How did we get here?

“Life can only be understood backwards; but it must be lived forwards.”
― Søren Kierkegaard

The financial market landscape has been more than rocky lately, but how did we get here? There are always reasons to be pessimistic, just the same as there are always reasons to be optimistic.

Looking back a couple of years we are going to assess supply and demand, inflation, real estate investment, stocks, bonds and the overarching US fiscal policy. We will highlight the trends seen from some pretty historical moments experienced between 2019-2022.

We don’t know what the future holds. Even the best data from the past cannot predict what is about to happen, so save any prognostication and stay focused on your horizon. The market will go up and down with current events, the best we can all do is stay focused on the big picture and our long-term goals to make the best decisions for ourselves.

Transcript

Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service financial services firm headquartered in Boulder, Colorado.

Today I want to talk a little bit more technical than usual. I want to talk about how did we get to where we are right now–the present. What’s happened over the last couple of years? What has transpired? In order to get us now to the present it’s so clear to us. That’s what it feels like. Hindsight is 20/20, but now what does this mean for us going forward, and there are reasons to be both optimistic and pessimistic. It could go either way so let’s figure out where we are and what led us to where we are now.

By the way, let me just tell you that it is complex. The United States is the largest economy in the world. About $22 trillion. The next closest to us is China which is in zero COVID tolerance. They’re closed down. And then after that it’s the eurozone and then everybody else is distant fourth, fifth and all the way down. The big behemoth is the United States and we are the reserve currency for the world because of our size. Many countries decide to peg many of their decisions to the U.S. currency but just by the fact that through the trade balance everyone’s got a lot of dollars. We’re buying things. And so we are the reserve currency. What we do matters in the world. But geopolitical issues are also important.

Let’s start talking about how some of these factors came together. About two years ago we’re starting to get out of COVID. We have supply chain issues, reduces of supply and demand. People are now getting out of their homes, they want to drive again, they want to go on vacation, they want to travel. Demand is high. So, right now we have an imbalance. We have high demand, we have low supply. That right there is a problem.

At the same time we’ve got some cash being thrown around. We’ve got some fiscal policy that over ten years the Congressional budget office has said that it will cost $4 trillion. It might have been well intentioned. It doesn’t matter. We’ve got lots of cash, lots of liquidity and people had saved a significant amount. When we look at the savings rates during COVID while everybody was stuck in their house, people now have cash. More and more people with more and more cash chasing less and less things. And, of course, if you want it then you bid up the price. That’s how inflation starts.

Inflation happened. I’m going to put up on the screen there and you’re going to see how it went from about 1% at the beginning of 2021 all the way up to almost 7.5% in one year. That is huge. During all that time we kept being told well, this is transitory and this is going to be temporary, et cetera. It continued up and up and up.

Oct 22 Inflation

Now, one of the problems is as you can see here on the second sheet – and I’m going to circle when the Fed started to increase interest rates. Increasing interest rates slows down the economy. It starts to take money out of the money supply. They didn’t start until the beginning of 2022.

Let’s imagine that you have a picture up on the wall. You can take a hammer and you can real gently nudge it, nudge it, nudge it until it’s straight, or you can take a huge whack and things are going to break. Well, essentially for an entire year the Fed did nothing and now they’re trying to make up for it by whacking it. Not nudge, nudge, nudge. They’re whacking it and that’s what has happened in 2022.

What is interesting is 2021 the stock market and unmanaged stock market indexes continued to go up even though the inflation rate was going up as well. Anyone who says that they said they completely called it that it was going to go up as much as this is really fooling you. Yes, there were some indications it was going to go up, but almost every single expert was surprised by how much inflation has gone up. Now the Fed is trying to make up for it.

Now up on the screen I have put the huge increase in both – the top line is a 30 year mortgage which is now as of the beginning of October at 6.7% and almost 6% so 5.96% on the 15 year. That in my opinion puts a screeching halt on a lot of the transactions in the real estate market. We’ve had a huge increase in housing prices when interest rates get higher, when someone wants to buy a house they might second guess it. This is something that I think we need to really watch out for as the unprecedented, really unbelievably sharp increase by the Fed in their monetary policy is putting the brakes on the economy big time. The odds of a recession is going up very high.

When we look at cash, look up here on the screen. There’s a lot going on here in this chart, but on the left hand side the CD rate for the average of the 1980s was 10%, but the inflation was about 5.5% on average. In the 2000s you had your CD rates of about 3.3% on average and inflation was less than that. The headline inflation was less than that. In the 2010s and in so far right now inflation is significantly higher than what you’re getting in CDs for a six month rate. Cash really is a great place not to lose money. It’s not really a great place to make money from a purchasing point of view. Bonds as well. It’s a complicated situation but bonds have had one of their worst years ever in decades this year because of the incredibly sharp increase in the Fed Fund Rate from the Fed.

Right here on this chart is the S&P 500 when we look at it standing back with multiple years. You’re going to see that in the last year or so we’ve given up a couple of years’ worth of growth. Very irritating, especially if you’re withdrawing money. That being said the upward trend has always been over many years upwardly mobile. You’ve heard me say this before in about three out of four years our positive one year is negative. This has a tendency to be the negative year and it’s an unpleasant. Every quarter this year has been negative.

