In this month’s edition of “Money Matters,” Scott talks about the recent volatility in the stock market and explains possible causes for the sudden market downturn, historical precedents, and financial strategies for successful long-term investors.

Money Matters: Financial Success in a Volatile Stock Market Transcript

0:00:00.8 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, and Scott is joining us now by phone. Good morning, Scott.

0:00:25.7 Scott: Hey, good morning, CJ.

0:00:27.2 CJ: Nice to chat with you today. So, there's some, there have been some big moves in the market the last week. Oh, my goodness.

0:00:35.2 Scott: Yes, for sure. It's been, it's been interesting times, that's for sure.

0:00:39.0 CJ: Can you give us an idea of what's been going on and, your thoughts about it?

0:00:44.0 Scott: I think I'd say first of all, a couple things, markets are incredibly complex, you’ve got thousands of interacting variables between all the different companies that people are investing and putting money in or betting against, and investors, the largest professional money managers, hedge funds, institutions right down to the very smallest individual putting money into maybe a bit into their IRA or their company retirement plan. You have fluctuations in interest rates, currencies, all the human emotions from all these different players competing different goals and timelines, objectives.

0:01:19.5 Scott: So, I say that to caution against ever really believing or buying into anyone who says they know exactly what's going on with the markets. There are just too many competing forces to know exactly what's at play, and I'll also say as a disclaimer, of course, we're just talking as a general education, try and have a conversation here. I don't want anyone to take any of this as specific advice and to really seek their own counsel.

0:01:43.8 Scott: But that said, there are a few things, CJ, that people are pointing to and do seem to have put some significant forces at play in the market, and one of them is economic reports coming in that look a bit weaker than they had been, a little bit less rosy than in the past. So, that's causing quite a bit of concern. The jobs numbers aren't looking quite as good and people are concerned about where this is all heading.

0:02:08.2 Scott: Related to that, different countries are reacting differently. Japan is getting a lot of attention. There were large professional investors, who made these hedge funds that were, it seems kind of odd, that they were borrowing money in Japanese Yen. It was almost essentially free money because the interest rates were so low and then taking investing in higher return assets. This is called the carry trade, in the business. That was starting to unwind as Japan actually raised their interest rates. So, a little bit of the opposite of what we think might be happening in the U.S.

0:02:41.7 Scott: So, there's that, and for a long time, there's been a very high concentration in a small number of technology companies and there's concerns, are they getting bid up too high. You can have something that's a great product or a great service that you love, but at certain points, CJ, you just say, "It's too expensive." Right? I may love this sandwich from my favorite shop or this pair of shoes, but at some point, the price just hits a wall, and so there's some of that going on. And, you know, you and I talked last month about elections and concerns about the presidential race and what happens, and now it appears there's a fairly tight presidential race again, and that uncertainty always causes a bit of distress in the markets. But we noted last time and put out some figures that historically the second half of election years has been quite strong.

0:03:33.8 CJ: That being said, do you have any feelings about where these trends are heading or what we're gonna be looking at?

0:03:40.9 Scott: Yeah, well, kind of related to my opening comment, short-term economic and market predictions have historically proven to be pretty poor in terms of their accuracy. So, it's not something that you want to make. I'm never a fan of short-term bets, CJ, in the markets, almost never, I'd say, but at this point, it doesn't appear that the economy is falling off a cliff, but that it's slowing. And what does this mean? Well, it likely means that interest rates probably will be cut. There's a tremendous amount of conversation. I just went to a big analyst meeting in New York and half the conversation was how much and when will interest rates be cut? How's this going to play out in the bond market and the real estate and the stock market? But when interest rates are cut, it makes it less appealing for people to sit on money parked in their bank account.

0:04:28.7 Scott: They're not earning as much interest, and I think, really what it does is it makes it easier to borrow money and to spend. I have to say, I kind of see analogy, I have to point out with the Olympics going on. I think it's worth noting that American consumers are number one in the world at borrowing money and spending, and economists will often say that consumer spending makes up two-thirds of the economy. So, this is a big big deal if interest rates get cut. Following 2022, we had a rapid rise in interest rates that caused a lot of turmoil in investment markets and had a lot of spill-off effects, but the rates are much higher now. So, there's a lot to work with from the Federal Reserve in terms of being able to cut interest rates in attempt to stimulate the economy.

0:05:11.4 CJ: And, so, along those lines, were you at all surprised that the Fed didn't cut rates even slightly by now?

