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So, You Think There’s A Chance?!?

Transcript

Hello, and welcome to our market alert video for today, which is December 2, 2022. And I’ve entitled this one, “So you think there’s a chance?” And the reason I’ve done that is well, I’ll get into it in just a moment. I want to give you a quick update on the whole grandfather thing. I hate to admit it, but you guys were right. And I was wrong. Being a grandfather is actually pretty cool. You know, my grandson at first, I wasn’t too happy with him because he stole my wife. Every time I turned around, my wife was leaving to go be with her grandson. But now that he’s starting to be able to walk a little bit, he recognizes me and wants me to hug him. He smiles. He’s got those kissable cheeks. Yeah, it’s not so bad. I’m in. And all right, you’re right.

So anyway, let’s talk about what’s gone on this week. Boy, howdy, did we get a lot of big news? And why did I entitle this video, “So you think there’s a chance?” I’m going back to the movie “Dumb and Dumber” with Jim Carrey. And you may remember in that scene, he goes up to the beautiful girl, the love interest. and he says, “So what are the odds? What are the chances that I could get a date with you?” And she goes, “One in a million.” And he goes, “So you think there’s a chance.” So that’s sort of what happened this week, when Jerome Powell, the Federal Reserve Chairman said, you know, he basically reiterated everything he’s been saying all along, he didn’t change much, but he did say that at some point, we are going to stop raising interest rates. Wow, really? And then secondly, he said at some point, we may reduce the amount of the rate increases that we will have? Wow, really? No kidding. So basically, what happened is it was that right? We had a whole thing of bad news. But we had one sentence with two little things in it. Everybody’s like, oh, so there’s a chance. And of course, that’s where we saw the massive rise in the market, then we got the jobs numbers this morning, which was kind of a cold dose of reality that kind of came back.

So, I’m going to go over with you basically, two scenarios, okay, “A Tale of Two Cities,” if you will. So, in one scenario, we could see the market go way up. And in the other scenario, we could see the market go way down. And so, I want to go over both of those with you. So, the first scenario is where the market goes way up. So let me go over that with you. I took economics in college. And basically, the idea is that you have inflation, and you have the interest rate that the Federal Reserve does. And generally speaking, you want those to be kind of in equilibrium, you want them to be about the same. So, when inflation goes way up, then what happens is the Fed wants to bring inflation down. So, it raises interest rates to reach that equilibrium point. And then if it leaves it at that equilibrium point, then the economy will cool down, inflation will come down, and then they’ll lower interest rates as well. So that’s kind of the interplay between the two. So right now, inflation is 7.7%, according to the latest data we got at the end of October, so it’s up here. The Federal Reserve interest rate is at 3.8%. It’s over here. So right now, what the market is thinking is that inflation is going to come down and interest rates are going to keep going up and they’re going to meet at 5%. And if that happens, then the Fed will stop raising interest rates, inflation will continue to go down, and then by the end of next year, the Fed will start lowering interest rates to make that equilibrium happen again. So, if that happens, then the Fed has engineered what people are looking for, which are they’re calling this soft landing, because if interest rates peak out at 5%, that’s not so damaging to the economy, like it is causing this terrible recession and massive unemployment and all that kind of stuff. So, in that scenario, the way the market reacted to what Jerome Powell said this week, is correct. The market will probably six months to a year from now be much higher than it is today. So, on that count, there’s the reason why we could see the market go up.

Now, the other side of the coin is what happens if this idea that they kind of meet each other at 5% is wrong? What happens if inflation goes higher than that? And they have to raise interest rates even more to reach the equilibrium, and then we do have a really bad recession, and therefore the market would go way down from here? Well, we have to remember that Paul Volcker, who was the Federal Reserve Chairman back in the early 80s, had inflation that was around 11%, and he had to raise interest rates all the way up to 18%, to get that equal to inflation and start coming down. So, if that happens this time, then at that high rate of interest to the interest rates, that could be very, very detrimental to the economy and cause a severe recession.

So, what kind of things could cause us to have the surprise that inflation is going to go up? Well, hmm, let me think about it, maybe the jobs numbers we saw this morning, where the jobs came in way hotter than expected. And if jobs are hot, people have money to spend, what does that do to inflation? It makes it go back up again. And if that happens, Feds going to have to react to that and raise interest rates higher than that 5%. And that’s why we saw the reaction from the jobs’ numbers.

So, it’s an interplay between the two going on right now. So, the question you may ask is, well, what do we do with all that? I mean, how does that help me? Well, there’s an old Japanese expression that says that the only person that knows where the market is going to go is the market itself. So, listen to the market, and it’ll tell you. So basically, what that means is, is that you want to listen to the market as opposed to try to second guess it or outguess it. And our strategy, our Invest & Protect Strategy, is designed to listen to the market. It’s not us being smarter than the market. It’s just us, acting according to what the market is telling us to do. And that’s why we sold in April. We told our clients to get out of all of their stocks in April of this year. And we also said to get out of all of bonds this year, for the same reason. We believe the Fed raising interest rates is not a good thing for bonds, generally speaking. And so, we still are in that posture at this stage. Even though the Federal Reserve Chairman said what he did, we don’t know yet that we are in a position to say that inflation is going to stop where it is here and start coming down as the Fed raises interest rates, and they’ll meet at 5%. We’re not ready to say that and therefore we’re not ready to tell our clients it’s time to buy.

Now, if you’re over 50 we think you should be thinking about the downside risk. You know, we always talk about how it is better for us anyway, to plan for the worst and hope for the best, meaning plan that interest rates will go way higher. We will plan to have a bad recession and a bad bear market and hope the other happens, as opposed to planning that everything works out great, and hoping that the worst doesn’t happen.

So, our philosophy is to be better safe than sorry. So, if that aligns with you, I encourage you to go to our website. It’s RPOA.com to schedule a visit with one of our retirement planners who will help build a plan with you. We’ll talk about our strategy and hopefully help you in that regard. Please share this video with as many people as you’d like. And thank you for watching and we will talk soon.

Please note: Transcript has been modified after the time of recording.

Economic indicators and stock market performance cannot be predicted. Opinions expressed regarding the economy and the stock market belong solely to Ken Moraif on behalf of Retirement Planners of America and may not accurately portray actual future performance of the economy or stock market outcomes. Opinions expressed in this video is intended to be for informational purposes only and is not intended to be used as investment advice for individuals who are not clients of Retirement Planners of America. All content provided is the opinion of Ken Moraif, CEO and Founder of RPOA Advisors, Inc. (d/b/a Retirement Planners of America) (“Retirement Planners of America”, “RPOA”). © Copyright 2024