David Nelson:
Welcome, everyone. My name is David Nelson, NelsonCorp Wealth Management. I’m being joined today by Jake Woodcock, Portfolio Manager at NelsonCorp Wealth Management.
David Nelson:
I want to thank you for tuning in. As I think we all know, the investing landscape is changing very rapidly.
David Nelson:
As we have committed to trying to keep everyone informed and trying to get the most current information to you, we’ve embarked on this monthly update that we will be sending out, as far as on a regular basis to you.
David Nelson:
Our goals are pretty simple and straightforward with this presentation and that is to try to take some of the complexity out of what’s happening and try to simplify it.
David Nelson:
We brought along, like I typically do, some charts and graphs. Hopefully, that will give you a better visual, as far as what’s taking place.
David Nelson:
The battlefront, as I think most people know, is the concerns about inflation. This has really hammered some parts of the investing marketplace, which we’ll drill down into here, in a little time.
David Nelson:
The FED has increased interest rates by a half percent. They pretty much committed to two more, at a half of a percent. We’ll see if that takes place or not. Certainly, that’s weighing on the market.
David Nelson:
What’s happening in Ukraine is always front and center, as far as what’s happening there. Now the political battles, we’re already starting to see it, as far as this is starting to really get rolling here, as far as the battles and as far as who wants to control the House and getting the right people in position.
David Nelson:
So with that, let’s get started. We’ll put up a slide here, a disclosure. Obviously, in our line of work, I think everybody is aware as far as the importance of disclosure and the attorneys’ mandate, as far as this stuff takes place.
David Nelson:
We’ll leave it up there for a second here, let you breeze through it and then we’ll move on.
David Nelson:
We’ll try to get to some of the information that I think will be of really nice value to you.
David Nelson:
Our next slide, hopefully, you can see as far as what we’re getting at here. The message is really simple and straightforward with this particular slide. That is there has been really no place to hide. Pretty much all asset classes are down substantially, year to date.
David Nelson:
The one that I’ve been chatting with my clients a lot, is this asset class called bonds, which people don’t buy bonds, as far as to get rich. They buy bonds as far as to protect capital.
David Nelson:
It has been really rough because again, stocks have been roughed up and bonds have been roughed up. The only asset class which is the top blue line there, are commodities. If you had all your money in commodities, you’ve had a really good year. Outside of that, it’s not a question of if you’re down, it’s a question of how much you’re down.
David Nelson:
With that, I’m going to say, Jake, feel free to jump in here and add to that.
Jake Woodcock:
Sure. Yeah. I look at this and generally speaking, out there, a broad repricing of risk. I think the market is looking at rising rates. Liquidity is coming out of the market. A lot of the fiscal stimulus and monetary stimulus is going away.
Jake Woodcock:
We’ve had the geopolitical issues, and recently looking at some growth slow down.
Jake Woodcock:
U.S. GDP actually contracted on this last print a little bit. Some of that was kind of a statistical effect, but globally, we’ll touch on that a bit later. It certainly looks worse globally, as far as growth is concerned.
Jake Woodcock:
I’ve heard a lot of comparisons to the 2000s, with the tech bubble and the way the growth stocks have been acting, and then also the 1970s with inflation. I think those are probably a bit extreme in terms of the comparison, but I find a lot of similarities to 2018, if people remember in the fourth quarter of 2018, the S&P was down right at 20%. The NASDAQ was a little bit worse, 23%. We are a little bit worse than that currently, but a very similar setup. The Federal Reserve started raising interest rates very gradually in 2016 and ’17 and in 2018 they thought the economy was in good shape, they started raising in earnest, and then the fourth quarter comes and the market throws a fit. What was interesting there is, and first thing in 2019, in January, the Federal Reserve basically blinked, they backed down, didn’t raise rates again, and then started cutting later in 2019.
Jake Woodcock:
I think the big difference between then and now is I do not see the FED blinking. We know the rate hikes are coming, so it’s really just the market trying to find out where they want to price in terms of the multiple.
