Market Whiplash: What Investors Need to Know Right Now

Speaker A: 00:00:06

Welcome to Money Roots, the podcast where personal finance gets personal. Each week, Amy and her guests dig deep into the world of finance, making it more approachable and understandable for everyone.

No matter where you are on your financial journey, from savings and investments to budgeting and planning, we'll bring you practical advice, inspiring stories, and expert insights. We believe that everyone has the potential to grow a healthy financial future, and we're here to help you nurture it.

So whether you're a financial guru or just starting to plant the seeds of your financial knowledge, this is the place for you. Get ready to uncover the tools and strategies that can help you thrive financially.

So without further ado, let's dive into today's episode of Money Roots.

Amy Irvine: 00:00:55

Hello Money Root listeners. This is Amy Irvine, CEO and founder of Rooted Planning Group.

One of the reasons that I launched this podcast so many years ago was because I wanted to make sure that there was education out there that brought it down to a non intimidating level. And during periods of volatility like we've been experienced, I really look for opportunities to make sure that I do just that, provide education.

If you looked at the title of this particular podcast, I called it Whiplash because I feel like the last couple weeks have been just that. So I thought it was a great opportunity to talk about the importance of both offense and defense within a challenging market.

Now, for most people, offense and defense both start well before an actual event takes place. And it can be any event doesn't. It's an unnamed event, right. But it takes place in advance.

And that's why we always talk about having a portfolio that is diversified, that is balanced, that doesn't weight too heavy in one particular stock or one particular sector. Well over the last couple of weeks and as of this podcast I'm recording on April 16th, so it's about a week from release date.

Certainly concerns that a trade war will lead to a recession, it's spread throughout the globe.

The possibility of retaliatory tariffs is on investors minds with certainly with China responding, with counterterroriffs increasing odds of worst case trade war scenarios happening. Markets in Asia and Europe have declined alongside US stocks and there's been a flight to safety as bond prices rise and interest rates fall.

Well, so then we get into the topic of what needs to happen and a portfolio balance and financial planning are even more important in my opinion.

And I realize that that may sound like I'm preaching to the choir a little bit, but they're more important today in my opinion than they are when the economy is Running on all cylinders and things so seem to be going quote, unquote. Well, if you think about it, in sports as well as investing, a winning strategy always requires a combination of both offense and defense.

Defense involves maintaining a portfolio that can withstand different phases of the market cycle. The stock market uncertainty and unexpected life events are inevitable. So always being ready to plan for defense is important.

But then on the other hand, offense involves taking advantage of market opportunities that emerge from changing conditions.

The irony is that while periods of market uncertainty may be unpleasant, they are also often the best time when asset price valuations are the most attractive. So ultimately, portfolios that are tailored towards financial goals need both offensive and defensive.

So how can investors position in today's market environment to both protect from risk and take advantage of the opportunities? Well, I would say there's two key principles of long term investing are, as I mentioned earlier, diversification and maintaining a long term horizon.

This is a showcase of, you know, thinking about it. It's a showcase of, you know, what are historical ranges and outcomes across stocks and bonds and diversified portfolios.

It also can be a range of different time horizons. And so when we talk to people, we, we look at goals and different time horizons for those goals.

% like it did in: 1983

Moving beyond just one year period though, you know, stock only portfolios can, can cause the, the stomach risk to feel a little uneasy.

So putting a balanced portfolio together and diversifying it might reduce the maximum returns an investor can experience, but it also reduces that risk. Now this is evident when we look at what's happening in portfolios consisting of a 60 40, which is typ typically what's considered balanced.

% lower, but a: 6040

You know, I guess after all the goal is not simply to grow a portfolio at the, at at the fastest, but most volatile rate. But to have the highest possible probability of achieving your financial goals.

A diversified portfolio historically has a much narrow range of outcome allowing investors to better sort of plan towards those goals. I would say also by extending your time horizon by even just a few years, you can have a significant impact on the range of outcomes.

