What’s next?

It’s such an innocent question, and one we ask our friends, family, and co-workers all of the time. But the person we ask this question of the most is ourselves.

There is so much unrest in the world right now. So much negativity. So much worry. It’s incredibly difficult, maybe even impossible, not to ask What’s next? Perhaps it’s said in a serious tone or, if you’re like me, you start to ask the question in a very sarcastic tone… “Lovely. What could possibly happen next?”

In our work as financial advisors, Grant and I are asked this question a lot. Oftentimes, we’re available to our clients not just to provide advice, but to act as sounding boards for their concerns regarding their investments and their financial future.

Money and personal finances can cause extraordinary stress. When people say that money can’t buy you happiness, they certainly miss the point that money can absolutely buy you piece of mind and a heck of lot less stress in your life. In a very famous study from 2010 by the legendary Daniel Kahneman at Princeton University, the magic number of annual income for an individual (not a family or a married couple, mind you) was $75,000 to be considered “happy”. After that point, their joy increased at a much slower rate and shifted to “life evaluation”, or a sense of accomplishment up until $125,000/year, at which point there was no discernible increase in overall happiness.

The flip side, of course, is the level of stress that comes with not having enough money. Financial related stress causes high-blood pressure, anxiety, and sleep deprivation (among many other maladies). In the most extreme cases, it can lead to suicide.

When it comes to our money, all of us spend a lot of time asking ourselves that simple, seemingly innocent little question. What’s next?

Enter the year 2020. Let’s start the year off with a deadly and new virus which will turn into a global pandemic, a forced shut-down of the economy and extreme job loss, shelter-in-place orders, racial tensions we haven’t seen in 60 years, literal rioting and looting in the streets, and a Presidential election as the cherry on top. What’s next?

Michael Batnick from Ritholtz Wealth Management wrote the perfect piece, All Wrapped in One, with an even more perfect summary in this tweet:

There is a lot to unpack there. While many of these things we are currently experiencing are certainly not new, it’s pretty unprecedented to be going through all of them at once.

It’s not uncommon to hear people say that the stock market doesn’t seem to be paying attention to all of these things on its unabated charge upward since earlier this year in March. I spend a lot of time explaining that the stock market is not the economy and the economy is not the stock market to our clients, but that doesn’t capture exactly what is going on here. Generally, the stock market reacts positively when the economy is about to do well, and negatively when it expects it to do poorly - it’s what we refer to as a leading indicator and is somewhat predictive. That said, we’ve never seen anything like this. 2020 is a true outlier when comparing the correlation of our stock market performance to the GDP of the United States.

In plain English, we continue to see a very overheated and overvalued stock market push forward despite one of the worst economic backdrops in modern times.

From a purely anecdotal perspective, the average individual investor continues to make what we would call “very interesting” bets on certain names in the stock market, and they continue to be rewarded despite what most of the professionals think from a fundamental perspective. As one of my friends pointed out to me this past weekend, “this goes against everything you’ve been taught, huh?”

He was specifically referring to Tesla (TSLA) and one of the more extraordinary individual stock stories in recent memory. Our readers might be familiar with the acronym FAANG when referencing the big technology stocks, Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Alphabet, formerly known as Google (GOOGL). Tesla is the lead name in a new stock acronym for 2020 - TAZ - or Tesla, Apple, and Zoom (ZM).

Tesla stock is up over 400% in 2020 and became the largest auto manufacturer in the world (by market capitalization). Will everyone drive a Tesla in the future?

Zoom just blew the doors off their quarterly numbers and, as of this writing on September 1st, 2020, was up over 500% on the year. Everybody uses Zoom, but where do they get their next customers from?

Apple is another great story, and became the largest company (by market capitalization) in the world. Again. Since March, Apple has only ripened with investors’ expectations for the continued growth of the services side of the business and the 5G adoption cycle. 

Investors may be ignoring the fact the price of the stock has not been supported by a similar increase in earnings.  Over the long run, a stock’s price should be equivalent to its earnings per share.  Over the past year, Apple’s stock price has increased by over 125%, while the earnings per share have increased by only ~22%.  Conversely, earnings per share are only expected to increase by 12% (Zack’s Research) over the next 12 months.  If the increase in price is only a symptom of investors paying too much for the same company, this particular apple could go sour fast.  The price appreciation from the 4-for-1 stock split could be the worm that spoils the fun for Apple’s stockholders.

So, what’s next?

