Show Transcript
After posting strong gains at the start of the year, markets appear to be losing momentum. Greg Bonnell speaks with Michael O’Brien, Portfolio Manager with TD Asset Management, about the change in sentiment and what it means for investors.
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* Strong start to the year for markets has lost some momentum recently amid concerns about the future path of interest rates. But are current conditions setting up for more volatility ahead?
* Joining us now with his view, Michael O'Brien, Portfolio Manager at TD Asset Management. Michael, great to have you back on the show.
* Hey, fun to be here.
* All right. So this was the year that we headed into thinking that at some point, the central banks are going to stop their hikes and we'll discuss how long they're going to stay at the interest rates that they're at. The markets rallied. Everyone liked the term disinflationary. And now we're in February and we're losing some steam. What's going on?
* Well, I think if you think about the start of the year, it was like the markets got shot out of a cannon, like they just had a huge, huge run in January. If we sort of step back and say, what drove that? There were a few pretty legitimate or encouraging signs.
* So the first, Europe did not get a cold winter, which was a huge deal. That took a lot of pressure off the European economy. So as we sit here today, the European economy is in better shape than we thought it was going to be. That's a plus.
* A second positive catalyst, people were wondering, when will China ditch its zero-COVID policy? When will it reopen? That's happened earlier and more aggressively than we thought. So again, another positive for the markets.
* The third thing which you alluded to earlier that really catapulted the markets in January was we were seeing some pretty encouraging data around prices. So inflation was starting to come down, looked like there is some moderation there. So I think investors really took that ball and ran with it, started speculating about how quickly the Fed could go to the sidelines.
* And not just go to the sidelines, but also whether we might actually see some interest rate cuts in the back half of the year. And that really lit a fire under what I would say are the more speculative, more frothy parts of the market. So I think that's really what we saw in January.
* So what's changed? What's changed is we actually had some better than expected job numbers, both in Canada and the US, a real whopper of a jobs report down there. At the same time as that disinflationary trend kind of took a bit of a pause in the latest CPI releases, you know, particularly South of the border, so I think investors were forced to rethink just how quickly or how easy this disinflationary process is going to be.
* They've begun to price out those rate cuts, which I always thought were a bit optimistic, but that's starting to change. And so I think what began in the bond market, with this rethink of just how quickly inflation's going to ease, that's begun to filter into the equity market.
* So to answer your question, how far has this run? How much more have we got to go? My read is that we pulled forward a lot of the 2023 returns into the first four or five weeks of the year. So it's natural to think that's going to slow down. It shouldn't be a big surprise.
* But I think the other part of it, which is interesting, is I think the nature of market leadership is changing here as we look. And so, like I mentioned, the first few weeks of the year, it was really about finding those names that had had a very tough back half of last year, which I would term more speculative or companies with their best days well out into the future. They really benefit when interest rates fall. So that's what drove the market in the first few weeks of the year.
* As rates have begun to actually back up again, that's changing pretty quickly. So I think the market's due to take a bit of a breather here, but more significantly, the leadership of the market is changing, I think, as we sit here today.
* Let's talk about that then. If we do end up in an environment-- because as you said, the market's sort of started to change their minds about where we might be headed, sort of fell in line with what the Fed was saying all along. It felt like the market didn't believe them for a while. We've got to get rates up to a certain point. We've got to hold them there for a while. It's like, yeah, sure, you do. But now sort of in line with that.
* So if that's the environment we're in, if that's what plays out, you get a few more rate hikes, who knows how many more and to what magnitude, from the Fed, they find that place they think they can stay at and they stay there for a while. What do you start thinking in terms of your portfolio?
* So what I'm thinking about in terms of my portfolio is spend less time trying to identify the world beating company in 2035 and focus more on the here and now. What are the companies that we have the most confidence in in terms of being able to execute in what's a pretty tricky environment? Growth is still OK but it's slowing. But at the same time, there are a lot of cost pressures.
* So it really puts a premium on quality management teams, I think. Who can control their costs best? Who can deliver on the earnings expectations? So I'm really focusing on best of breed companies here, relatively dialing down the beta a bit, dialing down the cyclicality a bit, going more for the sure things, which basically everybody ignored for the first three or four weeks of this year, circling back into some of those names that I can really depend on and I think will meet expectations.
* Do old dependables mean patience as well? I think during the pandemic, obviously, you saw these, obviously very aggressive moves from central banks, from the governments, with stimulus, the market takes off. And everyone thought, you can make a fortune in just a couple months, as the market runs up. And clearly we're in a different environment now. Does it mean a long-term horizon? It means a bit of patience to let your name sort of work out over the long term?
* I think you hit the nail on the head. I think this is a very different world than the world we were in in 2020. In 2020, you had massive fiscal stimulus, as governments were sending out emergency stimulus checks. You had massive monetary stimulus, as central banks were cutting rates to zero.
* The environment today couldn't be more different. Liquidity is tightening. Liquidity is becoming scarce. And that is not a positive environment for get rich quick investments. It's just not. At the same time, provided that the economy holds together here, a lot of these businesses, dependable, proven businesses, they'll deliver over the long term. It's just we shouldn't expect the fireworks that we got used to a year or two ago. That is not the world we're in. It's not the environment we're in right now for stocks.
