economic update: Special Update March 24, 2020
I'm just going to take a couple of minutes to update you on some things that are of interest and concerning to me and then talk about where we need to go through from here.
So first of all, I hope that this video finds your family healthy, happy and enjoying each other during your isolation time.
I do want to say thank you.
I had a client's daughters make me bracelet and send it in (shows bracelet).
So I really appreciate that was very kind
So to lay down the situation that we're at, and what I'm thinking about is that the stock market is currently down about 30% year to date, down 32% from its recent all-time high.
Interestingly enough, one thing that has occurred is the safety of bonds has been disrupted.
There's lack of liquidity into the market, and it's driving the prices down as people flood out of the market.
Some money is going into money markets from stocks and bonds.
And basically, you can see it in this graph here real clearly. (shows graph)
This is a weekly bond flowchart coming from financial times.
And you can see over $100 billion where money got pulled out of bonds, and people cant buy the bonds fast enough it.
So what's happening there is that people are selling a dollar's worth of bonds for 90% or 85% and it's driving prices down.
We're not selling any our bond funds, although, as you would know, we have very limited exposure to bonds in the first place, but we need a strong bond market before we can go anywhere.
And so, you know, one of the things that I am worried about is the amount of media that everybody is taking in everybody’s trying to get your ears to their channel.
And they're reaching out to some folks that really aren't experts in these type of matters.
And they're getting quoted, and it's just not helping the situation.
And so this quote is from NPR Andrew Yang, who is a former no candidate for President.
So, he's basically talking about, the question was, making direct payments to individuals, and we do know that that's, that's part of the bill that's in front of Congress, that they're working on, is, you know, are they going to write checks to individuals?
No, Republicans have enthusiastically come out to Reno Cash directly to Americans, which is obvious.
And frankly, the only move that we can make to keep our economy from collapsing into a great recession are great depression That's bullshit.
I mean, that, just far, so far, from what is actually going to happen here, Yes, our economy is severely fractured and, you know, some gigantic shifts but we're not going into a new, great depression that that's off the table.
Yes, I do believe that, we're gonna go into recession.
I think it's going to be, largely, this recession is going to be borne by on the backs of the workers that are being laid off by the, by the thousands of, you know, on an everyday basis.
But, it looks like a lot of the high paying jobs are staying in place, at this point.
We will talk about that more in a minute.
So, just be, you know, be conscious of what you're, what you're listening to.
What is behind this quote?
What would he even be putting forth in order to see such a thing?
So, I would listen to the analysts that look a little awkward on TV and a little uncomfortable with being there.
And that clearly, data driven, those are the guys that I follow, and I recommend that you follow, too.
So, some of the positives that are going on, this point is that China and South Korea are reporting material, the smaller amount of new cases.
So they're getting to the other side and Normalcy is coming back to their world.
And I'm not saying that has happened today, but they're getting closer.
There is an end, in every day that we go through is another day that we're getting closer to that, so that the tunnel is ending, and we're getting closer to it every day.
In Colorado, the Colorado, a firm, that has built 100,000 rapid tests and those are getting shipped out and deployed their approved by the FDA and making progress there.
People are largely responding to quarantine.
Order is really appreciate everybody's efforts in that We got to flatten the curve.
You know, the big piece, I'm going to say this a couple times already.
This is a temporary situation. Let's not take long term drastic measures to solve a short-term problem.
Hey, we need to be very, very vigilant.
We gotta get this thing stopped in its tracks.
But let's not stress our future in order to do that.
So, prior to the virus, we had low unemployment with low interest rates, with stringent approval for mortgages, you know, so the crisis has to occur.
This is not a bad time to put the shock into the economy.
I do think it's going to recover fairly quickly.
As we work our way through this recession, you know, the big pieces that credit is available.
Banks are going to be there for people or refinancing their houses all over the place.
I do have a client who's closing on a new rental property tomorrow's really happy that that's happening.
The Fed is going out and purchasing an unlimited amount of bonds to ensure market liquidity.
So, that's a big deal.
Congress is kind of duking it out a little bit, trying to get it sorted out.
But they're looking to do a $2 billion bill and get to, I'm sorry, $2000 billion, to get $2000 billion into the economy.
