In this week’s show we spend some time going over what’s currently happening with the volatility in the stock market and what to expect going forward. The bulk of the episode is around defining the parameters of a market correction, and how best to react when we are experiencing one in the market.
Speaker 1 [00:00:05] All right, welcome to the money puzzle. Pretty interesting name, right? Yeah. So if you didn’t catch it, go back and watch last week’s episode, we rolled out a new name for our podcast. It’s actually called the money puzzle. Do we? When we put podcasts on the internet, I don’t know. Do we? Do you want to know we’re not going to know? OK, just called the money puzzle. All right. So anyway, we reduced it last week. If you guys know that watches for a while, we’ve we sort of have gotten rid of the name Peace of mind radio. We did that for a long, long time. We got a couple of things that are coming up, especially over the next several weeks, hopefully mid February of 2022. We should be rolling out something new that we’re all pretty excited about. Actually, we’re all really excited about it. So in the midst of doing that, we changed the name to the money puzzle and so we thought we’d be fairly consistent. Keep the names consistent. So we change the name of our podcast to the money puzzle as well. So in case you didn’t catch it, if you don’t want to, if you don’t know more about it, go back to last week. Listen to that and we’ll explain in more detail. But for today, we set up last week’s show for this week. We are taught. We’re right in the middle of what is this, the end of January of 2020 to add to today’s the 24th. And we’re right in the middle of what
Speaker 2 [00:01:23] it’s been a fun year in the market so far, and we can we’ve officially entered correction territory. So yeah,
Speaker 1 [00:01:28] we’re in a market correction. So we thought we’d spend today talking about sort of what we hear that term a lot, right? And I know we throw it around like it’s nothing. We don’t use it that often. So we’re going to talk about how often do these occur? What does it really mean? And then what are some of the things that we shouldn’t do during a market correction that we see all the time? And then what are some of the things that you should be doing during a market correction? Right, right. All right. So what is the technical definition of a correction? You may want take that.
Speaker 3 [00:01:57] The technical definition of a correction is the when the market goes back 10 percent from the highs. So, for example, the S&P 500 hit the hit the high on January the 4th as of today at one point. I don’t know if it’s still there right now, but as of today, at one point it went into correction territory. The Nasdaq was in correction as of last week. Again, you fall back at least 10 percent from the highs from the all time highs as enters a correction territory.
Speaker 2 [00:02:28] Earlier today, the S&P is down about 11 and a half percent off of its all time high. So it was up to 48 hundred forty seven right, right around forty eight hundred, and it’s down about 11 and a half percent from that as of right now. The Nasdaq last week was down about 13 and a half percent off of its all time high. Don’t know what the Dow was, but I know the Dow had been kind of the one that was holding steady up until about the end of last week and now this week. So we’re we’re officially closing in on a correction territory with the Dow Jones Industrial Average, which is a little more heavily weighted towards the biggest companies. So now we’re starting to see some more destruction. But maybe that’s not the best word to use, but we’re seeing we’re seeing a little bit more of a correction with the largest stocks out there. Think you’re Amazon’s or Google’s or Facebook’s, et cetera, Microsoft’s, you’re finally starting to see some of those stocks cave in to, you know, what we’re seeing throughout really the rest of the market?
Speaker 1 [00:03:22] Yeah, I’ll say that this really got accelerated when we started to see a correction in the technical side or the, you know, the arty side
Speaker 3 [00:03:31] or, you know,
Speaker 1 [00:03:32] technology technology. Thank you for saving me there. The technology side, it really that’s where it all started, right? If you go back and look, the Nasdaq started to fall off. It correction territory and then everything else is like, OK, we’ll just go ahead and follow suit. So. So that’s really where it started. All right. So how long does the average or how how long does the average or how what’s the average time? Let me get this out. What’s the average time from a correction when it hits the bottom of a correction until it recovers? Does anybody know how long?