David Nelson:
This slide is probably one of the most valuable I think of what we’re going to go through today. Just giving you again, a nice visual. We think it’s really important. Jake brought up as far as the growth area. Look at some of the growth stocks out there, folks, you probably heard them on TV. I mean, there are many of these stocks that are down 30, 40, 50% as far as this point in time, and some even greater than that.
David Nelson:
The comparison going back just a few years was ’07, ’08, ’09, as far as growth stocks getting roughed up, as far as there. The NASDAQ factor in that era was down 82% as far as peak to trough. Hopefully, we’re not going down that path, but anyway, again, just letting you know, as far as this is what is happening out there in percentage terms. Hopefully, you got a better idea now. The next slide is talking about indexes and understating as far as what’s really happening underneath. This is yours, Jake. Why don’t you go ahead and take this and tell folks.
Jake Woodcock:
The top line there, the green line is the NASDAQ going all the way back to the 1970s. You can see with the exception of the dot com bust there in 2000 through 2003, it has been pretty impressive, but again, the broad performance of the index has masked some of the stuff going underneath the surface. The orange below that in the bottom clip there, that is showing us the percentage of stocks in the NASDAQ that are down more than 50% from their one-year high. Currently, there are more than 50% of NASDAQ stocks that are down more than 50%. So that’s quite a beating in those names if you’ve owned them. A lot of things like the unprofitable tech, expensive software companies, high, multiple stocks in general, have certainly fared the worst.
Jake Woodcock:
Again, once you get outside of the big, broad-based indexes that are weighted in the big names underneath the hood there is a lot of turmoil there. Another statistic in this vein, a third of the stocks in the S&P 500, which are the blue cap, US stocks, and the big ones. A third of those have given up all of their gains from 2020 and 2021. It feels like we’ve had a pretty good run since then, but literally, a third of those stocks down have given up all those gains from those two years.
David Nelson:
I should have prefaced this earlier on, as far as the NASDAQ, for those that aren’t aware, we’ve got multiple indexes out there that people can invest in, ETFs and whatever, and get that exposure. The NASDAQ, I don’t want to basically say it’s one area, but it’s primarily technology. Technology has been the place to be and might still be the place to be as far as when we come out of this. But the reality is that those stocks that have done so well are some of the stocks that have really suffered. You have some of the big household name companies that are down and they’re down substantially. Again, this is all about educating. This is not about having the exact answer. It’s basically saying to you, as far as the investors out there that, hey, here are the challenges that we face on a day-to-day basis.
Jake Woodcock:
So one more thing to note here, like I said, a lot of the smaller names, I said, 50% down more than 50%. Up until recently, the big names, the Apples, the Amazons, the Microsofts, they’ve held up pretty well up until recently. Lately, we’ve seen everything come under pressure. It’s those big names that have propped up the market and will decide the direction from here, I think to a large degree.
David Nelson:
Okay. We talked stocks a little bit. Let’s transition over to bonds. The next slide folks, we’re going to talk about bonds, and they’ve certainly been under pressure. My career started in 1981. In 1981 interest rates were pretty much peaking. For those that have been around the block like myself, a few years, you realize that you could waltz into the bank back in that era, 1981, and you could buy a CD that is paying 15, 16%. I try to explain on most of the calls and most of the educational stuff that we do. I said, “People, I think have a pretty good understanding of stocks.” The bonds, I think we’re lacking as far as in that area, so we try to spend some time on this, even though they’re not exciting. Again, people buying primarily as far as for capital preservation and trying to keep together my assets.
