Navigating the Bear Market

Steve Johnson:

With negative headlines piling up, volatility rising and the bear market officially out of hibernation, please join Chairman Dan Wiener and Portfolio Manager Steve Johnson as they discuss and debate the issues moving the market today.

Steve Johnson:

Hello, this is Steve Johnson. Portfolio manager here at Adviser Investments. I’m here with another The Adviser You Can Talk To Podcast, and it is a privilege for me today to be joined by our chairman and co-editor of The Independent Adviser for Vanguard Investors, Dan Wiener. Welcome, Dan.

Dan Wiener:

Oh Steve, I think it’s a pleasure for me to be sitting here with you.

Steve Johnson:

Well listen, thank you, but there is a lot to discuss and so let’s get right at it. Last week, the legendary investor Stan Druckenmiller recently spoke at the Ira Sohn Conference, where he said that we are six months into a bear market, and of course yesterday, the S&P suffered one of its worst days in a while, down almost 4%. And now we are down over 20% for the year. Over 20%, I think 24%, from the high, so…

Dan Wiener:

It’s an official bear market according to Wall Street, right?

Steve Johnson:

Yeah, which is a dumb thing anyway.

Dan Wiener:

Absolutely, 20%. If you’re down 19.9%, it’s not a bear market, but if you’re down 20% or 20.01%, it is? The thing about what Stan Druckenmiller said, that we’re six months into a bear market. I don’t know, you’re going to call me the ultimate optimist, but that means we’re halfway through it already because the average bear market lasts about 12 months. Lasts about a year.

Dan Wiener:

So 2020’s bear market obviously lasted 33 days, right? But the average drop on a bear market is 37%. So in some respects we’re halfway through a bear market already. We are more than halfway through the drop, right? But labels are kind of irrelevant. You and I have been watching what’s been going on in the stock market daily for years now. And over the last couple of years, or certainly over the last six months, a lot of stocks have been in bear markets individually for weeks now, months now, right? Down 20%, 30%, 40% from their highs. There’s been a shift in the market. You’ve talked about it a lot.

Steve Johnson:

Yeah, and that’s a great point because, again, the arbitrary nature of a bear market, but if you think about the NASDAQ right now, it’s off 34% from its November high. If we were to finish… This is an astounding—I think this was astounding. If the year were to finish today, and the NASDAQ being down 30% for the year or so, it would be the worst year in the NASDAQ’s history. That’s hard to believe compared to where we’ve been. But, to your point, a lot of names are down 40%, 50%, 60%, 70%. Take Netflix, right? We’ve seen Netflix drop from 700 down to under 200. We’ve seen Amazon down 30%, 40% this year alone. And not to mention of course your favorite topic, crypto. So think about this, right?

Dan Wiener:

Yes. My favorite, yes. Down two-thirds.

Steve Johnson:

Exactly. And so we were talking about that, and what it seems to me is last year was a year in which no one lost, right? Everyone thought they could win in the stock market and they bought meme stocks, they bought crypto. And now what we’re seeing is the reckoning that we thought would happen. But none of us could predict the exact timing of it. But what we’re now seeing is really some panic in those names.

Dan Wiener:

Well, but Steve, there’s a difference. If you want to call it a “panic,” and some of the traders, yeah, I would say they’re panicking, but this is the nature of the markets. It’s not that there’s a sell-off in the meme stocks or a sell-off in crypto. Yes, those are happening… Or SPACs for that matter. How many SPACs that came out at $10 are now in the two range, right? But we are seeing a sell-off across the board. Yesterday, I believe I read that 495 of the 500 stocks in the S&P were down.

Dan Wiener:

We’re seeing a… What’s going on? We’re seeing a huge divergence, for instance, between the quote-unquote growth names and the quote-unquote value names, right? And nobody wanted to look at energy stocks. All of a sudden energy stocks are up 50% for the year. Everybody was talking tech. Well, we know what’s happened in the tech world. You were talking about it with the NASDAQ. But, I think… We’ve been talking about stocks going down, the stock market being in a bear market. I do want to give people a little bit of optimism here. The average bear market, as I said, lasts about 12 months. The average bull market lasts three and a half years. You know, the average bear market goes down about 37%. Remember, we’re talking averages, but it goes down about… The average bull market goes up 136%. Markets ebb and flow, right?

