During the Ballast Open House last week, the advisors led a brief market update and economic discussion for those in attendance. This video was recorded live in the Ballast Conference Room with a full audience. Listen as they share current market conditions, financial planning strategies, and updates.
Advisors:
- John Boardman, CFP®, Founder and CEO
- Andy Reynolds, CFP®, MBA, Partner, COO
- Cameron Hamilton, CFP®, MBA, Partner, Director of Financial Planning
- Brian Burton, CFP®, Partner, Director of Portfolio Strategy
- Frank Yozwiak, CFP®, J.D., LL.M., Director of Estate Planning and Tax
Check out the video for the full discussion. If you have any questions, please reach out to us at 859-226-0625 or info@ballastplan.com.
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Transcript
00;00;01;24 – 00;00;22;24
Andy Reynolds
Thank you all for coming tonight. It’s really exciting that you guys are sharing your evening with us. We’re excited to have this space to host you all. And, you know, as we continue to grow, a big thank you to a lot of you all who continue to introduce us to friends, family and people you guys care about. We definitely would not be here without you guys.
00;00;22;24 – 00;00;42;10
Andy Reynolds
So it’s it’s fun to see faces that some of y’all we have not seen since COVID. So that’s kind of neat as well. But thank you all for being a big part of this. Obviously, we would not be here without your all support and we continue to be here to support you guys right back. So we just want to do a quick market update for everybody.
00;00;42;27 – 00;00;58;21
Andy Reynolds
It’s going to be rapid fire and really quick. So we’re going to try to keep it to like 15 minutes. If you have questions, feel free to grab us afterwards. But my part was going to be to begin talking just a little bit about where we are today.
00;00;59;29 – 00;01;05;08
Frank Yozwiak
00;01;05;27 – 00;01;22;06
Andy Reynolds
So we just want to start with kind of looking at the market. So real quick, I have several slides to give you, kind of state of where we are today. So this is a large cap. So this is the S&P 500. This is what a lot of people think about as markets. So if you look at the green line, that’s a long term.
00;01;22;06 – 00;01;45;10
Andy Reynolds
That’s kind of where we are today for a p e ratio, which is a representation of price versus the earnings of a stock. So a lot of people, when you think about the markets, think about how we’re doing economically this is what gets quoted the most. If you look at where we are versus going back to 1999, I think this gives a little bit of perspective about where the pricing of the of the markets are.
00;01;45;13 – 00;02;13;07
Andy Reynolds
But I think what a lot of people don’t realize is this is only one part of the way that we invest for people. It also can be broken into growth in value. So if you look at the story that the red line of value shows versus the blue line and just look historically of where prices are relative to earnings and basically trying to say is the market overpriced, we start to see different stories when we start looking at different parts of the market.
00;02;14;07 – 00;02;43;17
Andy Reynolds
If we keep looking at the market, we look at small and mid-cap. It also starts to tell different stories and things that we can interpret, interpret and things that we’re looking at behind the scenes, looking at different investment opportunities, not just looking at the S&P 500. So you’re seeing a pricing that if we again go back to 1999, that may look a little bit more appealing than if we go back and look at the S&P or look at large cap growth.
00;02;44;22 – 00;03;10;00
Andy Reynolds
Unless you’ve lived under a rock for the past year, you realize rates are going up, yields are going up. We’re seeing asset classes that really going back to the financial crisis. We’ve not had areas that works. As excited about as we are today, we’ve owned bonds for a lot of soon to be retirees, retirees. And it’s kind of been something that we we needed to put in the portfolio for lots of reasons.
00;03;10;00 – 00;03;31;01
Andy Reynolds
But we’re starting to see areas. This is a one year Treasury yield paying 4.7%, something we have not seen in over a decade. Bank CDs. This is a quoted bank rate and looked at a lot of different places. If you talk to your bank, your bank, or if there’s any bankers in the room, you’re probably going to be able to do a little bit better than this.
00;03;31;01 – 00;04;02;07
Andy Reynolds
But currently, bank CDs are still priced at about 1%. There are special rates, so you could probably get more than that. If you talk to a bank three month banks, it yields down a little bit different story ten about 4% on a year basis. The ten year treasury yield similar story rates are going up. Your risk free rate now getting closer to something that’s more meaningful if you were to be buying treasuries, corporate bond yields similar story.
00;04;02;18 – 00;04;25;04
Andy Reynolds
So what we’re saying when we look at these different areas are investment opportunities that we’re part of people’s portfolios, part that we needed to have in a portfolio for multiple different reasons. But we’re seeing opportunities where in bonds we may be able to make money not just on appreciation of the value but actually on yields, again, something we haven’t seen for quite a while.
