How Much Stock Should You Put in Market Predictions? – Episode #373

You read headlines like, “After a brutal 2022, Wall Street predicts 2023”, “Market Forecast 2023: Challenges Abound”, and you know analysts pour over numbers and trends to come up with their predictions. So are they accurate? On this episode of the Dentist Money™ Show, Ryan and Rabih discuss what economists base their predictions on—and what can end up going right … or wrong.

 

 

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Podcast Transcript

Ryan Isaac:
Hello everybody, welcome back to another episode of The Dentist Money Show, brought to you by Dentist Advisors, a no commission, fee-only, fiduciary comprehensive financial advisor just for dentists. Check us out at dentistadvisors.com. Today on the show, fan favorite, Rabih. Rabih joins us. And what we’re doing today is we’re talking about some of the predictions that top economists and financial thought leaders had predicted for the year 2022 that just ended, and we’re gonna talk about which ones landed, which ones did not land, and then we’re gonna talk about some of the ones that are coming up for 2023 that are floating out there. It’s gonna be interesting to see how these play out. But more importantly, we kind of tie this together with what does that mean for your financial strategy, your investment strategy, and your overall financial decision-making? What kind of effect do these kind of predictions have on your actual day-to-day life, that’s the conversation today. Grateful for Rabih spending his wisdom and time with us, thanks for all of you for tuning in as always. If you ever have any questions for us, go to dentistadvisors.com. We’d love to have a chat with you. Thanks for being here. And enjoy the show

Jess Reynolds:
Hey there, it’s Jess with Dentist Advisors. Did you know we recently launched a new service called The Dentist Money Membership? It’s an affordable way to support your personal financial strategy with cutting edge technology and guidance from dental-focused CFP advisors. The Dentist Money membership includes the Elements financial monitoring app, an annual financial check-up, CE courses, an automated investment platform and more. To learn more about the Dentist Money membership and to get started, go visit dentistadvisors.com/money.

Announcer:
Consult an advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to The Dentist Money Show, where we help dentists make smart financial decisions. I’m your host, Ryan, and I’m here with fan favorite, the crowd pleaser, Rabih. What’s up, Rabih? How you doing?

Rabih Dimachki:
Hey, Ryan. How’s it going?

Ryan Isaac:
Happy New Year, buddy. Did you ring in the New Year with anything special?

Rabih Dimachki:
It’s the usual resolution of, “I’m gonna eat healthy.” But I’m in the office today, and we had a really good burger, I’ll just start with that. [chuckle]

Ryan Isaac:
Office food and then there’s the closet upstairs full of junk food constantly. So that’s a tough one. I’m excited for our episode today. I reached out to you and I said, “Hey, let’s do a conversation about predictions.” Every year, there’s people who weigh in on what they think is gonna happen in the economy, in the markets, and that ranges from everything from Reddit, Wall Street bets, Reddit sub-page, but…

Rabih Dimachki:
Reuters and JP Morgan and Goldman Sachs, everyone has an opinion.

Ryan Isaac:
Everyone does it. And I think it’s so interesting just to look back and see what people said and then see what they’re saying for this year, and then kind of discuss that.

Ryan Isaac:
Here’s what I think is interesting, this is the cynical part of me. Fifteen years, doing this job and just being around these topics and watching how… At a high level, there’s all… You can talk all day long. We had a high level about markets and economies and all this stuff, but in the real world life of day-to-day people in the day-to-day decisions people have to make, it’s sometimes very different. But my cynical view of predictions is that it almost just doesn’t even seem like it matters how smart the people are, things happen that nobody sees coming, and then the things everyone thinks are gonna happen don’t happen, and then it’s just like every year, that kind of stuff goes on.

Rabih Dimachki:
And it’s interesting because once you form a prediction, someone will act on that prediction and suddenly your own prediction isn’t relevant anymore. It’s dynamic. It’s so dynamic.

Ryan Isaac:
Yes. It is always evolving. And so, I guess, what the cynical part about that is, I just, I don’t think that predictions should be and are actionable. I think it’s interesting or entertaining at best, but the average person shouldn’t be making large-scale personal financial decisions or even their business decisions in a lot of cases based on what experts are saying is gonna happen in the next 12 months. Because if that was the case, I’ve heard people say, “Oh, I’ve heard that this is gonna happen and this is gonna happen, maybe I shouldn’t expand my business, maybe you shouldn’t grow, maybe I shouldn’t invest,” and it’s like, then a year goes by, that stuff didn’t happen. Other things happen and they’re glad that they did it.

