Today, on the Market Call Show, we examine strategies for navigating volatile market conditions. Recent turbulence, driven by factors like the global sell-off, tech declines, and yen carry trade unwinding, has intensified volatility. We dissect the economic and geopolitical influences intensifying volatility.
We illustrate the multifaceted challenges facing investors through examples such as NVIDIA's production issues and looming stagflation fears. Additionally, we consider election-year uncertainties and their impacts on sentiment.
Yet amidst shifting seas, opportunity remains—with prudent planning. Given overvaluation concerns, we stress diversifying beyond tech and maintaining awareness of indicators and policy shifts.
For those nearing retirement, tailored strategies emphasize balancing risk through diversified equity allocation over heavy bonds. Well-informed risk management and acknowledging market cycles also feature prominently.
SHOW HIGHLIGHTS
- We discuss recent market headlines including the global market sell-off, tech sector decline, and the unwinding of the yen carry trade, with examples such as NVIDIA's production issues and fears of stagflation.
- The show highlights the impact of rising interest rates in Japan and the political and economic uncertainties leading up to the upcoming election on market sentiment and investor behavior.
- We emphasized the importance of diversification, especially in the tech sector, to mitigate the risk associated with sector-specific downturns.
- Stressing the necessity of staying informed about market developments, we discuss the economic indicators, and the impacts of monetary and fiscal policies on investment portfolios.
- I Explain the significance of risk management and being prepared for market cycles, likening it to a sailor adjusting to changing winds.
- We offer ideas for tailored strategies for those nearing retirement, cautioning against heavy reliance on bonds and advocating for a balanced equity allocation to sustain long-term withdrawals.
- I discussed the role of political and economic policies in affecting market volatility and the importance of understanding their impact on investment portfolios.
- We discuss having an emergency fund and a diversified portfolio to manage withdrawals during market downturns without negatively impacting growth assets.
- I encourage investors to remain calm and consult with trusted financial advisors or level-headed colleagues during periods of market uncertainty to maintain a long-term perspective.
PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:
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TRANSCRIPT
(AI transcript provided as supporting material and may contain errors)
Louis: Hello, this is Louis Llanes for the Market Call Show. I want to talk a little bit about the headlines recently. A lot of people are asking me questions about what do you think about all this craziness in the market? In fact, I've had several people email me or text me or even as I'm walking down the hallway at the office, saying, how are you holding up with this market? And I had a conversation with a client who once was a stockbroker back in the day, a very sophisticated client and we were talking about the markets and we were talking about ups and downs and the difference between certain investors and how they deal with ups and downs. So I wanted to spend a little bit of time just talking about the major headlines that we've seen recently, that's affecting the stock market. And once I kind of get through that, I want to kind of give you my take on it and then just talk about what I think are kind of the lessons to get from the recent headlines and then also, in particular for people who are nearing retirement which is a lot of people who are watching this podcast or are already retired what this means. And it's just some reminders of some basic things to think about. When these headlines come about, they really bring certain aspects of fundamental investing to light. So first of all, let's talk a little bit about the recent headlines.
So we had a global market sell-off. So, like on August 5th, the S&P 500 experienced a big drop. It was down like 3% and it was marking like the worst day we saw since December 2022. And that was part of a broader global market sell-off and the Japanese market had suffered the biggest one-day drop that it saw since 1987. The biggest one-day drop that it saw since 1987. In fact, it brings back.
I remember the day that the market crash happened. Actually, I went into a small brokerage firm that day. I was in college at that time and I was studying finance and I walked in and I remember the branch manager of this brokerage firm was kind of in a panic and he grabbed all the brokers and they had a big open floor and he said do you realize what happened in the Japanese market? It had a massive sell-off. Today is going to be an ugly day and I just remember how everybody was running around.
But what's interesting is our stock market did not follow through on the downside to the same extent as 1987. So a lot of people are making kind of a correlation between 1987 and today and really they're very different scenarios. So anyway, so there was a lot of concerns about economic growth and overvaluation of tech stocks, which I have been talking about for a long time. In fact, my last podcast that just was released last week I was talking about navigating in emotional markets. I actually recorded that podcast three weeks ago, so it was meant to go out sooner but we had a little bit of delay in launching getting it out. But I've been mourning about these problems for quite a while. So anyway, so that was the first thing.
