Upticks: May Market Update with Matthew Navickas, AAMS®

By Jake Falcon on May 12, 2022

On this episode of Upticks, Jake is joined by Matthew Navickas from Falcon Wealth Advisors’ Research & Trading team for a market update. They discuss the stock market’s recent performance, how decisions from Federal Reserve impact that performance, where the market could be headed, and actions we’re taking for our clients.

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Matthew Navickas, AAMS®, a member of our Research & Trading Group here at Falcon Wealth Advisors, joined me on a recent episode of Upticks to discuss the stock market’s recent performance, how decisions from Federal Reserve impact that performance, where the market could be headed, and actions we’re taking for our clients. A summary of our conversation is below.

Jake: Let’s kick off our conversation by congratulating you, Matthew, on recently passing level one of the Chartered Financial Analyst exam—I know that is not an easy test! What does the exam entail?

Matthew: It is indeed a difficult test that covers a broad range of financial topics. I still have to pass two more tests to earn the designation, but I’m happy about passing the first exam.

Jake: And I know the CFA credential is designed to prepare professionals like you to research and analyze stocks and bonds. I’m confident your commitment to furthering your own education will add value for our clients.

So let’s see your education in action. The Federal Reserve recently raised interest rates by 0.5%. How do you think this news has impacted the market?

Matthew: We saw the market rally after the announcement because investors were pleased the Federal Reserve didn’t raise interest rates higher than 50 basis points, or 0.5%. Investors also appeared to like that Powell said he didn’t see the need for raising rates higher than 50 basis points at a time in the coming months.

Jake: Would you talk about why the Federal Reserve is raising interest rates and why this action is needed?

Matthew: I know the market’s recent volatility has not been pleasant for our clients, but what the Federal Reserve is doing is indeed needed. Raising interest rates helps combat inflation, which was up over 8% in March 2022. Meanwhile, the Fed has a target of 2% inflation. That’s a big gap, so the Fed is essentially trying to cool off inflation without sending the economy into a recession. This will be a difficult line to walk.

Jake: Hopefully this action will cause the prices of goods and services to stop rising at a dramatic rate, and hopefully vehicles like savings accounts and CDs will start paying people more interest, as they did in previous eras. While bonds are down in value, rising interest rates allow investors to buy new bonds that offer higher yields.

I agree that what the Federal Reserve is doing is necessary. I don’t like seeing portfolios down, but raising interest rates was needed after the Fed lowered them during the pandemic—not to mention the government has pumped stimulus dollars into the economy in the last couple years, which can increase inflation. You can’t have your cake and eat it too. I was born in 1981, and we haven’t seen inflation like this since the early 1980s.

Matthew: Yes, I recently read the Fed raised interest rates by 5%—10 times what we just experienced—at one of their meetings in 1980.

Overall, we’re still in a good environment. Even though interest rates have gone up a bit, they are still historically low. I think the market can perhaps find its footing this year and rebound.

Jake: There’s an old mantra: “Don’t fight the Fed.” Markets don’t like higher interest rates because it’s harder for companies to justify their valuations—but again, raising rates is necessary.

Matthew: Indeed. As we mentioned, when interest rates rise, investors can buy bonds that yield more money in shorter time frames. More people investing more money in the bond market is not usually a positive development for the stock market. Expensive stocks or companies that haven’t yet produced earnings reports are hit especially hard during times like these, as bonds become more attractive to investors than investing in these companies.

Jake: While we can’t predict the future, we did have a meeting at Falcon Wealth Advisors early this year where we decided to position our portfolio of individual stocks and bonds for a high-inflationary environment. This means our positions aren’t as exposed to the type of stocks you just mentioned, and it’s why our core portfolio has outperformed the major indexes this year. We constantly look to take advantage of opportunities as they present themselves.

Shifting to another topic, Matthew. The most consistent question I’ve been asked lately is where the market is heading the rest of the year. What are your thoughts?