You know, that's a, that's a pretty big effort there.
And then we're gonna feel that, another thing that we've got going for us is solid housing equity.
People have equity in their homes, we're not upside down.
We're not able to make payments because we actually didn't have a job.
We're going to be OK with that housing equity.
Largely high income jobs remain in place.
Certainly, the service sector is absolutely just decimate it.
We're not hiding from that fact, whatsoever.
I would expect on Thursday when new.
When new jobless claims come in, that you might see a figure of two million in there, I think the only thing that stops them from being two million is that the system crashes and not everybody can get in to actually report their unemployment.
So expect a staggering number on Thursday.
And don't be shocked by it.
It's where we're at and what has occurred.
So, you know, on the other side of this, there will be some pent up demand.
Certainly, you know, because here's the Welch household, and probably your household is spending less than in March.
Then we generally do civic travel month for, everybody's spring break got canceled, so you're gonna have some money in your checking account.
And whether it be a month or two, someday this will end and we'll be back out and hitting the restaurant's again.
Getting these waiters and waitresses and all the service sector back online.
So, and then, don't forget that there is a, there is an economic bias towards growth.
We will carry this economy forward is small business, that is the backbone of this country, and it will continue to be so.
And nobody works harder than us.
I do want to say take a take a quick moment to say thanks to the staff at Welch Financial planning, an incredible amount of flexibility, understanding, phone calls have been coming in.
We've had multiple closings of clients buy real estate and obviously, you know, superior, fairly heavy traits going on And we've handled it very, very well and I'm excited that we've been stress test and we're passing that, passing the exam, So, you know, with that, there are some action steps that you need to take.
You gotta hold steady, Don't take a 30% down and turn it into a 30% loss, OK?
This is, this is where people break the rules of investing and start getting out of the market, at the bottom.
Maybe we're not at the bottom, but, you know, hey, if we're not, it's, it's gotta be somewhere there soon.
So let's hang tight.
You know, every bear market, which is what we have now, has come back to a brand new all-time high.
So you're gonna need money 10, 15, 20 years from now, this is a good spot to have.
It will continue to growth and keep you on your retirement goals.
So be part of the solution.
In your individual actions, joining others, becoming a team we can get this thing done.
I am part of a team. Rubicon, you might have seen some ads on that, but we're currently deploying to Greely team has headed up there to help.
And then when you've got yourself buckled in, reach out and try and help somebody else because there will be a day that you won't be able to carry your own load and you're gonna need someone to reach out and help a hand.
Consolidate your debt.
I would look at refinancing your mortgage for a lot of folks.
You know, mortgage rates were extremely low, two weeks ago, if you missed that window may come up, again as the feds buying NPS or mortgage backed securities might be another big dip in rates.
Make sure you're in line with your mortgage broker so they can hit the button.
So, those are my comments that I have for today.
And the personally, so, all of us are available for you, and look forward to talking to you.
Have a great day.
Be well, and take care.
Q4 Investment Update October 2019 - Transcribed
Hi, this is Tron Welch with Welch Financial Planning and welcome to our fourth quarter investment update.
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This is a follow-up to our quarterly economic update, which we just did two days ago.
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You'll find that on our website in short order.
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If you want to catch up with that, I do see both of these being two halves of a whole and worthwhile to see both of them to get the entire pictures.
00:26 - 00:34
So I hope to take 15 to 20 minutes go through a couple items and see where we are.
00:34 - 00:57
You know as we sit today the market had another volatile day has it has through most of October trade war, impeachment, a lot of unsettlement on the short-term, creating high volatility, you know, once again short-term news is impacting the market more than it should we are going to spend some time talking about continuing to be long-term over time.
00:57 - 01:02
So with that, where are we're going to look at the market.
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Here's the S&P 500.
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And going back to 1996 we do see some of the big market drop in 2008 that we've seen an increase of three hundred and forty percent during that time, you know the point that I want to make today.
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This is it, if we started from the high point in 2000 and we're able to just take a straight line to where we are today.
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We'd be all pretty excited and happy and we wouldn't be
01:34 - 01:37
Looking at the market so hard and reflecting on everything that happens.
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That's not the way it works to get from point A to point B in the stock market, you’ve got to go through all the drama and with that if you're looking for short-term profits within the market, it doesn't work.
