March 2021 – Capital Markets Update Excerpts

Full Episode Transcript

Naj Srinivas:

Hello and welcome to the Fisher Investments’ Market Insights Podcast, where we discuss our firm’s latest thinking on global capital markets and current events.

I’m Naj Srinivas, Senior Vice President of Corporate Communications here at the firm.

In this episode of Market Insights, we’ll get the latest thinking from Fisher Investments’ Investment Policy Committee. The Investment Policy Committee are the primary portfolio decision makers at Fisher Investments. The Investment Policy Committee recently conducted a special video session for clients called the Capital Markets Update. The Capital Markets Update video features the Investment Policy Committee answering some of our clients more commonly asked recent questions.

In this episode, I’ll guide you through some excerpts from that conversation on topics such as lessons learned from 2020, a look at the current state of the economic recovery and how we’re seeing potential trouble spots on the horizon. And be sure to listen for Fisher Investments’ founder and Co-Chief Investment Officer, Ken Fisher, for his thoughts on how politics could play into global equity markets this year.

There’s lots of great information in this episode, so let’s get started.

Enjoy!

[TRANSITION MUSIC]

Naj Srinivas:

2020 was an often-volatile and frequently stressful year for many investors. But along with the challenges comes the opportunity to learn. We’re going to start out with Aaron Anderson, Senior Vice President of Research, discussing some of the lessons they took away from 2020.

Aaron Anderson:

Last year, obviously quite a tumultuous year. And I think there’s some new lessons we learned. And then I think that there are some things that we’ve always known that really got reinforced last year. Now, in terms of the new things that we learned, of course we learned a lot about COVID-19, about the virus, about how it spreads, about its mortality, and so forth. Hopefully that’s not knowledge that we need to rely on too much in the future. Hopefully we’re not experiencing epidemics, pandemics, with any regularity. History suggests that we won’t. But of course, those were important lessons that helped us navigate through the course of the year.

I think we also learned though the extent to which governments will implement lockdowns and prevent travel, and just how far they’ll go in order to prevent the spread of a virus like that. So, should we enter into that environment again, we have a much better sense now of what governments are willing to do to try and contain a virus like COVID-19, whereas coming into this, even though we’d experienced pandemics, epidemics, before, we’ve never seen the types of lockdowns that we saw last year. So predicting that governments might respond the way they did, there’s really no historical precedent for that, but now we’ve got a good sense of what actually governments might be willing to do in this type of situation should it arise again.

Naj Srinivas:

2020 also showed just how adaptable people, businesses and economies could be in the face of a major disruptive event like COVID-19, but also how important a top-down, macroeconomic perspective can be for investors. Here’s Aaron Anderson again.

Aaron Anderson:

Last year you just saw adaptability everywhere. What I mean is suddenly you had this pandemic, suddenly you had these unprecedented lockdowns, people couldn’t travel anymore, they couldn’t go to the office, they couldn’t interact with each other in normal ways, and yet people found a way to interact with each other without going into the office and going to restaurants and going to bars and doing those types of things. We couldn’t travel, but we could use video conferences. Businesses couldn’t have people coming into the office, and yet they found a way to do business nonetheless. And so, I think one of the key lessons that we knew but that really got reinforced last year, is simply that people, companies, economies, markets are much more adaptable than people usually give them credit for.

Another concept that I think is core to the way that we manage money that really got reinforced last year is the importance of paying attention to the macroeconomic environment, to doing top-down analysis. As I think about all the volatility last year and what drove companies down in February and March, it wasn’t that suddenly they become terrible companies and management teams were awful. It was clearly the macroeconomic environment; the politics, the pandemic, the economic impacts of all of that drove companies down, and then all of the uncertainty surrounding that.

And then as we emerged, you saw huge spreads in performance between growth and value companies and technology companies versus, say, financials and energy companies. And again, I don’t think that’s because the energy companies had bad management teams and bad business practices and the technology companies had great ones. It was the macroeconomic environment asserting itself. So I think last year was a great example of just how important the macroeconomic environment and applying top-down analysis—trying to focus on the categories of companies first and the individual companies later. I think that was one of our keys to navigating through last year.

Naj Srinivas:

Even with the uncertainty around the pandemic and economic lockdowns, stock markets held up remarkably well. That surprised a lot of investors. To look at why stock markets did well in the face of adversity—which, many times, they often do—here’s Michael Hanson, Senior Vice President of Research.

Michael Hanson:

I think one of the things that we’ve been thinking about for years, and 2020 just really starkly showed us how potent this could be, is something you’ve heard from us a little bit here and there over the last few years called ABCD, or ‘anybody can do it.’ It has to do with adaptability. And one of the most interesting features about how markets price things is that information that’s widely known or widely discussed gets priced in instantaneously. And that has very odd and interesting features at times.