Rabih Dimachki:
And I totally agree. And I think it’s in our human nature to continuously try to predict what the future is to guarantee our own survival. So it’s more of, I’ll give you the benefit of the doubt trying to predict what the weather is gonna be tomorrow, because you need to go out and hunt as a caveman, right? But when you’re dealing with a very random, chaotic system, that predictive ability just goes out the window. And what do you do at that point?

Ryan Isaac:
What do you do? Yeah, and I often think too, what is the average person supposed to do with this information when someone says there’s gonna be a recession or interest rates are gonna do this, or you shouldn’t invest in this thing, it’s like we all have to just… Our lives go on. I think actionable… We’ll probably get to this, but what’s actionable is have some liquidity, have some emergency fund, be prepared for any expenses you know are coming up, have a healthy savings rate. There’s basic financial principles that apply whether the predictions are good or bad or neither, in any given year. Well, let’s jump into it. Can we start with the, I guess, the list of 2022 predictions?

Rabih Dimachki:
Oh yeah. Sure.

Ryan Isaac:
There’s some things that we hit. There are some things that were not quite hit, begin wherever you want, because you compiled kind of a great list here and I’m excited to go through it.

Rabih Dimachki:
It’s so funny, I discovered this yesterday, but you know when you do a Google search and right below your search, there’s a couple of million results in 0.5 second time of the… If you look right next to it, to the right, there’s a tool button, and if you click on that tool, you’ll say, I want all the results that were before December 2021. And this is what I did. I discovered it yesterday, I’m so hyped about it. And suddenly, I got all these articles that were actually written in November or December 2021 that were trying to predict what will happen in the stock market in 2022. And as you see, the results are amazing.

Ryan Isaac:
Okay. Now, I just started Googling that exact same thing, and that is a cool date. Yeah, who cares what you… Don’t predict something in the middle of 2022, tell us what you thought in December of 2021.

Rabih Dimachki:
Exactly, exactly. And here are some of the stuff that they missed. Let’s start with the stuff they missed. And for 2022, the S&P 500 closed negative 19.4%.

Ryan Isaac:
Okay, yeah.

Rabih Dimachki:
I don’t know… Do you wanna call out names or we’ll just say that market…

Ryan Isaac:
No, dude. Let’s talk about where these came from. Yeah, that’s great.

Rabih Dimachki:
Okay, so there’s this article by JP Morgan that was actually by Fortune magazine that showed what JP Morgan had predicted, what Goldman Sachs predicted, the return… And Morgan Stanley, they returned with B for 2022. Goldman Sachs prediction for the S&P 500 for 2022 was an 11.7% gain, and Morgan Stanley’s prediction was a negative 3.7. And those are experts in their fields.

Ryan Isaac:
They’re smart. These are multiple PhD level boards of… This isn’t one person. These are boards of human beings that work 80 hours a week, PhD level academia and research.

Rabih Dimachki:
Exactly. And before we start talking about what they missed and what they got right, you’ll have to give any predictor the benefit of the doubt that they are trying to come up with a prediction based on the information they had at that time, so we don’t have hindsight bias. Given the information I have right now, what can I predict towards the future? By the end of 2021, the stock market was at an all-time high. The S&P 500 was in the 4000 level, it was really a good market system with slight… The inflation wasn’t a big problem as it is in 2022, and people would have thought the Fed would work around it better, they would actually be able to come out of this without a heavy economic price tag on it. But as new information came in, it showed otherwise.

Rabih Dimachki:
And the market reacted S&P closed at negative 19.4%. And I think this is what’s interesting, maybe on December 31st, if they would, JP Morgan, Goldman Sachs and Morgan Stanley came and told you, “These are our predictions.” You’d be like, “Yeah, I believe you. It might be true.”

Ryan Isaac:
Yeah, totally.

Rabih Dimachki:
But if you read it right now and it’s like, “Oh, are they kidding me? They predicted 11% up for the year.” How do you feel?

Ryan Isaac:
Yeah. And I always wonder too, obviously, these people are very intelligent, educated people, taking into account lots of information and data. But I always wonder how… They’re just humans too, so how much does the current environment that they’re making predictions in affect their predictions? For example, it’s the end of 2021. We went all of the COVID, main COVID 2020 year, all of the stimulus… And then the stock market rebounded in 2020. Stimulus came out, at least in our little section of the world in dentistry, everyone’s crushing it, everyone’s producing and they’ve got profit and they have more cash than they’ve ever had before, markets are up. Think about the real estate market, 2021, you can’t even buy a house. Houses are going… Not even listed publicly, and they’re being sold in 24 hours, they’re way above asking. People are waiving. Is that when I moved? Did I move in 2021? I only buy assets when they’re at their peak, that’s something when I…

Rabih Dimachki:
That’s my trading indicator from now on.