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It doesn't happen.
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It never will and never has so the stock market is for long-term investing only. Don't let this 10-year run make you think that that situation has changed because it has not.
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Question I get fairly often is you know is the market fairly priced too high to low and from this chart.
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We are currently properly priced in the way that we're looking at that is called price versus earnings.
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So when a company makes one dollar of earnings, we are going to pay sixteen point eight two percent.
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Each times that phone company makes $1 in earnings.
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We're going to pay $16 and 82 cents for that.
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Okay, and you can see over time that we're pretty close to the 25 year average of that and we can see you know, the stock market was clearly overvalued during the tech wreck of 2000 and clearly undervalued during the Great Recession of 2008. So, you know PE ratio has been a nice indicator of where the market is and where we are.
03:05 - 03:07
I keep hearing “well the markets gone up for 10 years…
03:07 - 03:11
…It's time for it to go down” and that's just not how it works.
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The market will go down when earnings go down and we just don't see that today and actually earnings for JPMorgan and United Healthcare came out earlier today and both of those are up going Sachs came out and that was down a little bit.
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So as we kick off the earnings season we will see if how the P/E ratios look as of right now.
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They're doing just fine.
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03:42 - 03:46
Here's the PE Ratio again price versus earnings subsequent one year.
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We don't care about one year.
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We don't invest for one year.
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But look at the five-year annualized returns in each dot here represents a five year period in the stock market here.
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We are in the PE Ratio and you know, so the expected returns during that five-year period.
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Is actually fairly narrow relative to you know, when you look at it on a one year basis, that's a pretty big spread but it tightens up quite a bit on a five-year span.
04:17 - 04:23
So again, you know, the long-term is the way to go the correlation here is only 46 percent.
04:23 - 04:31
So this is not the Silver Bullet of stock market returns, but it does help with that.
04:31 - 04:37
So one of the things that I do want to go through and I don't want to rehash our economic presentation from a couple days.
04:37 - 04:57
Ago, but the economic growth that we're experiencing right now since you know, here's the here's the down in the recovery through 2009 the average explore the expansion during the time period has been 2.3 percent which is wonderful, you know, but it is still below our longer-term average of two point seven.
04:58 - 05:00
So the economy year over year.
05:01 - 05:07
So the last 12 months has grown at 2.3 percent again, basically right on the average that we've seen since
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Was an 8 and then quarter-over-quarter is actually two percent which means that the economy is slowing a little bit.
05:15 - 05:15
No surprise there.
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I think we all know that and understand that on that but what we're experiencing economically is really been the same thing that we've experienced since coming out of the Great Recession.
05:27 - 05:57
What is changing a little bit is profits and to me this is really interesting and you know to really understand the impact of it requires some thought and I do look forward to seeing some research papers that kind of delve into this but what's happening here on the left side is the SP 500 announced buy back and that means when a company a company says that they're going to buy back their stock they literally go out.
05:57 - 06:04
To the open market just like you and I do to buy stock and they go buy their own stock.
06:04 - 06:22
Okay, it would seem 2018 a huge spike at the end of the June quarter and then, you know continuing to make the buybacks materially in 2018 single thing with 19 off to another big round of buybacks.
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So what's happening with that is that there's fewer shares out there.
06:27 - 06:27
06:27 - 06:34
Is that each shareholder gets a higher percentage of the profits or another way to look at it.
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We used to cut the pie in four slices.
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Now we're only cutting it in three slices.
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So it's not that the pie has gotten materially bigger because the stock market's up in 2019. So it's not that the companies themselves for the pies have gotten bigger.
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It's more of we're splitting it fewer times which is helping drive up share prices and from the economics that we talked about last time, you know about half the earnings per share growth is due to share buybacks.
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So there's material in it is
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07:11 - 07:16
share prices another thing to look at I'm just going to blow this up a little bit.
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Is it the piece that concerns me is if you look at the green bar here, this is capital expenditures by The Fortune 500 companies.
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And what's concerning to me is that
07:31 - 07:35
There's a drastic drop in spending addresses.
07:35 - 07:47
Probably a little bit too strong, but can you can certainly argue that spending in capital expenditures declining by companies and that's concerning which for a couple reasons one.
