Market Volatility Adds to Spookiness of October
Key Points – Market Volatility Adds to Spookiness of October
- Why October Is a Spooky Month in the Market
- Trivia Time: Reviewing Negative Periods of Market Volatility
- Stress Testing During the Spooky Times of Market Volatility
- The Difference Between Market Volatility and a Bear Market
- 17 minute read | 26 minutes to listen
After the market experienced a negative month in September for the first time since January, Dean Barber and Bud Kasper suggest that the spookiness of October includes a lot of market volatility.
Why October Is a Spooky Month of Market Volatility
Dean Barber: Thanks so much for joining us here on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper. It’s October, buddy.
Bud Kasper: There’s been a lot of activity out there, and some of it’s a little spooky.
Dean Barber: October is historically one of the spookiest months in the market. This month is also near and dear to my heart because 34 years ago on October 19, 1987, I entered the financial services industry.
Bud Kasper: That is scary.
Dean Barber: That was the single biggest percentage drop day in the history of the market.
Bud Kasper: What did you think at that time? What am I doing? Is this what it’s all about?
Dean Barber: It was a crazy time. There was a 21% drop that day.
A Wild Swing in September
This September ushered in a wild swing in the market and gave us our first negative month since January. January was negative to the tune of 1.02% for the return on the S&P 500. Then, September was negative to the tune of 4.66%. Yet, when we look year to date, we’ve got an S&P 500 just under a 17% total return with two negative months. The point is that typically when you enter September, October, November, those are historically the three worst months of the market.
We’ve been talking all year about how equity valuations are overblown. Valuations, no matter how you measure them, are sitting at or near historical highs. That’s going all the way back to where they peaked in the early 2000s just before the Dot-Com Bubble. That in and of itself is a reason to pause and ask:
- Where are we?
- Can the growth in corporate America and corporate earnings catch up with the prices that our stocks have achieved?
- Or are we going to see the opposite happen?
- Are we going to have a correction?
- Are we going to have a flat market?
- Or is there perhaps a bear market in the future?
Using the History of Overvaluations to Help Predict the Future
Of course, nobody has a crystal ball. Nobody can tell you exactly what’s coming, but we can reestablish expectations for what people should think about. There are ways for people to know how they should position themselves today based on where they’re at in their life and what they’re trying to accomplish. Let’s first talk about some of the overvaluations. Bud, where do you see things today?
Bud Kasper: The point needs to be made that all we have is history. Can we take anything from the past and give any type of predictability going into the future? Look at it from that position and see what’s happening today. When analyzing the overvaluation of the market, I think most people in the business would agree that we are at about 24 to 25 times earnings.
Earnings catching up to the price isn’t typically the way it works. If the earnings increased, then the market thinks it is fully justified at this price. It will move exponentially higher, and we will still have an overvalued market at that point.
So many factors are going to come into play here. The one thing that the stock market hates is uncertainty. Uncertainty is going to run around inflation. Will Jerome Powell stay in the Federal Reserve? How are earnings going to look? It’s always going to come back to earnings. There will always be pockets of opportunity for us to go out and exploit at the appropriate time if we’re comfortable with whatever downside risks there might be.
The Impact of Historically Low Interest Rates
Dean Barber: We’re going to tackle the downside risks because that’s where everybody gets heartburn. That’s where the anxiety, emotion, and fear come in, which leads to people making bad decisions. However, let’s not forget about the one big thing that’s allowing these price-to-earnings ratios to stay elevated. I’m talking about historically low interest rates.
We saw interest rates begin to yield on the 10-year treasury at 1%. Interest rates ran up to 1.7%, then back down to 1.3% or 1.25% a couple of months ago. Now, they are back up to about 1.54%. What was interesting to me is in the last couple of weeks, headlines have read, “Technology Stocks Tank as the 10-Year Yield Spikes.”
Look at the charts. Did the 10-year yield really spike, the NASDAQ really tank, and technology really stink? No. Markets have been on a tear since the end of last March when we had more than a 30% drop in less than a month. The markets have gained all that back and a lot more. There’s a lot of pent-up demand. You’ve got the supply chain and ultra-low interest rate issues. All these things cause some people to worry, not to mention the current political unrest.
