The stock market started the new year by hitting record highs, but since then it's been rough sailing.

On yesterday's MoneyWise Live, SMI's executive editor Mark Biller discussed the recent pullback, plus the ongoing concerns outlined in our January cover article, Winds of Change Are Blowing: Casting a Wary Eye on 2022.

He also talked about why investors will be listening closely to today's news conference (scheduled for 2:30 p.m. ET) by Federal Reserve Chairman Jerome Powell. 

Audio from yesterday's program is posted below. Scroll down for a transcript.

MoneyWise Live with host Rob West airs weekday afternoons on Moody Radio. 

For more radio appearances by members of the SMI team, visit our Resources page.


Transcript

Rob West:
Lots of folks are hoping that 2022 will be better than last year, but can investors afford to be that optimistic?

Hi, I'm Rob West. Does the volatility we're seeing on Wall Street these days mean we are headed for a bear market? I'll talk about that first today with investing expert Mark Biller. Then it's on to your calls at 800-525-7000. This is MoneyWise Live — biblical wisdom for your financial decisions. (theme music ends)

Well, our friend Mark Biller is executive editor at Sound Mind Investing, where they've been warning lately about certain market indicators. Mark, welcome back to the program.

Mark Biller:
Thanks, Rob. Thanks for having me back.

Rob West:
I was delighted to see you were coming today because the last two days — the incredible volatility, the reversals! Mark, what in the world is going on?

Mark Biller:
Yeah, it has been wild and really this whole month has been kind of crazy. We set a new all-time high right out of the gate, January 4th. And then since the S&P 500 index is down about 10%. Some of the smaller indexes, like the small-cap index, the Russell 2000, the technology says they're down even more. So, in a way, that S&P 500, which is of course dominated by the very largest companies — your Microsofts and Apples and those types — they've kind of been holding up pretty well so far relative to everything else, which looks even a little bit more shaky. So, yeah, it's been a wild month — that's for sure.

Rob West:
Well, I would say, Mark, based on your January newsletter article that we'll be talking about today, you're not entirely surprised though at this market action, are you?

Mark Biller:
We're not. I mean, in fairness, the speed of this decline coming right out of the gate here in January, I think that's been a little surprising to everybody. But you're right.

You know, right before Christmas, we published our outlook for 2022, and it was a pretty blunt warning that we saw trouble ahead. Now, to be clear, SMI doesn't usually make big market calls — that's not really what we're all about. But in that article that we're gonna be talking about, I outlined why I thought the market was likely to shift from this long-term bullish trend that we've had for at least the last 18 to 20 months, and kind of shift towards a more bearish tilt this year — and why that might warrant additional caution on the part of some investors.

Rob West:
Before we dig into the specific reasons that had you concerned in the article, why don't you give us the big picture context of this market?

Mark Biller:
You know, one of the most important factors to the markets these days is the Federal Reserve, which is kind of unfortunate, but it's really true. The Fed has taken on an increasingly active role in markets since the financial crisis about a dozen years ago. And it's gotten to the point where a lot of investors just think the Fed's gonna rescue them — anytime the finance markets slide enough, the Fed will come riding to the rescue. And they think that because we've seen the Fed step in over and over again, cutting interest rates, purchasing assets, and really doing whatever they can to support the stock and bond markets.

So as a result of that, Rob, every market downturn that we've had over the past dozen years has been pretty short-lived and relatively shallow. We haven't had to deal with a sustained bear market since 2008.

And that has really created a whole generation of "buy the dip" investors — because the Fed just won't let markets fall. Now, things shifted a little bit,  from our point of view, a couple years ago when COVID hit — because that's when the federal government sent out these massive stimulus payments directly to individuals and businesses. We kind of think that's a game-changer because we've seen inflation really pick up since then. So for the first time in a few decades, now, the Fed has to weigh whether to rush in and save markets or stoke inflation. And that puts 'em in a tough spot.


Rob West:
Let's head to the phones because Jason has a question in Nevada — specifically about the Fed. Jason, go right ahead.

Caller:
Yeah, hi guys. Love your work, by the way.

Rob West:
Thank you.

Caller:
Yeah, so it's splattered all over the internet and all these things talking about a "great reset,"— and it starts, I guess, tomorrow with this big meeting about they're gonna default on their loans. Of course, the internet, you never know how accurate that information is, but I just wanted to get you guys' opinion on these loans that we're gonna default on apparently.

Rob West:
Any thoughts on that, Mark? I'm not familiar with what he may be hearing.

Mark Biller:
Yeah, I think that's a great question, Jason — and thankfully on this one, I think we can put your mind at rest a little bit, because I believe that what those news stories have been referring to was some testimony maybe by one of the Fed officials. I can't remember who it was that was talking about this, but this was in the context of the importance of the U.S. raising its debt ceiling.