00;04;25;16 – 00;04;45;23
Andy Reynolds
So my just quick observations going forward, we’re going to see competition for large cap growth, the same I heard Tina, if I heard that term, there is no alternative. That’s that’s the world we lived in for so long coming out of the financial crisis. We would joke around the office, we’d get phone calls up, Hey, what’s what’s your rate on the stock market?
00;04;46;10 – 00;05;08;19
Andy Reynolds
We’re like, What are you talking about? And people would come out of CDs and the only option that they would have to make some type of yield or some type of return was looking to be an equity investor. I think we’re moving into a TIAA, and that’s not TIAA-CREF, that’s TR. There is an alternative. Finally, it’s something we’re excited about to be looking at portfolios and how we build portfolios.
00;05;08;29 – 00;05;29;11
Andy Reynolds
We do. We’ll talk about that economy, but we do think that there’s a good opportunity to be open minded and looking forward and being an investor too. My big thing that I would just leave you with is to year liquidity should definitely be considered as it should always be considered, but definitely now looking for it should be certainly considered.
00;05;29;11 – 00;05;30;09
Andy Reynolds
So I’ll turn it over.
00;05;31;11 – 00;05;56;12
Brian Burton
All right. Thank you. So any talked about alternatives to equities? Been a long time since we’ve had other investments that are safe and yield something desirable. So why is that? If you look here at this chart on the left, this is consumer Price index. This is the most widely used gauge to track inflation. So you can see and this year we’ve had the highest inflation we’ve had in just over 40 years.
00;05;57;07 – 00;06;21;10
Brian Burton
So we saw a trend of 9% price increases year over year. If we think about the components of the consumer price index, it’s similar to our our budgets, right? So our three biggest areas of our budget are shelter, housing, transportation and food. And those three components year over year up just over 9% on average. Okay. So why does that matter?
00;06;22;10 – 00;06;46;06
Brian Burton
Well, it hurts it hurts the consumer, right? Our dollars in our pocket today are worth far less than they were just one year ago. All right. Prices have gone up. It seems like across the board, I think we’ve probably all in this room felt the pinch of inflation at this point. For me, it came a few months ago when I had to buy a set of four tires and I got the bill and I literally my jaw hit the floor.
00;06;46;14 – 00;07;10;26
Brian Burton
You’ve got to be kidding me. But it does feel like it’s happening everywhere. It also matters for the Fed. So the Fed has a very strict target for inflation. Right. That’s one of their two mandates, is to keep inflation around 2% over the long run. They’re not happy with eight or 9% inflation. Right. So things are expensive except for this one magical place.
00;07;11;23 – 00;07;31;25
Brian Burton
So tell me if anyone is familiar with this fine dining establishment. I mean, by recognize this Costco, right. The Kirkland Cafe, as my family calls it. So you can get a quarter pound beef, hot dog plus a soda for $1.50. Amazing. Feed my family for six bucks.
00;07;33;08 – 00;07;34;00
Brian Burton
That’s awesome.
00;07;34;24 – 00;07;58;01
Brian Burton
All right. So thank God for Costco. But anyway, so how did we get here? Like, why is inflation at this point today? Well, it’s really been kind of this perfect storm of events. We had we’ve had expansionary or easy money policies in place for what felt like and would probably be was too long. Right. We had an economy that was humming and we had rates at zero.
00;07;59;20 – 00;08;23;18
Brian Burton
Right. COVID hits and we send out stimulus checks and then some more and then some more. And that continues on and on. Right. We’re just flooding the economy with new dollars. Also, during COVID, there was a shift in consumer behavior. So no longer were we going out to eat where we spending money at restaurants or are we going on vacations?
00;08;24;02 – 00;08;50;07
Brian Burton
Instead of that, we started consuming goods. We were buying Peloton’s, right? We were bringing the gym to our house. We were dining at home and we were stocking up on as much toilet paper as we could get right? The war in Ukraine obviously is causing an increase in prices. All of these things have accumulated into this really large production constraint.
00;08;51;09 – 00;09;14;24
Brian Burton
Right. So it’s yes, there’s a lot of demand. But the bigger issue is that we cannot get enough goods for to meet that demand. And that’s where we are in the economy today. So what’s the Fed doing about it? As Andy mentioned, we’ve been raising rates since the beginning of this year. You can see it on the far right hand.