Speaker 2 [00:04:03] On average, it’s about 45 60 days. Yeah, that’s right. I mean, less than two months. Right.
Speaker 1 [00:04:08] As long as it’s what they consider, not fundamentally a non fundamental correction. I mean, there’s not something in the market that’s caused it. Like in 2008, we had a correction, right? But that was very real estate. I mean, there was an issue in the market this like, Oh boy, we, you know, we’re in trouble here. That’s totally different. These corrections happened about every while we’ll get to second anyway. So when they happen, they’re typically about, you know, 45 60 days or so they recover.
Speaker 2 [00:04:32] Do you think you do you think you would classify this one as fundamental or not?
Speaker 1 [00:04:36] Is that a curiosity? I don’t think so, because this is just regular regular items, you know, that are either going in the market.
Speaker 2 [00:04:44] I tend to agree, yeah,
Speaker 1 [00:04:45] that I don’t think there’s anything fundamental. There’s no, you know, it’s not like the unemployment number is weird. I mean, the unemployment number is weird because it doesn’t reflect true unemployment, but it’s not like it’s 12, 13, 14 percent. You know, earnings are going to be not as good as what they were back in the third quarter because, you know, fourth quarter wasn’t as good. And so as. And we had, you know, there’s issues that revolve around that, but I don’t think it’s going to be as good. GDP is going to be OK. So if you look at the core fundamentals, nothing’s going to be outstanding this quarter, but nothing’s horrible enough to cause the markets.
Speaker 2 [00:05:19] I think I think two things are occurring now and you guys can add to this or, you know, you know, anything that you want to elaborate on, please do. But two things that I think have really fueled this correction right now anyway. And neither one of them, I think, is a huge one. The Fed finally decided to raise rates. They’ve been talking about it forever. When you have hyper inflation, like we’re finally having I mean, we’re you know, when we’re talking about inflation numbers seven to 10 percent year over year, you have to address that. And really, the only way to address those inflationary numbers is to start talking about raising rates. So that’s what’s really started to fuel the correction in the technology sector. It will also in the growth sector of the market as well. So when you talk about raising interest rates in which the Fed has said they’re going to do probably at least three or four times starting in March and in 2022, when you start raising interest rates, what happens is those, you know, have higher growth companies that are using debt to fuel their growth. If you’re using debt to fuel your growth, you have to pay a higher interest rate on your debt, obviously, and that’s going to affect your revenue and your balance sheet. So that was kind of the first thing. The other thing was we’re starting to see the numbers come in from December on retail sales. Retail sales were down in December. I think primarily that’s because they were higher in November because I think everyone was a little bit scared with the supply chain issues. And so a lot of the Christmas shopping was getting done a little bit earlier than usual. All that to say, though, when you look year over year at the retail sales numbers for December, it was actually like 70 percent higher than it was the year before in 2020. So there’s still cause for some positive things to take away. But I think in the moment those two things happening is freak the market out a little bit and we’ve had a little bit of a quick correction.
Speaker 1 [00:07:01] You know, the one thing iron in air and I’ll come to you for the next one. But the one thing about the Fed, you know, the Fed everybody. So many people misinterpret what the role of the Federal Reserve is and what their actions do to the markets, right? The Federal Reserve is raising interest rates for two reasons. Number one, they’re signaling to the economy that the economy is good enough to withstand a rise interest rate. Absolutely. Hey, we’re off great footing the markets. The economy’s great so we can withstand raising interest rates, right? So that should send a positive signal to the market if everything’s good. If the Fed is willing to raise interest rates, that should be a good thing. And number two, they’re raising interest rates because they have to have something in their back pocket. In case we get into another situation, they have to have a way to lower interest rates, right? So they’ve got to find a time to start raising interest rates so that if we find ourselves back in another 2008 or another crisis with with COVID or whatever the next issue is going to be, they got to have something in their pocket to lower interest rates. Right?
