Money Rehab with Nicole Lapin - Why Stock Market Downturns Are Actually Good

Episode Date: June 5, 2023

It sounds extremely counterintuitive, but pro investors root for market downturns. In the second part of their conversation, Nicole and Josh Brown (The Reformed Broker) explain why. Plus, Nicole and Josh unpack where the big investing opportunities are right now, whether we're in a recession and Josh's favorite resources for learning investing strategy.

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Find a co-host at Airbnb.com slash host. I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. Last week, you heard from Josh Brown, a.k.a. the reformed broker, one of my favorite guys on Wall Street. In that episode, we go over the alphabet soup of some of the most jargony terms in finance that we get questions about all the time here at Money Rehab, like alpha, beta, liquidity, arbitrage,

and so much more. Now I'm bringing you part two of that conversation. Because Josh and I are money nerds, we could not help but talk about the state of the economy and really dig into where we think the big moneymaking opportunities are right now. Because even though a lot of the headlines on the economy right now are doom and gloom, last week the market rallied and had its best week since March, and the S&P 500 reached its highest level since last August. So there are big investment opportunities out there, and today Josh and I talk them out. Plus, Josh gives a shout out to his favorite writers in the investing space, so if you want to know what the pros are reading, wait for the end for his rec. All right, so let's zoom out.

And now that we have some of this lingo down, let's apply it to the real world. There are always opportunities to profit. So what are you seeing right now? The market is pretty darn good considering virtually every economist on Wall Street was predicting a recession for this year. The NASDAQ is up 27% year to date. The S&P 500 is up 10%. In both cases, those are better than the long-term historical average returns. So we're only five months through the year. So we're not going to throw a party just yet. But stocks are pretty okay. The economy is a different story. The good news is everyone has a job. Unemployment is at 50-year

lows. There are still more job openings than there are unemployed people. There are still people leaving one job, getting another one, and reporting a wage increase. So that part of it is okay. There are storm clouds, though, on the horizon. And mostly you're seeing those in manufacturing. And I think this is an interesting thing to point out to your listeners, which is that there's a really big distinction between the goods economy and the service economy. The service economy has never been stronger. People are traveling.

They're at restaurants. They're at concerts in record numbers, pretty much across the board. That's the services economy and it is doing great. And the reason is everyone has a job. The goods economy is struggling because there was a lot of pull forward demand in 2020 and 2021 when we were all trapped in our homes, there was nothing to do but remodel and buy things to make ourselves happy. So sporting equipment, dishwashers, televisions, computers, tablets, phones, nobody's going to do that two years in a row. If you bought a washing machine in 2021,

you don't go buy another one in 2023. So this is the problem with the good side of the economy. And you see that reflected in the stock market by the types of stocks that are doing well versus the types that aren't. There's a reason why some sectors of the market are doing better than others. So Target is a really great example. Most of what Target is selling is goods, not services. Target is selling you physical things. We binged on physical things during the pandemic. We're not repeating those purchases now. Every time they report earnings, they're reporting it against the comp from the prior year. So companies don't just say, here's our profits for this year. It's here's the percentage growth in our profits versus last year. And of course,

if you're selling people physical items, it's a much tougher economy. So I think that's why there's a lot of confusion and a lot of concern, just because some segments of the economy are struggling versus how they were doing last year and the year before. Then COVID warped everything for the comps. Yeah, 100%. You're exactly right, Nicole. COVID took all the charts and data and historical relationships and like a deck of cards threw it up in the air and the whole world was reshuffled and we are still picking up the cards and putting the deck back together. And it's not in the same order and nobody knows what to make of it. It's a really good way to explain it. I love your analogies. But where do you think the opportunities are for investors right now with all of this meshagos, all of this shenanigans?

