Episode 40

November Market Update: Three Things to Watch

November Market Update 2023 (1)

Sammy and Bob have been busy traveling to several industry conferences this fall. In this episode of Wealthy Behavior, Heritage Financial CEO, Sammy Azzouz, and CIO, Bob Weisse, continue last month’s discussion sharing takeaways from conferences and conversations with industry leaders. While some concerns from recent months have subsided, others remain. Inflation, Treasury yields, and the risk of a recession are what most investors are focused on today. Hear Bob’s thoughts on what he’s confident in, what he’s watching for, and what concerns him the most. They also discuss:

  • The difference between TIPS and I Bonds
  • Why stocks and bonds have been moving in tandem with one another
  • Views on indexing vs. active management, and some of the perils of indexing

Our Fall Market Outlook webinar addressed many of these topics as well as our expectations for the future. Be sure to catch the replay!

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

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This automated transcript may contain grammatical errors.

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

Welcome to the November investment edition of the Wealthy Behavior podcast, where I talk to Heritage Financial’s Chief Investment Ffficer, Bob Weisse, about what’s going on in the markets and the investment universe right now. Welcome back to Wealthy Behavior, Bob.

Thank you, Sammy.

What is going on? I noticed that recently just kind of following the news that we had three negative months in a row for the market, the S &P, that ended October. We’re recording November 2nd right now. The markets appear to be in a pretty optimistic mood today and this week. I think there’s been some good news on the yield front, the 10 year yields have backed up. So what are your impressions as you’ve followed things along?

Yeah, so yields have been climbing this year after the first quarter. First quarter they fell and they’ve been basically climbing pretty rapidly in Q3 with the 10 year Treasury that people look closely at, touching 5% a few weeks ago and that got a lot of attention. And I think we talked about this in the last podcast and the webinar we did, but part of what’s been driving that is what people call market technicals from the treasury issuing new debt. So think like economic supply and demand and as there’s an increase in supply from the Treasury having deficits and from all the kind of nonsense in Congress with the debt ceiling, there was a flood of issuance and that pushed yields up. And with higher yields that obviously impacts the bond market directly, but the stock market has been, I think, adjusting based on that as well on two fronts. One, just the fact that, okay, 10 year Treasury yield is now 475 to 5 % that’s been traded in that range. So what should stocks be valued at as opposed to when yields are say in the lower fours. So that’s been adjusting. And then there’s also, I think just kind of a lingering concern of like, are we done at 5%? Is that gonna be the cycle high in Treasury yields or is six around the corner, is seven around the corner? And those start to get to be kind of scary numbers for markets on a number of fronts if we were to see those. So the good news is we haven’t, as I said, it touched five and it’s been down and the Fed had a meeting earlier this week and did not raise rates. And overall, I think it’s what they call a dovish press conference. They could have said like next meeting, there’s a decent likelihood they will raise rates, and they left the door open, but market odds of seeing a rate increase again in this cycle declined. So it’s like a 20% chance of a rate hike at the December meeting now and going into the meeting that was higher than that. So the market’s backed off a little bit on expecting the probability of the Fed raising rates. And also the market has been digesting new Treasury issuance well this week. And as a result, bond yields are down, bond prices are up and stock prices are up.

That Wednesday Treasury auction, is that what you’re referring to in terms of the market has adjusted to Treasury issuance well? Because I know there were fears that that auction would not go well. You and I talked about it earlier this week. What were the fears and what did we see?

Yeah, the fears were that just really simply there aren’t enough buyers for Treasury debt as the Treasury comes to market with over a hundred billion dollars in Treasuries. Have to think of it as an auction. If you’re going to an auction for art, you have to sell it. Just like for Treasuries, they have to sell it. And if they have too much, then they have to sell it at a higher yield and you’d break through that 5% level. And we did not see that. In fact, we saw yields come down. So the market absorbed what they had to issue and we’re moving on. So it’s been good news to see treasuries stabilize and even decline in yield. So that’s it.

