Episode 18

December Market Update: Does The Fed See What We See?

Does the fed see what we see

In this month’s market update host and Heritage Financial President, Sammy Azzouz, and Heritage Financial’s CIO, Bob Weisse, discuss what’s going on across the investment universe today, including:

  • November’s FTX implosion and the unintended consequences to investors that haven’t invested in crypto
  • Protests in China over the country’s COVID shut down
  • Ideas to get venture capital like market returns with less risk
  • What 8 months of declines in LEI data has signaled historically
  • And, where to invest during periods of high but slowing inflation (like today)

We’d love to hear from you! Email us questions, ideas, or feedback at wealthybehavior@heritagefinancial.net.

December Market Update: Does The Fed See What We See?

This automated transcript may contain grammatical errors.


00:00:10 – 00:05:05

Welcome to Wealthy Behavior, talking money and wealth with Heritage Financial. The podcast that digs into topics strategies and behaviors that help busy successful people build and protect their personal wealth. I’m your host, Sammy Azzouz president of Heritage Financial, a Boston based wealth management firm working with business owners, executives, and retirees for longer than 25 years. Now, let’s talk about the wealthy behaviors that are key to a rich life.


Welcome to the December investment edition of the wealthy behavior podcast where I talk to heritage financials, chief investment officer Bob Weiss about what’s going on in the markets and investment universe right now. And looking at things today, it does seem like there’s a lot going on or that has been going on since we last recorded. We have the FTX implosion protests in China over their zero COVID policy, inflation numbers are getting better, and the markets may be responding favorably to that. Bob, what’s interesting to you? Where do you want to start? Well, Powell’s spoke yesterday, and we’ve been talking about the fed and inflation. So that might be a natural place to start. Yeah, go dive right into it. I mean, those comments really made the market pretty happy, right? Didn’t the market rip up like at least 3% after he said what he said? Yeah, so recapping a little bit the last couple of months there was a Jackson hole meeting where Powell spoke. And the fed has a scheduled meetings with the press conferences and it’s very structured after their meetings. And then in between, they’re talking points. And Jackson hole was the last informal check in. And he talked about economic pain that was going to come and inflation, how bad it was, and the markets crashed, and we had a bad run. We talked about that in September, right? Because it took the market. The market had been recovering over the summer and then Powell came out and put some rain on that parade. Right. So, the fear was going into yesterday, here comes Powell again, he’s going to talk about pain in the markets are going to sell off. And instead, he talked about how inflation data has a lag to it, which is something we talked about last week. We’ve talked about that too, yeah. Exactly. Does he know and will he acknowledge that there’s actually lagged data? And he made it very clear that he is well aware that there’s a lag to data and he is aware that the economy is slowing inflation is slowing and all the things that the Talking Heads on CNBC like Jeremy Siegel are screaming about. Like, doesn’t he see all this stuff? And he sees it. And he let us know it. So that’s just reassuring to markets that, okay, the policy is working. He’s recognized that it’s working. And he’s using language like we are getting closer to the end of this rate hiking cycle, like we’re probably done with a 75 basis point increases. So, the next one will probably be 50. And just overall that tone, I think, helps settle markets. And he wasn’t the only one I think other fed officials had been saying it or similar things before he came out the other day with his talk. Yes. Yeah, so hearing the fed officials all getting on the same page and the data supports it because the CPI data that came out since our last podcast in early to mid-November was pretty good. That’s right. Inflation is definitely slowing if you look at core X shelter. So, asterisk, this is CPI excluding food, energy, and shelter, house, and it was negative for the month. So, people are concerned about inflation on month over month. It was negative with things like used cars, prices going down durable goods, lumber, all these things are actually declining and its deflation. So, shelters, is the biggest component that’s actually increased. And at a high level, 8/10. But with what’s happening in the housing market, seeing housing prices decline month over month, we’re feeling pretty confident that that will slow down too. So, we think the fed is getting close to winning in the inflation battle and that’s good for markets because right now cycles can be painful and hopefully this one’s near an end. So, inflation seems to be moderating, although it’s still high, right? We’re just talking about it moderating from levels that were extremely unattractive over the summer, you know, 9 plus percent. And the good news is that the fed does seem to be acknowledging that some of the concerns that you shared when we’ve talked in the past about whether they were going to see this lag in the data, they’ve come out and said, yep, Bob, we see the lag in the data. Don’t worry. You can count on us. But which is all good. And then the market had been responding well to that inflation data, even before Powell came out the other day.



