September 2020 – Capital Markets Update Excerpt

Full Episode Transcript

Naj:

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.

This is a special “extra” episode of Market Insights. Today we’ll be featuring insights from members of Fisher Investments’ Investment Policy Committee. The Investment Policy Committee gathered recently to conduct a special video session, called Capital Markets Update, that we share with clients—where the Investment Policy Committee talks about their most recent thinking on current market events and market drivers.

In this episode, you’ll hear excerpts from that conversation on topics such as inflation, gold as an investment, some underappreciated bullish signs from the market, and the potential investment impacts from deteriorating US-China relations. And be sure to stick around until the end of the episode to hear Fisher Investments’ founder, Ken Fisher. He details his thoughts on the upcoming US elections.

As always, I’ll be here to guide you through the conversation. There’s lots of great information in this episode, so let’s get started.

Enjoy!

Naj:

After a precipitous fall earlier this year, stocks seemed to have regained their upward momentum and we believe a new bull market is underway. But with ongoing economic questions from COVID-19, many investors still wonder if the market’s renewed strength rests solely on the back of the various fiscal and monetary measures governments have unveiled in response to the crisis. Aaron Anderson, Senior Vice President of Research at Fisher Investments and a member of our Investment Policy Committee, unpacks this issue.

Aaron Anderson:

The market is figuring these things out—who the winners and losers are going to be. And that's very contrary to the narrative that stimulus and central bankers are just propping everything up because certainly that's not the case.

I think sometimes people get overly fixated on just what are the big, big indexes do, whether it's the MSCI World Index, the S&P 500 and so forth. They see them getting back to all-time highs and say, well, the market's just looking past this entirely. And there's just a lot of stimulus propping things up. That's really not the case at all. It's true that the broad indexes are getting back near all-time highs.

But when you start to deconstruct that and look at different sectors and industries and so forth, you'll see that some are doing very well here and have fully recovered. And yet there are a lot of parts of the market that really haven't yet. And that's simply the function of the market, figuring out what types of companies have the business models that can weather this storm and which types of companies have got business models that might really be impaired here.

If it were just a lot of stimulus, propping everything up, you'd think that everything would have mostly recovered and they're just tracking what the big indexes have done. But when you take it down a layer lower, you can really see the market’s actually being quite discerning here. And I think to the point that they're going to be winners and losers in some parts of the economy and markets are really struggling here.

You can actually see that in performance. It might not show up in those headline indexes, but when you start looking at other categories, smaller categories of stocks, you really do see that there are some companies that seem to be thriving now, but there are many kinds that are indeed struggling.

Naj:

Another investor worry about COVID-related fiscal and monetary policies is that they’ll set off a period of high inflation. Michael Hanson, Senior Vice President of Research, examines Fisher Investments’ thinking on this topic.

Michael Hanson:

In fact, in the current moment, inflation is not something that should have your full attention. So let me, let me just explain a little bit about how to think about inflation relative to your investments. And then I'll talk a little more fundamentally.

First, with the portfolio, a little bit of inflation is an okay thing, the dangerous part, and the part that people get in their minds, which is much less common and much less likely at the moment is high inflation—high inflation to the point where it's really galloping past the real rate of growth.

That's just not really on the table today. It's not impossible, but it's not on the table. And what people I think might be mistaking, some of their fears for at the moment, is the notion of just resuming a relatively normal level of inflation that we had, let's say, pre the COVID crisis and tragedy. And we're just sort of getting back up to those levels. That's a very different thing than saying inflation is about to be very structurally high.

So I just want to make that point because in portfolio management, you don't necessarily want to make moves before you really need to. This is a classic case of that. If you anticipate inflation too early, you could be very wrong and end up with a set of things that don't do much for you at all. And so we want to be very careful about that.

Now speaking about inflation in a fundamental sense—it is true, the money supply has grown very big and very rapidly in this country, but also in other countries in the last several months. In this country, what we've effectively done is issued a bunch of T-bills in the form of debt. And then put that into the pockets of people in their checking accounts. That's different than prior periods where we were very critical of things like quantitative easing, because it never really got money into the economy.