Speaker 2 [00:08:02] Well, it’s interesting too, because nothing has happened yet. They said they were going to raise rates. Nothing has changed. They haven’t raised rates yet. So we’ve had this ultra reflexive reaction in the market due to the Fed just going and having a press conference basically and announcing that they’re going to raise rates. We had some data, like I said, come in on December sales, but ultimately when you zoom out and look at the bigger picture, year over year sales weren’t really that bad. So this is just a very clear illustration when you look at the market that it is not it’s not rational. It’s never rational. It’s always emotional.
Speaker 1 [00:08:40] Yeah, yeah. So real quick, Aaron. How often do corrections occur?
Speaker 3 [00:08:47] On average, corrections occur about every 24 months. So somewhere in that ballpark range, if you if you think about it, were not quite 24 months from the beginning of the one that happened two years ago. But we’re getting close. Yep, so it started in February. So in 2020, the all time highs were reached, I think, like February 12, 13, 11, somewhere around that range. And then all of a sudden it started and an accelerated drop. Everybody knows what happened there and the reason why that was caused, obviously, with just came out of out of the blue, the economy was great. Everything. Unemployment rate was at a 30 to 40 year lows. Jobs are being created. Everything was going well. And then all of a sudden the pandemic happened. So. But just kind of talk about how quickly we get out of them. Even with the pandemic happening there, when things started getting on more solid ground, the market came right back within, you know, 60 to 90 days. It was almost four in the Nasdaq. It was close sooner than that. And then for the S&P, it was maybe a little bit outside of that 90 days. It was July, I think.
Speaker 2 [00:09:58] Yeah. But yeah, yeah, yeah. But it bottomed out March 23rd. So I think it was late June, early July after.
Speaker 3 [00:10:04] And that wasn’t a that wasn’t just a correction that was back in the bear market that ended what the longest bull market in the history of the stock market, so. So again, we went straight in the bear market but again recovered there. Part of the reason why we recovered is because the Fed did. What they did recover quicker is because the Fed did what you were talking about. They took some of those tools out of their toolbox to help the the economy helped the market and everything else. One, they started quantitative easing, so they started putting flood money in buying debt and doing all that. And now, right now, they’re starting to take that off their balance sheet, which is causing some of these issues, too. And then also, they lowered the rates they were raising the rates in 2018 and 2019, just like they are talking about doing now. And then they went basically the liquid they went all the way down to zero to 50 basis points on that, on the rate. So, you know, that’s helped the market spark the market’s back up, helped the economy start to recover. But let’s not a lot of people may be watching this, and clients we talked to think that the market is the economy and there they’re two separate things, and we’re kind of starting to see that right now, too.
Speaker 1 [00:11:21] Yeah. One thing I’ll say, and this is a whole show on what the federal Fed funds rate is. But make no mistake about it, the Fed funds rate does not affect any of us individually. It doesn’t affect the markets has nothing to do with that whatsoever other than it’s the banks overnight borrowing rate. That’s all it is. And that really shouldn’t affect anything, but it does. And so what happens is fed by the Federal Reserve comes and says we’re going to raise interest rates, you know, by quarter basis point, which is probably what what they’re saying they’ll do is I have a series of quarter basis point hikes. So really, it shouldn’t affect it has no effect on my checking account, has no effect on any kind of loans we have. But it does, right? I mean, because banks go, Oh, they increase the, you know, the Fed funds rate does. So we’re going to go out and, you know, and increase prices. But the funny thing is, when they go up, they don’t. The banks don’t follow suit as much. On the upside is money. On the downside, they’ll follow you, no doubt if it’s a quarter point drop, they’ll follow that all day long. But anyway, so that’s a whole different story about Fed funds rate. And by the way, if you think the Federal Reserve has a direct impact on what they charge for your checking account or what they charge in your line of credit, just go do the research and find out what the the overnight borrowing rate really means and how it really should affect you. And it really should have no effect on you and banks really shouldn’t. Even at the end of the day, they shouldn’t even use the Fed funds rate because they should have enough cash cash on hand to not have to access that. But some banks do. All right, so real quick, let’s talk about what are some of the what are some of the things that we see climate mistakes clients make? When you have a market correction like this, what are some of the things that we see that they do? They shouldn’t be doing panic.