What are investors doing? I’m just going to put up here on the screen there corporate defined benefit plans, endowments, university endowments, et cetera. We have a tendency to put money into fixed income. They do equities, they do fixed incomes as well. A lot of private equity, some alternatives. What I recommend for clients in general is very similar to what some of the biggest endowments at colleges and at universities do in defined benefit plans.

Some reasons to be optimistic. The more things go down, the more they go up. That’s the thing. We could absolutely six months from now, a year from now be lower than what we are right now. We’re going to talk a little bit about the reasons why that might be. When we look out one year, two years, three years, five years the odds historically have always come in our favor that when things go down they come back up. When things go up, at some point they’re going to turn around and we always forget that. We have to understand that it’s both ups and downs.

Up on the screen on the left hand side you’re going to see the consensus analyst estimates for S&P 500 earnings per share. The companies are still profitable. It’s that simple. Yes, some of them are laying off workers. We’ve had an unbelievably low unemployment rate and it’s been coming down over the last two years to historic lows again. As a matte of fact, we’ve been talking about the great resignation where people don’t want to go to work. Well, some of those people who have jobs are being let go in order to increase the earnings per share and they maintain it with some belt tightening. As an investor this is good for us. This is very good for us.

Here on the next screen you’re going to see the cycles of U.S. equity performance, and I’ve just circled right there. For the last 15 years the United States from an unmanaged stock market index has outperformed most of the world. There’s one index, the EAFE, and so we’ve outperformed that for the last 15 years. In my opinion that’s going to continue. When we look at all the different places that we can invest, the United States is the best horse in the glue factory here. Europe has made some unwise, in my opinion, decisions from a fiscal point of view. Germany in particular is in a world of hurt. Their whole business model is based on selling stuff to China with cheap energy and neither of them are really working. They’ve really got to rethink things in much of Europe. This is going to be a tough winter and the energy prices not only for the end consumer but also for all of their industrial base. They’re in a world of hurt.

Let’s look up here on the screen. Let’s pretend like we don’t know what the future holds which, of course, we don’t. Historically going back 70 years there’s actually never been, the sixth bar over there, the one that says 21 and 1. Over a five year time horizon if you’ve got a diversified portfolio that includes some of the unmanaged bonds that we’re talking about right now, you actually never lost money over a five year time horizon and you’ve done as well as 21% per year. And so that’s the range when we look back over a 70 year time horizon.

October 2022 time, diversification and the volatility of returns

You can see the first three bars on the left hand side, a huge range for the equity which is that left bar. A huge range for the bonds. You put them together and it’s a slightly lower range, but it really starts to play out – and this is the way we put portfolios together when we’re looking at 5, 10 and 20 years.

For people who are retired hey, let’s look at that five year. I’m hoping you’re not going to die in the next year or two. It could happen. We could die tomorrow. None of us know when we’re going to die, but we do want to keep the timeframe in consideration, and always know that that there’s good years and there are bad years. Good years are not necessarily followed by bad and bad is not necessarily followed by good. We’ve got a good, strong S&P earnings outlook. We have pessimism at an all time low frankly. I mean it’s very low. It hasn’t been this low since 2008, and 2008 was followed by an incredible rally that lasted many, many years. I happen to be a contrarian at heart. I believe that our emotions and our actions are messing with the portfolio has a tendency to do us more harm than good. You’ve heard me say many a time on these videos and in my newsletters that if you pick the aggressive level that you can stick with, but you don’t bail on. You might not be happy year to year, but over a five and ten year time horizon historically and what I believe your return is going to be that as volatility goes up and so does the return as time goes on. That’s why you create something and you sit back and you try not to tinker with it too much even though we’re always watching within the portfolio hey, maybe we need to increase our equity allocation, our bond allocation, our cash allocation, et cetera, within the portfolio. That’s one of the reasons why I believe in good, third-party management. We’ve got great people working really hard in a tough volatile situation.

That’s what’s led us to where we are. There have been some fiscal issues. There have been some major policy issues on the Fed side. They have said that they’re going to continue to increase rates. At some point that is going to stop and that’s going to be very good for the markets when they stop. And even when their expected increases have already been priced into the market is also good for the markets. And then we just have this supply chain problem which is getting better. It is actually getting better although it was very bad earlier in the year and at the end of 2021.

Those are some of my thoughts. Give me a call if you’d like to talk about them further. 303-747-6455. You have a wonderful day. Thanks. See you. Bye.

September 2022 Financial Market Update

“A bend in the road is not the end of the road… unless you fail to make the turn.”
– Helen Keller

There’s no way to sugar coat it- this has been a tough year. This quarter especially has not been good. July was positive but then what it gained in July, it gave up in August and September. These things happen sometimes.

Let’s take a look at what we’ve seen the past couple of months and what we can do to stay positive as we move through the end of the year.

Transcript

Hi, there.  Mike Brady with Generosity Wealth Management, a comprehensive full service firm here in in Boulder, Colorado.

This has been a tough year.  I’m not going to lie to you.  This quarter has not been good.  July was positive but then what it gained in July it gave up in August and September.  I’m recording this on September 18 so I’m not quite sure what the last week-and-a-half to two weeks of September are going to bring, but it’s been a really tough quarter.  It’s been a very tough year.  These things happen sometimes.