David Nelson:
Typically, historically, been a good buffer against stocks, but as we’ve seen, as far as over the last several months, that hasn’t worked out this time. So 1981, 16%, rates went almost down to zero as far as a few months back. If you remember the teeter-totter if you’ve joined us before bonds worked very similar to a teeter-totter. When one side is up the other side goes down and vice versa. So interest rates have been trending down, subsequently, the value of my bond has been going up and I’ve been making pretty good returns with very little risk. Now, the shoe is on the other foot right now. Interest rates have been trending up and it’s a question now of what type of bond you own and how much it’s actually down. The one that I’ve been chatting with my clients about on a daily basis in all the meetings that I have is I said the 20-year government bond last year was down over 5% last year. This year, that 20-year government bond, and we’re recording this on the 13th of May, as of yesterday, you’re talking about an asset class, that’s down north of 20%.
David Nelson:
We’re talking about a 20-year government bond down over 20% this year and last year was down as well. Now, an interesting point to note here. I suspect most of you probably aren’t aware of this is that we’ve never had two years ever that have been negative back to back. This year it looks like a certainty, as far as that’s going to take place, as far as with a 20-year government bond being down 20%, as far as year-to-date. Other areas of the bond market have suffered as well. Some of them are not as bad, but the bottom line is it has been a really, really rough space as far as to be in.
Jake Woodcock:
Yeah, absolutely we’ve talked a lot this year about it. As the geopolitical tensions came up with Russia and Ukraine and the stock market was falling, it seemed to go unnoticed that this is literally the worst bond market most people have ever lived through. Really going back to the introduction of most of the current indexes that are widely followed, the Barclays AGG bond, and then the Bloomberg US Treasury indexes. Their full history now, this is literally the worst ever. The other probably real important thing to note there is for the last 20 years or so, stocks and bonds have moved in opposite directions and that has given investors a lot of that cushion. That is why most investors consider bonds to be these safe assets, but we have been in a falling inflation, falling interest rate environment for those 20 years.
Jake Woodcock:
When you have a rising inflation environment, what you tend to see is those correlations change. All of a sudden stocks and bonds, the prices tend to move in the same direction. Depending on where interest rates go and where inflation goes, bonds may not provide the same diversification that they have in the past, which will probably touch on a little bit later. I guess the one glimmer of hope here is that David talked about the teeter-totter. The one good thing about that math is that as yields rise, the future returns, the expected returns get better. So if you consider starting yields tend to be about what you can expect as a return from bonds. As rates go up, that builds up some cushion there and the future returns on bonds should look a little bit better, but it’s painful in the meantime.
David Nelson:
Next slide, we talk about cash as a tactical move. Tactical, implying that it’s a temporary thing and maybe a good place to hide. You want to expand more on this slide, Jake, as far as what we’re trying to illustrate here?
Jake Woodcock:
Sure. The numbers that are right there are kind of hard to read, but what we’re showing in the top pane there, the green line is the inflation-adjusted yield on cash. Normally, people think a dollar is a dollar when it comes to cash, but this looks at it in real terms. If my cash is yielding zero, as it has been recently, then inflation at 8% is essentially 8% behind. If inflation stays at 8% for a year, my cash is zero. I’ve lost 8% purchasing power. So the green line in the top showing that at any given point in time. The gold line on the bottom looks at that on a cumulative basis, so kind of a running total. We see on the far left way back in the 1930s, cash was really losing ground, especially as we went into World War II in the forties, inflation was running high, the government was keeping cash rates low, like they have been recently, and we saw a huge decline.
Jake Woodcock:
Essentially, holders of cash during that period lost 50% of their purchasing power through about 1950. Recently, we’ve been in a similar environment where inflation, fortunately, has been low, but not zero, and cash has been zero since 2008 in the financial crisis. If you can’t read the numbers on that gold line currently, we are in a 20% drawdown. Since 2008, if you’ve held cash that whole time, it is now worth 20% less in terms of purchasing power. Again, long-term, that is really problematic, short-term, the fact that it doesn’t go down like other assets in quick declines makes it a good tactical play, but again cash is probably not as safe as most people think over the long-term when you consider that in history, we’ve had a 50% real drawdown in cash before in the US.
