Don't Do Something, Just Stand There!

Craig Pluta
CFP^® CERTIFIED FINANCIAL PLANNER™
CRPC^® Chartered Retirement Planning Counselor

April 2022

As we wade through yet another 10-15% market correction after an uninterrupted run of nearly 24 months, whilst watching in real time the expansionist ambitions of Vladimir Putin’s Russia, it becomes time again to take a deep breath, and ask some key questions.

The Federal Reserve 2022

This is like watching a movie where you can recite the lines before the actors do and know how the story ends

The federal reserve under Jay Powell is full swing in the implementation of a two prong strategy for combating inflation. Well, maybe a three-prong strategy if you count removing the phrase “transitory” from their vocabulary as their first order of business. As inflation clearly is the unwelcome guest that just won’t leave the party, the eviction process goes as follows: First, stop encouraging inflation’s behavior. Just as throwing gas on a fire is a recipe for an out of control fire, so is stimulating an economy that already has 6.9% GDP growth (4th Quarter 2021) along with 8.5% inflation. The “gas” in this case is the bond purchasing program instituted shortly after the Covid Correction in spring of 2020, intended to keep the bond market liquid and press interest rates down even after having lowered the federal funds rate to 0%. And so it was. As of the middle of March 2022 through a tiered process, the federal reserve stopped purchasing those bonds. Step 2 was to raise interest rates. Instead of having the fed funds rate at 0%, which is also simulative, we started the rate hikes to get to what the fed calls “neutral”, a nuanced term that means “somewhat higher than today”. Although no one knows the exact number, it is expected to be about 2.25-2.5%, significantly higher than where it is now. That means many rate hikes, since it is only at 0.25%. The end result is that the Federal Reserve is changing direction from being simulative to being neutral/restrictive with the goal of kicking inflation out of the party. And with that, comes the ever so popular chant “he’s going to throw us into a recession”. Why you ask? Because that is the chant we always hear when the federal reserve changes policy direction. This is like watching a movie where you can recite the lines before the actors do and know how the story ends. Deja vu? You tell me.

The Federal Reserve 2015

It accompanied the popular chant… “she is going to throw us into a recession”

2015 Janet Yellen, then Federal Reserve Chairwoman stated that the economy after coming out of the 2008 credit crisis, now known as “the Great Recession” no longer needed to have stimulus, and guess what she suggested? Stop the bond purchasing program referred to as “quantitative easing”, and follow that by raising interest rates back from 0% to neutral. Sound familiar? It should, and it accompanied the popular chant, “she is going to throw us into a recession”. And in both case we saw a 10% correction. By the way, no recession followed. It would be fair to say that history has taught us that changing the direction of interest rates causes a number of people to become anxious. Unfortunately, nothing takes place in a vacuum. ….Enter Vladimir Putin. From the joint communique with China expressing mutual support to each other with regards to Ukraine and Taiwan on the opening day of the Olympics, to the endless saber rattling and a speech to the Russian people which could be described as nothing short of “rambling on” about how Lenin is to blame for this since he screwed things up after 1917, we find that adding this to our list of worries, completely supported by the 24hr news cycle, broadcasting the next end of the world on a daily basis, has the natural tendency to make people who are already anxious about the Fed’s new direction, suddenly becoming doubly and triply anxious. Prompting many people to consider grabbing a handful of Xanax with a vodka chaser and hitting the panic button. …..Enter, Daniel Kahneman.

Dr Daniel Kahneman

2002 Dr Daniel Kahneman received the Nobel prize in Economics. If that’s all you knew that might sound unremarkable, but here is the punch line; Dr Kahneman is not an economist, he is a psychologist. His work centers on behavioral finance and points out why human emotions just might be the one thing that stands between you and making good financial decisions. You see, the truth is you have an emotional attachment to your money. Your money represents some or all of these: your income, lifestyle, the currency for your dreams, your measure of success, potential vacations, independence and peace of mind. This is why I can show someone a graph of the stock market going back to the great depression showing them that in every situation the markets have recovered to all time highs despite going through depressions, recessions, world wars, nuclear crisis, cold wars, oil embargos, collapsing empires, terrorist attacks and everything in between. And within 5 seconds, thinking about the current market correction and staring straight in to my eyes will ask, “so do you think we should sell?” It’s no wonder Kahneman pointed out that when logic and emotions come to a head on collision, emotions win every time. Unless of course there is an intervening force. That being a gentle or sometime not so gentle reminder of how the markets actually work, usually accompanied by the three most important words that you may ever hear an advisor say, “Don’t do that!”

…human emotions just might be the one thing that stands between you and making good financial decisions

The truth is, we live in a “timing and action” culture. The mantra pitched for most everything is “Don’t just stand there, do something”. Why? ……Because I suspect it feels good to take action and do something. We feel empowered exerting control. But the truth of the matter is we got the order wrong. When it come to a diversified portfolio that is built to weather the storms, the proper advice is “Don’t do something, just stand there!”. You see, in a diversified portfolio the managers are already there making the proper changes through their endless analytics to decide what stock or bond should remain and what should be sold and replaced. If indeed the future landscape is changing under new policy regimes then the managers are actively reflecting that change on a daily basis. The last thing you want to do is screw things up by second guessing them.

Reframing

Perhaps we are seeing this all wrong......

....As for the Fed’s change in policy, perhaps the proper chant should be: “Sounds wise, let’s do that”

....And for the 10-15% market correction the thought should be: “What a crazy opportunity this is, do we have more money that we can invest?”

....And lastly, for the geo political event in Ukraine, we should all recognize that it is indeed tragic and worthy of our attention on so many levels but at the same time recognize that a geo political event is rarely a “portfolio” event once the emotions subside. As Apple continues to sell a ton of iPhones, Nike continues to sell just as many sneakers and Kimberly Clark sells just as much Kleenex, we see that according to FactSet, as of this writing 20% of the S&P500 have reported their Q1 earnings. Of these companies 79% have reported earnings above the expectations, which is above the 5 year average of 77%. Just recognizing that alone might keep us from making the big mistakes with our investments.

But perhaps Mark Twain summed it all up best, when he said “I am an old man and have known a great many troubles in my life, most of which never happened”

Craig Pluta is a CFP® CERTIFIED FINANCIAL PLANNER™, CRPC® Chartered Retirement Planning Counselor, Financial PodCaster and President of Alliance Wealth Management Milwaukee, inc. He was named on Forbes Best-In-State Wealth Advisors again in 2021 and is a member of the Chairman's Council at Raymond James Financial Services. You can hear more from Craig by tuning in to his monthly PodCast Wealth Vision 20/20, available worldwide on Spotify or by visiting his website at www.AwmMil.com. You can also reach him at Craig.Pluta@raymondjames.com

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