00:05:05 – 00:10:04


I was looking at it. I think since the third week in October, markets are up double digits and even the bond markets up 5 plus percent, I believe, because rates have backed down. So, the market seems to be reacting favorably to this inflation news. Absolutely. Yeah, because it’s high inflation so the stock market on the bond market and is that problem is going away. Both markets are appreciating in price. Anything you see in the market that’s interesting along those lines or I know whenever we talk lately, it’s about inflation. It’s about the fed and that’s what’s going to drive things and that’s what we started talking about. Is there anything else that you see going on or that’s relevant in the stock and bond market? Yeah, maybe in the stock market, I have returns up in front of me just looking up broad indexes. Over the last one month, U.S. stocks up 4.6% developed international 10.7 emerging markets, 15.2. Wow. It’s almost 5, 10, 15, emerging markets up about 15% over the last month. So, there’s research that shows that when you have high inflation, but slowing inflation. So high rate that’s defined. That’s the best environment for emerging markets. Jeffrey Klein from Schwab has written about that and we’re seeing that scenario right now and emerging markets are performing well. And maybe is the segway to talk about China. Yeah, I think that’s a good segway because they have had some protests lately over their zero COVID policy and so what’s going on there and what’s the potential impact if any to investors or is it something to ignore? Yeah, that to be honest surprised me when seeing a protest, that part doesn’t surprise me, but how markets reacted to them. When this was happening, there was the Apple manufacturer Foxconn on Friday last week had protests. And then over the weekend, pro-democracy demonstrations and you’ve heard me talk about going to China, I went in 2013 and it’s not my favorite place in the world to visit. Just the Communist Party there and just seeing how it’s all run. It was a little unnerving. And seeing the protest you wonder how stable can that government be or what if there is an uprising, but the markets actually responded favorably to this. And the view is that the billion plus people in China do have power and if they’re pushing the government to reopen, pushing the government to take a lighter stance on COVID, that’s good for the economy. That’s good for the stock market. So that market is not performing well. It’s kind of counterintuitive, but I do see what you’re getting at there. And we have also seen something that I probably need to touch on even though you and I are crypto skeptics in terms of an investment, but we did have this FTX implosion, which I think is interesting in and of itself to potentially explain to people, but then I also believe you think it’s a good way to explain something we haven’t talked a lot about so far in the podcast, which is private investing, venture capital, private equity, because some notable venture capital firms were caught up in this in a not so good way. The FTX debacle, it is crazy and I’m not going to I’m not an expert on all the details of it. I actually don’t even know if anyone is including the man at the center of it. But in a nutshell, when you look at cryptocurrencies, a fascinating website I have looked at coinmarketcap.com, where you see all the cryptocurrencies out there and their market cap. So right now, Bitcoin’s market cap is about $325 billion. So, for $325 billion, you can have all the Bitcoin in the world. There are so many of these things, and you scroll through. And it’s just goofy, and they have real values. Tom coin is worth $2.2 billion. I have no idea what that is, but $2.2 billion is real money. And I’m rambling on about this because FTX is where people want to play with these things. It was an exchange. Exchange where crypto traders would go. So, you hear crypto, and you think Bitcoin, but it’s a lot deeper. There’s less mainstream cryptos than Bitcoin. And FTX was known for leverage. Letting investors trade with leverage and lending, the cryptocurrency. So, you just talk about a recipe for disaster to talk about a place where you let people go.