This seems to be different, except there are a couple of things. First, savings rate is actually higher today than it was several months ago, which means yes, some of that new money is hitting the pocket books of people, but by the same token, they're not necessarily spending all that at once. They have it there, they might spend it, but we'll see how that goes. But the, the idea that they just, all those stimulus, all that stimulus money is just about to hit like a wall in the economy is not quite happening in the same way people might expect.

That gets me to the second point, which is the velocity of money. Now, when you listen to us speak about inflation, we talk about the quantity overall quantity of money, a lot as one of the drivers of inflation. And that's very true, I believe in that, but you also need to look at the velocity.

Over the last 40 years velocity has been kind of on a trail down and in the last several months, it's really come down more. Well, velocity is just how many times money moves through a system let's say per year. Money exchanges, hands about six times per year or so on average, but today that's much lower.

That's important for inflation because in order to get the inflation, the money needs to really be moving through the system. You need to pay the producer and the producer needs to play the supplier and on and on. And in fact that goes in and out of banks quite a lot as you do that, the money needs to round-trip before prices can really start to spiral. We're not even in that beginning stages yet. We're just starting that really.

And so we want to see over the course of the next 12 months, 24 months—is the money supply growth persistent and persistent enough as it gets through the economy to really create some inflation that's well ahead of global economic growth?

Right now, that's just not even really on the table. What we have is just a resumption to inflation levels that were already low, and I think will continue to be low, but were more normal just as we started, let's say back in January.

Naj:

Investing in gold is a topic that’s often mentioned in the same breath as both COVID and inflation. Here’s Bill Glaser, the Executive Vice President of Portfolio Management at Fisher, to examine whether gold could add shine to investment portfolios.

Bill Glaser:

Gold has seen some significant gains here more recently, and you really gotta take yourself all the way back to 2011 for the last time you'd seen gold run up similar to what it's doing here today, and that's not too terribly unusual.

I mean, one of the features that we've noticed about gold is it tends to go in these fits and starts. You have these very short periods of time where it does very, very well, but then even these much longer periods of time, where really doesn't do much of anything.

And as you think back to 2011, I mean, at that point in time, gold did well tied to the fears of the increasing levels of debt and whether or not that would create an unraveling of the euro. Whereas today we can debate some of the reasons why gold has done so well. Maybe it's a safe haven in this global pandemic. Maybe it's a hedge against a dollar devaluation or a hedge on inflation, or even on the flip side, I've heard it being a hedge on deflation.

You name it—if you're a gold bug, you can find any reason to really justify your bullishness on the metal.

But for our part is we think about gold relative to owning stocks, bonds, or any other asset class for that matter. I mean, if you think about all the reasons why you would want to own a stock, they're not really relevant to gold. So for instance, gold, doesn't generate earnings. It doesn't kick off dividends. And in fact, when you look over longer periods of time, the returns of gold lags, both that of stocks and bonds, and in fact, exhibits higher levels of volatility. So as we think about building a globally diversified portfolio, you know, we feel we can do so in such a way that includes stocks, bonds, cash, and deliver without having to really result to owning gold. So gold had a nice run here, but you know, some of the characteristics for us are unappealing relative to other asset classes.

Naj:

With so much negative news topping the headlines, it’s often hard for investors to see the positives. So, Jeff Silk—Fisher’s Vice Chairman and Co-Chief Investment Officer—looks at some of the underappreciated positive signs that markets are currently discounting.

Jeff Silk:

The market is up 50% from the March bottom. We're in a new bull market. Few people are talking about that. The fact that there’s something so positive that is not getting a lot of attention or press is very bullish.

There's a disconnect between the performance of the stock market and the performance of the economy. And you've got a lot of people who are saying, “How is it that the stock market could be so strong with the economy chugging along and with the economy not at its prior levels?” Quite simply what people are missing—which is bullish—is the normal mechanism of the market discounting a very positive future.

The other thing which is important to note is the way the market is behaving is bullish. And that is that right now, as there's a concentration of market best-performers in big, huge mega-cap names. That is a very normal feature for what you would expect in the later stages of a bull market. But you've got a lot of people who are saying right now that the market's sick, it's unhealthy because there's not broader leadership. That's an incorrect statement. The fact that the market is acting normal in terms of the breadth of what you might expect right now is very bullish. Few people are talking about that.

