Podcast: Taking a Look Back at 2018

looking-back-at-2018

Clark: So you always know that every day that the market goes up is a day closer to the market going down. And every day the market goes down brings us a day closer to the market going up. And if you keep that in mind you’ll make better decisions.

You’re listening to “Retire Happy” with Roger Gainer, President of Gainer Financial and Insurance Services, Inc. Thanks for joining us. I’m your host, Clark Buckner. After a comfortable 2016 and 2017, 2018 was the year of volatility in the stock market. And this episode we’re looking back on 2018 and discussing how the definition of volatility in the stock market has changed. Along the way, we’ll discuss how even cash can be a barrier of protection for you when you invest. For more content like this, be sure to visit gainerfinancial.com. Enjoy the conversation.

Roger, I’m really looking forward to talking with you today. A little recap on 2018, what we need to be thinking about in 2019, and I know you’re doing so much of this work all the time, it’s gonna be impossible to fit all of this in just one episode. So we’re just gonna hit the high points. But how do you feel about…just diving in, when you reflect back on 2018, what comes to mind, what’s on your heart, and why does that matter?

Roger: Well, thanks for that introduction, Clark, I look back on 2018 and I would say the number one order that comes to mind is volatility. We have seen the reintroduction of significant volatility into not just the stock market, but we’re seeing it now creep into real estate, we’ve seen it in oil, we’re seeing it in bonds, it’s picking up all over the world. Here in the United States, a lot of people got very comfortable in 2016 and 2017, particularly 2017 which was a unique year, it was the only year in our stock market history that we had zero months of down movement in the stock market. So we had 12 up months, that’s never happened before. And so as people came into this year, they were feeling pretty comfortable. I know I talked to a lot of folks towards the end of last year who were like, “No, the market’s doing great. My investments are doing great. I don’t really wanna protect.” And, of course, as soon as that happens, that’s when you should be very nervous because, you know, the market had been going up for over nine years. We’re just coming up in March of next year on the 10th anniversary of the very bottom of the market from the Great Recession of 2007 to 2009. And, you know, people forget, they just do. This time it’s different, is something you’re always hearing. And as a matter of fact on a couple of different points as we look back, I’ll touch on that theme of, this time it’s different.

Clark: I like that, yeah. This time it’s different.

Roger: Yeah. And I’ve studied our markets and our economic system going back to the 17th century. And it’s been said many, many, many times. There’s a great book called “Extraordinary Popular Delusions and the Madness of Crowds.” It was written by Charles Mackay LLD. And it was written in 1865 and if you pick it up and read it today outside of the fact that the language is a little tough…the English language was a little different back then. The stories could be right out of today about excesses and people saying, you know, “This time it’s different, values can reach the sky,” and it goes into things like tulip bulb mania, if you’re familiar with that. That’s when tulip bulbs became the coin of the realm in Holland hundreds of years ago, and that ended pretty badly, and other manias that have picked up.

You know, you’ve seen that going back to gold in 1980 or tech stocks in the 1990s and you saw valuations that really made no sense. But people said, “Well, it can be justified because this is new technology.” And somehow it always seems to come back to a “normal” situation. So looking back over this year, we hit really the high for the year at the end of January of 2018 and the markets have bounced up and down ever since. The last couple of weeks as we’re talking right here, we’ve now wiped out any gain as of today that had happened in the entire year in the stock market. We’re seeing losses pile up in certain elements of the bond market and we’re seeing big movements, today we have a 2% movement in the Dow Jones and the Nasdaq, N-A-S-D-A-Q, markets and it’s becoming more “normal.” This week, it’s Tuesday, if you add this to last week, we’re down well over a 1,000, actually over 1,500 points, in the Dow Jones average. And the market’s looking for a bottom here, no question about it.

But the real thing people need to understand is volatility is back, it’s getting more extreme not less. I wrote a blog post recently about that, it should be coming out the next few weeks, keep an eye out for that on how the market trades differently than it did 30 years ago. And because of these new developments and how the market trades, when volatility occurs, it tends to become much more extreme. And since we got a little complacent, a lot of money managers got complacent, and frankly haven’t had to deal with this kind of volatility for quite some time. And now that it’s back and it’s back in a big way, I would encourage people as we look forward to really take this time right now, don’t wait. And look at your holdings and make sure that you are positioned in a way to take advantage of what’s coming. Volatility is not bad in and of itself, it’s bad if you’re not…

Clark: Right, I was gonna ask you about that. When you think of that word, you know, how should you…how should someone feel and you’re saying that it’s not bad?

