GrowthCast Episode 6: Is it Different This Time?

Our guest today is Rick Kramer. Rick is the Vice President and founder of DHG Wealth Advisors. Rick was an early advocate of the scientific factory methodology of investing and is passionate about our investment philosophy here at DHG. He brings over 40 years of wealth management experience to designing and monitoring our ongoing portfolio structure.

Transcript

Introduction

[00:00:09] JL: Welcome to today's edition of DHG’s GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace.

Thanks for joining us as we discuss tomorrow’s need today.

[00:00:42] ANNOUNCER: Views and concepts expressed by today’s panelists are their own and not those of Dickson Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.

Interview

[00:00:58] JL: Our guest today is Rick Kramer. Rick is the Vice President and founder of DHG Wealth Advisors. Rick was an early advocate of the scientific factory methodology of investing and is passionate about our investment philosophy here at DHG. He brings over 40 years of wealth management experience to designing and monitoring our ongoing portfolio structure. For 20 years, ending at the beginning of 2020, Rick authored DHG Wealth Advisors’ quarterly newsletter, which has become well known for both its unique insights, as well as humor. Rick is a cum laude graduate of Bucknell University and Dickenson School of Law - Pennsylvania State University.

Thanks for joining us today, Rick.

[00:01:42] RK: Thank you, John. It’s nice to be here, and hopefully we can have some fun discussing what’s going on right now.

[00:01:49] JL: I’m sure we will. Well, during any crisis, the question is always is it different this time. Rick, you've lived through some of the worst bear markets this country has ever experienced, so I know we’re going to get some war stories from a true veteran. Let me ask a couple of questions here. First and foremost, Rick, the last six weeks have been unsettling for investors as they have seen the longest, most robust bull market in US stock market history come to a sudden end, followed by a swift steep selloff. As a veteran who’s lived through multiple market cycles, what would you say to someone who's feeling nervous about staying invested?

[00:02:30] RK: One good thing about being old is you’ve been around the block a few times. There have been 12, including this bear market. There have been 12 bear markets since the end of the war over the last 75 years, and I divide those bear markets up into two categories. One is the typical bear market, and that’s maybe the average or maybe the smaller bear market, which is defined as a 20% down move from a recent top. Those typically happen because of a slowdown in the economy in a typical recession.

But the big bear markets, the one we’re having right now and the ones in the past that have gone down anywhere from 30 to 50%, are typically due to occurrences in the financial markets that people have never experienced before, and that sets up a lot of fear. Fear of the unknown specifically because if it’s never happened before, people really don't know how they’re going to work out. That happened back in 1973, ’74 and that market was down 46% if you remember. You might've been alive back then but you may not remember. That was the time of audit in gas lines. It was the time of the nixing wage and price controls where companies were not allowed to increase the prices on their goods and services and increase compensation of their workers.

We’ve had several other big bear markets in 1987. That was probably the first bear market that related to our derivatives market, the first time when there was a lot of unwinding of S&P 500 futures. In 2000 and 2002, which is one of the longest bear markets we’ve had that lasted almost fully two and a half years, we had a big tech bubble. Just to give you some background there, in 1995, ‘96, ‘97, ‘98, ’99, those five years, the S&P 500 was up 20% or more each of those five years in a row, so it was a massive move-up and a massively inflated bubble in the technology market. When that was popped, that was something that we have not seen maybe since 1929.

Then the one that most of our clients that have been with us for any time I remember is the 2008, 2009. In that scenario, we had huge financial flaws in the mortgage markets, which literally overnight turned the AAA mortgage-backed bonds into defaulted bonds where markets were freezing up, and the government had to come and guarantee money markets, for instance. That had never happened before and had a lot of people concerned. Was the free enterprises and those capitalism going away? Was it not working? Were we going to go in a black hole and never come out?

