Video: Silent Recovery – Still More To Go
Wednesday, August 17th, 2022

  • STEPHEN: Well, that happened fast. The stock market just had one of its best months in years. Real estate prices are falling. Good news about inflation. And interest rates, well, they might still be rising. If you want to know how these things might be affecting your financial life, then you’re gonna want to watch the rest of this video. Thanks for tuning in to another episode of The Smart Money show. I’m your host, Stephen Rischall along with Matt Stadelman today.
  • MATT: Hello
  • STEPHEN: And Matt, you know, the S&P 500, the stock market it’s up 9.1% this past July. That’s the third best single month return for the S&P 500 in the last 10 years. Pretty unbelievable, but other than that it’s been a relatively rough year for the stock market and the economy.
  • At one point back in June, the market was down almost 25% and since then it’s gone on to recover more than half of those losses. Today the S&P 500, it’s down just about 10% for the year. And you know, this all happened, Matt, I’m really surprised no one’s really talking about it much. I remember a month and a half ago on the news, they were saying that the market might fall another 40% and frankly, since then the opposite has happened.
  • MATT: Yeah, it’s true. And that’s another reason why we can’t time the markets. Nobody knew July would be that good for stocks. Yet people are still feeling inflation. Grocery bills, gas, everything costs more. Inflation, it’s been up this year big time still.
  • I mean, the CPI numbers have been up in the last 12 months. 8.5% over the last 12 months, just to be specific. But the good news is, the surprise reading for the monthly CPI in July was zero. Historically, we usually see 0.1%, 0.2% on a monthly basis. And over the last 12 months, many of those months were much higher, like point 0.8%, 0.9%. The stock market liked the news and there were big gains of the day that they announced the July CPI number. But we need to keep seeing how low monthly numbers will continue.
  • STEPHEN: Yeah, I agree with you Matt. We need to keep seeing these monthly inflation numbers, the trailing 12 month CPI number. We need to keep seeing that trend down in the direction that we have this past month. But that doesn’t really mean that consumers are going to start seeing prices go back down to pre-COVID levels, right?
  • MATT: Correct. I mean, decreasing prices or disinflation, that’s when we see negative numbers for certain CPI inputs. For July, energy across the board was negative. Used vehicles, transportation services were also negative. We’ll probably continue to see some of the inputs come down but for the most part, higher prices, higher cost of doing business, this will probably remain for a while.
  • STEPHEN: It’s an interesting point. So we’re seeing that some prices have come down but really we should expect the prices, the cost that we pay for foods and for goods and services, this is going to cost more over the long-term.
  • MATT: Yeah, I mean, that’s what I’m thinking is most likely. I mean, inflation has always been around. Things cost more now than when I was a little kid. Sometimes we’d go through these periods of higher inflation and historically, the economy, stocks, real estate, they go up too.
  • STEPHEN: Yeah, and speaking of going up, another thing that’s been going up is interest rates. Mortgage rates have doubled since the start of this year. And this all happened in anticipation of the Fed raising rates, which they ended up doing so far, several times this year, in fact.
  • Remember, we’ve talked about this before on the show. The Fed is increasing rates on purpose to slow down the economy, to slow down inflation. And whether or not we like it, we’ve certainly seen the economy slow down a little bit, so this does seem to be working.
  • While the stock market’s up over the last month and a half, real estate is down quite significantly. It’s slowed. I saw a number printed last month Matt for July, they said 26% of buyers actually fell out of pending home sale contracts. Listing prices are down 10 to 20% in certain markets.
  • We see that here in our own backyard in Los Angeles. Now, many people predicted this. We talked about this on the show too. But just like you shouldn’t time the markets with your portfolio, it’s not like you could have timed selling your house a few months ago.
