• Stephen: Hello everyone and welcome to another episode of the Smart Money Show. I’m your host, Stephen Rischall along with one of my partners today, Chris Carter. And today we’re gonna be talking about rising interest rates, inflation, what’s going on with real estate, and the possibility of a recession. Let’s get started.
• Like we said it’s been a rough start to the year for stocks and for bonds, the S&P 500 just experience its worst April since 1970. Volatility is back and has many investors on edge, there’s clearly confusion in the market about inflation, interest rates, and more. Chris, can you bring us up to speed, what’s gone on so far this year.
• Chris: Well, the global markets are down, the S&P 500 is down over 12% since January, interest rates are up putting pressure on bond prices, actually the Bloomberg US Bond aggregate index is down, 10% since January.
• We’ve made some changes in the past year to our income conservative portfolios, so we’re still down but not nearly as much as the index. This is quite unusual to have bonds down almost as much as stocks. The Fed also just raised rates 50 basis points which is largely what we expected to see, certainly our opinion and the consensus opinion is that the Fed will raise rates several more times throughout the year.
• When the Fed raises rates, this puts pressure on both bonds and stocks to perform, and as we’ve seen many of these high flying growth stocks, the technology stocks, their prices have been hit pretty hard. The Nasdaq which is tech heavy, is down almost 20% if not a little bit more year to date, whereas value or the dividend paying stocks are down around 5%, so not quite as much obviously. With rates going up and probably continuing to go up for a little while, that affects all sorts of things in the economy.
• Stephen: Right, I mean mortgage rates, credit cards, business loans, when interest rates increase, the cost of borrowing is more expensive. Adjusting rates that’s one way that the Fed can help stimulate or in this case cool down the economy.
• Let’s face it, other than the extreme volatility we saw during the COVID pandemic in markets two years ago, markets have really been on booming for the better part of the past decade, stocks are way up, real estate’s been on a tear, bonds have actually done pretty well even in this low interest rate environment, and it’s been quite a while, it’s been low interest rates, right Chris?
• Chris: Yeah, that’s right. If we look over the past five years, really pre-COVID, we see stocks, the green line on the chart, make big gains, the purple line, real estate has done very well even more so recently as we all know, and bonds in blue, they’ve remained pretty steady.
• With bonds you can see the recent decline since the start of the year as expectations around the interest rates began to increase. So, I think the shocking thing to some bond investors right now is seeing these negative movements in bond prices while interest rate expectations are being adjusted. When we look back even further over the past 10 years, we see stocks returned more than 250%, real estate doubled and bonds were up almost 19%.
• Stephen: Like I was saying, other than the COVID pandemic and that little blip at the 4th quarter of 2018 not sure, if anyone really remembers that, I remember that it was like Thanksgiving to I think around Christmas day it stopped.
• Times have been really good lately, but what if we zoom out a little bit more and we go back to the financial crisis, that’s really a time where we had serious of recession, stocks were down, real estate was down, what about then?
• Chris: Yeah, so let’s look at the past 20 years which does include the financial crisis. It’s a longer term view and during this time we’ve gone through a lot of economic and market cycle, so much has changed in the world in the past 20 years, and still, what we see is the continued trend of asset values increasing long term, stocks, home prices, bonds, they’re all up considerably.
• It is easy to zoom out on the chart and see these longer term trends but let’s be honest, when you’re in the moment like we are now, when we hear the news, it can be scary, nobody likes to see their portfolio or their net worth go down. We may have become a bit complacent the past few years with easy money, big returns in our 401k, and our investment portfolios and also in our real estate.
• Stephen: Yeah, and here we are today, interest rates and inflation have been going up, markets recently have gone down, home prices aren’t affordable, it’s more expensive to get a mortgage.
• I saw some news come out today think rates nationwide went up to 5.27%, is the average rate on a mortgage today. And still we’re dealing with some supply chain issues, recently in China, there was some lockdowns in some major cities again because of COVID, and this has investors worried, is another recession coming?
• I think a lot of people are asking that question.
• Chris: Yeah, well, it depends on how you define a recession, historically it’s been, an economic decline over two consecutive quarters, but the National Bureau of Economic Research which officially declares recessions, they’ve said they now view a recession as a significant decline in economic activity spread across the economy lasting more than a few months.
• So a little bit more vague, a little bit more open to the reality of maybe what’s happening. That said, the commerce department recently reported that the first quarter of 2022 GDP, did decline at a pace of 1.4%, now, maybe that was a bit of an anomaly but we’re just gonna have to wait and see.
• Stephen: Well, then Chris, it sounds like then maybe we might actually already be in the midst of a recession right now, and not even know it. It’s backwards looking, so until after the fact, we can’t really call it a recession ’cause it hasn’t happened yet.
• So, let’s just say, we are in a recession right now, what should you do? What should investors be doing?