00:10:05 – 00:15:16


So, lever, this fringe coins, and then you have the cryptocurrency market sell off as it should. And levered investors get hurt. And those rental banks, everyone runs out and there’s not enough money there. So that story kind of adds up to me. Now there’s definitely some funny business. Supposedly there was maybe a hack of customer funds. Who was involved in that, the timing of that seemed very suspicious. But I’ve heard when you invest in cryptocurrency, you should plan on losing 1% or 2% a year to hacks. So that’s just seeing all of this happen. I think its about as good of a case as one would need to stay away from investing in crypto. So, you know sometimes there can be unintended consequences to mainstream investors or mainstream investing as an investor. If I stayed away from this stuff, is what does what’s going on, have any impact on my portfolio? Yeah, so that’s a great question. What we’ve seen when you kind of connect the dots of markets and investable assets is there is some correlation between crypto and then maybe call it French financial market stock. So, I’m talking about nonprofitable tech. There’s even like sandbank and freed was trying to sell his Robinhood stock as this was melting down, so that’s almost like the exact connection I’m talking about Robinhood, a FinTech company that’s not making money. So you have the people who are heavy in cryptocurrencies like to speculate in the stock market and you speculate on stock market with high flying stocks that aren’t making money and boom bust typically looks like growth companies, small growth companies, so when you’ve seen the selloff in crypto, those players get hurt, they frequently might need to raise money and that can move into the stock market. Fortunately for us and our clients, we aren’t speculators. We’re not investing much in those markets where typically underweight companies that aren’t profitable. Underweight in small growth. So that’s kind of the next level of the closest connection to the market that hits the areas that have had froth that aren’t supported by fundamentals just like crypto isn’t supported by fundamentals. So that would explain Bob why crypto and some of the more speculative tech names seem to be correlated this year and in prior years in terms of kind of running up and running down at the same time. One other question that we’ve had as it relates to this that’s taking some clients and just people, we know in life by surprise are some of the very prominent VC firms venture capital firms that lost money in this FTX implosion. And I know you have some thoughts on that, both in terms of maybe defending some of them. But also explaining the pros and the cons of venture capital investing versus other types of private investing. Yeah, I too have been really surprised. There’s some really prominent names that have been our investor. We’re invested with FTX. In their defense or maybe to add some color to this, you hear things like, well, there is no board of directors, what were they thinking? It’s venture capital. And the rule of thumb with venture capital investing is a third of the companies they invest in go to zero, a third they get their money back if they’re lucky, and a third or home runs. And that’s what venture capitalists do. And if you hit that if you hit those numbers, a third go to zero, a player to get your money back in a third year making 5X 10X, you’ll deliver very good returns to investors. So, you’re going into invest in a company as a VC with the expectation that there’s a 33% chance this thing goes to zero. So, they take risks like investing in companies that don’t have great governance. They’re not doing these scrubs that you’d see with more middle or large buy up funds where you’re buying more cash flow and profitable, stable businesses. So that’s just one of the things that they will chalk it up to, one of our losers and we’re in our portfolio. It happens. This is basically buckle up. So interesting though, I did see that Sequoia had taken down something on their website connecting them to the FTX. So, I wonder if it’s just a matter of, well, you win some, you lose some in the VC world why they needed to kind of disassociate themselves from it. I don’t know. But then how does that kind of connect to our view of how we invest in private companies, which is, I think, completely different than the venture capital approach. Yeah, so with VC, what I just explained, there’s a ton of risk there. You’re going to go to zero or you’re going to go up 10X and everywhere in between what you see in aggregate data is the average return of the average BC fund is about the same as the average return of the average private equity fund.



00:15:17 – 00:20:01


Private equity, I’m talking about large buyout funds on which buy more established businesses. And those funds don’t have the third or third rule where a third of the things they touch go to zero. So, you’re taking more risk in VC investing. So, you’re taking more risk and you’re not getting more return on average. So, then it gets down to manager selection. And there’s huge dispersion. If you’re with the very best, best VC firms, you can do really well. And frankly, Sequoia, like the FTX players fit in that area and they’re very hard to gain access to. Because they’re raised small funds and it’s ones, you’re in, you’re in. But there’s just a lot of risk in VC investing. So, we’ve tended to stay away from it and we think we can get VC like market returns with less risk in the middle and upper market. Sure. No, that makes sense. And obviously, if you can have that journey, it’s smoother and smoother always makes more sense for folks. Not to put you on spot, but I’m going to put you on the spot. You sounded a little bit optimistic about the markets with inflation with what Powell said about rate hikes and, you know, we talked a little bit about we did have a summer head fake before, where are you these days in terms of whether we’re going to go into a recession or not, or maybe we’re already there. Does it matter? And do you think the market has seen its lows and we’ve started to rebound upwards? Yeah, so when I look at the leading economic indicators, released by the conference board. We’ve now had 8 months in a row of declines. And to have 8 months in a row of decline in that level, it’s always led to a recession. What’s the leading economic indicator Bob? Just for people’s benefit. Yeah, so broadly speaking, there’s a category of them. You could call them sentiment driven. Where they’re doing surveys. How do you feel about housing market? How do you feel about the economy? Which is why it’s leading is there’s a bit of a self-fulfilling prophecy there, where it’s like, oh, the future stinks, I’m worried about the future. Well, guess what? When you think that way, then you’re going to act that way and when you act that way, that’s spending less such recessionary type behavior, like where do you think the housing market is going? I think it’s going down. Well, that person’s likely not going to over bit in the house tomorrow. So, there’s a lot of negativity in the sentiment surveys. So that’s a lead in economic indicator. And then there’s also financial markets. Are parts of the leading economic indicators, the big one is the yield curve. And seeing that the yield curve is heavily inverted, about 80% of the different ways you can measure the yield curve are inverted, basically meaning shorter term yields are higher than longer-term yields, so when you look at the lead in economics get indicators, it’s really flashing red. Recession is coming. So, it’s hard to look at that and disagree. So that does the conference boards has probably starting late this year. Into Q1, Q2 of 2023. So, you see that what we have not seen too much, we wrote a blog about this corporate earnings declining corporate earnings if you exclude energy are down in the single digit percentages are down at around 5% or so. Which it’s down, but it’s not recessionary magnitude down. If you play it out and if a recession does come, there’s more adjustments to be made in earnings, earning misses and expectations coming down analyst estimates coming down. And that would probably hit markets a little bit as investors adjust. So I don’t think we’re out of the woods yet. It’s not like off to the races, FED is done. It could be bumpy for the next 6 months. But that does go hand in hand with investing. And at the same time, there’s still big spreads between value and growth. I’ve looked at growth companies that I think are still at pretty large valuations that are overvalued. And on valley companies that are cheap, like companies that if you buy them today at these levels, you I think we’ll do very well. And markets that are cheap. So, what happens in the next 6 months 8 months? Not going to get too prescriptive. But I think there are good opportunities right now for long-term investors. Yeah, and you’ve been consistent with the idea that you thought we would be having a recession at some point.