Ryan Isaac:
It is. If I ever buy a house or a car, then you guys know were at a peak. Yeah, when we were out shopping for houses, open houses were bringing hundreds of people sometimes, people were waiving. I remember we felt all this pressure to waive, oh, you have to waive your inspection, you have to waive your appraisal contingencies.

Rabih Dimachki:
Wow, that was crazy.

Ryan Isaac:
Insane thing, so I think about… I just wonder how much does environment influence someone’s prediction or outlook for market, even as much as they’re trying to take data into account, how much is that environment… It was really frothy. Everyone’s really excited. Everyone’s really hyped up. Inflation hadn’t come in yet.

Rabih Dimachki:
Recency bias, right?

Ryan Isaac:
Recency bias, yes.

Rabih Dimachki:
Predictions for 2023 are actually dismal. We might get positive surprises just because we had a hard year and we are victims of this recency bias. It goes both ways.

Ryan Isaac:
Yeah, exactly. So I think that’s what… When I looked at the things that you’ve… And if you just do the Google search like you did and use the little tools button to put the cap on December 31st, 2021 and look at their predictions, they’re all really positive about the market. They’re all like, “Hot housing market, increased stock market,” maybe medium inflation, maybe some…

Rabih Dimachki:
The comeback of SPACs, that one really, I have to laugh.

Ryan Isaac:
So, let’s keep going. All right, keep going down your list.

Rabih Dimachki:
Yeah. Motley Fool predicted SPACs will come back.

Ryan Isaac:
Explain SPACs to the audience.

Rabih Dimachki:
SPACs are simply… Let’s call them special purpose entities, where if a company is too small or doesn’t want to cover the cost and the compliance headache of trying to go on a public market offering, a SPAC is a shadow company that will list itself on the market and then go and acquire that company, so it’s indirectly listed on the stock change. It has its benefits, it’s a great financial engineering product where people will have access to companies that they usually can’t access due to size or due to the company not being able to go on a public offering. But aside from the financial and economic benefits of it, it became a trend, it got traction, numbers of SPACs were much higher than IPOs for some time in 2021, and people thought this trend would continue. But as the market goes down, both IPOs and SPACs actually took a hit, because wide raise equity capital at low valuations too. In general.

Ryan Isaac:
I was just reading something from Goldman Sachs, this was previous… This was like in 2021, talking about last year is exactly what you’re just saying, there’s something that they refer to as the TINA effect, and then they explain that that means the alternative to equities appears unattractive. Although I don’t know why TINA, T-I-N-A, what that states.

Rabih Dimachki:
I think TINA is, There Is No Alternative.

Ryan Isaac:
There Is No Alternative. That’s what they were saying. They were saying S&P would have at least a moderate gain because there is no attractive alternative to S&P equities but…

Rabih Dimachki:
Not the case anymore.

Ryan Isaac:
Yeah, not the case. Yeah. Just to that point, as we move through 2022, what was the attractive alternative to… What were people doing with their money? I can give some contextual perspective from what clients did with money, but generally, society, what did people find more attractive than buying equities? ‘Cause people were selling equities.

Rabih Dimachki:
Right. People were selling equities, but it’s a transition, some of them just went to cash, they tried to go into something safe, but now that the TINA environment disappeared, you’re gonna be looking at alternatives. And what are those alternatives? The biggest one is fixed on income, and we’ve had multiple podcasts talking about this. Yields are now in the 4% range, this means your portfolio is gonna give you a hedge if in case economic slowdown happens, the Fed needs to get raised. And as well as on top of that, you will be receiving cashflow in terms of higher coupon yield.

Rabih Dimachki:
And actually, I did not find… Maybe I did not research much, I’ll just put that disclaimer. But I did not find an article that said, we’re gonna be having the worst bond return quarter in recorded history of bonds. Bond prices went down double digits. And this was new, we haven’t been in a zero interest rate environment for a long time, and the whole history where the Fed has been intervening and changing policy rates. And given that we started from a really low interest rate, it had a much bigger magnitude on the prices, and no one really expected it. We knew bonds would take a hit, would we know it would be the worst quarter in recorded bond history? Absolutely not.

