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No tree grows to the sky. You have heard that expression before. Many clients have not seen a down market. Stocks are cyclical. When one eventually arrives, some investors will handle it well, others will not. Studies have shown retail investors tend to buy high and sell low, when it is supposed to work the other way around. You cannot prevent them from selling, because it’s their money. What can you talk about to calm their fears and get them thinking about the long term?
1. How much longer will the recession run? It has been said recessions typically run six to eighteen months.1 Unlike a horse race when everyone takes off at once, the words “we are in a recession” often happen after we have been in one for a few months. This is because determinations are made from previously recorded data or adjusted figures. The good news is this might not last as long as people fear.
2. Higher interest rates. When the Federal Reserve sees inflation as a symptom of an overheating economy, they raise interest rates to slow down economic activity. There are many people who complain about low interest rates because earned interest contributes to their income. Higher rates at the Fed usually means higher rates at the bank. Just be careful what you wish for!
3. Is there a rally someplace else? We say when US America sneezes, the world catches a cold.” This can often mean world stock markets go down when ours goes down. This is not always true. Markets elsewhere in the world may be in different stages of a market cycle. Put another way, there is often a rally going on somewhere.
4. A down US market does not mean 11 sectors are down equally. The S&P 500 index has 11 sectors. They do not all move together in one direction. Some can be up when others are down. This often signals where money is moving behind the scenes. How is each sector performing right now?
5. Are there trends with staying power? Your firm’s research department has a list of trends they feel will influence the economy of the future. This might involve solar power, climate change, artificial intelligence and health care. If the stock market is down, does that mean these initiatives have been abandoned? Probably not. Tell your client what your firm is saying about these major trends now.
6. Who benefits from government spending? It has been said the economy and world inside the Capital Beltway is a totally different place from the rest of the country and the economy. Why? Because people might be buying few presents or eating out less, but Washington is still spending lots of money to government contractors. Often these projects have long timelines. The economy might have slowed, but the government keeps spending. Who are the beneficiaries?
7. What is the overall direction of inflation? Are things getting worse and worse, with inflation accelerating month after month? On the other hand, is inflation gradually coming down, but still a problem? Will the economy improve once inflation is under control? We might not be there yet, but are we headed in the right direction?
8. What are oil prices doing? Oil (and gas) has been central to the world’s economies for a very long time.2 When the economy slows, demand for oil falls and oil prices drop. This is usually reflected at the gas pump and in heating oil prices. The economy might be slowing, but your client benefits because of lower gas prices at the pump.
9. What does your client think life will look like in five or ten years? Do they think we are all going back to stones and clubs? Civilization will fall apart? Not likely. They probably think life will look similar to today with better technology, higher prices and advances in health care. If they think the future doesn’t look too bad, why are they worried in the present?
10. Your client is wealthy. According to Yahoo, if your client’s household has a net worth of $3.8 million, they are in the top 5% of US households. If they top 11.6 million, they are in the top 1%. (Other sources place the number higher.) $970,900 puts you in the top 10%.3 This includes real estate and other assets, not just cash and securities. When the stock market goes down, people might look at their account statements and feel poor. They are probably better off than they think.
When stocks go down, people find reasons to be glum. There are plenty of reasons to be optimistic. Part of the way advisors add value is pointing this out.
Related: How “Present You, Future You” Can Close Sales
1. https://smartasset.com/financial-advisor/how-long-do-recessions-last
2. https://www.opec.org/opec_web/en/900.htm#:~:text=Oil%20has%20been%20the%20world%27s,on%20into%20the%2021st%20century.
3. https://finance.yahoo.com/news/rich-enough-join-top-5-170012713.html#:~:text=According%20to%20recent%20data%20from,top%205%25%20of%20U.S.%20households.