- I want to start with-- I should just mention, it's a great report. I recommend people kind of get it in their hands and give it a read. There's a lot of really great stuff in there. I pulled out a few things here. And one is that you talk about the fact that the virus is still raging. But when you take a look to see what the recovery could look like, that's going to determine a lot. So what do you see when you think about the recovery?
- Well, look, I think the starting point is that-- and just even alone, looking at the big picture of this, if you look at where we were a year ago, and there was a lot of reasons to be really dark about it. But the bottom line is that we human beings have an incredible ingenuity to us. And ultimately, that's how capital markets work. It's that there will be a better tomorrow than there is today.
And you said some of it. Between the vaccination and monetary policy and fiscal policy, we have really turned the corner of the economy. You look at some of the third-quarter numbers came out for GDP growth in the US in the high 30%, in Canada at over 40%. And there's a great deal of positivity and robustness going on in the global economy. And I know sometimes it's hard to see that, but it's there.
- What do you think we're going to see-- if you look to history and in terms of what economic booms can look like after bad times, what do you look to?
- Well, I think one of the things that-- this ultimately comes down to when-- and it's not an "if." When we go through this pandemic and when COVID-19 starts to diminish in its impact, we're going to look at a world that's either going to go back to the sort of growth that we saw going into it that, quite frankly, growth was hard to come by.
It was moderate. It was about 100 basis points lower than the historic norms of the previous 30-year period, if you will. But there's also an awful lot that would point to that this is an area that could look very much like the period after the Second World War, where there was actually robust growth. And the robust growth was there because of not only monetary policy, which was active, but fiscal policy, infrastructure buildouts, and highways, and airports, and education, and a lot of the things we're talking about now.
And that has a very real impact on the economy. And ultimately markets move towards the economy. And so if that robust growth is there, you could also see that sort of thing in the long term for markets as well.
- You talk a bit about some of the more positive things you see. And I know you mentioned four factors you say that are supportive right now-- risk assets. You just mentioned a bunch, but the macro environment, consumer Main Street, the pandemic, and valuations. So just if you could, just take me through those.
- Oh, look, the first and foremost is that we're often, especially in the last few months, we've been fixated on politics. But at the end of the day, that in the modern era, what central banks are doing with monetary policy is really the key measure. And I defy you to look in any place to go to find a place where there isn't a major central bank that's got their foot on the gas that says that, look, we're prepared to build and move this forward.
So that means that monetary policy is really loose. It's accommodative. Inflation is really under control and really not on our radar screen in any way. The consumer, there is massive pent-up savings that we're seeing across the board. And so as we start to move into the economy and as people can start to spend again, we think that's going to have a real positive impact as well.
And so you kind of start putting those pieces together. And I don't want to push it too far, but sometimes I think we're a little bit too far on the dark side here, for understandable for what's going on in the world, but there's a lot of the element underneath of that, which could really translate into a very different economy but a better one.
And I think the last one is to hit this home and look at the digital revolution that we've gone through. And that in itself is-- we're both phoning in from home. We're both shopping from home. We're starting to move. And all of this, I think, is going to have ramifications as we go forward, and ultimately in a positive economic light.
- 100%. I think all innovation has been pulled forward so quickly by this. And that is a definite upside, not to say that the downside has not been horrific. I've got a chart here. I know you always look at risk regimes, and you've got a risk regime scoreboard chart. We're going to bring it up.
And maybe you could tell us-- just to remind you, housing, you're saying a 5% weight is strong. You've got financial conditions 10%, very strong. Why is this chart that we're looking at so important?
- Well, look. One of the things we made a commitment to our own client base back in March is that we said, let's not go into this blindly. Let's actually-- let's create a scorecard that's going to say, what's the progress that we're going to have? And I admit, the first time we showed it, I was a little bit reluctant. Because, I mean, everyone was red and it was bad.
But when you look at this chart now is that really the only part on the screen that isn't red-- that is still red is the economy itself. And that economy is one that we put it in this position to go and work against and to combat this pandemic. And so when you start to look at it in those terms, today we're looking at if we include fiscal and monetary policy in our regime score, we're at a 0.8.
If we actually back out monetary and fiscal policy, we're at a 0.3. Now I go, oh, 0.3. That's good news? It is, actually, because it actually means that we are in an expansionary economy without monetary and fiscal policy. And if we look at with monetary and fiscal policy, it looks like that we're an expansion economy.