Roger: It’s not bad necessarily unless you don’t prepare for it. If you don’t prepare for it, it will run you over. And today that word has changed in meaning, volatility historically means extreme price movements, that’s volatility, and that includes up or down. So you could argue that 2017 was very volatile to the upside, but today people just think of volatility as market losses. In fact, there’s a market called the VIX. The VIX that really, when the VIX increases it’s because the markets are going down and that’s what they call volatility today, it’s become a euphemism for losing money. So the price movements are getting much more extreme without getting too deep in the woods.

Clark: Right.

Roger: There’s something called some technical formations on charts in market after market. In the oil market, in the high yield corporate market, if you look at Apple, if you look at the Nasdaq, if you look at small-caps, the Russell 2000. This formation, this chart formation is starting to appear over and over and over again and it’s called, Wall Street’s so good at naming things, the death cross. Doesn’t that sound…

Clark: It sounds pretty terrifying.

Roger: Yeah, all the death cross is when the 50-day moving average goes below the 200 day moving average. And like I said, I’m not gonna get too deep in the woods here. But when you start seeing that pattern everywhere, you better hope you find a bottom quickly and correct that chart formation, otherwise the technical damage could be extensive and long in the tooth. It could be here for quite some time.

Clark: A lot of times I’ve heard you talk about cash and the security that may bring. When you look at the volatility and look at what’s happening next in 2019, what’s your…what are some of your thoughts around this?

Roger: Okay. Well, great question, actually. I think cash is one of the most misunderstood under-represented and maligned asset classes there is. In every crisis we’ve ever had, when you look back…

Clark: I love as you’re talking I hear some sirens, crisis everywhere.

Roger: Yeah, there’s quite a bit of activity today outside my office. There’s been a number of police and fire and ambulance situations. I’m not sure what’s going on there but hopefully it…

Clark: Yes, when crises happen.

Roger: Yes, here comes.

So cash, you know, because interest rates have been low for so long and we’ve seen people become very uncomfortable with cash. Now, here at Gainer Financial, We help people understand there are strategies for your cash that can help you earn 3%, 4% on cash. But there’s only a few different places where you can put your cash and one of them certainly is under the mattress. But as I started to say, in every crisis, when we look backwards, if you think 2008, people who lost, you know, they bought a bunch of homes and they lost them due to the downturn and they lost their primary residence. If they’d had cash, they wouldn’t have been in that position. a lot of people got overextended with debt and were cash poor. And that’s why they ended up having to sell things at losses, couldn’t make moves in their stock portfolios, couldn’t take advantage of really the opportunities that presented themselves. I mean, let’s face it, the S&P 500 was down 60%. When you go to Macy’s to buy your Christmas presents, if there’s something selling at 60% off, you’re all over that rack, right?

Clark: Right.

Roger: Okay, but if you don’t have any cash, you can’t get all over those assets. But a lot of people made a huge amount of money coming out of the last recession. So, you know, they can either be a detriment or they can be a tremendous advantage if you are prepared. But being prepared means you have to have patience and a lot of people are very impatient. I’ve had a few clients over the years that say, “I’ve got this cash and it’s not doing anything and it’s driving me crazy.” Well, you don’t wanna put it somewhere and lose money, that’s even worse, right?

So, you know, we sometimes have to talk people off the ledge of, “Gosh, I got to do something. My friends are doing something and they’re making money.” You really have to keep that along those long term objectives, have that context so that you can make those decisions. But even if you’re just investing, you have to understand that today, even if we experience a pattern we usually experience in the third year of presidential terms. So this is an interesting statistic for you Clark. Since 1946, we’ve had 18 midterm elections. And the year after the midterm election, this last one was the 19th. In every year after the midterm elections, we’ve had the stock market go up and go up by an average of 17%.

Clark: Interesting.

Roger: Yeah, and that’s a pretty strong pattern, usually it’s attributed to the fact that Congress and the White House get very generous. They start giving away money and stimulating the economy because like Clinton said all those many years ago, “It’s the economy, stupid.” And if you wanna get reelected you better have the economy and the stock market percolating along when the election season rolls around. So that’s generally what happens and then frequently, in the fourth year, it’s not as good because now we’re gonna all start fighting this to claim our territory for the coming campaign. You know, that’s the political cycle but it certainly spills over into those markets.

Now, all of that said, past performance is no guarantee of future results. And with the increase in volatility, one of the things we’ve seen in this last year is a lot of generally accepted economic principles being violated. The Federal Reserve normally when things are good, we would see interest rates going up and that helps the Fed to have tools in case there’s another recession so that they can cut rates and stimulate. They wanna reduce deficits to pile up cash. You wanna take the excess tax receipts to reduce the deficits to retire debt and to get the nation’s balance sheet in order. We’ve seen that happening here in California over the last three or four years. Governor Brown has built a rainy day fund. They’ve been resistant to taking the increased revenues and starting a whole bunch of new programs because there’s this understanding that there’s a boom-bust cycle, things get better and then things get worse.