So I know we don’t know what the market is quote unquote thinking, right? But in your travels, and we both attended an industry conference recently, I know you talked to a lot of professional investing teams, investing consultants, you talked to your own team. So you know at least what people are thinking, whether it’s flowing through to what the market is doing, do you feel like the new focal point of the market is the 10-year yield and we’ve moved away from concerns about Fed rate hikes and inflation, which were driving so much of the narrative?

I think there’s kind of three topics. Yes, the Treasury yields, that’s a focal point. And inflation, I mean, it’s still certainly a headline that we need to pay attention to. But the third topic I would add, and I’d put that they’re all like equally important, is recession watch. And I know that it was kind of recession watch was the topic for 2023. And I think we still need to be aware of that. And a theory I’ve heard people say that that does make sense to me is when you look at things like leading economic indicators, we should have been in a recession a while ago and we didn’t this time. So some people say, well, why not? What happened? And there was a ton of stimulus from COVID in 2020, about $5 trillion injected into the economy. So consumers had extra savings in the bank, companies had extra savings. So we went into this hiking cycle with strong balance sheets and that’s starting to run out. So there are charts we show on excess household savings and it’s being depleted. So that’s something to watch. And then on the second front with the labor shortages that we had, if you think back to 2021, companies in many industries like construction, for example, or hospitality had a hard time hiring people. And now if you’re, say you’re in real estate and construction and the jobs are drying up, are you as quick as you were historically to lay people off or, well, now I finally have a good crew and it was hard to get these people. And maybe as the business owner, I’ll just ride out this period. So you might see companies a little slower to lay people off compared to previous cycles, which can just extend it before the inevitable recession comes.

So you said something that stocks and bonds were both up recently. And over the summer, we saw that stocks and bonds were both down at the same time. I think people expect that the relationship doesn’t work like that, that stocks and bonds move in opposite directions. Of course, that’s not always true, but how would you educate folks on the stock bond directional interplay?

It’s complicated. It depends on the environment. There are scenarios where they are correlated and move together and ones where they’re not. It’s like in this environment where you have yields creeping up, that is a headwind for stocks, because if bond yields are rising, that means bond prices are falling, but it also means bonds are getting more attractive. It’s very simple. If a bond yield goes from four to five, well, I like it more at five than I did at four. So then all is equal, I should like stocks a little less if I’m like a dynamic asset allocator. So as bond prices are going down, then you have stocks going down. And then also vice versa, as bond yields fall, then stocks can become a little more attractive. But where you get the inverse relationship that you’re talking about is in what you call flight to quality. And you specifically see that in recessions. If it’s okay, a recession’s coming, economy’s going to slow, time to buckle up and get in safe assets, that’s when people buy Treasuries. And one, it’s buy safe assets, but you could also look at it as get 4% and 5% Treasuries now because they’ll be cutting rates and you won’t be seeing those yields anymore. So you’ll get appreciation in Treasuries while stocks would potentially struggle in that environment. So sometimes they move together and sometimes they don’t, it depends on the environment.

Sure. And you touched on three things that the market is focused on right now, in answer to my question about whether it’s all about the 10-year yield. What are your thoughts on those three things and how do you see them playing out or impacting portfolios?

Yeah, the first one that you said inflation, it has been sticky, it’s taking time, but I do think we will get through this cycle with inflation getting back down on the Fed’s target. So I’m not very concerned on that front. I think we are moving in the right direction. I was a little concerned about oil prices. We’ve talked about that, but that’s pulled back nicely. Something to watch, but that has come back down. So I think they will, and the Fed has been so clear that they are very focused on price stability, i .e. inflation, and they’ll get that under control. So I feel confident in that. Second one, the 10-year Treasury, again, we talked about it a little bit earlier, but seeing the support for Treasuries at 5% and below on the 10-year and how the market absorbed the issuance this week, and we haven’t seen them just blow through that level. And you mentioned the industry conferences and talking to other people. There are a lot of buyers of Treasuries at 4% and 5%. Mathematically, they have to be because there’s $30 trillion of Treasury debt out there, but people are interested. And that’s what we’re seeing in markets. So it’s a view it as a tail risk, a remote risk, but unlikely that you see a more severe outcome such as a 7% plus yield on Treasuries. And if people wonder why I say that’s severe, because on one hand you’d be like, I’d like Treasuries at 7% or 8%. What’s wrong with that, Bob? Well, the problem is that the government has to pay the interest. And if you’re paying 8% interest on $30 trillion in debt, mathematically, you start to run into some financial problems. So we don’t want to pay 8% interest on our Treasury debt as a country. Of those three, the one that I’m concerned the most with is the recession. It’s part of economic cycles. It’s not something that is typically avoided indefinitely. Recessions do come. And seeing a Fed rate hike and cycle going from zero interest rate policy for a long time to a 5% plus interest rate policy, and you hear about the delayed and lagged effects of monetary policy, I think there’s a very decent possibility that it eventually sends us into recession.