Steve Johnson:

Yeah, I think you’re right and obviously longer term. But I guess what investors are worried about here, too—let’s go switch gears a little bit here. There’s been a tremendous amount of debate in the press, and again, this is kind of those labels. People calling for a hard landing versus a soft landing. And just to put that out there for investors, a soft landing would mean that the Fed is able to navigate these waters, cool inflation. Slowing down the economy just enough to not put us into recession. Is that possible? You know, yesterday we had a report late in the day from The Wall Street Journal. Many thought it was leaked by the Fed to the Journal. It said: “Well, perhaps they’ve had a change of religion?” And they’re going to think about raising the fed funds rate by 75 basis points tomorrow, rather than kind of the expected 50. So let me ask you, do you think the Fed—can they avoid recession, or is it even relevant at this point?

Dan Wiener:

Well, this is a very complicated time, and you and I were in meetings yesterday where I brought this up, that the economy and the numbers, the data that the… And the Fed is very data driven, right? The numbers that everybody is looking at are so different in terms of where we’re coming from than we have ever seen before. This is a unique period because we’re coming off a recession. The 2020 recession was unique in that the economy essentially had its brakes put on. Economies go into recession, things slow down, and then they start to go backward for a while. And then they start to speed up again. And we come out of a recession. The recession of 2020, as short as it was, was a complete halt to economic activity. A complete halt. So unemployment numbers shot up.

Dan Wiener:

Inflation numbers fell through the floor. Interest rates fell through the floor. Any economic statistic you want to look at. The lines just went off the charts. Now we’re rebounding, but like a pendulum, you have to come back to some sort of equilibrium, and we are shooting up. We’re shooting down. The Fed obviously got it wrong on inflation. Everybody was talking about inflation being transitory. They’ve all said, they’ve all taken the mea culpa and said: “We got that wrong.” But everyone was working off of data we have never ever seen before. So, does it matter if we’re going into… Some people say we’re already in a recession. Hard to believe with unemployment at 3.6%. Hard to believe with earnings still growing, corporate earnings still growing, but maybe we are in a recession. Does it matter?

Dan Wiener:

If we’re in a recession or if we’re in a bear market, what do you do about it? As an investor, you have an objective. You have a long-term objective. Maybe you have some short-term objectives. If you’ve done it right, and I assume that it… Particularly if you’re working with a financial planner, like the excellent financial planners we have at Adviser Investments. If you’re working with a financial planner, you have already put together a plan, not just for your investment, but really for your financial life, for your wealth. What are your objectives?

Dan Wiener:

You have a short-term objective that, you know—buying a vacation home, sending a kid to college, buying a new car. Whatever it is, you should have money set aside ready for that. You have a long-term objective. Whether it’s retirement, moving overseas in retirement, buying a vacation home that you’ll eventually live in. Those are longer-term goals, and you should be invested, and your money should be allocated in a manner that will get you there over time. Again, recessions don’t last forever. Bear markets don’t last forever. You, as an investor, have to be able to weather those storms because as I said, bull markets last a heck of a lot longer and go up a lot higher than bear markets go down.

Steve Johnson:

Yeah. No, those are great points and, just to circle back on the recession, I was in that camp and I’m still in that camp. I think we’re in the midst of one and I think that’s encouraging. And I know that sounds a little bizarre, but let me explain why. If we look at those areas of the market that are down the most this year: Housing, autos, consumer discretionary, retailers, down 40%, 50%. What’s done well this year: Defensives, staples, utilities. Dividend-paying stocks.

Dan Wiener:

Energy.

