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After reaching numerous highs in the first quarter, equity markets appear to be losing some of that upward momentum. Justin Flowerday, Managing Director and Head of Public Equities at TD Asset Management, looks at some of the reasons behind the declines and the outlook going forward.
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* After reaching numerous highs in the first quarter, equity markets appear to be losing some of that upward momentum. And there is a lot for investors to digest right now, from geopolitics to a cloudy outlook for interest rates. Here to discuss it all is Justin Flowerday, managing director and head of public equities at TD Asset Management. Just a small conversation to discuss it all, everything that is happening right now.
* Looking forward to it.
* How are you?
* Very well. Thank you.
* Good. Good. Let's start off with the state of the markets. April has arrived, and we seem to have lost some of that go-go momentum that we have been seeing in the markets right now. What are you seeing?
* Yeah. So, look, we entered April, everything was moving in the right direction, and we've hit a couple bumps in the road. And all I'd say is it's not really that surprising when you look at the returns coming into April. In the first quarter, I think S&P was up 11%.
*TSX was up 7%-- really good returns, not something that you can sustain that kind of momentum throughout the year. So we've hit a bit of a bump. And some of the stocks that were reaching all-time highs have come off their highs.
*And you think about it, it's not that surprising that this would happen, particularly in the context of what we've seen in the rates market and a backup in interest rates. And, look, this is the rate where equities get priced against. And so there's been a little bit of pressure.
* Yeah. And do you think the market is rerating, to your point, where they see rates being? So the delay of rate cuts, could we even see a rate hike?
* Ooh, a rate hike, yeah. So that was off the table a few months ago, and now is back on the table as a possibility. It's not the base case, but if we continue to see prices and CPI continuing to kind of rise and move back into that 4%-plus band, a rate hike could absolutely be on the table.
* What about, and so much of this hinges, of course, on the health of the job market-- and we are starting to see things slow down more and more right now. And that's, I think, what you think we're starting to see that as well, too. So that makes that rate hike even less probable. So what do you see happening?
* Yeah. So the jobs market has been incredibly resilient. And in particular, if you look at the headline payrolls numbers, it's been just incredibly resilient. And what I would say is we look at a few other things. There's one of the indexes we look at is the Conference Board's employment trends index.
*And this is just a compilation of eight different data points that get compiled. And it provides an index that I think is quite nice, because, first of all, there's no revisions. It includes initial jobless claims.
*It includes job openings, six other indicators. And it started to roll over a while ago. And so you're starting to see some cracks.
*You're not seeing it in the employment reports, but you're starting to see some cracks in that index. And I think it's only a matter of time before we start to see a little bit more pressure on initial jobless claims and the employment numbers. And, look, companies are looking for any way to protect margins. And we've heard about some cost-cutting initiatives across the board. And that'll weigh-- not severe, but it'll weigh.
* Yeah. And it feels like it's almost starting again right now, too. We had some, and then it paused again. What about geopolitics-- we always talk about this at a broad level-- but it feels like for the first time since I've been watching markets for 20 years that geopolitics are having a much more direct impact on what's happening in the markets.
* Right. Yeah. And they are. And you can see it in the headlines. And there are reactions to the headlines.
* The advice I always give in terms of geopolitics is you don't really want to make investment decisions based on geopolitical events and geopolitical news. It's just really tough to get an edge. Thinking about where we are today, I'll make a couple of comments.
* On one hand, this past weekend, the House in the US passed a bill, about $100 billion worth, that's going to provide more backing to Ukraine, more backing to Israel. And in the short term, it looks quite unlikely that we're going to get a slowdown in terms of the conflict zones and what's happening there. So I wouldn't expect to see peace declarations come out soon.
*On the other hand, I think what you saw between Iran and Israel indicated that people don't want this to spread. This is going to be contained. It's highly tragic, and it's really unfortunate.
