Is a Recession Coming? | Insights #136
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Episode Summary
It often seems like the world economy is not prospering, but instead heading toward a recession. Negative news frequently dominates headlines, and it tends to catch the attention of investors more than its positive counterpart. The unfortunate reality is that optimism is rare and hard to come by.
If we went off headlines and article punchlines from the last two decades, we may think that the economy regressed. From the tough times in 2008 and the fall of financial institutions to 2020 when there was genuine concern that civilization as we knew it might collapse. Headlines were there to warn about the storm to come, but there was little thought given to what would happen afterward.
The peak of every negative news cycle produces the most fear and worry, and tends to be the time when winners and losers are determined. Those that accept losses at market lows and sell out do not participate in the recovery rallies to come, and those that are resilient and hold a long-term investment horizon are rewarded. Over the past 20 years, the S&P 500 has returned a cumulative 335.62%. That is the reward for weathering the storm.
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Episode Highlights:
(0:00) Intro
(0:59) Thoughts on the talk of Recession and how to actually think about it.
(1:49) Recissions and the general relationship between the market and economy
(2:58) Predicting the future, relevant news, and news cycles
(3:57) Using information and trading on it, how does it pay off?
(4:21) Interest rates and trading on assumptions
(4:50) Long-term steady approaches improve your odds of success
(6:10) Short-term trading, why it just doesn’t work
(7:45) Portfolio construction, keeping you invested and protected
(8:39) The right question to ask about portfolio construction
(9:18) Health and Financial Health
(11:03) Takeaways: Media, Economy, Dinner Convos
(12:10) Consistency is key
(12:20) Wrap Up
+ Read the Transcript
Brandon Averill (00:04): All right. Well Justin, I'm back. You guys actually let me come back.
Justin Dyer (00:07): In the flesh.
Brandon Averill (00:09): Yeah, totally displant me, but definitely did probably a much better job when I was away, but when you're one of the bosses, you get to reclaim your seat.
Justin Dyer (00:17): There you go, yeah.
Brandon Averill (00:18): So I'm back and there's absolutely no shortage of news that's happening out there. We've seen the market bouncing up, down, sideways, everything in between, and I know we'll have some fun topics to hit on there. At least perceived inflation may be tempering a little bit. We'll see what's going on. China's in upheaval. I mean, there's so much going on right now. I've been out meeting with clients and talking with them. One of the big questions that I continue getting, and maybe we can jump back to some of these other earlier points, but is just really, is a recession coming, and what impact does that have overall on their portfolio, their situation, et cetera?
(01:06): I've obviously given them my answers to it, but I thought it would be fun for you to pipe up here and just give us how you look at it from a Chief Investment Officer perspective. I think our viewpoints are going to align, so let's find out. I mean, when you're getting that question or if you were getting that question on, hey, is it a recession coming, I mean, how should we think about that? How should me as a client think about that?
Justin Dyer (01:31): Well, there's a couple of different angles that you need to take a step back and think about. So one is from an investment standpoint, how does that impact your portfolio? I think that's really where you're asking the question from. The immediate answer to that is the market, your portfolio, is not the economy. A recession is tied to the economy. Those two things, and we've talked about this in the past, they're definitely related, but they're different. They're different beasts. The market is very much forward looking, taking many, many, many years of growth into account into a present value calculation essentially to come up with a present value of a stock today or the overall market today. That is related to what's happening in the economy right now and maybe in the economy over the next six to 12 months, but that six to 12 month timeframe is a very small component of what actually feeds into the market. So I think that's the initial way to think about this is the market is not the economy.
(02:39): The market then, like I said, is forward looking, so chances are the market is already going up if we're actually in a recession or if we go through a recession in the near future. None of this is even touching on the important point that predicting the future is incredibly difficult. We say it time and time again. Years like this are great reminders of how difficult it is to predict the future and guess how the market's going to react. I mean, this week, like you mentioned, inflation being a big topic, China being a big topic. China was the big topic Monday of this week and now it's almost a long lost memory, 36 hours.
Brandon Averill (03:19): Well, the Fed took over.
Justin Dyer (03:20): Yeah. The Fed came in and swamped out China. So it's a great reminder though of how fast news cycles move. What factor, what variable is going to be the prominent variable or the prominent piece that the market looks at and cares about? Is it China? Is it the Fed? Is it interest rates? These things are all competing, if you will, in a sense to dominate market reaction or market participant attention, and you never know which one it is going to be. So that's the predicting of the future side of it.
(03:54): And then the sub point there, and I'll stop, is you have to predict the future twice. You have to predict when the market's going to react to a potential recession and then how much it's going to react and what time to actually get back in. Where's the bottom? And no one really in the history of mankind, it's a bold statement and there's probably an asterisk there, but no one in the history of mankind has proven to do that in a repeatable fashion. So it's really a fool's game to play.
Brandon Averill (04:22): Well, I think it's interesting too. One thing I think about is, well, I've had a lot of comments from different people that, hey, interest rates are definitely going up, the Fed's going to drive us X, Y, and Z. And we just saw the Fed react to additional information and actually signal that they're going to raise interest rates at a slower rate than everybody had predicted, so the markets react to that new information. I think we're all tempted to think that we can somehow read this information and make a quick trade. But I think maybe talk a little bit about if you are a long term investor, how much of this short term noise, even if you were trying to get it right, actually has an impact on the long term? So if you're focused on 15 year returns, how much of an impact would it even make to get this one week decision correct?