David Nelson:
Now, most folks look at this year and say, they wish they had everything in cash. Knowing as far as what has happened with stocks and bonds. What you’ve basically walked us through here is that it can be a wonderful hiding place as far as for one’s money. We’ve had a lot of people wish they had it buried in the backyard, but again, when we start throwing inflation and whatever in there it makes it very difficult. One last point on this slide. I talk about this a lot as far as if we’ve got a… The goal is to try to keep pace with inflation and taxes. Depending on what numbers you want to use, we’re looking at let’s say maybe a 3% long-term inflation or maybe even 4% inflation over an extended period of time now, and then you’ve got the taxman that wants a little bit of your money.
David Nelson:
Translation, you got to make five, 6% as far as the rate of return. So again, we’ve got to invest. We all know we need to invest as far as over a period of time. The key is timing. Our objective has been, as far as year-to-date has been trying to mute as far as this downside risk. Depending on what index you look at, we’ve done a pretty nice job as far as pertaining to bonds and as far as getting out of a lot of the ones that have been hit the hardest. As far as stocks are concerned, we’ve had a pretty light allocation there. We’ve held up pretty well. The next slide is going to give you a visual of the importance of this. This is a really important slide folks. And again, what we’re looking at here is a variation of… A lot of times people think in terms of I’m going to put half my money in bonds and half my money in cash, or maybe half in bonds and half in stocks, could be a variety of different things.
David Nelson:
So what we’re illustrating here is the stocks and bonds combo. We start with a 90-10, so 90% in stocks, 10% in bonds. Then we go all the way down in 10% increments here. What we see is those lines are really tight. The point being with this particular slide is looking at a 90-10 combo, 90% stocks, 10% bonds, and then a 90-10 in the other direction, so we have most of it in bonds and some in stocks. What we see is the returns have been almost identical during that particular period of time.
Jake Woodcock:
This is kind of what I mentioned earlier in terms of the correlations. People are used to having that buffer from bonds when stocks have a rough patch. But again, in these rising inflation periods, if stocks and bonds are moving together, you really don’t get that cushion. So that presents a lot of challenges for investors, in particular, the buy and hold asset allocation model. Really, I think those types of investors are definitely going to have to probably reset their expectations for future returns.
Jake Woodcock:
There is no way you can look at what has happened in the past and expect that to repeat itself. But it also tells me that you need to look for diversification elsewhere. We talked about commodities having a good year. There is real estate and other real assets and you can also diversify by strategy. We use a lot of different tactical types of strategies that we can move things around. I think investors going forward are really going to have to lean on that to fund the kind of returns that they’re used to, or like to see going forward.
David Nelson:
Be realistic. I mean, that is probably one of the challenges that we have is that I think all of us that have been investing for a few years, we’ve gotten spoiled as far as the rates of return going forward. Again, I just look at… For most of my career, if we didn’t like stocks, we could take our money out of stocks, and we could put it over to these safe investments over here called bonds. They were paying 5%, 6%, 7%, 8%. Now, we pretty much went to zero. They backed up a little bit and come back up as far as in the 2%, 3% range now, but still two to 3%, factor in inflation and factor in taxes. It’s quite a battle.
David Nelson:
Next slide. This one is a little harder as far as to read and understand, but I think what’s important here, and I’ll let Jake expand upon this, but the big picture is, as interest rates are going up, what we are trying to illustrate here is different patterns that have taken place in the past.
David Nelson:
Doesn’t mean they’re going to take place in the future, but history is probably the best guide that we have to try to look at in the future as far as what is going to take place. What we’re looking at here is essentially looking at interest rates trending up by the FED increasing interest rates. When they’re consistently increasing interest rates, pretty much every meeting, what happens then is typically the markets don’t do as well. Whereas if the FED periodically, hey, today, we’re going to increase interest rates, but we are not in meeting two or meeting three. They didn’t increase. Markets can usually swallow that much easier than they can when interest rates are going up each and every meeting, which appears to be the pattern in the path that we’re going down right now.
