Show Transcript
The year 2020 will be remembered as the year that the COVID-19 pandemic caused human and economic devastation around the world. If ever there was a year that needed a midyear reflection, it’s this one. Kim Parlee talks with Brad Simpson, Chief Wealth Strategist, TD Wealth.
Print Transcript
- We all know that 2020 is going to be remembered as the year of COVID-19. So far, 13 million cases have been confirmed worldwide, more than half a million people have lost their lives, and millions have lost their jobs. And we're only halfway into the year. Here to tell us what he is watching and the kinds of things we should be watching as we move ahead is Brad Simpson, who is chief wealth strategist at TD Wealth. He joins us from Victoria, British Columbia.
Brad, it's always great to chat with you. I do miss our chats in person, but I will take this. Let me ask you-- you have put together a number of charts in terms of what you're watching right now. And the first one is showing us the new COVID-19 cases. Maybe just take us through why you're watching this one so closely.
- Sure. And thanks so much for having me. Well, I think your introductions-- we're living in the middle of a pandemic. And at the end of the day, the number one answer to almost any financial question is vaccine, and when is that going to occur. So in the meantime, we are fascinated by watching the movement of this virus, and what does it look like? And every time you kind of think you've got it figured out from a financial guy's perspective-- as I think many of us are learning this as we go along-- but I think what we're looking at is kind of a disturbing trend right now.
So if we see globally what it looks like-- and I think there's a couple of really quick ways to look at this is the first and foremost is that you see the United States really picking up, but you also see emerging markets in terms of Brazil. And because you're seeing that-- but even if you look at countries like the kind of a straight line below and look at Europe, Europe has really turned it around.
And I think if you know who did a reversal and some of the discussions we've had in the past, we're like, boy, these Europeans-- and as an investment it's interesting to look at is that if you actually took a month and extrapolated the S&P 500 versus this and then took a look at global measures, Europe's actually outperformed. And part of that, I think, is the outlook saying, well, their actions that they're doing with the pandemic are going to pay real positive dividends down the road.
And so A, there's the human element, that when you look at these charts, you kind of look as conservative and they're a red flag, but as an investor, you can also learn things from them and watch these trends and go, well, the more positive movement you start to see on this, equity markets or fixed income markets in different regions start to reflect that.
- The fascinating thing about all of this is that with the COVID cases moving up and to the right, we see markets, like the NASDAQ, for example, moving up and to the right at the same time-- not something I would have expected, but given all the liquidity out there. But you've got another chart here I want to take a look at called the Market Risk Regime Score. And maybe you can just tell me just what this is and what we're looking at here.
- Sure. Sure. So this was a tool we designed back in early April. And it was a way of saying, we know we're going to be in the thick of it for a long time. And we better figure out a way to be able to measure it and weigh it and then look at a way of how is the economy and how is the market interacting with one another. So that's what we did.
So kind of the deep orange line is kind of what risk regime. So what would it look like? And as you can see it plunging downwards-- that's kind of the risk in the global economy as a whole. And quite frankly, if we traced that out, it would look an awful lot like the world economy would in the 1929, early '30s, which no one wants to hear, right?
There's an important lesson to this-- the black line is the risk that is out there and the way that the economy is running, but with the monetary policy and the fiscal policy that we've been implementing with really dramatic measures. And I think that's no news to anyone. But if you take that gray line and you look at the S&P 500, which is in the green, you actually see how closely they're trading with one another.
And so what's happened is that you see that, really, orange lines actually started to improve. So we weren't doing anything. It's getting better on its own. But it would be in a really dramatic crisis. Because we're so active and governments and monetary policy are interacting and we're implementing the things that we've learned as a society over the last 100 years since the Great Depression, we learn, we adapt-- we've been implementing all those things, and they have a real positive impact. And that's really the score we're looking at. So today, believe it or not, you look at it, we're back to actually sort of the risk regime we were in January, beginning of the year.
- It's fascinating. And you're right-- I mean, when you pull this next chart we have here, which shows the market risk regime scores by category-- so you've got at the top tier economic growth, inflation, employment, but then the monetary policy and fiscal policy to your point are very skewed to the right. But still, there's a lot of flashing red on this screen. And I guess the question is, does the net effect of the fiscal and monetary offset that other red stuff we're seeing on the screen right now?
BRAD SIMPSON: Well, I think it does, because what it's doing is that, first and foremost, you see the strength of them and they're leading the way. But you're also starting to see the consumer kind of work their back way in again, and you start to see housing kind of work its way back in again. And I think people are surprised. You see trade starting to kind of pick up again.