Ryan Isaac:
Yeah, it’s such a good point that. You could probably speak to this better. The last time I remember bonds and stocks being correlated so tightly like that and moving both in such a heavy negative direction was kind of the Great Recession, ’08 period when there wasn’t safety, there was nowhere to go. And there’s probably been some little micro times between them, but yeah, last year was one of those times when usually people… Just so everyone understands what you’re referencing, usually when people are scared about stocks, they’ll go buy bonds ’cause they’re supposed to be safer and at least give you a small rate of return that’s not gonna drop double digits.

Ryan Isaac:
But bonds did what they did because bonds are inversely related to interest rates and when interest rates went up sharply, bond prices went down sharply. Yeah, that’s what I was just trying to think. What alternative did people consider instead of buying stocks or bonds? I would say in the beginning of the year, people were like, “Let’s buy some bonds.” I remember that. Clients wanted to shift some kind of… And it’s just a handful for my discussion, so I don’t know what everyone was doing, but they’re the handful of people who are like, “Let’s shift some big money to bonds,” and we didn’t. And I’m glad we didn’t because we’ll be able to… These are younger people. They don’t need to do that at this point in their lives. But there was also, to me, and again, this is my experience just anecdotally, this seemed to revamp a lot of real estate discussions. We’ve talked about it on the podcast recently, but having equities be down for a whole year, which is not unprecedented, the average bear markets what? 14 months. That’s the average. The longest is over two years that it ever was.

Ryan Isaac:
It’s kind of funny how impatient I guess we are as humans with our investments in stocks. We’re really patient with investments in dental practices or other side hustles.

Rabih Dimachki:
Or real estate.

Ryan Isaac:
Or real estate. We’ll sit on junk forever and we’ll be like, “It’s gonna be fine.” But stocks, it goes down for more than 60 days and we’re like, “Dump this thing.” But it seemed to revamp a lot of interest in what people on the surface call passive income that doesn’t have losses. People will just be like, “Oh, this stock market thing sucks, I’m gonna get into passive income and real estate because I don’t wanna have these losses, and I kinda just want some steady income passively,” which is a whole other… We’re not gonna go there.

Rabih Dimachki:
This is a whole other… And it’s very interesting.

Ryan Isaac:
Yeah, very interesting. And that’s a whole other discussion, and there’s a lot to unpack there that’s not just on the surface, but that was my experience of what kind of… It rejuvenated some interest in other asset classes, which was kind of fascinating to watch. But I will say from a whole, and we just did a recap episode of last year’s statistics and benchmarks, most of our clients still kept saving lots of money, relative to the national average of almost triple the national average savings rate, which was our client average last year. And to see people saving, in the high teens as a percentage of their top line gross income during a year like last year, shows me a lot about people’s discipline and understanding of how markets work. And I’m excited for the people who did that because they’ll reap the rewards.

Rabih Dimachki:
Yeah, it’s great. And actually, this year is one of the years where it tested patience. Usually in the stock market, you see a sharp sell-off and people will freak out, the VIX will hit 45-50, right? The VIX never hit 45-50 this year.

Ryan Isaac:
Can you talk about the VIX? Explain a little bit. What is the VIX? What is it measuring? And give us some context, historical context of those spikes of where it’s hit.

Rabih Dimachki:
Yeah, sure. So the VIX is the Volatility Index. It’s an index, you can’t really trade it.

Ryan Isaac:
Yeah.

Rabih Dimachki:
But it’s a great indicator for whether people are hedging their stock portfolio or not. When people decide to go buy put options and hedge their stock portfolio, the VIX goes up and down. And it’s calculated in a way that the number you look at actually tells you what is the expected annualized volatility for the next 30 days is. So when you look at a VIX reading of 20, it’s telling you that next month, the next 30 days, they expect there’s a 20% deviation in the market on the upside or the downside, annualized. It’s not like 20% is gonna happen in one month, it’s 20 divided by 12 in a sense. And when the VIX number shoots up to 50, they expect the next 30 days annualized to be a 50% move in the market, either up or down.

Rabih Dimachki:
So as risks increase in the market, as people run to the options market to hedge their portfolio, the VIX reflects it. And with time, it just tells you what’s the fear. High VIX, it means the people are fearing and there’s uncertainty in the market. Highest VIX… The two most recent VIX hikes that were really, really high was in ’08 when the VIX hit around 80 and in 2020 during COVID when it hit 80. While this year, it really stayed at most in the 40 range for a couple of days and this tells you that even though we had 12 months of sell-off, it wasn’t a fear-induced sell-off.

