Ken Moraif: Hello, and welcome to our Market Alert video for today, which is December 15 2023, we have a lot to cover today, we are going to be going back into bonds, and we want to give you the rationale behind it. So this could be a little bit longer video. So we’re gonna dive in, we’re gonna have a special guest, we’re gonna go over what the Federal Reserve said this week, which rocked everybody’s world. So we got a ton to talk about. But before we do, I just want to share a quick story with you. A good friend of mine loves to go hunting, and he asked me if I wanted to go with him. Now, of course, I don’t want to shoot anything. But I said, you know, that sounds like fun. We’ll go, you know, we’ll go stalking through the woods in the snow with our camo on and do all that. Well, actually, that’s not what happened. What we did was we sit in this in this box that’s up on stilts, a blind. And basically you just wait. So this wasn’t hunting, this was waiting and so. Well, as it turns out, we didn’t shoot anything, nothing, nothing happened. We waited a long time saw a few things. But none of that rose to the level of being a trophy. So we didn’t do it. So anyway, now I’ve experienced it. And that was my hunting experience. Let’s talk about the Fed. So this is a couple of days ago, the Fed came out and basically shocked everybody, because we were all expecting them to say that yes, inflation is coming down. And yes, you know, things are going the direction we want. But no, don’t get excited, we’re not ready to lower interest rates yet, we’re just going to leave them where they are for the time being. Well, that’s not what they said. What they said instead was we’re done raising interest rates. And our bias now is to start lowering interest rates, oh my gosh, that just you get it the market, the bond and the stock market both shot up into the sky like a rocket. And so well received by everyone involved. Now, as we’ve been telling you, you know, we’ve been out of bonds since April of 2022. So over a year and a half now. And so I have a special guest to share with you the rationale, the analysis that we’ve done to decide that it’s time for us to go back into bonds. So I’m going to bring a member of our Investment Oversight Committee, Jordan Roach. So Jordan, if you could join us, that’d be great. There he is. Hey, Jordan, how’s it going?
Jordan Roach: Doing great.
Ken Moraif: Awesome. So your analysis on the historical context 2018, that period versus today and how similar they are. And what we can learn from that was very, very interesting. And I thought our clients and our SCWPerS would enjoy would enjoy this your analysis. So tell us what you found.
Jordan Roach: Yeah. So this was born out of right: Is our team being challenged to make sure we’re ready should the Fed do something that we expect or not expect, like we saw a couple days ago. And so what I wanted to do is, look at recent history, evaluate what happened then in a similar event based on the Fed hiking cycle to slow down and see how did you know bonds perform through that. And if it helped us make some good decisions right now, when we’re thinking of going bonds, we say some bonds, some money markets, and all those decisions that we’re thinking through. So I’ll share my screen here, to kind of look through a couple of things visuals together, to kind of help us think through what we’ve been seeing here. And so this is the last hiking cycle that the markets have went through, right? So it was a three year cycle started in December 2015, and went through to December of 2018. And I remember the cycle really, really well, right Ken because you hired me in this time. This is something that I remember really, really well. And we made some good decisions in here. Because stocks and bonds throughout this time were challenged, right, and certainly, towards the end of a cycle like could happen, which we saw in 2018. And so you know, at the time investment team, you made a great decision where he said, the Fed is continuing to say, we’re going to we’re going to hike, we’re going to hike, we’re gonna hike, and ultimately got out of bonds got out of bonds early in the summer of 2018. And that was a really good decision. And so you know, we’ve had that same thing, like you said, 18 months out, and we gotta figure out, when do we want to go back in? When does that risk reward on our side? And so we look back at, you know, the last cycle. And what we see is it was it was a slow race, right. So it was three years to ultimately raise rates just 2% Right. But at the time, the market felt like that was a lot that was felt like a lot because of the first time the Fed had raised since the great recession. And so the bond market in particular, and even stocks were challenged during that time. Right. But again, the thing that’s interesting is, that’s a three year hike, just to raise two percentage points. Now we look at what we just went through, right? We had the worst bond market in 50 years, right. And that’s because the Fed took rates from a quarter of a percent or really 0%, toward a quarter percent, and then ultimately to five and a quarter in just 18 months. Right. So that’s the quickest rise the bond market has ever experienced. And that’s what led bonds, depending on the type you look at that lost 13 to 25%. And again, fortunately, made