That's kind of the major headline the global market sell-off. And we also had a lot of headlines related to the unwinding of the yen carry trade. The yen carry trade is when investors borrow in the yen at low interest rates and they invest that money at higher yield, yielding assets, mostly stocks and other assets as well. But stocks were also a big part of the allocation that came from borrowing money. Like hedge funds and certain types of asset managers were doing more speculative leverage trades, where they're borrowing money in yen and buying stocks. Well, that unwound because we saw that there was a rise in interest rates in Japan and that caused a lot of margin calls in interest rates in Japan and that caused a lot of margin calls and that forced some selling in stocks globally and added to the market volatility that we saw. So that was more of what I would consider to be kind of a structural thing, and this is something that happens at market extremes. You tend to have those investors or traders that were over levered have to unwind leverage and it creates stress in the market. So I think that was a that was part of the headline.
The other thing was the tech sector sell off. We talked a little bit about this, but the tech sector, particularly the so-called magnificent seven stocks, have been hit hard. You know, nvidia, tesla and other major tech companies have had significant declines recently. That contributed to the overall broad market sell-off. So NVIDIA, for instance, it faced a production issue with its next generation AI chips and that further exacerbated and caused investor sentiment to go sour. You saw the headlines in Financial Times, in Market, business Insider and other Wall Street Journal and that was kind of part of the concerns there.
And to make things a little bit more concerning, we had a lot of talk about stagflation. There was particular analysts that were talking about maybe there could be potential stagflation where high inflation and the sluggish economy could prevent the Federal Reserve from cutting interest rates as much as they need to, because the market had been anticipating interest rates to be going down. And if there's stagflation then maybe the Fed will not be able to drop rates as much as the market is anticipating. So that scenario led to forecast of a possible 10% decline in the S&P 500 over the next quarter. Take that for what it's worth, but you kind of put those things together. It caused more angst.
And then there's also the political and economic uncertainty Politicians have been. As you know, the election is coming up and it's playing a role. It's definitely playing a role. The recent market turmoil has been described by some people as the Kamala crash, or Kamala crash by critics. That's highlighting the political risks really that are associated with the election and potential economic instability.
On this phone call that I had earlier today with a particular client, one of the things we talked about was how, really, for the most part, if you look at it historically, politics generally or I should say the election of the president generally affects certain sectors and industries more than it affects the overall economy. There is some effect there. But if you look at it statistically and you just kind of graph out the market and then you kind of overlay whether it was a Democrat or a Republican, there's really statistically not that much difference in the capital market outcomes. But there is definitely big differences between how certain sectors respond and how certain industries respond. For example, if Trump were to become the president, maybe certain energy stocks would do well if it's related to increasing production and others might do poorly if they're tied to a lower oil price. You know, it just depends on what you're looking at. So these factors created to a volatile environment. It significantly infected investor sentiment and market performance recently. So what's crazy is that since that happened we had a big jump up in the market so that initial you know how you feel about this market. You know, and now it's moving up. You have to really now I want to get into my thoughts about this you have to really not think about the headlines so much, because the headlines really are not going to, in the end, have a lot to do with your results.
So, given this market volatility, there's some lessons really. The first one I would say is that diversification is crucial. The significance of a sell-off in a specific sector or particularly technology. That just leads you to understand and just basic blocking and tackling that you need to have some diversification across industries and asset classes. Diversification can help you mitigate the risk associated with sector-specific downturns. So in a lot of, if you look at the sector concentration in the S&P 500 or the overall market, it's pretty high. It's over 30% in tech. There's also more economic growth there, but it's pretty highly concentrated right now. So being diversified is important. So the other thing is staying informed is really important, because if you've been informed about market developments and economic developments and valuations and the quality in the market, you would have already been aware that this type of thing could happen. So you're not surprised. It shouldn't be surprising for you.
So markets are influenced by a myriad of factors, like we just talked about, and these unexpected global outcomes that sometimes they seem like out of the blue. They're really not so much out of the blue if you're kind of aware of what's happening in the market, like what's happening with the unwinding of the yen trade. I mean this has actually happened before. The whole thing about risk on versus risk off and borrowing in yen and buying other assets, that's been an excuse for exacerbated volatility in the past and it does have some effect. But it shouldn't come as a surprise that headline. So understanding economic indicators, I think is helpful because when you understand that these inflation rates or unemployment data, central bank policies, et cetera, et cetera, this helps you kind of understand that these policies could affect the market longer term and these policies tend to move slow and so you know it's not like things just turn around on a dime. They generally happen over time. So if you're watching those trends, that could help you invest as a long-term investor, which is really the way to think about this.
I think the other lesson would be risk management. Unwinding of the end carry trade, like I had mentioned before, that's just normal volatility. That can happen. So your portfolio should already be really constructed in a way where it makes sense for you to hold on to a longer term strategy. And that leads to really the lesson always to be prepared for market cycles. So it's just like if you were a sailor. If you were a sailor, a professional sailor if the winds change their direction, you shouldn't be surprised. You should be in a position where you understand, like, if the winds are changing, this is how I'm going to change my sales and these are the specific actions I'm going to do so. Having your portfolio managed in a way especially, you know, if you're a long-term investor which I believe everybody really should be for the most part then you know you really want to be thinking hey, I'm prepared for the market cycles. Here's my plan on how I'm doing that, or here's my advisor's plan. This is our strategy. So if you don't feel like you have a plan for market cycles, then it's time to get one. It's time to get an investment policy and work with professionals to put one together, if you don't feel like you could do that on your own.
