Power Up Wealth podcast – episode 5 transcript:
Sharla Jessop 0:00
Are we headed for a recession? I’m Sharla Jessop. Today we will discuss market risk, inflation, and what’s happening with interest rates with our Chief Investment Strategist James Derrick, longtime team member at Smedley Financial Services.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James, thanks for joining us today.
James Derrick 0:49
I’m happy to be here. Thank you.
Sharla Jessop 0:51
Great, it’s a great time. Interesting things are happening in the markets. And with interest rates in the Fed. A lot of changes going on. I think the main thing we’re most concerned about, or many of our listeners might be concerned about is what is happening, and are we headed for a recession?
James Derrick 1:06
Well, recession is probably the biggest fear that a lot of people have, although I don’t know that many people are worried about it quite yet. But some of the more astute people have probably started asking the question, and there are some very real risks out there. And so there’s no way to know for certainty whether it’s coming or not. But let me just say that I don’t think we’ll see it in 2022.
Sharla Jessop 1:30
What indicators would you be watching for the risk of a recession.
James Derrick 1:33
One of the indicators that’s concerning is oil prices because they have a big impact on inflation, they have a big impact on the psyche, of consumers. American spending, as the price has been rising at the gas pump, it just makes it more difficult than if you’re paying $4.50 or $5 a gallon at the gas pump, you might decide you’re going to spend a little bit less somewhere else. And that kind of decrease in demand can lead to a recession.
Sharla Jessop 2:00
And we’re all feeling the pinch at the pump. And everywhere else. We’ve seen increased volatility in the market. And a lot of it’s probably a result of this. What kinds of things are you doing? Or can investors do to hedge against volatility?
James Derrick 2:13
Well, there’s only so much you can do first of all because risk is just inherently part of investing in the market. There are a lot of good things out there going on still. So like unemployment is really low, consumers have plenty of money, corporations, actually, overall have quite a bit of money. And so it’s important not to panic, first of all, which almost goes without saying, but I think we should say. Some of the things that people look at our bonds. First of all, like if you’ve got a portfolio of stocks, and you’re looking to diversify, you might choose bonds. They have not been good this year. Other areas might be in commodities like we talked about oil, we also get a lot of questions about gold, for example, a way to diversify.
Sharla Jessop 2:55
It seems like there is a lot of chatter around gold and energy and commodities. And a lot of people wondering why you wouldn’t dump a lot of money in there as they see those things rising. What can you tell us about gold and energy commodities?
James Derrick 3:09
Well, first of all, they have been very poor investments since I would say 2008 overall. And that’s important for people to remember because they follow cycles, just like other things do. Like the stock market does. And so they’re not a fantastic investment. They don’t always go up. They can also go down just as much as anything. In fact, people would be very surprised to know that the volatility in commodities, including gold, the ups, and the downs are just as big as in the stock market. The difference is really in the long-term expected returns. Because when you go back and look at history over long periods of time, like 10 plus years, the stock market tends to do very well for people despite all the ups and downs. You don’t find that always with commodities like gold. In fact, a Roger Smedley likes to say that an ounce of gold 100 years ago could buy you a nice suit, and an ounce of gold today can buy you a nice suit. So it’s not quite a solid investment as it might seem.
Sharla Jessop 4:14
And it moves fast. I think if people were looking at a chart or the movement of that, and thinking they were going to load up on that area, they might be surprised.
James Derrick 4:23
Yes. And I don’t want to discourage anybody from using it as a tool for diversification. I just want people to understand that there are risks involved in that as well. And, you know, any allocation to that I would think should be viewed as a diversifier and not as like a core part of your portfolio.
Sharla Jessop 4:41
It’s no secret that we’re fighting inflation right now or that there’s a lot of inflationary pressures in everything from filling your gas tank to going to go to the grocery store in many other areas. What do you see happening with inflation? How’s that going to impact what’s going on in the market?
James Derrick 4:56
Inflation is currently at the time we’re recording this at 7.9%. The Federal Reserve came out recently and said that they had thought that by the end of 2022, inflation would be two and a half percent. But now they are saying 4.5% by the end of the year, which is a lot better than 7.9. But it’s still a little high. We expect inflation to continue to be difficult part of that is the price of oil, although that has come down from its highs, a great deal. Part of that is disruptions from COVID-19 still happening over in China. And that seems like they still need to deal with that issue over there. So I think that there are several reasons. The final reason is consumer demand. And there’s a lot of spending out there you see it, you know when you go to a restaurant on a Friday night, and it’s a long wait. I know you and I have talked about this. And so you know, it’s busy, the airports are getting more busy. So spending has been pretty high in that kind of demand gives companies the flexibility to raise prices. So I think it’s going to be around a while. And I think it’s going to present a bit of a challenge, especially for low-income earners. Very difficult.
