Stephen: Wow, another historic day for the stock market. We’ve got midterm elections, inflation, interest rates another packed month that we’re getting through here. Let’s get right to it. Welcome back. Thanks for tuning into another episode of The Smart Money Show. I’m your host, Stephen Rischall along with my co-host David Jacobs. And today we’ve got quite a bit to talk about. You know, David, we just had a crazy day a crazy good day in the stock market yesterday. What’s going on?

David: Yeah, really, who saw that coming? And we’re so focused on the election that the inflation number kind of snuck up on us yesterday and it turned out to be a much better than expected, which is just to say it’s high but not nearly as high as it has been. So we saw really the second best day in the stock market in or the best day in the stock market in over two years, which is really incredible. So speaking of inflation, the number came in at 0.4 for the month of October. Remember, this is always backwards looking versus 0.6. So about 33% less than expected. The trailing 12 months was about 7.7 and that’s compared to well over 9% to just a few months ago. So the market’s really looking at this as a sign that inflation might be slowing.

Stephen: I think that’s a really good point, David. There’s a couple important things I think we need to point out about the inflation numbers. There was two particularly sticky components that everyone keeps talking about, right? Food and energy and I think a really promising sign, right over the last 12 months, big, big numbers, 17.6% inflation just on energy, 10.9% on food, but when we look back and we more importantly focus on the last 4 months, those have both been trending down. Energy actually experienced deflation from July through September, ticked up a little bit in October, but that’s normal and then food as well, you know much more normal numbers that we’re starting to see with these specific components of energy and food and I think that’s got a lot of people really excited.

David: The reality of it is bigger pictures still a pretty bad year, right? The market’s down 15% even after yesterday’s surge of five and a half percent and it’s mostly due to people taking risk off the table. The theme of our client event in January of this year was invest in profits, not stories. And what we’ve seen is a lot of those stories whether it’s cryptocurrency or tech have really collapsed and people have de-risked. And when people de-risk, we see the PE ratio on the market fall. So really the entire bear market this year has been based on valuation contraction and that’s really due to the rising interest rates and again, people’s lack of risk tolerance. Bonds have been really sneaky this year in the sense it’s the worst year really on record. Was down 16, 17% in the last couple days. We’ve seen some sign of recovery in the bond market but this is the worst bond market in over 40 years really ever and so we have a unique scenario where both stocks and bonds are both down double digits.

Stephen: Right. This is really unprecedented and I think the lesson learned here is that you have to stick to your long-term plan, right? Your investment plan, it ought to follow your financial plan and you don’t wanna be making reactionary decisions in your portfolio. We’ve talked about it on this show. We’ve even done the math, right? Those few really, really good days in the market like we just had yesterday up a whopping 5.6%, I’ll put that back up on the screen again. I mean, if you miss out on a day like that in your portfolio, it really can spell for, you know a bigger impact negatively to you with your long term returns.

David: Yeah, for sure. We always show those charts in bad years. You know, you don’t wanna miss the best days and yesterday was absolutely one of them. I think, didn’t you say it was the sixth best day in the last 10 years?

Stephen: Yeah literally the sixth best day in the last 10 years.

David: And the other five, I believe were all in 2020 during that pandemic crash period where we all didn’t know what the next day was gonna bring. So when you see big volatility, you see a lot of these big ups and downs, these big days. And speaking of volatility, I think most of us are really focused on the election this week and what really turned out, what a lot of people expected was gonna happen with the big red wave maybe really didn’t happen. A lot of people were hoping for it and a lot weren’t.

Stephen: That’s right David. I think, you know, the election results aren’t totally in yet but if we look at a quick update, it seems likely that the Republicans will probably have a slight majority in the House when this is all over and it’s possible that they eke out a slight majority in the Senate, but either way, this wasn’t this big red wave that either some were really hoping for or some were really worried about. You know, we always talk about how you have to be careful with making investment or financial decisions related to politics. One thing is for sure though, there is a group that really, really likes a divided government, likes gridlock in Washington and that’s Wall Street. There is no doubt that returns for stocks and capital markets have actually been more positive during times where there’s gridlock in Washington. Now some people might ask themselves, why is that the case? Well, simply put, gridlock means it’s a lot less likely to have any sort of legislation or major legislation passed during those times, and what that does is it sort of allows businesses to plan ahead at least for the next couple years a bit more easily without having to worry about different laws and rules and regulations changing that might impact their bottom line.

David: For sure. So speaking of looking ahead, I mean, with a divided government, that does mean we’ll see maybe less big regulation, big spending. So the real question is what does that mean for the stock market? I know that’s what most of of our watchers here are really interested in. So it’s gonna come down to a few things. Number one, what’s the Federal Reserve who’s been raising rates at a historic pace, what are they gonna do with the sign of slowing inflation? Are they going to put the brakes on a little bit at their meeting in December? Most think they will. Maybe instead of another 75 basis point increase maybe it’s gonna be 50 basis points. If you look at what the bond market’s doing, they’re actually expecting a big slowdown next year. Bond prices or bond yields have fallen quite a bit so that the 6 month yield is actually much higher than the 10 year yield, which is really interesting and we could do another one of these videos on that alone. But looking at the market in 2023, the real risk isn’t gonna be necessarily what we saw this year, which was falling PE ratios. It’s gonna be more corporate earnings, which is the E in PE. So we’ve seen prices fall this year, corporate earnings have actually been positive this year. Not as good as the prior couple as we had suspected, but they are positive. The real question is, is the Federal Reserve with these higher interest rates gonna throw us into a deep recession? A deep recession, we’ve already seen signs of some big tech companies in particular cutting jobs, that’s kind of the beginning. A lot of these growth companies are starting to scale back so that’s a sign. Is it gonna really send us into a severe kind of hard landing, you’ve heard maybe hard landing, soft landing. Is next year gonna be a hard landing or a soft landing which would be the Federal Reserve kind of hitting their stride and the economy kind of chugging along just at a slower pace. So we’re really gonna have to wait and see what happens with corporations next year. Again, most likely dividend payers, those profits, not stories, I think those are likely to outperform should we have a stronger recession than expected.

Stephen: I think you’re right David. It’s gonna be a bit more of a wait and see for all sorts of things, especially the Fed. I’m certainly in the camp that I think the Fed probably even starting with December will slow down the pace of these hikes. It doesn’t mean we’re out of the woods yet. Certainly there is a lot to watch going into next year in terms of corporate earnings and how the employment market fares and everything else. But hey, if you learn something new in this video, please share it with your friends, your loved ones because they might have some of these same questions too and they might learn something as well. It’s really valuable to them. We’re looking forward to seeing a lot of you in person for our annual event in January. That’s gonna be on January 21st, it’s a Saturday. Invitations will be going out to that shortly and we will still be doing our new virtual format as well the following day on Sunday, the 22nd of January. Until next time, I’m Stephen Rischall, that’s David Jacobs and this is The Smart Money Show.