So you always know that every day that the market goes up is a day closer to the market going down. And every day the market goes down brings us a day closer to the market going up. And if you keep that in mind you’ll make better decisions. So when it’s going up for a long time without going down, that means that when it does go down, it’s gonna just go down more. So take advantage of that up time

So this year, instead congress decided to cut taxes to stimulate an economy that was running along at a very high rate to create jobs when we don’t have anybody available to fill those jobs. For the first time, really in memory and probably in history, there’s many jobs being offered unfilled as there are people looking for work, actually there’s more jobs. So, by cutting taxes to try to create more jobs, we don’t have anybody to take those jobs. So it kinda, you know, becomes cross purposes if you will. And so because we’ve done things that you normally wouldn’t do when things are going well, maybe next year will be the exception to that year after midterm elections. The volatility is suggesting that in all kinds of asset classes, we’re seeing it in gold, we’re seeing it in bonds, we’re seeing it certainly in tech stocks, Apple, the so-called Fang stocks, F-A-N-G. Have you heard of that?

Clark: What’s a stand for?

Roger: That stands for Facebook, Amazon, Apple, Netflix, and Google. So when that was coined, Google wasn’t called alphabet like it is today. Okay, but those were the stocks. You bought those, you didn’t have to think about it. They were going up, they were gonna go up forever, and you’re just cashing the money. Unfortunately, there is this thing called gravity and nothing goes up forever. And so those are actually the five stocks that are starting to lead this market down. We’ve seen 20% drops in Apple, we’ve seen Google doing the same thing, as of yesterday Netflix was there and we’re waiting for the other two to just join the party. There is a…there needs to be an understanding when you’re going to be in the stock market about how it actually works.

So over this last year, it’s certainly reinforced the importance of dollars. Even now we’re seeing articles about, you know, the dollar is Fiat currency and you should be buying gold. I get clients calling me about gold and Bitcoin. Have you been investing in Bitcoin?

Clark: I’ve been watching it. I know we can get on the weeds on this, but on a high level, what’s been your take on the whole cryptocurrency world?

Roger: Well, cryptos interestingly enough have their own self-limiting upside limiter. There’s a cap on what you can do with cryptos because there’s a limit to the amount of electricity in the world and I don’t think a lot of people understand this. But mining bitcoin is very, very, or any cryptocurrency is very energy intensive. You have to push some serious computer power to get these things out. In fact, I read an article on “Market Watch” about a week or so ago, that it costs three times as much to mine a dollar’s worth of Bitcoin than it does to mine a dollar’s worth of gold. And if you’re familiar with how labor intensive and equipment intense and capital intensive gold mining is, that is…frankly it’s shocking. But I read a report six months ago that it’s a current level of expansion, this was back when the cryptos were doing much, much better than they are today. And it said that by 2022, 100% of today’s energy production will have to be used to run blockchain technology. That means we’ll have to double the amount of electricity on the planet. Boy, that’s a big ask.

Clark: What?

Roger: That’s a big ask.

Clark: That’s so unreal. It’s been such an interesting year, so many things.

Roger: Well, it certainly has and, you know, there’s two ways people react. One is to ignore it all. And I would say ignore what’s going on with your investments at your own peril going forward. And the other is to panic, it’s easy to happen. And to me, if you feel yourself panicking, it means you’re in the wrong stuff, okay? I don’t care what you invest in, we use a very big toolbox here at Gainer Financial because I’ve come to realize that, you know, stock market…we’ve talked about this. The stock market isn’t right for everybody, the mine market isn’t right for everybody, real estate isn’t right for everybody. But for the people it’s right for, it’s very right for. So pick those things that you can relate to that will help you sleep at night. If the volatility in the last few weeks, if you think that’s gonna go away quickly, I think you’re going to be very disappointed.

So as we look forward to 2019, I’m hopeful that the markets will be up overall for the year. I still feel that that’s a good possibility, but it isn’t gonna be a straight line, it isn’t gonna be 2017. We are gonna have to start embracing volatility. And one of the best ways to embrace volatility is to have cash available to buy the dips and to take profits when markets are up. That’s probably the single hardest thing I see people have to do, they don’t have a sell discipline. So if you don’t have a sell discipline in terms of taking profits, you should at least have a sell discipline to limit your losses. And I would put to you, it’s not losing from where you bought, it’s losing from where ever that investment peaked. So if I bought Apple at $5 bucks and I rode it up to $900, split adjusted or $1,000 split adjusted. If that thing drops, you know, I don’t wanna write it back down to $5, that would be really depressing. So you gotta know when you’re gonna sell, you have to have that context to understand and make those decisions. What’s this money for? We’ve talked about this a bunch of times over the last couple of years, Clark. Once you have that context, your decision making you can be more empowered to make good decisions on your behalf.