Sharla Jessop 6:07
I agree makes it hard. They are definitely impacted the most or feel the impact the most. You have recently written an executive message for Money Moxie, and I was found it very interesting as you were talking about attitude and perception of risk. Talk a little bit about your findings and research.
James Derrick 6:25
It’s really interesting to think about risk and the stock market because what we see is that there’s always something to be afraid of and in fact, at the times when the market has the best returns, it usually tends to be a very surprising time when people are so scared about things, you know, whether it’s inflation, or war, or the price of oil, but there’s always very real reasons to be worried. And yet, the market at some point in time flips around and starts going positive, despite what’s happening. In fact, one of the most powerful words in investing might be despite because there’s all this bad news in the market. You know, despite all that the market goes up. I mean, it tends to, to do well, when you least expect it.
Interesting. And I think when we hear about risk, or think about risk, it really has a negative connotation with it. You know, it’s a four-letter word.
It does. It risk feels like a necessary evil in our portfolios. You know, like when you’re investing, whether you’re saving for retirement or some other purpose. I mean, you feel like you have to take some risk in order to get some return. But you most people do it reluctantly, you know, they don’t want they don’t want any risk. The reality is, is that risk is a tool that works very much in your favor, or can I should say work in your favor. And I think if we can view it that way, we’ll get a great benefit. There was a study done at UBS, just coming out of the 2008 Great Recession. Big financial crisis back then, and researcher Alia Crum divided employees into three different groups. One group received a negative message about stress, probably very similar to a message that we’ve all heard. It’s debilitating. The second group received positive messages about stress. How it can be a tool to help you focus. To elevate your performance. And they saw video clips of people rising up during crucial moments like Winston Churchill during World War II, or LeBron James making a game winning free throw. People who embrace the moment and the stress and really came through with their best performance. The third group of UBS employees received no instruction. And then a week later, they asked the three different groups about how they felt their week had gone. The first group who had the negative message felt no change, maybe because they had already we’re already familiar with the negativity of stress. The group that had so the group that had no instruction had no change. The group that had the negative instruction had no change. It was the group that had had the positive messaging, a nine-minute-long video, that felt they had slept better, aches and pains, and their bodies were diminished. They felt fantastic. And they thought that their performance at work had risen, a great deal. That they were feeling just much better about life. And the reason why I love this is because it helps you see the power of your attitude and what it can mean in your life. So rather than taking something that we often think of as inherently bad, stress, take that and flip it into a positive realize that hey, at some point in time, it could save your life or it could help you perform better. It’s a tool and I think risk in our portfolios is the same way. It’s not a necessary evil. You can’t ignore it, but you can’t run away from it either. You need to you need to manage a certain amount of it and realize that’s going to be a tool. And if you do things right, it’ll be a tool that will help you in the long run. Help you reach your goals.
Sharla Jessop 10:09
I think that’s a strong message. It’s really hard for people who are investors who are watching the market and what’s happened in their, on their statements when they’re getting their statements. And this year has been a pretty choppy year, pretty rough. What would your encouragement be to them regarding risk?
James Derrick 10:28
Well, I don’t expect anybody to come away from listening to this and say, I love risk. You know, when you this has been a very difficult start to the year for the stock market and for most investors, and so I don’t suspect that they’re going to love that kind of risk. But I think that they can flip it on a positive. Flip it into a positive and see that when times get rough, that’s really when opportunity might be elevated. And so don’t run away from it. But stick with your plan. If your plan is to buy and hold, then buy and hold. If your plan is to add more money when the markets down, add more money. You know, if you’ve if you’ve worked out a plan with your financial advisor, follow that plan. If your if your individual circumstances have not changed, don’t make a change to your portfolios just because you’re worried about what’s happening in the marketplace. Because the market has a way of surprising everybody.
Sharla Jessop 11:30
Oh, we were talking earlier today, in another meeting about that very fact that just when you think you can manage what’s going on the market or understand what’s going on in the market is certainly going to surprise you. And sometimes not to the good.
James Derrick 11:43
It’s very difficult even even for professionals. The market is moves in ways that are at times extremely surprising. So you need to be very careful with what you’re doing. Don’t assume that if you feel great about things that they’re going to continue going up. And if you feel terrible, don’t assume they’re going to keep going down. You know the market some people say the market moves in the way that’s going to hurt the most number of people, which is just a way of saying that when you’re feeling really confident and like you know what’s going to happen, you probably don’t. So stick with your long-term plan.
Sharla Jessop 12:19
I think that’s great advice. I think it’s good advice as far as staying invested, sticking with your plan, and understanding the risks that you have and that it can be a good thing. James, thanks so much for joining us today.
Shane Thomas 12:36
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly, as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
