Show Transcript
While investors may be focusing on the latest vaccine news or the U.S. race for the White House, there may be bigger headwinds and tailwinds headed for markets next year. Kim Parlee speaks with Brad Simpson, Chief Wealth Strategist at TD Wealth.
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[SOUND EFFECT]
- Lots of big news this week as we've been talking about the election of Joe Biden combined with news of a COVID-19 vaccine. However, our next guest says there's a few more things you want to keep in mind. And specifically he's going to zero in on one issue. There's a pun there. We'll talk about what that means.
Joining me now, Brad Simpson, he's Chief Wealth Strategist with TD Wealth. Brad, nice to have you with us. And let's start at the beginning, the big news, Joe Biden coming in as president, looks to be Republican Senate, an effective vaccine on the way. What does that mean for your overall investment strategy?
- Well, I think it means for investment strategy is, one, it really reinforces an awful lot of things that we have been seeing over the last few months. And it really reinforces the importance of having a process for how you make decisions and really sticking with it. And the bottom line for us is I've answered the question, what's going to happen with this election, I mean, I'm sure a million times over the last few months.
And the one thing we kept saying is at one point, this election is going to come to an end. At some point, there is going to be good news for the pandemic. And the thought is that when you're investing, you're looking out 6 and 18 months. You're not looking at the immediate.
And so for us, following that is a process and a decision for making and a way of making decisions. We're really well structured right now for everything that's been going on for the last 10 days. And so it's really-- it's reinforcing that consistent approach. And how you think does ultimately translates into good returns.
- You put out a great report, Brad. We're going to bring it up here so people can take a look at it. This is your portfolio, Quarterly Strategy. And within that, you talk about headwinds and tailwinds that are coming our way.
I've got a board here. I'm going to bring up the board of headwinds. I know we can't spend a lot of time on every single one. But we can see here, the first one on the list is another wave of COVID-19. And as I looked up on my screen a moment ago, I saw the Mayor of Toronto talking about concerns about another wave of COVID-19. So that's something we all have to deal with.
Yeah, there's two pieces to this. Markets are always looking forward. And so that-- and that is no doubt that is an issue for investment. But the problem is it's looking out at six months out. The real economy looks out today.
And you've got to balance those two things. So there's no doubt over we're in the second wave for this for COVID-19 now. It is having a negative impact on businesses. And we're seeing that.
But the other side of that is that a lot of the movement we're seeing in both in equity and fixed income markets is reality is that there's positive signs coming out and starting to talk about a vaccine. The impact of that is that the economy down the road starts to open up more. Companies start doing better, and that translates to an awful lot of really good things. So it's interesting to see how quickly you can have a headwind that will move to a tailwind. And for that, that's certainly been the case. So then you're looking...
I'm going to bring up--
- Yeah, please.
So I was just going to interrupt. I apologize. I'm going to bring out the tailwind chart in a moment.
But I just do-- because this headwind board is-- there's so much here that I do want to make sure we touch on in terms of if you tell us a bit about just general policy failure, and I mean, the economic and earnings disappointments, I guess that's going to ebb and flow as things open up and close up, but also the escalating trade wars and tariffs. I mean, that's something I think we put to the back of our mind that's going to resurface.
No, I think the first one is that always comes down to, at the end of the day, the importance of both monetary policy and fiscal policy and the environment that we find ourselves in. And the one that we're going to be going through for a long, long time is that any error on that front, which is possible at any time, is still, I would say, the key risk in a market.
It's an unknown risk. You don't know when that's going to happen. But that really is, I think, an important piece to it.
And the other part of this is that one of the things we've seen successively is companies coming out and seeing earnings surprises. We go quarter after quarter. And the expectations are for abysmal earnings.
And what happens is they haven't been abysmal. They've been bad, but they've been better than expected. So one thing that we have is that if we adjust too much and we start getting off, we could start seeing some disappointments along the way. Again, no doubt, that is a definite headwind as well. So I think you think of the monetary, the fiscal policy, and our companies doing better, those are the things that we have to continue to get right.
