Fix It Friday Ep. 15 - Federal Reserve Chairs: Not Market Oracles — Valuation is Never a Reliable Timing Tool

•  The Fed’s decisions impact markets—but not your long-term financial plan.
• Overreacting to headlines can cause unnecessary portfolio changes.
• Consistency and patience are the investor’s greatest assets.
• Focus on fundamentals, not forecasts, to build real wealth

Disclaimer: [00:00:00] The following podcast by Fusion Family Wealth, LLC Fusion is intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Please see additional important disclosure at the end of this podcast.

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com. 

Jonathan Blau: So recently, the Fed chair, Jerome Powell. Warned of high market valuations. The last time this happened was in December of 96 when Alan [00:00:30] Greenspan, almost 30 years ago, issued the same warning with his famous phrase, irrational exuberance as it related to his view of the stock market, what transpired for the next three years from December 96 [00:00:45] to 2000.

Was the stock market increased by about 25% a year with a historic run and the market, uh, when Greenspan made those comments, the s and p 500 was about 7 35. [00:01:00] And, uh, today stands at 6,600. So let's take that as a lesson. To tune out Fed chairs whose mandate is low unemployment and low inflation, and [00:01:15] they know nothing more than you or I about the future direction of the stock market.

Voiceover: Welcome to the Crazy Wealthy Podcast with your host, Jonathan Blau. Whether you're just starting out. Or [00:01:30] are an experienced investor. Join Jonathan as he seeks to illuminate and demystify the complexities of making consistently rational financial decisions. Under conditions of uncertainty, he'll chat with professionals from the advice world, [00:01:45] entrepreneurs, executives.

And more to share fresh perspectives on making sound decisions that maximize your wealth. And now here's your host. 

Jonathan Blau: Hello there and welcome to another episode [00:02:00] of Crazy Wealthy Podcast. We're gonna be, uh, talking today about the recent commentary that came from Jerome Powell, the Federal Reserve Chairman this week, where he claimed that the, uh, the markets, uh, stock markets seemed [00:02:15] to.

Be, uh, very highly valued. Um, that hearkens back to a time in December of 96 when one of his predecessors, Alan Greenspan, uh, re referred to the market as, as being irrationally exuberant. [00:02:30] So let's explore that and let's see if, if, uh, the, the current fed chairs warnings about a high market indicate that investors ought to be considering reducing their exposure to stocks.

So, uh, some of the things we need to [00:02:45] consider, one is when we hear somebody with authority, like the Federal Reserve Chairman say something, uh, about the future, he's kind of implying that valuations are high now, meaning they should be lower sometime in the future [00:03:00] to get back to normal, and, and we think that he knows something that we don't because of his authority, his education, his stature, et cetera.

One thing about the future, one, the defining characteristic about it is that there [00:03:15] are no facts about it. Somebody who's smart and well educated and smart sounding doesn't have one more fact about the future than either you or I. So it's important to remember that. The second thing to, to understand, we call, we call this also the [00:03:30] illusion of predictive value.

That because you or me or or the Federal Reserve Chairman thinks something is going to unfold a certain way, that the actual outcome is likely at all to reflect what he thinks it will be. I call that the [00:03:45] illusion of predictive value, meaning his thought, your thought mine has zero predictive value. So just keep that in mind as we talk about whether or not his statement indicates that we should be paring down our stock holdings in a multi-decade investment lifetime.[00:04:00] 

An investor is going to see many recessions, bear markets, uh, terrorist attack type, uh, surprises. Um. One in a hundred year pandemics, things that, that, uh, that, uh, are [00:04:15] unexpected happen all the time. And so what we need to do is we need to realize all of those things fall into a category that I refer to as the noise and the signal is earnings.

So it's earnings and only earnings that lead to the increase in [00:04:30] stock prices. We need to make sure if we're gonna be long-term successful investors, that we never let the noise drown out the signal. So one of the things that we need to understand, uh, and the media's been, uh, carping for the last two [00:04:45] months about new highs, the market's at all time highs, uh, could be dangerous, et cetera.

So the market is, is often at new highs In the, um, 1,188 month period since [00:05:00] 1926, the market was at an all time high. About a third of the time, 363 of those months were, were in an all time high. In just the last two years, in 2024, the market hit close to 60 [00:05:15] all time highs, and this year we hit close to 30 all time highs.

So in just the last two years, almost a hundred all time highs, investors who responded to any of them by taking it as a signal to to sell stock because it, [00:05:30] it, it somehow might indicate that they're about to go down, uh, has been disappointed and it's been that way throughout all of history. So one of the maiden lessons, um, behaviorally to take away from this [00:05:45] is that, uh, neither stock market valuations or anything else have ever been, nor will ever be able to be used as a consistent market timing tool.

It's very important to [00:06:00] accept that truth because, because it is a truth. We're always looking for certainty and, and it's a human nature bias that we, that we, we can't fight. And, and, and it's, um, something called hindsight bias. We, we like to kind of know the past [00:06:15] and knowing the past makes us believe the illusion that somehow, because we know the past, the future will be more predictable.