Up on the screen you’re going to see the multiple year graph and I have now circled the decline that we have seen this year where we have given up in the last nine months or so what we gained in a year-and-a-half.  No, we didn’t give up the entire stock market.  We gave up what we earned in the last year-and-a-half in general with the unmanaged stock market indexes.  Sometimes that happens.  It stinks absolutely every time.  If you look up on the screen I’ve done another chart.  Those that are on the bottom are the intra-year declines.  The black numbers or the dark numbers are what the year ended.  You’ll see that the last three years were positive even though they had during the year some negatives.  This year it’s been negative.  It was worse negative but now it is still negative.  Three out of four years as we go back 30-40 years historically have been positive and one out of four is negative.  Every single time it happens it stinks.  It’s all right to have some emotion about it.  The question which we’ll talk about here in a little bit is what you do with that emotion.  Having the emotion is fine, doing something with it that is detrimental to your long term is quite another matter.

Up on the screen is another chart which shows even bonds this year are negative.  I’m putting a little red box around that third column over.  If you had 30 year guaranteed government bonds, you’re down almost 30% so far this year.  You know that by the time they mature it will be back and it will recover all of that.  But even bonds this year – stocks are down and bonds are down.  If you just have your money in a money market, if you have it in your mattress, due to inflation you’re also losing money.  Inflation is one of the big drivers which we’re gong to talk about here in just a second.

On this graph right here up on the screen on the left hand side you’re going to see what the stock market does, does not necessarily correlate directly with what the economy is doing.  However, they definitely walk hand-in-hand even if it’s not perfectly.  You’re going to see there on the left hand side that expansions in the economy average 47 months – 47 months.  That’s about four years and recessions are about 14 months on average, so that’s about a year.  Getting back to that whole discussion I had just a few minutes ago, three out of four are positive and one out of four is negative.  Those are odds that I’m willing to go to invest in going forward.  The future is always uncertain.  However, we’re going back decades and decades in a diversified portfolio, especially of unmanaged stock market indexes.

I said I was going to talk about inflation.  Look at that chart right there.  I have now circled what has happened in the last year-and-a-half.  Inflation is the big driver from my point of view.  Now, why do we have some inflation?  This is a tricky one.  We’ve got a supply problem and we’ve got a monetary problem.  Step back for just a second.  When people talk about fiscal policy that’s what the U.S. government does.  Monetary policy is what the Fed does.  The supply is global, whether you’re able to get your circuit board or various materials that people want.  If we just had a supply problem then if there was a finite, if there were ten widgets, ten things, and a lot of people wanted those ten things they would bid the price up.  It was very important to complete your car or your particular manufactured goods.  However, in this case we’ve thrown some gas onto the fire here.  We have flooded through fiscal policy, eve if it was well intentioned, we have flooded the market with lots of cash at the same time we have restricted supply which is a problem.  This then causes the Fed to want to take money out of the market and they do that by raising the interest rate.

You’ve got all these competing forces.  It’s going to take a little while for it to settle down.  This has been a huge shock to the system over the last couple of years.  This is pretty unique.  It’s not pleasant.  In my opinion there were some things that we could have done differently.  Maybe that’s in hindsight given the benefit of the doubt, but there have been some missteps here and now we are correcting that.

When we look back at various crises in the past and various declines there’s usually some reason.  It seems only so obvious after the fact whether it’s the tech bubble, whether or not it’s a housing crises which I would argue was really a cash and a credit crunch back there in 2008.  Right now we have a money supply issue and a global supply mess getting materials to the proper manufacturers.  Having unpleasant emotions around it is normal.  We are human beings for goodness sake.  The question is do you do something short term when you really have long term plans?  The answer should be no.  We have long term plans and so we can’t let short term data dictate those long term plans.

It’s interesting that the market went sharply down but came back relatively quickly.  That’s like ripping the bandaid off very quickly – boom.  However, this is a ripping off of the bandaid very slowly.  It is being dragged out over months, over some quarters.  All I can really say is that 100 percent of the time going back 100 years, it has recovered if you are in a diversified portfolio.  I expect this to be the same so I’m not worried except to the degree that I want it back as quickly as possible.  Let’s not kid each other.  That’s more fun.  When it is down, everything is down, pretty much everything is down both in the U.S., internationally, stocks, bonds.  We’ve got to figure out this mess.  The best thing for us to do is always keep our eye on that long term and stay cool as cucumbers.

Mike Brady, 303-747-6455.  Have a great day.  Let’s hope that this next quarter is a good quarter and that we end up the year a little bit better than we are right now.  Have a great day.  Bye-bye.

July 2022 Volatility in the Financial Market

“Last week I found myself wondering why I don’t buy more piñatas, because right now I’d love to beat the holy crap out of something and then sit in the grass and eat candy.”- Susan Blankston

When you listen to newscasters talk about the financial markets, volatility is often explained away in a very linear and simplistic manner. Even if their explanation contradicts itself from one day to the next, they do what they can to pinpoint one reason for the ups and downs. What’s often left out is the range of emotions that have also come into play – hopes, fears, greed, and more that also get mixed into the elements.