The most common concern we hear from clients and prospects lately is how they should be dealing with their money and the upcoming Presidential election. I have to remember my own mantra about anecdotes not equaling data, but the amount of people that I’ve had conversations with that were so scared about Obama becoming President in 2008 that they sold all of their investments and went to cash is astonishing.

Presidents, like the quarterback on your favorite football team, get far too much of the blame when things go wrong and far too much credit when they go right. However, they’re the first in line to take credit when they’re going right, so perhaps they get what they deserve.

“Bull markets and bear markets come and go, and it’s more to do with business cycles than presidents.” - Jeremy Siegel, Stocks for the Long Run

Forbes put together a great piece back in July about how the stock market performs under different presidents. It’s very visually appealing and is much more in depth than any research I’ve seen previously on the subject - I highly encourage you to spend some time and read this piece. At first glance, the data may surprise you:

Our bottom line with this: you can’t predict the future, you can’t easily predict who will win the election, and it won’t matter very much, anyway.

Will there be an increase in volatility? Most assuredly. Will there be plenty of news stories, propaganda, and social media posts designed to scare you about either of the candidates and the resulting collapse of the economy if one or the other wins? Yep. Will it matter? Not really. Most decisions when it comes to politics are going to be made through your own personal blue or red glasses. We don’t spend our time being political, and we feel pretty strongly that making decisions about who wins this upcoming election is a waste of time when it comes to the effect it has on the stock market.

Noble Wealth Pro Tip of the Month

Mortgage refinancing. It seems as though this is the financial item on everyone’s mind right now, and for good reason. 30-year mortgage rates have dipped below 3% for the first time ever, and it’s got people so excited that some lenders are simply telling people, “we’re too busy, take your business elsewhere”.

A new mortgage refinancing surcharge being handed down from Freddie Mac and Fannie Mae (0.5%) is not making things any less tense. While it was originally scheduled to go into effect today, on September 1st, the uproar from the lending community pushed its start date back to December 1st. If you are looking at getting your home refinanced, get it done before then.

And, more important than that, please pay attention to the closing costs and amount of money being added to the new loan balance. We find that our clients often are trying to shoot for the lowest possible rate, and that usually comes with higher costs.

In conversations with other homeowners, you’ve most likely heard them brag about how low their interest rate is on their mortgage or “note'“. It’s an odd psychological phenomenon, and one that potentially can cost you a lot of wasted money. Depending on how long you plan on staying in your house, your focus should be on shooting for the new mortgage rate that has the lowest amount of costs and fees, as opposed to the lowest rate or monthly payment.

If this is something you need help with, we’re happy to talk with you as a non-biased observer and help you review your options from different lenders.

Things We’re Reading and Enjoying

Surrounded by Idiots: The Four Types of Human Behavior and How to Effectively Communicate with Each in Business (and in Life) - by Thomas Erikson

Do you ever think you’re the only one making any sense? Or tried to reason with your partner with disastrous results? Do long, rambling answers drive you crazy? Or does your colleague’s abrasive manner rub you the wrong way? You are not alone. After a disastrous meeting with a highly successful entrepreneur, who was genuinely convinced he was ‘surrounded by idiots’, communication expert, and bestselling author, Thomas Erikson dedicated himself to understanding how people function and why we often struggle to connect with certain types of people.

Surrounded by Idiots is an international phenomenon, selling over 1.5 million copies worldwide. It offers a simple, yet a ground-breaking method for assessing the personalities of people we communicate with – in and out of the office – based on four personality types (Red, Blue, Green and Yellow), and provides insights into how we can adjust the way we speak and share information.

I don’t say this lightly when I say this is one of the most important books that both Grant and I have read in our adult, professional lives.

Wealth Inequality in America: Causes, Consequences, and Solutions: The Destruction of the American Middle Class - by Dr. James Glenn (a former Noble Perspective podcast guest!)

If you have wondered why prices for everything rise continuously, or why it now takes two people working full time to maintain the same lifestyle that one paycheck used to afford, or why the rich keep getting richer, and the poor, poorer, this book is a must-read. Wealth Inequality in America is an erudite and entertaining read, and explains in detail the mechanisms used by the wealthy and investing class to maintain, and increase their wealth year after year, decade after decade, and century after century. The somewhat arcane, often esoteric and complex world of central banking, money creation, and wealth transfer is simply, and brilliantly described in this thoughtful and provocative book written by Dr. Glenn.