* And for now, I think it's going to be contained. And you won't see it spread across the rest of the Middle East. The one implication we are watching, though, goes back to the spending that's happening and the pressure it's putting on sovereign balance sheets across the Western world. The US is the poster child, but every country in the Western world is seeing pressure on deficits. And, look, it's only a matter of time before investors come out and say, look, we're not really willing to fund this kind of spending anymore.
* Yeah, and then the rerating that comes with the markets on there, too.
*Listen, I've only got about a minute and a half and I want to touch on the Mag 7. You and I were chatting in the break and saying that people tend to look at these all together. And you're saying, you know what? That's not how we should look at these particular companies.
* Yeah. The Mag 7 had an incredible run as a group last year. I think it was up 75% for the year, right?
* Not bad.
* And so people clump them together-- these big stocks that really don't have a ton to do with each other. They have different end markets, different economic exposures, just different drivers. And so when I think about the Mag 7, you've got to think about seven different kingdoms that operate very differently.
* What about Nvidia? Let's talk about a few others.
* Yeah. So Nvidia, look, incredible company-- the ultimate generative AI enabler technology lead beyond what anyone else could think about generating. They're not going to lose that moat. What people are going to continue to debate is the valuation and what to pay for the earnings that that company is generating. But incredible company, long-term drivers.
* Yeah. What about Apple? And again, I'll throw this one in there, because an incredible user base-- but some people kind of questioning, do they still have the mojo when it comes to innovation?
* Yeah, that's right. And this happens to companies that grow as big as Apple has and have penetrated the market, the high end smartphone market, as much as they have. They're seeing competition out of China that they hadn't seen before.
* Huawei came out with an incredible new phone last year. And so they're starting to lose share in China, which was a huge growth market for them. So not the growth drivers that they once had, still an incredible consumer products company. Great margins, great returns on capital. But they're probably going to be challenged to grow like they have in the past.
* OK, I'll ask you maybe just about Amazon-- your thoughts on that one quickly.
* Yeah, Amazon, look, this is an incredible company. They had their shareholder letter earlier this month, and the CEO basically said, look, we haven't lowered costs as much as we need to, and we're going to continue to lower the costs to serve our customers. E-commerce spending hasn't slowed. Terrific company-- again, multiples will get debated, but long-term growth prospects intact.
[MUSIC PLAYING]
* Looking forward to it.
* How are you?
* Very well. Thank you.
* Good. Good. Let's start off with the state of the markets. April has arrived, and we seem to have lost some of that go-go momentum that we have been seeing in the markets right now. What are you seeing?
* Yeah. So, look, we entered April, everything was moving in the right direction, and we've hit a couple bumps in the road. And all I'd say is it's not really that surprising when you look at the returns coming into April. In the first quarter, I think S&P was up 11%.
*TSX was up 7%-- really good returns, not something that you can sustain that kind of momentum throughout the year. So we've hit a bit of a bump. And some of the stocks that were reaching all-time highs have come off their highs.
*And you think about it, it's not that surprising that this would happen, particularly in the context of what we've seen in the rates market and a backup in interest rates. And, look, this is the rate where equities get priced against. And so there's been a little bit of pressure.
* Yeah. And do you think the market is rerating, to your point, where they see rates being? So the delay of rate cuts, could we even see a rate hike?
* Ooh, a rate hike, yeah. So that was off the table a few months ago, and now is back on the table as a possibility. It's not the base case, but if we continue to see prices and CPI continuing to kind of rise and move back into that 4%-plus band, a rate hike could absolutely be on the table.
* What about, and so much of this hinges, of course, on the health of the job market-- and we are starting to see things slow down more and more right now. And that's, I think, what you think we're starting to see that as well, too. So that makes that rate hike even less probable. So what do you see happening?
* Yeah. So the jobs market has been incredibly resilient. And in particular, if you look at the headline payrolls numbers, it's been just incredibly resilient. And what I would say is we look at a few other things. There's one of the indexes we look at is the Conference Board's employment trends index.
