In this month’s edition of “Money Matters,” Scott discusses the volatility of the stock market, which factors are causing these stock market ups and downs, including the “September Effect,” higher interest rates, and the “Magnificent Seven” stocks, and how investors can stay disciplined in their investment strategy.

Money Matters: Volatile Stock Market Investing Transcript

0:00:00.1 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. Scott joins us now by phone. Welcome, Scott.

0:00:24.4 Scott Oeth: Good morning, CJ.

0:00:24.7 CJ: Good morning to you. So volatile markets have people wondering about what money moves to consider right now. Do you want to talk to us a little bit about that?

0:00:34.4 SO: Yeah, absolutely. Spooky drop. Yesterday was a big one and just in time for the Halloween season. So I'm starting to get this question a lot. As always, CJ, our general disclaimer, it's just an overall discussion. Listeners need to do their own research, seek their own expert advice. But I think there are some interesting points here to talk about to help frame this up. One of the first things, maybe just as a little bit of an aside, is there's actually a long-standing historical precedent for the markets to be off this time of year. There's something called The September Effect, which is known as a market anomaly. And going back over the last century, September, on average, has been the worst month in the markets. And I just was listening to some newer research and what they found is they think this is really tied to a vacation effect. That traders and investors have been away for the summer, they haven't been as focused as what's going on.

0:01:27.1 SO: They come back, they start aggregating bad news and saying, wait a minute, I don't like this, and selling off. And interestingly, it was also found to happen in Asian countries around the Chinese New Year. So anyway, but that's a bit of a sidebar. At this point, the market jitters and sell-offs such as yesterday and kind of general slide we've been having over the last couple of weeks, it largely has to do with interest rates, it appears. Fighting inflation has been a primary concern in the economy, and it looks like it's still an issue, persistent inflation. And interest rates are one of the key weapons to help fight inflation. Rising them can slow the economy, makes it more expensive to borrow money. You look at today's mortgage rates and home prices staying where they are. Homes are effectively as expensive as they've ever been. It's very tough to buy a home right now with mortgage rates. It looks like it may be coming in around 8%. And on the other hand, there is incentive to actually keep the money in the bank. CJ, when you and I were talking, just not even two years ago, savings accounts were paying effectively about zero, nothing.

0:02:36.7 CJ: Right.

0:02:36.9 SO: And now if you shop around, well, you can get about 5% on that. And so there's an incentive to actually sit on your money and not just spend it and put it into some of the crazy things we've talked about in the past. So it has the effect of slowing the economy. Well, the other thing that it does in the financial market, CJ, rising interest rates hurt the prices of bonds. Bonds are generally viewed to be a safer asset. But when interest rates on new bonds are being issued in the market, where you're lending money to companies or governments go up, existing bonds have to be repriced to a lower value in trading so that they offer the same effective return as the new bonds. So it puts downward pressure on bonds. At the same time, what's happening is stocks, which are slices of equity ownership and corporations, little bits of ownership, stocks are feeling the pressure in many areas because these companies are going to face higher borrowing costs with these high interest rates. And investors are looking down the road to an economic slowdown with these rising interest rates. So it seems to be... There's always lots of factors, but that's the general theme that seems to be playing out right now.

0:03:49.5 CJ: All right. Well, should investors be concerned about their investment performance?

0:03:55.3 SO: CJ, it's very natural to be concerned, especially when you're seeing scary headlines and news surrounding you about what's happening in the markets. And that's really one of the things that can make being a good investor so difficult. We know there's two of the keys to being a very successful long term investor, to be diversified and to stay disciplined. But really one of the paradoxes of investing is that it's easy to say that it's easy to look at numbers and lay it out and look at it historically and say, "Oh, yeah, yeah, yeah, we'll stay diversified.' That makes sense. It gives nice long term returns and smooths out the ride and we'll be disciplined. We'll stick with the plan. So it's easy to talk about. But once you're in the game, it feels a whole lot different. So certain areas of the market this year, one of the things that's been tough for people is headline numbers up to this point have looked very good, but they've been driven by just a small handful of stocks, largely large technology companies. And there's many other valuable areas of the market, at least areas that most, I should say, many investors view to be valuable areas that are kind of flat for the year.