It means that things that seem readily apparent or that things that people really know, even if, and especially if they’re very data-driven, actually get digested in this market very quickly because we’re living in a world, a technological age, where many people have access to the same types of data and because a lot of folks are trained in the same way I find in this industry, they tend to come to similar conclusions. Well, that’s the great humiliator at work.

And when folks come to similar conclusions, especially when they tend to be data-driven, that gets priced in very quickly and the market adapts and something else happens with prices because the way a price moves ultimately is the difference between expectations and reality. And when things get priced in, it means that which surprises actually moves the stock market. I think one of the most surprising things about last year is just how well ABCD worked, how well the adaptive mechanism worked, how well the pricing mechanism worked, and in fact, the markets being cold-hearted as they are saw COVID, panicked initially, but understood and saw a recovery and a brighter future somewhere into that 3- and 30-month future. And in fact, price that in very quickly.

Naj Srinivas:

While stock markets generally recovered from their early 2020 drop, investors are right to wonder about the economic recovery that we’re still going through right now.  Here’s Aaron again to discuss the reality of the recovery, which might not always match up with the perception.

Aaron Anderson:

The economy has indeed mostly recovered by most measures in aggregate. I think a lot of people don’t feel that recovery because when they look around themselves, they see that we’re still locked down in some ways. I mean, certain parts of the economy are indeed still struggling. I think it’s important to acknowledge that, whether it’s people being locked down, not being able to go to restaurants or theaters or travel like they would normally want to. And those are things that we all feel in our personal lives and you’re not so immediately aware of the fact that manufacturing is booming or that even though we’re not going to a mall, online retail is booming and so forth.

And so I think one of the reasons that people aren’t fully aware of the fact that the economy has done as well as it has, is that a lot of the things that are in our day-to-day lives still feel like they’re severely impacted by COVID in the lockdowns, where a lot of the things that we don’t feel as directly are really doing quite well and recovered massively.

But what’s important for the stock market, of course, is what’s going on in aggregate. In fact, those real high visibility things like travel and restaurants and leisure and so forth actually are a relatively small part of the overall economic pie. So while they might not be doing as well as you might hope tied to the continued lockdowns from COVID and so forth, other parts of the economy that are bigger, more impactful, those are doing quite well.

And so I think the perception of how the economy is doing these days can be very different than the reality of the economy just because what we feel in our day-to-day lives is indeed still impacted.

Naj Srinivas:

The economy is just one of the many factors that influence stocks. Politics are another major market driver that investors are following closely—especially today. Here’s Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher discussing his thoughts on how politics ahead could affect markets in the US and the rest of the world.

Ken Fisher:

So the reality is a separation, in my view, as the way you should think about politics. There’s the part about politics, which is the yak-yak and the excitement that is maybe a little bit like watching the crowd at a big-time wrestling match. And then there’s the part that actually impacts commerce and over the 3-to-30-month timeframe, the capital markets in any material way, which is what gets changed that creates uncertainty and alteration of business planning.

And in the United States, there is this unprecedented gridlock for this point in a Democratic administration. The House of Representatives has the thinnest margins for a new Democrat since 1893. The Senate has the thinnest margins for a new Democratic president since, and I know all of you recall this very well, but the initial administration of Grover Cleveland in 1885. The fact is for a first year of a president’s term in a Democratic administration, is as gridlocked as we have ever seen.

And when we think about what really impacts capital markets, it’s changes in big, controversial legislation. Pretty much completely. There’s other things, but they’re littler. So for example, as you’ve already seen, the Biden administration has issued quite a lot of executive orders coming out the gate, and they said they would, but most of them—and people don’t quite get this, it’s overly simple and it’s not perfectly true, but it’s mostly true—most of them simply undo executive orders that previously President Trump had issued, which most of them undid previous executive orders that formerly President Obama had done. And the total net consequence of that to the economic reality, that impact capital markets over the 3-to-30, is not terribly huge. Kind of small.

The fact is in today’s world, for example in the Senate, in a not literal sense but close there to, relatively conservative Democrat Senator Joe Manchin is arguably the kingpin of the Senate; arguably has more power than Chuck Schumer. Takes one vote to stop Democrats from passing anything. But then there’s also other ones like Senator Sinema and actually a handful that on this, that, and the other, thinking about their own futures, won’t necessarily be in alignment with the Democratic party, creating the effective gridlock in that first year.

This is also an unusual time in that with heated, divisive, hostile commentary from one side of spectrums to the other side of spectrums, inside America and globally, gridlock is more widespread globally than ever.

You’ve got a huge amount of hand-waving and excitement in Italy over their failed government and the move to try to get Mario Draghi to be out of retirement, which he is doing to try to form a government. But this government, if it gets formed, will be a do-nothing government for legislation.