David Nelson:
The FED has pretty much announced, we’ve got two more coming and they’re probably coming in the very next meetings, the next two meetings. The market is reacting to that like history is trying to illustrate here as far as in the slide that they don’t like that in the bottom line as markets have a tendency, as far as the sell-off.
Jake Woodcock:
Sure. I’ll try and explain this a little bit, because I think if I had to pick one thing that I think is really driving the current in the market, it would be this. I think probably the declines we’ve seen in most risk assets can really be attributed to the resetting the discount rate, the higher interest rates make earnings in the future worth less. I really think this has been the key driver. If we look at the two lines, I want to point out first are the bright green line and then the blue line. What this does is separate market returns. The blue line is when the FED is hiking interest rates and the green line is the times when the FED is not hiking interest rates.
Jake Woodcock:
So obviously, not hiking interest rates much better for stocks. Then the black line and the orange line are when we break apart that blue line. We say, if the FED is hiking interest rates quickly, that’s the orange line. If the FED is hiking interest rates slowly, that’s the black line. We can see out of all this, the FED hiking rates quickly, that orange line is by far the worst-case scenario. It’s also very clear that’s the scenario that we’re in. The FED has been very transparent about what they’re doing, and we know that the hikes are coming this year. We definitely know we’re going to have a fast cycle. Basically, this just tells us that stocks are really going to struggle compared to those times when interest rates aren’t rising. Again, like David mentioned, be realistic. We have to have set expectations. In terms of what we think stocks are going to do over the next year or two, I don’t think we can expect too much if this is the way things unfold with this fast-rate cycle.
David Nelson:
Okay. Next slide. Global growth. Jake made reference to that earlier, as far as trying to… All countries are kind of tied together here, as far as looking at some of these data points. This particular one we’re looking at globally, as far as what growth looks like. I think all of us in the United States have been the lucky beneficiaries, as far as some of the happenings around the globe, the dollars, the currency of choice. Subsequently, we get many benefits as far as from that. When we look at growth prospects for the United States, they don’t look that bad, but when you get outside the United States, things don’t look quite as rosy. Jake, once you take it and walk people through, as far as what we’re looking at there.
Jake Woodcock:
This is a model that’s based on economic indicators from 35 different countries. It looks at things like financial conditions, business, sentiment, manufacturing, building, and it takes all that and gauges global growth and the probability that global growth actually contracts. Currently, we’re sitting at about 80% likelihood that we’re in a recession and that’s represented by that orange line, in the bottom clip. Then the gray shaded periods are actually defined recession periods. So you can see there’s a fairly high degree of accuracy when this is saying there’s a high likelihood of a slowdown. We do tend to see recessions. It’s also interesting, this tends to lag the defined recessions a bit. So this tells me there is a real likelihood probably that the global economy is already in recession.
Jake Woodcock:
And as David mentioned now, the other takeaway, if you look at those gray shaded periods and compare them, we don’t have it here, but if you compare that to the US, it’s a stark difference. Since 2008, actually, the global economy has been in a recession 50% of the time. And that certainly has not been the case in the US other than the brief recession in 2020. We haven’t seen that since 2008, but you go globally, and 50% of the time, since the financial crisis, the global economy has been in a recession.
David Nelson:
So you could still make money during recessions. It’s harder. It’s a greater challenge. But again, just trying to educate you as far as what we’re seeing, as far as out there, and then trying to make informed decisions about tomorrow. Obviously, nobody rings a bell as far as entries and exits. The tools that we use, we’re showing you as far as a few of them here, as far as, that we use on a daily basis to try to help us make informed decisions. The tools have been pretty remarkable as far as trying to shield us from some of the nastiness this year. But again, we’re not saying it’s over, we’re not saying it’s not over. What we’re trying to illustrate here is, again, just trying to give you a weight of the evidence is the term that we use a lot.