History has shown that Since World War II there has been, I guess there has not been a 20 year period in which any of these ass and any of the asset and portfolios experienced annual decline on average. Now that's a 20 year period. The same is true over a 10 year period for many diversified asset allocations. I think that's important to understand.

Now as I mentioned earlier, volatility can create opportunities. So where are some opportunities? The VIX chart, that's a, the vix's volatility index indicator. Right.

p drops in the market such as: 2008

These are times when the markets are most nervous and in many cases investors feel as a situation will never stabilize. Notice I said they feel that it will never stabilize. Now we can't, we can't, you know, say that something will or won't happen.

We can't guarantee anything. But this is from a historical reference.

So if you were to look at returns over, you know, look at returns of the S&P 500, there are always going to be this level of volatility. I mean it's, it's, you know, again if you look at it on a day to day basis, it's, there's significant volatility.

And if you match that up over the vix, what you'll often see is the spikes of the volatility index are often, you know, again around those periods of time that make people very nervous. Now for, for people that, they've probably worked with me, they've heard this particular saying.

But Warren Buffett has often quoted to be fearful when others are greedy and to be greedy when others are fearful. Now I've said it a little different way is to buy on fear, sell on greed. Same meeting, you know, underlying meeting.

Now when we look at periods of time when the market faces, I would say liquidity rather than solvency concerns. Liquidity problems emerge when the market declines.

I guess you know that it's a big force, specifically those who use leverage or borrowing to sell other assets. So it forces it. This is a liquidity problem.

In these situations, prices may Decline even when the underlying fundamentals of the assets remain unchanged. These are classic cases when short term market moves become disconnected from long term outlooks, creating opportunity for patient investors.

So valuations as of today, well as of the recording are actually more attractive as a result of some of the things that have just recently happened. Which assets have helped this this year and, and which ones are more attractive?

Well, bonds have played an important role this year as interest rates have fallen, helping to balance portfolios and partially offset declines in other asset classes. But bonds are able to do this because they typically exhibit lower volatility. I say typically than stocks and move in the opposite direction.

And again, that's not always. And again, I think you have to look at how assets can be uncorrelated to each other.

Valuations are more attractive today after multiple years of strong stock market returns.

And while it's still unclear where earnings will settle after accounting for tariffs, the price to earnings ratio of all the Overall S&P 500 has declined to 20 points.

And some sectors such as information technology, community service and communication services and consumer discretionary have seen multiple declines amid a broader pullback. So those sectors have actually seen more interestingly assets such as gold, which often are service as safe havens.

Safe havens have struggled more recently. Gold prices rose to a new all time high earlier this year resulting in double digit returns over the past year.

Investors are typically drawn to this asset class for many reasons. You know that they are interested in bonds. It can serve as a, I guess a store of value in times of uncertainty.

However, gold prices have retreated as economic fears have weighed on all commodities. This is why I think it's.

It highlights the importance of not focusing only on a single asset class, but viewing it from a holistic portfolio review or view, I guess you want to say now the tensions between the US and China have escalated, right? So we've heard things for a moment. You know, it was 125 now, 145. I think I saw an announcement this morning that was over 200%.

This is creating some global tension and can create that uncertainty. And history shows that markets have weathered similar challenges in the past.

And despite the headlines, understanding the economic relationship between these two countries can help long term investors to maintain perspectives. Tariffs against all trading partners have dominated the market news.

And the last 90 day pause that was just implemented now puts a focus mostly on US and China. The underlying issue runs much deeper than trade policy alone.

Current tensions are a result of this multipolar world in which the US and China are the Two largest economies, but with significant global influence both of them. This is a decade decades long shift from the unipolar world in which the US was the only major superpower after the Cold War.

This naturally creates new challenges and opportunities for each country.

And while there's no easy answers to how the trade negotiations might progress over the next few months, maintaining perspective has become more important for long term investors. The US and China remain significantly linked through trade, finance and global supply.