Bud Kasper: There’s so many variables. We’re not sure how the markets will be impacted. It’s a big deal, so we must have a full understanding of implications associated with rising rates, rising inflation, whatever the case may be.
Scott Minerd, who is the Chief Investment Officer of Guggenheim, has thoroughly addressed this issue. He is one of the most sought out people with what’s happening to the bond market, the impact from interest rates, inflation, etc. He’s warned us that if interest rates start to rise, there will be negative implications for the stock market.
Trivia Time: Reviewing Negative Periods of Market Volatility
Dean Barber: Let’s do a little bit of trivia to put things in perspective with market volatility. I mentioned earlier that we’ve had two negative months so far this year, January and September. We were a little over -1% in January and about -4.6% in September. In the last 36 months, how many negative months have we had, Bud?
Bud Kasper: I’ll say three.
Dean Barber: We’ve had nine negative months in the last 36 months. so essentially one out of four months was negative over the past three years.
Bud Kasper: OK.
Dean Barber: Let’s back up a little bit. In the last 10 years, how many negative quarters have we had?
Bud Kasper: Six.
Dean Barber: You’re exactly right.
Bud Kasper: That was a good guess.
Dean Barber: That’s 15% of the time. In the last 10 years, how many negative years have we had?
Bud Kasper: Three.
Dean Barber: One. That’s 10% of the time we’ve experienced a negative year in the last 10 years. How many negative years do you think we’ve had in the last 20 years?
Bud Kasper: Three.
Dean Barber: You’re exactly right. Fifteen percent of the last 20 years have been negative years. When you put that in perspective, what that tells us is that there’s one thing that’s certain in the stock market, and that is uncertainty. You can always guarantee volatility in the stock market. Typically, when market volatility hits, it comes in short spurts.
Tackling the Trends of the Stock Market
They have this saying that stocks go up like an escalator and then they fall like an elevator. Sometimes those negative months or those negative quarters are so painful that people have an adverse reaction. They think the sky is falling. People don’t understand what they own, what’s happening, and why they own what they own. They think that this thing can go down into perpetuity. So, they panic out of fear and sell, which is probably the biggest mistake someone could make at that time.
Bud Kasper: No doubt about it. People can be scared about what’s happening here and think there will inevitably be a bear market. How long could it last? How much could that damage your savings, etc.?
Climbing the Wall of Worry
Remember that we always need to climb the wall of worry when it comes to investing. There are ways to reduce your portfolio’s risk at specific times. These insurance people are going to come out of the woodwork and yell about guaranteed returns. Don’t take the risk to the market.
The risk is that the market is the only way you’re going to keep up with what your inflation needs are and the growth you’re desiring for your portfolio for throughout your retirement. It’s simply a matter of understanding it through comprehensive financial planning, where we can influence the amount of net return you have through tax strategies, Social Security strategies, Medicare, etc. It’s the big picture we must keep our eye on.
Dean Barber: I’m glad you brought that up because we have two new videos, Retiring at Market Highs and Retiring with $1 Million, that I want people to watch. They are must-watch videos for anybody that is thinking about retiring within the next five to 10 years, or if you’re retired right now.
Our videos are for educational purposes. We believe that the more intelligent you become will help you be more protected from financial salespeople and better allow to make informed financial decisions.
A Winning Formula: Buying Low, Selling High
The industry tells us that if you want to win at the game of long-term investing, you need to buy low and sell high. We talked several times last year and the beginning of each quarter this year about rebalancing. Now is the time that you need to look at the equity positions in your portfolio compared to the fixed income or the cash positions. Ask yourself if this meets your balance and where you should be from an overall equity exposure.
Keep in mind that the markets have had a great run since the 30-plus percent pullback in March 2020. There’s some uncertainty. The markets are ripe for either a flat or slightly negative period. I don’t think we’re sitting in front of a full-on bear market because you typically don’t see them occur when you have economic expansion.
We do have economic expansion right now, and we’ve got a lot of pent-up demand in the economy. We have a lot of things that are going well from an economic perspective that could keep our asset prices buoyed for a while.
A lot of the upside has been captured, so people would be wise right now to follow that mantra of Wall Street, which is to buy low and to sell high. Take some of your winnings and put them in something safe for a little while. I’m not saying lock it up into something for a long time, but rather sit on the sidelines with a little bit of that money and wait for another buying opportunity.
