Special Update: Bear Market Playbook

Dano:

[0:02] Welcome to On the Markets from Sonoma Wealth Advisors.

 

 

Dano:

[0:17] Seeing information in your newsfeed, drawing conclusions, perhaps even logical conclusions. Well, guess what? Welcome to the market where logic doesn't exist. And I'm joined by our managing principals of the firm, Daren Blonski, CFP, Chris Sipes, CFP. And the goal of today's broadcast is to provide what we're seeing, what we're expecting, and what we're calling our bear market playbook, Chris, so that there are some moves that people can make in times like this.

 

Chris:

[0:48] Yeah that's right dan because i think you know our our initial reaction to situations like this is to take action right everything all the alarm bells are going off in our head saying do something so uh you combine that with the fact that you know selling when everybody is panicking is probably not the right thing to do based on history, right? So if you want to take action, what is a better action to take? So we thought we'd put together this bear market playbook as things that you should consider doing if you want to take action. So you need more clarity on that or should we jump right in?

 

Dano:

[1:32] I think we'll.

 

Daren:

[1:34] Jump in and then we're going to tear it up in between. so we

 

Dano:

[1:38] Got to hit our magic intro song first though Daren i mean.

 

Daren:

[1:41] We do all right all right we won't jib people in the magic show already all right here we go Thank you.

 

Music:

[1:47] Music All right so you know chris the first one here we say consider putting that cash to work um if you're waiting for a better entry point and i think for a lot of people that's really hard to hear right now right like here's this market selling off tariffs are changing the world lots of change happening and anytime there's uncertainty it's very scary in the markets so what are we talking about like why would we even say that right now

 

Daren:

[2:19] See you next time.

 

Chris:

[2:53] Well, like we talked about on Friday in our very, very long video, which probably nobody made it to the end of,

 

Daren:

[2:59] But the two times where- But if you did, there are some nuggets in there and we're going to toot our own horn on that here and again.

 

Chris:

[3:04] There's a few nuggets, yes. But really the two times where people can have the biggest negative impact on their portfolio performances are times like this when you're fearful, right? And you're making decisions based on fear. The other time is when you're making decisions based on greed, FOMO. And what's lucky for us as investors is we have good examples of both of those feelings just within the last six months so that it's easy for us to kind of draw on that, right? So in the fall, there was an almost palpable sense of FOMO, right?

 

Chris:

[3:45] Everybody's getting rich. Your neighbor's getting rich. You need to jump into the hot stocks. Things can only go up. Animal spirits, as they were saying, now we're at the other end of that spectrum where you're seeing the big drops that we kind of assume were over during COVID. Each day you're getting multiple percentage drops in the market, and that generates a lot of fear. But as we're going to show in some of the slides today, counterintuitively, that's usually when you want to be buying is when everybody else is selling, when everybody else is panicking, everybody's running for the exits, stocks are on sale, different assets are on sale, right?

 

Chris:

[4:31] So people often say, look, I've got this cash that I want to wait for a good time, right? Now, normally we're not big on that because historically timing the market is impossible, right but if that was you if you set money aside now might be a time to consider putting that money to work

 

Daren:

[4:55] All right. So we're going to drop back on each of these action items throughout as we talk about this. We've got some charts because, I mean, this wouldn't be our show without charts, right, Chris? So let's talk about our first one. And this chart is perhaps my most favorite chart out of all the charts I ever use when it comes to helping investors think about how they should or shouldn't invest and how they should or shouldn't move their money.

 

Daren:

[5:23] So what you're looking at, and this chart actually takes it back to 1990. I love the one that takes it back, I think, to 1980, quite a ways back. And what you're looking at is the blue bar here represents annualized return. And so if it's up, that means the year finished positive in the green. And if it's down blue, that means that particular year finished it in the negative. So this is taking it from 1990 here on the bottom to 2025 and the blue mark again is the annualized return the largest intra-year drawdown right so that's how deep did it go how bad did it get within any one of these given years and you can see in almost every single case i don't think there's one case here where there was never a negative point in the year, a significantly negative point. I mean, look at 2020 where we had negative 34 and actually ended the year up positive 16, right? Sometimes like in 08, we're down 49 at the worst point, but finish the year up 38% negative. But in every case you can see at some point during the year, we had extremely negative moment. Now, what you or I, Chris, do not know, or Dan, is the worst it's going to get this year. We don't know that.

 

Daren:

[6:51] What we know is that typically in every single year, there's a point where it's a negative during the year, and then the year finishes up doing whatever it does. The other thing I take out of this, that in every single case you can see, so let's take 1990. At some point it was down negative 19. It finished the year negative 7. Or in 08, it was down negative 49. It finished the year negative 38.

 

Daren:

[7:23] But out of all these years from 1990, 35 years, the market finished in the negative 1, 2, 3, 4, 5, 6, 7, seven, eight, nine. Nine times in 35 years, it finished up negative. Now, those are pretty good odds, right? So the game of investing is a game of probabilities and trying to skew the probabilities in your favor. And those are pretty good odds. If we were down only nine times in 35 years, we finished up negative. But what you see in every single case, in every single year, is that the market always finishes up higher than its worst point on December. So on December 31st, the market is going to be higher than its worst point. So what we don't know is right now, the worst time of the whole entire year, or is it going to go lower and this will actually be good? We don't know that. I'm going to show you some data on the charts that might suggest some different things here. And you could deduce your own conclusion out of that. But what I will generally say is that in every time, the best time, if you're ever going to run from the market, it's not intra-year. It's at the end of the year, December 31st. So I always think about that idea that if I'm going to bail out, right, I'm not going to do this. I'm not interested. In every single case, the probabilities are in my favor that if this is the worst point, it will be better on December 31st. It's happened in every single case since 1990.