Over the last couple of years we have seen an off kilter supply and demand – with demand greatly outweighing supply in many areas. We’ve seen shock waves of disruption as the markets responded to Covid, the war in Ukraine, and more. As the gap narrows a bit now, let’s take a closer look at what we’re seeing and what it means for investors.

Transcript

Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service firm here in Boulder, Colorado.

Today I wanted to talk a little bit about the volatility in the market. You might read or watch on TV that it’s up one day because of X and it’s down the next day because of Y, and the journalists seem to be very confident that the reason that they’ve given for a complex question is absolutely right despite the fact that the day before might have been contradictory. They’re optimistic on day one and pessimistic on day two and then optimistic and renewed on day three. It really doesn’t make a lot of sense many times.

When I was in college we learned about this thing called CAPM which is the capital asset pricing model. A guy by the name of Markowitz came up with that, a brilliant economist. He actually received a Nobel Prize in economics in the early 1990s because of it. His work was followed up by the work from a guy by the name of Kahneman and work by the name of Thaler, T-H-A-L-E-R, Thaler. They received Nobel Prizes 20 years ago and another one about five years ago. What they determined is that unlike what I learned in college and what Markowitz had said is it’s not all about math. The reason why the value of an asset – in this case it could be the stock market, the bond market – it’s not all mathematics. It’s not just a stream of income payments in the future and the entire formula. It’s an efficient market meaning everyone’s got the available information and not everyone, though, is logical. That’s really the biggest work that came out of the last 20 to 25 years is that go figure, people sometimes are emotional and are illogical.

So, I take that into consideration when I look at what’s happening right now. A lot of it has to do with some of the emotions that we have, some of our predictions, some of our fears, some of our hopes, some of our greed, some of our real fear. And that all boils together in a pot to get what we see on a daily basis and then is in the news.

Over the last two-and-a-half years we’ve had on the demand side. It’s a demand and supply, but on the demand side we’ve had $7 trillion helping to support the demand for goods. Whereas, on the flip side the supply has been restricted. We’ve had supply chain issues. You have lots of demand, lots of money with lower supply. It hasn’t been transitory. The impact of that is being inflation and it’s been exacerbated by various shocks to the system. COVID waves that have led to one right after another. Then we’ve got Ukraine being invaded by Russia. There’s a reason why it’s been this inequality of demand and supply and out of whack has been extended longer than what is frankly comfortable.

What we’ve seen recently is we have the supply chain, there’s an agreed upon consensus throughout the world that we need to focus on getting that fluid again. On the flip side, demand is coming down mainly because of the inflation, the reaction to it. What I would say is the overreaction. The oversold we talked about. So, interest rates are coming down because the real estate, really with mortgage rates dramatically increasing to 40 year highs for mortgage rates, people are buying less houses and so the demand throughout the entire economy has reduced due to some of the inflationary pressures that we’ve seen. But at the same time we’re seeing the supplies go up and so they’re going to be back. Hopefully we’ve got some demand and supply coming back into equilibrium which is what we want to see and that’s good for us. Good for us as investors. Of course good for us as long-term investors as well as things start to settle down.

I always hate it when there’s a volatility. I never mind it on the upside. You get two or three days of an upside and you’re like, “Yeah, right. Things are back.” And then we have a day or two of downs. The important thing is as we stream them together that there are more ups than downs and that starts to happen when things go back into equilibrium. It takes a while for it to happen. I would say that it took a while for it to come to this situation. It’s possible – sorry guys, that’s my dog right here underneath the table – it takes a little while for it to work itself out as well. The risk to us is if there is a shock, especially to the supply side. On the demand side printing more money doesn’t seem politically feasible at this point in time. However, from a supply side if we have a major shock to the supply side that won’t be good. That will derail us from coming back into equilibrium which is what we want for that demand and supply side.

Anyway, Mike Brady, Generosity Wealth Management, 303-747-6455. You have a wonderful day. Thank you.

June 2022 Financial Market Update

“All happy markets are alike; each unhappy market is unhappy in its own way”
– Philosopher Mike Brady

The market has gone down even into bear territory for this year, 2022.  Painful. It’s just matter of fact, there is no way to deny how crummy it has been to watch. As humans, we’re both logical and emotional – for some the news may cause instant panic. However, rationally we need to look at the data and look at our portfolios and continue to make rational choices based on the long-term plan, not short-term discomfort.

Remaining diversified is really important. Going back over 100 years every single time 100% of the time when it has gone down, it has come back over time – 100% of the time.  That’s not the case for non-diversified issues they might have whether that’s real estate, whether that is a business deal, whether or not that’s an individual stock or an individual bond.  That’s the reason why you have a huge, diversified portfolio.

Let’s dig a little deeper at the data and importance of balance between your logical and emotional brain.

Watch my latest video update for more on what we’re seeing.

Transcript

Mike Brady with Generosity Wealth Management, a comprehensive financial services firm headquartered in Boulder, Colorado, although I am recording this video from our Wyoming cabin where I work during the day and help restore this cabin in the evenings.  Just real quick before I get down to business.  These windows were all brand new last year.  This window over here, a brand new stove that goes up to a brand new roof.  All this cladding my wife has done.  It’s something that we’re very passionate about.  This is a 50-year-old cabin that’s been in my wife’s family and I’m so blessed that I get to work during the day with you clients and prospective clients and work on this beautiful cabin in the Wyoming woods and mountains in the evenings.

