations faster than others. There was a good article. I was reading today from a, from another firm where they, they talked about how small-cap stocks tend to do better in these recoveries than the overall market. So sometimes a little shift in allocation is also good because how your position to come out of the market is often, much more important than how you were defensive going into the bear market.
Emily Agosto (18:50):
Nice. And then maybe Amanda, if you wanna take, what if you're someone who's closer to retirement what would you advise at this point for someone who may need cash a little bit sooner?
Amanda Vaught (19:04):
Yeah. So I think risk tolerance, we discussed a little bit, but that's another issue is time horizon, right? Like how, when are you gonna need the money that you have invested? And so typically that's for somebody who's already retired or retirees. And so for them, you know, we do see people who are getting a little bit fearful and so they're keeping cash on the sidelines because they don't wanna lose out on the market. Right. Which is, which is understandable. But you know, sometimes I wish, you know, when you log on you Schwab a lot, so, right. So if you log into Schwab and you see the days numbers and a lot of times lately you see a lot of red and you're like, oh, that's not great. You know? And so I wish when you logged into your checking account that you could see that big red number also because when you have a bunch of cash in there, you're losing out to inflation so much.
Amanda Vaught (19:58):
And I mean, what was the latest inflation number? It was 9%. Yeah. Something like that. I mean, yeah. You should see a flashing red, negative nine for your cash balance, you know? And then maybe that would spur people to say, oh, you know, I'm actually losing money. I'm losing my own purchasing power if I leave my money in cash. Because we have seen the bond market go down and usually that's a safe area, but the two year Treasury is paying, I forget the latest number, but it's more than 3% now. There's a little volatility there, but 3% over two years, that's, that's not bad. That's a lot better than it was, you know, just a few months ago. And so you're gonna give you getting positive returns on that money instead of the negative you're getting right now by letting it, just sit in cash from the inflation effect.
David Vaught (20:52):
I think the other point there that man that we should mention, especially for older folks, being the older person here in the podcast, I should add this is look at your overall situation, not just where you are in the stock market. As people get older, they often do some downsizing, sometimes getting out of a expensive house that they've lived in that's too big for their needs today, is an example. Or just downsizing your budget, you know there may be some things you're used to spending money on that you'd be better off not spending money on, you know, and that helps prepare you for the uncertainty of the future. And there is uncertainty in the future. That's one of the reasons we're in a bear market, it's responding to uncertainty instead of the, instead of a more certain situation where everything seems to be getting better all the time. So look at your broader context too. Not just what's happening in your investment account.
Emily Agosto (21:50):
Very good advice. Yeah.
Amanda Vaught (21:51):
That's a great point. Yeah.
Emily Agosto (21:54):
All right. Well I think we covered a lot of things here. The last thing I did wanna touch on because I'm a CPA and if I didn't talk about tax, then who am I? Roth conversions are something that is a tax strategy you could use currently when the market is down. And it's always a good time to do a Roth conversion typically for most people because when you convert pre-tax funds in your IRA to post-tax funds in a Roth, then your investments grow tax free. So if you're converting a security, when it costs less, then it'll grow tax free during the recovery. So that's one strategy we can use. Does anyone not have any other, any other tax strategies to add? I was gonna talk about tax losses, but that's a little bit dry.
David Vaught (22:51):
Yeah, it's dry, but it's a, it's a good thing to do in your, in brokerage accounts. Tax losses in your IRAs and your retirement accounts, tax-deferred accounts, they don't really do anything on your tax return, but a good combination of, and you know, we can say this for Danielle, because she's been emphasizing it and she's not here today. You need a good breakdown of, you know, tax deferred accounts and then you know, brokerage accounts that are better places to have liquidity, you know in a, in an emergency or for other uses anyway. And there, you can look at, you know, one of those those stocks or mutual funds you bought that are way down and you can take that tax loss and next April 15th, you'll get some money back from the IRS. And then, you know, later you can reinvest that money too, or you can reinvest it in something else while still taking tax loss. So that's a good strategy. We like to help implement those with people as well.
Amanda Vaught (23:53):
Yeah. And I think, you know, it can hurt or can hurt to sell something when it's down. Like, oh, I hate that I lost money on this, but you have to remember that that loss has a value, you know, and that, that value is, you know, your capital gains tax. It's gonna save you money. So if you have to try to think about it a different way a little bit, when you do those things.
Emily Agosto (24:14):
Yeah, absolutely. And going back to the Roth conversion, I wanted to mention that Danielle has a blog post all about the Roth IRA and how you can use it currently to help out your investment accounts. So we'll post those all in the show notes. But before we wrap up here, any other thoughts, David or Amanda, or anything you wanna share with anyone listening, who might be a little bit nervous about the current state of the market?
David Vaught (24:45):
It's an election year. That's creating part of the uncertainty that's out there. So I, what I tend to call it, having been through a lot of elections, is silly season. It does get a little silly sometimes, and sometimes that even fuels the uncertainty. So, you know, we're getting closer, it's July the uncertainty will go away about the election in November. And so until then, I think you can expect a little more volatility here, not necessarily another down leg in the bear market, which could happen, but at least some volatility related to that political uncertainty. Big changes could happen in an election or maybe not.
Emily Agosto (25:29):
Okay.
Amanda Vaught (25:29):
Yeah. And I would just say that if you are in the accumulation phase of your retirement savings, you just, the stock market is really on sale right now. And it's a really great time to put extra cash into the market if you have it. The other thing I would say is that you know, I saw a headline yesterday. They're talking about doing a COLA increase, cost of living adjustment, for social security of 10% this year. And that's great for people getting social security. And I think, you should also think about giving yourself a raise in your retirement accounts. So because the dollar is losing its value every day with these high inflation numbers. So you're gonna need a bigger number when you retire. So make sure you put a little extra, if you're able into those accounts,
Emily Agosto (26:26):
Good points all around. Well, thank you both so much for joining me today. Like I said earlier, we'll get the video version up on YouTube so people can see us talking about this, and we'll also have our regular podcast version. For all of the blog posts we mentioned and any other helpful resources, you can find them at connectingthedollars.com. You can also reach out to us info@connectingthedollars.com. Find us on Instagram, on the web, we're at propelfinancialadvisors.com. And yeah, we'd love to hear from you.
Amanda Vaught (27:05):
Yeah. I was gonna say too, we, we do this as a webinar sometimes, and we're not really doing a webinar this quarter, so normally we would take live questions. So I hope people don't hesitate to reach out with their, with their questions cuz we're, we're here to answer them.
Emily Agosto (27:19):
Yep.
David Vaught (27:19):
And new meetings are still fun guys, you know? We've all kind of grown accustomed to 'em so mm-hmm, good to see you Emily, even though we're not, we're seeing each other over zoom.
Amanda Vaught (27:30):
Yep.
Emily Agosto (27:32):
All right. Well thank you both. And we'll talk to you soon.
Amanda Vaught (27:34):
Yeah. Enjoy the rest of your summer.
Emily Agosto (27:36):
You too, for all links and resources mentioned today, head over to connectingthedollars.com. Thank you for listening.
Amanda Vaught (27:48):
This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast does not engage in rendering legal, financial, or other professional services.