Here's how investors should react during times of uncertainty.
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00:00Okay, let me just turn off my Slack notifications.
00:07All right, Art, you ready?
00:10Ready.
00:11All right, let's do this.
00:13Okay, the stock market has seen a major sell-off over the last few days.
00:17What are some of the major factors driving this?
00:19Yeah, some of the major factors in the recent sell-off we've seen in the market really sit around uncertainty around trade policy.
00:26So by that I mean after the election we saw a certain amount of enthusiasm and exuberance about the new administration coming in
00:34with the idea that they would be pro-growth, pro-business, and good for the market.
00:38And all of that has dissipated over the course of the last three weeks and certainly over the last week or so.
00:43That's because the bad part of the new administration, the things like tariffs and immigration
00:49and certainly cutting the federal spending and firing federal employees have come first.
00:54The sequencing doesn't have an offset.
00:56There's no positive attributes that we can say, well, we've got higher prices with tariffs,
01:01but we'll have a lighter regulatory touch or perhaps corporate taxes will remain the same for the next five years.
01:07So investors also feel like they changed the goalposts or what trade policy is going to do for us almost on a daily basis.
01:15So that uncertainty really affects how investors think about the markets.
01:19They're pulling back.
01:20It affects how people that run companies actually do their planning for the year.
01:24And it certainly affects in a real sense what the economy might do.
01:30The longer we remain uncertain, the further we push out decisions, the more the economy may well slow.
01:37And I think that's what the market's worried about in the here and now.
01:40And so what advice do you have for investors during these periods of uncertainty?
01:44Yeah, three things on that front.
01:45You know, my advice to investors in uncertain times like this is first and foremost, try to separate the news from the noise.
01:52We hear a lot. And unfortunately, with social media, we hear a lot, 24 hours a day.
01:57And not everything you hear is necessarily going to be the end result. Right.
02:01So don't assume some worst case scenarios are going to happen.
02:04So there's been a lot of things that have been thrown around about stagflation, which we haven't seen since the 70s.
02:09And that's likely not going to be the economic outlook for us this year.
02:14We may slow down, but I don't think we're going to go to recession.
02:17But you don't want to make changes to your long term diversified portfolio because of what's going on in the current politics,
02:23because it's almost impossible for you to get out and wait till the dust settles, because the dust never settles.
02:31We're always uncertain about something. So sticking to your game plan, making sure you're diversified and always remember,
02:37there's more noise than there is news out there and not everything's a signal.
02:42And do you see any prime buying opportunities right now? And if so, where?
02:46Yeah, I would tell you this. So what's been interesting is even with this sell off, we've had some different sectors outperforming this year.
02:53And it makes sense. So some very defensive sectors like health care and consumer staples and real estate have outperformed.
03:01And the top three performers in the S&P 500. That makes sense. But that can that can go too far.
03:07So for us, we think health care is going to be a great sector this year, but we think staples have gotten expensive.
03:12Be careful with that defensive mode, because once we get some good news on the administration's policies,
03:19we're going to see people flooding back into technology.
03:22And I would tell you right now, technology is as cheap as we've seen it for three years.
03:26So you might want to start making a list of those stocks that perhaps you missed over the course of the last couple of years and penciling in.
03:33And I think there's going to be some good buying opportunities, especially in those names that are tied to artificial intelligence,
03:38whether it's NVIDIA, which is down significantly from its all time high.
03:42I think Microsoft would certainly fall into that bucket.
03:46And another sector that has been adversely affected over the course of the last couple of weeks has been financials.
03:52And some of the best banks out there, like JP Morgan, are trading at multiples we haven't seen in the better part of six months.
03:58So I think there's opportunity. You don't have to dive right in, but keep your eye open for things that you've always wished that you had bought.
04:04Start writing down that list, and I think you're going to get some opportunities over the coming weeks here.
04:09And how significant is this sell-off? Is it a sign that the U.S. economic risks have majorly escalated, or is this just a minor blip?
04:15Such a great thought process here. Does this sell-off actually indicate that we're seeing worse fundamentals?
04:21Is the economy actually slowing? And that's where I'd like to say no.
04:25In the here and now, we haven't seen a slowdown. Now, there are a lot of people that are predicting that the economy is going to slow,
04:31but we don't know yet because we don't have the final results of what tariffs are going to look like.