And so they're early stages, but they are happening. And so that has been part of the driver of making our score for this kind of improve. But kind of the dark ones at the top, which we really need to see-- the last part of is we need to see it ultimately result in the economy starting and GDP to really start to move. Unemployment, which has improved-- I mean, it's still dreadful, but the analogy I often use is because you can see in this is that, remember, overall, this financial market and the economy with which it lives in, we put it in a coma. This is self-induced. We're bringing it out.
And so as it comes out, this is kind of our measuring tool to go, OK, well, let's take the stats. And the stats are that you can see the positive ones, and you can also see the ones starting to reignite. We need to see the economy now really pick up, and then we need to see those employment numbers. That's when you know we're really going to be there, and that's really the big question next.
- We're going to talk a bit more about what you're watching. But just one thing I think is fascinating if we look at this next chart is showing some of the equity performance that we're seeing, not just in North America, but around the world. We've got some emerging markets in China. And I think when we're going through survival mode, we tend to get quite myopic and pay attention to our own world, our own stuff. But there's a lot of levity in it international equity markets right now.
BRAD SIMPSON: Well, first and foremost, the COVID started in China. And so their measures started there. And so the byproduct of it is that they're ahead of us in the measures implemented to be able to work with this virus. And so when you start looking at their manufacturing sector, start looking at their service sector, they're starting to turn up. The magic number that we use in many of the surveys that we use-- PMIs and ISM is 50 is this magic number. We have kind of real numbers there, which are also a little hard to come by, turning up into a positive place, and we have equity markets reflecting that as well.
- Brad, you put together some key things you're watching as we move ahead, as the economy hopefully recovers. I want to run through them. First one on your list is central banks. We all know that's part of the reason why the markets have been doing so well. But what are you watching specifically with central banks?
- Well, I think that, first and foremost, is that we have a so-called fiscal cliff coming up, and this isn't so much the central bank, but it's a US government piece-- I would say the first start is that we're going to have another measure that's going to need to be passed here in the next few weeks, which is what I'd say we're watching. And then the second part is the central banks.
They're just under $7 trillion worth of spending that they've done or are promised to do. And we're going to look for that to continue to increase and probably hit a number, believe it or not, up to $10 trillion. So what we're going to be watching is anything that would suggest that they're going to step off the pedal, and we've seen nothing that would indicate that so far.
- The next trend you're watching is more digital, and I mentioned the NASDAQ meteoric rise. What are you watching there?
- Well, I think at some of the valuations that we see now and some of the movement, I think you can rationalize it with their earnings are there. These are some pretty spectacular companies. And look at the call that we're doing today-- the digitization of the economy and the rate that that has happened in the last three months has been extraordinary.
I think what we're really going to be watching is to see, does capital flows start to move away just from this very list of names? And will it start to work? And I don't think this is a discussion doing value in this-- I mean just generally through the rest of the equity market as we start to be more focused on earnings than we are on future earnings.
- You've got a third theme here that you talk about about value is passe. I'm going to bring up the chart here, but tell me what we're looking at and why you're saying that.
- Well, I think what we were seeing is that as we were moving from, let's call it, the first and second phase of the market movement of the correction we experienced-- the brutal correction and then hit the lows April, and then we've basically gone up and up and up and up and up almost nonstop ever since. But as you looked at the movement of what was going up, it's like we were going through a normal economic and market cycle that you usually see over five years.
You would see just expectations that all these things would happen in a span of about six weeks, which just shows that it's the narrative that mattered, not the reality of what was going on around that. So value went up for those couple of weeks when it would have been that narrative that, well, the economy is really moving now, and it's really heating up. And we're going to that area that really could prosper during that time.
And then once we started to get to the reality of, wait a minute, we do have a real economy. We do have Main Street out there. And this movement, whether it be a V recovery or a U recovery-- what if it's just a recovery that's going to take a lot longer and that, for these companies to make money, is going to be a lot harder, and all of a sudden, you started to see them fall off.
So it was kind like, the value trade is here, then they were passe. And then it was almost overnight. And I think that's going to be something that's going to continue, because I think these names could be really difficult.
- I guess contributing to that is your next theme, which is less global, and just even if you're watching the headlines recently, we're seeing the UK get out of Huawei. We're seeing lots of choices being made in terms of-- which isn't a trade specific thing, but barriers going up, I'll say, to trade that are happening.