07:48 - 08:01
You know, they do have extra cash on hand due to the reduced corporate taxes, but that means that they're not really finding good projects or things that they want to invest in or equipment that they like
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We'll be like wow, we need this equipment is really going to help our process.
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They're not finding those those things to invest in.
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And so instead of doing that.
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They're really going back and buying shares and you know, so that's the process of buying back shares, even though it does increase the stock price.
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It doesn't really benefit the company in terms of using their cash in the best efforts.
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So when they return the cash to the shareholder that
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Means that we just can't find anything interesting to invest in or just going to give it back to you.
08:38 - 09:07
to think yours a little bit moving from domestic market to now the world market the two graphs here and you can even see in Prior years prior time periods between 1997 and really 2009 that they were, you know, the domestic Market in Gray and the international market in purple were pretty highly correlated moving along but then since
09:07 - 09:35
2011 they've gone on two different paths and you can see that our stock market is up three hundred forty percent since then, but the world is only up a hundred and seven percent and that's interesting to me and you can see that in the P/E ratios are PE ratio is 16.8. The PE ratio for the rest of the world is 13.3. And so that means that a valid dollar made in Europe.
09:35 - 09:37
We don't see that.
09:37 - 09:42
As an important as an important of a dollar is one that's made here.
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So what's interesting to me is one the sp500 half of the profits come from overseas.
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So it's not a u.s. versus the world thing.
09:53 - 09:57
And obviously, I mean what kind of foreign goods do you have in your house?
09:57 - 09:59
What kind of foreign goods do you have in your garage?
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And so there's plenty of foreign activity going on in this is a little bit of I'm making the argument of a global economy and that we're really all very very connected that the only difference between these two lines.
10:14 - 10:16
Is where their stock market resides?
10:16 - 10:22
Okay, and that's you know, that's got to be a part of it on that.
10:22 - 10:37
And so, you know, we do see opportunities in international seeing the Pu ratio going from 13 percent maybe more of a historical number that we would expect of maybe a 14 or 15 percent.
10:37 - 10:41
So we do see some opportunities International and we're continuing to wait that way.
10:43 - 10:43
10:43 - 10:56
dollar will weaken as we reduce our interest rates and then as our economy slows, which it is that will also weaken the dollar which should bring these two points together.
10:56 - 10:59
So, let's see what happens moving forward.
11:00 - 11:03
On kind of a different point but a little bit finer point.
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This is emerging markets.
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So this is looking at the stock markets or how we value company or countries that are not not u.s. Not Japan not Europe.
11:19 - 11:29
These are these are countries that are kind of bridging over from third world to First World typically is described as brick brush Brazil, Russia.
11:29 - 11:40
In India and China, obviously, it's a little bit broader than that, but currently, you know, here's the historical average when we look at Price to Book ratio.
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And this is where Emerging Markets is currently trading.
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So we're just not valuing assets held at other countries as much as we have in the past.
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So we've always traded them as a discount.
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We were only giving them 68% credit.
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For every dollar of assets they have now, we're only giving 47 cents for every dollar of assets that they have so pretty good discount there in a real opportunity.
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And you do see on this chart.
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It's a little bit hard to follow but the gray bar returns over twenty year period so not just yesterday but over the 20-year period where you've got just straight u.s. Stock and zero emerging markets and you can see as you introduce Emerging Markets.
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The returns go up.
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So this bar hop performing at seven one point one percent has 40% us and 40. I'm sorry 60% us and 40% Emerging Markets has a higher return but then we need to also pay attention to this purple bar.
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And that is volatility.
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So one thing to keep in mind is that Emerging Markets typically does outperform our domestic Market over time, but it does bring volatility into the
12:54 - 13:16
We're seeing a lot of clients talking about volatility and younger and younger clients are talking about volatility and it's not unusual for somebody 65 or 70 to be concerned when their account shakes a little bit, but that that's also happening in our 40 and 50 year old clients are calling with concerned volatility.
13:17 - 13:24
So I think generally people are just kind of pulling back from Emerging Markets, but there's real money being made out there and there is real progress out there were
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Just not valuing it so we do see an opportunity internationally do see opportunity in Emerging Markets.