a really good decision in there to get a bonds in April of 2022. So we did not experience that downside. But now we want to look at this and say, okay, based on what, you know, the Fed said this week, we think they’re done. Right, we thought that was we’re getting closer, but they even kind of surprising the whole market. And so we say, Okay, off the back of a five point increase over one and a half years, what do we expect going forward, and can it help us make some good decisions on how aggressive how convicted we are, that money markets are a good decision to stay in there versus start allocating towards bonds. And so this next slide, what it’s doing is it’s overlaying the two years, right, so this has got 2018, and then 2023 on the bottom. And what you see is you get through the back end of a hike cycle, right? Where you have the last through, you know, the last few raises in there. Both bonds, and these are showing bonds US bonds in general, they perform pretty similarly. Right? They start up, they move down, because interest rates and bond prices move on, have an inverse relationship. So as yields go up, bond prices go down. And that’s what you see in both periods. Now, if you look in 2018, what happened? What’s really interesting is bonds ultimately, that year, sold off from top to bottom about 5%. Right. So if you look here in November, we will see on the right side about is a 4% loss. And we’re under that by about a percent. So bonds lost about 5%. But what’s really something that I think we want to take note of that we’ve been looking at, right in the Investment Committee is bonds actually bottomed before, before the Fed, ultimately, on December 20th 2018, said, we’re done hiking. Right. So the bond market, like the stock market, a lot of times moves faster than the decisions. They’re constantly pricing. And well, we think we’re gonna be and we saw that as November bonds bought them before the Fed said, we’re done. And if you look at that move that the bonds made to the upside to kind of read the change the overall trend back to the upside is bonds made, you know, about a 1.8% move in the span of a month, even ahead of the Fed pausing rates. So now let’s let’s look at happened this year. So this year, again, bonds sold off pretty well. But like this last time, ahead of the December meeting, bonds, we’re already looking to price in a bottom meaning expecting that yields are as high as they’re going to be, before the Fed even spoke this week, right? So back in mid October is where we saw Bond prices, therefore yields being as high as they go. And then what you’ve seen is a move in front of that expecting the Fed maybe to, to pause rates, maybe they say, Okay, we’re getting out of the way, I don’t think they expected them to say we’re already going to start maybe looking to cut, but you look at the upside move here. And they went from being down roughly, you know, 3% to now they’re up one and a half percent. Right. So that’s a four and a half percent move the bond market has made in a month. Right. And so what we’re looking at now is say, okay, the bond market is pricing in what the Fed is gonna do ahead of time. And if we think now with what the Fed has said, what do we expect going forward? Right, how much upside could there be in the bond market? Is it now the risk reward, right to move from money markets into the bonds? And so what we’ll do is say, Okay, well, what happened in 2019? Okay, so this is kind of the end of 2018 2019. And what we saw there is from the bottom to the end of 2019, bonds moved up 8.3%. That’s a pretty healthy return for fixed income, right? I mean, it’s almost stock market, like returns for bonds. And they actually to the top here, you made actually, top over 9%. Right, but ultimately 8% move. Right? And so what we look at right, our view is going into next year with in light of what the Fed just said, I certainly would think it’s not improbable. In fact, it’s, it’s probably actually probable that we could experience an 8% 9% upside in bonds or more. Right, when you have bond market that experiences a 2% move in three years. And once the Fed gets out of the way, then you get 8% returns. What do we expect when the bond market has moved in 18 months has moved rates up 5%. You know how I look at it? That is a spring that has a weight, it’s been coiled and cooled and coiled. Right, and the weight of that move from, you know, a 5% yield increase in in in 15 months. There’s a lot of weight on that spring. And once that spring is released, how much momentum can we get going forward? Yeah, well, we think it’s gonna be held
Ken Moraif: It’s very similar, you know, we’re looking at it from the standpoint of we’ve had a historic bear market in bonds. And now that it’s turning around, we think that we’re going to have a historic rise in bonds. And so that really, is why you know, we’re going to be going back into bonds. In all of our models, we’re gonna go in whether you’re 60/40 40/60, if you’re in our basic conservative, we’re gonna go all in to bonds because of this dynamic that we think represents a tremendous opportunity. The interesting thing about this chart, Jordan is that most of the returns of that 8% that we’re seeing here happened towards the second half of the period before the Fed actually started lowering rates. Can you talk about that?