I think the number one thing is not to focus on what are the opportunities that are going to pay off right now because nobody can really do that. So I think people should be focused on what the opportunities are for their own situation. And I'm guessing most of your listeners have a very long life ahead of them. They have lots of expenses they're going to want to fund in the future. And they need to be comfortable taking risk now. They need to be comfortable with the concept that they might buy a stock fund or a bond fund and six months from now, the price is lower. That has to be okay. Has to be. Put your blinders on. What's the alternative? You want to buy all-time highs?

For what? You want to take your parents out of their stocks at all-time highs? Why is that good? So whenever I meet somebody who's my age or younger, who's cheering for the market to go up, I don't understand the logic. If you're in your 20s, 30s, 40s, you are a forced investor. For the next three to five decades. You have no choice. Every time you get a paycheck, part of that paycheck is going into your 401k. What are you doing with that money when it goes there? You're buying stocks.

Why do you want to pay all-time highs? It's absurd. The best case scenario for someone in their 30s is that we have a lost decade for stocks and they go nowhere for the next 10 years. Why? Because you're buying. You're buying. You're not selling. Why do you want the prices up? You want the prices down. You know when you want them up? When you're 70 and you're taking required minimum distributions from your retirement accounts, forced seller. That's when you want the bull market. So it's not that bull markets are good or bad. It's just think about who you are, where you are in life, and what you should be rooting for.

Volatility is your friend. Lower prices are your friend. That's what you should be rooting for if you're a forced buyer. And I wager 90% of the people listening to this right now are. It's a really good perspective. I was at a dinner last night, did a little chat about investing and everybody says, are we in a recession? It's like the number one question

I get asked out in the wild. What do you think? And like, does it really technically matter? The debate of if we're gonna have a recession or if we're gonna skip past it, like you're always eventually gonna have one. So it's almost a moot point. The question is more on the timing or is it happening now? I'm in the camp that we're having rolling recessions in different segments of the economy. I think we had a technology recession in 2022. You had valuations correct. You had venture

funding dry up. You had all these crypto things go out of business. You had trillions of dollars in market cap evaporate. That was a Silicon Valley based recession. And I know you have a lot of friends there, so I'm sure you would agree. My friends who work in Silicon Valley and Silicon Alley, if you asked them last year in a recession, they said, fuck yes, this is horrible. This is the worst thing I've seen since 2001. Like that is what they were living through. The housing market probably should have had a recession given how much mortgage rates went up, but it didn't because there's not enough supply. Because like the traditional GDP being down for a couple quarters is not really like how it manifests and it matters. There was a recession in Texas and Oklahoma in 2016 because of oil prices.

Not a lot of people understand that. But like if you lived in those states, you were living through a recession. Oil went from 80 to 20. And huge swaths of the economies in those states are directly affected by oil and natural gas prices. are directly affected by oil and natural gas prices. So I think the rolling recession is probably the best theory as to what's going on. But again, remember, COVID screwed up everything. Normally, we would be in a recession, but there was so much excess money shot out of a cannon directly into people's bank accounts. And there was such a sharp decrease

in the available labor pool. Don't forget a million people died. Now, not all of those people would be in the labor force looking for a job, right? But a lot of them would have been. So we just had this really bizarre reset in the economy. And so maybe traditional measures of are we in a recession, like two consecutive quarters of GDP growth, just are not applicable to the environment we're in. So the rolling recession call feels like it's the right one, but it's so muddy that there's plenty of room for disagreement. But if you're telling young people that a good hope would be that the stock market would be in the shitter or there would be like a lost decade, are you rooting for a recession?

No, because in a recession, the likelihood of you losing your job goes up. So I wouldn't go that extreme like root for chaos. I would just say like, chaos is inevitable. It's part of the system. It comes and goes. It's not bad when it happens if you're a buyer of assets. So it looks like we have a new debt agreement, Mazel Tov, signed. How do you think that agreement in Washington, fiscal policy vibes, is going to impact short-term bond yields? I'll be honest. I don't give a shit about it at all. I paid no attention to the whole thing. It's politics. It's not really economics. And I paid a lot of attention in 2011. It was a waste of time. I skipped this one. Cool. Good talk. I sat this one out.

