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The Smart Take:
Consumer sentiment reached a low in July 2022 not seen since 1980. Yes, bond and stock markets are down and inflation is present to an extent not seen in decades. But this pessimism is despite having much worse economies and markets — Black Monday (1987), Tech Bubble (2000-2002), and Financial Crisis (2007-2009) — and a plethora of tragic world events over these decades compared to today. Why such pessimism?
“It’s the End of the World as We Know It (And I Feel Fine)” is a 1987 song by American rock band R.E.M.. The title may sound pessimistic or perhaps a bit delusional. Yet, hear Kevin make the analogy as to why this song — one of his favorites — is a perfect theme song for capitalism, creative destruction, and rational optimism about innovation and future stock returns.
Read the book Kevin mentioned during the podcast, The Rational Optimist.
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The Host:
Kevin Kroskey – About – Contact
Intro:
Well, it’s going to be a fun episode today. We’re going to be optimistic. Hey there. Welcome to Retire Smarter. Walter Storholt, alongside Kevin Kroskey, your President and Wealth Advisor of True Wealth Design serving you in multiple areas, Northeast Ohio, Southwest Florida, and the greater Pittsburgh area. But you can also find them online and chat from anywhere by going to truewealthdesign.com.
Walter Storholt:
Kevin, I hope your week is going well. What’s going on?
Kevin Kroskey:
Week is going well. And we’re not just going to be optimistic, Walt, we’re going to be rationally optimistic.
Walter Storholt:
Oh, rational optimism. Okay.
Kevin Kroskey:
Yes, not blind, but rationally optimistic. And I’m a little short on sleep. My wife told me yesterday at the dinner table, don’t feed the dogs. And I fed the dogs, and one of them ended up getting sick in the middle of the night in my bedroom.
Walter Storholt:
Oh no.
Kevin Kroskey:
And so we’ll see here how I do, but I think-
Walter Storholt:
Wait, how did she know not to feed the dogs? Was this-
Kevin Kroskey:
My wife she’s smarter than me.
Walter Storholt:
She just knew? She was just like, don’t do it. I have a feeling.
Kevin Kroskey:
Well, no, we generally don’t feed them food table, and I broke that rule.
Walter Storholt:
Oh, we talking table scrap feeding. I gotcha.
Kevin Kroskey:
Yep, yep. Yeah. Yep. Yeah. So score one for the wife and a negative one for daddy. But I’m a little, I don’t want to say incoherent, and hopefully, this makes sense. And rest assured, I have the best co-host in the business, so I’m sure you’ll carry me if need be.
Walter Storholt:
A lack of sleep could lead to that blind optimism, I would imagine. So that will be your challenge today, making sure that you stay rational with that lack of sleep going.
Kevin Kroskey:
On. All right. Well, here’s the thing. So I mean, just tons of bad news out there. I think everybody knows at this point the old saying, if it bleeds, it leads. Bad news tends to sell more headlines, more papers, get more clicks, and so on and so forth. So that’s nothing new. We got Russia invading Ukraine, we still have that going on. You have inflation for the first time to a material fact in many, many decades, which certainly is harming some people, particularly those that are of lower socioeconomic status. But then you also have some stories that are maybe a little positive and contrary to all this about, hey, things aren’t so bad. We’re going to have a soft landing as we work through this.
Kevin Kroskey:
Well, I’m getting bombarded with all that, but I went last week to my daughter, my four-year-old Cameron’s ballet class. I haven’t been able to go to this. She’s been going for a few months now, and it’s generally been the middle of the day, but now that they’re back in school, the class was moved to the evening. So this was really the first opportunity that I had to go. And you want to talk about optimism, just going to that class and seeing these cute little girls that are like four, five years old in their little tutus dancing around. I was the only dad there, so I’m giving myself a little pat on the back, but I was beaming. It was awesome. The girls were so cute, so happy. And my four-year-old she’s like, I know I’m completely biased here, but she’s absolutely adorable and beautiful. And she’s in her little tutu, and she’s like a girly girl, but she’s two-thirds that with one-third slapstick Chris Farley humor.
Walter Storholt:
Oh, wow.