Justin Dyer (05:18): Yeah. Well, I mean the short answer is it doesn't impact all that much. Now the caveat is if you miss out on the good days, you actually do impact your long term wealth substantially. The conclusion or the little zinger to that is getting those good days right is incredibly difficult. I mean, if you look at the probability of what a market does on a daily basis, whether it goes up or down, it's almost like a coin flip. So predicting that, and again what news event is going to drive that, is incredibly hard. And then what happens if you miss those days where you get a big pop? We had one a couple weeks ago where, I mean the market was up high single digits in a single day. If you missed out on that, yeah, there's probably real wealth you're leaving on the table. Now that is if you're trying to time that right.
(06:10): So I think that's the true conclusion to your question, is trying to figure out these short term movements and trade in and out of them, it doesn't lead to greater wealth over the long term, 10 to 15 years. What leads to greater wealth is just being patient during times like this, letting the market do what it does over long periods of time, making sure you're in the market. There's this saying we like to say quite a bit, "Time in the market is far, far more powerful, far more beneficial than timing the market on a day to day basis."
Brandon Averill (06:45): Right. I think that's such a good thing to revisit because as the poor people that sold out when things didn't look so promising, missed out on, like you said, the other day, a high single digit return, they missed out today on a three plus percent return potentially in the US markets. So you start to miss out on these things if you're just sitting on the sidelines, and it becomes pretty detrimental and tough to overcome being on the sidelines for those types of things. So I think that definitely makes a lot of sense.
(07:19): I think the hard part here is the behavioral side and just reminding yourself to go back to the data and understand that this is part of it. And the way you allow yourself behaviorally hopefully to get comfortable is that you have the right financial structure in place. Because what we wouldn't suggest is sitting on your hands and ride the wave here with money that you might need next year. I think that's unfortunately what too many people do. And for our clients listening, that's why we build portfolios the way that we build your portfolios is because at the end of the day, we want you to be able to benefit from this time in the market. And if you potentially put some of your money at risk where you have to pull that money out of the market at the wrong time, I mean that's catastrophic at times.
Justin Dyer (08:06): Oh yeah, 100%. I'm dumbfounded by the number of conversations I have, luckily not with our clients, not with you all that are listening, but the number of folks you speak with who are either seemingly sophisticated or not, are trying to get into investing, where there's just so little purpose and logic in what they're trying to do and what they're trying to accomplish. It's just like, "Oh, what should I invest in?" And that is such a basic question to ask or simplistic, rather question to ask. And really the way to think about this is exactly what you were alluding to, is there should be purpose in how you're investing.
(08:45): What are your goals? What are your priorities? Times like this are great periods to be a little bit more reflective. Not only is it the holidays, but the market's been tough recently and it is a good time to say, "Well yeah, what is important to me?" I think you can be a little bit more honest. Not everyone is like this, but more often than not, it seems like people can be a little bit more honest with themselves in times like this and retrospective and really think about what's important. So to make sure and reassure them that the portfolio is structured in a way that does support their priorities and has that logical bearing to it that gives them that staying power.
Brandon Averill (09:20): Yeah. We were actually chatting about this yesterday, I think it's a good analogy, but it's a lot like your health at the end of the day. Your health compounds over time. Dr. Peter Attia has this saying.
Justin Dyer (09:34): Totally.
Brandon Averill (09:35): "In the history of mankind, there's never been a 90 year old that's uttered the words, 'I wish I had less muscle,' but if you wait until you're 90 years old to build the muscle, you're screwed." But if you chip away over time, you build yourself to a standpoint where you build this empire, you build this body that can withstand quite a bit. It's the same thing even at the beginning. A lot of people, a lot of clients will get the question, we want to 10X our money, or I want to double this by then. That's like saying, "Well shoot, I want to go in and bench 350 tomorrow and I can put 100 up right now." That's absolutely ridiculous.
(10:20): The same thing goes for your wealth, is that you want to be systematic in how you go about things, because we know that's the most successful approach over time. Doesn't mean that we all don't want to jump on the bench and throw 350 around, but at the end of the day-
Justin Dyer (10:33): You're going to hurt yourself doing it.
Brandon Averill (10:34): Yeah. You also want to be realistic with what the outcomes actually can be. I think for clients when you're listening to this, hopefully these experiments of mind, like take your money out of it and apply other applications. Hopefully that's helpful.
Justin Dyer (10:49): Oh yeah, I think it's a great framework to think about. The little things matter. I mean, we could put so many little phrases on this, the little things matter, build good habits today over time, they really compound on themselves. All that stuff. It's true and applies to investing as it applies to so many other aspects of life.
Brandon Averill (11:08): Yeah, no, totally. Well, just hopefully some of the takeaways here are there's a lot going on out in the markets right now. There's a lot of media around what's the economy doing, all that type of stuff. You're certainly having conversations, whether it was over the Thanksgiving dinner table or the upcoming holiday dinner tables. What's going to happen? Did Bankman-Fried actually think he was ripping everybody off? Surprise news flash, he went public and said he didn't, which would've been shocking if he said he was intending to rip everybody off. But I think at the end of the day, what you can find confidence in is that your portfolio is built in a way that you don't have to listen to all this noise and you don't have to try to win the lottery. Your portfolio's built in a way that you are going to participate from this time in the market.
(11:59): So that's the ultimate zinger, is that while somebody else is out there trying to nail the 350 bench when they've only put 100 pounds on the bar previously, you know that when you get to 90 years old, you're going to have all the muscle, you're going to be able to survive. So that's the big takeaway, is just stay consistent, stay in the market, try to dampen this noise that we're all hearing as much as possible, and definitely reach out if you have questions. One way to reach out, as you all know, is to shoot us a text, (602) 704-5574. We'd love to get you on the list here, hear your questions, make sure we're addressing them in the future. And until next time, own your wealth, make an impact, and always be a pro.