Jordan Roach: Yes. So the really interesting dynamic right, that we’ve talked through as an investment team, right, is that we think this move could happen, for lack of better terms, violently, like quickly, it’d be a big pop initially, when the Fed is getting out of the way, not out of the way, getting out of the way, which would be what happened from November through the end of this year, into into next year before even rate cuts. Because if you look at the return here, what happened is bonds bottomed before the Fed paused. And then when you see kind of this start topping period, here in the market, where we just go sideways, and there’s volatility increase. That is actually where the rate cuts we’re in 2019. Right. So most of the move happens before rate cuts happen. And our view, right as a team, Ken we talk a lot is we think what rate cuts probably happen, let’s call it the back half of next year. And so if we take 2019 as our precedent, and we think most of the move is going to happen in the first six months, which is why we want to be more convicted, be aggressive, in our belief that bonds are the right answer right now, in favor of being in money markets, like we have for the last 18 months or so.
Ken Moraif: So Jordan, thank you for your analysis, you did a terrific job. And so I appreciate your time. And I’m sure clients and SCWPerS will see you again in some future videos.
Jordan Roach: I hope so. Thanks so much Ken.
Ken Moraif: You bet. So the interesting thing also about this is that, you know, the I want to talk about our stocks as well, because they’re an important part of our portfolio. And what we see for that, in view of what we’re talking about here, there’s the potential that bonds could actually outperform stocks next year, which is kind of an interesting thing. And it’s actually there’s precedent for that back in the 80s. However, there’s two ways that it could go next year, there’s two reasons why the Fed could lower interest rates. And in both cases, it’s good for bonds. One is that inflation has basically been coming down, and the Fed now wants to lower interest rates, they don’t need to keep them as high anymore, and we have a good economy. So in that scenario, the stock market should do very, very well. And we’re excited about that. We think that’s the most likely outcome. However, there’s also the possibility that the Fed has overdone it. We don’t we don’t know the full lagging effects of all the rises of interest rates they’ve made yet. And it could be that we go into this really bad recession next year. And if that happens, then the reason why they’re lowering interest rates is to counteract the recession. And that being the case, stocks will do very badly. Now for that one, we have our sell strategy ready to be implemented should we need to so we’ve got that covered as well. So in both of those scenarios, bonds should do well, again, why we think we need to go back into bonds and out of the money market fund. So next year, we’ll have our Fearless Forecast for you in January not ready to make that one yet. But we did want to make you aware of the rationale behind why we’re going to be going back into bonds and out of the money market fund that we have been so nice and warm in for the last over a year and a half. So this was a long video. I know that a lot of data but we wanted to share with you we want to make sure you’re informed and share this video with as many of your friends and family. We want to help as many people make good financial decisions and become SCWPerS themselves one day. So thanks for watching this video and we will talk soon.

Please note: transcript has been modified after the time of recording. 

Economic indicators and stock market performance cannot be predicted. Opinions expressed regarding the economy and the stock market belong solely to Ken Moraif on behalf of Retirement Planners of America and may not accurately portray actual future performance of the economy or stock market outcomes. Opinions expressed in this video is intended to be for informational purposes only and is not intended to be used as investment advice for individuals who are not clients of Retirement Planners of America. All content provided is the opinion of Ken Moraif, CEO and Founder of MMWKM Advisors LLC (d/b/a Retirement Planners of America). ©Copyright 2023