“But the worries of this life, the deceitfulness of wealth and the desires for other things come in and choke the word, making it unfruitful” (Mark [4:19]).
At the beginning of October, the marketplace enters its fourth quarter, and many people are hoping to see improvements, especially from that of the previous third quarter.
In today’s episode, Darryl Lyons addresses Q3 concerns and reviews external factors that have had their chokehold on the market and its ability to thrive, offering insight into what the future may hold and how we can deal with it.
This week’s highlights include:
- A review of the third quarter market and its impact on financial portfolios.
- The impact of rising interest rates on the stock and bond markets.
- What a statement risk is and how to avoid it.
- An overview of structured products and how they provide a degree of risk management.
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Hey, this is Darryl Lyons, CEO and co-founder of PAX Financial Group and you’re listening to Retire in Texas. Remember, this information is general in nature. It’s not intended to provide specific investment, tax, or legal advice. Visit PAXFinancialGroup.com for more information. So, I want to dive into, we’re in October here, and I want to dive into the previous quarter. So, the previous three months.
August, I’m sorry, July, August, September, right? Yeah, July, August, September, and I want to talk about those months, those summer months. Kind of look back at the past, what happened. And the reason I thought this would be interesting is because or the reason I, I triggered this thought is because I had a client that called and he said, “Hey, my portfolio didn’t do that good in the third quarter and I’m nervous.”
And you know, one person asked, and I usually begin to look for clues, if there was more people that are nervous. And there’s really, for me, there’s not any reason to be concerned personally. But I don’t discount if somebody’s nervous. I want to, you know, recognize that and see if we can unpack it and think through it logically. The idea is to think through these things, logically, I was convicted just recently studying some stuff that when we make these emotional decisions, it just really weakens our decision making. So, how can we think through logically, what happened in the third quarter? It wasn’t crazy, crazy bad. So, you know, if you don’t know what’s happened in third quarter, it wasn’t like the market crashed or something. But the markets were just stuck in the mud, like a four-wheeler stuck in the mud. And so why was this four-wheeler of the market stuck in the mud?
And so, I think there’s three things that we should talk about. And then I’ll also kind of put a framework of like, how do we handle this going forward.
But let me, before I jump into these three things, let me not discount and jump over something called statement risk. And I talk about statement risk in my book 18 to 80. And so, the research is in that book, but statement risk is the risk that takes place when somebody becomes addicted to looking at the statements. Prudential did the study and said, the more frequent that you look at statements, investment statements, the worse your investments are.
And by deductive reasoning, we would say that it’s because you start to tinker with it more. And so, there’s something called statement risks. So, I can’t measure that, like, I don’t know how many of your client – I don’t know how many times you open your statement, I don’t know how many times you go to your website. But you do want to take inventory, because doing that on a too frequent basis could lead to you tinkering and ultimately hurt returns.
So, it’s something that we are aware of, but we don’t have a way to measure or prevent somebody from doing it because you don’t want to restrict information. So, statement risk is a risk that not a lot of people talk about, but I very, very well understand it, I guess is the best way to say it. And I want to make sure that I don’t discount it when somebody says I looked at my last statement in the third quarter and I’m concerned I don’t, I don’t just throw that away.
But what is it about this third quarter? Again, the market just didn’t crash but it was stuck in the mud like a four-wheeler. I think the first thing that you need to know is bonds were trash. In that third quarter, I mean, complete trash. What are bonds? Taking a step back, bonds are a loan that you make to a company. So, you’re lending money to AT&T or Facebook or whoever Apple, you’re lending money to them. And they, they’ll pay you back after 10 or 15 years with interest payments along the way. But if bonds keep up this pace, which isn’t a good pace, this will be like three years in a row, they’ve had negative returns. And so, we, when we construct portfolios, a lot of people have like 60% stocks, 40% bonds, and this 40% are just really, really hurting performance.
And in fact, if you look at some of the mutual funds that within the mutual funds, they own these bonds, some of them have had their worst quarter ever, ever. Like it is insane that this bond market is just really struggling, and again it’s not like it’s an economic collapse the system, but it’s just hurting and dragging down the portfolio. So, you say well, okay, I don’t own all bonds. So, what about my stocks? How are my stocks doing? Well, the stocks this last quarter weren’t doing so hot either.
In the first half of the year, we had this nice little run through artificial intelligence mainly led by Nvidia. But this quarter those stocks, called The Magnificent Seven, which I did discuss in a previous podcast, they were down in this last quarter. A lot of stuff was down. I mean, even real estate was down.
Small companies, the small, smaller companies that are publicly traded, they were down really, really bad. I think the only thing that was up was, well, first of all Apple was down too, you know, Apple is usually a pretty reliable stock. But I think the only thing that was up, there’s probably more than one thing, but Turkey, the country of Turkey, was up last quarter. But I don’t think a lot of people own Turkey stocks.
So, bonds were trash. Stocks didn’t help; they were down 3% in the previous quarter, according to Morningstar Index and all the research that supports this will be in the show notes. So, that brings me to the third thought about the third quarter. That really, the catalyst that impacted the stocks and bonds, and that was the Federal Reserve raising interest rates.
And as long as the Federal Reserve is raising interest rates, we’re continuing to see that the stock and bond market have a distaste for this rising interest rate environment. And it all makes sense, in terms of when you raise interest rates, people won’t borrow as much money, because it’s more expensive. And it puts pressure on your cash flow because your payments are higher. So, when you do that, across an entire economic system in the United States, and raise interest rates on bonds, it just puts pressure. When you raise rates, it just puts pressure on everything, including stocks and bonds.