I watched Succession instead. Hold on to your wallets. Money Rehab will be right back. I love hosting on Airbnb. It's a great way to bring in some extra cash, but I totally get it that it might sound overwhelming to start or even too complicated. If say you want to put your summer home in Maine on Airbnb, but you live full time in San Francisco and you can't go to Maine every time you need to change sheets for your guests or something like that. If thoughts like these have been holding you back, I have great news for you. Airbnb has launched a co-host network, which is a network of high-quality local co-hosts with Airbnb experience that can take care of your home and your guests. Co-hosts can do what you don't have time for, like managing your reservations,

messaging your guests, giving support at the property, or even create your listing for you. I always want to line up a reservation for my house when I'm traveling for work, but sometimes I just don't get around to it because getting ready to travel always feels like a scramble, so I don't end up making time to make my house look guest-friendly. I guess that's the best way to put it. But I'm matching with a co-host, so I can still make that extra cash while also making it easy on myself. Find a co-host at Airbnb.com slash host. And now for some more money rehab. Are there any other investments people should be worried about during these volatile, you know, chaotic times? But they're all volatile and chaotic.

So these in particular. Yeah, it's never going to be the right time to invest. And by the way, the actual right time to invest will be when things are the scariest. And that's how it works. The market basically frustrates the maximum amount of people at all times. And prices rarely react the way you think they would to specific events. I can give you a million examples. Let's take the last debt ceiling. In 2011, we had a technical default.

For the first time ever, the US Treasury went through the debt ceiling and Standard & Poor's, which is a big ratings agency that rates the creditworthiness of borrowers, cut their rating on the US Treasury from AAA status, first time ever. And so what do you think happened to the price of bonds? The 30-year Treasury went up 16% over the next two months. Makes no fucking sense. So if I told you definitively in April or May of 2011, there's going to be a default and S&P is going to cut their rating on the Treasury, you'd guess that bonds would fall. And it's the exact opposite. Well, yeah, more risk, more reward. So that makes sense that bond yields would go up if

the country's credit rating went down. That explains higher yields. That also explains why bond yields have gone down since the debt agreement was reached, right? Less risk of the US defaulting. The reaction in risk assets is rarely what the crowd expects. So should we worry? Is there a right time to invest? Should I wait for this? Should I wait for that? I think no. I think focus on longer term time horizons. And God forbid, you buy a stock and the next day a bear market starts. It's not going to be the worst thing that's ever happened to you. Well, maybe that's also why AI plays into this really well because it takes emotion out of investing. I mean, people get very emotional. There's so many feelings when markets go down and it's hard to buy even though you know that's the right thing to do.

Yeah. Most people can open an account with Fidelity, Charles Schwab, Betterment, Wealthfront. I have a robo-advisor that we started called Liftoff. You can put as little money as you want in. You can connect your bank account so that it automatically adds to your account and just leave it on set and forget and let the algorithm automatically add your money to the market over long periods of time. Sometimes you'll buy high. Sometimes you'll buy low. Don't pay any attention to that. If you do that, you're going to win if you believe that American capitalism is the best system in the world and is investable. If you don't believe that, there's nothing I can

tell you that can help you. So the premise that you have to start with is that things in the future will be better than they are today and there'll be more profits and more revenue and more growth in the future than there is right now if you start with that premise and you can automate your decision making so that you're not waking up every day and saying am i bullish am i bearish you're definitely going to be in a better position than somebody that's like going by their emotions or trying to bet on one headline or another. So of course, we always recommend exactly what you're talking about, Nicole. The less decisions you force yourself to make, the better off you are. And the apocalypse has never come.