00;09;15;04 – 00;09;44;09
Brian Burton
We were at zero. Now we’re up almost to 4% on the Fed funds rate. So the Fed is aggressively raising rates to try to dampen demand to bring down inflation. Right. This is great in theory. The hard part about this is policy rates do not affect production contracts. So what’s driving inflation? And all of this economic volatility are production issues.
00;09;45;07 – 00;10;23;21
Brian Burton
Okay. So the the Fed has two choices continue to raise rates, bring down demand to a level where the production can meet that demand and inflation eventually cools down. Or we live with a little bit higher inflation. Those are the options the Fed hates inflation. So in our opinion, they’re going to continue to raise rates until we see a meaningful decline in CPI or some of these leading economic indicators should start showing signs that these rate hikes are affecting our economy in a negative way.
00;10;24;21 – 00;10;27;10
Brian Burton
That’s what Frank talk about here in just a second.
00;10;28;18 – 00;10;31;24
John Boardman
They were so.
00;10;32;16 – 00;11;02;00
Frank Yozwiak
Again, piggy back off of Brian was saying the Fed has a dual mandate of price stability and maximum employment. So when you have price instability like we’ve seen over this past year, by inflation, the Fed raises rates and they felt empowered to do that because the unemployment number had actually been very low. Part of the reason for that, we’ll get into it a little bit, is that the labor force participation rate has been so low, a lot of people went out of the workforce when COVID struck and not come back into the workforce.
00;11;02;10 – 00;11;30;24
Frank Yozwiak
But that unemployment number does look very low. Now it’s 3.7%. So that gives ammo for the Fed to keep raising rates has not yet shown up in the unemployment numbers, that that’s having a big effect. But one area where we are starting to see some indications is the Chicago purchasing Managers Index. This is a monthly survey of purchasing managers in and around the Chicago area, manufacturing non-manufacturing industry up up in that area.
00;11;31;07 – 00;11;57;20
Frank Yozwiak
And what this does is it takes a qualitative survey of what those people are seeing, and it’s a leading indicator of where the economy is going. So I put that line there at 50, when the number is above 50, that indicates we’re in an expansionary period. And when it’s below 50, it indicates a contraction coming out. So you see now we are at 37.2 in November, and it’s been going down for the past three months in a row.
00;11;57;28 – 00;12;17;12
Frank Yozwiak
So, again, this is one of those leading indicators showing that, hey, there may be some some of the effect of these Fed rate hikes are starting to take effect here. So we might be seeing that. So this is giving some ammo for those members of the Fed board who are saying maybe that slowdown on the rate hikes hopefully get us back to a normalization type period from the consumer side.
00;12;17;12 – 00;12;43;10
Frank Yozwiak
This chart is showing the credit card balances year over year in a percent change of credit card balances year over year. So we can see a big sharp decline right at the beginning of 2020 when everyone was staying at home, not going out and not spending money on their credit cards. And then a sharp increase here. So the CEO of Discover Credit Card recently said they’re already starting to see consumer behavior changing, starting to moderate a little bit.
00;12;43;10 – 00;13;06;09
Frank Yozwiak
People are spending so much money on their credit cards and that’s starting to taper off. So what is telling us is party’s over. You know, when the consumer debt is going up, as it is, always the two different outcomes. Number one is that consumers stop spending as much as they currently are. So that leads to less demand, less inflation, which is the ammo for the Fed to stop raising rates as quickly as they are here.
00;13;06;11 – 00;13;29;11
Frank Yozwiak
Number two, people have stopped going back to work. People go back to work. The labor force participation rate increases, unemployment increases as a result. That equation, again, more ammo for the Fed to moderate on these rate increases as much as they are. So this is one of those situations where we’re looking at bad news is good news and we’re seeing a few negative pointing, leading indicators.
00;13;29;18 – 00;13;42;02
Frank Yozwiak
But that’s good news for us to kind of go through this tough period to get back to a point of normalization, which is the Fed’s goal. And it’s starting to show signs that it’s it’s working. In fact.
00;13;42;02 – 00;14;04;25
Cameron Hamilton
Thank you, Frank. I do a lot of financial planning, and I kept my planning presentation for you all to one slide because I have this problem when I get up and speak, I have to quiet the room down after the round of applause. Every time I finish one of these slides. So few simple planning ideas for you. For what can we be focusing on as we think about planning for next year?