David Nelson:
We’re just trying to lay that out for you. So the next one we’re looking at bonds. I’ve spent a lot of time chatting with my clients recently about this and they’re saying, what do you see, when do you see this recovering, and what do you see recovering first? If I were a betting man, and I’m not, but if I were a betting man, probably the opportunities are going to come in bonds. I’m not talking about great opportunities where you can double your money in a short period of time, by any means. What we’re talking about here is some stability.
David Nelson:
When we look at a 30-year government bond, it’s really important when we look at patterns and things of that nature, as far as how to invest profitably. The 30-year bond is a really important variable as far as when it reaches some level of stability. And it’s not ramping up at the levels that it has been over the last month, month and a half. When we see that again, that’s probably going to indicate that stocks have some opportunity as far as to maybe make some forward progress versus back peddling. But I think the bond opportunity is going to be probably one of those that’s going to present itself before we see it as far as in stocks.
Jake Woodcock:
Yeah. I think that’s the message we have here on this chart. The top section there with the green line and the orange dash line, that is a model that uses a couple of key inputs. Safe bonds like treasuries tend to stay anchored to fundamentals, because it’s not really a question of if you’re getting your money, it’s how much is your money worth when you get it? So it’s primarily anchored to things like inflation. We look at the historical relationship of bond yields to inflation and cash rates and the bond yields in other countries because those act as competition for safe assets and the message is currently that maybe the current move in yields might be a bit overdone. So I agree, probably going to see some opportunity there before we see it in stocks.
David Nelson:
The last slide that we have here is looking at stocks and it’s looking at past patterns. If you’ve ever listened to me yap, either face to face, in the office, and/or in any presentation, TV, radio, et cetera. I like to quote Mark Twain often, and that is history never repeats itself exactly, but it rhymes. And so what this slide here is trying to illustrate is it’s looking in the rear view mirror and various patterns that take place, and it brings them together into one conclusion.
David Nelson:
Doesn’t mean it’s going to be right. Nobody is implying this. But what this does do is it is a tool that we use as far as to try to see into the future as far as what’s going to take place. What we’re illustrating here is the red dotted line is showing us the current pattern and then the blue line is illustrating as far as these past patterns shoved together. What we see here is that there’s some hope potentially as far as for stocks, not two years down the line, not three years down the line, but maybe even in the second half of this year.
Jake Woodcock:
Yeah. And I think a lot of people downplay this type of cycle analysis, but I think in recent years it’s actually gotten a bit stronger because some of the structural market forces that it captures are getting more pronounced and things like options expiration at the end of the month, or the end of the quarter, those have a lot of impact on the direction of stocks. More and more, we’re seeing turning points around those kinds of events, but definitely, this isn’t a roadmap per se. It can really get swamped by macro factors. But I would say you could probably look at this as the path of least resistance for stocks. It’s going to be the natural state that they would want to be in. But yeah, like David mentioned earlier, the weight of the evidence, this is definitely hopeful, but just one small piece in a lot of the data we have to sift through.
David Nelson:
To wrap it up here, I guess I would just bring it back to everybody. Stay focused and relax. Jake is working hard. We’re working hard here as far as trying to again, get your accounts moving in the correct direction. We all understand and realize that markets don’t go straight up and never pull back. So this is something that happens on a regular basis. With the media, like it is today, it has drawn even more and more attention to it. This has happened. Everybody’s entire life out there, every three to four years, you get these drawdowns would have you on average. It’s natural. It’s going to continue as far as over the next 50 years, but the bottom line is now, it’s just really, really important to understand a lot of shifts have been made as far as in your accounts to try to protect capital.
David Nelson:
We’re sitting with a fair amount of cash as far as in many of the portfolios out there. That’s going to give us a really nice buy-in opportunity and that buy-in opportunity will come. Don’t know exactly when, but it will come. Again, we’ll take advantage of it. We’ll continue to communicate with you as far as on a regular basis. We’re going to do these as far as going forward. We’ll have some face-to-face events that we’ll be doing. You’ve got questions as far as along the way, do not hesitate. Pick up the phone, give us a call, let us know, and we’ll get back to you just as quick as we can. Thank you folks.