Speaker 2 [00:13:04] No one panic in what way they start selling positions at the bottom. I mean, I can have there’s so many war stories. We all have these war stories and things that we’ve heard from clients, and I know clients that panicked and sold out at the bottom of 2008, and they just never really fully recovered because they missed, you know, when after everything dropped, they missed the initial, you know, rise, you know, the comeback of in the market. So you have to stay invested if your financial plan dictates. First of all, if you put together a good, solid financial plan, you’re not fully exposed to the market anyway. And I think we need to probably talk about that first and foremost. All these different things, all these corrections that we’re talking about are happening in the S&P 500, the Dow Jones Industrial. Whatever indices, whatever index you want to look at, you, our clients, most clients are not invested in those directly. We have diversified portfolios. You have some exposure to the S&P. You have some exposure to the Dow. You also have exposure to the Barclays Aggregate Bond Index, right? And all these different things. So you’re not invested in just one thing or the other. So all of these headlines that are dominating the news media are really coming strictly from the S&P 500, which is just how many stocks do you want to guess that represents, right? Three hundred. It’s, you know, had no story. But basically, you’re looking at five hundred stocks in the Dow Jones Industrial Average. Was this quoted the most? That only represents what 24 stocks
Speaker 1 [00:14:33] to get started
Speaker 2 [00:14:34] 30 30 30 stock? I’m sorry. Yeah, 30 stocks.
Speaker 1 [00:14:36] So I don’t know, either. I think that’s interesting, but I don’t pay much attention to the Dow Jones anyway.
Speaker 2 [00:14:42] So and they’re in the S&P 500 and the Dow Jones are both, you know, market weighted. So it’s not even an equal weight. So you have the biggest companies that have an overdue influence, outsized influence on the performance of those indexes. So you have to separate kind of, you know, how you’re invested versus the headlines that you’re seeing and what’s happening in the quote unquote market.
Speaker 1 [00:15:03] Yeah.
Speaker 3 [00:15:04] I would agree with exactly what Eric says. The biggest thing is is emotions they get. They let their emotions take control here, essentially where, you know, if they were watching their portfolios every day, which I wouldn’t even recommend doing that because that’s enough. And you know, you’re like this, but you start seeing your portfolio go down 10 percent in a short period of time or you see your portfolio go down 20 percent or whatnot in a certain period of time. People start thinking, Oh my gosh, I’m losing money, I’m losing money, I’m losing money. But the reality of it is, is you only really lose that money when you sell that position. When you sell out, you move it to cash. The biggest question I always typically ask somebody whether it’s a retirement plan or review that I’m doing with a participant or it’s a client or whatnot. If they have a question, should I sell, what should we reposition? Should we do this or they want to do that would be the first question is if you’re going to sell a position and at a loss or at any time, really, at what point in time are you going to get back in? And to your point, and there are a lot of people that I’ve seen that moved their money to a fixed money account or an annuity or something in 2008 because everything that had happened and a lost 20 or 30 percent when they made that switch and in 2017 18, 19, whenever I was meeting with them, even even up to this point, they missed out the entire bull market that happened. And that is a large amount of gain. The other thing that I would say is the timing. There are so many people that want to try to time these markets and to Eric’s point, sticking to the financial plan, making sure that that plan dictates, OK, what is your time horizon? Is it ten years, 15 years? Is it five years? Whatever your portfolio should be structured in a way that meets that time horizon. When you’re going to need to start using income from that, then you’ve got a bucket for growth or whatnot. But we’re not trying to time the market because if you literally sell out, when do people want to get back in when they see all of a sudden the market comes up four percent in one day or three percent in one day, like we saw a couple of years ago? Oh, now it’s time to buy. Well, we just missed out on maybe the largest gain day that we had.