So this debt ceiling drama is something that comes around every year or two. There are some congressional limits on the amount of debt that the U.S. is allowed to borrow. And almost inevitably, when we bump up against those limits, the political parties kind of jockey back and forth and try to use that issue to either cut spending or kind of push through some other political goals. And I would just say that we have seen this drama play out many, many times in the past because it's something that Congress has to reauthorize — a higher debt ceiling every so often.

So this is just the latest in a string of many similar episodes in the asked. And I would just say, Jason, probably that's not a huge concern simply because both parties and all of the politicians know how devastating it would be to actually let the U.S. default on any of its debt. And there's no reason why they need to allow that to happen. So that's not one that I'm specifically real worried about — even though it does create a lot of smoke and a lot of rhetoric whenever it comes up.

Now, as we're gonna be talking about here, the rest of this program, there are some other things that I'm kind of concerned about, but that one — the threat of us actually defaulting on U.S. debt — is not high on my worry list.

Rob West:
Mark, what about the Fed action that's expected to be taken? I suspect we'll hear about rate hikes, many folks expecting several rate hikes this year. What does that mean for us here in the U.S. and developing countries, which obviously could put some additional strain on them?

Mark Biller:
Yeah, absolutely. Now that rate-hike expectation, which is gonna be a huge amount of drama and focus on this Fed meeting tomorrow and Chairman Powell's [news conference] tomorrow afternoon. When we really kind of peel back the layers here on what's been going on with the stock market so far this year, it's directly related to the Fed — and the Fed has explicitly been warning investors that it is going to take away a lot of the liquidity that has been the backdrop of this really 12-year bull market that we've had in stocks.

And certainly since the 2020 decline, the Fed has been just pumping liquidity into this market at an incredible rate. And the Fed really since last June has been saying, "Look, guys, we're gonna be pairing this back. We're gonna be taking the punch bowl away" — and investors don't want to hear that. They hate that idea.

And so they've kind of been ignoring the Fed, and only recently have they really started to believe that the Fed is serious about taking these steps. And the reason that I say that is we can gauge what investors are expecting in terms of future rate hikes through some various market indicators. And over the last month or so, investors as a group have gone from pricing in very little expectation of future rate hikes, and they've adjusted those expectations to where they are now pricing in four Fed rate hikes in 2022.

Well, that's a huge adjustment for such a short period of time. And I would argue that that's the direct immediate catalyst for what we've seen in the stock market so far since the beginning of the year. Stock market investors have been adjusting their expectations for stocks based on these higher interest rates that seem to be an inevitably coming down the pike.

So tomorrow afternoon is gonna be the first time since the stock market shakeup and correction has happened that Chairman Powell is gonna address the investing community and basically say either, "Yes, we're going to stay on with our plans to continue to tighten conditions and these rate hikes are still on schedule" — or potentially back off.

And what we were talking about right before the break, Rob, is for the last 20 to 30 years, the Fed has been able to basically just address the financial markets in isolation. When we have these periods where the market is wobbling, they can come in and just address the financial markets because inflation hasn't been a problem. But today we obviously have this runaway inflation — or at least higher inflation. I don't wanna be overly dramatic about it.

Rob West:
Sure, sure.

Mark Biller:
But we have this high inflation and that for the first time in, truly, at least 25 years is putting a counterweight to what the Fed would likely want to do. They probably would love to come in and reassure investors and reassure them markets, "Hey, we're not gonna move too fast. It's not gonna be too severe." But they know full well that if they do that, that's going to be interpreted as we're not going to take the actions that are necessary to stop this rising inflation.

So they're really caught between a rock and a hard place in this meeting tomorrow to try to thread the needle of saying, "We're gonna do enough that you can count on us bringing this inflation down, but we're not gonna do so much that we're gonna disrupt the financial markets and cause a bear market in stocks." And that's a really narrow window for them to try to thread that needle. So it's gonna be interesting. And this is all exactly why we're seeing the stock market correcting the way we have in recent weeks.

Rob West:
Do you think we're likely to see more market weakness ahead?

Mark Biller:
That's really the million dollar question, right Rob?

Rob West:
<laugh> Yes.

Mark Biller:
You know, right now, to kind of put it in context, the S&P 500 index is down about 10% from its high — and that's really not an unusual drop at all. We've had about 14 of those types of market corrections in the last dozen years. They averaged about a 12-to-15% drop, so very much right in line with what we're experiencing right now.

So with that said, unfortunately, I'd be a little surprised if we've seen the end of it. And that's simply because the factors that had me concerned coming into this year really haven't changed at all. And the historically high market valuations have only had this very small adjustment — the correction. So my guess is that we haven't seen the end of it — but in fairness it's always is really hard to say for sure whether a 10% drop like we've just seen is just a typical correction or if it's the start of something more serious. And that's really where we kind of need to pivot back to the article that we wrote last month on what we thought the market set up for the whole year was likely to be.