 

Daren:

[8:51] And it actually goes back much further than that, that data set.

 

Daren:

[8:54] So I always tell people like, hey, I get it. If you're scared, you're ready to get out of the market things look scary um there's been a lot of scary times in history where things have turned out okay but if you're there at least wait till december 31st do your portfolio the favor so we

 

Chris:

[9:13] Can't know for sure right but that's that's a good point that's a good point

 

Daren:

[9:16] And statistically it's just in your favor right so if this is the worst point i would argue that the fact that we've sold off as fast as we have um which i'll show you in some other charts in a minute, there's good reason to take at least a pause here in this moment.

 

Chris:

[9:35] That's right. Okay. So what we're showing here are the three major stock indices. So when people hear the market is down, it's usually one of these three indices that the media is referring to. We've got the S&P 500, the largest 500 companies in the United States,

 

Chris:

[9:56] Market cap weighted, which means Apple is bigger than, say, Walmart or ExxonMobil. And so if you're owning the S&P 500, you're owning those 500 largest stocks in proportion to what the market values them at. So then you've got the Dow Jones, that's kind of the old industrial average, and then the NASDAQ, which is mostly very tech heavy. Now, key point here is most people are not concentrated in just one of these three indices. So when you hear that the market is down 20%, most likely, most people do not have a portfolio of just one investment asset. Most of the time, people are diversified. Even if you're all within, say, one asset class like stocks, usually you have some foreign stocks, you have some mid-cap stocks, you have some small-cap stocks, you have different types of stocks in there. But the vast majority of people have some combination of stocks and bonds and alternatives, which makes this kind of worst-case scenario much less of a stinger. So I've been talking to a lot of people this last week that just are seeing the headlines and they're panicking, thinking, oh my goodness, my account is going to be absolutely decimated.

 

Chris:

[11:20] And then they look at where they're actually at, and they're like, oh, it's actually not that at all. These bonds that I held through 2022, when I was asking myself, why would anybody own bonds? They finally have been providing some protection this year. So all those diversifiers that you were questioning over the last few years have been really handy in this market to kind of buffer that loss that some are feeling in these indices.

 

Dano:

[11:49] And Chris, I'll speak to a small behavioral piece here too, because I bring maybe sort of the average investor retiree perspective to a lot of these discussions. It's unfortunate that one of the ways that we look at our investment portfolio is functionally exactly the same way that we look at our checking account online. And if you had a checking account and you just saw the number in your checking account just going down and down and down and down and down without you doing anything, gosh, I better go pull it all out. I better go yank it all out. Well, the same thing can happen with your investment accounts, right? You can see it go down and it's the same kind of mental model. But what you're not thinking is that that investment is not all in one place. It's not actually in New York and it's not actually on wall street it's spread out across united states uh stock investments it's if you're diversified it's spread out amongst bonds to spread out and perhaps an international or crypto or alternatives wherever it is those are totally different places and so that can speak a little bit to it's different it seems like it's the same experience logging in and looking at it Looking at your investment account is different than your checking account.

 

Chris:

[13:07] Yeah, that's a great point, Dan. And two things on that is one, I would say the vast majority of our clients come to us for planning first and foremost. And we really try to focus on planning, having a plan, having a financial plan, understanding that client's capacity for risk, their desire to take on risk and such. And usually, most of the time, the market's kind of in more of a middle range where people are not making that decision under duress. So we go through those plans and we stress test those portfolios for good markets and bad markets because we're expecting you're going to have bad markets. That's just a fact. You're going to have it sometime. We don't know when. We don't know how bad they are. But that's part of the plan is that you stress test them using randomized trials

 

Chris:

[14:03] where it'll say really awful markets, really good markets, median type of market. So people that are actually using their money, I think you can rest assured, hey, I've got a plan.

 

Chris:

[14:16] My advisor stress tested this plan. They know this portfolio has, you know, what it's done in the past, which of course is not what it's going to absolutely do in the future, but you've stress tested it. You know that even under poor conditions, my plan can still keep going. So you've got those folks that are actually using the money or very close to using the money. You've got other folks that are in accumulation phase. And Dan, I think that's the one where you want to say, yeah, it's not the same. You're not looking at your checking account draining. You should look at it as, hey, I just got the advertisement from the local supermarket or whatever. And look, things are 20% cheaper than they were last week. They're 10% cheaper.

 

Chris:

[15:04] People are selling these on a fire sale. You know, like that is how you should look at if you're in accumulation phase, like, Hey, this is a, this is a good thing for me. If I'm an accumulation phase, I'm able to get more shares. My dollars are going farther in the assets that I'm, that I'm buying. So a lot of times you see people say, Oh, I'm going to slow down my 401k contributions just until this storm blows over. No, but most of the time, that is a very, very bad thing to do historically. So that was the number two thing on our bear market playbook, which was consider increasing your 401k contributions or your retirement plans. If you've got a 403b, 457, hey, things are on sale. And so, you know, buying things when they're on sale is, is action that you usually want to take. So, and that also kind of goes into the third section there, which was consider rebalancing into the storm. Rebalancing is fancy for going back to your targets. So let's say you've got your strategic long-term allocation is 60% stocks, 40% bonds, very common allocation for a lot of folks. Well, if your stocks have dropped and your bonds have increased, you want to go back to your strategic balance, your 60-40. So you sell some of what's done well and you buy some of what has not.

