(upbeat electrical music) - Welcome to Forum 360.

I am Mark Welfley.

Happy New Year.

Thank you for joining us for our Global Outlook with a Local View.

I think we can all agree that the last three years have been tumultuous.

We are living through a pandemic, a war, and record inflation, to name a few things, and now economists and market analysts have been calling for a recession in 2023.

The very mention of the R word, as it's known, strikes fear into the heart of investors from Main Street to Wall Street.

Well, what exactly is a recession?

Should we fear it?

And what preemptive actions can we take to ease the pain of a market downturn?

My guests today are Bob Huebeck and Nick Yaw from Encore Financial.

They're investment advisors, and I've asked them to come on the show and take us behind the scenes of the current market and share their thoughts on the year ahead, along with three investments for a recession.

So, welcome, Bob, and welcome, Nick.

Can you start by telling us what is a recession?

- I'll leave that to Nick.

- Well, Mark, broadly defined, a recession is two consecutive quarters of negative growth in our GDP, or two consecutive quarters of contraction, which we actually experienced in 2022.

The first and second quarter were contractions.

So by that measure, you could say that we are currently in a recession.

However, a recession was not officially clocked in 2022, likely due to unemployment being at record lows and wage inflation, which is good for the consumer.

So there's still been a lot of spending.

There's still plentiful jobs.

I think there's actually 4 million jobs available between ages 25 and 45.

So some measures, the economy still looks pretty robust, which is why there's some reluctance to actually call a recession.

However, I think what economists are forecasting in the future is perhaps a credit crunch.

So at the same time, you have record low unemployment, you also have record high credit card debt.

And as interest rates are also increasing, how does that eventually transpire and trickle down to Main Street in terms of future lending, home purchases, auto purchases?

So the forecasted recession is due to a lot of technical data that we just haven't seen actually hit Main Street yet.

So we may look back in five years and say that we actually were in a recession in 2022, just the beginning.

And over time, you'll have Federal Reserve or Treasury Secretary, or whoever the Administration is, actually acknowledge a recession.

And we're seeing more layoffs, right?

You went from a cycle of 10 years of massive growth in excess.

Something I read over the weekend was Twitter, for example, started the year, or started 2022, with some 7,500 employees.

Now they're down to 2,500 with very little change to the actual product.

So you're seeing some of maybe the excess head count go the other way.

And over time, that trickles down to Main Street.

- Sure.

So does a recession, when it's called Harvard's-defined, does it equally affect everyone?

Does everyone feel the same type of pain?

- Well, certainly not.

Inflation is really, it affects your paycheck-to-paycheck worker, American worker, more so than someone that had maybe excess savings during periods of low inflation.

I mean, if you think about it this way, maybe you have an American couple and they make 80, $90,000 a year.

Well, if you have an inflation rate of 10% or so, 15%, and that couple was saving 10%, right, maybe they were saving $9,000 a year, well, now the inflation, now they're maxed.

Now they're spending all their dollars.

Or that same couple, they have another child that's coming due, and they had savings, now they're maxed, plus inflation.

Now they're putting more on credit.

So different swaths of consumers are gonna be affected differently.

It's either going to impede their ability to save.

They're going to perhaps save less, and then dependent on worker class.

So this is somewhat of a, I don't know how different this recession is, but it may affect white collar more so than blue collar.

I mean, a lot of the jobs that you have vacant currently, and what's driving some wage inflation, is blue collar trade jobs.

Because we've spent decades promoting higher education, which look at the student loan legislation that is ping-ponged back and forth, and that debt, we've spent decades promoting higher education at the loss of somebody that can turn a wrench.

So you're gonna maybe see more white collar affected in this recession than you do blue collar.

And that's some of what's continuing to drive this economy, and the fact that a recession maybe still hasn't been called.

- Your backgrounds.

Bob, you've been in investment advising for years.

Tell me a little bit about your background.

- I'm much older than Nick, but I started in 1974 in Harrisburg, Pennsylvania.

Moved here in 1980 and run my own agency, or had my own agency since 1981, and still doing it today as a full-time basis.

- Right, you've seen a lot of ups and downs over the years in the market.

- I have.

- Share some advice from your years of- - Share some advice.

First of all, so you gotta stay the course when you're investing.

It's not the time to be jumping in and out, or into it or out of it.