What makes this situation different from previous trade tensions is that both the magnitude of the tariffs and the broader geopolitical context.

As the US maintains significant trade deficit with China, trade levels above 100% effectively mean the goods crossing either border would more than double in price. All else being equal, this increases the price of goods for consumer, raises costs for businesses and can slow economic activity.

And so the fear of high inflation and worsening profit margins have caused market volatility in the most recent weeks with a notable shift in the consumer surveys and corporate earnings guidance. Markets have also been worried about how far the White House will be willing to go in escalating with China.

Since tariffs at these levels are unlikely to be sustainable in the long run, is it still likely that they'll represent a negotiation position for the administration?

And again, the 90 day pause on tariffs above 10% except for China and the exemption for technology products are evidence that the White House main objective seems to still achieve the goals.

als the Tariff implemented in: 2018

on. While markets stumbled in: 2018

I don't think, you know, that's a really tough one to connect the dots to. But the broader scope of tariffs makes it more difficult for companies at this time to depend on that, you know, historic reference.

So again, the rally after the 90 day pause though I think can show that conditions could improve once things settle down.

One thing I also want to mention, I think it's a really important topic to cover with people because I think this is something that they can relate to, sort of relate to I should say.

'm going to show goes back to: 1990

That actually represents what the, what the S P500 did for the full year versus the maximum drawdown that happened at some point in time throughout the course of the year. You will notice when you look at that, if you take the time, you'll notice that every year that's listed there has some sort of drawdown.

And by drawdown I mean where, where was the low point in the S&P 500?

ou'll notice, for example, in: 2008

own. Now, the very next year,: 2009

th of: 2009

So it was a 53% range from that 27% negative to the positive 26%. Now those are exceptional years.

When you look at the chart, you'll see though, even, Even as of April 11, the S&P 500 this year was down as much as 19%. And as of April 11, it's down 8%.

I think it's really important to understand that the stock market throughout the course of the year has these ranges, even though when we look at it from a long term perspective, it has upward swings.

And this is why when I'm talking to people about how is this impacting your goals in the short term, if, if you don't sell anything, then you're not locking in that loss and it shouldn't impact the goal. I'm not saying tweaks shouldn't be made. I'm not saying that it doesn't match your risk tolerance and you discover that.

I'm saying that if we've put, if we if we're trying to match the dollars that you're saving and investing to the goals that you're trying to achieve, thinking about those time horizons and how those things are invested, even when people retire, I often say to them, well, you're not, you know, you're not using all your money today. You're using it over the course of, hopefully a 25 to 30 to 40 year period of time. So it all should go into bonds or cash.

The moment that you retire, there should be a piece that's still being invested for the long term. I hope that you have found this podcast helpful and educational.

As I mentioned, I'll put that chart in the show notes and we're always trying to provide additional education to our our listeners. So if there's something to be particular that you'd like me to dig into a little bit more, please let me know.

In the meantime, you know, if, if there's, if there's information out there that you're struggling to understand, send us a note and we'll either try to put it in our newsletter or we'll try to do an additional podcast or maybe even a webinar on the topic. Thank you everyone for listening and again, I hope this was very educational in nature.

Speaker A: 00:19:24

You've been listening to Money Roots, your go to podcast for making personal finance accessible and approachable. Thanks for joining us today. Amy and her guests have enjoyed guiding you through the roots of your financial journey.

Remember, whether you're planting new seeds of financial knowledge or nurturing the growth of your existing financial plans, Money Roots is here to support you every step of the way. Be sure to follow them on Facebook, X, LinkedIn and Instagram for more resources.

And of course, subscribe to Money Roots wherever you get your podcasts so you never miss an episode. A big thank you to the sponsor, Rooted Planning Group, for making this show possible.

At Rooted Planning Group, they're committed to helping you cultivate a thriving financial future. Until next time, keep growing your Money Roots.