 

Chris:

[16:32] Now, that is very hard to do emotionally, but you're selling high and you're buying low, right? And so historically, that's been a smart thing to do. If you, if you rebalance into that storm, uh, which again, is not the thing you feel like doing, uh, it tends to, tends to be a smart thing to do, um, um, So with this chart, maybe, Daren, you want to talk a little bit about why the whole strategy of let's go to cash or let's get out until this storm clears and then we'll get back in. Maybe go over a little bit about why that strategy tends to not work.

 

Daren:

[17:12] Yeah, so in order to do that, I'm going to share this tab instead here and go back to that deck here in a minute. But so what you're looking at here is a couple of things that start here. This is the SPI, which is the exchange traded fund that allows you to track the S&P 500. So this is how you buy it. So when you hear the financial media talk about the S&P 500, you can't buy the S&P 500 unless you buy it on an index fund like SPI. SPI is just one of the many. VOO is another one out there. That people use. So when we look at the chart, so this is just to orientate yourself. This was the COVID low right here on the chart.

 

Daren:

[18:02] You know, I'm going to, let me get rid of this for a minute. So this is, this is the COVID low. And then this is a long-term trend line. So I drew the trend line in there. That's not something the chart showing you. A trend line helps us understand performance relative to the average or what we historically think about. And so trend lines tend to be guide us up and down in the markets. And so what you had after COVID was this drawdown, this substantial drawdown during COVID and then a huge bounce. And then in 2022, it came back into that line and checked in with it. And then that has been an important area of support and resistance. And what happened over the last few days when the tariffs got announced is that create a lot of uncertainty and repricing in the markets.

 

Daren:

[18:54] And that's forcing kind of a change of economic understanding globally. And so the market has sold off substantially. You can see since those were announced, this was Wednesday, then Thursday, and then Friday was this red bar here and then this is today. And today, so now that's a daily chart. So each one of those bars represents a daily chart and we're going to go look at the hourly. So this is the hourly I'll show you here. And on the hourly, and the reason I'm going to the hourly is because a really interesting thing happened this morning. And that is that somebody took some words that were mentioned on Fox News saying that, hey, we're talking about pausing the tariffs for 90 days, basically.

 

Dano:

[19:42] Trump's economic advisor.

 

Daren:

[19:44] Trump's economic advisor had said something that suggested they were going to pause for 90 days. And that sent the market really high, really fast. And you can see when the market opened, it opened right here at this point. And it went all the way up to right here, basically in a matter of minutes. That's one hour. So this all happened within one hour at 6.30 this morning of the market opening. It had gone up 6.8% in that hour. If we look at the five-minute chart, we'll be able to see this even more starkly. You can see all of that happened right here. So what happened coming into the open this morning is that every one of these candlesticks represent five minutes in the market. And so the market opened and then that news came out. And basically from that low in the morning to that high, just that move from right there was 8.6%. So that's a big move really fast.

 

Chris:

[20:49] Just to hit on that, that's an 8% move in the market now. And you said minutes, but I'm telling you, I think it was in seconds, right? It was that headline hit and boom, the market just exploded higher to the point where you and I were talking on the phone and I'm looking at the stocks on my phone and I'm like, is my phone not loading correctly? I'm like, these are all green, like very green. Like what is going on? Um and and that's because the market incorporated that information immediately um and so if you think you can get out get back in before that information hits because right now you have to remember it's pretty much all bad news that is baked into into the market at this point if we get any kind of good news and this wasn't even that great of news it was just we're pausing it for 90 days. It wasn't like, we have a deal,

 

Dano:

[21:41] There's a resolution. We maybe might. Maybe might.

 

Chris:

[21:47] Maybe might pause it. 90 days got us an 8% jump in the market within 30 seconds. Trying to time it is very, very difficult. Impossible, I would say.

 

Daren:

[22:06] What happened is And so, and to go back a little bit, so on Friday, if you go back to that show, I put these two lines on the chart. I put this line right here and I put this line on. And I said on that show, I said, look, you know, we're getting to the puke point, which is a technical term for like people are just starting to feel queasy about how fast we're moving down. And, you know, there's a lot of support right here. But ultimately, you can if you want.

 

Dano:

[22:44] This was Friday. This was Friday. And Daren said this.

 

Daren:

[22:48] 60 on the SPY. If it goes below that, then we were probably looking for a longer downturned true bear market that we haven't seen in almost a generation.

 

Daren:

[23:03] That's when we start looking at these areas of support. And mark my words so we can chapterize this, Dano. All of a sudden, the politicians are going to start getting along somewhere. Where my guess right now, just looking at the chart, they're about there, or it's going to start somewhere around $4.60 on the SPY. So about there that I was pointing out was on, let's see, so right here. And lo and behold, look where we traded right into today, right? And the reason that was an important point, the reason that got picked out on the chart is this was support right here back in March 19th, 2024. And you can see the market traded into there. Support just means the buyer step in and then the buyer stepped in and bought that up and we never really came back and tested that area too much so what do i mean by testing it means that enough buyers are unloading their shares and have to wait for um there's their sellers unloading and the buyers have to step in to buy.