We’ve got elections coming up in Holland, which will create nothing.

We have, issues in country after country and in September, you’ve got German elections. They similarly are as pancaked in terms of ideological thrust as you can get. A multi-party coalition, a so-called “grand coalition” there, will have a do-nothing quality to it that’s virtually unprecedented, and there is no one with the clout in Germany, with the popularity, with the gravitas to be able to replace the position that Angela Merkel had.

The fact is, Brexit’s over and there’s again, lots of yak-yak in Britain. Nothing much happening that impacts the concerns capital markets care about. This is also true in Austria. This is true in France. This is true across most of Scandinavia. This is true in a different way, but true, in Japan. And that global gridlock creates this process of relatively unexpected, but falling, uncertainty and the ability of businesses to hold a steadier course moving forward through this 2021 timeframe.

Naj Srinivas:

Even with fundamental factors looking to serve as a tailwind for global equities in 2021, it’s important to keep an eye out for potential trouble on the horizon. Jeff Silk, Vice Chairman and Co-Chief Investment Officer at Fisher Investments, assesses some potential bear market hazards.

Jeff Silk:

Let me cover the standard, big things that cause a bear market. First, an economic recession tied to excess. Well, as we analyze the global economy, we really don’t see a slowdown in the global economy to the extent that that would cause a global bear market.

Other things that cause bear markets that we’re paying very close attention to is extreme euphoric sentiment. We don’t see those conditions existing. Often what happens when you get extreme sentiment, you also have a massive pickup in the global equity supply, and we don’t see that right now. Yes, IPO’s have become more popular, but people are forgetting that we’ve been buying back, or corporations been buying back stock for a long time. So if you look at the ratio of stock buybacks to IPOs, what you really see is the global equity supply is increasing, but not at a huge, fast troubling pace.

We’re also paying attention to what’s going on with the liquidity in the system and is the liquidity evaporating at a pace that could cause a bear market as well. And we don’t see those conditions right now.

We talked to you before about the impact of major changes in regulation or major changes in accounting rules and how that could cause a bear market. And we’re not seeing that as we look at the impact of regulatory changes on the stock market right now.

But the real big focus right now is where are the excesses that have the ability to create an economic recession? Where are the excesses that have the ability to tip the market over into a bear market?

So we’re putting a lot of time and effort into looking at various forms of excesses. Right now we’re looking at the commercial real estate market. It’s probably no surprise to anybody that, tied to work-from-home, that fewer people are going into the office. There’s less demand from the corporate standpoint, so rents are falling, and so how could that trickle into a problem in the financial system?

We’re also paying attention to looking for excesses that might come out of the banking system. Things like are there a lot of bad loans that are being made? Are banks’ balance sheets poor? Other excesses that we’re paying attention to that typically happen, that we’re not seeing happen, but we’re watching are as M&A goes up towards the end of a bull market, how many of those deals, transactions, are actually bad transactions that don’t make sense, that the M&A environment is just not a good environment for stocks. We’re not seeing that right now.

Let me point out a few more excesses that we’re looking for. The private equity markets, not the public, but the private equity markets have raised a lot of money. So we’re paying attention to what’s going on in the private equity space, as well as the private debt space. When we look at those conditions, we don’t see them to be extreme enough to cause a bear market, but we’re looking for them.

Naj Srinivas:

So without any clear bear market indicators on the horizon, many of our listeners are probably wondering, well, what your portfolio playbook should look like this year? So, we’ll wrap up this episode with Mike Hanson’s thoughts on how investors should maybe think about and approach the rest of this year.

Michael Hanson:

This is an interesting time in a late cycle market, as we view it, because you do have pessimism, you also have some optimism out there, and we haven’t had to say this for a long time, but one of the features of the discipline of doing this business is, you stay in when others are too fearful, but you also stay disciplined when others are starting to become optimistic.

One of the things we’ve seen, whether it’s in our client base or outside of it, is people starting to have that fear of missing out. Some areas, optimism is fairly high. People want even more gains. They say to us, “Maybe I could get even more.”

Truthfully, this really isn’t the time for that. What you really want to do is reap the gains of the stock market, be positioned appropriately, but this is not the time to try and go chasing after heat. That’s just as important as staying in the market at vital times, and that’s where we are today. This is about being disciplined, sticking with the plan and the program and making sure we reap the right gains, but not getting overextended either.

[TRANSITION MUSIC]

Naj Srinivas:

That wraps up this episode of Market Insights featuring members from the Fisher Investments’ Investment Policy Committee.

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Join us for our next episode. Until then, I’m Naj Srinivas. Be well and stay safe.

Disclosure:

Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher Investments, and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Copyright Fisher Investments, 2021.