Ryan Isaac:
Yeah.

Rabih Dimachki:
And it was the market pricing in what the economy is doing and how long it will take for those medium-term phenomena such as interest rates and inflation and the job market to cool down, to be priced into the price. And when you have a market that sells off for 12 months and fear isn’t included, like it’s a normal selling, it really tests your patience and it’s like, “Do I want to keep saving?” And kudos to our clients who kept a really high savings rate.

Ryan Isaac:
Yeah. And I look back to a year ago, the first quarter or even first half of the year, I think there were a lot more questions and phone calls about, “What should we do? Is this bad? Is something big going on? Should we change our strategy?” And again, most of these people are 30s and 40s, mid-career, they’ve got decades ahead of them. So if they’re on a set plan, unless there’s like a big life change, no, they should keep going and they did. But to your point of how kind of slow that decline was and it come up a little and back down a little bit, I think people got used to it in the second half of the year. There was a lot more questions and more concern, I would say, in the first half of the year, especially the first quarter.

Ryan Isaac:
Because we’ve just been spoiled, man. I mean, you think about… I always keep going back to 2020, March of 2020, and I can just think of some of those circumstances so vividly and to go through a situation, as crazy as that was, as unprecedented as that was, and we’re still feeling the effects of it and will for a while, at least in the market perspective, I mean the whole world and the economy and all the other effects, health and that kind of stuff is a whole other separate. But from a market perspective, to have that sharp of a drop, March of 2020, and then that sharp of a rebound and end the year the way we did, I think we just got a little bit spoiled…

Rabih Dimachki:
Yeah.

Ryan Isaac:
For what we think markets are supposed to do. And before that, I mean 2018, I think it was 2018, like around Christmas, it was pretty bad. I remember getting phone calls around Christmas, like that. I think 2015 had some mid-year stuff, and then earlier than that was kinda following the recession stuff from ’07, ’08. But I just think we got a little bit spoiled. So the first half of last year I think kinda freaked people out, and then they got used to it. I think they kinda got used to it.

Rabih Dimachki:
Yeah, they started getting used to it. The bull market spoils you, let’s just put it as is.

Ryan Isaac:
It totally does.

Rabih Dimachki:
No one expected the Russia-Ukraine war, right? And when that started… Like going back to our conversation, in the first half of the year, people were like, “What’s going on? Do I need to hedge?” You were getting very hawkish fed, fastest hike based in history, a Russia-Ukraine war the affected supply chains, oil price is hitting the 130 level. So people… But as the war continued happening, as the fed continued raising interest rates, as oil prices reacted to market supply and demand and OPEC, people got used to it. And…

Ryan Isaac:
Yeah, yeah.

Rabih Dimachki:
This is how it goes. Now, once we have this information, are people taking it for granted and now making predictions for 2023 based on these events? Do they not think these events are gonna end? It’s a continuous process of re-adjusting your prediction.

Ryan Isaac:
Yeah, it is. And so looking back, I guess, in this list, and you could search for a ton of other predictions out there, but they all kind of ended up pretty similar. It seemed like it was gonna be a lot more positive outcome for markets that people had predicted. I’m glad you brought up the Russian war situation because that… It’s things like that that you just can’t see coming, or you could say like, “Yeah, eventually Russia was gonna do what they did, but like when and how?” Those are things you can’t predict and you can’t predict how all of the world around them is going to react to that stuff. And that was a lot like COVID. You could have said that it’s possible in the future that we have some kind of worldwide pandemic outbreak that shuts down modern economies, but how and when and in what magnitude and how it affects things, it’s just completely unpredictable. And that’s the world. That stuff will never change. And so I guess to pause at this point and say, “Alright, there’s the list, what do we learn from predictions?”

Rabih Dimachki:
When you have an opinion or a conviction about the market and the market has a different opinion, there’s one of two circumstances: Either you are right or the market is right. Either the market aggregated more information than you do and know something you don’t, or you have more information than the market. Me as a third person trying to decide, do I put my money on a person having different opinions than the market versus putting my money on the market who has all the information, it’s quite clear. If you are really, really convinced that you have superior information that’s legal, of course, let’s start with that, [chuckle] so legal superior information…

Ryan Isaac:
Okay.