 

Daren:

[24:18] And, um, the, so when that happens, it creates this imbalance in the market. And, um, the, that's basically what happened. We traded right into that point this morning. Um, and we found the buyer step in and cover the sellers and then the market started moving up. So when you look at what's happening here is you've got that trade that came right into here. We gapped in, we traded up, we hit that point of support. And then lo and behold, this random weird media comes out, fake news, all the stuff's going on delay for 90 days, all these tariffs, no more. And then it bounces way up and then it kind of settles in. But that's usually what happens. And I think the point is, is that the market is technically usually moving to a point. It's moving to an area. And then the financial media will construct a narrative around that particular point to define or to create the reasoning, to socially construct, oh, this is why this is happening. When in reality, the market was going to suck to that point anyway,

 

Daren:

[25:28] Technically, and then move up. And that's where you have to be really careful with the financial media. We We always construct the narratives after, right? And that point was incredibly important. And that was 488-ish in that range on the SPY. When you look at the SPX, which is tracking this kind of the international CBOE. So this is traded with the futures on the market. And that traded right into the $4,800 mark right there. You can see where that support level was again. And what's interesting, though, that I'm watching on this is, let's look at the weekly news.

 

Daren:

[26:10] What we're also looking into is this spot right here, which is a 200-week moving average. So if we continue selling, I think we see this area as a really, really important spot to find support. And that spot there, if it goes much below that, then things are really going to look ugly for a while. But I think we'll get support right at that point.

 

Daren:

[26:40] The point of all this being said is that we've moved down here very fast, and being able to get back out or get out and get back in is very, very, very difficult to do, if not impossible, because it will move so fast.

 

Daren:

[26:55] And so much of the markets are algorithmic now, so that means they're just traded from algorithms. They're not traded by humans, so that's why the market hits certain points and moves really quick. There's also something called a relative strength index. So why do I think this is oversold? Why do I think we're likely to see a bounce? Am I saying that we're going to go back to all-time highs from here? No, I'm not saying that. I'm saying we'll probably hit a bounce from here. And that's because a relative strength index is way oversold. And if we look historically, when it goes below this 30 point on relative strength index, which is just looking how strong the movement is up or down, you tend to get a correction. It tends to show you peaks and it tends to show you valleys as well. So all that being said, we go back to this right here. And these best 25 best days in the market,

 

Daren:

[27:53] All happen around those bottoms and they happen quickly. And that's why we don't advise people, oh yeah, get out and you just get back in when things get better. Because the right time to get back in is not when you feel better. It's when the markets feel better.

 

Chris:

[28:07] So Dan, I have a question for you. Who's been more annoying today? Daren talking about his lines being correct or me talking about diversification being a good call? You can be honest here i i received who's mentioned it more who's been more annoying about i

 

Daren:

[28:24] Received i started in going dan and chris about my lines at 6 a.m this morning so all of you should

 

Chris:

[28:30] Feel great i

 

Dano:

[28:31] Received invites to both of your victory laps and i will be sure to uh hang at those parades um yes you're right i mean the for for those who don't who are just joining us or just subscribing to the channel for the first time, we're just learning about the firm, Cinema Wealth Advisors. Of course, every situation is unique, but Chris, as a person and as an investor, as a diversified investor, has been preaching it a long time, and it's been difficult through the concentration of the MAG-7. Daren is a technical analyst. He will have charts printed on his casket. He will be have candlesticks uh were probably on his birthday card uh and he's in this case he's been right i mean that's why i pulled the clip from last week because i knew he would want to show it off so yes you both have um you both have been have been smiling at least in those in respects.

 

Chris:

[29:28] Yeah so we we got a lot of uh charts here to kind of show where does this fall right is this I think the good news is here, if you rewind to COVID, that was a, okay, we've never seen this before. And so many different things happen that we've never seen before, that it was really tough to kind of come up with a playbook. But in terms of this drawdown, we have seen this. We've actually seen it many, many times before. And we can show that with these charts. So not taking into account the narrative, right? There's always going to be a story. The market doesn't fall for no reason. The stories are always bad. So if you just take that out of it and you just look at, okay, how much has the market fallen and how many times has this happened previously? We touched on 20% today in the NASDAQ. And so that's roughly happened 11 times since 1950, according to this chart. So, and we've had 71 times where it's down 5% or more. So those folks that are diversified in their portfolio might be down in that range, 5% on the year or so. That's happened multiple, multiple, multiple times. And I can almost promise you that is going to happen many, many times in the future too.

 

Dano:

[30:54] I think it's a key point to make too, Chris, which is that, you know, some, when you see again in the media, when you see that there's a headline, you see that picture of that trader with his head in his hands, a lot of people are down right now, but the difference between being down 5% and being down 50% is stark. And it can be helpful to know where you're at.

 

Chris:

[31:14] It is, but you know, it never feels awesome. Like talking to people about their diversified portfolios, it's like, you're still down, you know, it doesn't feel great. But it just doesn't feel quite as bad, right? But it's important, again, it goes back to the plan. Is it part of your plan? So here we see the average number of days where the S&P is down during the year, multiples, 1% down days. I forget the exact stat, but it's around, it's pretty close to half of the days where the market is down when you look at it on one year timeframes. When you scope out longer, It's a little bit better than that, but being down is very normal. So now historically, okay, now this is something that's a little difficult to get your mind around, but when asset prices go down, the expected future returns go up. Okay. And vice versa.