04:35So we can't gauge what those tariffs will likely mean to economic growth and inflation.
04:39So I think it's more of a concern of if, in fact, we started to look at some worst case scenarios on tariffs and immigration,
04:47and we never get a lighter regulatory touch, and we're not able to keep taxes where they are and they go higher,
04:53then we certainly would say that the economy is going to run into difficult times.
04:57I think in the here and now, we're in a wait-and-see mode, and I think that's true for investors, and I think that's the right place to be.
05:02But if you look at the current economic data, we just had a good jobs report a week ago.
05:06We just had a CPI and a PPI this week, and both of those came very much in line.
05:11What you can get caught up in, though, is looking at survey data or soft data, as we like to call it.
05:15So whether it's University of Michigan sentiment surveys or the Conference Board sentiment surveys,
05:20and they basically will bring out the worst in people that are willing to answer surveys.
05:25They'll say, how do you feel about current conditions? Oh, I feel terrible. Well, everybody feels terrible.
05:29What do you think about the future? Oh, that's not great either.
05:31But then you compare that to hard data like retail sales, and consumers aren't confident at all,
05:37and yet over the last couple of months, they spent more money than they ever have.
05:41So I would say keep an eye on the hard data versus the soft data.
05:44Surveys don't always give us a good viewpoint into what the economy is really doing.
05:49And in the here and now, in today, as we talk, the economy is doing OK.
05:54The potential for it to slip up would come if this uncertainty lasts for quarters and not for weeks.
06:01And that's the biggest concern, I think, in the market right now.
06:04And how might this recent market turbulence impact the Federal Reserve's next move when they meet in March?
06:09So how this recent volatility in markets impacts the Federal Reserve is a great question.
06:15So I think three things about that.
06:17The Fed has time to make their next decision.
06:19And that time gives them time to look at what these proposed policies will do to economic growth and inflation,
06:27and then they can make a decision.
06:29So they're going to have a meeting next week, and they're likely not going to do anything.
06:32But with that meeting, they're going to give us another summary of economic projections,
06:36or otherwise known as the dot plot.
06:38And at the beginning of the year, there was an assumption that the Fed might cut, call it one to three times.
06:43And then right after the month of January, people started thinking they're not going to cut.
06:47They may raise rates this year.
06:49Well, they've come full circle back to the fact that right now we think that they're going to pencil in at least three cuts and rates this year.
06:57But what they have to take a look at is the short-term impact of tariffs.
07:01Will that be inflationary, keeping them from cutting rates, versus how much does the economy slow down because of tariffs?
07:08And that would make them want to cut rates.
07:10So they're going to be in a precarious position.
07:12That's why they're buying themselves some time.
07:14They probably don't do anything until the June meeting.
07:17They'll have a better reading on the economic impact of the new administration and make a decision then.
07:22My guess is by then we'll know a whole lot more about where the goalposts really are for tariffs and trade policy,
07:27and they'll be able to make a more educated decision at that point.
07:31All right, and we're seeing more and more discourse surrounding the word recession.
07:34Do you think a recession is getting more likely?
07:37Well, I will tell you this.
07:38Any given year, there's always a chance for a recession.
07:41Let's call it 10% in any given year.
07:43Typically it's from something that's exogenous that comes in, disrupts the economy,
07:48or a major change in fiscal and monetary policy that can disrupt economic activity.
07:53I would say that percentage is probably closer to 25%.
07:57So it's certainly not a prediction that we're going to have a recession.
07:59But the chances of a recession certainly are higher,
08:02especially if the uncertainty about new policy drags on throughout the summer and we head into the fall.
08:08We still haven't landed on a place where the administration is happy with where they are on trade policy.
08:13And if they drag their feet that long, they don't pass a bill to get corporate taxes made permanent,
08:20and we haven't really heard about any big regulatory changes.
08:23We could certainly see this economy going into a recession, but that's certainly not our base case right now.
08:28And if a recession is on the horizon, how should investors be positioning themselves, both in the short and long term?
08:34Well, I think you always position yourself in the long term.
08:37And if you're contemplating a recession coming up, it's certainly wise to look at your asset allocation.