Naj:

Despite the economic downturn tied to COVID, economic results recently have actually been much more positive than most people appreciate. Here’s Aaron Anderson to explain.

Aaron Anderson:

Nowhere has that been more true than in corporate results. I mean, don't get me wrong, corporate earnings are down a lot tied to the big economic contraction that we've had here, but expectations for what was going to happen with corporate earnings, got to be much more dour than we're seeing in reality. You know, we're just coming through earning season here. And if you look at the percent of companies that are beating expectations coming into this period, it's literally at record highs.

Most companies here in the US have reported by this time and, you know, 80 to 85% of those companies now have beaten expectations, which is way higher than you see historically. And so getting back to that notion that what drives stock prices is how reality plays out relative to expectations. I don't mean to a case that corporate earnings, the economy haven't been through a very rough patch here—they have. But if you start to look at actual results, they're turning out significantly better than people were fearing. And I think that's a key driver of the market as well.

Naj:

Switching to a topic that combines economics and politics, we’ll bring back Bill Glaser to discuss whether deteriorating US-China relations could be a risk for stocks.

Bill Glaser:

Well, we don't think so. You know, recall that some of the increased rhetoric that you're seeing between China and the United States, this is really nothing new. I mean, you could take yourself back the last few several years where you started to see some of these tensions start to rise.

And if you really think about what moves markets, it's surprises. It's surprises that have some scale, some size and some magnitude. And while you could argue the fact that, you know, trade relations between the US and China have some of that size scale and magnitude, it really lacks that surprise power, because as we sit here today, I don't think it would surprise anybody if you see increased sanctions, or if you see increased rhetoric tied to adherence to the phase-one trade deal, and so a lot of these things.

I think in some ways investors have built up some internal defenses to this, so to speak. And so by that account, it somewhat lacks that surprise power to move markets. And particularly in an election year.

I mean, when you get in an election year, like 2020, or any election year, for that matter, a lot of this political rhetoric, it's a bipartisan topic. People can get behind it on both sides of the aisle. And you know, it's not going to surprise anybody if you get a lot more saber rattling and bashing on China. But what really remains to be seen is does this have the teeth to remain beyond the election? Does it have the teeth to remain beyond November? And I think that's debatable and we'll see as time progresses.

Naj:

Speaking of the election, we’ll wrap up this edition of Market Insights with Fisher Investments’ founder and Co-Chief Investment Officer Ken Fisher discussing his thoughts on the upcoming US elections and their potential impact for markets.

Ken Fisher

So people are always interested in politics and I'll speak to the elections. More importantly, I'll speak to elections impact on markets, which are really more about how markets work than about the elections.

First, stepping back, if you think about the elections themselves, it's really important when you then would step from that to markets, to separate your own ideology, whatever it may be, from thinking that that actually impacts markets at all, because almost none of us have ideologies that are truly very unique or different from so many other people's. And there's lots of people that lean on the right and lots of people lean on the left and markets are pre-pricers of all widely known information and opinions. So all that stuff gets pre-priced really well. Markets are really good at doing that.

But when we look at the election itself, there's some things I think that you can say that are important. And one of them is just that in this election, as much or more than most, people have really firm views at the presidential level about what they think of the two candidates. And the proportion of the culture of voters that might change their mind is less than normal. Simply because opinions about President Trump and former Vice President Biden are long and strong and deeply held.

The real part that's hard to know is, across the swing states, how good the ground games of “get out the vote” will be for either party. Uh, if I had to make a guess, which I would not have much confidence in my guess would be the President Trump gets reelected with the same numbers, not very different than he did last time. He might lose the popular vote by a little more than he lost it last time. And when the Electoral College by a little bit less, but I don't have much confidence in that. That's a guess. It's not a forecast. There's still the potential for a lot of things to go crazy between now and then.

The fact is, and I've said this many times before—I've written about this at length—Vice President Biden isn't the kind of candidate the Democrats have ever won with. And I'm not talking about the peculiarities of Vice President Biden. I'm talking about the normalcies of Vice President Biden.