And then if you kind of look at that and you project that forward, when you look at your statement from the end of 2020, you go, what? How did this happen? How was there positive returns, and how did the market actually do well?
Well, the market is kind of saying, look, what that regime score is telling us is that as we get into the third and fourth quarter of '21, it's actually going to be very positive. And we are actually in an expansionary regime today, and that's why that score is so high. And so far, if we kind of trace the regime score that we've built from back in March to today, it's been incredibly accurate and has correlated really tightly to the movement of the S&P 500.
- You were just taking us through your risk scoreboard-- a lot of green on the screen-- and what that translates into in terms of the earnings and therefore equity prices. You brought a chart in here that talks a bit about what we could see with a bounceback in earnings. I'm going to shut up and let you explain what is in this chart and why you think it's important.
- Look, I think at the end of the day, one of the things you'll hear is people say, boy, valuations are expensive based on a price-earnings multiple. And you know that I think you've got to flip that over a little bit and you have to say, ultimately, earnings and what the economy looks like are the two things that you think about when you're looking at the equity part of your portfolio.
So the question is then, what we did simply here is we said, let's take a look at the move in the market. Let's look at where the markets moved in 2020. And let's look at where there's earnings growth expectations as we move through '21. And the big orange spikes you see with the difference between the little green and the big spikes in gold, really what that shows us is that those are the areas of the market that actually they grew up-- that the return hasn't met what the earnings expectations are for 2021.
And those are earnings expectations that are actually quite low that could actually have an awful lot of surprises to them. So really what we're showing here is to say, yeah, if you look at growth and you think about the S&P 500 and you say, well, that was a real driver of returns of that is the growth side, but there's other markets. If you look into Canada, you can look into China, you can look into Europe, and you look at where the growth expectations there are and where the actual move that they've already had, they don't meet with one another.
And really what we're seeing is that making sure you're allocating both through this geography, but you can also do this with style. Growth was the big thing to work, but value, size, small cap still has a lot to move. And so what we do is we build portfolios. We diversify across diversification through geography, but we also do it through style. And I think if you look at it those ways and you look at the spread between those, it actually makes for a market that, again, there's a lot of support to say that there are markets there and then factors inside the market that actually could really move as we move through '21.
- It's a great chart, and it really illustrates that very well. And if we dive in a little further, this was taking a look at global equities. If we now take a look at the S&P 500, and you can see the sectors and styles, to your point, in terms of what's going on. This also shows it quite well. And you see some really outsized differences in some of those charts.
Yeah, and so I think what the takeaway from this is that I think what we have to do is get away from these-- which is understandable. When you have a big market turn, it just becomes all about the market. I think what we're going to see in '21 is all of a sudden, once again, actually the process of having-- building an investment portfolio where you're taking and unwinding that market and looking, what are the component parts? And think about actively, how am I going to allocate based on that?
Is, do I have an allocation into an exposure into an economy like China? Do I have some exposure to an economy in a market in Europe? And then when I'm looking at it a factor way, is my whole portfolio in growth? I mean translated, you know, if I want ot go all out. Is it all FAANG stocks?
Or do I have exposure into small-cap? Do I have exposure into value? Do I have the exposure in those sides of the market? And I think if you went in and actually started to weigh between those different things and think about it in those, I think that all of a sudden the valuation argument becomes far less important than I think in many areas where people are-- what they're speaking about and thinking about their returns today.
- Brad, I've only got about 30 seconds. It's a real 30 seconds. Is there anything you think could derail some of the outlook, I guess going back to that risk score board? Which if we see some more red pop up there, what would you be watching for?
- Yeah, look, we think 85% of the world's people who want to be vaccinated around the world could be done so by the end of the third quarter. If there is a real slowdown in that as a rollout, that, to me, that's for sure a real red flag. That a geopolitical crisis of some sort, anywhere between the South China Sea to anything through there, I think, is a real concern that we want to watch for.
And then last, of course, we don't know what this new trade regime is going to look like between China and the United States. And that will be another thing that we'll be watching really closely. And, look, we still want to see the political situation in the United States, which is far more stable than it was a few weeks ago. But I think that's another thing that we'll be watching and monitoring really closely as well.
And all that equals to is to remember, make sure that-- build a portfolio that is properly diversified based on your goals and needs.