 

Daren:

[32:15] So say that again, Chris, because I think this is a really important point.

 

Chris:

[32:19] When asset prices go down, whatever the asset is, when that price goes down, the future expected return goes up. So your expected returns are a function of the price that you pay for that asset. And so the vice versa of that, when I was really nervous was towards the end of last year, there's a lot of very expensive areas of the market relative to history. So if you're paying a lot for that asset getting in, your future expected returns are smaller, right? We talked about Goldman Sachs. We talked about Vanguard having, you know, at the end of last year, projections on a 10-year basis for U.S. Large cap growth of flat to negative. So now that those prices have pulled back, the future expected returns are higher. So this chart's just showing when you get a drawdown, what the average returns are moving forward. And I'm not seeing the exact time period on when it's going forward, maybe one year since the crisis. But you look at all these different… It's the annualized

 

Daren:

[33:36] S&P return from maximum drawdown. So these are all these major crises. And then what was the actual return annually? Annualized from moving there forward.

 

Chris:

[33:49] Okay. So from today, back to that timeframe. So again, if you look at the narratives, right? Start of World War II, obviously horrible. Oil crisis, peak inflation, Black Monday. I mean, the markets dropped something like 20%. Dot-com bubble was awful. The financial crisis was awful. The pandemic was obviously awful. So there's always going to be a negative story. That is going to be very easy to get wrapped up in when the asset prices are falling.

 

Chris:

[34:26] So previous bear markets, again, I'd say a 25%-ish on the S&P. That's like, I would say a normal doozy of a pullback. But if you get over 50%, which has happened several times in the past, That's an extreme market, but it does happen. And we've talked many times on our shows about how no matter what asset class you're in, from cash to stocks to bonds to whatever, if you're concentrated in one asset class, you should expect to have a 50% drawdown. Even if that's in the case of cash, when you're looking at it on a real purchasing power basis, like if you just left your money in cash, historically, it gets eaten up by inflation. You can have a drawdown in the purchasing power of that money over time. So again, the power of diversification is that it lessens that probability that you're going to see a major drawback, a pullback like this.

 

Daren:

[35:33] And Chris, to that point, if we go back to the charts, if you look at, so this was the high from 2022. So we had our drawdown here, market went up. This area right where we're at right now, this 4,800 on the S&P was resistance and then a market broke above. And notice how the market actually never came back into that area.

 

Daren:

[36:00] It never tested that area. So when we have a breakout here and it goes up, we often see tests like this. Ideally, we like to see tests like this right here so that we don't have to go this far down. But part of what was happening the last couple of years is you had all this money getting pumped into AI and this AI bubble just driving the market higher. And what you and I have been screaming for a while is like, hey, this isn't going to last. When this correction happens, it's going to be fairly violent and ugly and fast because all the oxygen was being sucked into the MAG-7. And interesting, so if we compare that to the other bear markets we've talked about, that it was the high. And right about where we're at right now is about 21% down from the high, which is actually, though, right, still in line with pretty common bear market moments. When we look at the MAG7 stocks, these are the stocks that were sucking up all the oxygen in the room the last few years. And you can see this was the high here. And this was, well, where we're at today, it's at 28% where the market closed. It was as low as 33% down.

 

Dano:

[37:14] Daren, for people who don't know the MAG7 are what, and this is an ETF that only looks at those seven?

 

Daren:

[37:20] Yeah so um this is what's called a heat map the s&p 500 and the meg 7 or nvidia microsoft apple amazon tesla google and meta um those are your big companies is the whole ai revolution they've sucked so much of um the investments uh and money into the markets and so these grew substantially bigger. I mean, if you think about it, like Microsoft and Apple, for example,

 

Daren:

[37:49] they're bigger than the whole entire financial sector. Look at this. This is the energy sector down here.

 

Daren:

[37:58] Microsoft is like one and a half times the whole entire energy sector. And when you have moments like that, it's just not going to last. It just can't go on forever. So whatever event it is that pops the bubble like we've seen, well, that's what's going to happen. And that's why, to Chris's point over and over, diversify, diversify, diversify, because you don't know when that moment comes. It creates immense opportunity when it does come. And much like I've talked about with the AI revolution, the full adoption of the S-curve, we're going to go down before we go up, then it's really going to change all our lives with AI. And there has to be that moment. Is this that moment or is it going to get worse? I don't know. But it certainly looks like at this point there's some significant consolidation happening in the MAG7 stocks or these stocks have been the source of much of the growth of the last few years.

 

Daren:

[38:54] So when we go back to this chart and we say okay this is a manual for or so this is the bear markets and what you expect in the bear markets and um this is where we're at so you know we're not we're right in line with norms that

 

Chris:

[39:17] Would be the average so um if we go back to our playbook So given where we're at with those drawdowns, Daren, because a lot of people bought into those mags last year close to that top, right? And if you did that in a taxable account, there might be opportunities for you to do what's called tax loss harvesting. And uh just like it sounds you're you're harvesting those losses you and you want to consult with a tax advisor this is not tax advice we're not tax professionals but uh the long and short of it is that uh you know just like you pay taxes on gains as we're all painfully aware of when you sell something at a gain you've got to pay tax on that gain if it's in a taxable account Well, the government also allows you to recognize losses. So if you've got losses, you're able to sell that position, take that loss, and bank it so that you can use it against gains in the future. So that can be a very valuable thing. So again, what can you do to be taking action right now? You might be able to take some of those gains. again, on the tax front, if you're someone that's considering Roth conversions,

 

Chris:

[40:39] Now might be the time to look at Roth conversions while your IRA values are down. You can transfer those shares to your Roth, pay less tax on it than you would have had you, say, converted at the beginning of the year. Potentially less tax than you would pay on it if you convert those shares at the end of the year if we end up getting a rebound in the market. So with those values down, those are a couple of action points you can take.