Steve Johnson:

Energy, right? Those areas of the market. Energy’s been the anomaly, I guess, in this, if you were talking about the slowdown, but what I’m saying is that the market has already… To your point, whether we’re in recession or not, the market has already priced that in. So what that means is yes, the Fed is going to raise rates and maybe they raise too many times. Maybe they’re able to bring demand down so that we see that oil price come down. Because think about it, we’ve been talking about inflation, right? And you’ve been saying that the Fed… Did they get it wrong? Yes. But give them a little bit of pause because no one could have predicted Russia invading Ukraine. No one predicted oil… The policy mistakes that were made. Oil right now at 123. We are seeing signs, though, of inflation coming down, right? Whether it be lumber, if you look at the price of lumber—

Dan Wiener:

Yeah. Lumber is back at its five-year average.

Steve Johnson:

Yeah, we’re looking at it… It’s down 47% in the last three months. Nickel, soft commodities, even wages, everyone was worried about really excess wage growth. So, I’m optimistic that the Fed can bring down demand. Perhaps not causing it ultimate destruction. But to your point about financial planning. This market and the declines that we’ve seen here have created opportunities. And one of the challenges that we have seen this year has been the performance of a balanced portfolio because of the decline that we’ve seen in bonds. So what’s the role of bonds today and are there other opportunities outside of the bond market that you think investors should be looking toward?

Dan Wiener:

Well, come on, Steve? You know as much about bonds as I do. But again, bonds have had a tough time here. We were in a 40-plus-year bond bull market, right? We saw yields… Let’s take the 10-year, go from 15%, 16% down to 0.5 at the bottom or at the top, depending on how you want to call it. Bonds have now, as you said—they’ve more than doubled their yield since the beginning of the year. That’s astounding. And it’s also fantastic for people who want to buy into the bond market now.

Dan Wiener:

The role of bonds, I believe, should be and always will be as a buffer to stocks in a portfolio to take some of the volatility out of a balanced portfolio. That being said, they have not acted in that regard this year. Bond markets down 12% this year. That’s astounding. But it’s happened very quickly. And as I said, yields have more than doubled very quickly and I think that’s fantastic for a lot of investors. Particularly if you’re investing in a bond mutual fund and reinvesting the income right now. You are buying bonds at a 12% discount, right? And every one of those bonds you buy is now yielding you twice as much as it did at the beginning of the year.

Steve Johnson:

No, absolutely right. I couldn’t be more optimistic. If you think about the bond market in the sense that everyone has found inflation religion, I call it now, right? So people didn’t believe it. Now, everyone won’t get off of that. But think about this: The two-year Treasury yield jumped 28 basis points yesterday. So 0.28% to 3.34%. That two-day move was over a half a percent. The largest move that we’ve seen since 2008. And if you go back, just to where we were… Think about it. To your point, where we were just a year ago, right?

Dan Wiener:

Oh yeah.

Steve Johnson:

If we think about where we were a year ago in the bond market. A year ago you were looking at the five-year, it was at 0.75%, and now we’re at three and a half. So, just incredible value.

Dan Wiener:

When you talk about being bullish on the bond market, though, Steve, are you talking about being bullish on the fact that yields are higher now? Or do you have some sense that we actually get some capital appreciation here because bond prices have been taken too low? Yields have gone a bit too high?

Steve Johnson:

It’s a great point. I think I’m optimistic because I think you’re going to get the best of both worlds, right? So if the economy does slow and you start to see inflation slow, well, yields probably go a little bit lower. And perhaps they don’t go back to the lows that we saw, but they’ll stabilize to get a little bit lower, so you’re going to get some price appreciation. Plus, you’re picking up, you don’t have to go out that long. That’s the problem—five years ago you were going out 10 years to get yield. Now because of where the yields are, on the short end, you can go out on a two-year bond today and pick up 3.32%. And to your point, we’ve also seen people selling in the bond market. So it’s created opportunities in corporate bonds.

Dan Wiener:

Well one of the things that we’ve talked about, you and I, is the fact that… I believe, anyway—I’m not sure where you stand on this—that the bond market is sort of finding a new plateau. That yes, yields and prices are going to fluctuate between a couple of ranges, but we’re not at the 10-year Treasury plateau at 1% or one and a half percent. We’re now at the 3% range for, say, the 10-year. And this is… You never say permanent, of course, in the markets. But as I said, this just has a much higher yield that you’re working around and it makes bonds much more attractive. But let me throw something back at you. You’re a portfolio manager in a strategy that buys not high-dividend-yielding stocks but companies that you believe can grow their dividends over time. So I believe every one of your stocks does have a yield. Does this make dividend-yielding stocks more or less attractive, given where bond yields have gone today?

