Motley Fool Hidden Gems Investing - Should Investors Prepare for a Recession?

Episode Date: March 11, 2025

And what’s that mean for long-term stock investors? (00:21) Asit Sharma and Ricky Mulvey discuss: - The tech stock sell-off. - If the investing thesis for Tesla has fundamentally changed. - No more free bags on Southwest Airlines (for most fliers). Then, (19:18) Alison Southwick and Robert Brokamp discuss Social Security’s funding challenges and how investors should prepare. Companies/tickers discussed: QQQ, TSLA, LUV Build your Range Rover Sport at www.landroverusa.com Host: Ricky Mulvey Guests: Asit Sharma, Alison Southwick, Robert Brokamp Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl, Heather Horton Learn more about your ad choices. Visit megaphone.fm/adchoices

The bears are roaring. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined for the second time today, but you didn't hear it the first time. It's Austin Sharma. Austin, thanks for being here again. Ricky, thanks for letting me come back after that dry run that wasn't so great. Yesterday was a tough one for tech investors. The NASDAQ losing 4%. It was its worst day since 2022, wiping out $1 trillion of value. Fears of a recession are rising. We could hear it this morning even from Delta Airlines cutting their top line forecast from 8% to 4%. Fewer people are flying or the pricing power isn't quite what it was. You also got a trade war heating up

off again, on again. I don't even know where we are as we record this right now. And I'm hearing a lot of chatter from investors who are prepping for a recession. The market is overvalued. Things are already tanking a little bit. And they're gearing up. They want to sell. Should investors prepare for a recession? And what's it even mean to do so if you're buying and holding companies for long periods of time? Ricky, I think investors should think about a recession. A recession is when economic growth takes a U-turn. So theoretically, the economy is shrinking rather than growing, but markets tend to look forward. So I've seen recessions in my investing career, my long and not so illustrious investing career, in which the

recession sort of came and went, but investors were ahead of the curve before they came and they got out of that mindset well before the actual GDP figures started picking up. So part of your question really signals my answer. As long-term investors, we should be aware that this could be an eventuality, but I don't think we should make drastic changes. Maybe make some changes to portfolios around the margins, raise some cash if you're that bent, but more or less, keep the course. Stay steady. I'll bounce this take off you. I saw this in Bloomberg. This was from Michael Bailey, the director of research at Fulton Brickfield Broneman. He said, quote, sell your winners. Embrace the bear case and duck and cover. This is strong language. And a trade war,

if it goes for a long time, Asit, could be economically disastrous. It's hard for us to see the future, Ricky. I'll note that that quote that you just read sounds more like warfare than investing. We do get caught up in what's right in front of us. And yeah, the market looks scary right now. Geopolitics looks scary. But you know, in my lifetime, on this data set that we've got going back to like the 1870s, this is U.S. market performance going back well over 150 years. There have only been two periods, and they caught everyone by surprise, in which the market went up for eight straight years or more. Both of those happened in my short lifetime. So when we think about this data set, you look at the consecutive

down years. If you start imagining, well, if all of this comes to pass, can the market just keep going down. It can. But the preponderance of years in which the market's gone down more than two years in a row, very small in comparison to the uptrends. And this is tied to our ability just not to be able to see what's coming right after the Great Recession, which is one of these periods I'm talking about. It's not the last thing anyone thought that the market would go up year after year after year for so many years beyond that crisis. And so, yeah, the eventualities and the event horizon show scary things, but there are also unseens that could create value in the economy after a short period of even extreme distress. Markets can also focus on

what businesses are doing, and that tends to push towards appreciation. So, you have to be prepared for anything, but I wouldn't let the present scare you totally out of the water. So one thing that I'm counterintuitively excited about is that fear is returning to the market. When people start to panic, these can present wonderful opportunities for long-term buy and hold investors. Are you looking for opportunities? Where are you looking, if so? I am looking at opportunities, and I'm looking at the same companies that folks who know me have criticized me for liking because they were so expensive. So some of these are very great innovators in their respective fields. Some are AI-oriented, some are in manufacturing.

But we've had, remember, a run of two years in the market before 2025 in which the cumulative return was about 51%. So the market gained 51% in the space of two years. And so, sure, we had excitement pushing up some values as the herd came into the markets, capital flowed in, beyond what may be reasonable based on the expected future cash flows of these companies. The reverse is true, too. When there's fear, what you get is an acceleration of capital outflows, and that tends to dislocate prices from reality.