Matthew: My opinion is the market could find its footing and perform better as the year progresses. I think a lot of the pessimism around inflation and rising interest rates is already “baked into” the market. There will likely be volatility as it unfolds, but I think we could see the market rally this year. I think this is a good time to put some money to work and aim to buy stocks while they’re “on sale.”

Jake: That’s a good point. There are still a number of uncertainties, like the war in Ukraine, the pandemic, and midterm elections. But if the Federal Reserve does what it says it will, inflation numbers pull back, and we receive some strong earnings reports, I think we could see the market perform better.

As you said, with the market down, this is a good time to buy stocks. Everyone says they want to buy low and sell high, but when the market is down, people often find it hard to pull the trigger and buy.

Matthew: Environments like this are when it pays to have a fiduciary wealth advisor and a customized financial plan. Our team makes decisions based on math, not emotion. That’s what you need when things are volatile.

Jake: Indeed. This is when we show our value. It can look easy to manage a portfolio when the market is up. But good times don’t last forever, and the financial plans we build for our clients take bear markets and volatility into account.

Let’s next talk about the action we’re taking for our clients. I don’t like when wealth advisors tell clients “do nothing” as the world changes. Instead, at Falcon Wealth Advisors, we take action while staying disciplined to our process.

Matthew: Well said, Jake. We stick to our plan. As we mentioned, when markets are down, we don’t look to sell. We instead look to buy stocks when they’re at a low point. We check our emotions at the door and use math to guide our decisions in accordance with each client’s financial plan.

Jake: Many of our clients regularly receive cash in the form of stocks that pay dividends or bonds that pay interest. If they have some cash they don’t need in the near term, it makes sense to use that cash to buy stocks that are undervalued.

We choose the stocks we buy, in part, based on a stock’s Relative Strength Index (RSI) score. The RSI is a technical indicator that uses an algorithm to inform us if stocks are overpriced or underpriced. If a stock falls below an RSI score of 30, we view that as an opportunity to potentially buy an undervalued asset.

There’s no such thing as a perfect indicator and the RSI is not perfect. But it’s a math-based tool that I believe helps us make good decisions. We use fundamental analysis—which involves our team researching companies—to pick the stocks we buy, and then we use technical analysis to guide when we invest in a stock.

If you buy a stock at $100, but its value falls to $80, it’s understandable you could be disappointed. But if the stock’s RSI falls below 30 as the price drops to $80, it’s actually a good time to buy more of the stock. And with your average purchase price now being $90, you don’t need the stock to climb all the way back to $100 to earn a profit.

At Falcon Wealth Advisors, we help make sure our retired clients or clients preparing for retirement have 5-10 years worth of living expenses invested outside the stock market in vehicles like bonds or cash. Stocks are long-term investments, and this strategy means clients don’t have to sweat the market’s day-to-day volatility.

Matthew: And we plan to own every stock we purchase for at least five years. The bonds and cash in which we invest clients are a nice cushion during times of turmoil.

We also rebalance portfolios when appropriate. In every client’s financial plan, we indicate what percentage of their portfolio should be invested in stocks and what percentage in bonds. When the stock market falls like it has and the stock portion of a portfolio is too low, we can use money from bonds and cash to buy stocks and rebalance the portfolio. We haven’t been able to rebalance lately because the value of bonds has also been down, but we could in the future. Rebalancing is a natural way to try to buy low and sell high.

Jake: I agree, it’s a prudent way to manage money, and it prevents you from being too heavily invested in one area. And I like that you noted that we have a 5+ year outlook on the stocks we buy. We do a lot of research before we buy a stock and just because it goes down shortly after we buy it doesn’t mean it won’t deliver on the long-term potential we envision.

Thanks so much for joining me, Matthew. I enjoyed our discussion. Whether you’re a current or prospective client, if you want to learn more about our disciplined process and how it helps us aim to buy low and sell high, please contact Falcon Wealth Advisors today. You can reach me directly at Jake@falconwealthadvisors.com.

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