Again, this coronavirus bear market is totally different in many, many ways. You still have the fear of the unknown, but the interesting thing about this particular market is it is centered around not necessarily the economy but around the virus. Unlike any of those other bear markets I’ve discussed, this is one where we made the decision to run through our homes and lock the doors and not come out, and the decision to not fly in airplanes, not go to restaurants, and not engaging in any business activity. We commit business by doing something like that, and that’s meaningfully different than most of the other markets, the bear markets that we’ve had. What does that mean? Well, the current bear market should be over once the virus runs its course.

Lastly, it’s good for everyone to remember that the economic cycle in the stock market are not proportionally lined up, meaning that the stock market always discounts news. Most of the time, a bear market will bottom when the news is at its absolutely worst because what the stock market is doing is it’s discounting all of what he knows and is extrapolating into the future. That's why it's so difficult to time any of those markets, because you will have the move-up in the market and you won't know if it's a move-up only to come back down to make a new low or if this is the beginning of a great new bull market. Unfortunately, they don't ring a bell at the bottom, so everybody knows to get in.

[00:07:33] JL: You’ve already addressed a couple of things that make the current market unique. When you think about the different market cycles you've lived through, Rick, what else about the current bear market stands out to you?

[00:07:45] RK: That’s an easy one, this market more than any market. I’ve read that more than the 1929 bear market has been fastest, deepest selloff of any bear market we’ve had. Historically, it may take multiple months, a year or two. As I mentioned earlier, we had a two-and-a-half-year bear market in order to go down its formation. This bear market literally lost more than 30% in one month, and that's what makes it so, so unique and so, so scary to the average investor. Even in other bear markets, we are not used to that kind of downwards velocity.

The other bear markets I mentioned earlier, the 1987 bear market was one of the fastest, and that took somewhere between three and four months to take place. I’ve mentioned the longest one is about two and a half years. But to have that kind of volatility in four weeks’ time is heretofore unheard of, and that goes back in 1929. I’ve read a few articles that this even beats that downwards velocity of that particular market, the volatility both upside and downside. Because, yes, we moved down dramatically but we’ve had at least a couple bounces of 10% or more, so we’re not just talking about downward volatility. We’re just talking about a wildly fluctuating up-and-down marketplace that we haven’t experienced potentially ever.

We have years incidentally when there have been less than three or four days in the year where they’ve been up or down more than 1%. In March of 2020, there was one day of those trading days within March where there was less than a 1% up or down move, meaning every other day trading day during that month you had a plus or minus 1% movement. Obviously, we’ve lived through a lot more days and a lot greater volatility than that. It’s certainly understandable that all investment will be nervous because this has not happened before.

[00:10:14] JL: Well, we talked about what makes the bear market different from other bear markets. What about the current market that’s not different?

[00:10:22] RK: Markets occur when people sell, more people are selling more things and buyers. In order to agree on a price, the place has to continue. That happens because there’s gear. All bear markets are based on fear. Sometimes, it's fear that the economy will do a lot worse than others. Sometimes, it’s fear like this in this virus-oriented bear market. It’s fear that we just don't know any of the rules yet because we’re dealing with human beings, health, and medical systems, and drugs, and viruses, and all those types of things, which we have literally never have to worry about in another bear market. But the fear that's there and the fear of the unknown is very similar no matter what, whether it's this or whether you don't know if US companies are ever going to be able to set their own prices and wages. But like back in 1973, ’74, at a certain period of time, because you don't know, there's a lot of imagining worst-case basis.

What's not different about this market is that chances are after the bear market is over, all of the reasons for this bear market are going to be researched and determined how maybe this won't happen again. For example, there's lots of laws that change after every bear market try to make an attempt to not have those same occurrences take place. The Securities Act of 1933 and 1934 occurred because of the bear market starting in 1929 and that’s why we have so many of the safeguards and regulations that we have in the securities industry.