When there's selling pressure, then prices have to match that urge to get out. And yeah, I'm looking for those dislocations. Some companies will come back to fair value, but there are others that are just going to get caught up. If we do have continued distress in the market, just get caught up in this maelstrom of, I want out. Sort of the duck and cover quote you read me before. Let's move on to one company that's having a rough stretch. We'll see if your shoulders hunch up as you're listening to the show. And that's Tesla. Yesterday, its worst day since September 2020, losing 15% of its value in a single trading session.

This is the most polarizing company we can possibly talk about on the show. During an interview with Fox Business, CEO of Tesla, among other things, Elon Musk said he is running his businesses, quote, with great difficulty. I want to talk about this company with you because I think we are in a fundamental thesis changing event with Tesla as Elon Musk has grown more political. Now, you may be on one side of the spectrum that says, I'm grateful for the efficiency that Elon Musk is bringing to the federal government, the spotlight that he is shining on various areas. You may be on the other side saying that this man is a threat to democracy and that he is doing terrible things

responsible for the layoffs of thousands of federal workers. Or you might be in the middle where you like some things, you don't like others. But even if you're in the middle, I think, maybe you don't want to drive a Tesla because that's become an increasingly political statement, the car that you drive if you're inside of a Tesla. And I think this one's going to be a tough one to shake. I think this one is unlike a lot of other sort of brand pivots. So all of that set up, I think we're in a thesis-changing event for Tesla. What say you? We could be, Ricky. And before I get into why, I will state there's still a bull case there out on Tesla. There are many people who believe that the investments in AI, the investments in things

like humanoid robots are eventually going to bear fruit and this company can swell up again. But we have to also look at it, you know, as we have for the past few years as an automobile manufacturer, that is still the core of the business case. And that is getting affected, whatever side of that divide you're on in some ways by elon musk's desire to opine on politics so there's a direct correlation there between uh the expression of opinion and as you point out sort of the brand being a lightning rod for owners we can look at the sales figures in europe which are plunging and why i'm not saying anything political here is because it is flying in the face of a strategy that Tesla has employed for the last four to five years, which is a cost-volume

profit proposition. So, this is something from management accounting where you keep investing in fixed costs, but at the same time, you're trying to reduce those fixed costs. And more importantly, you're trying to bring down the variable costs of what you produce. Now, this kind of planning can work beautifully, and it worked beautifully for Tesla because they took the cash flow from their rising volume and they invested it in production plants, which lowered the cost on the fixed side and also helped with the variable costs. But one thing planners of this type of analysis always assume is that the CEO is not going to go talk down the price of the product in the marketplace. And that affects everything. It affects Tesla's ability

to keep investing in production, which is what they need to bring their costs down to compete with Chinese electric vehicles, which are proving to be ingeniously made, subsidized by the government in some fashion, and presenting a very stiff challenge in the marketplace. So when we look at this company for what it is today, and I'm not saying that it doesn't have this burgeoning electricity business, power business, and it doesn't have other opportunities. But when we look at the core of it today, I think that the company is doing two things that are indirect opposition to each other, lowering the price points by will, purposefully, for whatever reason, and therefore really throwing a wrench into this whole CBP type of strategy. And I guess,

Ricky, we should call this potential, at least a thesis that's getting brittle. I don't know if we can say it's a broken thesis, but it seems to me it's getting brittle. Well, some of this has been going on for a long time. Before Musk even got involved with the Trump administration, he had wanted to bring down the cost of EVs. The promise of a $25,000 Tesla has been around for quite some time. But I continue to think this is a company that needs to sell cars despite the other businesses. And you look at one example being Germany, where sales are down 76% in February compared to where it was a year ago. That's the largest European market. Just one example. Sales are also down in China and Australia. And I'm not a shareholder, but I

wonder what you would say to those long-term shareholders, maybe even some Motley Fool members who are saying, I hear you saying the thesis is getting brittle. Maybe this brand has been permanently affected by Musk. Tesla doesn't necessarily need Musk to run its day-to-day operations he's always had other projects taking on twitter uh just what was it a year ago but now i think that the brand has fundamentally shifted and i want to get out what would you say to a motley fool member who's thinking along those lines i'd say make a rational decision based on your position size in tesla and what you think the eventual outcomes will be if you are a believer in the bull case that despite all this near-term disruption, Tesla will eventually come to market

