A Tale Of Two Decades (Audio Podcast)

February 22, 2020

On this episode of Creating Richer Lives, Karl discusses how two different decades in the past gave investors very different results depending on how they were allocated. What will this decade bring?

Plus, an update on the Coronavirus and the stock market.


Hey, good morning everybody. Welcome to the show. This is Creating Richer Lives, the podcast. My name is Karl Eggerss. Hey, don’t forget, you can check us out on creatingricherlives.com is our website, and our telephone number, (210) 526-0057. If you have a comment about the show, if you have a topic that you want covered, if you need help in the financial planning realm, anything in your life regarding your finances, investment management, you have some questions regarding when to take social security and stock options maybe, maybe you were given grants at work and you don’t understand the tax ability of that or the impact, give us a call. That’s what we do here. (210) 526-0057. And of course on the podcast we are trying to make your life richer in many different ways, so we talk about a lot of different things on the show. Jam packed show. And by the way, the show is brought to you by Covenant Lifestyle Legacy Philanthropy.

A lot of stuff going on this week. We’re going to touch on that, and then we’re going to talk about the lost decade. A tale of two decades. We’ll get into that just a minute. Quick little tease there. So of course this was a four-day week, because Monday markets were closed in observation of Presidents’ Day, but it was interesting, even though the markets were closed, we got Apple saying that, “Hey, there’s a warning our revenue’s not going to come in what Wall Street thought.” And the markets were closed, and so it was one of those situations where we thought, “Well, what are we going to see Tuesday morning?” Because that’s a big deal, right? One of the biggest companies that we know of, Apple, is saying that the coronavirus is going to affect their revenue. So was this going to put a dent in all the other companies out there? So that was a big deal.

And again, if you’re looking at this and saying, “Well, this is just China, and we’ve looked at SARS in the past and we got over that,” that’s true. A couple things to consider is that China, and the reason everybody’s making such a big deal about it, is China’s about four times as large from an economic standpoint as they were in 2003. Four times. So the losses there are going to impact the global economy a little more than perhaps they did back in 2003. So yes, it’s a comparison. Yes, we got over that. The markets have done just fine. But having said that, China is a big deal. I mean, their gross domestic product was about 16% of the global GDP for last year. Again, about four times the size of their economy that was there back in 2003. That was only 17 years ago. So that is why people are making a big deal about this. And again, we hear evidence that it’s slowing down. Then we hear, “Well, it’s speeding up in areas outside of China,” right? So you have all these concerns.

So we come in Tuesday morning, not really know what to expect. And what’s interesting is Walmart came out and said they’re going to miss their sales estimate just like Apple. And yet despite that, Walmart was up on Tuesday. Now, the market was down about 250 points for most of the day, but it pretty much still took, even Apple really took some of that news in stride. So again, very persistent, strong bull market.

Wednesday, we get some inflation data coming out, and inflation a little hotter than expected. And immediately the economists were digging into the numbers and saying, “Well, here’s why. There are some unusual things like retailers, their margins have increased, and so therefore they could pass on those expenses,” so to speak. “Those higher prices down. They have room to do that.” You know, sometimes economists rationalize things. Sometimes they are accurate. Sometimes they give you the reason for things. At the end of the day, PPI was stronger than what was expected, but so were housing starts. So the housing market’s still doing extremely well. Building permits, housing starts, very, very strong. So the housing market’s a really bright spot for this economy.

And then we heard about the Fed on Wednesday. The Fed came out with their minutes and essentially said that it looks like they’re going to leave things on hold. They’re comfortable on hold. Now, some of the things that are a concern for the market is that the Fed hasn’t seen the full effect. When these minutes took place, remember, these are the minutes from a prior meeting, when that meeting took place, there were some things around the coronavirus that weren’t fully put in or they knew about at that point. So they mentioned the coronavirus, but let’s see. So the market’s pricing in, this is important, they’re pricing that the Fed’s going to cut rates again later this year.

