Is A Recession Looming? | AWM Insights #131
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Episode Summary
We have recently hit 2-year lows on many indexes, and if you have tuned into any financial news offerings lately, you would believe that the worst is yet to come.
More interest rate hikes are on the horizon, greater uncertainty remains from the war in Ukraine, and energy prices that continue to rise are leading many pundits and analysts to predict an imminent recession. Are they right, and what should you do?
On this episode of AWM Insights, we walk you through the recent turbulence, a comeback story in Real Estate, what news is actually relevant in our saturated world, and how changing market conditions should impact your mindset and portfolio construction.
Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.
Episode Highlights
(0:00) Intro to Wine
(1:07) Weekly Market Movement
(3:06) Real Estate
(4:35) Profiting from News and Opinions
(5:25) Complexities Today
(7:27) Recession and Market Pricing
(9:13) Earnings
(10: 11) Tying it all together
(12:25) Liquidity and Accessing your money
(13:31) Zinger 1 Market Timing
(14:00) Zinger 2 Market’s general movement
(14:13) Zinger 3 Financial Structure
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Justin Dyer: LinkedIn
Brandon Averill: LinkedIn
+ Read the Transcript
Brandon Averill (00:09): All right. Just another AWM Insights. We got a new setup. Here we are. We're busting in some wine. We can thank Erik for this.
Justin Dyer (00:18): Good tip. Good tip.
Brandon Averill (00:19): Yeah. Goofed around with us and said, hey, I want you guys to act like you're having a glass of wine together and talk about the markets. So what the heck? Let's have a glass of wine talk about the markets. So new little feature, more fun for us than probably anybody, but we're going to feature new wine every one of these podcasts now. So AWM, you're sponsoring the wine.
Justin Dyer (00:38): There we go.
Brandon Averill (00:38): We'd appreciate that. But yeah, Justin, you and I are familiar with this wine, Deovlet Wines, good friend, just awesome dude and even better winemaker, somehow. But this is a ramato, it kind of looks like a rosé. He probably wouldn't want us to call it that. But pretty cool process, unique wine. He does it in like clay vessels, brings a uniqueness to it.
Justin Dyer (01:03): Old school, yeah.
Brandon Averill (01:04): So cheers.
Justin Dyer (01:06): Cheers, man.
Brandon Averill (01:06): Let's talk about the markets.
Justin Dyer (01:07): There we go.
Brandon Averill (01:08): All right. Well, we've had a lot of volatility. Not surprisingly, I think, last week we talked about markets declined and then we turn around in Monday, Tuesday, the markets actually- Justin Dyer (01:20): Bounced back.
Brandon Averill (01:20): Explode, right?
Justin Dyer (01:21): Impressively.
Brandon Averill (01:23): I think it just reinforces what we talk about so often. We can't time this stuff. It's impossible. Even when we think we know what's coming and there's volatility probably likely ahead, at least in our viewpoint. But who knows when it's all going to show up? I mean, from what you've seen, did it surprise you Monday, Tuesday? What in the heck happened? Why reverse after such a bad week? Justin Dyer (01:47): Well, I mean, there's an old adage, you push in on a string and bouncing back or overselling where some sort of amount of negative news or some sort of fundamentals. Friday was the end of a month, end of a quarter. Just interesting time of the trading session that generally can drive interesting market activity both up or down. So you could potentially argue there was a little bit of not fundamental trading because of those interesting end points to various periods that drives, like I said, interesting market dynamics.
(02:24): Was I surprised? No, because again, you mentioned you can't really predict. If you look at what happens after an up day, it's about a 50/50 coin flip, what's going to happen the following day. So that goes exactly to your point. You can't predict, certainly the market day to day, we can't predict the market month over month, week over week, year over year even. We know, luckily though, over the long term, it generally goes up and it goes up quite handedly. And one thing that I saw in the news too that I think is a perfect tie into this idea of predicting the future or the difficulty of it is retail real estate. I mean two years ago-
Brandon Averill (03:08): We're back to pre-pandemic.
Justin Dyer (03:10): Pandemic highs. So two years ago, in the midst of the pandemic, I mean everyone was just putting a nail in the coffin of retail real estate. Mom and pop stores are going to be dead. No one's going to buy retail anymore. No one's going to be leasing retail anymore. Low and behold, fast forward to today, it's back to where it was and it's had its best period of growth for 15 years. So there are these people out there and we talk about this quite a bit, that do put their opinion out there and try and predict the future. And that's okay, but hopefully you're not making big investment decisions based on that because if you have an opinion, that's one thing. Actually doing something about it, is a whole nother, you have to be incredibly confident and really look at the underlying data behind that.