00;14;05;05 – 00;14;29;04
Cameron Hamilton
And I see a variety of people in the room. So I brought an idea that I think any one of you can think about one of these three ideas. This is a Venn diagram. On one side, we have retired, on one side we have working in in the middle. I would love to talk to anybody who donates money to anyone, because what we find is as we have these conversations with people, I don’t want to tell you where to donate your money, but I do.
00;14;29;04 – 00;14;44;28
Cameron Hamilton
If you want to chat with me about it, I want to know who you like to give to and we can find out what’s the best way to give it to them. There’s only a few things we can do with our money. We can spend it. We can give it to our friends and family. We can donate it to the charities we care about or we can give it to Uncle Sam.
00;14;44;28 – 00;15;07;27
Cameron Hamilton
And I like diverting a little bit of that money from Uncle Sam. So those first three buckets. And so we’d like to help you with that. Tell us about your given. We’ll help you optimize it. If we’re working, I have three letters up there, HSA That’s health savings account. What we’ve been finding is more and more the plans that have a high deductible seem to be the ones that are being mathematically favored.
00;15;08;03 – 00;15;26;01
Cameron Hamilton
I think the insurance companies are thinking if we make the consumer in charge of their health care, they’ll go to the doctor less and we’ll make more money. So what the plans seem like they’re setting up to do is have people get on a high deductible plan. So if you get into open enrollment and that’s an option, you’re also allowed to use a health savings account.
00;15;26;09 – 00;15;43;07
Cameron Hamilton
That’s something we can stack up and keep with us and invest. And there’s some strategies there. So give me a shout. And then if we’re retired and we get to age 72, our M.D. is a term you’ve heard required minimum distribution. That means money has to start coming out of the retirement accounts. And we want to help you build a strategy around that.
00;15;43;07 – 00;15;59;20
Cameron Hamilton
So there’s different things you can do with that. You can use it on your own spending income. You can take it out of your IRA and turn it right back around and reinvest it. You can give it to charities. And there’s a different thought process for each one of these things you might do with it and love to make help.
00;15;59;20 – 00;16;12;11
Cameron Hamilton
You all get that right. So engage us. We’ll try to find that little edge to make your plan just a little bit better. John All right.
00;16;12;11 – 00;16;33;07
John Boardman
So first off, I want to thank you all for being here. Mirror what Andy had said 15 years ago. We rented a 400 square foot office or room across the street for our first holiday party, and we had 20 people in here, which I think was mainly family and friends, just trying to make us look like we had people in our services.
00;16;33;21 – 00;16;44;10
John Boardman
So this is really cool to see all of you all here tonight. So really appreciate you being here. And I want to thank Madeline, too. So she was instrumental to this entire party.
00;16;46;20 – 00;17;13;20
John Boardman
I was trying to come up with an analogy of how current financial media is talking about recessions. And this video just came it came to me. This was actually shared 4 million times. It was during Hurricane Ida, and I think we’ll probably have to click it from here to show that. Is that right? And I don’t know if that mouse is working there.
00;17;13;20 – 00;17;14;16
John Boardman
See if that works.
00;17;14;28 – 00;17;18;06
John Boardman
00;17;19;15 – 00;17;27;24
John Boardman
So this was the Mike SYDELL with the Weather Channel. Obviously having a hard time during this storm.
00;17;28;08 – 00;17;28;21
John Boardman
And it’s.
00;17;28;28 – 00;17;30;08
John Boardman
Just, you know, I.
00;17;33;03 – 00;17;33;28
Frank Yozwiak
00;17;33;28 – 00;17;44;09
John Boardman
Notice the people just walking behind there.
00;17;44;09 – 00;17;44;21
Frank Yozwiak
Yeah.
00;17;45;05 – 00;18;12;23
John Boardman
So, yeah, they seem to be having a real hard time back. So now I’m not asking people I’m having a hard time as a mouse. Yeah. So recession is the term that’s being thrown around right now. Obviously it’s a scary term and the media obviously loves to run with it and we’re not telling people to be excited about recession.
00;18;12;23 – 00;18;32;00
John Boardman
But what I’ve always said is that we’re either in one or we’re headed towards one. It’s always going to be the way that the markets and business cycles have to happen, unfortunately. And we’re running through this right now, and you see this in certain parts of the stock market right now, particularly parts of the Nasdaq, where we’re seeing stocks that have been just devastated, 70, 80, 90% sell offs.
00;18;32;00 – 00;18;58;04
John Boardman
And these are companies that were trading valuations that should have never traded at those levels. Carvana is a name that’s been tossed around the last few days in the midst of a bankruptcy declaration. This was a $350 stock last year, halted trading of $4 yesterday. So they were supposed to reinvent the used car market. Obviously there, the narrative of what that company was going to be as far different, what the actual reality of what that company is.