Democrats have only ever won the presidency since the Civil War with someone who was already somehow-someway president or someone who four years earlier in the prior cycle, no one would have contemplated at all as a potential nominee, much less than early front runner in the subsequent cycle. That's true of the original poster boy Grover Cleveland. It's true of Woodrow Wilson. It's true of Franklin Roosevelt and right on down the line to John Kennedy, Jimmy Carter, Bill Clinton, Barack Obama. Whenever the Democrats have run former old war horses, sitting Vice Presidents, past Vice Presidents, people that have run before, they've always lost. And partly that's trying to get the youth vote to be enthusiastic. And particularly in the kind of COVID environment we're in, it's hard to get that youth vote to be very enthusiastic. Simply it's hard to get the “rah-rah” spirit up that they had for Barack Obama that they had for, John Kennedy, Bill Clinton, et cetera.

The fact is that still, however, there's a lot of potential for surprise. Now here's the surprise. The surprise is that markets don't really care. The surprise is that the real issue is about the timing of the returns. There is a long history of this. The investor class is much more leaning to the right than it is leading to the left. And there tends to be this view that the Republican candidate is more business-friendly, more free market-oriented, more anti-regulatory, less prone to government spending. Whereas the Democratic candidate is typically seen as the reverse: more prone to spending, more prone to regulation, more anti-business more anti-rich.

And those views, whether they're right or wrong at any particular point in time, tend to reflect themselves in markets pre-pricing.

So in years when we have elected Democrats, there is a consistent tendency for returns to be a little lower than when we've elected Republicans. But then in the inaugural year that's flipped. And in the inaugural year, Democrat returns tend to be very high and Republican returns tend to be low. The two put together tend to be very similar, very tight.

And that timing differences, because the reality is presidents don't get to do nearly as much as they say they're going to do. They never do. The fear or hope that you may have for them, whatever it is, tends to get squashed in the inaugural year, in that, in the most successful of presidents, they've gotten much less done in their first year than they ever thought because our system is set up not to let them do that.

And next year, that will be more true than normal because the Congressional races are going to get very tight. It is possible that the Republicans take the House. It is possible that the Democrats take the Senate. It is possible to get a government with both chambers Republican and the presidency, or both chambers Democrat and the presidency. But in Congress, the margins will be very, very thin. It's possible for them to take it, but it's not possible for either to take it with a wide margin so they could put a lot of legislation through.

What that means is, is that whatever you think of President Trump and whatever you think of Joe Biden, whether they win or whether they lose, they won't be able to do as much as you hope or fear. And when the market realizes that if you think President Trump's great, next year, if he wins, you'll be a little disappointed at what he can't get done. If you think Joe Biden's terrible, next year, you'll be pleasantly surprised at what he can't get done.

And therefore those two, which get pre-priced in the election year tend to flip in the inaugural year. And it's really just about the timing of returns. This is a bull market. This is a new bull market. New bull markets don't get derailed easily. And this presidential election in those ways is almost more stereotypical than you could possibly imagine when it seems so unusual.

And that's our story and we're sticking to it.

Naj:

That wraps up this special market update episode of Market Insights, featuring members from the Fisher Investments’ Investment Policy Committee. A big thanks to Aaron Anderson, Bill Glaser, Mike Hanson, Jeff Silk, and, of course, Ken Fisher.

If you'd like to learn more, you can visit the Market Insights podcast page. You’ll find a link to the page in our episode description.

And if you like what you heard, I encourage you to subscribe to Market Insights wherever you get your podcasts. You can engage with us or Fisher Investments via social media through LinkedIn, Twitter, and Facebook. And also look for our Fisher Investments channel on YouTube.

If you want to learn more about topics discussed here today on this podcast, and a lot more, check out the MarketMinder section of our website: fisherinvestments.com. That’s where we keep all of our latest capital markets insights.

And if you have questions about investing or capital markets, email us at marketinsights@fi.com.

That’s market insights—all one word—at FI dot com.

We’ll answer as many questions as we can in an upcoming Listener Mailbag episode.

Join us for our next regular episode, when we take a look at what happens when investing tackles social and ethical issues.

And, as always, a very special thanks to Eric Foll and Hayley Thornton for producing and editing this episode.

Until next time, I’m Naj Srinivas. Be well.

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, 2020.