Clark: Well, that’s I think a good moment to, of course, mention the Thought Organizer and how that’s a tool. I like how you mentioned there are these variety of options, some things work for some people and there are some things that aren’t maybe a good choice. But the Thought Organizer is a tool that you use to help your clients find those right matches.

Roger: Well, it’s where our process begins because if you can get your thoughts in line. If you can get in touch with where your head and your heart connect and understand what your priorities are, what’s truly important to you. You know, I would put it that health, for example, is much more important than money because if you lose your health, I don’t care how much money you have, you can’t buy it back. Okay? We see all too often in our society people trading their health to gain wealth and then they think they can buy it back and that’s just a bad deal. It doesn’t work that way. I have several friends that come to mind, that are workaholics and their health is in trouble these days. They make lots of money but they’re not relaxing and enjoying it. So, knowing how much is enough is really an important part of being able to make those proper decisions.

But as you go forward into next year, take advantage of right now. We’re gonna see a lot of moves happen because people are gonna be surprised when they file their taxes come April. So use a little time now to talk to your tax preparers and make year-end moves this year because we’re in a completely different tax code on top of all these other changes in markets that I think will likely increase the amount of volatility going forward. So, have strategies, do your year-end loss harvesting so that you can be more comfortable taking gains and not worrying about taxes. And get yourself a strategy to protect what you have and to get ready to profit. Frankly, we’re gonna have a great buying opportunity sometime in the next three or four years. And wouldn’t you like to be able to take advantage of it? Remember, this is all about buy low and sell high. It doesn’t matter what markets you play in, that’s what we’re all trying to do. And so even with the recent volatility, markets are historically very, very pricey.

One quick warning that I wanna put out there, I need to emphasize this. I’ve talked about this for two years. If you are in bond funds, you better know what’s in them. Bond funds are not a safe haven today. They might help you a little bit if they’re treasuries. But if you have corporate bonds in your portfolio, so if your fund is called a Total Bond Market Index Fund, if it’s called a corporate or high yield fund, especially if it’s called a high-yield fund, those are junk bonds. And junk bonds tend to be the canary in the coal mine and they are getting beat up badly right now. We’re seeing spreads between the yield on those much higher than they’ve been in a number of years and they’re going in that direction. That means the value of those underlying bonds are going down. And if you’ve got these things in an ETF or a mutual fund, you better get out of those things because the liquidity is drying up rapidly in the high-yield market. Please, you moved into those funds to protect yourself and they’re going to be hurt badly.I rarely say something that definitively, Clark, but the high-yield market, it is not time to own high-yield corporate bonds. A lot of those bonds come from people who work, companies who work in the oil industry. Whether it’s drilling companies, oil service companies, or the oil companies themselves, it’s a very capital intensive business, drilling wells and pumping oil and gas. You may not have noticed but oil is down from about $76 a barrel to under $55 a barrel, that’s a huge move in just two months. And a lot of it has to do because they’re having trouble raising capital to keep the companies going. There is an oversupply in our country because of tariffs. A lot of foreign countries have increased their pumping and production, so inventories are up and it could get ugly, it really could get ugly. So, I encourage our listeners to please take the steps to protect yourself. There’s a time for greed and there’s a time for fear and if you don’t have a healthy bit of fear, it could turn out very badly.

Clark: Well, Roger, thank you as always, really enjoyed connecting with you and just kinda hearing. Well, we’ve been able to kind of take back from this year. I know again, we could talk a long time about it but I really appreciate the macro view on what’s happening and why it matters.

Roger: Well, I appreciate that Clark. And yes, as you look forward, if you need a sounding board or you wanna be introduced to strategies for protecting your assets, there’s a number of different ways to proceed. If that’s the case, please give our office a call, go on our website through the contact us and send us a message. That’s www.gainerfinancial.com. And we’ll be happy to set up a complimentary consultation and see, at least introduce you to some ideas that you can follow up with to protect yourself at this time. And I wanna especially talk to my listeners who are within five years of retirement either before or after because you do not have the time to make up for significant losses. You just don’t and it will have a significant negative impact on your ability to retire.

Clark: Thank you, Roger.

Roger L. Gainer, RIPC, ChFC, California Insurance License number 0754849, is licensed to sell insurance and annuity products in California, Illinois, Arizona, Nevada, and Oregon. Roger L. Gainer is an investment advisor representative, providing advisory services through HFIS Inc., a registered investment advisor. Gainer Financial and Insurance Services, Inc. is not owned by or affiliated with HFIS Inc. and operates independently.