'Twas the Night Before...Another Financial Meltdown?

As the new year approaches, many investors would no doubt like to take a little time off from obsessing over the ups and downs of the market, and just enjoy time together with the people they love. Besides, late December ought to be a pretty quiet time on Wall Street anyway, right? If only.

In this segment from Motley Fool Answers, hosts Alison Southwick and Robert Brokamp attempt to enjoy their holiday tradition of reciting "A Visit from St. Nicholas," but a tetrad of totally terrifying financial news items gets in the way of their fun. If the business news has you worried, though, perhaps Bro can ease your concerns.

A full transcript follows the video.

This video was recorded on Dec. 18, 2018.

Alison Southwick: Oh, the holidays. Aren't they the best, Bro?

Robert Brokamp: The holidays. They are the best!

Southwick: You mean that in all seriousness.

Brokamp: Yes.

Southwick: That this is your favorite time of year.

Brokamp: It is.

Southwick: And this is the time of year when we get together as family, and we turn off our devices, and let the noise of the world die down and just enjoy peace and love and all those wonderful things.

Brokamp: Yup.

Southwick: And we certainly don't freak out about the stock market.

Brokamp: Absolutely not!

Southwick: So tell me about one of the Brokamp family traditions that you are bringing to our listeners today.

Brokamp: On Christmas Eve there are actually three things that happen in the Brokamp household every year. No. 1, everyone gets new sleepwear. It could be pajamas. It could be robes. It could be onesies. No. 2, we all make food for the reindeer in a nice, big bowl. Who knows what goes in it? Different ingredients -- and then we spread it around. And then No. 3, we read "'Twas the Night Before Christmas." So we thought we'd do that here for our listeners.

Southwick: Yeah! And I, even though I really love to be attached to my cellphone, see the news that's coming in, and stay on top of things; I am going to set my phone right over here and I'm not going to look at the headlines. I'm just going to enjoy this holiday moment with you. Rick, can we cue some fake fire-crackling noises that we could have, maybe?

[Music]

Southwick: Here we go.

Brokamp: Here we go. Everyone ready?

Southwick: Are we ready?

Brokamp: Everyone nestled in?

Southwick: Yup!

Brokamp: Here we go.

'Twas the night before Christmas, and all through the house

Not a creature was stirring, not even a...

[Sound of needle scratching record]

Southwick: The Fed! If it keeps hiking rates it will cause a recession. Bro! Look at this interview on CNBC! "Trump's former economic advisor, Stephen Moore, is saying that we're sunk if the Fed raises rates."

Brokamp: I thought you said we weren't going to look at headlines.

Southwick: I mean, it was just like a little...I just saw it pop up on my phone. It's just a little...I mean but come on! I need to be freaking out about the Fed raising rates, right?

Brokamp: Well, I would say not necessarily. First of all, this is what the Fed does and it has done since the beginning for over 100 years. It lowers rates during an economic recession and then it brings the rates back up during the expansion. And we are in quite an expansion -- the second longest in history -- not that far from being the longest.

The current Fed funds rate is only 2.2%, which is still very low, so when they lowered rates and then raised them back up after the dot-com crash, the Fed funds rate got to over 5%. There were times in the '90s when it was over 10%. Times in the '80s it was almost 15%. So we're still at a very low Fed funds rate.

Are they trying to tamp down things a little bit to keep inflation in check? Absolutely. Will it affect the economy? Will it possibly affect your stocks? Absolutely. But it won't be catastrophic.

I think it's also important to know that often what is not so good for one part of your portfolio (in this case stocks) can be good for other parts of your portfolio (in this case cash). Because the Fed has been raising rates, we are finally now at a point where earning something...Robinhood just announced they are going to start paying 3% on cash, which is getting up to the historical average.

And the final thing I'll say about this is Stephen Moore is a right-leaning pundit, he's not necessarily an expert, and he has a political agenda for what he says. He's been known, somewhat, to play fast and loose with the facts and you could choose a pundit anywhere along the political spectrum and you can say the same thing about them. So whenever you see a headline from someone with a political agenda, just take it with a big grain of salt.

Southwick: OK. All right. You can keep reading. I'll put my phone away.

Brokamp: I can keep reading? OK. All right, everyone. Here we go.

[Music]

The stockings were hung by the chimney with care,

In hopes that St. Nicholas soon would be there;

The children were nestled all snug in their beds; while...

[Sound of needle scratching record]

Southwick: The housing boom is already gigantic! How can it last? Bro, look at what Robert Shiller wrote for The New York Times. He says we are "experiencing one of the greatest housing booms in United States history." How long will it last and where is it headed? Next to impossible to know. If Shiller doesn't know, no one knows!

Brokamp: Well, indeed, the Nobel Prize-winning Shiller is a bit of a smarty-pants when it comes to these things. He's the co-creator of the Case-Shiller housing index. Known for anticipating the dot-com bubble and crash, as well as the housing bubble and crash. Whenever Robert Shiller says something, I pay attention. And coincidentally, I read the same article.

Southwick: And you didn't freak out like me?

Brokamp: I did not freak out like you, but here are the facts. Since housing prices bottomed in 2012, they've gone up 53% nationwide. Adjusted for inflation it's a little less than 40%. That's a big jump over a span of about seven years or so, and he points out that this is the third biggest boom in history. The biggest was the one we went through that ended in 2006 and it was followed by a 35% crash in home prices, as well as the Great Recession. The other time was from 1942 to 1947. The end of World War II. GIs coming home. The baby boom and stuff like that.

But after that, housing prices actually didn't crash. If you read Calculated Risk, a blog by Bill McBride (which is my favorite economics blog), he points out that if you look at different statistics, different historical information for housing booms and busts, that there are a couple of others with bigger price increases than what we've seen in the '70s and '80s, and in those times housing prices didn't crash.