I want to start off by talking about human emotions.  It is okay as a human being as part of the experience to sometimes have conflicting emotions.  To have happiness and sadness at the same time.  When your son or daughter got married you probably were sad that they were leaving the fold but happy that they were starting their lives and very happy for them that they found the right person.  You jump out of a plane with a parachute.  You’re feeling very fearful but you might be feeling alive, maybe conflicting emotions.  It is also okay to feel calm but disappointed.  I bring that up because I’ve been doing this for 31 years and a friend who is also a client said last week, “Mike, you’re so calm.  Aren’t you excited and aren’t you disappointed.”  The answer is I can have all of these emotions at the same time.  I’m not sure how not being calm helps in any way.

Since I started back in 1991, I’ve seen well over 200 market days a year for 31 years.  I’ve seen ups and downs.  I have seen it all, and I take it in stride.  I’m a big fan of Warren Buffett and Warren Buffett I remember in the late 1990s, he was made fun of for being an old fuddy duddy.  Oh, you need to get on all these tech stocks.  You need to get on all this new information superhighway.  And he was like, “Hey, I’m going to continue with what I do which are good value companies.”  He has always talked about avoiding expensive and exotic hedge funds.  He didn’t really understand some of the bond offerings and wrappers and products by the various companies in the 2000s, leading up to 2008.  Most recently he has been made fun of for badmouthing cryptocurrencies.

Sometimes sticking to the tried and true is the best thing that you can do and that’s something that I believe in very strongly.  Staying diversified is absolutely essential.  Staying in control of your emotions is essential. And knowing what your time horizon and your duration is, is absolutely essential.

The market has gone down even into bear territory for this year, 2022.  Painful.  I do not want to give you the impression that it hasn’t been painful.  As a matter of fact, I was with a couple of financial planner friends earlier in the week and it was like oh my god, just give us an up day, give us an up week.  This is just so painful to watch.  We have logic and then we’re emotional human beings as well.  The difference is that we acknowledge that as professionals and say, “Okay, great.  I’m just going to compartmentalize this over here because that part doesn’t help me.”

Remaining diversified is really important and all I can really say is going back over 100 years every single time 100% of the time when it has gone down, it has come back over time – 100% of the time.  That’s not the case for non-diversified issues they might have whether that’s real estate, whether that is a business deal, whether or not that’s an individual stock or an individual bond.  That’s the reason why you have a huge, diversified portfolio.  I have said in the past that over time – when you look back the last ten years – those of you who have said, “Hey, I can take a high risk tolerance level,” are those that usually, in my opinion going forward, not guaranteed, will have the higher rate of return over a long time horizon even if in the short term it might be more volatile than what you like.  It is not a guarantee of losses along the way, but that is why you keep the duration into consideration.

This has been real bad.  I’m going to put up on the screen and circle there – it’s going to be in a box actually – that’s what the stock market has done so far this year.  Not good at all.  Every sector has looked very poorly or performed very poorly and very consistently.

This next sheet that I put up on the screen are bonds which is unique that bond funds have also done very poorly in general, the unmanaged bond market indexes.  When interest rates go up, bonds go down in general.  That’s the thing.  However, in my opinion both with stocks and with bonds it’s oversold.  You’ve heard me say that before in previous either corrections or bear markets.  I’m saying it again now.  That’s just my opinion that it’s oversold.

This third chart that I’m going to put up on the screen, you’ve seen me use this.  It’s 40 years’ worth of data, 42 years – since 1980.  I’m going to highlight the bottom half.  It’s normal for there to be declines.  It doesn’t mean the top half there – that’s what the year ends.  Three out of four years are positive, ends positive, but almost every year there are declines throughout the year.  It doesn’t mean that’s how the year ends.  But I want to bring it back to 100% of the time a diversified portfolio of the unmanaged stock market indexes, unmanaged bond indexes have recovered – 100% of the time.  That’s what I’m going to do.  Could the future be different?  Absolutely.  I don’t know the future anymore than you.  However, that’s something that I’m willing to invest with from a philosophy point of view.

Keeping cash, keeping money in a bank account after inflation is going to be a loser.  Inflation, depending on which index you want to look at – 6%, 7%, 8%.  If you look at energy it’s even 30% on energy just in that particular segment.  Food is also double digit inflation.  You’re going to lose money on your cash after inflation because the banks aren’t paying anything and you’re going to lose principle power on that cash.

Heads or Tails: Financial Market Commentary

“One moment of patience may ward off great disaster. One moment of impatience may ruin a whole life.” – Chinese Proverb

If you flip a coin 1,000 times–mathematically, 500 times it’ll be head, and 500 times it’ll be tails. However, if you look at the distribution of those heads and those tails, sometimes you’ll have 10 tails in a row, or you might even have 20 heads in a row. It doesn’t mean that the 21st or the 22nd will be either heads or tails. It’s just that they get clumped together. The reason we look at this analogy now is that’s what we’re seeing in the financial market. It’s very painful and no one is happy.