 

Dano:

[41:07] Chris I think it's important to to to give that nuance there because you are in this instance saying depending on the situation and everybody's situation is different selling strategically so not selling so perhaps you have a position perhaps you inherited some Microsoft and you never really wanted anyways and it's always been a real outlier in your portfolio and it's down right now rather than saying I'm selling it and heading for the hills you're saying strategically sell things at a loss with the idea that you're banking now that loss for taxes at the end of the year.

 

Chris:

[41:45] Correct correct they allow you to you know you can sell sell one thing as long as you don't replace it with the exact same thing so you can't like say sell nvidia and then get the get the loss and buy it right back. In fact, you have to wait at least 30 days to avoid something called a wash sale. So you can't just sell it, recognize the loss and get right back in. There are rules to it, but you would be able to say sell NVIDIA and buy maybe the S&P 500. So if you were looking to diversify out of that, that's just an example. And then you get to keep those losses, which you can use against other passive gains, including if you sell real estate at a gain, that it can come in handy

 

Chris:

[42:33] in those situations too. So you're able to carry those forward. So if you don't end up using it this year, you're able to carry those forward, which can be very valuable.

 

Chris:

[42:50] So we kind of have talked about this ad nauseum, but if you look at the S&P historically, this is a historic drawdown. So the deeper that chart goes, the deeper the loss was. And this is as of Friday. So the market was about flat today in the S&P. So you can see where we're at in terms of severity of this pullback. Not crazy. And to me, the market and the price is always going to be king. So the market is telling us how severe this whole situation is likely to be. And so far, it's not great, but it's not like it's the end of the world. Now this is a 60-40 benchmark which if you remember those those that volatility you were just looking at hopefully the first thing you notice about this is one you've got a lot less volatility and those drawdowns that you get are also much smaller so that's the power of diversification now this is only a two asset class diversification so there's much more you can do in addition to this, but just by combining these two different asset classes, it can reduce that risk on the downside pretty dramatically.

 

Chris:

[44:17] Now, if you want to get a little more spice in your portfolio around diversification, I love this visual because depending on the type of drawdown, you can use different types of diversifiers to hedge or to help your portfolio in these types of situations. And this is from Rodrigo Gordillo at Resolve Asset Management. They have a ton of great stuff on diversification, so you can look them up. And so a sharp drawdown, like what we've seen, this is very quick. Then really the only thing that does well in this type of situation is volatility funds where they're like set up to respond quickly to sharp drops. Long duration treasuries, those have finally done well up until today. They've done well through this. And tail risk strategies. Then you've got more of an extended drawdown. So it's less of a sharp draw, but more of an extended one. And there you're going to find trend following, managed futures,

 

Chris:

[45:26] Or CTAs, which is commodity trading advisors. Those types of assets are going to do well if we start to see prolonged extended drawdowns. So having different types of diversifiers in your portfolio can be very helpful. So diversifiers in general, though, provide uncorrelated returns. And we always talk about if you're properly diversified, there should pretty much always be a part of your portfolio you look at and go, why do I own that? While you look at another part of the portfolio and go, gosh, why don't we just put everything in there? Right. And unfortunately, that's just the way diversification works. You can't know ahead of time which one is going to work well to put it all in there. So if you're going to be diversified, there's always going to be a part of the portfolio that you're not loving holding on to.

 

Chris:

[46:19] Um, last couple here, this is from Charlie Bellolo at creative planning, showing that when the VIX closes above 45, which it did last week, uh, today it was at 48 when I checked it earlier, that is the volatility index. And you can kind of think of that as like, how expensive is it to buy protection in the market right now? How, um, how worried are people? How worried are traders? Now, typically when the worry gets to this level, you can see that in the light blue, what the performance, the forward total returns have been over a one year, two year, three year, all the way out to five years versus kind of a normal. Normal VIX levels, I would say, would be somewhere in the 20 or below range. And so we talk about the VIX a lot on our weekly calls. And you can see that when we're in normal range, returns are good. But when people are really panicked, typically that forward returns goes dramatically higher. I don't think you could look at this and say that's just a coincidence.

 

Dano:

[47:26] So you're saying, this chart is saying that when the VIX closes above 45, the VIX is an index that measures volatility, of which it did today, it's above 45, you're saying then your expected returns for the S&P, say in five years, are 136%?