Kevin Kroskey:
And if you remember the Saturday Night Live skit where Chris Farley’s in a tutu and Patrick Swayze’s on stage, I think. It was like all that rolled into one. So it was beautiful, it was laughter. It was awesome. I came out beaming. So I was thinking about that, thinking about all this bad news that’s out there. And then when I was driving in today, one of my favorite songs is from REM, a big band, particularly in the nineties, “It’s the End of the World as We Know It.” And I’m like, man. But it’s such a happy song with that title. And then the joiner to it is, “and I feel fine.” So I’m like, let’s see if we can turn this into a podcast episode. So that’s the setup today, Walt, we’ll see how it goes, but that’s where we’re going.
Walter Storholt:
It’s the end of the world as we know it, but I feel fine. Financial version. I like it. I like it.
Kevin Kroskey:
All right. So here’s what I mean, obviously the bad news, it’s out there, but to put a little bit of facts behind it, you’ve probably heard of the University of Michigan’s consumer sentiment survey.
Walter Storholt:
I probably have heard of it.
Kevin Kroskey:
Yeah. It’s a question. Maybe I didn’t phrase it as well as I could have.
Walter Storholt:
I maybe not have heard of it.
Kevin Kroskey:
All right. I think you probably have but maybe are not aware of it. it’s an often talked about news story.
Walter Storholt:
Consumer sentiment survey. Okay.
Kevin Kroskey:
So it’s just a survey, basically.
Walter Storholt:
Is this thing they mention in the news? And it’s just, but where the data comes from or where the survey comes from, you glaze over that part, but they’re talking about the results all the time around you?
Kevin Kroskey:
Or that may just be short to consumer sentiment. So sentiment is-
Walter Storholt:
Gotcha.
Kevin Kroskey:
Feeling. How are people feeling? And when I saw this at the end of July, I was astounded. It actually reached a low that we hadn’t seen in the US since May of 1980. And just think about that for a moment. We had COVID two and a half years ago, and we had a temporary low there, but it was nothing to the extent of the low that we had at the end of July. We had the tech bubble burst back in the early 2000s. Certainly, people saw an incredible amount of wealth destroyed, and they didn’t feel as bad based on the consumer sentiment index and the survey back then. We did get close, we actually just eclipsed the prior lows of 2008. So think about the financial crisis when it looked like the whole financial world was going to implode. So November 2008, it was pretty bad and pretty consistent with where we’re at as of the end of July, but the end of July of this year actually was a little bit worse. And we had a similarly low reading in the middle of 2011. So while you’re a quasi-young, at least relatively speaking millennial, let’s see, let’s put you on the spot here, buddy. What was going on in 2011? Why would people feel bad in 2011?
Walter Storholt:
2011? Let’s see. Well, we had just had the financial crisis, and I feel like we were starting to pull out of that though around 2011. I would’ve thought we would’ve had some momentum there. I don’t know. 2011 was a good time for me. I don’t know.
Kevin Kroskey:
All right, there you go. Well, so some of the things that were going on around then, and I agree with that, we were coming out of the-
Walter Storholt:
I feel like there were some maybe terrorism concerns around that time. That’s sort of always with us.
Kevin Kroskey:
Sure. And some of the conversations that I was typically having with clients or the news stories that you saw or concerns about a double-dip recession. Hey, there’s been all of this monetary stimulus. Oh my gosh, we haven’t seen this before. What inflation and issues is that going to cause? You had a European debt crisis, particularly in Greece and other Southern European countries. And there was the talk of, hey, maybe the euro’s actually going to collapse. And then you had our “leaders” down in Washington that actually, for the first time, didn’t increase the debt ceiling. And we actually nearly avoided a default on our debt. In fact, for U.S. credit rating, S&P actually downgraded the US from AAA status. I remember being in my basement and watching that story.
Kevin Kroskey:
Brian Williams was on the news channel on NBC and led with that. And it just oozed pessimism all the way around. So that’s what was correlating back in mid-2011, but we just got there. So July 2022, we haven’t seen this sort of pessimism since May of 1980. If you think all the way back from 1980 now, I was a whopping four-year-old at that time, just like my Cameron is now. And I certainly don’t remember, but I am a student of history, and Walt, let’s give you a chance of redemption. What was going on back in May of 1980? [inaudible 00:08:37] I won’t say May.