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* Strong start to the year for markets has lost some momentum recently amid concerns about the future path of interest rates. But are current conditions setting up for more volatility ahead?
* Joining us now with his view, Michael O'Brien, Portfolio Manager at TD Asset Management. Michael, great to have you back on the show.
* Hey, fun to be here.
* All right. So this was the year that we headed into thinking that at some point, the central banks are going to stop their hikes and we'll discuss how long they're going to stay at the interest rates that they're at. The markets rallied. Everyone liked the term disinflationary. And now we're in February and we're losing some steam. What's going on?
* Well, I think if you think about the start of the year, it was like the markets got shot out of a cannon, like they just had a huge, huge run in January. If we sort of step back and say, what drove that? There were a few pretty legitimate or encouraging signs.
* So the first, Europe did not get a cold winter, which was a huge deal. That took a lot of pressure off the European economy. So as we sit here today, the European economy is in better shape than we thought it was going to be. That's a plus.
* A second positive catalyst, people were wondering, when will China ditch its zero-COVID policy? When will it reopen? That's happened earlier and more aggressively than we thought. So again, another positive for the markets.
* The third thing which you alluded to earlier that really catapulted the markets in January was we were seeing some pretty encouraging data around prices. So inflation was starting to come down, looked like there is some moderation there. So I think investors really took that ball and ran with it, started speculating about how quickly the Fed could go to the sidelines.
* And not just go to the sidelines, but also whether we might actually see some interest rate cuts in the back half of the year. And that really lit a fire under what I would say are the more speculative, more frothy parts of the market. So I think that's really what we saw in January.
* So what's changed? What's changed is we actually had some better than expected job numbers, both in Canada and the US, a real whopper of a jobs report down there. At the same time as that disinflationary trend kind of took a bit of a pause in the latest CPI releases, you know, particularly South of the border, so I think investors were forced to rethink just how quickly or how easy this disinflationary process is going to be.
* They've begun to price out those rate cuts, which I always thought were a bit optimistic, but that's starting to change. And so I think what began in the bond market, with this rethink of just how quickly inflation's going to ease, that's begun to filter into the equity market.
* So to answer your question, how far has this run? How much more have we got to go? My read is that we pulled forward a lot of the 2023 returns into the first four or five weeks of the year. So it's natural to think that's going to slow down. It shouldn't be a big surprise.
* But I think the other part of it, which is interesting, is I think the nature of market leadership is changing here as we look. And so, like I mentioned, the first few weeks of the year, it was really about finding those names that had had a very tough back half of last year, which I would term more speculative or companies with their best days well out into the future. They really benefit when interest rates fall. So that's what drove the market in the first few weeks of the year.
* As rates have begun to actually back up again, that's changing pretty quickly. So I think the market's due to take a bit of a breather here, but more significantly, the leadership of the market is changing, I think, as we sit here today.
* Let's talk about that then. If we do end up in an environment-- because as you said, the market's sort of started to change their minds about where we might be headed, sort of fell in line with what the Fed was saying all along. It felt like the market didn't believe them for a while. We've got to get rates up to a certain point. We've got to hold them there for a while. It's like, yeah, sure, you do. But now sort of in line with that.
* So if that's the environment we're in, if that's what plays out, you get a few more rate hikes, who knows how many more and to what magnitude, from the Fed, they find that place they think they can stay at and they stay there for a while. What do you start thinking in terms of your portfolio?
* So what I'm thinking about in terms of my portfolio is spend less time trying to identify the world beating company in 2035 and focus more on the here and now. What are the companies that we have the most confidence in in terms of being able to execute in what's a pretty tricky environment? Growth is still OK but it's slowing. But at the same time, there are a lot of cost pressures.
* So it really puts a premium on quality management teams, I think. Who can control their costs best? Who can deliver on the earnings expectations? So I'm really focusing on best of breed companies here, relatively dialing down the beta a bit, dialing down the cyclicality a bit, going more for the sure things, which basically everybody ignored for the first three or four weeks of this year, circling back into some of those names that I can really depend on and I think will meet expectations.
* Do old dependables mean patience as well? I think during the pandemic, obviously, you saw these, obviously very aggressive moves from central banks, from the governments, with stimulus, the market takes off. And everyone thought, you can make a fortune in just a couple months, as the market runs up. And clearly we're in a different environment now. Does it mean a long-term horizon? It means a bit of patience to let your name sort of work out over the long term?
* I think you hit the nail on the head. I think this is a very different world than the world we were in in 2020. In 2020, you had massive fiscal stimulus, as governments were sending out emergency stimulus checks. You had massive monetary stimulus, as central banks were cutting rates to zero.
* The environment today couldn't be more different. Liquidity is tightening. Liquidity is becoming scarce. And that is not a positive environment for get rich quick investments. It's just not. At the same time, provided that the economy holds together here, a lot of these businesses, dependable, proven businesses, they'll deliver over the long term. It's just we shouldn't expect the fireworks that we got used to a year or two ago. That is not the world we're in. It's not the environment we're in right now for stocks.
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