- We're definitely in an environment where the idea of globalization is under an awful lot of duress, at least the narrative around that and the way that we discuss it. And I think one of the things to really point out on that is that as we move into this election cycle, the dialogue in the United States is that when you kind of look at the research around it, the Republicans don't own anti-Chinese sentiment. The Democratic Party has a great deal of that flowing through it as well. And that's been increasing over the last few years.
And so the amount of rhetoric that's going to happen during this election cycle and hammering on this idea of trade with China I think is something that we're going to hear a ton of. I think we're going to have to separate the verbiage and the reality of what's going on underneath of that, and a little bit of look at you've got political saber rattling, if you will. But there still is an understanding of trade that needs to occur that's underneath the surface.
And what we want to do is continue to measure the verbiage on one side and what are the real numbers underneath, and what is the action that's occurring. Because I think there'll be a pretty big spread between those two.
- Couple more themes I want to touch on if I can in a minute. Fixed income divergence-- what are you seeing there?
- Well, we always say don't fight the Fed when it comes to equities. And I think in this case, we're going to have to look at it as don't fight the Fed when it comes to fixed income markets as well. When you actually look at the improvement in movement of fixed income markets, it spread from, let's call it, government and investment grade and high yield, you really want to go right across the capital stack.
I think what you'll notice is that the things that have moved in a real positive way of the spreads narrowing have been anywhere where the Federal Reserve Board says they're going to be active, and the areas that they haven't has very much credit markets and said, you know what? I'm going to hold off here, and I'm going to wait for the turnaround. And I think there's something, again, A, I think for fixed income investing, don't fight the Fed. Go where go where they're going. And B, watch these non-areas to see how they improve are going to tell you a lot of what the economy and what financial markets are going to be doing down the road.
- Last one. I've got 20 seconds, Brad. Real estate trends-- you got a piece, you're talking about rents resuming. And I think a lot of people are quite fixated on this one.
- Yeah, the bottom line is that for the last three months have been incredibly difficult for commercial real estate, but a couple pieces that were showing, first and foremost, is that what we've seen in month by month by month is actually, including in retail, rents improving and companies paying their rent, and every month that's getting better and better.
And I think we really want to watch that. You can also look at really where the positive structure has been, and more difficulty in the retail space, if you will. You look over kind of at infrastructure and industrial and anything that was infotech oriented, the movement in the real estate investment trusts have been really positive. So you're seeing the same sort of trends in real estate, both public and private, that you're seeing, actually, in public equity markets.
- Well, Brad, great insights as always. Thanks so much for joining us, and we do hope to talk to you again soon.
- Oh, thank you.
[MUSIC PLAYING]
Brad, it's always great to chat with you. I do miss our chats in person, but I will take this. Let me ask you-- you have put together a number of charts in terms of what you're watching right now. And the first one is showing us the new COVID-19 cases. Maybe just take us through why you're watching this one so closely.
- Sure. And thanks so much for having me. Well, I think your introductions-- we're living in the middle of a pandemic. And at the end of the day, the number one answer to almost any financial question is vaccine, and when is that going to occur. So in the meantime, we are fascinated by watching the movement of this virus, and what does it look like? And every time you kind of think you've got it figured out from a financial guy's perspective-- as I think many of us are learning this as we go along-- but I think what we're looking at is kind of a disturbing trend right now.
So if we see globally what it looks like-- and I think there's a couple of really quick ways to look at this is the first and foremost is that you see the United States really picking up, but you also see emerging markets in terms of Brazil. And because you're seeing that-- but even if you look at countries like the kind of a straight line below and look at Europe, Europe has really turned it around.
And I think if you know who did a reversal and some of the discussions we've had in the past, we're like, boy, these Europeans-- and as an investment it's interesting to look at is that if you actually took a month and extrapolated the S&P 500 versus this and then took a look at global measures, Europe's actually outperformed. And part of that, I think, is the outlook saying, well, their actions that they're doing with the pandemic are going to pay real positive dividends down the road.
And so A, there's the human element, that when you look at these charts, you kind of look as conservative and they're a red flag, but as an investor, you can also learn things from them and watch these trends and go, well, the more positive movement you start to see on this, equity markets or fixed income markets in different regions start to reflect that.
- The fascinating thing about all of this is that with the COVID cases moving up and to the right, we see markets, like the NASDAQ, for example, moving up and to the right at the same time-- not something I would have expected, but given all the liquidity out there. But you've got another chart here I want to take a look at called the Market Risk Regime Score. And maybe you can just tell me just what this is and what we're looking at here.