So we have a stock market that’s near an all-time high. We have an economy that people think is great, and yet the Fed’s acting as if we’re in a recession. What’s going on here? These two things seem to oppose each other. But the Dow was up that day. Yield curve continues to flatten. That’s another thing. Remember, 10-year treasury rates, what those rates are compared to two-year treasury rates. Very little difference now. So again, people worrying, “Are we going to have a recession?”

Thursday, China cuts interest rates, and we’ve talked about that huge deal. One reason why I do think the stock market is sitting near all-time highs is because China has provided more stimulus to try to prevent a global recession. We also saw Morgan Stanley buying E-Trade. That whole deal continues, right? Schwab’s been in the news, TD Ameritrade’s been in the news. We’ve had Morgan Stanley buying E-Trade. I mean, a lot of consolidation going on in this industry, and the Dow fell 400 points very quickly on Thursday. That was something that it was very … Had a little flash crash feeling to it. Now, for those of you that don’t know, remember, 2010 we had a flash crash. The Dow fell 1,000 points very quickly. And that was when the Dow was much, much lower. Then in 2015 we had flash crash 2.0, I call it. We woke up, it was a Monday morning, markets fell drastically and then bounced back. Very interesting to watch.

This wasn’t as much. It was 400 points. Again, the Dow’s almost at 30,000, so 400 points, not a huge deal, but how fast it happened. And there was rumors the reason that happened so quickly was because algorithms kicked in, computers, and started to sell based on a headline of a newspaper in China about coronavirus. So that’s how fragile sometimes the markets are. Dow finished down about 130 on Thursday.

And then Friday we got a lot of news. Yesterday we got news that we saw an economic indicator called the Markit Services PMI came in, and it was under 50. That may not mean much to you, but under 50 means contraction. Over 50 means expansion, and their manufacturing number missed as well. So people are clearly worried about the economy right now. Continuing, we continued to see issues about coronavirus. Again, there was news out of Italy that it’s spreading there. So again, it may be getting a little more contained in China, but you have people traveling still and spreading it. So we’re watching that.

And look, the 30-year treasury rates, 1.9%, which is probably going to translate down to record low mortgage rates. Refinance, refinance, refinance if you can. Take advantage of these low rates. Yes, they’ve been around for a while. Maybe they’ll be here a little longer, but do yourself a favor, go check. Can you refinance some of that debt out there? And so we saw the market kind of struggle most of Friday, and James Bullard, and maybe this was one reason, James Bullard, who’s a member of the Fed, was on CNBC saying, “Maybe we don’t need to lower rates if the impact of corona is temporary.” And that’s really the struggle here, is because you have some economists saying, “We think this could put us into recession.” I mean, there’s no question that we’re going to take a little slowdown hit because of China, mainly with supply disruptions. Those of you who own businesses know that. There’s other economists who say, “We’re going to take a little bit of a sucker punch into the gut, but we have enough room to spare that we will not go into recession.”

You know, again, we know we’re going to slow down a little bit because of this. How long it lasts, we don’t know. The thing is, most economists have never managed money, so the effect on the stock market is the thing that we care about, right? That’s what you care about. The economics behind it, who really cares? It’s, “How does the stock market react?” If I told you the economy was slowing down six months ago, you would have said, “Well, that sounds really bad,” but yet the stock market has done fabulous. Why? Because there’s been a lot of money put into the system by the Federal Reserve, by China, and by other countries around the world. So that’s what we’re focusing on right now. So let’s continue to watch. Clearly the market’s still a little nervous about the coronavirus and how bad things are going to get, but we’re still hanging around the all-time highs.

Now, as we do that, we continue to see this interesting market where you’re really seeing things that are performing very well, and some things that are performing are lagging, and they’re performing poorly and lagging behind. What are those things? Well, we know foreign markets have been that way. We know value stocks have been that way, and people are getting trapped, I think, into buying what is working as opposed to staying diversified, rebalancing. Continue to buy the international stocks and small cap value. You know, those areas, for example, if you are way, severely underweight.