Steve Johnson:

Well, I don’t think it’s more or less attractive. I think dividend-paying stocks will always have a place for investors because it’s growing income. And our portfolio, we’ve grown the dividend this year by almost double digits, so probably I think 10% growth in terms of the dividends. So those companies have survived.

Dan Wiener:

And is that because of the stocks you were buying or because the companies you bought have grown their dividends 10%?

Steve Johnson:

No, it’s the companies that we bought have grown their dividends by a total of 10%. And the reason why is in this environment, it’s been a difficult environment, but you want to find companies that can grow and people that have companies that have grown their free cash flow. Meaning, after everything is said and done, they’ve got money left over to pay shareholders. And what’s interesting, Dan, is I think we saw this big move into passive investing, right? Everyone was indexing. I think you’re going to see an era now of active management be able to outperform. Because, think about it, the S&P was dominated by those large names. Now all of a sudden we have the opportunity to really find those companies that will survive in what has been a challenging environment. And I think we’ve seen that this year.

Dan Wiener:

You are putting this down for posterity, that active management. Every time somebody says, “We’re now in an environment where active management is going to outperform,” I think to myself, there are always environments when active management outperforms, but on average active management does not outperform, and I have tremendous confidence in you and Charlie Toole, your co-portfolio manager, that you guys will. And the SEC prevents me from talking about your performance, but let’s not go to that place that I see in the paper every six months where somebody says: “Now is the time for active management to outperform.” It doesn’t happen on average, right? We look for the excellent and I think we have it here at Adviser Investments, but…

Steve Johnson:

Well, I will say this, Dan: There are opportunities even for this guy who tends to be on the pessimistic side sometimes.

Dan Wiener:

Yeah. You were our pessimist.

Steve Johnson:

I am looking, and people know from the Friday videos that I have been, but for the first time now I look at risk/reward. You know, as we kind of wrap up this podcast here, I look at risk/reward and we had 3,750, in that range yesterday, on the S&P 500. Could we trade lower from here? Of course. And I’m not smart enough to pick bottoms, but if you look at valuation, which is not a great indicator as a timing mechanism, but if we look at this the S&P 500 right now is trading at let’s say 16 times forward earnings. There’s a lot of debate about where those earnings are going to come in because of profit margins and some other issues.

Dan Wiener:

Right.

Steve Johnson:

But with that we were trading at 21 times. We’re now, obviously, much better placed. And so you’re never going to be able to time the bottom. Could we have another difficult month or two? Of course. I think we’ll continue to look at oil, continue to look at where interest rates are. But risk/reward now, from where we were in January, clearly—it’s a good time to be an investor. And I know Charlie and I are both looking at names and areas that we’ve been in that were defensive, that we’re now starting to be maybe, perhaps a little bit, more cyclical, a little bit more optimistic going forward. So…

Dan Wiener:

But wait a minute, wait a minute, wait a minute.

Steve Johnson:

Right.

Dan Wiener:

Before you start tapering off our podcast here. We move very quickly from this discussion of the stock market and the bear market into the economy and recession, and hard and soft landings, and all that stuff. But let me go back for a minute. I think you and I agree we’re in a bear market. Whether we were in one two days ago or not doesn’t really matter. We’re in a bear market. What do we do about it? What do we do about it? Do you change your stripes? Do you change your investment objectives? Do you change your strategy? What do you do about it?

Steve Johnson:

Yeah. And I think it’s a great time to rebalance, right? So if you think about it, if you were… Perhaps you thought you were too conservative and you moved to cash or you took some out of your portfolio because you’re feeling nervous. Now is a good time to rebalance, but again, to your point, now is not the time to be making drastic decisions with your portfolio, because this is a time when people make great mistakes. Whether it be 2008 or March of 2020, we know it’s impossible to time the market. Everyone thinks you can get out and then get back in. But I will say one of the things that I’m just astonished by over the last… And I’ve been doing this now for 25 years. One of the things that I’m astonished by has been the speed of these moves.