with ingenious goods that combine physical modalities with a lot of AI, and they're going to sell a lot of those, then it may make sense for you to hang on. If you're investing in this primarily as a car company, I would say there's some warning signs to look at, one of those being that Elon Musk has really shifted in how he wants to push the levers of margin. So it used to be that Elon would sleep on the plant floor to really try to get production going and set an example for engineers. But he's shifted to more of a policy-based, almost lobbying or working with the levers of government to try to get on the margins, favorable outcomes for Tesla. And that may be, there are any number of things we can read about, whether it's the so-called

potential contracts to sell a lot of Cybertrucks to the U.S. government, or being able to influence tariff decisions, which could be beneficial to Tesla. It's a little reminiscent of Boeing, the old Boeing, which moved its headquarters right where the planes were being manufactured to Washington to lobby. It has a little bit of that flavor. So if you're looking at this as a vehicle manufacturer, I would take a look at all these pieces of the thesis that the competition is ramping up from the Chinese, the willful lowering of the price points, because you can't move vehicles without promotional activity if you're talking down the brand. And this is why you're pointing to the numbers out of Germany, where Elon Musk, whether you believe it's right

or not, has aligned with the far right. And that's really caused a maelstrom there. So I would just try to be rational about it and see what I believe more is the outcome and then make a hold or sell or buy more decision. And Tesla, I'm seeing this more from, this is more on Reddit. This is more the internet take. And Tesla has been on and off the most shorted stock on the market. In the short term, the shorts on Tesla have been correct. There is a trail of burned shorts previously for Tesla. But now, you always want to be careful saying this time is different, but this time is kind of different with what Musk is doing. What would you say to someone who's thinking, a speculator who's thinking, the brand is poisoned,

the stock is dropping, but it's still overvalued. I want to take a short position on this company because I think the stock is going to continue to plummet. Do they have a good idea? Is shorting ever a good idea for retail investors? Sometimes shorting is good for those who just have an irresistible need to try it out. For me, borrowing money, which in a way is what you're doing, you're actually borrowing stock when you short. Let's not get into that detail. But using leverage to invest either on a long or short position, it's not a great way to make money over the long term. I would be careful and advise anyone trying to short any company to keep that position size small. Personally, I'm not good at it. I've had this this time as different

thinking, and I still have the skin grafts on my rear end where I got burned to prove it. That didn't work out for me. But if you have to scratch the itch, as David Gardner says, keep those position sizes small for any shorting exercise. And this one is, maybe this time is different, Ricky, but boy, Tesla's burned the shorts, as you point out, so many times. All right. We can take a deep breath. We can bring our shoulders to a more neutral posture. We can worry less about bringing up Tesla. Maybe one company I'm not bringing up at the family dinner table when you go get dinner with your extended family. Let's talk Southwest because starting on May 28th, now Southwest customers are going to have to pay to check bags unless you are in their A-list, top tier, business class, that kind of thing. even if you're a credit card holder they'll only give you one free bag not two free bags was a key reason many customers flew on southwest this is different from assigned seating because this is something they gave to you for free but now asset you have southwest coo andrew watterson telling

cnbc quote what's changed is that we've come to realize that we need more revenue to cover our costs, end quote. Maybe there's a little Elliott management there as well. What do you think of that explanation? What do you think of that move? Maybe it was inevitable. Maybe that writing was on the wall, Ricky. Southwest's unit costs have been sort of going up in excess of how much it can raise its prices. So, cost exceeding revenue on a unit basis. It's slowed its capacity expansion plans from a few years ago. So, it's expanding its fleet at a slower rate. It's adjusting to changes in the larger economy. I mean, it was the premier short haul, low cost carrier, but the short haul business is troubled. Flights are longer haul now, and they're really going back to

the legacy networks, being able to have these huge hubs and service those flights. So a carrier like Southwest sort of has to read the writing on the wall. And they've talked about this in conference calls and in their filings that, look, the way we monetized our business in the past isn't really suited for today's world. That's why we're charging now for premium seats. We're going to have more affinity-type revenue. This one is interesting, though, as you point out, because isn't this what Southwest is? I mean, you're going to make me pay to schlep my bags onto your airlines? I mean, this brought me to the door. So, I think they're going to lose some customers. But the question is, a company like this has probably done the math and understands they have to make