It's the stay committed to what you're doing and what your goals are, and to make sure they're planned properly so you know which direction you're heading in.

- Okay; Nick, a little bit about your background?

- Yeah, so I'm a Northeast Ohio local guy.

Grew up in a small town, went to Kent State University, where I graduated with a degree in Finance, which has been a passion of mine for many years.

And then a few years after graduation, I decided to become a licensed broker, which then led me to get more into the investment advising and consulting.

And then that has evolved into a more overall encompassing financial planning career.

And then I've been working with Bob for the last eight years, and then we've been partners the last three.

So it's been a great benefit to learn from an industry veteran.

I've said in a recent talk that we were invited to a month ago, that that significantly accelerated my career at least 10, 20 years, but- - [Bob] I have a tendency to age people.

- Yes.

(laughs) - With wisdom.

- Yes, with wisdom.

- I wanna ask you this question before we get into the investments that are meaningful during a recession.

And I'm sure you get the question when someone comes to you and say, "I don't need any investment advice.

"I can just go to the Internet to my brokerage account.

"I can pull up any kind of research, any angle, "any chart that I want.

"I can make my own investment choices "based on what I know from the Internet."

What do you say to them?

- Yeah, a couple weeks ago, we had a really foggy day.

It was a Thursday, and I had to drive from my house to a meeting at, like, seven o'clock in the morning.

And it was foggy and I was driving down the road, and it was in tunnel vision; all you could see was this.

And I noticed some lights off to the right in the woods.

And I drive by this area all the time and I never noticed a house was there.

So I stopped, I literally stopped the car to look, to see this house.

And I realized I was about two miles past where I thought I was, 'cause you can't see.

And when you're investing on the Internet, and you're doing it yourself, you only see what's there.

You don't see all the programs and products, and other areas to invest in.

You only see what you're looking at.

And it gives you tunnel vision.

When you're dealing with a registered advisor, hopefully, they're doing the job properly and they're giving you a field of, a view much larger than what you're getting off the Internet.

- And if you think about it, too, we have a data set of real life client experiences.

So a lot of times, to piggyback Bob's point, we're looking five to 10 years down the road because client Mr. Smith had a similar experience, and we're setting things up in a way to keep future considerations in mind; where someone just solely looking on, it's a high likelihood you're gonna miss something.

- Piggybacking on that concept is the investment concept or the investment approach for, say, someone who is a first-time investor, not real familiar with the market versus a seasoned investor.

Now, does one one size shoe fit all?

Or how do you work with a first-time investor versus a seasoned investor?

- Not just a first-time or a seasoned investor, it's what they call "know your client."

It's before you even think about what investment products to use, what areas to go into, you've gotta know what the client's expectations are, what they're looking for, how long they're gonna be in the market, what age they are, what their financial situations happen to be.

You could have a first-time investor that's earning 200, $300,000 a year, and an experienced investor that's not anywhere near that type of income.

So you have to know your client, know what their goals and directions are, and then you can pretty much direct which type of investments to put them in.

- There's a difference between managing investments for accumulation, if I'm in the accumulation phase versus, perhaps, a preservation and income phase.

So how you actually organize those investments are gonna be completely different.

- So let's get into the, in the investments now.

So whether we, it's been called as a recession or not, whether we've had two quarters of downturn and one up, but if you are in a recessionary environment, however that's defined, let's just say for the example that it is, where do you put your money?

Where do you invest?

You brought some investment opportunities for us I'd like to hear.

- Yeah, well, let's just say, to your point, Mark, whether we're in a recession or not, we're in a different economic environment.

That, we can all agree on, regardless of whether we're in a recession.

So we're out of; we were coming out of in 2022.

We are there; we are out of now a period of zero interest rates and loose money, a lot of printing of money.

We are now in more of what's called a monetary tightening phase rather than easing.

So you have rates that have gone from 0% to four and 1/2, and you've got a tightening of the money supply.

So different companies are gonna fare better in those types of environments.

Compare and contrast a couple companies.

- Sure; before you do, I just wanna reintroduce you again to our listening audience, so- - [Nick] Yes.

- Use that as a cliffhanger.

If you're just joining us, thank you for watching and for listening.

I am joined today by Bob Huebeck and Nick Yaw from Encore Financial, and we're talking about investments; investments to consider during a recessionary environment.