Rob West:
Yeah, let's unpack that a bit more. So you mentioned four potential catalysts pointing to a declining market in 2022. Quickly walk us through those.

Mark Biller:
Yeah. So the first one was just slowing economic growth. We've had some really above-trend growth the last couple years due to all the stimulus in the system. And I think that we're probably gonna see that decline as the year goes along. So that was the first thing we were pointing out.

The second one's kind of a weird one, but it has to do with where we are in the political calendar. And to really briefly sum that up, the six months leading up to midterm elections tend to be the worst six months on average of the four-year political cycle. So that's what we're looking at from May to October of this year. And we wouldn't normally put a lot of emphasis on that, but because it corresponds exactly with these other negative catalysts, that's something we're looking at.

Rob West:
So interesting the forces that drive the market. What other potential threats are we facing this year?

Mark Biller:
Yeah, so the third one is we've got this looming fiscal cliff, which is the other side of all of this federal government stimulus. So they've been pumping money into the system through these stimulus payments, and now the amount of federal government spending is forecast to decline by about 4% of the entire country's GDP. It's just a huge amount. When you look around the world, other governments are also cutting back. So this headwind — or I should say, what's been a tailwind for financial markets is about to turn into a headwind.

And then the last one is simply the thing we've been talking about with the Fed — and this is the one that the most concerned about — and that is this tightening policy is really the thing that has been the most typical catalyst for killing bull markets in the past. Every time the Fed has tried to cut that liquidity back, the stock market has stumbled, and it's really hard for me to see why that's gonna be different this time.

Rob West:
Interesting. So let's talk about where we go from here — how investors should respond. How do they prepare for any further weakness coming in 2022?

Mark Biller:
You know, some of that's gonna depend on what their investment posture looks like already. With our SMI members, we already have some defensive capabilities built into our strategies and we've been taking some small, incremental steps to get a little more defensive. So for our members, a lot of them didn't really need to change a whole lot. And if a listener is hearing this and they already have a fairly defensive portfolio — with a lot of bonds, less-risky stocks — they may not need to change much either.

But I would just caution anybody who has an aggressive portfolio — lots of growth stocks, maybe some crypto, other riskier assets — I would not assume that this is over and done and we go back to racing higher. At a minimum, I would say you should be thinking about, "What would the implications to my portfolio be if we go down, say, another 20% from here" — and maybe consider making your portfolio a little bit more conservative as part of that process.

Rob West:
Yeah. That's great advice. Now, if somebody has a long-range investment horizon — say 10 years or more — and consistently contributes the same amount each month, dollar-cost averaging, should they be concerned?

Mark Biller:
You know, the length of that runway, that's really so important. If you got that multi-decade investing horizon ahead of you, that really covers a lot of the concerns here. So it's really more folks who are getting closer to retirement — maybe they're in retirement — that really need to think about this, because they may not have a lot of time to recover if we do see a full-blown bear market.

Another piece of this, Rob, is really, "What type of investor are you?" If you're kind of a "I make changes to my 401(k) once a year" kind of [person], then you're probably not gonna take a real active approach here. Whereas, like our SMI members, they tend to be more active and that's what we're helping them navigate through at SMI.

So, because I don't think this is necessarily over, I am inclined to caution people to to move to their most conservative posture — but that doesn't mean sell everything, get out of the markets, [and] throw up your hands and panic.

It just means that whatever your normal range is, or your normal posture is, you want to lean more conservatively again. Again, that usually means possibly going a little heavier in bonds and less in stocks. And certainly I would consider if you're heavy in growth stocks, aggressive names like that, that it might be time to maybe lean a little more towards the value side. Value stocks over growth stocks, larger companies over small, perhaps — because small companies' stocks tend to be a lot more volatile.

So I'm not encouraging folks, Rob, to go out and make massive adjustments. But I would think through, "If there is more downside ahead, do I have an appropriate mix for my age and my risk tolerance?"

Rob West:
And the key, I think, Mark, is that whatever portion is at the risk of stocks — especially more growth-oriented stocks — go ahead and anticipate that downside now and think about the psychological response you might have. Make sure you're not feeling like you're gonna be prompted to sell, because that'd be the last thing you want to do, right?

Mark Biller:
That's exactly right. Couldn't have said it better.

Rob West:
Mark, really appreciate your time today. Thanks for stopping by my friend.

Mark Biller:
Thank you, Rob. Always a pleasure.

Rob West:
Grateful for you.

Mark Biller's been our guest today. You can read more about his article, Winds of Change Are Blowing: Casting a Wary Eye on 2022 at soundmindinvesting.org. Check it out.

Your calls are next on anything financial — 800-525-7000. We've got a few lines open. This is Moneywise Live — biblical wisdom for your financial decisions.