So I would say the other lesson would be political and economic policy does matter. Like we talked about it, those developments do matter. In the long run they can have significant impacts. They tend to move slower, you know. Monetary and fiscal policy do have an impact. Some of the you know the election issues can have a short-term impact. I would argue that long-term they have. They don't have much effect on the overall returns on stocks, but they definitely have impact on returns in sectors and interest rates. Regulatory shifts can also have some impact. So understanding what those are and how they affect your investment portfolio is important. So by incorporating these lessons into your investment strategy, long-term investors can better, you know, navigate market volatility. But the you know, if you're somebody who is near retirement and I'm getting ready to do a webinar actually on preparing your portfolio for retirement, that's going to be actually next week, but in fact I guess by the time this is published I'll probably already have done it but so, as I was thinking about that particular webinar, I thought about well, what does all this kind of volatility mean for those people, those investors, those people that are going to be on that webinar?
And the first thing is, you know, you have to have a plan for moving towards retirement, right, like, like, what is your portfolio. How does it need to be readjusted as you get closer to retirement? A lot of people feel like you should be 100% in bonds or really high in bonds Once you get to retirement. The data actually shows that's not a good strategy, primarily because inflation eats up at your value After taxes and inflation, bonds generally don't do very well. You know it could be negative returns or slightly positive, and if your withdrawal rate is, you know, 4% or so or 3%, you're not going to be able to sufficiently have that last for a long period of time over retirement horizon, which typically lasts somewhere about 30 years or so. Being 100% invested in bonds is not a good idea. So having a long-term strategy generally requires and some of the data shows that your stock allocation or equity allocation should be somewhere between 50% and 75% going into retirement on an optimal basis, looking over a wide variety of economic conditions.
So in terms of how people who are getting close to retirement should think about this, it's important that you're dealing with your withdrawal rates, like you understand what your withdrawal strategy is likely to be going forward and in the future, and that you have a plan for dealing with ups and downs. So in order to deal with that. It's important to strategically have some considerations like how you're diversifying your portfolio right now and what kind of funds emergency funds are you going to have. So you don't want to be in a position where you're having a negative impact on your portfolio because you're pulling money out of growth assets at the wrong time. So it's really important to have an emergency fund that can help you through those downturns and even have there's been some great studies out there I know Charles Schwab did one even also having an emergency fund plus. It's kind of a basket of shorter term bonds and more intermediate term bonds too, so that you are prepared for these types of things and you can let the growth of your portfolio work over time. And that's been a strategy I've really worked with clients for years, decades, and it has worked very well over the longterm. So these ups and downs and in fact, if you look at a longterm chart, this recent decline is but a blip on the radar. So even the 1987 crash is a blip on the radar.
So you know, some people might even think, oh my gosh, I'm going to delay retirement or I'm going to adjust my spending. I would say the thing to do is there are some spending. If you're already retired, there's a lot of different ways that you can think about how you take withdrawals out. But I would not be withdrawing money out of the market the growth assets, stock market type things or even real estate things like that for the average person just because of a decline. But delaying some spending might make some sense, depending on how you're structured. But really taking a look at your overall structure right now makes a lot of sense your overall asset allocation so that it's aligned with your goals.
I think the biggest consideration right now is psychological, and staying informed is important, but being able to stay informed and remain calm is crucial. So you want to be able to not panic because of various headlines and so consulting with people that you trust your financial advisors or family members or colleagues that you know are level-headed during periods of uncertainty, that's the best way to deal with things and to get your psychology level headed. So it's important to think about these things from a long-term perspective. It's important to look at them from. You know high quality investments would be another focus that we've talked about a lot. You want to be focused on high quality. So I think, when these recent headlines, although there are some things that could have longer term implications that are embedded in them, like, for example, the high debt ratios, the likelihood of higher tax rates, things like that. Those can affect long term planning horizons and valuations being overbought in certain areas. That can affect long term investment decisions. And if you didn't listen to that podcast I did last week on navigating in emotional markets, I highly recommend listening to that because I talk more in detail about those aspects of investment security selection and how to be psychologically dealing with these types of scenarios.
All right, well, that's all I have for you today. I hope you find this useful. If you like this, please like and subscribe. Share it with your colleagues, friends, people who may benefit from this. That's all for now, luis Llanos signing off. Talk to you next time.