*And this is just a compilation of eight different data points that get compiled. And it provides an index that I think is quite nice, because, first of all, there's no revisions. It includes initial jobless claims.
*It includes job openings, six other indicators. And it started to roll over a while ago. And so you're starting to see some cracks.
*You're not seeing it in the employment reports, but you're starting to see some cracks in that index. And I think it's only a matter of time before we start to see a little bit more pressure on initial jobless claims and the employment numbers. And, look, companies are looking for any way to protect margins. And we've heard about some cost-cutting initiatives across the board. And that'll weigh-- not severe, but it'll weigh.
* Yeah. And it feels like it's almost starting again right now, too. We had some, and then it paused again. What about geopolitics-- we always talk about this at a broad level-- but it feels like for the first time since I've been watching markets for 20 years that geopolitics are having a much more direct impact on what's happening in the markets.
* Right. Yeah. And they are. And you can see it in the headlines. And there are reactions to the headlines.
* The advice I always give in terms of geopolitics is you don't really want to make investment decisions based on geopolitical events and geopolitical news. It's just really tough to get an edge. Thinking about where we are today, I'll make a couple of comments.
* On one hand, this past weekend, the House in the US passed a bill, about $100 billion worth, that's going to provide more backing to Ukraine, more backing to Israel. And in the short term, it looks quite unlikely that we're going to get a slowdown in terms of the conflict zones and what's happening there. So I wouldn't expect to see peace declarations come out soon.
*On the other hand, I think what you saw between Iran and Israel indicated that people don't want this to spread. This is going to be contained. It's highly tragic, and it's really unfortunate.
* And for now, I think it's going to be contained. And you won't see it spread across the rest of the Middle East. The one implication we are watching, though, goes back to the spending that's happening and the pressure it's putting on sovereign balance sheets across the Western world. The US is the poster child, but every country in the Western world is seeing pressure on deficits. And, look, it's only a matter of time before investors come out and say, look, we're not really willing to fund this kind of spending anymore.
* Yeah, and then the rerating that comes with the markets on there, too.
*Listen, I've only got about a minute and a half and I want to touch on the Mag 7. You and I were chatting in the break and saying that people tend to look at these all together. And you're saying, you know what? That's not how we should look at these particular companies.
* Yeah. The Mag 7 had an incredible run as a group last year. I think it was up 75% for the year, right?
* Not bad.
* And so people clump them together-- these big stocks that really don't have a ton to do with each other. They have different end markets, different economic exposures, just different drivers. And so when I think about the Mag 7, you've got to think about seven different kingdoms that operate very differently.
* What about Nvidia? Let's talk about a few others.
* Yeah. So Nvidia, look, incredible company-- the ultimate generative AI enabler technology lead beyond what anyone else could think about generating. They're not going to lose that moat. What people are going to continue to debate is the valuation and what to pay for the earnings that that company is generating. But incredible company, long-term drivers.
* Yeah. What about Apple? And again, I'll throw this one in there, because an incredible user base-- but some people kind of questioning, do they still have the mojo when it comes to innovation?
* Yeah, that's right. And this happens to companies that grow as big as Apple has and have penetrated the market, the high end smartphone market, as much as they have. They're seeing competition out of China that they hadn't seen before.
* Huawei came out with an incredible new phone last year. And so they're starting to lose share in China, which was a huge growth market for them. So not the growth drivers that they once had, still an incredible consumer products company. Great margins, great returns on capital. But they're probably going to be challenged to grow like they have in the past.
* OK, I'll ask you maybe just about Amazon-- your thoughts on that one quickly.
* Yeah, Amazon, look, this is an incredible company. They had their shareholder letter earlier this month, and the CEO basically said, look, we haven't lowered costs as much as we need to, and we're going to continue to lower the costs to serve our customers. E-commerce spending hasn't slowed. Terrific company-- again, multiples will get debated, but long-term growth prospects intact.
[MUSIC PLAYING]