Rabih Dimachki:
From the market, you would want to act on it. If you think the market is bullish, then you would… You’re bullish on the market, the market isn’t pricing this bullishness in, you would add risk in your stock portfolio. You know what? You would increase your allocation to stocks, you’d go and hire beta. If you think otherwise that the market isn’t bearish as it should be, you would want to reduce your beta or reduce your bond duration and you change these in your portfolio. Well, I know you’re gonna be talking more about how you would do it outside of your investment portfolio by properly saving or making sure that your cash flow is healthy in your dental practice, but you would act on them. But the question isn’t on how you act on them. It’s straightforward how’d you act on them. The main question is, when you are in an opposing view of the market, are you confident enough that your information is superior, or are you experiencing overconfidence bias?

Ryan Isaac:
Yeah, I like the… I don’t know what the exact phrase you just used, but it’s like, what are the odds that the average dentist has totally legal yet extremely rare information that would tell them how to bet on stocks? Yeah.

Rabih Dimachki:
Exactly.

Ryan Isaac:
And it’s funny you mentioned that though, you’re like, “Well, if you had information that would be bullish, you should probably have a more bullish portfolio, or more equities, less bonds.” But what’s interesting about that is when we build a plan for people outside of emergency funds and temporary cash or money they’re trying to save for something that they’re gonna pay soon like a downpayment or a landscape remodeling job or something, we’re trying to get people to invest in more aggressive portfolios. If you have decades ahead of you, that should be the plan anyway, just generally speaking. I’m 42. Everything I have in an investment account is all stocks. Any cash I need outside of that is just sitting in a savings account as a little buffer. So I think that’s how people should behave with their long-term investment accounts anyway, which is funny because it doesn’t matter what predictions tell us, you should do that anyway.

Ryan Isaac:
You should have a 20% savings rate in a bad year and a good year. And really, the counterintuitive, weird feeling that all this is, if you are a 20% saver or 40% saver like some people, or a 10% saver, if you are a saver and we have years like this where the whole year is down and has declines but you’re saving every month, or your portfolio is buying something multiple times a month, like in our business, we run rebalancing, you run it every single day, and if people have enough cash from dividends, interest payments or new savings, we’re buying stuff.

Rabih Dimachki:
Correct.

Ryan Isaac:
Some people are buying things cheap this entire 12 months, multiple times a month. And it’s like aside from having a crystal ball, there is no better strategy to getting superior, like highest possible returns out of a market than constantly buying, like some people have done. And that’s the strategy and it doesn’t matter if B of A or Wells or LPL said things are gonna go up or down. It doesn’t matter. It doesn’t matter.

Rabih Dimachki:
You’re right. Our friends at DFA say, the best investment strategy is the one you can stick with, right?

Ryan Isaac:
Yeah, the one that you stick with and you’ll actually do… And I would just say if there’s significant real data that would show us, “Hey, we might be going into a recession,” which means maybe your patients don’t accept treatment like they were 12 months prior, maybe your collections do dip a little bit, maybe you do have to pay people more to keep them around because of the job market, what you should do about that is just pay attention to your liquidity, that’s your LT score, make sure you have enough cash in the business, enough cash personally to weather that storm. But should you keep investing for the long term? Yourself 30 years from now needs you to keep saving this year no matter what the prediction was or what the market did. So let’s talk about this year. What’s on the schedule according to…

Rabih Dimachki:
Wait, just to give some justice to the predictors, there are two predictions they actually got right.

Ryan Isaac:
Oh yeah, yeah, yeah.

Rabih Dimachki:
They predicted that Bitcoin is gonna have a… Or crypto in general is gonna have a bad year and they did like every other S class.

Ryan Isaac:
Hold on, did they quantify what they meant by bad?

Rabih Dimachki:
No, unfortunately.

Ryan Isaac:
Okay. How bad do you think… [laughter]

Rabih Dimachki:
They did not say a 60-plus percent dip.

Ryan Isaac:
Yeah. Yeah, for context, the S&P had a bad year and ended about down 19%, I think. I think at the worst, it was down like 24 or something.

Rabih Dimachki:
Yes.

Ryan Isaac:
Bitcoin… Yeah, crypto… Crypto as a whole didn’t fare very well the whole year either, so…

Rabih Dimachki:
Yeah.

Ryan Isaac:
Okay, so someone said the crypto wasn’t gonna be great, alright.

Rabih Dimachki:
And that value might be growth. The value might be growth and…

Ryan Isaac:
Value stocks, value stocks will be growth stocks.

Rabih Dimachki:
Yes. It has good merits because there’s an economic explanation. When interest rates go up and the fed communicated the interest rates are gonna go up, companies that don’t really depend on far-away-in-the-future revenues to justify their price, are more immune to interest rate hikes. They have dividends, short-term cash flows that protect them. So that was an economic opinion that actually materialized. So there are predictors. Some people are gonna be right, some people are gonna be wrong, but it’s not better than a coin flip, unfortunately.