0:05:20.9 Scott: Yeah, good question. I don't know if I was surprised, I'm just sort of waiting. There's certainly people who think that they should have started the rate cutting cycle, and they have some pretty good arguments for that. It appears that it's on the horizon, but the big factor on the other side is inflation, as we've talked about so many times in the past, and it seems the central banks Federal Reserve are very concerned that if they start cutting interest rates too soon, inflation will spring back to life. That is a significant problem, causes a lot of pain with monthly bills for a lot of households, if prices start spiking again.

0:05:58.3 CJ: All right. So, I think I have the answer or know the answer to this already, but do you have any advice for moves that investors should make right now?

0:06:07.8 Scott: Yes. You know what I'm gonna say, don't you CJ?

0:06:10.3 CJ: I kinda do.

0:06:12.2 Scott: A couple of things maybe to reinforce this: I saw this fellow named Brian Levitt, he's a global investment strategist for Invesco, and he put together some really interesting points. He said, hey, market corrections, volatility like this, is common, in fact, even in good market years. So, if we go back to 1980, and we look at one of those classic line charts following stock returns of the S&P 500, or the Dow Jones, or really almost any investment index, you're gonna say, wow, look at those incredible returns since 1980. But there has been, he pointed out, in every year except for two, at least a 5% draw down in the S&P 500. So, even in very good market years, and I've shared different charts of this in the past with clients on my blog and whatnot, even in many of the very very good years for investment returns, there's downturns in the market.

0:07:03.9 Scott: So, there's that, and the average time to recover from a 5-10% downturn, Levitt points out is three months. If it's worse, like a 10 or 20% correction, eight months is the average time to recover.

0:07:17.0 CJ: Wow.

0:07:17.4 Scott: So, you really want to avoid making a short-term, a quick reaction to a market move like this for many reasons. And here's another, I just love this point that he put together: he said, if we go back and look at the 30 best days in the stock market over the past 30 years, 24 of them have happened during what we would consider to be just terrible financial or economic events. The tech wreck of 2000 to 2002, the global financial crisis, and the COVID-19 pandemic. So, the really good days in the market tend to be bunched very tightly with the very bad days.

0:08:00.8 Scott: So often people have an idea that I want to sell. I'm gonna wait for things to calm down, and we're gonna wait until things look and feel better, until it feels like the right time. It's a tough thing, but you want to try and use your brain and the analytical side to override the emotional side and say, this is gonna be tough, but we know that many times, excellent returns have come in the midst of times when it just looked terrible. So, I think the things I would really encourage people is if this episode on Monday caused you a lot of concern about your financial future or a bit of panic, it's rarely the right thing for long-term investors to react to short-term trading swings, but it's always a good time to reevaluate your financial plan, your portfolio, and make sure it's really a right fit.

0:08:51.6 Scott: Do you have the right mix? Are your near-term spending needs insulated from these types of market shocks? Most people can withstand volatility in their investments as long as they're long-term investments, and they give those investments enough time to take their kind of jagged, staggered step upward. So, CJ, I guess what I'm saying is another Olympic analogy comes to mind. I've caught little bits and pieces here and there, so all kinds of incredible events, team handball and ping pong and volleyball, which is my favorite, swimming and all these things, and, it's kinda like that in the markets. We see the S&P 500, we see the Dow Jones. Well, you gotta realize this: there are all different types of people, investors, speculators, playing very different games or competing in very different events in the market.

0:09:40.5 Scott: And just like, there's no way, even though when I was an athlete and I was in shape, okay, I was probably faster than the average person, but no way, never, even at my best, would I want to try and get on the starting line against Olympic sprinters. It would be an absolute embarrassment. I'd probably have to stop, or try and hoist weights with an Olympic weightlifters. No way. So, you've got these big hedge funds moving massive amounts of money from swings because they're concerned about the carry trade of Japanese Yen unraveling. You want to position yourself so that is largely irrelevant and stay focused on your event, and you don't need to try and win and outrun these people. You don't need to. Markets work very well for people with a diversified, well-designed portfolio approach if they give it enough time and stick with the plan.

0:10:26.0 CJ: Oh, good advice. Thank you so much for this, Scott. I really enjoy our conversations. We'll, put this up on our website, and I'm sure you will put it up on yours. What is your website, by the way, so if people can reference some of the other conversations we've had?

0:10:43.5 Scott: Yes, I do post them all there, and, along with the transcript, and it's scottoeth.com, and Oeth is O-E-T-H, so pretty simple. Scottoeth.com, and I'll post it there as soon as we get the recording and transcript.

0:10:55.4 CJ: All right. Thank you, Scott.

0:10:56.6 Scott: Thanks, CJ.