- Sure. Sure. So this was a tool we designed back in early April. And it was a way of saying, we know we're going to be in the thick of it for a long time. And we better figure out a way to be able to measure it and weigh it and then look at a way of how is the economy and how is the market interacting with one another. So that's what we did.
So kind of the deep orange line is kind of what risk regime. So what would it look like? And as you can see it plunging downwards-- that's kind of the risk in the global economy as a whole. And quite frankly, if we traced that out, it would look an awful lot like the world economy would in the 1929, early '30s, which no one wants to hear, right?
There's an important lesson to this-- the black line is the risk that is out there and the way that the economy is running, but with the monetary policy and the fiscal policy that we've been implementing with really dramatic measures. And I think that's no news to anyone. But if you take that gray line and you look at the S&P 500, which is in the green, you actually see how closely they're trading with one another.
And so what's happened is that you see that, really, orange lines actually started to improve. So we weren't doing anything. It's getting better on its own. But it would be in a really dramatic crisis. Because we're so active and governments and monetary policy are interacting and we're implementing the things that we've learned as a society over the last 100 years since the Great Depression, we learn, we adapt-- we've been implementing all those things, and they have a real positive impact. And that's really the score we're looking at. So today, believe it or not, you look at it, we're back to actually sort of the risk regime we were in January, beginning of the year.
- It's fascinating. And you're right-- I mean, when you pull this next chart we have here, which shows the market risk regime scores by category-- so you've got at the top tier economic growth, inflation, employment, but then the monetary policy and fiscal policy to your point are very skewed to the right. But still, there's a lot of flashing red on this screen. And I guess the question is, does the net effect of the fiscal and monetary offset that other red stuff we're seeing on the screen right now?
BRAD SIMPSON: Well, I think it does, because what it's doing is that, first and foremost, you see the strength of them and they're leading the way. But you're also starting to see the consumer kind of work their back way in again, and you start to see housing kind of work its way back in again. And I think people are surprised. You see trade starting to kind of pick up again.
And so they're early stages, but they are happening. And so that has been part of the driver of making our score for this kind of improve. But kind of the dark ones at the top, which we really need to see-- the last part of is we need to see it ultimately result in the economy starting and GDP to really start to move. Unemployment, which has improved-- I mean, it's still dreadful, but the analogy I often use is because you can see in this is that, remember, overall, this financial market and the economy with which it lives in, we put it in a coma. This is self-induced. We're bringing it out.
And so as it comes out, this is kind of our measuring tool to go, OK, well, let's take the stats. And the stats are that you can see the positive ones, and you can also see the ones starting to reignite. We need to see the economy now really pick up, and then we need to see those employment numbers. That's when you know we're really going to be there, and that's really the big question next.
- We're going to talk a bit more about what you're watching. But just one thing I think is fascinating if we look at this next chart is showing some of the equity performance that we're seeing, not just in North America, but around the world. We've got some emerging markets in China. And I think when we're going through survival mode, we tend to get quite myopic and pay attention to our own world, our own stuff. But there's a lot of levity in it international equity markets right now.
BRAD SIMPSON: Well, first and foremost, the COVID started in China. And so their measures started there. And so the byproduct of it is that they're ahead of us in the measures implemented to be able to work with this virus. And so when you start looking at their manufacturing sector, start looking at their service sector, they're starting to turn up. The magic number that we use in many of the surveys that we use-- PMIs and ISM is 50 is this magic number. We have kind of real numbers there, which are also a little hard to come by, turning up into a positive place, and we have equity markets reflecting that as well.
- Brad, you put together some key things you're watching as we move ahead, as the economy hopefully recovers. I want to run through them. First one on your list is central banks. We all know that's part of the reason why the markets have been doing so well. But what are you watching specifically with central banks?
- Well, I think that, first and foremost, is that we have a so-called fiscal cliff coming up, and this isn't so much the central bank, but it's a US government piece-- I would say the first start is that we're going to have another measure that's going to need to be passed here in the next few weeks, which is what I'd say we're watching. And then the second part is the central banks.
They're just under $7 trillion worth of spending that they've done or are promised to do. And we're going to look for that to continue to increase and probably hit a number, believe it or not, up to $10 trillion. So what we're going to be watching is anything that would suggest that they're going to step off the pedal, and we've seen nothing that would indicate that so far.
- The next trend you're watching is more digital, and I mentioned the NASDAQ meteoric rise. What are you watching there?