I mentioned the tale of two decades. There was a piece that came out from Dimensional Funds, and full disclosure, we have and and do own some Dimensional Funds along the way, but they put out some good research, and they had a piece last month called A Tale of Two Decades, and it was lessons for long-term investors. And it was really interesting how, if you look at the 2000s, 2000 through 2009, the S&P was down almost 1% per year for 10 years. Here’s the things that were up, though. Their international small cap value fund, for example, made almost 14% per year that decade. Emerging markets, over 10% per year. So they had five other funds that were listed here that did very well during that decade. It was the S&P 500 that lagged.

Now, let’s fast forward. The 2010s. January, 2010 through December, 2019, it’s the S&P that has performed very well, about 13 and a half percent per year. Meanwhile, if you look at those other areas, they’ve underperformed pretty significantly. The point of this is if you look at the broad context of the last 20 years, you put those two periods together, those other areas have still outperformed the S&P 500, and right now what you have is three or four stocks really lifting the markets right now. They are responsible for most of the market’s gains in 2020.

As we move forward, it’s going to be very important, in my opinion, to continue to have a diversified portfolio, because it’s not always going to be the US bond market and the US S&P 500 that are the main places to go. There are going to be other places. The divergence between value and growth has never been larger in the US, and we’re really seeing the same thing. We did some research. We’ve really been seeing the same thing internationally in terms of value and growth. So this becomes important when you look at your 401k allocation, when you look at your overall investment allocation, that you don’t get sucked into just owning what’s working and saying, “Well, when something else changes, I’ll change my allocation too.” Because you probably won’t do it in a period of time. So really interesting, because it really was a tale of two decades, depending on what you own. So as we move into 2020 to 2030, what is that decade going to look like? And it’s probably going to look different than what we just experienced. So what does your portfolio look like? Extremely important to analyze that now.

Now, one other thing I wanted to mention too is that we saw, last week we saw the Democratic debate. We have another one coming up Tuesday. You know, it’s interesting, if you look at the Trump odds of winning the presidential election on predictit.org, there’s a high correlation between his odds and the S&P. When his odds go up, the S&P does well. Why is that? Well, clearly when you look at who’s leading in the Democratic race, Bernie Sanders, he’s an open socialist that does want higher taxes. His highest marginal tax rate, according to the Wall Street Journal is 69%. So for folks that are looking at that and running businesses and so forth, they don’t like that.

And I think again, if you’re looking at change coming, which there would be some significant change if Bernie Sanders won the general election, then you would see that change. And so obviously people, the way they do business, the way they invest in things would change, and so that’s why you’re seeing the market sometimes move the way that is. Now, the markets are bigger than elections. Let me be clear about that. But in the last few months, it’s been clear that as these polls change, the markets change. Multiple factors, multiple factors in moving stocks for the longterm, okay? Stocks have done well under Democrats and Republicans, they’ve done poorly under Democrats and Republicans. Doesn’t have to do with that. It has to do with what the policies are today, where they might be going, and what that can do to our investments. So that’s really what we’re watching.

So continue to watch those, and as we get closer and closer, but as I’ve been saying, take your portfolio, assume one president’s going to win, assume another candidate’s going to win, what the market might do, and have a portfolio that really is balanced and you can weather any type of storm. Yes, you’re going to make modifications based on all kinds of things. That’s what we do, but to be saying, “Well, I’ll just keep a lot of stocks now, and if somebody else wins, I’ll change it,” it doesn’t work that way. By the time you do that, things will have drastically changed. You’re not going to get the timing right on that, so be very careful with that.

All right, guys. Have a wonderful weekend. Really busy week, we had, of course in the markets, and let’s look forward to next week. Don’t forget creatingricherlives.com, and our telephone number (210) 526-0057. Have a wonderful weekend. We’ll see you back here next week on the podcast.

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