00:20:01 – 00:24:13


And you’ve also been consistent on the inability to pin you down with short term market forecasts. So, I think our listeners appreciate that consistency. The blog post that you were referencing that people should check out on heritagefinancial.net is how to bear markets and it’s our most recent post and it’s really an excellent look at what Bob was talking about, particularly with a focus on corporate earnings and multiple expansion and when you can start to feel like the worst may be behind us just based on history and what’s been going on. Anything else Bob on your desk from an investment standpoint that you think our listeners should know about? We’re doing tax loss selling, looking at mutual fund capital gain distributions a lot of yearend tax planning right now and just about getting started on 2023 capital market assumptions too. So, we’re busy lots to come of a lot of trading activity that clients may see much of a tax driven as we’re wrapping up the year. Nice great. And so, we have a listener question this week and as a reminder, we would love any feedback or questions that you have and you can email us directly at wealthybehavior@heritagefinancial.net with your questions or thoughts on the podcast. We touched on this question a little bit earlier in the podcast today, but basically taking it out of the context of FTX, do we own crypto? Do you own crypto? Do we invest in crypto? Why or why not? No, we don’t own crypto. I don’t own crypto. It was a little more interesting a few years ago. But right now, with cash yields where they are, where you can get risk free 4% and just seeing the madness with FTX, run from crypto. If you have any, I would sell. Just because the speculative nature of it, the lack of an understanding of what you’re getting into, what in particular turns you off as an investor. It’s a non-earning asset. No cash flow. You can buy money market right now, get 4%. So, you’re not getting any cash flow from it. And it’s just, there’s a ton of risk there, but just with FTX, $500 million was stolen. Just from a hack. And it’s a highly volatile asset. Part of the purpose of it was an inflation hedge people said, well, inflation came, and crypto went down 60%. I think it’s kind of been tested and failed the test. So, what purpose does it serve? Honestly, the only purpose I see for crypto is money laundering and illegal nefarious activities. There is a purpose in the world for those things. I don’t want to be part of it though. Yeah, I think the other purpose is speculation, which again is not investing in it’s not something that we’re going to do. Thank you, Bob. And thank you all for listening. If you’re enjoying wealthy behavior, please subscribe and leave us a review wherever you get your podcasts. And again, please send any questions or feedback to wealthy behavior at heritagefinancial.net. Thank you. Thank you.

Thank you for listening to Wealthy Behavior. If you found the conversation useful, please consider leaving us a review wherever you listen to your podcast and sharing this episode so those around you can live a rich life too. For more insights, subscribe to our weekly blog at heritagefinancial.net and follow heritage financial on Facebook, Twitter, and LinkedIn. Check out my personal finance blog at thebostonadvisor.com. Wealthy behavior is produced by Kristin Castner and Michele Caccamise. This educational podcast is brought to you by Heritage Financial Services, LLC located in the greater Boston area. The views and opinions expressed in this podcast are that of the speaker, are subject to change and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment or strategy discussed will be successful or will achieve any particular level of results. Investing involves risks including the potential loss of principle. *This automated transcript may contain grammatical errors.

About Wealthy Behavior: Heritage Financial Services

Wealthy Behavior digs into the topics, strategies, and behaviors that are key to building and protecting personal wealth and living a rich life. We’re Boston Massachusetts-based wealth managers who have been helping busy, successful people pursue their financial goals for more than 25 years. Hosted by Sammy Azzouz, President of Heritage Financial, Wealthy Behavior digs into the topics, strategies, and behaviors that are key to building and protecting personal wealth and living a rich life.