- Well, I think at some of the valuations that we see now and some of the movement, I think you can rationalize it with their earnings are there. These are some pretty spectacular companies. And look at the call that we're doing today-- the digitization of the economy and the rate that that has happened in the last three months has been extraordinary.
I think what we're really going to be watching is to see, does capital flows start to move away just from this very list of names? And will it start to work? And I don't think this is a discussion doing value in this-- I mean just generally through the rest of the equity market as we start to be more focused on earnings than we are on future earnings.
- You've got a third theme here that you talk about about value is passe. I'm going to bring up the chart here, but tell me what we're looking at and why you're saying that.
- Well, I think what we were seeing is that as we were moving from, let's call it, the first and second phase of the market movement of the correction we experienced-- the brutal correction and then hit the lows April, and then we've basically gone up and up and up and up and up almost nonstop ever since. But as you looked at the movement of what was going up, it's like we were going through a normal economic and market cycle that you usually see over five years.
You would see just expectations that all these things would happen in a span of about six weeks, which just shows that it's the narrative that mattered, not the reality of what was going on around that. So value went up for those couple of weeks when it would have been that narrative that, well, the economy is really moving now, and it's really heating up. And we're going to that area that really could prosper during that time.
And then once we started to get to the reality of, wait a minute, we do have a real economy. We do have Main Street out there. And this movement, whether it be a V recovery or a U recovery-- what if it's just a recovery that's going to take a lot longer and that, for these companies to make money, is going to be a lot harder, and all of a sudden, you started to see them fall off.
So it was kind like, the value trade is here, then they were passe. And then it was almost overnight. And I think that's going to be something that's going to continue, because I think these names could be really difficult.
- I guess contributing to that is your next theme, which is less global, and just even if you're watching the headlines recently, we're seeing the UK get out of Huawei. We're seeing lots of choices being made in terms of-- which isn't a trade specific thing, but barriers going up, I'll say, to trade that are happening.
- We're definitely in an environment where the idea of globalization is under an awful lot of duress, at least the narrative around that and the way that we discuss it. And I think one of the things to really point out on that is that as we move into this election cycle, the dialogue in the United States is that when you kind of look at the research around it, the Republicans don't own anti-Chinese sentiment. The Democratic Party has a great deal of that flowing through it as well. And that's been increasing over the last few years.
And so the amount of rhetoric that's going to happen during this election cycle and hammering on this idea of trade with China I think is something that we're going to hear a ton of. I think we're going to have to separate the verbiage and the reality of what's going on underneath of that, and a little bit of look at you've got political saber rattling, if you will. But there still is an understanding of trade that needs to occur that's underneath the surface.
And what we want to do is continue to measure the verbiage on one side and what are the real numbers underneath, and what is the action that's occurring. Because I think there'll be a pretty big spread between those two.
- Couple more themes I want to touch on if I can in a minute. Fixed income divergence-- what are you seeing there?
- Well, we always say don't fight the Fed when it comes to equities. And I think in this case, we're going to have to look at it as don't fight the Fed when it comes to fixed income markets as well. When you actually look at the improvement in movement of fixed income markets, it spread from, let's call it, government and investment grade and high yield, you really want to go right across the capital stack.
I think what you'll notice is that the things that have moved in a real positive way of the spreads narrowing have been anywhere where the Federal Reserve Board says they're going to be active, and the areas that they haven't has very much credit markets and said, you know what? I'm going to hold off here, and I'm going to wait for the turnaround. And I think there's something, again, A, I think for fixed income investing, don't fight the Fed. Go where go where they're going. And B, watch these non-areas to see how they improve are going to tell you a lot of what the economy and what financial markets are going to be doing down the road.
- Last one. I've got 20 seconds, Brad. Real estate trends-- you got a piece, you're talking about rents resuming. And I think a lot of people are quite fixated on this one.
- Yeah, the bottom line is that for the last three months have been incredibly difficult for commercial real estate, but a couple pieces that were showing, first and foremost, is that what we've seen in month by month by month is actually, including in retail, rents improving and companies paying their rent, and every month that's getting better and better.
And I think we really want to watch that. You can also look at really where the positive structure has been, and more difficulty in the retail space, if you will. You look over kind of at infrastructure and industrial and anything that was infotech oriented, the movement in the real estate investment trusts have been really positive. So you're seeing the same sort of trends in real estate, both public and private, that you're seeing, actually, in public equity markets.
- Well, Brad, great insights as always. Thanks so much for joining us, and we do hope to talk to you again soon.
- Oh, thank you.
[MUSIC PLAYING]