So as long as the Feds still in the business of raising interest rates, then we’re still gonna have this pressure. So, let’s move on past the third quarter and say, What does the future look like? What does the crystal ball of the future look like? Are we going to continue to deal with this Federal Reserve Pressure?
I certainly don’t know a lot of people have, you know, thoughts on it. But you know, it looks like Fed may raise rates one more time. And then they might plateau. And then eventually, a lot of people think ‘24 and ‘25, they’re gonna start lowering rates, which will be a tailwind for a lot of our portfolios, which would be really nice. But, regardless of what the Fed does, what should you do given that the weak third quarter, the stuck in the mud third quarter? First of all, I- you need to speak with your advisor about all this stuff, but you really should look at your bond portfolio.
Not to say it’s, hey, it’s broken, I’m talking about adding to it. You know, think about bonds for a second. A bond is a loan. So, we know that if you have borrowed money for a mortgage or credit card, those rates are high. But what about being on the other side of it, and you’re not borrowing, you’re lending. If you’re lending, you’re making a lot of money off of interest right now. And so, you really should look at your bond piece of the pie, and maybe even adding to it. Check with your advisor again, but when things go down like this, this has been my philosophy for 20 years. I’m looking at saying, “Okay, are there opportunities in this bond market?” You really, really should take a look at that with your advisor. So that’s one.
Two, you probably have, if you’ve worked with a PAX advisor, you’ve probably heard of something called structured products. I did talk about this in a previous podcast, I wrote an article on it on Forbes. But structured products are very interesting for this market, because they provide a degree of risk management. So, they, they’re always different. So, we always we issue, we don’t issue them, but we go to the market and look for them. And then we introduced to the structured products to our clientele like every quarter or so, but what they basically do are allows you to get some upside in the market and then reduce your risk. So, you’re not fully exposed to the downside of the stock market.
Now they’re all different, they’re all unique, but they are constructed to reduce losses. And so, if you do you have concern about stocks, rather than just escaping them altogether, you know, adding a structured product as a part of your solution with, you know, with your advisor’s discretion, and walking alongside you, I think is really makes a lot of sense.
And the third thing I’d suggest to you is to avoid any statement risk. And I did talk about this earlier and just as we go through this rising rate environment, and what will ultimately happen is the rates will go up and the market will start to really contract. We’re waiting for housing prices to fall, that hasn’t quite happened yet. We’ve seen some pressure in the public markets of real estate, but not in the single-family units across the board. But we will likely start to see some pressure in the overall markets. I’m sorry, not the markets, the economy, which are two different things. Similar but different.
And I just want you to not open your statements too often and freak out. Just be, just be cognizant of that. That’s all I say, you know, you need the information, but just be careful that you’re not opening too frequently. And if you want to cite those studies, again, in 18 to 80 I put that study in there. So, that’s just kind of a general idea of the third quarter bonds were trashed, stocks really struggling down 3%, and it’s really a byproduct of the Fed raising those interest rates.
And so, what do you do now? I suggest you really, really revisit your bond positions. It’s very attractive to me right now. Maybe look at the structure products, if you want to do something different on the stock side of the equation, and then make sure you avoid those statement risks. I also, you know, as I was developing content for this podcast, one thing I did want to mention that’s, it’s kind of been on my heart lately, and it’s worthy of mentioning it to you, for you to memorize. I would even suggest that you memorize this because I like to memorize Scripture. This is a good one. This is Mark [4:19].
But the worries of this life, the deceitfulness of wealth and the desires for are the other things to come. Choke, choke the word, making it unfruitful. I butchered that. So let me say it again. I’m sorry. This is the NIV. “The worries of this life, the deceitfulness of wealth, and the desires for other things come in and choke the word making it unfruitful.” Now, there’s some theology behind this, I’m not going to go there. But hear my paraphrase. Just for the sake of this dialogue. Choking the life that is truly life. I know I’m making a stretch here. But I want to make the point. Slightly different. So, hang with me if you’re theologian. Sorry.
But what’s choking the abundant life that you are called to have? What’s choking that life? What’s choking the word, and here’s the reference the word, but I’m going to use the phrase the abundant life, the life that’s truly life. What is choking it? What’s, what are the hands that are choking that life, and I can’t believe 2000 years ago, this was said. I can’t believe it. I mean, you think about it, it doesn’t change.
Three things were mentioned in this parable. This is a parable by Jesus. Three things: the worries of this life or choking the deceitfulness of wealth, and the desire for other things. Worries of life, deceitfulness of wealth, and the desires of other things, were the hands around the neck, choking the life that is truly life. And so, it’s just amazing how these Scriptures still play today. And Jesus’s parables are so powerful.
So, stock market is going to do what it does, the bond market is going to do what it does. As your advisors we are, we’re here for you. We’re walking alongside of you. This is not, this is not chaos moment by any means, but just a little stuck in the mud moment. And the good news is, here’s the good news. The fourth quarter historically, historically has been the best quarter of the stock market since the 50s. Up about 4% on average.
So, hopefully we’re not stuck in the mud for long. We can get on the other side of it. But do check with your advisor, maybe do a little tweaking. Don’t make major overhauls; you don’t want to mess things up, but little tweaking with your advisor. I think it makes sense.
So, I hope that was helpful today. Hang in there and remember you think different when you think long term. Have a great day.