Let's flip it over and get more optimistic. The tailwinds-- you talked a bit about a couple of these. But reflation supported by what the Fed is doing. The vaccine we've touched on. Again, monetary policy with the central banks, and low rates for the foreseeable future, which is another, I'd say, almost, in some sense, it can be a headwind at the same time. But this is a significant list of tailwinds people have at the same time.
The reality is that what we've been looking at, I would say, for the last six months is the idea that we went into COVID-19 with a pretty good economy. And then we purposefully shut that economy off. And there's nothing saying that when you start turning the lights back on again, and you get it started going again, that the movement doesn't start to pick up. And you start to-- and you really start to reconnect and you start to move.
Now, in the middle of all that, you will have central banks. And you have governments around the world that are providing a ton of support to help make that happen. And so you ultimately-- when you use that, you use that force to move something, you ultimately don't know how far the trajectory is going to be. But without a doubt is that we've always said is that you start getting good news about this pandemic, and what you're going to see is what you're seeing in markets right now, and that is equity markets start moving up. And not only do they start moving up, but more value oriented names, more economy sensitive names start to move up, more interest sensitive names start to move up.
And that's definitely what we've seen. And even if you look at a market like today, like say the S&P 500 being flat, the actual number of names on that graph actually up were two or three times more than the ones that were down. And the early ones that were causing a little bit of pressure on it are really those hyper growth stocks, the so-called bank stocks. And what I think is that the tailwind of this is that a return to normalization of a real economy with a lot of support behind it can actually have really positive ramifications.
Brad, I apologize. I'm getting squeezed for time. I've only got about 30 seconds.
But I made the pun at the beginning about zeroing in on things. And we'll show the board again here that has your piece. But the biggest clear right now is that interest rates are still zero.
And bonds, it's a tough place right now. Again, apologies. I've only got about 20 seconds.
The bottom line is this is that all these issues are going to come and go as they always do. But the fundamental issue that investors are going to be dealing with those who want to build a diversified investment portfolio are going to be that government bonds now basically yield below zero. The quick number of it is that today that almost 76% after inflation and of all government bonds are industrial nations anyways bonds trade below-- have a real return of below zero, and that we're going to have to start thinking about how do we manage portfolios both for income and for diversification in a way that incorporates other strategies other than that.
[MUSIC PLAYING]
- Lots of big news this week as we've been talking about the election of Joe Biden combined with news of a COVID-19 vaccine. However, our next guest says there's a few more things you want to keep in mind. And specifically he's going to zero in on one issue. There's a pun there. We'll talk about what that means.
Joining me now, Brad Simpson, he's Chief Wealth Strategist with TD Wealth. Brad, nice to have you with us. And let's start at the beginning, the big news, Joe Biden coming in as president, looks to be Republican Senate, an effective vaccine on the way. What does that mean for your overall investment strategy?
- Well, I think it means for investment strategy is, one, it really reinforces an awful lot of things that we have been seeing over the last few months. And it really reinforces the importance of having a process for how you make decisions and really sticking with it. And the bottom line for us is I've answered the question, what's going to happen with this election, I mean, I'm sure a million times over the last few months.
And the one thing we kept saying is at one point, this election is going to come to an end. At some point, there is going to be good news for the pandemic. And the thought is that when you're investing, you're looking out 6 and 18 months. You're not looking at the immediate.
And so for us, following that is a process and a decision for making and a way of making decisions. We're really well structured right now for everything that's been going on for the last 10 days. And so it's really-- it's reinforcing that consistent approach. And how you think does ultimately translates into good returns.
- You put out a great report, Brad. We're going to bring it up here so people can take a look at it. This is your portfolio, Quarterly Strategy. And within that, you talk about headwinds and tailwinds that are coming our way.
I've got a board here. I'm going to bring up the board of headwinds. I know we can't spend a lot of time on every single one. But we can see here, the first one on the list is another wave of COVID-19. And as I looked up on my screen a moment ago, I saw the Mayor of Toronto talking about concerns about another wave of COVID-19. So that's something we all have to deal with.
Yeah, there's two pieces to this. Markets are always looking forward. And so that-- and that is no doubt that is an issue for investment. But the problem is it's looking out at six months out. The real economy looks out today.