Speaker 2 [00:17:17] So, yeah, I saw a great read, a great article. Recently, it was talking about there was an example of three different investors. One investor was really, really safe and was only buying when he felt safe and secure, and he ended up buying, for the most part, at the top of the market because that’s when the market was quote unquote the best. Another investor only bought at the bottom of the market, and this is going back to like 1980 up through today’s numbers started with $100000. Theoretically, the third investor was basically buying consistently every single month dollar cost averaging, buying when it was up by when it was low. And it a very clearly showed the difference in, you know, between the two individuals that were trying to time the market, one that did it well, one that didn’t do it well, the one that didn’t do it well ended up with, I think, still ended up with like eight hundred thousand dollars. The one that did do it well, we ended up with like 1.1, one point two, the one that just did it consistently with no regard for trying to quote unquote tame the market just consistently invested, whether it was up or it was down, ended up with an additional $600000 over the person that tamed the market well and did the did the right thing and tied that at the bottom and only bought at the bottom. But he was sitting on so much cash in between there and only bottoms out. So often you only get these really massive bear markets once a decade or so. I mean, we had one in, you know, in 2020, we had one in 2008, we had one in 2000 with dot com and the one before that was 87 by Monday, right? So these things don’t happen to terribly often,
Speaker 3 [00:18:45] I think real quick just to piggyback on that because I work with a lot of clients that are in retirement plans. So like for all three B’s government plans, that’s why they’re so good. Exactly. So if you are participating in a four one K for three B 401k plan, whatever it might be where you have systematic simple IRA, where you have systematic contributions going in your dollar cost averaging, you’re doing exactly what Eric just mentioned. So every time you’re contributing to that account, when that stock market’s down 20 percent or 15 percent or 10 percent, you’re buying at lower prices when that goes back up now, you bought more shares at a lower price to go up. So, so again, you want you don’t. If the market went up every single day of the year from here to there, certainly you’re going to make money, but you’re also going to pay for the highest. You’re paying the highest price you can possibly pay every single day when you’re when you’re putting money into the market, when you do that,
Speaker 2 [00:19:38] well, yeah, we did a show. Well, first of all, let me say this, so the market is inherently what risky. By definition, there’s risk involved. It’s going to go, you know, you’re going to go up, you’re going to go down. But without risk, there is no return. So the alternative to not investing is to take your money out and you’re not going to get any kind of return or any kind of return you do get. It’s going to be so minimal. So maybe you’re happy if you’re invested in something with the fixed income that. Family announced that they’re going to raise some rates, right, but we did, we did an episode last year talking about some, some data or some numbers around investing in the stock market. And one of the ones that really stuck out to me was the fact that the stock market is actually down, I think on fifty five percent of the days. So fifty five percent of all days, if you’re checking that account on a daily basis, fifty five percent of the time you’re going to see a negative balance or, you know, the market was down on any given individual day. Most days it’s down. But when you zoom out, you have to look at these things over a long time horizon. If you zoom out, you’re going to see a positive, positive return in most cases.