Capturing Your Winnings
Bud Kasper: Conventional wisdom has always been to stay in the market and not try to time it or anything like that. I’ve never agreed with that. If there is a harm in front of me, why in the world wouldn’t I try to side-step it if I think I can do so. It doesn’t mean you take everything out, but it most certainly means you adjust at the appropriate time. We can win with that type of solution.
Dean Barber: There’s no question about it. Go back and look at your portfolio to see how much you have gained this year. Take those winnings and set them aside for a little bit. You’re not going to spend it or go gamble with it. You don’t want to lock it up into a long-term CD. Don’t lock it up into an annuity or anything like that.
Capture some of those winnings and they’re yours for this year. Just look at it and realize that you’ve done well. It could be a rebalance. Let’s go back into some shorter-term fixed income instruments. They’re not yielding a lot, but they’re going to protect the asset value.
Bud Kasper: The old saying of the wall of worry that we’re dealing with right now is unbelievable, isn’t it? When you look at the debt ceiling debate and the package Congress is working with right now, it is all about debt if you ask me. This is incredible what we’re trying to do to our nation under the guise of equalizing pay structures and things like that across the country. It’s dragging on the market right now.
We need to have some leadership inside of our nation through the House and Senate. There are certain things that we need from a fiscal perspective that makes people comfortable and confident that the economy is moving in the right direction. They need to make these necessary mini steps to compliment that target.
Stress Testing During the Spooky Times of Market Volatility
Dean Barber: If we were working with an individual today, we would focus on their short-term, intermediate, and long-term strategies. The short-term strategy is where we spend from, the intermediate term strategy focuses on getting more equity exposure, and our long-term strategy deals with most of our equities. We would look at this as an opportunity to take those winnings off the longer-term strategy and put them back into the bucket where we know we’re going to spend from. Maybe we created a year-and-a-half or two years of income that we can lock in and put in that short-term strategy.
That’s one of the things that we look at as we’re trying to create that retirement income strategy for people. AllianceBernstein recently said their estimate for a total return for a 60/40 portfolio over the next decade is going to be somewhere between 3.5% and 4.5%. The only way that you’re going to do better than that is by not participating in the big drawdowns that come along. Take advantage of this.
Market volatility is here. We’re seeing price swings of 1% or greater several times per week. What do you do about market volatility? How do you get it put together in your plan? How do you stress test for it?
The Parallel of Post-War and Pandemic Trends in the Market
We’ve gone through a few statistics illustrating market volatility. We know the S&P fell 4.66% in September, which was the worst month that the market has had since March 2020. We had one other negative month this year, and that was January, where the markets were down a little more than 1%.
But, we’re still up over 16% on the year for the broad-based markets. It’s still a great year. The great way to win in the market is to buy low and sell high. The question is, when are the markets low, and when are the markets high? We’ve been talking all year about how high valuations are.
Bud Kasper: There’s a guy named Nick Calus who appears on CNBC quite often and talks about predictability of the markets. He made a significant parallel between past wars and the pandemic in a recent article he wrote. When you come out of a war victorious, you usually have a healthy year in terms of stock market participation. History has told us that stock markets do well post war, meaning in the recovery period.
If we’re in the recovery period as we thought we were last year coming out of COVID-19, that would make sense for the market to be up this year. That’s the parallel that he wanted to draw from that perspective.
We’re experiencing that, but to the point you made earlier, we’re at over 16% on the year for the S&P 500. Even with the consternation we had last month, we’re still tracking wonderfully this year from that perspective.
Assessing Equity Exposure
Dean Barber: This is a time when people should be stepping back and assessing the equity exposure that they should have in their portfolio so they can accomplish the goals that have been set out within their plan. We talk a lot on America’s Wealth Management Show about your plan.
Here’s where this can get interesting. When you create a comprehensive financial plan, which we do through our Guided Retirement System™, you’re essentially starting in the future and then backing your way into today. You want to start with looking at, what are the things you want to happen in your life over the next 10, 20, 30 years, and then get detailed on that.
Then, you start to put dollar figures on that, and apply inflation and apply taxes to it. After that, step back and determine your resources. Let’s say you’ve got Social Security, maybe a pension, some rental income, farm income, royalties, and investments. Once you lay all that out, then you get to answer the question that everybody has, which is, “What does my money need to do to accomplish all the things that I want to do?” We call that your personal return index, your PRI.