Walter Storholt:
A gas issue, a gas crisis of some sort.
Kevin Kroskey:
Well, perhaps. I can’t say that that’s definitively incorrect, but we were certainly perpetuated with high inflation. We had fairly high unemployment. We had stagflation back then, which peaked not too long after 1980 and actually peaked in 1982. But you had an entire decade where stock prices pretty much just went sideways. Interest rates increased, which meant that bond returns were generally negative. So it was a really bad decade, at least, to be an investor. I’m not saying that people had a ton of money invested back then. I think pensions were certainly more of a preponderance of people’s wealth back then, but nonetheless, we had stag-
Walter Storholt:
I think I was a little early. I was thinking about what was going on during that timeframe. A gas shortage and a Flock of Seagulls, that’s about it. But I think that’s a little earlier, maybe mid-seventies. Austin Powers reference. Does that fall short?
Kevin Kroskey:
I am a big Flock of Seagulls fan, at least for their one-hit-wonder song. As a matter of fact, that hair that went to that guy, I don’t know what his name is, but I tried to do that one Halloween, being a bald guy was quite poorly executed, but a good laugh all around. But let’s get back on topic here.
Walter Storholt:
Please.
Kevin Kroskey:
So here’s the thing and why I really wanted to bring this up. So it feels bad out there right now for a lot of people. Stock returns bounced back fairly strongly in July, so that was positive. August, it was down, at least as we record this in mid-September, stock returns last few days been back up. So just because it feels bad, it doesn’t mean that it’s a bad time to invest. In fact, it tends to be a contrarian indicator.
Kevin Kroskey:
So if I look at the same data set and I look at well, hey, whenever this consumer sentiment reached a low, what were returns like for the broad US market over the next 12 months, S&P 500 basically? So whenever lows are reached, the next 12-month returns are about 25%, 25%. So 12 months, 25% per year on average. And whenever highs are reached, returns are about 4% over the next 12 months. So when it feels bad, forward-looking returns are probably better. It’s a wealth effect. Stock prices go down, of course, nobody likes to see that. Of course, it’s always bad news that sells more so than good news. But it’s one of those things where the basic role of investing is to buy low and sell high. Obviously, stock prices are lower, having come down year to date in 2022 and certainly some more than others.
Kevin Kroskey:
And I’m not saying that, hey, we’ve reached a low or anything like that, or, hey, it’s all sunshine and rainbows from here. It’s certainly plausible that things could get worse, that sentiment goes lower, that stock prices go lower. You’re never going to get the timing right unless you get lucky, and luck isn’t really a good investment strategy to make sure that your wealth lasts your lifetime. But nonetheless, this does hold true. So it’s one of those things where we’ve talked about this a lot over the years in different ways. Tyler was on and did an episode about behavioral finance and talked about some of the shortcomings we have that our brains predispose us to. If you think back evolutionarily, we had this fight or flight mechanism, and when things look bad, it says run. And that part of our brain, that more reactive part of our brain, is actually faster than the rational part of our brain.
Kevin Kroskey:
So it’s just really important to be able to just process this, to think, to be educated, to come back and try to be unemotional as possible and make a good, informed, disciplined decision. So long story short, when it feels bad, it’s probably a good time to invest. Again, you’re not going to make a timing call with anything like that, but nonetheless, the evidence is very clear that that’s the case. And part of the reason, in addition to why this is true, isn’t just because of the faster part of our brain trying to protect us from the bear in the woods when it may just be a bear market. But it’s also, I think, another reason that our brains tend to think in a linear fashion. You think about innovation and how things could really take a giant leap and change.
Kevin Kroskey:
That’s unpredictable for the most part. And we can’t really pretend what that’s going to do to our lives and to society, and to stock returns, for that matter. And if anybody may want to write down what I think is a good book recommendation, I read this book a little bit more than a decade ago, and it was by a Brit named Matt Ridley, and in the book, The Rational Optimist, he went through several examples throughout history, over hundreds of years, where he illustrated how predictions by many smart, many renowned people warned of a bleak future and how these predictions were fairly common. I’ll give you a couple as a highlight here.