 

Chris:

[47:46] No, that's what the S&P forward total returns were between 90 and 25. five. So that's not, uh, I'm just saying the expected returns are higher now, right? Because the prices are lower. Um, and because people generally are fire sailing their, their assets, fire selling their assets, they're selling in a panic. And so they're taking lower prices. So you typically your returns forward looking have been higher. And this Daren's showing the, uh, chart of the VIX going historically. And you can see it doesn't happen very often where we spike,

 

Chris:

[48:27] But occasionally it happens. And that's just an indication of panic in the markets. And historically, when that's happened, the returns on the S&P have been much better forward-looking than they have been when people are feeling pretty copacetic about things. Now, I want to hit on going back to our bear market playbook on something that a couple things. One is that every crisis looks like an opportunity in hindsight, right? Morgan Housel said that. I'm sure there's others have said that. But when you look back and you look at these crises, you're like, oh, that was a great time to buy. Obviously, I would have stepped in. I would have been doing, I would have stick with my investments. I would have stepped in. I would have bought more. When you're in it, it's a totally different feeling, obviously, right? So every crisis is going to look like an opportunity in hindsight, or at least it has historically, which leads to the other saying here, this time is different, right? Possibly, you know, maybe this is the last time we all get together for a video like this, guys. This could be it. Potentially, it could be it. Not likely.

 

Daren:

[49:41] Well, hold on. And here's why. So let me show you some direct evidence where this time is probably not different. So the last three trading days, the S&P fell 10.7%. This is only the 11th biggest drop in a three-day period in history. In every single case, so there's been 11 other times it fell bigger in three days than this. In every single case in one year, three-year, and five-year, the stocks were higher. So if this time is different, it's got a lot to contend with because it doesn't seem that it's going to be different.

 

Chris:

[50:26] Now, I don't want to skip that one point. That was a great point, Daren. But this right here where it says use the experience, use this experience right now to consider your strategies in times of calm. So if you're someone that is like, oh my gosh, this is overwhelming to me. I don't know. I can't sleep. I can't eat. This is really affecting me. And I just, I can't take this. When things calm down, they will. When they calm down, consider whether or not your strategy that you're in is the correct one for you. Right um because we can run you know tolerance questionnaires and you can picture losing hundreds of thousands of dollars and everything but until you're actually seeing it on this on your screen and living it it's a totally different experience so if you if you're someone that is like wow this is just too much for me let's let's talk about it when things calm down maybe maybe you're in a portfolio that's just a little too high speed for you.

 

Daren:

[51:30] Well, and then also being really clear about what your performance is actually, because I think all too often we find that clients hear the financial media say, oh, the S&P is down 10%. And then my response, well, it's a good thing you're not in the S&P. And because you're not most of the time, right? So any diversified client is going to have a portion of their portfolios in stocks, but it's just a portion. And I think being clear about that is really important. All portfolios, you can see what their correlation level is to the stock market. So what I'll tell clients a lot of times is, keep in mind that you're about a third correlated to the stock market. So if the news says, oh, it's up 10%, well, you're only getting a third of that upside. And if it's down 10%, you're only getting a third of that downside. So having a clear sense of what the components in your portfolio are can be extremely valuable in these times because it's very rare that clients are in a full stock portfolio. Just like it's very rare that this time is actually different. All right, there was one more slide here, Chris.

 

Chris:

[52:42] One more, and it's a good one. It's a good one. This is, again, from Charlie Biello. And now, the first thing when you look at this, these are the biggest two-day declines, okay?

 

Chris:

[52:56] And the first thing you look at this, Daren, is, let's see, there's 2020 on here twice, and then there's 2025. five. So three out of the 10 have just been, you know, very recently in the, uh, in the history of Sonoma wealth. So congratulations, the 30% of the largest two day declines in history have happened during our, our short history here. But, um, then you've got 2008, which I know, uh, we were familiar with as well. Um, there's a lot of them from 2008 here. So no doubt horrible times in the market. But when you take a look on the right-hand side of this chart, and then you look at the forward returns, what you'll notice is a lot of green. And so there's going to be another side of this. The world's going to keep turning, most likely. And when it does, like you said, the probabilities are in your favor. Of course, you never know. This time could be different. History is not, what is it? History doesn't, past performance is no guarantee, right? And that's on all of our disclosures, but probabilities are in your favor over the longer run.

 

Daren:

[54:16] And just a sense of probabilities, you can see here, this is the target rate probabilities for the May 7th federal, or this on May 7th, but the up and coming meeting is on May 7th. Excuse me. My brain was like, wait, it's April 7th, May 7th. And yes, so a month from now, you can see that it's more likely now after the last few days that the Fed's actually going to drop rates when they meet in May. So that's why you've got to be really careful because what we've seen over the last few years is as soon as we think things are awful, magically the politicians get along at those points where I've been pointing out and they start printing money. And when that money starts printing, then it's best to be in a portfolio that you're comfortable with the upward trajectory.

 

Chris:

[55:15] Dan, why don't you summarize the bear market playbook if we're getting towards the end here? If you would just, I'm sure you could clip that puppy and put it into the email. You're probably just, you can't wait to clip that, right?

 

Dano:

[55:31] I got so much content up here. I got a week worth of work here, Daren. I'm on overtime.

 

Chris:

[55:35] For anybody that didn't tune in until now, or they're just going to watch the first five minutes, which is usually normal, right? Maybe you could summarize that bear market.

 

Dano:

[55:46] Daren, could you get me back there real quick?

 

Daren:

[55:48] You want the playbook? Yes, please. All right. We'll give you the playbook. Here we go.

 

Daren:

[55:54] Okay.