Eventually can be five years from now we get a recession and you were right, because we had been talking about it for seven years – not you personally. But I would imagine you think eventually is more within this cycle and this compressed time period that we’re looking at. So I guess I would ask you and to speak for others potentially, what would you need to see to make it feel like that recession risk is off the table in the short term?

Off the table, I think if you get inflation back down to that 2% level, the 2, 2.5%, then you’re not dealing with a combative Fed. With the Fed, kind of think of a car and there’s gas and brakes.They are on the brakes right now because inflation is above target. And when you have the Fed with a foot on the brake, I think you’re at risk of recession. So until Powell is not restrictive and is happy with where price stability is, I think it should be on your radar.

So when we get where they want to be, and until then there’s things to be cautious about, which makes a lot of sense. How have the international markets performed, Bob, while the US markets have been doing their thing?

Markets have pretty much pulled back about the same, just looking at a trailing three-month number, US down about eight, international down about nine. So markets in general have pulled back about equally over the last few months.

We’ve had some podcast guests recently and ones that are coming up that I’ve talked to who are big fans of an allocation to the S&P 500. Just index, forget about it, move on. It’s really diversified. It’s extremely difficult to beat. It’s low-cost. And I know that you agree with that mindset, but not necessarily the narrowness of that recommendation. What is your viewpoint on indexing versus active management and maybe some of the perils of just owning an S&P 500 index fund as your stock portfolio?

Yeah. Indexing by itself is a good approach to investing. The question is what index? And you suggested the S&P 500. That happens to be one of the best performing indices over the last 10 years. Who knows? If it were the other way around and say the S&P were one of the worst performing and had a lost decade, would we have had those guests or were those people have given that advice or would they have had a different index to recommend? So I think in general, the advice of indexing is a good one, but then there are so many indexes out there, which one to choose is a very difficult one. And people, it’s just in human nature to get caught up in performance chasing and look at what indices have done well. And US large cap happens to have been one of the best places to invest over the last 10 years. And that can mainly be attributed to some of the top holdings in the index. That’s how it got that high, the magnificent seven they’re now called. And those stocks do make up a disproportionate part of the market. I saw a note from Goldman Sachs today that is advising clients to invest overseas because of that reason. And that they say, if you look at the US stock market relative to GDP, the US market is much more expensive than foreign stock markets compared to their GDP. And also the concentration of these big companies in the index when you have companies that are like 7% weights as individual companies. So the S&P, it is a good index. I would be a little cautious about the time now as far as indexing. And that’s where I would be, just I’m more of a fan of diversifying much more broadly, like in the US beyond 500 stocks in the US, more like 3 ,000 stocks in the US and globally. People like to hear stories about why overseas and Novo Nordisk is one in the news now and how they’re doing well. And you want exposure to that stuff in your portfolio.

So tell people why they’re doing well. It’s kind of an interesting story.

Yeah. It’s the weight loss drug that there’s, I mean, very early stages. And some people say it’s the next AI with how obesity is a big problem worldwide. And I think the trial results for that are coming out quite strong and there’s so much demand that there’s not nearly enough production. And it’s a company that makes it, but it’s an overseas company. But you want exposure to that. So I would diversify globally. And you asked about active versus passive. That’s a tricky one. If you’re doing it yourself, I would probably lean towards passive. But we do think on the active side, you can find good active managers. One of the keys is to keep fees down. You can buy active managers at higher expense ratios, lower expense ratios, and we’re able to get institutional class shares that retail investors typically couldn’t get on their own and just being thorough with due diligence and discipline and investing in selecting those managers.