Kevin Kroskey:
Walt, let’s go back to you and your timeline here, buddy. Do you remember the Y2K scare?
Walter Storholt:
I do remember that. Yes.
Kevin Kroskey:
What was the Y2K scare?
Walter Storholt:
All the computers were just going to stop working at the stroke of midnight on 2000, and it was going to cause just mass chaos across the world.
Kevin Kroskey:
You got it. So we have a four-digit year, but apparently, whenever computers were initially programmed to just use the last two digits and truncated the four-digit year. So as we were flipping into a new millennium, nobody really knew what the heck was going to happen. So Matt really goes through and shows how a lot of people were purchasing backup generators and withdrawing large sums of money from banks. There were scares that this was going to cause infrastructure just to come pouring down, whether it was banking or air travel or anything that was really reliant upon technology. And ultimately, we’re still here. I don’t know about you, but I was okay when it turned one, two, 2000. Everything went okay for me. Not that I had much back then, but nonetheless, I was okay. And it seems like most of the world was too.
Kevin Kroskey:
And one other example I’ll give from the book was in the 1960s there was a Stanford University professor Paul Ehrlich, I believe I’m pronouncing his name correctly, but he wrote a bestselling book. It was called The Population Bond. And basically, he went through some math. You got to be a pretty smart guy to be a professor at Stanford University, but basically, he showed that, because of the population growth, we were going to have mass starvation that was going to come in the seventies and the eighties. And so this is a good example where you have this sort of linear thinking and just can look at a certain trend projected out, and maybe it doesn’t happen.
Kevin Kroskey:
Bill Gates wrote a good review of the book. It was published in the Wall Street Journal. And one of the things that he said in the review was, “Pessimism is so often wrong because people assume a world where there is no change or innovation. They simply extract from what is going on today, failing to recognize the new developments and insights that might alter current trends.” Said another way, they can’t predict the future, but if you look back through history, we have so much evidence of innovation, of things continually getting better, but we tend to use these linear projections. We look at what the problems are today, and we just project them forward and see a perpetual downward spiral. So it’s one of those things. I think The Rational Optimist, the title that Matt Ridley had, is perfect.
Kevin Kroskey:
I wrote an article on this year around that 2011 time when people were feeling really bad, when we had the debt ceiling issue and so on and so forth, and just trying to put things in perspective. So being rationally optimistic, I think, makes a lot of sense. If you think about this as it comes more to investing in economics and how markets work, you may have heard the phrase “creative destruction wall.”
Walter Storholt:
Creative destruction. Yeah.
Kevin Kroskey:
Okay. So I won’t put you on the spot for this one.
Walter Storholt:
Yeah, don’t ask me who said that.
Kevin Kroskey:
So this was from Joseph Schumpeter, who was an Austrian economist.
Walter Storholt:
Oh yeah, that’s exactly what I was going to say.
Kevin Kroskey:
And he was also a Harvard professor, so this was the early-mid 1900s. But he was talking about capitalism and how markets work, and it’s just that competitive force where you’re always taking resources and trying to take them to higher and better use and help solve problems and create wealth in aggregate. Now, it is creative destruction, so there’s one side that maybe is being deconstructed and another that’s being constructed. And if you’re on the losing side of that, most surely it doesn’t feel well. But collectively, as an economy, we’re better off through that process. It’s maybe a side issue about how society deals with that, maybe to provide some safety nets or what have you. But collectively, overall, we’re unequivocal, we’re better off from that. And this sort of invisible hand, this competition, it just continues to drive innovation.
Kevin Kroskey:
Another way we can think about this is so you just look at the stocks that are the largest stocks and see, did they maintain their ranking or do things change over time? I have a list here in front of me, a cheat sheet, I don’t have this memorized. But I always found this pretty interesting, and you can tell a good story with it. If you go back to the 1980s, some of the top stocks that were in the world based on how big they were, based on their market capitalization, IBM, AT&T, Exxon, and a whole bunch of different energy companies in addition to Exxon as well, even Eastman Kodak is on that list. Walt, again, maybe before your time.
Walter Storholt:
No, I remember Kodak. Yeah.