Back in 2008, 2009, you better believe that there is a major overhaul in the safety of banks and other financial companies that took place immediately after that bear market so that those particular issues are not going to take place. I can only assume that once this virus has run its first course, it’s first round and now the medical establishment gets together, we will be much better prepared for any other pandemics that take place in the future, so we will undoubtedly have stockpiles of certain medical supplies, etc., etc. but we won’t be in the same situation. We’ll have planning that clearly we didn’t have and apparently most countries on earth didn't have the planning set up for this kind of epidemic.

[00:13:11] JL: One of the biggest fears investors have is that they don't have time to recover after a down market. So what would you say that, Rick?

[00:13:20] RK: That's usually not correct. If you’re a retiree or you're somebody who has not 40 or 50 years to live but maybe a meaningful less than that, you may think that it will take forever for a bear market to work itself out. But typically, it takes a lot less than that. Bull markets are typically four times longer than the average bear markets. Bull markets have averaged 64 months. Bear markets have averaged about 15 months in length over the last 75 years. Bull markets have generated an average gain of about 175%, whereas bear markets have lost about 35% on average. What that means is if you’re a long-term investor, you don't have to do much as long as you stay the course and you stay disciplined in your investing. Your bull markets are going to last longer and gain more than the bear markets on the downside and both in terms of losses to value of your portfolio and how long it takes.

Just to give you an idea, the recovery from 2008, 2009, which had been the worst bear market we’ve had in my lifetime from the bottom in March of 2008, it took eight quarters. It took two years for a properly managed 60/40 portfolio to make it back. Remember one more thing. A good third of the upside in the next bull market occurs before it’s eating to be a bull market. Typically, in the three months from the bottom of the bear market, a large meaningful portion of the upside potential of a new bull market has taken place. If you're not in place to take advantage of the repairing that takes place in your portfolio as the new bull market sets in, you’re obviously going to be in an inferior position. That's why you never want to try to flee a properly managed and diversified portfolio in the bottom of a bear market, because when the next bull market starts, you’re cutting your capital's ability to grow back to where it was by trying to flee a market. If you wait until the economy looks good and until you feel comfortable to get back into the market, you will miss such a large portion of the next bull market that you’re going to be behind the eight ball for a long period of time.

[00:16:06] JL: Yup. Great advice, Rick. We all need to just stay put and talk to our advisors and ride this one out, right? I mean, I think we’re all somewhat convinced that this is going to end sooner than later, and so with that will come recovery in the markets. It’s nice to have your perspective based upon what you've seen over all the years. Thanks for joining us today, Rick.

[00:16:30] RK: Thank you. Thank you very much, john. I hope I could of help.

End of Interview

[00:16:34] JL: You’ve been listening to the DHG GrowthCast today with Rick Kramer, Vice President of DHG Wealth Advisors. We hope that you've learned a few tips on managing your investment strategy and retirement savings during the COVID-19 economy. I'm your host, John Locke, and I look forward to reconnecting with you again soon on upcoming episode of DHG GrowthCast.

I’m John Locke, your host, and I look forward to reconnecting with you again soon on an upcoming episode of DHG GrowthCast.

[00:16:54] ANNOUNCER: The content in this podcast is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. The opinions expressed in this podcast are those of the participants only and do not necessarily represent the views of DHG Wealth Advisors. The services, securities, and financial instruments described in this podcast may not be available to or suitable for you, and not all strategies are appropriate at all times.

Any investments mentioned on this podcast may lose money. DHG Wealth Advisors makes no guarantee that you will profit from any investment or strategy described in this podcast. Information in this podcast is believed to be accurate and reliable as of the time the podcast, and it may become inaccurate or outdated with the passage of time. Past results are not an indication of future performance. You should contact your financial advisor before making any investment decision.

About DHG's GrowthCast

At DHG, our strength lies in our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser focused on company goals. In this ever-changing world, DHG’s Growthcast, provides insights and thought -provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Join us in discussing tomorrow’s needs today.

Disclaimer: The views and concepts expressed by today’s guests are their own and not those of Dixon Hughes Goodman LLP. Always consult with your legal and financial professional before taking any action.

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