Right. Thank you, Bob. And I do think, and not only do I think, I know after the last decade, 2000 to 2009 with the S&P, there wasn’t a lot of clamoring for, can you just build me an S&P 500 centric portfolio? So not blaming folks necessarily, but I do feel like your point, which you led off with is great and simple advice that you can follow, but it’s also coming at a time when the S&P has knocked the cover off the ball. And that has not always been the case with that index compared to other ones.

Yeah, I actually ran some numbers. I had a client question related to this on bonds. We actually got a question during the webinar. I wonder if it’s the same person. I don’t know, but they’re like, you guys like bonds, but I look at the historical returns of bonds and they’re terrible, why should I own them? And so I ran a chart over two periods. I did the trailing three years up until mi -March of 2020. So right kind of at the COVID peak, as far as like hitting the stock market. So the trailing three year return and it’s just March 20th, 2020, bonds were up 11 % and stocks were down globally. This is global stocks, MSCI ACWI down 23%. So someone could look at that and say, well, last three years, stocks have lost me 23%. That’s terrible. Bonds, less risk and they’re up 11. So bonds are great. Then if at that point, say you switched, you sold your stocks, dumped them at down 23 and bought bonds that are up 11. Well, what’s happened since then? We know rates have risen a lot. So since then it just totally reversed. Bonds are down 10 % and stocks are up 62%. So as professionals, we get this that to some extent, what goes up comes down, what goes down comes up. Mean reversion is very powerful, but I think it’s very difficult for investors too. There’s a tendency to look at historical returns and then act on it. And what you don’t want to be doing is buying the best performing assets and selling the worst performing assets, typically even the reverse is what you want to be doing.

Yeah. And that webinar you’ve referenced a couple of times is our fall market outlook webinar, which we did on October 12th. That was you and Michael Waldron, our director of portfolio management. And people can go to our events page at heritagefinancial.net and click to watch the replay if they missed it the first time around. So Bob, I’ve referenced, we’ve been to some industry conferences. I know you’ve talked to some folks. I don’t know if I’m getting cranky in my old age, or I’m just tired from all the traveling that I’ve been doing recently, but I’ve come away from these investment presentations that I’ve been listening to lately that everybody’s kind of saying the same thing. Everybody’s focused on the same two or three things that you’re focused on. And this is where the crankiness comes into play. They’re not saying anything differentiated or unique or interesting about it. Talk me off the ledge. Do I just need a nap or have you found, yeah, the more I’m listening to people, the more I’m hearing the same thing these days.

No, I think you’re appropriately cranky. No, I agree. I mean, it’s a kind of simple story that there’s just a few factors, but they’re very important and it’s what to watch. And it’s also, I think pretty well documented that making directional calls on interest rates is very difficult. I saw a study once presented where they looked at the Barron’s Roundtable and Barron’s Magazine. And at the beginning of the year in January, they have the top 10 Wall Street strategists. And they asked them a bunch of questions like, what’s your forecast for the 10-year treasury at year end? And forget about the exact number. In the study, they just said, is the projection higher or lower than the current level? And they didn’t even bat 50%. They were more wrong than right just directionally if rates were going up or down. So when one of the main driving factors is rates and it’s just very difficult to forecast interest rates, I think you get a lot of people who are just like, yep, these are the risks and we don’t know. And that’s not very fulfilling to hear.

All right. I appreciate you letting me off the hook there with my crankiness. I’ve been sending you some stuff on iBonds. Is it iBonds or Tips that I’ve been sending you stuff on?


All right. Well, that would be the first question. What’s the difference between tips and iBonds? And I feel like people haven’t allocated to Tips in a long time, particularly our team. There’s been a lack of attractiveness to the investment type, but they’re getting more attention now. Why is that and are you paying attention to them?