And you've got to balance those two things. So there's no doubt over we're in the second wave for this for COVID-19 now. It is having a negative impact on businesses. And we're seeing that.
But the other side of that is that a lot of the movement we're seeing in both in equity and fixed income markets is reality is that there's positive signs coming out and starting to talk about a vaccine. The impact of that is that the economy down the road starts to open up more. Companies start doing better, and that translates to an awful lot of really good things. So it's interesting to see how quickly you can have a headwind that will move to a tailwind. And for that, that's certainly been the case. So then you're looking...
I'm going to bring up--
- Yeah, please.
So I was just going to interrupt. I apologize. I'm going to bring out the tailwind chart in a moment.
But I just do-- because this headwind board is-- there's so much here that I do want to make sure we touch on in terms of if you tell us a bit about just general policy failure, and I mean, the economic and earnings disappointments, I guess that's going to ebb and flow as things open up and close up, but also the escalating trade wars and tariffs. I mean, that's something I think we put to the back of our mind that's going to resurface.
No, I think the first one is that always comes down to, at the end of the day, the importance of both monetary policy and fiscal policy and the environment that we find ourselves in. And the one that we're going to be going through for a long, long time is that any error on that front, which is possible at any time, is still, I would say, the key risk in a market.
It's an unknown risk. You don't know when that's going to happen. But that really is, I think, an important piece to it.
And the other part of this is that one of the things we've seen successively is companies coming out and seeing earnings surprises. We go quarter after quarter. And the expectations are for abysmal earnings.
And what happens is they haven't been abysmal. They've been bad, but they've been better than expected. So one thing that we have is that if we adjust too much and we start getting off, we could start seeing some disappointments along the way. Again, no doubt, that is a definite headwind as well. So I think you think of the monetary, the fiscal policy, and our companies doing better, those are the things that we have to continue to get right.
Let's flip it over and get more optimistic. The tailwinds-- you talked a bit about a couple of these. But reflation supported by what the Fed is doing. The vaccine we've touched on. Again, monetary policy with the central banks, and low rates for the foreseeable future, which is another, I'd say, almost, in some sense, it can be a headwind at the same time. But this is a significant list of tailwinds people have at the same time.
The reality is that what we've been looking at, I would say, for the last six months is the idea that we went into COVID-19 with a pretty good economy. And then we purposefully shut that economy off. And there's nothing saying that when you start turning the lights back on again, and you get it started going again, that the movement doesn't start to pick up. And you start to-- and you really start to reconnect and you start to move.
Now, in the middle of all that, you will have central banks. And you have governments around the world that are providing a ton of support to help make that happen. And so you ultimately-- when you use that, you use that force to move something, you ultimately don't know how far the trajectory is going to be. But without a doubt is that we've always said is that you start getting good news about this pandemic, and what you're going to see is what you're seeing in markets right now, and that is equity markets start moving up. And not only do they start moving up, but more value oriented names, more economy sensitive names start to move up, more interest sensitive names start to move up.
And that's definitely what we've seen. And even if you look at a market like today, like say the S&P 500 being flat, the actual number of names on that graph actually up were two or three times more than the ones that were down. And the early ones that were causing a little bit of pressure on it are really those hyper growth stocks, the so-called bank stocks. And what I think is that the tailwind of this is that a return to normalization of a real economy with a lot of support behind it can actually have really positive ramifications.
Brad, I apologize. I'm getting squeezed for time. I've only got about 30 seconds.
But I made the pun at the beginning about zeroing in on things. And we'll show the board again here that has your piece. But the biggest clear right now is that interest rates are still zero.
And bonds, it's a tough place right now. Again, apologies. I've only got about 20 seconds.
The bottom line is this is that all these issues are going to come and go as they always do. But the fundamental issue that investors are going to be dealing with those who want to build a diversified investment portfolio are going to be that government bonds now basically yield below zero. The quick number of it is that today that almost 76% after inflation and of all government bonds are industrial nations anyways bonds trade below-- have a real return of below zero, and that we're going to have to start thinking about how do we manage portfolios both for income and for diversification in a way that incorporates other strategies other than that.
[MUSIC PLAYING]