 

Dano:

[55:59] So things to do. Thank you. First of all, thank you for checking out the show today and making it this far all the way till the end. We are Cinema Wealth Advisors, and this is what we're suggesting at this time, as we are potentially entering bear market territory. So we covered this in the episode. You'll be able to find this not only in a replay on our YouTube, but also on Apple Podcasts and Spotify if you want to watch the whole thing again. First, consider putting that cash to work if you are waiting on the sidelines. If you did, in fact, perhaps before the election, it was very common to say, I'm going to get out of the market until things calm down because of the election. Perhaps you've been out this whole time and you're wondering when is the moment to get back in. As Daren said on a team call this morning, if Chris Sipes is saying buy stocks, by golly, there can't be a better time. This could be your entry point if you've been sitting on the sidelines.

 

Daren:

[57:02] For those who don't watch us, Chris is the really conservative one of us.

 

Dano:

[57:08] Consider increasing retirement contributions. So again, same mindset. So you hear that things are really bad and so you're going to pause your retirement contributions until things calm down. If you're in the accumulation phase, you're under 50 years old, you're working at your job, maybe you're new at your job, you've got your 401k contributions, now might be the time to ramp those up because it's a buying opportunity because things are on sale. Um, rebalance into the storm. So depending on how your portfolio is, uh, if your stocks are underperforming and now suddenly your bonds are doing well, that's great. Why would I sell my bonds? They're doing well. Well, because you want to keep the same ratio of the two, uh, that you had going in, uh, unless you're changing your financial plan, unless you're changing your risk tolerance. But in general, um, this is your moment to, again, you're selling some stuff that's done well and putting it into things that perhaps are on sale. Take advantage of tax loss harvesting opportunities. Meaning, I really love that you included this one, Chris, because we are a big proponent of, as some people say, being in a power position, taking control.

 

Dano:

[58:23] Yes, something is bad happening in the market. Market is going down in general, but you're not going to be dictated to. You're going to take it, take what's given to you and deal with it and make it make the best of it. And in this case, you're saying, OK, well, fine, I'm going to take it as a loss and I'm going to use that as a tax savings. So look at that. You can work with an advisor on that. If you if we are your advisor, if you're looking for an advisor. Consider Roth conversions. You'll want to consult with your tax advisor on that. Use this experience to consider your strategy in times of calm.

 

Dano:

[58:57] So in my mind, it's always a random Tuesday in August when you've got nothing going on. And perhaps you could sit there and actually do some of this stuff. And here's one that I'll add with that strategy is to do a budget today. If you're in that situation. If you're really reliant on your portfolio and you're wondering what's going to happen and you're wondering what will next month look like, perhaps you're not that close, when it comes to making it every month, but it can sometimes be really helpful to sit there and on an old legal pad, on paper with lines on it, write down what's it going to cost, what's coming in. Perhaps you are not as reliant on your portfolio as you think because you haven't thought it through recently. So consider your strategy in times of calm.

 

Dano:

[59:49] Think about the phrase, but this time is different. It's possible, but as we showed today, through several pieces of data, historical data, not likely, but no one knows. And anyone who tells you that they do know is no longer your friend because they're lying to you. They don't know. And finally, every crisis looks like an opportunity in hindsight. The big one that you can point to is 2008. And could there be anything worse than 2008? I've thought about 2008 a lot today in context of what's happening today. Could there be anything worse than a cascade failure of real estate, banking, and the stock market simultaneously? That's not happening right now. And in 2008, if that happened with your house, If you knew what was going to happen later, you probably would have gone out and bought three foreclosures. But it's hard to do, very difficult to do in the moment. So those would be our recommendations today for educational purposes.

 

Daren:

[1:00:52] I just add one more.

 

Dano:

[1:00:53] I think we just have to add one more.

 

Daren:

[1:00:55] And we just got to sum this up. So there's a guy named Jim Cramer, and Jim Cramer came out over the weekend predicting that we were going to have a Black Monday. And...

 

Dano:

[1:01:08] This is the CNBC guy going.

 

Daren:

[1:01:12] Everybody should be scared, freaked out. We're going to have a Black Monday. Actually, in truth, the market during the trading hours was green today. It didn't quite make it back up to above and beyond Friday, but it filled in a green candle. That's meaning that it opened up a lot lower and traded up. So the last thing I would say is turn off the junk media because your portfolio is not your politics and the portfolios are not run by the financial media and the media is there to sell eyeballs, not to help you make money in the markets.

 

Chris:

[1:01:52] Yeah. Sounds corny, but I think that's great, Daren. Turn off the TV, put down the Twitter, go for a walk listen to music you know my my seven-year-old had a bob dylan t-shirt on yesterday and she said who's this dad and i said oh it's bob dylan she's like who's that you know let's let's listen to some songs right so listen to some songs and i gotta tell you that made me feel great so if you haven't done that you know find somebody you love listen to some music go for a little walk i promise you you're gonna feel better that's

 

Daren:

[1:02:26] Right well we hope this been helpful. And as always, reach out. We're here. Happy to answer questions. And we'll keep watching how the week goes. If things are raucous, we'll film again. But otherwise, we'll be back to wrap up on Friday.

 

Dano:

[1:02:43] And if you're new to our channel or if you're new to our firm, of course, our clients already know us. But if you're just checking us out for the first time, we're Sonoma Wealth Advisors. We work with families and retirees, individuals, not only in Sonoma County, but actually across the country. If you want to learn more about us, you want to see how we work with people, how we could help you, sonomowealth.com is our website. We have our free wealth analysis, and you can even get to know Chris and Daren even better than you already do from this show. So thanks for checking it out. Make sure to subscribe here on the channel.

 

Daren:

[1:03:18] All right. Take care, everybody.

 

Music:

[1:03:20] Music