Of course heads and tails is completely random, the financial markets are not, their odds are even better than 50/50! When you look back over 90 years, three out of four years, not 50-50 but three out of four years are positive. In year’s like we’re having in 2022, this can be hard to remember because it’s been a pretty sharp decline, not only on stocks but also in bonds. And there’s a lot of reasons for that. We’re going to talk about it here today.

Transcript

Hi there. Mike Brady with Generosity Wealth Management. Today I want to start off with an analogy. If you flip a coin 1,000 times–mathematically, 500 times it’ll be head, and 500 times it’ll be tails. However, if you look at the distribution of those heads and those tails, sometimes you’ll have 10 tails in a row, or you might even have 20 heads in a row. It doesn’t mean that the 21st or the 22nd will be either heads or tails. It’s just that they get clumped together. The reason why I bring that up is that’s how it feels right now. Every day, every week, every month so far this year has felt like it’s been down. Very painful. I just hate it. Nobody likes it.

One thing that’s a little different from my analogy is, of course, a head or tails is completely random. That is the pure luck of the draw. With investment, and especially when you look back over 90 years – I’m going to put a chart up here in a few minutes that will show since 1980, which is now over 40 years – three out of four years, not 50-50 but three out of four years are positive. But, I’ve got to tell you that this year it’s hard to remember that because it’s been a pretty sharp decline so far this year, not only on stocks but also in bonds. And there’s a lot of reasons for that. We’re going to talk about it here today.

The very first thing I want to show is a long-term chart, and I’ve just put a circle around where we are right now.

S&P 500 Analysis as Markets Decline May 2022

Irritating. Absolutely painful and one of the reasons why I am always talking to people about their duration. You can sit back and watch these videos that I’ve been doing for 12-13 years, and in almost every single one I talk about, well, if you need money in the next couple of years, you shouldn’t even have it invested. That’s because periodically, there are these times where the market goes down, the unmanaged stock market indexes, and it takes a while for it to recover. And who knows how long this particular one is going to recover. But I’m going to show you that a balanced portfolio, at least historically, has come back 100 percent of the time. If you’re an individual stock, no, that’s not the case. Things go bankrupt, which is the reason why you stay diversified. Staying diversified, what’s your duration? Those types of things are real nice and cute and almost cliches until something like what has happened so far in 2022 actually happens. And then you remember why it is a core fundamental foundation to investing.

Up on the screen once again is where we are so far this year.

As you look at this next chart, the numbers on the red are the intra-year declines for an unmanaged stock market indexes, the S&P 500. That means that during the year, there’s a decline of that amount. A lot of times, it doesn’t happen at the beginning of the year. Maybe the first half of the year is really good, and then it gives up some of the money. The top number, the black number at the top is the way the year ended, the rate of return. So, just because there’s an intra-year decline does not necessarily mean that the year ends negative. It is too early so far this year; it’s now the middle of May, who knows how the year is going to end. But just because it has started off not good at all does not mean that the year will end negative.

This screen right here, I’ve circled that on the right-hand side.

You’re going to see that depending on where it’s invested, the unmanaged stock market indexes, this is kind of a compilation of them, you’re talking between 10 percent and almost 30 percent negative for the year. It’s really been a broad-based decline so far this year, which is painful for everyone. At least a couple of years ago, when the COVID decline happened, we’d have some up days. It feels like a long time since we’ve had an up day which is absolutely irritating. Sometimes these sequences of returns are not in our favor, and that’s what’s happening right now.

The next page and I’ve now circled it, are the returns for bonds.

Most of the time, stocks and bonds are decoupled, meaning that when stocks go up, bonds go down, and the other way around, bonds go up and stocks maybe go down. Right now, because of the interest rate increases, the bonds have also declined, and they have priced in future expected rate increases. When interest rates go up, bonds go down. They’ve priced it in. So, from my humble opinion, I believe that this is a relatively short correction, an overcorrection in the bond market, that will be corrected as the months play out. At this point, the hit has happened with the bonds. I don’t expect it to be much greater in the future. But, stocks are down, and bonds are down, which really is the core of a portfolio – stocks, bonds, and cash. Cash is paying nothing; bonds are negative this year, and stocks are negative as well, the unmanaged stock market indexes and the unmanaged bond indexes. So, it’s not really been a rosy picture. It’s been very painful, and this is the reason why you have long-term investments. If you’re looking at things on a daily, weekly, monthly, or even quarterly basis, sometimes you’re going to be very disappointed. And that’s when the fortitude, your emotional control, is so important. The best advice I ever give as a financial advisor is to stay in control of your emotions. You don’t take short-term trends and extrapolate it out into a long-term decision.

This next graph that I have on there are corporate profits.

You’re going to see corporate profits are good. When we’re trying to evaluate the future of the market, one of the things that’s absolutely essential is the money volatility which is high, and also what is the cash reserves and the profitability of the things that we might be investing in. That is good. That is a positive sign. That’s something that I’m very happy about.

One thing that we have to remember, this next sheet here, I said earlier that if you have a diversified portfolio, I now have circled five years out, at 50 percent unmanaged stock market index and 50 percent unmanaged stock and bond index.