Kevin Kroskey:
Yeah. I used to love the Polaroid and where you just get the pictures right after you press the button and shake it around a little bit.
Walter Storholt:
Those were the best. Trading today at about $5 or so?
Kevin Kroskey:
Well, and really, truly a different company and a shadow of itself at best. But if you go down that list, certainly some of those companies are still around. If I went down the whole top 10 list, some of those companies aren’t around anymore. But looking at the list today, none of those companies are in the top 10. If I go and say, okay, let me look at the year 2000, here we see Microsoft coming up and showing on the list for the first time. General Electric is actually showing up on the list. They had been on it in 1980, fell off, and came back in 2000. Cisco shows up, but then they’re going to fall off looking at the next decade, ten years, hence. Intel is another one. Lucent Technologies is another high flyer from the tech bubble days. And then you look today, and you see companies, of course, like Apple, Microsoft, Amazon, Alphabet, and Facebook.
Kevin Kroskey:
Now, no doubt, when I say those companies today, in people’s minds, they’re probably thinking, well, no way are they not going to be around. And you’re already seeing that to a certain extent, with Facebook taking a huge decline in stock price this year. Netflix, similarly. Tesla’s also on this list. We’ll see what happens there. But inevitably, at least give it enough time. Some of these companies are going to fall, not only fall off that list, but they may go away. I know that may sound very difficult to believe, but Jeff Bezos himself has said the same when he’s thinking about just how companies live, breathe, evolve, survive, and eventually die. It’s just that invisible hand that continually drives competition. And that invisible hand is the same that drives innovation, and it makes it very difficult for our minds to really grasp that.
Walter Storholt:
I think you’ve mentioned Netflix is a great example because, well, originally, it was Blockbuster. Nothing could ever top Blockbuster, nothing could ever beat that experience of going to the store, walking through, picking up that popcorn, and looking at all the different movie covers. It was just such a fun thing to do as a kid, but I think even my parents enjoyed taking me. It was just a fun family thing to go do and get that excitement up for what movie you were going to watch that night. And it’s very difficult to predict that demise. And then Red Box comes along, and you’re like, oh my gosh, while I’m at the grocery store or the gas station or pretty much anywhere I can just bloop, pop a movie right at, I can return it very easily. There’s no hours. It’s 24/7. This is fantastic. Nothing will ever beat this. And a Netflix comes along, and nothing’s going to ever beat this. And things keep beating it, but for some reason, we don’t seem to learn those lessons, do we?
Kevin Kroskey:
No, we don’t. And I’d say contrary to Bill Gates, if there’s a brain that’s out there, he probably has one that can predict some of this innovation, but most of us can’t. But I would just urge everybody just to think and look backward rather than look forward. Don’t look at the present issues that we have today and just project them forward into a perpetual downward spiral and end in some negative endpoint. Rather, look back and look at the growth that we’ve had, whether it’s over the last 10 or 20 or a hundred years, and how, more likely than not, your lives have gotten better. You can never say that everybody’s lives are going to be like my kids may not do better than my wife and I financially. As long as they’re happy and healthy and doing well as they determine it, that’s a success as far as I’m concerned. But it’s not just about money or anything, but generally speaking, our quality of life, our standard of living has increased.
Kevin Kroskey:
Sure, there’s all kinds of people out there that want to take statistics and twist them or report them incorrectly and try to support some political angle that they’re propositioning, but that’s not what I’m talking about here at all. I’m really talking about the continual innovation that we’ve had through history and how that has positively impacted our collective well-being. And it will continue to do so because we have no evidence to the contrary that it won’t. So you can’t predict the future. When you can’t predict the future, your mind maybe goes to a place of fear. Maybe that’s normal, maybe that’s baked into our survival, and that’s why we ran away from the bear in the woods. But nonetheless, if you just take a look with your rational brain, look back through history and see how innovation has always propelled us to be better and to grow, I think you can take solace in that.