Brandon Averill (04:01): Totally. I thought the other interesting thing around the real estate sector, I heard was, on the flip side it was home sales. Housing in general is back to pre-pandemic in the sense that we have this big boom through the pandemic, housing prices just soared and now we're starting to see a pull back there. And it could be interest rates, who the heck knows? But I think back to the point that you were talking about, even if you had the crystal ball and you saw this coming. Interesting conversation, kind of shifting gears with what's going on with OPEC+, which I'll be honest, they just learned that the plus got thrown on the end. But they're going to cut production, try to manipulate price a little bit. Maybe they're aligning with the Russians, who the heck knows? But the question comes, how do you profit from this?
(04:49): And I think that's an interesting thing. There's so many sides to this coin that you might have this vision into like, oh, okay, well OPEC's going to cut production, they have a price, maybe I'll play this way. Well, who the heck knows? What if the Biden administration turn arounds and now opens up US more freely? So I think trying to predict all these dynamics and we're in a pretty comp... I mean, I don't know, it seems like to me a very complicated economic and policy position right now. Even if you could get it right, how do you play it? I think that's a tough thing.
Justin Dyer (05:22): Well, I mean the simple answer is how you play it is have a diversified approach. Put your financial structure in place. I know that's not necessarily as interesting, but it is proven out over time and in the data that is the best way of doing it. But to get a little bit more maybe opinionated about it or just factual really. To your point, it is a really complicated time right now. We have inflation still not fully under control. Interest rates are at highs that we haven't seen over the recent history, especially for young new investors. You've never seen interest rates this high at all. There's a war in Ukraine that's not deescalating, seemingly continuing to escalate, unfortunately. There's an election right around the corner. I mean there's a lot that goes into the overall equation right now though.
(06:11): The one piece I would say is that it's usually the case. There's usually a lot that's going on, both positive and negative. Maybe the scales tip a little bit more to the negative right now, but the market is always forward looking. It doesn't like uncertainty. And I would say there's probably a little bit more uncertainty than average right now, which is you could argue a big reason why we're seeing the volatility and the market action that's happening. Interest rates have obviously been top of mind and that's been a big driver of market declines. Will that continue? We don't know. We've talked about that. That's not a variable to use for predictive analytics going forward, but hopefully as uncertainty starts to fall off over time, I'm not going to say it's going to get better next week or next early next year. (07:02): Hopefully that does happen. But as that starts to fall off, then markets will generally start to calm down a little bit. And again, like I said, they're forward looking. So markets are looking at 6, 12, 18 months. So even if the present moment, the uncertainty around the present moment is still potentially similar to what it is now, if there's some light at the end of that proverbial tunnel into the future, we'll start to see some calming, I suppose.
Brandon Averill (07:30): Yeah. And I think that's super interesting. I keep talking about what the markets are pricing in. I was listening to a podcast actually on the way to the office this morning and they were talking about how the market, so I talked to clients one and in the media, and what media saying is like, oh, a recession is coming, a recession is coming. We know a recession is coming. And then on the flip side, you look at what the market's pricing in, the market's actually not pricing in a severe. So it comes back to the question, who am I going to trust? Am I going to trust the media and the pundits that are trying to generate ad sales or am I going to trust the market participants? And it's clear in a way, at least time and time again, the best estimators of prices are the broad market participants.
(08:17): And so I thought that was really interesting to see. Also, stats wise, all the S&P, the S&P500, the valuation is back to the 20 year average. So it's not like we've gone in this deep correction mode, which is basically the market indicating we don't expect this deep recession or else they would price in a pretty severe drop at this point. Now, anything can happen, new information comes light and the market participants price that in. But I think that's an interesting thing for people when I'm talking to them to realize is like, hey, the market does a pretty good job at pricing this stuff in when it's expected to happen.