0:05:00.3 SO: And I saw a piece that Hartford Funds put together just a couple of days ago and they said, you know, the S&P 500, which is one of the most widely followed measures of the market, a benchmark of 500 large US company stocks. Well, it was up 13.9% as of a couple of days ago. It's probably off a bit now. But it's primarily driven by what they call the Magnificent Seven stocks, which is this cluster of big technology stocks, a lot of excitement about artificial intelligence. That cluster of the Magnificent Seven stocks has returned. It was over 80% year to date. The rest of the index, the other 493 companies were up only 3.5%. So very concentrated, not diversified. So it's tough because people say, well, I know I'm supposed to stay diversified, but boy, I want those returns. It's the fear of missing out. And I think something to keep in mind is those same companies took a tremendous hit last year in 2022, and we've seen it many times in past the dangers of being overly concentrated. So, CJ, analyzing investments gets you in the game. But once you're out there on the field, maintaining your game face, your investment exposure is really necessary to winning the game. So investors might be asking, "Why am I underperforming?"

0:06:21.2 SO: I see these big numbers and they might have a relatively well-diversified, moderate portfolio. But what they really need to also be asking themselves is, do I want to be positioned where the market is? The S&P 500 is not your financial planner. That collection of stocks was not constructed to meet your financial goals. It's not managed according to your timeline of when you need the money or your appetite for volatility. It can be a very useful way to get market exposure, but we just want to keep those core principles in mind. And I think, like say, we know folks who have built a thoughtful allocation and stay disciplined with that and keep their eyes way down the road tend to do very well. When you get too focused on the short-term movements, it could be a real trouble.

0:07:11.3 CJ: So, in the past, when things have seemed a little difficult, you've often had some interesting opportunities to share. Are there any compelling money moves right now that we should focus on?

0:07:21.5 SO: Yeah, and I love that question, CJ. I think that's the way to think about it. When times are tough, where's the opportunity? Let's look at the other side of the coin. I recently did a webinar with an economist, chief market strategist from Vanguard Investments, one of the largest investment firms in the world. It was great. And I have a lot more information on that. I'll be posting it on my site in just a day or two. But some of the things we looked at that people might wanna consider and everyone needs to decide if this is appropriate for themselves and get advice on their own situation. But bonds, we talk about the rising interest rates. So for someone generally viewed as safer money and which really hasn't delivered hardly anything the last, say, 10-15 years, bonds you can now buy with a really nice interest deal on them and get that rate locked in your portfolio. So that's something to consider and reevaluate your positioning of a fixed income part of your portfolio where you're lending money out and getting that interest income back. And on the stock side, valuations are something we look at.

0:08:23.4 SO: What is the price that you're paying for a company or for that share of earnings? And smaller companies, especially in the value side of the market, and international companies look to be much more favorably priced. Many analysts would say compared to large growth companies. So something to consider is just part of your overall long-term plan.

0:08:45.0 CJ: Well, we're talking with Scott Oeth and we'll be talking finances with Scott on the first Wednesday of the month on North Shore Morning. Anything you'd like to add, Scott?

0:08:54.0 SO: Well, I always enjoy our conversations and enjoy connecting with listeners. So if anyone has a question, feel free to send me an email or give me a call and I look forward to our next conversation.

0:09:04.5 CJ: All right. Your email?

0:09:06.8 SO: Scott@C-A-H-I-L-L-F-A.com. It's on my website. It's also Scottoeth.com.

0:09:14.9 CJ: Okay, that's O-E-T-H. All right, Scott, thank you so much. Always good to talk with you.

0:09:19.8 SO: Thanks, CJ.