Sorry to interrupt; and if you'd continue.

- So the period that we've exited, being of low interest rates, growth companies are going to thrive in low interest rates.

Part of how they grow is through leverage and financing their operations through debt.

So that might be a company like Tesla.

Tesla is a 100% growth stock.

Snowflake, which is a cloud-based computing company, another growth stock.

So as interest rates rise, it becomes more expensive for those companies to finance their expansions.

Companies that are gonna do better in those types of environments are gonna be more legacy companies.

Think Coca-Cola.

If I drink Coke, I'm probably not gonna switch to Pepsi and vice versa, right?

These are relatively established brands that are in a completely different game.

Tesla needs to grow at 30%, et cetera, and continue to grow their market share for their stock to do well, and they do that through low interest rates.

A company like Coca-Cola is in the cash management business, so now they're taking their cash and they're earning a higher clip on a coupon.

They may be cutting costs, doing different things.

It was interesting, last year, a sleeper company, Hershey; Hershey chocolates returned 20% to their investors in 2022.

- [Mark] Comfort food.

- In a minus-20% S&P.

So you wanna look at more value companies.

Now, that doesn't mean that you completely overlook growth companies.

You maybe trim your exposure.

Because at some point in time, hopefully, we sort through some of this monetary mess, and you're going back to an interest rate cutting cycle.

And before you've even realized it, the market sniffed it out, and your growth stocks have come back.

So I don't wanna discount growth entirely.

Depends on your time horizon.

But your value companies, and bonds have become more attractive.

If you were in bond portfolios last year, you lost just as much as a stock.

You were down 13-some percent, because your bonds, in an increasing interest rate environment, became less valuable, your current bonds.

Right now, you can buy treasuries and get 4%.

You can get 4% pretty risk-free.

So if you're a more conservative investor, you start to dabble into bonds.

And if we go in an interest rate cutting cycle again, those bonds become worth more.

- Various.

- Yeah.

- So we have value, the value companies, right, like Coca-Cola.

- Look at funds.

- Okay, look at some bonds, perhaps, in this environment.

- And then, perhaps, some insurance-based products.

It's interesting, in your early years, so when we talk about insurance and how it relates to financial planning and investments, in my early years, my biggest risk, if I have a family, or I'm in my earning years, is premature death.

So I buy a life insurance policy.

When I've accumulated assets and I'm in my retirement phase, or I want to protect what I've built, you may loop in an insurance company to transfer market risk, and that's where there are many insurance-based investment products.

There are fixed and variable.

There's been some innovation in those markets as well, just due to algorithms and ability to trade options.

And there's some interesting insurance-based investments in these types of markets.

- How do you know when to get in and when to get out of a market, Bob?

- Well, you're looking at me for that one.

- (laughs) Well.

- When to get in and when to get out.

- Your 40-plus years of experience, tell me, how do you know when to get in and out?

- Well, the simple answers are always buy low and sell high.

But as far as having a crystal ball that tells me when those highs are gonna hit and when those lows are gonna hit, I don't know.

The biggest problem that I have with clients is the emotion of it.

When the market's high, everybody wants to buy because my barber's telling me in the barber shop that the market's great, you gotta get in.

And when it goes the other way and it's low, everybody wants to get out because the emotion's driving, "We're losing money, we're losing money; I gotta get out."

And it's backwards the way it should be.

So you gotta get the emotions out of it.

- It brings to mind the Warren Buffett quote.

And he's quoted as saying, "Be fearful when others are greedy "and greedy when others are fearful."

We're in an interesting perspective, because we can kinda gauge investor psychology.

And I do recall investors wanting their frothier.

They wanted to get a little more aggressive the tail end of 2021.

Now, that might be hindsight bias, but I can think of a handful in particular.

And that was at the top of what that bull market.

As far as timing to get in and get out for viewers, if you have a long time horizon, there was a study by "Harvard Business Review," said at over a span of 20 years, the entry point mattered very little.

So if I'm saving for retirement, which I read over the summer, that a trending search on Google is, "should I stop saving in my 401(k)?"

20 years, it says absolutely not.

There's a lot of mechanics going on, whether you have an account that's being rebalanced or you have a dividend reinvestment going on, staying in the market is what's most important.