Kevin Kroskey:
Two things I’ll say in closing. So I think REM had it right. It is the end of the world as we know it, and I think we should feel fine because that creative destruction is going to create something better collectively over time. So kudos to REM for having well-thought-out lyrics. Now, quick disclaimer, when I listen to music, I literally just listen to the music and not so much the lyrics, but this lyric, it’s like the first one in the song. So the rest of the lyrics could say something completely different. And I completely disclaim any responsibility for having some sort of conflicted analogy here. My wife makes fun of me all the time.
Walter Storholt:
I take music lyrics in my own direction too. Someone may say, “Oh, that this song means blah, blah, blah.” And I’m like, “Yeah, okay, but it doesn’t mean that to me, so I’m just going to keep going along with what I think it means.”
Kevin Kroskey:
Well, real quick. So when my wife and I first started dating, there’s an 80s song from a band called Til Tuesday, and it’s “Voices Carry”. And I loved the song. I told my wife, and she’s like, “Did you ever listen to the lyrics? Do you know this song is about domestic violence?” I’m like, “Whoa.” I had no idea about that.
Walter Storholt:
And you pause for a second and go, huh? Well, I’m going to still enjoy it, but it’ll just mean something different to me. Okay.
Kevin Kroskey:
Yes. Sorry for freaking you out, but thank you for still marrying me.
Walter Storholt:
Oh, man.
Kevin Kroskey:
But yeah. Yeah. Let’s pull it back on topic here. But here’s the final point that I’ll make. This innovation, again, maybe if you’re Bill Gates, you can predict this. I sure as heck can’t. I don’t think most people can. So what do you do when it comes to investing? Well, in the short run, of course, anybody that needs money this week, next month, in the next year, that’s going to be in cash or some short-term, high-quality asset. What we’re really talking about here is being long-term optimistic and really participating in the growth of the equity markets. And because you can’t predict the innovation and because these big companies don’t stay on that big company list perpetually, there is that creative destruction, that ebb, and flow. You need to diversify. So things feel bad right now. Certainly, history has shown when everything feels bad and we get to these lows that, the forward-looking returns look better, but there’s nothing precluding us from going lower here.
Kevin Kroskey:
So again, I’m not saying that it’s all sunshine and rainbows, but nonetheless, things have gotten lower in price. Things are more pessimistic today. If we look out over a longer time frame, be it five or ten years from today, compared to where we were just, say, nine months ago coming into the beginning of the year, we can expect higher future returns looking forward, but we need to diversify because we can’t predict the winners and the losers and the innovation that’s going to happen in between.
Walter Storholt:
So it’s the end of the world as we know it, and it also sounds like we’ve been here before, and we can maybe take a little bit of solace in that as well. Great breakdown, and well done on your light sleep night and being able to bring that rational optimism to us today. You persevered, Kevin, so well done, my friend.
Kevin Kroskey:
Thank you, Walt.
Walter Storholt:
Yeah. If you have questions about something you heard on today’s episode, if you like the style of planning that we talk about here on Retire Smarter and that the team at True Wealth Design employs with their clients that they work with on a daily basis to improve their financial lives and their retirement preparation, and you want to learn a little bit more about what it’s like to work with the team, want to see if you’re a good fit, you can certainly schedule a 15-minute call with an experienced financial advisor on the True Wealth team.
Walter Storholt:
Do that by going to truewealthdesign.com and click on the “Are We Right For You?” button to schedule that time to visit. That’s truewealthdesign.com, or you can call 855 TWD PLAN. That’s 855 TWD PLAN. We’re going to link to all of that in the description of today’s show so you can find it easily as well. I’m also going to link to that book that Kevin mentioned in the show notes as well, The Rational Optimist, so you can check that out there. I’ll put an Amazon link so you can go and check that book out if you want to get a copy of it and read up a little bit more after Kevin’s mention today. Kevin, really appreciate your help and the guidance, as always, here on the show. Get some rest and quit feeding the dogs table scraps, man.
Kevin Kroskey:
Yeah, I think I learned my lesson until I don’t again.
Walter Storholt:
Listen to your wife, and more than just table scraps, she knows what she’s talking about.
Kevin Kroskey:
Amen to that, Walt.
Walter Storholt:
All right, man. Have a great week, and we’ll talk to you again soon. Come back and join us for the next episode, folks, right back here on Retire Smarter. Until then, take care.
Disclaimer:
Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references are historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