Yeah. So Tips are Treasury Inflationary Protective Securities. They’re Treasuries that have an inflation component. So you basically get the coupon plus CPI. iBonds are a type of bond offered by the government. And I believe the most an individual can purchase is $10,000. So because they have that ceiling and I think you have to buy them through Treasury direct, it’s something that we as an investment team haven’t really looked at because it’s not implementable across our clients. So it’s something you can’t do in scale. But Tips are interesting. So they’re good to protect against inflation. What’s held us back with Tips historically is because they’re typically long-term bonds with an inflationary component…

Bob, when you say long-term, are they 10-year duration?

You can buy them on the run really. So you could buy any maturity you want, but an average Tips fund typically would carry an Agg-like or higher, like a five to 10-year duration.

Sorry. Yep. Got it.

You have some interest rate risk there. So if you have an environment where inflation ticks up, you get protection from the CPI component kicking in, but you’ll have downward price pressure from interest rates rising. So I heard someone say it nicely that it neutralizes inflation, as opposed to being a nice hedge against inflation. So we do like things that zig and zag. So if you have an inflationary environment, well, hopefully you have something that performs well in that environment. If you have a deflationary environment, hopefully you have something that performs well in that environment. Tips are meant to more just like kind of neutralize inflation, remove it from the equation. So you get the same outcome no matter what. So they’re decent, more attractive now than they had been historically. I think they’re priced for about a two to 2.5 % real return. So return above inflation, which is attractive for Treasuries, but it’s not our best idea in fixed income.

So that sounds like more of a longer term objection to investment versus… No, I could see myself investing in it, but it’s just not the right opportunity set today.

Yeah, that’s fair.

Okay. What else is on your mind, Bob?

What else? So, I mean, just things we’re looking at as we get to year-end with bond yields increasing, we’re looking at municipals, possibly increasing our allocation of municipals. We were on a call earlier today and municipal yields are pretty much the highest they’ve been in 20 years, getting tax exempt in the 4 plus percent range. And then also just with bond yields being higher, looking to increase our total allocation to bonds, possibly coming from real assets, possibly coming a little bit from stocks. So those are some things to look at. Maybe something to mention for listeners, we have a new cash management solution, FDIC insured account that we’re opening up for clients where we’re getting a 5 % yield on cash. Not too long ago, you’d have your working capital account or savings account and wasn’t earning anything at the bank. And now there are solutions to get good yields on that cash. So maybe run your operating account a little tighter and get some yield on your excess savings.

To end on a kind of a fun fact or a lighter note, I actually don’t saw Dr. Joe Coughlin from the MIT age lab speak at a conference and he talked about health and he said, if they’re looking at retirees, I think is where he really did his study, but to answer, you feel lonely, have loneliness in a survey that’s as bad for your health as saying you smoke 15 cigarettes a day. So he was really targeting retirees and when men in particular retire and aren’t socially active. So get out there and interact with people, it’s good for your health. He said, you ask people what they plan on doing retiring and it’s like, oh, spend time with family, friends, travel. But in reality, when you then survey retirees, one of the biggest differences between what you did when you’re working and when you’re retired is watching TV. The average person who’s working watches a hundred minutes of TV. The average retiree watches 270 minutes of TV. So just some more lighthearted things, but get out there and be social is the takeaway there.

Bob, you are a full service Chief Investment Officer giving health, wellness, retirement, and investing advice. I love it. Thank you for your time today. As always, I think your insights are extremely useful to our clients. It’s always a privilege to be able to get into the mind of a Chief Investment Officer who’s managing a large amount of money for individual clients and appreciate your time.

All right. Thanks, Sammy.

Thank you for listening to Wealthy Behavior. If you found the conversation useful, please leave a review wherever you listen to your podcasts and share this episode so those around you can live a rich life too. We appreciate your feedback and questions. Please email us at wealthybehavior@heritagefinancial .net. For more insights, subscribe to our weekly blog at heritagefinancial.net and follow us 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 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 principal.

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 & CEO 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.