Once you’ve identified what that personal return index is, go back and figure out what the asset allocation was that allowed those things to happen with the very least possible amount of risk possible. Put that into the plan, and you’ll come up with the allocation and the percentages of money you should have in equities and fixed income. Then, look at that and ask yourself, “Where am I today? Do I have too much or too little exposure?” After that, you adjust.
Grains or Gains: There’s Nothing Wrong with Harvesting
As things change, we like to meet with our clients throughout the year so we can adjust that as well. We have been systematically reducing equity exposure this year because it’s gotten out of whack. Equities have performed so well relative to fixed income, so we have too much equity exposure in many cases. We could look at it and say, “Why would I want to sell something that’s doing so good and put it back into something that’s very safe?” It’s just a systematic way to do that so that you are capturing those gains, setting it aside, and saying that you will have future income.
Right now, I might have two, three, or four years of future income created since the bottom of the market and COVID. Let’s take that and capture it so that if the markets turn down again, we don’t experience as big of a draw down and have money that we know we can spend.
Bud Kasper: Right. From a farmer’s perspective in that analogy, let’s simply harvest some of this gain. Here’s the issue, though. We’ve had a nice crop. We can harvest that crop, but the question is, where are we going with the money that we just harvested? That becomes another issue we’re all dealing with right now in terms of the safety of the money, how much safety we need, etc.
Inflation Is Always a Factor
Dean Barber: You’ve also got inflation out there that’s going to be a factor. There is also this threat of an increased tax liability through the $3.5 trillion, $1.5 trillion, and other trillions of stimulus money that all include different tax increases. All that impacts most people in America. You need to understand what’s happening right now and how to address it yourself. That’s why I encourage you to watch those videos, Retiring at Market Highs and Retiring with $1 Million.
Bud Kasper: Those videos are incredibly important. Honestly, when we produce videos, we often bring in people that are not necessarily related to the company so we can get their expertise, outlook on what they think is going to happen in the market and other topics semi-related to finance, investing, and most importantly, comprehensive financial planning. Those educational pieces are well worth your time.
Fifteen years ago, at least, when we were doing America’s Wealth Management Show, one of the things that we talked about when events like the recent consternation we’re experiencing in the market was to come in and let us see what you have. That still plays out today. If anything, more so today, because of the gains we’ve had in the prior years. This would be a great time for people to come in and ask, “Is there anything else that I should adjust in my portfolio right now?” We’d be happy to do that for you. We’ve been doing it for years.
A Flashback to the Fall of 2007
Dean Barber: Do you remember in the fall of 2007 when you and I were on the show talking about subprime debt. You wrote the paper, When Subprime Goes Prime Time. Your thesis was, if the subprime mortgage problem leaks into a prime mortgage problem, we have a big problem.
Bud Kasper: And that’s what happened.
Dean Barber: We were saying this, and people were going, “You guys are crazy. Look at what’s happening. The housing market and stock market are great. You guys are nuts.” Suddenly, 2008 rolled around. It wasn’t until the latter part of 2008 that all hell broke loose, but it was horrible. I don’t think that’s in front of us right now, but people need to understand what they own, why they own it, and how it fits into their overall plan.
The Difference Between Market Volatility and a Bear Market
This month is shaping up to be one of market volatility well. We’re seeing swings in the market that are 1% plus either direction. It’s hard for people to get a sense of what’s happening out there and why these are markets going wild like this. It makes people nervous. They think, “Gosh, we’ve had a good run. Should we just sit on the sidelines for a while?” This is typically a volatile quarter, but people must understand that there’s a difference between normal market volatility and a bear market.
Bud Kasper: Right. How many times do I have to say people, investors, and retirees hate uncertainty?
Dean Barber: There’s a lot of that right now.
Bud Kasper: It’s tremendous. I don’t think I’ve ever seen it worse than this. It is beyond belief. I try to weigh all the outside factors that aren’t necessarily generic to financial planning or the creation of a portfolio.
The Source of Uncertainty
Dean Barber: We don’t need to get into politics, but the political environment is the source of much uncertainty. When we talk about this whole idea of inflation, let me tell you where the market is at on this right now. What the market sees when it’s looking at inflation is not only the supply chain, demand, and wage price issues, but a robust economy that by itself, if left alone, is going to produce the target inflation rate that the Fed has set forth. That’s what the market sees.