08:43And if you're a typical, you know, call it 60-40 or 80-20 where you have 80% of your equities,
08:48your assets and equities, and 20% in fixed income, you may want to look at that equity allocation and say,
08:54is it defensive or is it aggressively speculative?
08:57Meaning, am I overweight technology versus things that could actually be a little more recession-proof like health care?
09:03And if that's the choice that you need to make, I would say that, you know, you should be rebalancing on a regular basis anyway.
09:09But the best thing to do is perhaps raise a little bit of cash.
09:12So you can be, you know, call it 60% equities and 35% fixed income and have 5% cash allocation for some of those opportunities
09:21that come along as that recession recedes.
09:24But again, recession is not our base case, but it's always important to look at your portfolio
09:28and make sure your asset allocation is something that helps you sleep at night.
09:32So if you're way overexposed and this market volatility has been making you crazy,
09:37you're probably overallocated equities.
09:39You might want to go from 80% down to 60% depending on your investment time horizon.
09:44And which asset classes or sectors tend to hold up best in uncertain environments or recessions?
09:49Yeah, the things that hold up best in a recession and uncertain times, oddly enough,
09:53are the things that we need versus the things that we want, right?
09:56That's why health care is doing so well right now.
09:58We're always going to need health care.
10:00We always want a new TV or a new iPhone, but we always need health care.
10:04The same thing is true with utilities.
10:06We need, you know, that in our daily life.
10:08I would argue that the Apple phone or your iPhone has become a utility,
10:12but certainly the things you need fall into that category of things like health care,
10:16things like utilities, consumer staples.
10:19And oddly enough, those are three of the best performing sectors in the S&P 500 so far on a year-to-date basis.
10:26All right, so all eyes were on the consumer this morning with this morning's CPI data.
10:29So how does the consumer look to you right now?
10:31And what are you watching into this week's PPI and University of Michigan sentiment reads?
10:35Yeah, so that's a great question.
10:37So with today's CPI, I think everybody breathed a sigh of relief.
10:41There's not a new flare-up of inflation.
10:43A couple of data points there, I would say that the biggest draw on inflation was airline prices have come down about 4 percent
10:51and gasoline prices came down 1 percent.
10:53So that's the headline level.
10:55At the core level, that was very much in line with the expectations, and it's moving in the right direction.
10:59But the second we took that sigh of relief about the CPI, markets started to think, yeah,
11:03but we haven't really seen the impact of tariffs yet, so I think it was discarded a little bit.
11:07PPI will be equally important because when we get the data between the CPI and the PPI,
11:12we can actually extrapolate pretty closely to what the PCE or the personal consumption expenditure will be,
11:17and that's what the Fed looks at.
11:19When they say they have a 2 percent inflation target, that's exactly what they're measuring that against.
11:23As far as the University of Michigan's sentiment survey is, what's interesting to me,
11:28and for the last two reports that have come out of the University of Michigan,
11:31is inflation expectations have gone up exponentially.
11:35So we were well-anchored at, call it 3 percent inflation one year out
11:39and less than 3 percent when you go out three and five years.
11:42All of a sudden, that popped up over the course of the last two months,
11:45and the interesting side note to that is if the survey respondents were willing to say,
11:52do they call themselves Democrats or Republicans?
11:55Well, lo and behold, Democrats think inflation is higher than it actually is and think it's going higher,
12:00where Republicans think inflation is lower than it's actually at and think it's going even lower.
12:05So that's why I kind of discard some of that survey data coming from the University of Michigan,
12:10and I really think it's better to look at hard data, things like retail sales
12:14and the things that actually speak to how the consumer is doing, like Walmart's report,
12:19which was spectacular a couple of weeks ago.
12:21They're still out there. They're certainly being price conscious.
12:23They're certainly holding up well. Their wages are rising faster than inflation is.
12:28So they're at a good place, but they're at an insecure good place,
12:31and I'm sure the longer this uncertainty hangs out,
12:34I think the more they will pull back on making some of those larger purchases.
12:40All right, perfect. I think we are all good.
12:42Wow.
12:43That was great. Thank you so much. We had great answers.
12:45I tried to repeat everything you said. I don't know if I did it exactly.
12:48You did a great job. Usually if guests don't do that, I'm like, let's redo that.
12:50You did a great job, so thank you.
12:52Fantastic. You couldn't even tell my dog was actually coming over.