Ryan Isaac:
No, it’s not better than a coin flip. And again, okay, if someone said value is gonna be growth, or if they said growth is gonna be value, would that have changed the average dentist portfolio? No.

Rabih Dimachki:
Absolutely not, because you need both to stay diversified.

Ryan Isaac:
Yeah, if you have a low-cost, globally diversified portfolio, and not only diversified, globally diversified across types of stocks, sizes of stocks, big companies, little ones, medium-sized, expensive growth stocks, cheap value stocks, if you have a diversified portfolio, which is what our expertise is in building that stuff, then you’re gonna take advantage of those parts of the market that did beat out the other parts, and then next year when they inevitably flip-flop, or five years from now, whatever, in a diverse portfolio, you have that too, so you’ll take advantage on both… You’ll win in all types of markets. That’s the beauty of a diversified portfolio. So I’m glad you brought that up. Okay, 2023, what do we have on tap? What can we expect for this year?

Rabih Dimachki:
Alright. I got a couple. Some predicted that even by the end of the year, we’ll still stay in a recession, the S&P 500 will re-test its lows in the first half of the year and end the year at 4,200 levels.

Ryan Isaac:
It would give it… What would that give us ending of 4,200? What kind of a…

Rabih Dimachki:
Well, let’s say as of today, we’re at the 4,000 level, so that’s like a 5% return for the whole year.

Ryan Isaac:
Okay.

Rabih Dimachki:
And healthcare will be the top performer next year and house prices will slash by 20%. Interesting, the greater majority, which brings us to the point you made at the beginning, the biggest majority of all predictions for 2023 are actually bearish. There are bad news. House prices will go down. Healthcare would be the top performer, but healthcare is a defensive stock that only does well when people don’t have discretionary spending to spend on the other stuff, right? And we’ll stay in recession.

Rabih Dimachki:
People are fluctuating between a soft landing and a hard landing, a stronger recession that would slash house prices or a soft landing where the unemployment rate won’t budge much, but inflation will go down. I could explain where they were coming from when they were making decisions for 2022, because 2022 past, I know the information, I can kind of form the argument for them. I can’t form the argument for why they think the housing market is gonna drop 20%.

Ryan Isaac:
That’s interesting.

Rabih Dimachki:
I can’t form the argument for why I think the S&P 500 will re-test its lows. You can come up with stuff, but will I be completely convinced? Will I be true to being objective and not making predictions based on recency bias or over-confidence bias, all these biases we talked about at the beginning of the episode? You wanna stick your neck out? I’ll say globally diversified and we’ll be fine.

Ryan Isaac:
Yeah, that’s really interesting. A lot of the search results, and I’m sure it exists somewhere, but a lot of the search results for last year’s predictions did not include a significant decline in housing prices. Especially in 2021, if you would have said that housing would basically just come to a screeching halt within six months, no one would… Who’s thinking of that? That would have been a tough prediction because things were so hot in 2021. It was nuts.

Rabih Dimachki:
Right. And… Go ahead.

Ryan Isaac:
And then it kinda happened. Oh, I was gonna say then it kinda actually happened. What they’re predicting for this year kind of happened already this year, or last year for 2022. So that would be interesting.

Rabih Dimachki:
Yeah, they would continue to grow. We know headwinds for the real estate market is having higher interest rates because now your mortgage, or your mortgage is a 7% level, budging around that. So that would slow demand and…

Ryan Isaac:
Which it has.

Rabih Dimachki:
Which it has. Now the mortgage payment is a bigger percentage of your paycheck, which also slows demand. Does this mean house prices are gonna fall by 20%? Well, that’s a very strong prediction. Putting a number on it, it might be a continued slow… No one knows. No one knows.

Ryan Isaac:
No one knows.

Rabih Dimachki:
It really depends on how interest rates are gonna be moving.

Ryan Isaac:
Here’s what I would say about… This would be the way I would think about housing. I would just think about it from what the humans inevitably do with housing. Inevitably, eventually, we move. If we want to move, we’re trying to get to a different city or town, we’re trying to change our environment, we’re trying to get our kids in different schools, we’re trying to make our commute different, like whatever. I wanna live in a cold place, a hot place, whatever. Eventually, we move. Humans move. So if you were eye-balling a $1 million house that used to be a 3% interest rate and you’re like, “That’s in my budget,” well, guess what? Now you’re gonna be buying a $700,000 house at 7% rates and you’re still gonna move. If this drags on, of course, that has an effect on prices, but eventually humans just have to move and they’re going to and they’re gonna sell their houses and they’re gonna buy their house… They’re gonna lower their expectations. Guess what, you don’t get… You’re not gonna clear half a million dollars when you sell your house. You’re gonna clear 300 now.