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Fixed income yields.
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This is where we don't the opportunity, you know continues to concern us us treasuries.
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The 10-year is currently trading.
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Well as of September 30th
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It's trading at one point six percent.
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So that means that we're going to loan
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Money to the federal government for 10 year period and earn an interest rate of 1.68 and that seems concerning to me if we're trying to get somewhere.
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We're trying to get your portfolio to grow that seems like a really hard way to do that.
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And then the other piece of it to keep in mind is that if interest rates go up.
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So this is the impact of one percent fall in interest rates the same happens the
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One percent rise in interest rates.
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So if the 10-year treasury goes from one point six eight two two point six eight, you're going to lose 11 percent total return on that investment and that just feels really risky to me now bonds have performed.
14:42 - 14:53
Well in 2019, but that's driven by rates going down at this point, you know, people are buying a longer bonds, but they're doing it for speculation.
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I don't like using speculation and your retirement in the same sense.
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So it's just an area that we're not going to fiddle with we're stepping away from that.
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It's reusing very little bonds in our portfolios and we think we've got good marriage for that.
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15:10 - 15:27
I do want to go into this is a slide that I came across and it's really interesting to me in this is a little bit more of let's think about who we are and how we view the world and it's you know, it's based on Republicans and Democrats.
15:27 - 15:29
Although I don't believe this is a political slide.
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I believe these are just this is data and facts and so, you know during this time period where a republican was in the White House
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You know Republicans really optimistic about the economy.
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This is economic conditions and the Democrats are really pessimistic and then everything kind of all gets into disaster land of the Great Recession and everybody feels horrible, but then climbing out of it.
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The Democrats are more optimistic about the future in the economic conditions than Republicans are.
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And the argument that I would make is that neither is true.
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The economy is the economy and you see this, you know, this inflection point with the change in administration is just you know in a very short order the Republicans feel that the you know, that the economy economic conditions have improved drastically.
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Well, the Democrats feel that the economy is in peril.
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And again, neither of that is true.
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Been the same economy basically since 2009 all of this data here represents the same economic growth as we saw in that earlier slide.
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We're going to flip on in just a second that that you know, I think you need to look at how your view the world gets tainted by politics that aren't indicators of actual economic data, and that's what we're missing.
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So I do think this is a this is an issue.
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Two of you know, letting your politics go into how you invest your money.
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But then also the tainted information that you get depending on which side of the aisle that you sit on that.
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You may not be getting a complete picture to go back to a slide that we looked at earlier.
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Here's the expansion that we've seen since the Great Recession and basically it's average 2.3 percent.
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It's all been the same the economy, you know kind of picked up a little bit and then drop back down and out speak back.
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A little bit and it's drop back down and we've had you know, two or three little jagged points.
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But certainly it doesn't support the way that we feel about it depending on how you vote.
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And so just be aware that in yourself and check yourself to are you viewing economic data properly or not?
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So with that here's our last slide that we're going to go through today and this is class returns.
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So the best performing asset classes again real estate, which it has been regularly over the you know, since 2004 real estate's done very well.
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Performing Market is 20% and that's large cap.
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That's the sp500 and then on down we go to the least performing asset class is cash at one point eight percent.
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Okay, but the point that I want to make is the asset allocation of 13 percent year-to-date growth is probably a little bit of where you should be if you've got a well-diversified portfolio and that's you know, certainly better than down in 2018 down six which all occurred in
18:46 - 18:59
in the base of the last quarter 2018, you know, but during that time period so with that if you're Diversified your returns should be around 13 in with that.
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Sorry got one more slide gonna drive home or long-term investors one more time.
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This is the one year Returns the worst one year period is down 39 percent the best one year period is up 47 again.
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That doesn't matter to us.
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Interested in this data out here at the 10-year in the 20-year rolling the best 10-year period is up 19 the worst ten year period is down to one obviously contains 2008 in that and then the worst 20 is at 6 percent and the best one is up 17. So you know, if you're going to do the stock market, you got to be long term.
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There's no data that supports short-term investments in the stock market.
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So have yourself a wonderful day if you got any question or things that you want to talk about?
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Feel free to give a call.
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We're happy to help any way we can thank you for your attention, and we'll talk to you soon.