00;18;58;04 – 00;19;19;06
John Boardman
And so recessions actually are a healing process for the economy. They’re actually quite constructive. But if you look back at the history of recessions in this country, certain bubbles that needed to burst in fact, did burst. And that’s what we’re running into right now. This is not a tech bubble like we saw in 2000, but it is a it is a bubble in a number of areas.
00;19;19;06 – 00;19;40;17
John Boardman
And I call it a bubble of complacency. So if you think about cryptocurrencies and these high tech stocks and fees, you know, all of the the junk that was basically floating around in the marketplace has been exposed. And I think we’re running into a period where it needed to be exposed. And I think it’s generally constructive if people fall back on fundamentals.
00;19;40;17 – 00;20;11;05
John Boardman
And I think that’s what this market is more about. If you look at day to day market behavior, positive earnings reports, positive guidance for next year, healthy balance sheets, good cash flow, healthy dividends, those companies are being rewarded. Those that don’t have those areas covered are being punished. I like this chart. This is put out by Vanguard. Everyone remembers the financial crisis and this is clearly what everyone is has in the rearview mirror when they’re thinking about the stock market right now is like, are we headed back to the financial crisis?
00;20;11;05 – 00;20;33;21
John Boardman
I don’t I do not believe we were. I mean, that was we are that was a structural breakdown of the financial system. I think clearly what we’re going through right now is just again, a bit of a bubble deflation And again, dealing as Frank and Brian both mentioned, you know, the Fed for the first time in 40 years is the enemy and really has been supporting the economy for the last 40 years.
00;20;33;21 – 00;20;57;01
John Boardman
But it feels strange that the Fed would want poured cold water on the economy, drive up unemployment. But that’s what we’re doing they’re doing right now. But I want to remind people, the market peaked before the financial crisis in October of 2007. It fell 53% to March of 2009. It was a very scary period. Obviously, the headlines, if you’ll recall, is this the end of the US financial system as we know it?
00;20;57;05 – 00;21;22;23
John Boardman
Thanks for failing every week. Now let’s look what happened. For the forthcoming two years we had a 111% return on the S&P 500 and look at the headlines that happened along the way. Dow 5000. There’s a case for a jobs report. Shakey home foreclosures reached record high. Fannie Mae needed to be bailed out by the government. And all along the way, the market continued to climb.
00;21;22;23 – 00;21;47;27
John Boardman
Why is that happening right now and what the market’s likely doing this year is an anticipation of economic behavior next year. And this is the hardest thing investors have to put together, is that when we look out the window and if you look at the economic data today, it does not show a poor economic environment, but the market is always looking 12, 18, 24 months ahead to predict where the market or the economy is actually going to go.
00;21;47;27 – 00;22;07;20
John Boardman
And that’s why in the last six weeks you’ve seen the market bounce quite a bit because it’s trying to interpret where the Fed’s going to go from here. So I just want to leave everyone with a little bit of a positive note is that, you know, markets often fall well before economic conditions fall. At the same time, markets love to climb what they call a wall of worry.
00;22;07;20 – 00;22;29;02
John Boardman
If everything is very if the skies are blue and the sun is shining, that’s probably a bad sign. And that’s what we were dealing with in the fall of 2021. What we’re dealing with now is redeveloping that wall of worry. We actually have to have concerns in the market for the market to take a healthy growth pattern forward and tell you a really funny story.
00;22;29;02 – 00;22;45;25
John Boardman
Again, it’s so funny that it’s so great that you all are all here tonight. About a week ago I was talking to Madeline and Andy. I said, What’s the RSVP count for this party? And she goes, We have 30. And I was like, Wow, that is really depressing. Like, What are we done to make all these people mad?
00;22;45;25 – 00;23;03;18
John Boardman
And Andy made a good point. He said, Have you checked the info@ballpstplan email? I don’t think there are forwarding to us. She logs in and we had 150 hours RSVP and so thankfully there wasn’t just food for 30 when you all arrived tonight and plenty of plenty of drinks. So that is the end of our presentation.
00;23;03;18 – 00;23;11;16
John Boardman
I just want to thank all of you all for being here. The faith, you all. It’s incredible. We we take our job very seriously.
00;23;11;16 – 00;23;13;19
Speaker 6
00;23;14;11 – 00;23;21;05
John Boardman
Does anyone have any questions? We’re happy to answer? Okay. We solved all your problems.