Dan Wiener:

Yes. Absolutely.

Steve Johnson:

So we were at 4,100 about two weeks ago. We’re now at 37. The S&P 500 has dropped 10% in three days. Now, I’m not smart enough or fast enough to be able to trade that. And so getting back to your point about having your financial plan. Knowing what your risk tolerance is, knowing what you need to do, that’s more important than trying to time the market. And if you’ve had cash on the sidelines, you’ve been thinking about it, speak with your adviser about even dollar-cost averaging into the market. It’s a great way to be able to get exposure. You’re never going to time the bottom or the top, but at least you’re going to be able to get invested in, with bond yields where they are now, a balanced portfolio going forward. I think we’ll do quite well in the next year, one, three and five years.

Dan Wiener:

I think it’s also worth saying that when you and I talk about timing the market, we often are talking about people who are kind of all-or-nothing investors. We have tactical strategies at Adviser Investments that move assets around, do add to cash, reduce cash over time. They almost never go 100% in or 100% out. And there’s a big difference between being tactical and being an all-or-nothing market timer. So I just wanted to add that.

Steve Johnson:

You got it. So, all right, Dan. We’ve covered a lot.

Dan Wiener:

Yes we have.

Steve Johnson:

I think people probably… And so, one last question. You are a successful businessperson and investor, a sage. I won’t call you a sage.

Dan Wiener:

No one’s ever called me that.

Steve Johnson:

But it is graduation season for high school and college. And what was the best advice you were given about investing, and what lessons would you like to impart?

Dan Wiener:

Wow, nobody’s ever asked me to give a graduation talk. Well, thanks for the compliment. I wish I’d had a mentor in this. I met and have interviewed a lot of successful people in this market. Some of them are very well known: the Michael Prices, the Julian Robertsons of the world, Ron Baron, Andy Stevens. But some of them are not. Jonathan Berg, there’s a guy named Michael, who I won’t give his last name, George, I won’t give his last name, Avery, Parron. These were all people who were mentors in one sense or another to me. What’s most important, I think, is to have a good modicum of humility, but also to work really hard and to work long. I don’t think anybody could accuse me of short shrift on the hours I’ve put in.

Dan Wiener:

Be very thoughtful about your family. I think family is super important. Work is important, and exercise is important. I think you have to take care of yourself so that you can take care of others, and I feel that our work at Adviser Investments is about taking care of both our clients and our colleagues. I’m very proud of the fact that our company is continually rated a great place to work. And I think it’s because we take care of the people at the company. So it helps to have a strategy, it helps to have a belief system as long as it’s well thought out and to stick to it. And I’ve been a risk taker. I think taking some risks is a good thing, particularly when you’re young, when you can afford to take risks. And maybe the way I’d go out on this is don’t be a pig.

Dan Wiener:

Don’t be a pig. If you’re successful, share your success with your family, with your friends, with your colleagues. You can even share it with strangers. I don’t think you have to be a showoff. My wife and I drove our last car for 20 years and we sold it this year only because it was becoming a maintenance nightmare. We don’t need a Porsche, a Ferrari or a BMW to show off who we are. We drive a Subaru. Works fine, gets me from point A to point B. But that means that we’re not spending a lot of money on ourselves. We spend it on others. So, take care of the people around you. Try to make society better if you can.

Steve Johnson:

Very good advice. So Dan, many thanks for joining me today. We all hope you find it entertaining and informative. We know there are going to be many headlines in the days and the weeks to come. We got a big Fed decision this week. We know volatility is going to be heightened, but one thing is for sure: No matter how volatile the days and the weeks are to come, we look forward to helping you secure your financial future. So this has been Steve Johnson and Dan Wiener with another The Adviser You Can Talk To Podcast. Thank you, Ashlyn Melvin and Kailey Steele, for your great work in producing these podcasts. If you’ve enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. Thanks for listening. Stay safe.