It’s returned, at least going back since this is all the way to 1950, so that’s 50, 60, 70, 72 years you’ve had a 100 percent recovery rate within five years. Now, let’s hope that it doesn’t take five years for us to recover our particular portfolios. It’s gone down. The absolute worst was that. Most recently, we had declines two years ago, right around Christmastime. Well, before that, it was the COVID and that recovered within the year, within nine months. Prior to that, in 2018 there was a huge decline at Christmas and it still ended up about breakeven, just a little bit negative for the unmanaged stock market indexes. But it recovered very quickly within months. When we look back at 2011 with the downgrade of the U.S. government, it recovered very quickly. In 2008 it still recovered very quickly. The worst financial crisis that we have seen in most of our lifetime was still a two to three-year recovery if you had a diversified portfolio. That’s one of the reasons why I’m always talking about you’ve got to know what your duration is. It doesn’t mean you’ve got to like it when you’re underwater. It does mean that you’ve got to be patient. Warren Buffet has a great quote that says, “Corrections like this transfer money from the impatient to the patient,” which is the reason why I always say you’ve got to be patient.

Right around this time, this next chart is consumer confidence.

When the market is down, a lagging indicator is confidence. Not a leading, it’s a lagging. Oh my gosh, consumer confidence is at an all-time high. That usually happens after the movement has already happened. In this case, it’s the opposite. Consumer confidence is at a low. That’s because after the fact – and I’m a contrarian – what everybody knows isn’t worth knowing. When everything is going up, then you’ve got to wonder, wait a second, when is it going to go down. When so much has gone down, this is when a contrarian like me says, “Gosh, now is when I might want to put more money in.” If I believe that it’s going to recover and it’s going to be higher in the years going forward from where it is now, don’t I want more invested in the unmanaged stock market indexes. Of course, that just makes sense. But I will tell you that our emotions have this tendency to say well, it’s going up so it’s going to continue to go up so, therefore, you’re buying at the top, and you sell at the bottom. That’s what real investors who do not have professional investment advice many of them do. Not all, but many.

The last chart I want to talk about today is inflation.

It is unbelievable how inflation has shot up in the last year. When we had COVID and the whole world pretty much closed down, we dumped lots of money into the economy and I think that was a wise thing. Otherwise, we never would have been able to restart the economy at any point. This is my opinion, and the opinion of many, many economists is that was a smart thing, but sometimes you can just go too far. A year ago, way too much money was poured in, fiscal bills that were unwise that have thrown so much liquidity in that it increased inflation, and that’s what we’re seeing right now. Yes, there is a strong argument to be made that it’s also through some of the demand that we have when we don’t have the supply in order to meet that demand. I get it. And that doesn’t help that we’ve got China is in lockdown with all of their COVID issues that they’ve got going on. Absolutely. What the value is of these two variables to get to where we are right now, it’s where we are right now. It’s that simple.

A year ago, I have to tell you that especially as these massive spending bills were being passed that there were many economists who were saying that this was going to lead to a high increase in inflation. I even had a couple of clients send me some articles talking about it, and I said, “No, I don’t believe that. Let’s not extrapolate out one or two months’ worth of data into an entire year.” Well, that whole year has now gone by, and yeah, we’ve gotten higher inflation than most of the economists a year go would have imagined including me. So, it’s remarkable that some of the signs were there. It could have gone the other way. I mean, there’s an old joke that economists predicted nine out of the last three recessions. And we’re always thinking, yeah, oh my god, this is horrible. Well, in this case, it was a situation where it has actually turned out worse than most economists have even imagined. And thank goodness there were not even more fiscal bills that were passed that were proposed.

How exactly the supply issue is going to continue to impact things, we’ll just have to watch it very closely. One thing that we have to keep in mind is that there’s always a reason to be pessimistic, and at a certain point you get that out of the system, and then it’s a buying opportunity again. If you’re already invested, then great, you stay invested. If you’re not invested sometimes, it’s a good place to be which is to be in there for any kind of recovery that might happen.

We don’t know when it’s going to happen or how long it will take in order to break even and for us to be in that positive again because frankly, so far this year we’ve give up much of what was gained in all of 2021. We’ve probably taken a 6, 12, 18 months step back to where we were. But what isn’t helpful is to catastrophize. That means if its gone down, you imagine, oh my god, I just don’t want to lose all my money. Just because you’ve made some money, it doesn’t mean you’ll always make money. And just because you’ve lost some money in some timeframe, it doesn’t mean you’ll lose all your money or continue to lose money. It’s not linear. It doesn’t move in a straight line, and so we have to remember that it truly is three steps forward, one step back, and sometimes it’s two steps back. When we look at the past 12 months, it has been three steps back. Three steps forward, three steps back which is absolutely irritating. So, it doesn’t mean that it’s flawed in any way. It’s how we want to view it and, of course, our emotions allowing us to make the decisions that we need to make which is to stay with the plan that we have.

Mike Brady, Generosity Wealth Management. You have a great day. See you. Bye-bye.

Forward Thinking: May 2022 Financial Market Update

“The Stock Market is a Device for Transferring Money from the Impatient to the Patient.” – Warren Buffet

There are always reasons to be pessimistic. There are always reasons to be concerned. That’s why we keep our investments, keep our strategies sound and we stick with it.