I think that the market is right. Then the market looks at the trillions of stimulus dollars that the House of Representatives is trying to get rammed through. They look at that and they realize that it would create not just a little bit of inflation with the inflation that the Fed is targeting, but inflation that is far greater than that.
A Two-Pronged Sword
At the same time, that would create a drag on certain parts of the economy through excess regulation and tax at the corporate level and excess tax at the individual level. It’s a two-pronged sword, and both ends of that are dangerous. Any time that this thing looks like it’s getting close to passing and inflation numbers come in, the market’s going to react in a negative way or a positive way depending upon which way this thing goes. That’s one piece of uncertainty out there that goes back to our political leaders. It ties into what’s going on in the economy and the impact of inflation.
Bud Kasper: I’ll give you an example. There’s a great restaurant in my neighborhood that sent out an email to everybody that they’ll only be open three days this week. Why? Because they can’t get enough employment.
It just infuriates me that this is happening. We have all those tankers in places like Corpus Christi, Texas, or Mobile, Alabama, Long Beach, California. We can’t get enough people to unload those things onto trucks and sometimes we’re having trouble getting truck drivers to drive it to their destination.
Going back to what you were talking about before with the debt, inflation is going to impact that debt dramatically. Therefore, if that’s the case, it’s going to cost us. That’s going to be a drag on economic growth and influence the markets as well.
Signs that Show People Could Be Going Back to Work Soon
Dean Barber: We did see just this past week where private payrolls rose by $568,000 faster than expected. What’s happening is that the final paycheck in that second round of stimulus that came around right after the Biden administration started ran out at the end of September. I believe this employment shortage is about to end.
Let’s face it, when you couple the federal unemployment along with the state unemployment, a lot of these people were making more not doing anything than if they went back to work. If you were stuck in that situation where you could go to a job and you could make less than what you were making, if you just stayed on the unemployment with the federal and the state, what would you do?
Bud Kasper: Yeah, obviously.
Dean Barber: But, hopefully over the next quarter, we’ll see some of these jobs getting filled and some of these restaurants getting back to capacity. We can solve some of these issues that you’re talking about with the tankers offshore that don’t have enough people to unload the ship.
Bud Kasper: From a psychological perspective, people need to work. It’s part of what it should be ingrained in yourself to get up and support your family. You don’t want to do it on minimum wage. You want to advance past that minimum wage. When I look at jobs that I had when I was a young man, I look at minimum wage then and look at it now. Wow.
The Purpose of Our Passion
Dean Barber: You and I are both very passionate about that. The reason we’re passionate about it is because it’s impacting people who have worked hard, saved hard, and sacrificed to get to where they are today. These policies put those people who are now getting to a point in their life where they can say, “I’m done, I can stop working. I just need my money to take care of me.” Now there’s all this uncertainty about what to do and how it works. How will they get the income they need with the markets at the high values they are today, interest rates the low values they are today? We have the answers for you.
Please remember to watch the two videos I’ve mentioned, Retiring at Market Highs and Retiring with $1 Million. The Retiring at Market Highs video talks about what happens when you try to retire when valuations are high, and you try to take a systematic withdrawal and keep up with inflation. The other talks about retiring with $1 million. We talked about how a couple of solid financial planning techniques can impact the amount of income that you can have in retirement to the tunes of well over $200,000 to $300,000 of lifetime income.
Dean Barber: Well, Bud, we are here in October, and you and I expect more market volatility to come. We don’t anticipate this is the beginning of the next bear market, because I don’t think a recession is ahead of us. We’re going to continue to keep our eye on this. We’re going to continue touching on this subject throughout the month of October and November. We appreciate you joining us here on America’s Wealth Management Show. Everybody stay healthy, stay safe.
Schedule Complimentary Consultation
Select the office you would like to meet with. We can meet in-person, by virtual meeting, or by phone. Then it’s just two simple steps to schedule a time for your Complimentary Consultation.
Investment advisory services offered through Barber Financial Group, Inc., an SEC Registered Investment Adviser.
The views expressed represent the opinion of Barber Financial Group an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Barber Financial Group does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.