It won't be so, so it's important also to let go of, of that hindsight bias and that that, uh, constant seeking of certainty, [00:06:30] it doesn't exist. Anywhere in nature Certainty. Um, one of the things I wanna talk about is in my lifetime, uh, when I was born in 1967, the s and p was about 500. The s and p 500 index was about 99 0.[00:06:45] 

Today it's 6,600. It stands 73 times higher. There were many, many, many all time highs since I was born. I, if I had, um, 10 friends in the room and you could use their fingers and toes to count 'em, you still [00:07:00] wouldn't be able to get to the number of all time highs in my lifetime. Uh, but, but the, the s and p went up 73 times, so a million invested dentist is 73 million and inflation is up 10 times to buy what a million bought back then.

I would eat 10 million. My stocks [00:07:15] have given me 73 million. And dividends. My cash flow that I receive as a shareholder in the stock in the s and p 500 have gone up 26 times, more than two and a half times what inflation went up with a cost of living. Um, but in that [00:07:30] time there were many, many new highs.

Uh, there, there were about, um, eight, eight or so bear markets, meaning the market went down 20% or more. There were, uh, probably a similar amount, eight or nine recessions. [00:07:45] And, and, um, and by the way, of the bear markets that, that I just mentioned, the eight or nine that occurred since my birthday, um, in nineteen seventy three, four, one of them caused the market to have [00:08:00] in 2000 to oh two, the market halved again.

And then in 2008, nine, the market halved again. So three times in my lifetime. The market went down 50% or more. That's an event that happens traditionally once or twice in [00:08:15] 100 years. Through all of that, uh, the, the return that, that, that accomplished a 73 fold increase since I was born in the, in the market level, was about 10.5% a year, which coincidentally, is the same as the [00:08:30] almost a hundred year return for the s and p 500 since it's been recorded.

What does one have to do to make 10% a year, I should say, have the high probability of achieving those kinds of returns? What they need to do is they, they need [00:08:45] to, um, buy their portfolio elect to reinvest in, in the dividends and not look at it and react to it. And that's all they needed to do. But most investors don't do that.

They worry about new highs, they worry [00:09:00] about recessions and pandemics and Democrats and Republicans and, and, uh, terrorist attacks and everything else that has nothing to do with where their long-term stock prices are gonna land because there's only one reason. [00:09:15] Stocks go up in the long run. And that's because earnings relentlessly go up in the long run.

Uh, so when I was born, the earnings for the SP were $5 in change. Today they're $230 through all of the events I just mentioned, and the bear [00:09:30] markets and the recessions, they went from five. And why do they do that? Because the companies that we buy are relentlessly responding to any kind of challenges rationally.

If, if we're in a recession, they're gonna close down capacity. They're gonna lay off workers, [00:09:45] they're gonna pay down debt. They're gonna do the opposite of what Western governments do. Uh, so, so the other thing I'll mention is try not to get into the habit again, of looking for certainty and making predictions or [00:10:00] believing predictions instead of predicting, use the P word preparedness.

Make sure that emotionally you understand what drives us to make these poor decisions and, and then financially be prepared by having two to three years living expenses outside of [00:10:15] stocks that protects you against what's called sequence of return risk. In other words, if you're investing for multi-decade and you're gonna make 10% a year, likely over the multi-decade period, we don't know what next year will be.

Could be down 30 or down 20, uh, [00:10:30] just like it was in 19, uh, in 2000 and, uh, eight and 2009. Uh, so to protect against that and knowing that since 1926, the market from a peak in value, where it is today at about 6,600 to a trough. [00:10:45] With the average bear market being down 33%, a trough might be about 4,000. And back to new highs, that round trip has taken about 40 months since the 1920s.

So as long as we have two to three years living expenses, we protect against that [00:11:00] potential. And one word I'll say on the economy, uh, many big firms like to roll out their economists and tell you what the, the economy's about to do. They don't know any more than you know about what the economy's about to do.

But one thing I can tell you. I feel comfortable, [00:11:15] uh, about saying as it relates to the economy is that based on all of history, uh, it's a good bet that the past is is not as good as we remember. The present is not as bad as we [00:11:30] think, and the future will likely be better than we anticipate. Uh, with that, I wish everybody a happy fall and, um, thank you for tuning into this.

Fix it Friday. Look forward to seeing you next time. You can catch us. On, uh, [00:11:45] all of your favorite podcast venues, as well as the Crazy Wealthy podcast website and the fusion family wealth.com website.

Voiceover: Thank you for tuning into another episode of The [00:12:00] Crazy Wealthy Podcast. For more insights, resources, and to sign up for our newsletter. Visit Crazy Wealthy podcast.com. Until then, stay crazy wealthy.[00:12:15] 

Disclaimer: The previous podcast by Fusion Family Wealth, LLC Fusion was intended for general information purposes only. No portion of the podcast serves as the receipt of or is a substitute for personalized investment advice from Fusion or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific [00:12:30] investment or investment strategy or any non-investment related or planning services, discussion or content will be profitable.

Be suitable for your portfolio or individual situation. Neither fusion's investment advisor registration status, nor any amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Fusion is engaged or continues to be engaged to provide investment advisory services.

Fusion [00:12:45] is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client or perspective client as a guaranteed that he or she will experience a certain level of results if Fusion is engaged or continues to be engaged.

To provide investment advisory services, a copy of Fusion's current written disclosure brochure discussing our advisory services and fees is [00:13:00] available upon request or at www.fusionfamilywealth.com.