So I'm not too worried about it. Really, I think a lot of our perception about home prices has been colored by what happened during the Great Recession. It was very unique because it was the first nationwide crash in housing prices; but it was also unique because it was the only time when housing prices declined and the stock market declined.

There's research from Mark Hulbert that looked at the 20 bear markets in the stock market over the last 65 years. He found that when stocks go down home prices tend to go up. So historically, in most cases, home prices are actually a good hedge against stock prices.

So I'm not too concerned about it. When it comes to housing, I always look at it as an asset and not an investment, meaning that it's something that I put on my balance sheet. It is something that you can definitely use in retirement, whether by downsizing or as a reverse mortgage. I don't look at it as an investment. I don't get too concerned about whether my home price is up or down. I just look at it as something that, as long as it fits within my budget, I enjoy it and know that in the future I can use it if I need it.

Southwick: OK. I guess I feel a little bit better. And more peaceful, now.

Brokamp: Well, that's good!

Southwick: You can keep going.

Brokamp: OK! All right, here we go.

[Music]

And mamma in her 'kerchief, and I in my cap,

Had just settled our brains for a long winter's nap,

When what to my wondering eyes did appear,

But a miniature sleigh and eight...

[Sound of needle scratching record]

Southwick: "A Bear Market is Already Here for Most Major Global Stocks." Bro! This article from Bloomberg says that 52% of companies in the MSCI World Index are down by more than 20% from their 52-week high.

Brokamp: Wow! Well...

Southwick: Oh, did that shake you? Did that actually rattle you a little bit?

Brokamp: No, not necessarily! This index looks at stocks all over the world, including the U.S. And when you look at the U.S. -- as of the taping of this episode which is Dec. 14 -- the S&P 500 is down a little bit at a price basis, but when you throw in dividends it's about flat. Small caps and midcaps are a little lower. They're down about 5% for the year.

But when you look internationally, it's been a rougher year. International stocks are down anywhere from 12%-15% depending on what you're looking at. The worst countries this year are Turkey and Russia. They're down 20%.

These are the indexes, and most indexes are weighted by market cap, which means they're strongly influenced by the biggest companies. What this article did was look at all the stocks individually. And it's true that the majority of stocks are actually down 20% which, by definition, is bear-market territory.

So, am I concerned about that? Not necessarily, because when stocks go down, there are better values. A recent article in The Wall Street Journal found that globally stocks, valuation-wise, are now at five-year lows. Lower valuations mean a higher (prospect) of future returns, which is always a nice thing.

But it also shows the need for diversification. This year international stocks are lagging U.S. stocks. In 2017 it was the opposite. International stocks greatly outperformed. So I'm not too worried when I have some things that are doing OK, some things are up (like cash), and some things are down significantly, because that's what happens with a diversified portfolio.

One of my favorite quotes about asset allocation comes from a...

Southwick: There are so many to choose from.

Brokamp: It's a tough choice, but this one comes from a financial advisor in Pennsylvania named Lou Stanasolovich and he says if you're not losing money somewhere in your portfolio you're not diversified enough. So I'm OK with some things being down, especially in the context of where we've been. Over the last 10 years, the S&P 500 has grown something like 14% a year. Even international stocks have grown 8% a year. We've had a really good run. It's OK for things to take a little bit of a break.

Southwick: OK, all right. I feel a little better.

Brokamp: Do you? Good. I'm glad to hear that.

Southwick: I guess you can keep going.

Brokamp: All right, here we go.

[Music]

With a little old driver so lively and quick,

I knew in a moment he must be St. Nick.

He was chubby and plump, a right jolly old elf...

[Sound of needle scratching record]

Southwick: So much for the Santa rally. Trump's trade war is sending the S&P 500 toward its worst December since 2002. Bro, even Santa can't save us! Look at this headline from Business Insider. It says that we're going to have the worst December in 16 years and that there will be no Santa rally this year. Look at this sad photo of a sad man in a sad suit and a Santa hat. There's just too much sad! The hat isn't enough!

Brokamp: I looked at that picture and I think it's Art Cashin, so those of you who know Art Cashin from UBS know he's on CNBC every day. Just imagine him sad and in a Santa hat.

So here's the deal. December, traditionally, is actually a really good month in terms of its average annual return, but also it is the best month in terms of percentages with a gain. Since 1950, December has made money 75% of the time. So at this point in December, halfway through, we're actually down 5.5%. That is a bit of a shock.

But that's where that 25% comes in and the lesson, of course, is regardless of what's happened in the past, the future can always be different or something that is historically a low-probability event can happen. Now that said, we do have the Santa rally. Now the Santa rally technically happens the last five trading days after Christmas and then the first two trading days of January.

Southwick: We've got time.

Brokamp: We've got time to recover. Historically this was discovered in 1969 by the guy who writes the Stock Trader's Almanac, and the Santa rally makes money something like 80% of the time. So, who knows? We still might end up with a good December which would then make at least the S&P 500 put us in positive territory for the year.

But we don't know if that's going to happen, so you just hold on through it. If there's money you need to spend at the end of December, you should probably have it in cash. But generally speaking, I don't pay much attention to what might happen or what might not happen from month to month, because I'm not going to retire for another 20 years and that's all I care about.

Southwick: [Sighs] OK, I do feel a lot better!

Brokamp: Do you feel a lot better?

Southwick: And it's not just the eggnog kicking in. Let's finish it. Take us home, Bro!

Brokamp: All right. Here we go!

[Music]

He sprang to his sleigh, to his team gave a whistle,

And away they all flew like the down of a thistle.

But I heard him exclaim, ere he drove out of sight--

"Happy Christmas to all, and to all a good night!"