the tough decision to change and go where the wind is blowing. Not to make a bad pun, because we are talking about an airline. And so, they probably are already, you know, spreadsheeted out in industry parlance. They know exactly how many customers they'll lose. And if it sinks the brand a little bit in the near term or changes the brand, I guess they're okay with it. Yeah, but, you know, cynically, one can say that, you know, all the other airlines charge for bags. So, it's not like you're going to go from Southwest to an airline where they give you free bags yeah there's loyalty stuff going on where you can get a free bag but you know how important is it though that southwest seems to be making a long-held brand promise

it may not be all that important in the end result because southwest is still set up where it has those shorter flights as the lowest cost carrier in so many cases we won't really see that change. Even when they start charging for bags, they'll still feel a little less expensive in many markets. It may not be the value proposition that it once was. But I'll tell you, Ricky, I was sitting sweating in the finance team of a company in manufacturing that worked for many years ago, talking to an insurance agent. We were trying to close out some insurance for the company. I was like, well, if we move this here, what about this? If we move this part here? And he told me, you know, look, insurance is going to get you either way. Think health insurance,

whether it's a high deductible plan, low deductible plan, any which way you choose, at the end of the day, insurance is going to get us money. And I think flight is like that now in this day and age, like the airlines are going to get their money one way or another. So this is really just changing how Southwest gets its money from us. The days of these super low cost carriers and so much differentiation in the marketplace are sort of long gone after the pandemic. So it's a brave new world and Southwest has to find its way in that world. We'll leave it there. Appreciate being here. Austin Sharma, thank you for your time and your insight. Ricky, thanks a lot for having me. This was a lot of fun.

Up next, Allison Southwick and Robert Brokamp talk about the future of social security and why savers should hope for the best, but plan for the worst. This year marks the 90th anniversary of the passage of the Social Security Act. The program has become the foundation of retirement in America, providing 31% of income for people over the age of 65. For 39% of men and 44% of women over 65, social security provides the majority of their income. Now the program is funded primarily by taxes assessed on working Americans. Employees pay 6.2% of their earned income into social security and employers pay another 6.2%. Self-employed workers pay the entire 12.4%.

Yet despite more than $1 trillion going into the program each year, social security is in trouble. Yeah, unfortunately, payroll taxes aren't enough to cover the payout. So this shortfall has been anticipated for decades, which is why Congress and then President Reagan passed the Social Security Reform Act of 1983. The bill did a few things. It gradually increased the full retirement age from 65 to 67, as well as increased the payroll tax rate. It also made Social Security benefits taxable, at least partially for the first time. And at that time, it only affected households that were maybe in the top 10% of income earners. However, because the Social Security tax brackets haven't been adjusted for inflation, more than half of current recipients

pay taxes on a portion of their benefits. All the extra taxes that have been collected go into a trust fund, and Social Security has been able to honor its obligations. Unfortunately, though, the trust fund is in trouble. Yeah. So, according to the latest report from the Social Security trustees, published last May, the trust fund will run dry in 2033. And at that point, the program will only be able to cover about 79% of benefits. However, even that may be optimistic because back in January, Congress and then President Biden passed the Social Security Fairness Act, which boosted benefits for about 3 million government workers who had been penalized due to a couple of things.

One was named the windfall elimination provision. The other was the government pension offset. So these extra benefits will exhaust the trust fund six months sooner, according to the Congressional Budget Office. And then there's President Trump's campaign promise to eliminate taxes on Social Security benefits. Because those taxes go right back into the system and are used to pay benefits, eliminating those taxes would move up the exhaustion date of the trust fund by two years, according to the Penn Wharton budget model. Some recent developments may exhaust the trust fund even sooner, but it was in trouble already, largely thanks to a declining worker to retiree ratio, a trend that has been getting worse for decades. In 1950, there were 16 workers

paying into the system for each person receiving benefits. In 1960, just 10 years later, there were five workers per beneficiary. Today, the ratio is around three to one. This is the result of people living longer, baby boomers getting older, and younger generations having fewer kids. So those are the challenges, but what can be done to fix the program? If and when Social Security's underfunding conundrum gets solved, it'll likely be a combination of things like higher payroll taxes, higher full retirement ages for future retirees, and adjustments to the benefits formula that will result in lower payouts for some or maybe all beneficiaries. Last September, the Social Security Administration published a report that