  • MATT: Right, I mean, that’s a good point. We know we can’t predict the markets. Timing is more luck than anything really. But people get more bothered when they see their portfolio go down by 10% to 20%, than they do when their house goes down 10% to 20%. Some people might even sell their investments. But that’s probably because it’s much easier to do that. It’s pretty liquid. Selling real estate takes more time and it can be costly.
  • So interest rates seem to be a big reason why real estate has slowed, you know, the rising of the Fed rising interest rates. But another thing people are talking about related to rates is the inverted yield curve. They say that’s a possible sign of recession. What do you think, Stephen?
  • STEPHEN: What do I think? Well, let’s start with what we actually know. And maybe you’ve heard about this inverted yield curve in the news lately. But what does it actually mean?
  • We’re going to the chart for this one. Normally, with interest rates, what you would expect to see is lower rates for shorter-term bonds and higher rates for longer-term bonds. But look at this chart. In the bottom left-hand corner is where we’re starting. And interest rates over the next one month to about one year, we see that it’s trending up. But then it starts to sputter out, right? Then around one year to two years, it starts to kind of flatten out and go down. Then to five years and then 10 years, it goes down even more.
  • This is the part that is inverted. And what that suggests is that markets expect rates to increase a little bit more in the short-term, but over the next one to two years, it probably seems likely that rates are going to come back down again.
  • MATT: So if rates are probably coming back down soon, why is that bad?
  • STEPHEN: It’s a fair question. Earlier we said the Fed increases rates to slow down the economy and then the Fed reduces rates to actually stimulate the economy. So some people interpret this as the Fed may need to step in to stimulate the economy within the next one or two years, whether that’s to fend off a possible recession or maybe get us out of a recession.
  • Now, this isn’t a foregone conclusion. We’ve had inverted yield curves before and not been in a recession or not gotten anywhere close to a recession. So it’s not a guarantee that one is going to happen.
  • You know I think honestly, Matt, more importantly what we need to do is we need to get over this hang up with the word, with the term, recession. Not all recessions are created equal. In fact, if you look at most recessions, they’re all rather unique. You know, some are worse than others, some last longer than others.
  • Yes, growth is slowing but there is still growth right now in this economic cycle. And frankly, there’s a lot of positive things going on for us in the markets and in the economy today. So this short-term pain of rising interest rates and inflation, it’s going to pass but we’re probably not out of the woods just yet.
  • MATT: Yeah, agreed. I mean, most if not all of us have experienced a recession and we’ve all lived through it. You know, moving forward, politics will be in the news. And more and more during and with the midterms coming up, it means more uncertainty and more than likely that the markets will experience some level of volatility. Now, we should expect it but that doesn’t mean that we should try to time the market.
  • Long-term, over and over, the stock market doesn’t care which political party is in the House, or who controls the Senate or who is even President. One party hasn’t been much better or worse for capital markets over the long-term. But in the short-term, you’re gonna hear a lot more of this in the news. And it’s gonna be tempting, but you gotta make sure this doesn’t let you get off track with your portfolio and you need to make sure that this doesn’t get, this takes you off track from your financial plan overall.
  • STEPHEN: Yeah, that’s for sure. And it’s not just the news. Social media, we’re on our phones and the internet all the time. We read and hear shocking comments and they just draw us in. But we have to remember. It’s not financial advice. It’s not information that’s specific to our goals and our situations.
  • Inflation and interest rates, yeah, they’ve gone up quite a bit this year. The stock market just experienced a rather quiet recovery, and there’s still more to go. And real estate just took a dive but it too will return back to more sustainable levels of growth over the long-term.
  • Now, some or all of these things may play a part in your financial life. So if it’s been a little while since you’ve reviewed your financial plan or your portfolio, now would be a really, really good time. Please feel free, reach out to our office, contact your advisor and let’s schedule a meeting to go over your financial plan soon. And hey, if you learned something new in this video, please share it with your friends, share it with your family and your loved ones because they might learn something new too. Until next time, I’m Stephen Rischall, that’s Matt Stadelman and this is The Smart Money show.