Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu’s days. We had a bit of a pause last week because Stu and I were at a conference talking to a group of senior advisors, and they are, like a lot of investors, a little bit nervous about what's been going on in markets. So we had Stu come in. Now we had to bring Stu in via satellite again. If you ever do ask Stu to speak at an event that you're hosting, you put him up on the big screen, he has a giant head. Now, I think some people would say that means there's lots in there. Why is your head so big?

Well, I don't know. I guess I got a big forehead. The hair is exceeding a little bit, and that makes it look pretty big.

Okay, well, let's dig into that brain of yours and see. We're two weeks away from our last discussion. At that point, we were right in the midst of the Federal Reserve and their announcement on interest rates, all kinds of things going on in a market that just is not behaving particularly well, whether you're talking about equities, stocks or whether you're talking about bonds. You had your investment strategy committee meetings last week. What came out of it and what's your view? What are you doing in your portfolios right now?

Well, it is an interesting time. It's an emotional time for investors because everything seems to compress during a volatile period of time. The first thing we do is try and extend our time horizon a little bit. The other thing we do is we try and answer, okay, well, what do we know for sure? We know that sentiment is very poor, that there's a lot of concern out there. We know that earnings have still been pretty good, but some uncertainty into the back half of this year surrounding supply chains and not so much the impact of inflation, but how much monetary tightening is going to go on to get inflation under control. Then we look into inflation and in all likelihood, we're at the zenith now. The question is, when we finish the year, if we're say low fours by the end of the year and it's on its way to two— call it two to three—, that is probably what a soft landing looks like. If it's a four and it looks like it's going to be persistent, which would likely be due to ongoing wage pressure, then there might be some more tightening that would come following that. The one thing that the stock market is worried about, as many assets are, as you point out, is that when we've had inflation this high before— and there hasn't been a huge sample set—, but when it's been this high before, it's been a recession that was necessary to take care of it. You are then thinking about earnings. An economist might say that there's about a 35% chance of recession. What we like to do is look at what the stock market is factoring in. When the S&P is trading around 4000, that's probably about a 50% chance of recession priced into the stock market. The number one task to understand here are the movement as we get into the back half of the year around the plight of inflation, because the plight of inflation will determine the amount of monetary tightening, and that will be very important to the amount of earnings that the stock market produces and the multiple that it trades at. From a long-term standpoint, we know as long-term investors that we're going to live through one, if not two of these types of situations every 10 years. But in the near term, what people are focused on is like, well, what if there is a recession and what often happens in a recession is 10 to 20% of earnings disappear and the multiple contracts for a period of time. During that period of time, it's great if you have some capital to put to work because you can really accelerate your long-term returns. But what tends to happen is that, again, even when the recovery takes place, it comes right back in a very short order. We're doing a lot of work on businesses, where what do they look like in recession, and how far would those share prices be from here? There are a lot of businesses in some of the cyclical areas of the market— not necessarily like commodities because those have been stronger— but in some of the more economically sensitive industrials, some of the banks, things like this, there has likely been more than that 50% concern put into some of their share prices. The two things any investors are always looking to do is to look at earnings in an optimistic case. And then maybe when things are down in the dumps a little bit, put a multiple on those different scenarios. If you can find situations where you're paying a low multiple on depressed earnings, you have two sources of upside that will come your way, once the concern ends. You'll get the slingshot recovery in earnings and you'll get the valuation of recovery that comes with it. We're looking a lot for those companies. You can go back and you can take 15% to 20% off a company's current earnings, look at the multiple that the current share price would be on that. You can go back to 2018, when we have these concerns. You can go back to prior recessions. I wouldn't say it's every stock, but there are certainly some businesses out there that are already factoring that type of activity in. There are still some businesses that would likely struggle a little bit in a full recession. While it's an emotional time to be an investor, it's also a great time to be an investor because scenario analysis really pays for investors during this period of time. Always trying to reverse engineer: what's required for success in the investment I'm going to make? If you can get into situations where you're getting paid for some of the cloudy skies that exist right now, then you can get the upside that comes when those clouds part. Unfortunately, as we sit here today, it's probably going to be three to six months before we have a good handle on that. But we're actively looking for clues every day.

Yes, that's what we've talked about so many times with all the guests. It's just one of those periods where the range of possible outcomes is so wide and there's so many different things that could happen. If we're at the end or at the zenith of inflation, as you suggest, or potentially we are— and the report last Wednesday was a little mixed on that front— but if we are, you can certainly see where inflation drops and there could even be some upside from here because you've had the market kind of overreact to that potential and the potential for how high rates could go. The other thing that I often talk about with investors particularly— and I'm drawing a very clear distinction between long-term investors, investors who are still deploying, as you say, new capital all the time, so they're still saving and accumulating, versus those investors who have accumulated their savings, and now they're living off the income that those savings are generated, because there you have to be much more careful. But for those investors with long term, 20% off has proven over time to be a pretty nice price, whenever you can get 20% off, because you don't see that every year. You see 10% corrections quite frequently. But the 20% corrections are much farther apart. For a long-term investor, they have proven to be not a bad entry point as well. Just talking to these advisers who are working with very large investment clients and just saying, hey, the one thing that's hard to grasp, although mathematically it makes the most sense, is if you've got a long time to invest, you actually like the market down. In fact, I want it to go down even further, then I can buy more at lower prices. Again, it never feels good when it's happening, but if you get your mindset to that frame of mind, it actually ends up being better when things go down, if you have 30 or 40 years before you're using this money.

100%. As someone who continues to save, it's like you point out, the irony is I'd like the stock market to go down for 20 years and then have all the gains in that final day right before I retire. What we know is that it comes with all sorts of ups and downs and it’s just a wonderful environment for advisors to be talking to their clients and understanding their objectives and where their risk and return sits, and really turning volatility into your friend. If you're using your portfolio for income and things like this, then you're going to have one tact. If you're putting capital to work, you're going to have a very different tact and that's the beauty of the advisor-client relationship.

So, Stu, I just figured out what's filling up that giant noggin of yours: it's wisdom. Filled with wisdom! That was a lot of wisdom you tossed out there in ten minutes of podcast time.

Yes, well, I don't know. That's maybe the nicest thing anyone said to me today, so I'll take it.

Well, markets are up today, so it's a good day all around. People are complimenting you. We got markets up. Stu, always great to have you here and we look forward to seeing you next week.

Great. Thanks, Dave.