analyzed more than 100 reform ideas and how much they would reduce the program shortfall. We're obviously not going to cover all of them, but here are several that have been proposed. Let's start with taxes going into the system. Right now, there's a cap on how much income is subjected to Social Security taxes. It gets adjusted every year, and in 2025, it's $176,100. If that were eliminated and all wage income was subject to that 12.4% tax, then 53% of the shortfall would be eliminated. But that assumes these higher income earners would get a bigger Social Security benefit in exchange for paying higher taxes. If they didn't get a bigger benefit and they just paid more taxes, then 73% of the Social Security shortfall would be eliminated.

Now, what if the payroll tax rate, which is currently 12.4%, went up? Well, if it were increased by 0.1 percentage point each year from 2027 to 2032 until the rate reaches 13%, that would eliminate 16% of the shortfall. So, those are two ideas related to the taxes. What about adjusting the benefit amounts? Well, here's one idea. Currently, Social Security is based on your 35 highest earning years? What if instead it was based on your 40 highest earning years, which would likely result in more lower earning years being factored into the benefit, which would likely result in a lower benefit. Phasing this in between now and 2033 would eliminate 13% of the shortfall. Another adjustment to benefits would be reducing how much the annual

payouts get increased each year for inflation. So if the cost of living adjustment were based on a different measure of inflation than what it's currently based on, specifically if they use the chained version of the Consumer Price Index for wage and salary workers. That would reduce the annual COLA by about 0.3 percentage points, and this would eliminate 18% of the shortfall. Finally, let's look at a couple of age-related adjustments. After all, one of the biggest reasons that Social Security is underfunded is because we're living a lot longer than we did in 1935 when the program was created, and even longer than in 1983, which was the last time the full retirement age was increased. So maybe the age at which we can claim should be higher.

So if the full normal retirement age or the full retirement age, which is currently 67 for most people, if that were increased two months per year until it reaches 68 in the year 2030, 15% of the shortfall would be eliminated. And the final thing to consider here, what if you think the age should be even higher and that the age should go up a little bit over time based on the assumption that we're going to just continue to live longer and longer? Well, if you increase the normal retirement age by two months per year until it reaches the age of 69 in the year of 2036, and then it continues to go up one month every two years, then 38% of the shortfall is eliminated.

So, those are just six of the many, many ways that the program could be adjusted, and you can see how it'll take probably a combination of a few things to fully fund the program, which will happen. I wish I knew. What I do know is, no one in Washington is currently making this a priority, which means that if and when the problems are fixed, the solutions are going to need to be more drastic because the longer we wait, the worse the problem gets. All right, bro. So let's wrap things up with explaining how can you factor all this uncertainty into your retirement plan? Well, social security

is eventually going to need to be fixed by our elected officials. And I have no ability to predict what those people are going to do. So I'll just tell you how I, as a worker in his mid-50s, incorporate social security into my retirement plan. I take the social security trustees at their word. And when I use a retirement calculator, I assume that my wife and I will only get about 75% of what is currently projected. And I believe that's probably the prudent assumption for anyone who's in their fifties or younger. I think that those who are closer to or in retirement will likely be spared from benefit reductions. That would be the right and politically expedient thing to do, but nothing's guaranteed. Here's what I do know. You will still get likely most

of your projected benefits and maximizing those benefits will still be a significant factor in your retirement, which generally comes down to when you claim benefits, since the longer you wait, the bigger the payout. So I suggest that people use a tool, or if you determine the right claiming strategies for them, some tools to consider. One is OpenSocialSecurity.com, a free tool created by CPA and author Mike Piper, great guy. T. Rowe Price also has a free tool, just do an online search for the T. Rowe Price Social Security Optimizer. And then there's Maximize Social Security, which costs $49, but I think it's worth the money. As you use the tools, adjust the inputs for a reduction in benefits that you believe is appropriate for your situation.

The bottom line for me is when it comes to social security, I think it makes sense to heed the old saying, hope for the best, plan for the worst. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content It follows Motley Fool editorial standards and are not approved by advertisers. Motley Fool only picks products that it would personally recommend to friends like you. I'm Ricky Mulvey. Thanks for listening. We'll be back.