Justin Dyer (08:56): Oh yeah, totally. More often than not it's right to your point. And we'll see, or I should say in addition to all these events or the current set of circumstances that exist today, we're entering into a new earning season, the expectation is that earnings are roughly going to be in line with where they were last quarter. And that I think is a large reason why the market's not pricing in a recession. They're expecting, they being market participants, is generally expecting earnings to be flat. That's a key driver valuation. Again, interest rates have been a big headwind to valuations over the recent history, but I think you're seeing some bouncing across the bottom or some stabilization here. Granted it's going up one take down, one day fairly drastically. But it's somewhat leveled out to an extent.
(09:45): And that's largely because there's a wait and see type mentality. I would say wait and see both around what the Fed's going to do further, wait and see around what inflation's going to be. Wait and see what the employment report's going to be. And then I think one of the bigger variables probably right there with the Fed is what earnings are going to come in, in this most recent session or earning season.
(10:08): So all that being said, when you do bring it back together, the market has declined quite substantially. And we always say, hey, let's go back and look at the statistics, let's look at the data. What does the data tell us to do? And we know that pretty consistently after major declines like this, there's a really nice bounce back. Doesn't happen immediately, but over a trailing subsequent one year, three year, five year period, you can see quite substantial returns from these more challenging periods of time. And that's really where we go back to say, hey, time in the market, staying disciplined, having the right strategy to allow you to weather these, really, really pays dividends long term.
Brandon Averill (10:51): And I think that's the other thing. You think about other periods of time, even in somewhat recent history of some big policy changes, interest rate changes, et cetera. You think like the early nineties and what followed after that, and people that went through the 2000 dot com crash. And there's a little blip in 2002 and then you had 2008. And those are all scary moments in the midst of it. But if I could tell people like, hey, go back and invest your money in 1990 and look at your account today, you're probably in a pretty darn good position.
Justin Dyer (11:23): Sign me up.
Brandon Averill (11:24): Yeah. Sign me up. And we look back at periods of history and to me, I keep going back and try to reinforce with clients, that's all about financial structure because if you had money invested in 2000 that you were hoping to retire upon in a year or two, I mean shoot, I'd be scared to death as well, that's mind altering. But if I had set up my protective reserve and I was in 1990, if I was investing I guess at 10 years old, but great, I don't need that money for the next 30, 40 years. There is no better place to park your money than the US stock market, world stock market and allow everything to grow. And yes, some moments of pain and heartache throughout that period of time, but it's all psychological at that standpoint.
Justin Dyer (12:13): Yeah. If you have the right structure, it should be psychological at that point and then go back to the data and understand it. Get comfortable with the philosophy, because that gives you the staying power. The other piece I would say to that, which I agree fully, is making sure liquidity also matches up with your liquidity needs.
Brandon Averill (12:34): Yeah, absolutely.
Justin Dyer (12:34): Liquidity of your holdings. We talk a lot about private investments, which we love. Venture capital, a little bit more specifically there, but private market investments in general, they're wonderful vehicles to grow wealth. But you need to match those up with your liquidity needs as well. Don't just over allocate to that asset class overall because it might not match up with your liquidity needs. We actually do see that. Unfortunately, more often than not with newer clients of really substantial wealth at some points or in many instances. And they have these really powerful priorities and goals and want to make an impact and their liquidity doesn't allow for them and they haven't planned ahead of time for that. And I think that's another important piece to keep in mind.
Brandon Averill (13:21): Totally. I think that's a great point. And I think as we know, or most people know, the best way to actually learn things is to go teach it. So we're going to keep it that theme and get people listening to this. A couple zingers. The zinger number one is just say, trying to time this stuff, even with a crystal ball. I mean you got to get too many decisions right. So number one, your zinger is, hey, look at last week and look at this week and what a difference a week makes, what difference a weekend makes. And what really changed, not a whole heck of a lot. And so trying to time those things. So that's your zinger number one.
(13:58): Zinger two is just time in the market wins. Take them through that example, 1990 to today. Yes, you went through some correction points, but man did your wealth just absolutely explode. And then the lesson ultimately in all of this is what really matters more than anything is having the right financial structure in place, because it allows you to be rewarded for all these different things.
(14:19): So anyways, we'll wrap up for today. Hopefully you like the new wine segment. We encourage anybody listening, go to deovletwines.com, throw Devo an order there, you won't regret it. The wine's phenomenal. If you guys want to have a glass of wine with us, don't be afraid, reach out. We're always down for a glass of wine. And shoot us a text, (602) 704-5574. We'd love to hear your questions, your wine recommendations, if that's your fancy. So until next time, own your wealth, make an impact, and always be pro.