But if you were looking at more of a short-term investment time horizon, the price-to-earnings multiple, which I'm not gonna get technical but just know the numbers, 17 to 20 is an average market on the S&P 500.

We were well over 20 at the top of 2021.

Right now, the market is trading at right around 15, 16, so it's a little bit less than its historical average.

Now, here's the bad news to that, is for a recession to be called, typically, the S&P 500 needs to bottom at about 14 times earnings, which would say, it suggests, if history repeats itself and they eventually call this recession, so on and so forth, that there's a little bit of room to fall before it gets better.

- Hmm, it's interesting.

So looking for the silver lining in the dark cloud, there are some benefits to a recession, a chance to buy in at lower multiples or with stocks that have have fallen.

I was also doing some research, and a couple of articles said, "Starting your own business "in a recessionary environment also can have some meaning."

The availability of employees who perhaps have lost their job, now that pool is larger and richer.

Thoughts on starting a business in a recession?

- I started in the industry in 1974.

In 1981, when we had interest rates at 12 and 13, 14%, I started my agency.

I started it in a bad economic environment, and it's been very good to me.

It's worked well, in my case.

I don't have a problem with starting a business in a recession, 'cause you really can't go much lower than where you were.

And that's where we were, at the bottom.

And so we, my wife and I, opened the doors of our agency, and it's been the same agency since then.

We've never changed broker-dealers.

We were the same company for 42 years; 43 years now.

- Starting a business?

Thoughts?

- Yeah, yeah.

No, it makes me think about, I cite Buffett often enough, but where can you find a return on investment other than yourself?

So investing in yourself in some form or fashion.

That can be education, that can be starting a business, but labor market definitely gets a little bit more attractive.

You have companies that just don't survive recessions.

It makes me think about the overall health of the economy, and how the point of recessions and the silver lining is you start to trim some of the excess.

You start to weed out, and I guess that's the fundamental purpose or idea with capitalism is you weed out some of the subpar performers to foster on whether it's innovation or just a overall better service model.

That's something that we're challenged with doing often enough in our business, is just adapting to our clients and our consumers.

And especially as a professional investment advisor and someone that's managing money in a recession, if you're not forced to do better by your clients and keep them, and challenge yourself in your service model, that's when you would expect people to shut their doors.

- In the last minute that we have, I'd like you to comment, if you can, on how the war in Ukraine might complicate a recovery of a bottom, if you will, in the United States market.

Can you?

- So that's an interesting question.

With markets being a leading economic indicator, forward-looking, our hope, what we like to think is that a lot of the negative in the war in Ukraine has been priced into markets.

We are currently experiencing, and have seen how this has disrupted supply chain, and energy, and global trade, and perhaps even shifting power, these power struggles.

It could surprise either way, meaning if there's a ceasefire, surprise ceasefire, this year, you could see a significant positive to markets.

And markets do not like uncertainty.

And that's the war in Ukraine.

- Might the opposite also be true if the war drags on, we might have a harder time finding certainty, and therefore, perhaps, a bottom?

- You know, it's been good for military companies.

So that's the other side of it.

There's certainly been companies that have benefited, whether we'd like to acknowledge that or not.

Could there be significant surprise, right?

Has history told us "Yes," yeah.

And then it could surprise the other way.

I'd like to remain optimistic.

- Yep.

- Me, too; thanks.

Walt Disney once said, "I've heard there's going to be a recession.

"I've decided not to participate."

My friend, Kevin, always says, "Recessions don't affect me "because in the stock market, I'm always a buyer."

And finally, Peter Lynch advises, "Know what you own and why you own it."

However you approach investing, you can all benefit from the words of Ben Franklin, who said, "An investment in knowledge pays the best interest."

I wish you well navigating the choppy waters of the market in the year ahead.

Thanks again to my guests, Bob Huebeck- - [Bob] Thank you.

- And Nick Yaw.

- [Nick] Thank you.

- And thanks to you for watching and listening.

And let's keep our minds and ears open until next time on Forum 360.

(upbeat electrical music) - [Announcer] Forum 360 is brought to you by John S. and James L. Knight Foundation, The Akron Community Foundation, Hudson Community Television, The Rubber City Radio Group, Shaw Jewish Community Center of Akron, Blue Green, The Electric Impulse Communications, and Forum 360 Supporters.