• Chris: Well, the one thing we know for certain is that we will have another recession but like you said, the timing is uncertain. If we are about to enter a recession, you should probably stick to your financial plan, your long term investment plan, if you have a diversified portfolio and it aligns with your financial plan unless something has changed about your situation, your financial situation, you should stick with your plan.
• Now that said, we have made some changes this year in client portfolios to reposition slightly as we enter this new part of the economic cycle, but we’ve seen this in markets before, no one has a crystal ball, you can’t perfectly predict and time when to get out, when to get back in, so market timing is near impossible.
• We do hear the word recession, they talk about it in the news, and it scares everyone, it brings bad memories back to us about what happened back in 2007 and 2008 frankly.
• Stephen: Yeah, I remember seeing my investments get whacked back in 07, 08, it definitely wasn’t fun. But while the economic recovery from COVID might be slowing down a little bit right now, it really isn’t all doom and gloom.
• The circumstances that led to the financial crisis are very different from what’s happening today and where we are today. Many economists actually point to the strong jobs market, wages have been going up, consumer demand is still strong, even with inflation increasing, consumers are still out there spending, look.
• I’m seeing people, you probably are seeing people get back out there in the world, traveling, going to restaurants and keep in mind the world, even around us locally, it’s still not open 100%, there’s still record amounts of cash on the sidelines and stimulus from government programs the last couple years.
• And look, I’ve been talking with a lot of clients, a lot of you and for the most part, savings accounts, our home equity, the amounts in our portfolios today, are the highest they’ve ever really been generally speaking in over the last 10, 20 years.
• Chris: Yeah, I think it’s important to know that we have to accept that a recession is normal, it’s expected to happen as part of the economic cycle, we just can’t always have this expanding economy. So in fact, recessions tend to show up usually every three to four years on average, some are worse and some last longer than others.
• Look, my wife Sarah and I, we bought our house back in 2007, it was the height of the real estate market back then and right before the recession.
• There was no way for us to know that at the time, we bought it according to what our financial plan could support. We all know what happened after that, like everyone our home price dropped the next several years, but we stuck to our plan, which was to live in that house, not to sell it, we’re still in the house today, it’s recovered and the value’s gone up significantly.
• Stephen: Yeah, that’s one of the big benefits about real estate, is it’s not liquid like your 401k or your investment portfolio, it takes more time and costs and money to sell your home. With home prices right now, some people are asking, are we in a real estate bubble?
• Well, I don’t think we’re in a bubble, I do think demand is dropping but demand is still higher than supply, which supply is pretty low right now but that’s changing, it’s gonna continue changing over time.
• Here’s my favorite chart again, it’s the emotional cycle of investing. So whether it’s the housing market, stocks, bonds, maybe the real estate market is overheating right now, so maybe we’re over on the right side. That doesn’t necessarily mean a crash is imminent but we can’t sustain the breakneck pace of home price increases we’ve seen the last couple years.
• It seems like we’re headed back towards more sustainable growth, which is about 4 to 5% annually, for home prices nationally, and as for the stock market, it’s a bit beaten up this year, like Chris said earlier, we’re down over 10, 12% so far this year.
• Maybe you’re feeling a bit nervous, that’s okay, it’s okay to feel that way, so, we might be on the left side of this chart. I also don’t like seeing my portfolio value go down by the way, but just like how I’m going to stick to keep paying my mortgage and I’m gonna keep living in my home, I’m gonna stick with my financial plan, I’m gonna keep saving regularly, putting money in my 401 and other investments.
• Chris: Yeah, we say it all the time but we really can’t stress it enough just to stick to your financial plan, keep that long term view, stay disciplined with your investments.
• This is why we rebalance portfolios on a regular basis to make sure that the right balance of risk and reward, is in our client portfolios.
• We make adjustments to how we invest for clients over time, it’s planned. Like with interest rates, we didn’t know when the Fed would start raising rates, but you’ve heard us talk about it on the show.
• As I mentioned earlier, we’ve been shifting to shorter duration bonds, and some alternative income investments the past couple years. Rates were so low, they couldn’t really go any lower, so it was only a matter of time until rates would begin to increase.
• Stephen: So look, we do expect the Fed to continue raising interest rates, that means a little more short term pain possibly for the economy and volatility and stocks and bonds, so we should probably expect it.
• It’s also possible that we’re in a recession already or one will happen soon, it’s part of a normal economic cycle. But just remember, as asset values, the stock market, real estate bonds, our personal financial plans, these are all affected differently and on different timelines.
• Your financial situation and goals are unique to you, and may not necessarily align with any economic recessions timeline.
• So if you have questions about your financial plan or have something that’s changed about your situation, your goals, be sure to reach out to us, let’s talk, let’s talk with your advisor and get a meeting scheduled soon. And if you learn something new or you like this video, share it with your friends, your loved ones because they might have some of the same questions that you do too. Until next time, I’m Stephen Rischall, that’s my partner, Chris Carter. And this is the Smart Money Show.