Rabih Dimachki:
Right. I actually read a really interesting statistic, either yesterday or today, the mortgage refinancing index is in a very strong up-trend lately. All those people who… Because interest rates peaked around October, November, and since then they’ve been slightly due to market forces dropping down. So your mortgage rate was most probably the highest during the October-November period. And now in January, it’s slightly low. And people are already running to refinance for the lower rate.

Ryan Isaac:
Okay.

Rabih Dimachki:
So to your example, you will be buying the $700,000 house, you will move, but in a couple of years, you would refinance, right?

Ryan Isaac:
You’ll refinance it. That’s my point, man. Humans… All this stuff that lives really high level in academia and print and blogging, it’s interesting and it maybe can be helpful in certain circumstances, but in the real world, people are gonna sell and buy houses. And they’re only gonna wait so long before they decide, “Alright, we’re either gonna buy the house we’re gonna buy, but we’re gonna stretch the crap out of our budget and then refinance in two years.” And so for two years, no vacations, or cheap ones, or they’re just gonna lower the expectations on the price of a house they can afford. ‘Cause they need to get to the city. They need to put the kids in the school district and they need to go. People won’t wait around forever for perfect economic conditions before they pull the trigger. Especially not with something like housing. We’re just crazy creatures with housing. We’ve always said that in our content and people are gonna buy what they wanna go buy. And I don’t think they’ll wait super long to do it. That would be my prediction.

Ryan Isaac:
Interesting, okay. Hold on. You said something else that I wanted to get back to. Oh, I was just gonna say, S&P as of January 11th, we are up for the year, 3.8%. So we’re almost there to 5% like they predicted.

[laughter]

Rabih Dimachki:
Yeah. [chuckle] Now we’ll just close the market for the next 11 and a half months and call it a day.

Ryan Isaac:
Just shut it down. Okay. Anything else on your list of… That we might not have hit? Or maybe we hit it all for this year’s predictions.

Rabih Dimachki:
Yeah, I can’t wait until we meet next time, January 2024 and see what went wrong and what went right. [chuckle]

Ryan Isaac:
I love it, man. My takeaway from this is just… It’s gonna be the same thing that we’ve been preaching for a long time. These lessons year in and year out, and I… Look, I feel really grateful to be able to have a career where I get to observe this stuff in the wild, so to speak. I feel like I’m on a safari and I’m just sitting in my truck with my binoculars and I’m just watching everyone like grazing and mating and doing… That’s weird.

Ryan Isaac:
But just watching people in the wild behave with money, just live their lives with money and I get to observe this for so many years. I’m really grateful for that context. And I think what this teaches me is slowly over time, the lesson is just like a good baseline plan that accounts for a good savings rate, enough liquidity, healthy amounts of debt, healthy amounts of spending, a healthy, growing net worth over time, a lot of organization tracking and communication with a third party that gives you some kind of accountability, those habits. That’s strategy, and that’s strategy that will work completely independent of what predictions are supposed to be and not be, year in and year out.

Ryan Isaac:
And it’s gonna work for decades and decades. It’s accessible to the masses. Anyone can do it. It’s just a matter of like, get organized, track your data, make long-term sustainable decisions that you can stick to and have an accountability partner to hold you to it for years and years and years. That’s the secret, not the inside information in trying to react to what seems like the information coming out. That’s the secret to me. And that’s the lesson I feel like I keep learning every single year. I don’t do it perfectly. It’s the thing we all are trying to work on. So thanks for bringing all this to our attention. This will be fun to do in 12 months, Rabih.

Rabih Dimachki:
My pleasure. I can’t wait. [chuckle]

Ryan Isaac:
Yeah, I appreciate your time. And thank you all for tuning in and listening. If you have any questions whatsoever, we’re recording this in January, it’s resolution time, perfect time to reach out if you have money questions. If you wanna finally get organized, if you wanna finally build the right portfolio, have a plan, have accountability with a third party human that can act as like your finance coach, just go to dentistadvisors.com, we’d love to have a conversation. Thanks for being here and we’ll catch you next time on another episode of The Dentist Money Show. Take care now. Bye-bye.

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