While we’re seeing inflation soar, gas prices rise, and a war rage on between the Ukraine and Russia, we must remain focused through the uncertainty. The reason why we have investments is because we believe that in the future it will be higher. We don’t know exactly when that will be, but a good guess is that now is the low and we’ll be happy in the future.

Let’s take a look at what we’re seeing in the current state of affairs and what it truly means for our investments.

Transcript

Hi there. Mike Brady with Generosity Wealth Management, a comprehensive, full-service financial services firm headquartered here in Boulder, Colorado.

With today’s technology you never know if this is a backdrop or if it’s reality. And I’m just telling you it’s real. I’m out here in the gardens of my building. A beautiful spring day and I want to share it with you and I’m hoping that you’re enjoying the spring weather we’ve been having as well.

For the past year gas prices have steadily increased and they might go up more—I’m not really sure with the energy through Russia and Ukraine and some of the supply problems we’ve had there. We’ve got inflation. Twelve months ago we started talking about it. It has steadily increased. Now it is at the high in the last 30 to 40 years. We’ve got the worst start to the unmanaged stock market index, the S&P 500, in almost 50 years. There’s lots of reasons to be pessimistic if you allow yourself to be pessimistic. And, we’ve got continued from the pandemic supply chain issues. What does this all mean?

One thing that I like to think about, and I believe that you should as well, is what’s the long term impact of some of the changes that happen. We’ve had globalization now for many decades and I continue to think that’s a good thing. It’s not perfect. It’s not a panacea. I think that’s one of the things that we’re finding out is just because you do business with a country like Russia, it doesn’t mean that they won’t invade you or they might invade another country, one of your allies, that puts you at odds. We are interconnected which is both good and bad. So, there’s no absolutes in this. There’s a spectrum that is continually being negotiated between countries and the world and the economy. Things are complex.

The older I get, that is one of the messages and one of the things that I’ve learned is that it’s not if A, than B. It’s A plus B plus C plus all these things and then I might have an output of X, Y or Z. There are many things that contribute to an ultimate equation, to the solution, to the output. And we have to always remember that. Things are not simple. Things can be complex, and so we take that humility of not knowing exactly what the future holds into the decisions that we make.

I remember back in the 1990s. This is before I owned my house and I was in my 20s. Listening to this older couple – of course this old couple were in their 40s – younger than I am right now. And they said, “Oh no, we rent here in Boulder because it’s so expensive. We think that it’s real high in the market. We’d be crazy to buy a house here in Boulder.” Really? What do any of you who have property think of that decision. Not very long sighted. Not very forward thinking. I remember when I bought my house that I’ve lived in for the last 22 ½ years. I bought it in 2000 which was pretty much the high of the tech bubble. I remember people saying, “Oh my god, housing is at a bubble and you’re kind of a fool for having bought it.” Since then it’s doubled, it’s tripled depending on what source you want to go to, and I’ve lived in it the entire time. I love my house. I’m probably going to die in in hopefully many decades from now and it’s served my purposes.

Just yesterday I was talking with someone who’s considering real estate again and they said, “Well, should I really buy because it’s really at a high.” Well, it is at a high from where it was one year ago, five years ago, ten years ago. When we look back 10 and 20 years from now are we going to say that it was at a high now? Most people would say no. I’ll bet if you really think to yourself wow, if I have a 10 or 20 or 30 year house that I’m going to live in or rent out, it’s probably now might be the low.

Let’s take that into investments. It’s the same concept. When you have a diversified portfolio, and I’m going to put up on the screen some bar graphs that you’ve seen before, that a diversified portfolio of 50 percent of diversified unmanaged stock market index, and 50 percent of a bond index diversified, there’s actually never been a five year time horizon going back to 1950. One hundred percent of the time it has at least broken even or made money over a five year time horizon. The next five years could absolutely be different. Frankly, it’s still something that I believe is important for me to think that I’m making a bet. That’s why I have investments that five years from now, now might be the low in the markets.

GWM 2022-05-03 Slide on diversification

I said two years ago when the markets went down significantly that I thought it was an oversold position and we might, for the rest of this year, the markets as an unmanaged index might still be down. It might happen, absolutely. It could even be in the next two years, but that’s why we always have to have a time horizon of, you know what, it might be high right now, it might feel that way. It’s definitely lower than where it was four months ago. That’s the reality. But it’s higher than where it was a year ago, five years ago, ten years ago, 20, 30. Going forward nine months from now it could be lower. Two years from now it could be lower. It could be lower – there’s no guarantees – anytime in the future.

However, the reason why we have investments is because we believe that in the future it will be higher. We don’t know exactly when that will be, but I would guess that now is the low and we’ll be happy in the future. Even though the ride, the fun of seeing it go up every single month isn’t there and it stinks along the way, that’s the reason why you don’t look at it every day, every week or even every month. That’s why you’ve got to string these things together.

There are reasons to be pessimistic. There are reasons that I’m concerned. I’m not going to lie. If the Fed doesn’t get this inflation, these numbers, under control that will be bad for the economy. That will not be good. You know what? We have recessions periodically. That’s why we keep our investments, keep our strategies sound and we stick with it. That’s what we do here as well.

Mike Brady, Generosity Wealth Management. Give me a call at any time, 303-747-6455. You have a wonderful day, week, month and let’s make it a great year. Bye-bye.