I mean, it's not a great bet because even if it happens, who are you going to collect from? Zombies. Right. So that's the one way bet that never pays off until you can't be paid off. All right. We end each episode with a tip listeners can take straight to the bank. What's one piece of money advice that you would just share with listeners today that's actionable? I know you have so much. Just one. Read more books than you read articles. Read more articles than you read tweets. Oh. And read more tweets than you watch TikToks, specifically

about investing. There is zero knowledge to be gained by anything on TikTok. It's not a diss. It's not generational. It's just the format lends itself to sensationalism more so than any other format. And as a result, it's garbage. Shout out to all my TikTok fans and followers. I don't think my content there is particularly helpful either. Tweets are trash also. But there are some really smart people who do tweet. I would just really minimize how much you're influenced by that stuff. Articles are probably better than blog posts for the most part, but some bloggers are really good. I happen to work with some of the best financial bloggers in the world. But again, books are better because what you're getting from an

article is a news item about something that's just happened. What you're getting from a tweet is something that the only reason you're seeing that tweet is because it's somehow inflammatory and the algorithm is promoting it because people are reacting to it. What you're getting from TikTok is usually somebody promoting, you know, whatever bullshit they're selling. Books are different. Books are giving you context that will not necessarily just help you right now in the moment, but will instill a way of thinking in you and will, I think, give you a more historical context for the things that you're seeing happen today. So that would be the hierarchy of financial media. And then where do podcasts fit in? Because I'm a podcaster, so are you.

I hope that we're closer to the side of the book. I think we are. We're very verbose. There's a lot of information on a typical podcast. We could talk about things that aren't necessarily happening in the moment because it's not a broadcast lot of information on a typical podcast. We could talk about things that aren't necessarily happening in the moment because it's not a broadcast, it's on a delay. So I think podcasts are really high quality as well and a great way to get information.

What's your favorite financial book? What's your favorite financial blogger, tweeter? All right. So my favorite financial book, you can't buy it on Amazon. You have to buy it from his website. But there's a gentleman named Nick Murray, who is the advisor to financial advisors, basically. He's like our spiritual leader and our coach. And he wrote a book that changed my life when I read it in 2010. It's called Simple Wealth, Inevitable Wealth. It's my Bible.

It's the book I open up at least once every couple of years. It's the book that I hand to young people that I meet who asked me what they should start their career off with. So for me, that is the best book about investing ever written. And it's been updated many times through the years. You could buy that at nickmurray.com. And tweeter and blogger and podcast. What's your favorite? Money rehab. And tweeter and blogger and podcast. What's your favorite? Money rehab. Duh.

Well, I've been off Twitter. I think it's three years. Yeah, Memorial Day is three full years. I don't know what goes on. Full time. Yeah. Okay. That site kind of died like seven years ago. And then I kind of overstayed my welcome there. And I just left and I don't really miss it. I think the two best financial writers of our generation, Morgan Housel, who writes a blog at Collab Fund, and he wrote a book two years ago called The Psychology of Money that is now one of the top 10 all-time bestselling

investing books ever. He sold 3 million copies all over the world, which nobody does that. So Morgan Housel is just this incredible storyteller. And when you're reading his books, you don't feel like you're reading about financing or investing. You feel like you're reading about life because you really are. And he's amazing. Shout out to Morgan. My colleague, Ben Carlson, who works at my firm, he writes a blog called The Wealth of Common Sense. He publishes two or three pieces a week. The quality, the ratio of signal to noise in Ben's blog is probably the highest on the whole financial media, makes really important points really succinctly. A Wealth of Common Sense is the name of it, and it is common sense stuff that

he's talking about. And he speaks in a way that you can understand. And he shows you a lot of tables and charts to illustrate the points he's making. And I never miss anything that Ben writes. So those would be my two go-tos. And follow our show. Our podcast is called The Compound and Friends. And we have really smart, funny people who love markets and investing as much as I do. So that would be a good source of information, too. If you're not sick of me already. Never. OK.

I could never get sick of you. Money Rehab is a production of Money News Network. I'm your host, Nicole Lappin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some money rehab? And let's be honest, we all do. So email us your money questions, moneyrehab at moneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me. And follow us on Instagram at moneynews and TikTok

at moneynewsnetwork for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.