Speaker 1 [00:20:42] Yeah, look at the end of the day, I started to say that that’s a that’s a that’s a phrase that we were going to remove from my vocabulary wasn’t. Yeah, we talked about that. All right. So maybe at the beginning of the day? No kidding. But look. Anything that dealing with money is emotion, right? We talk to clients all the time. We say this. We say this one phrase to them all the time. Every major financial decision you make in life, there’s two sides to it. There’s a data side of it. That’s what the numbers tell you to do. And then there’s emotional side of it. Sometimes that emotional side can sort of outweigh the number side, but it’s no different. When you have a market correction, the numbers will tell you to stay in it, right? The numbers actually tell you to buy more, right? If you have cash, put that cash to work. But then there’s the emotional side of it as well. You know, I don’t feel good putting money when you putting my money in the market was down, you know, thousand points. But sometimes I can be. That can be tough to allow your emotions to get out of the way to do what you should be doing, which is adding more money to the pool. So it if you’re if you’re looking for something to say, well, what should you be doing right? This table, I’m getting ready to make money on there. That’s why I hold it down a little. Yeah, I know, but I’d say, you know, it’s all about consistent. It’s all about being consistent and putting allocating money when you when you have it. And really, I don’t know what tomorrow the market’s going to look like. I don’t know what’s going to look like five days now, but what I do know is the market constantly goes up. It just it looks weird. Going up there can be all over the place, but that in the long haul the market’s going to be positive. That’s what it’s always done. I think it’s what it’s always going to do, but it’s going to be pretty choppy in between and we’re going to have times like this. But you just get you got to you got to be able to withstand the volatility and not look at your statements. I joke around go, Oh, don’t open your statements as much. And I mean, you open them up and look at them because you need know what’s going on. But sometimes it can be kind of tough to look at.
Speaker 2 [00:22:33] Every, every market correction in the past looks like a fantastic buying opportunity. Buy the dip right. Every market correction in the past looks like a buying opportunity. Every market correction that you’re currently living through feels like the end of the world. We will get through it. We always get through it. I don’t know if it will be next week. I don’t know if it’ll be this year. We will get through it and we will come out on the other side. Like you said, when you zoom out, look at a big enough time horizon is going to go up
Speaker 1 [00:22:59] just as long as you didn’t say, we’re going to get through this, we’re going to get through this together. I do not want to ever hear that saying, you know, if and if you’re not from Kentucky, don’t talk about this Google, the governor of this state and your will know what I’m talking about. But then you think you know me better than that? Anyway, I think we’re all going over that phrase as much as I hate at the end of the day. But anyway. All right. So that’s it for another day. Phone number five zero two two zero zero five two one zero. Call us! Listen to our podcast! We did change the name, so if you guys are, if you’re used to seeing Peace of Mind radio, it’s not going to say the money puzzle. It’s going to be real cool. We’re really excited about what we’ve got coming out. Hopefully in the next couple of weeks, we’re going to we’ll actually do a podcast on that specific thing. We have getting ready to come out. So it’s going to be kind of cool. But anyway, if you’ve got any questions or if you’ve got any topics she wants to cover, let us know. We’re happy to to cover those topics. But I think this has been a good one. We get these calls a lot about what’s a correction. You know, what’s this mean? What should I be doing? So it was good that we covered it anyway. Air is going to start us off and we’ll start to you guys next week.
Speaker 2 [00:24:09] Thanks for watching. Thanks for listening to the Money Puzzle podcast, wherever you might be doing so. If you can, please leave us a review. You know, make sure you’re subscribed and leave us a rating, and we would greatly appreciate it and spread the word to any friends or family that you think might benefit from any of the topics that we discuss here on the show. Look forward to, uh, being in your living rooms or in your car stereos again here next week. The information given here and is taken from sources that IFP Advisors LLC Doing Business is independent financial partners, IFP IFP securities, doing business as IFP and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and or legal advisor before implementing any tax. And or legal related strategies mentioned in this publication, as IFP does not provide tax and or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. This report may not be reproduced, distributed or published by any person for any purpose without AFP’s express prior written consent. Securities offered through IFP Securities LLC Doing Business as Independent Financial Partners, IFP member of FINRA and SIPC investment advice offered through IFP advisors doing business as IFP, a registered investment advisor. IFP and family wealth planning partners are not affiliated. The information given herein is taken from sources that IFP Advisors LLC doing business as IFP IFP Securities LLC, doing business as IFP and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and or legal advisor before implementing any tax and or legal related strategies mentioned in this publication, as IFP does not provide tax and or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.