With all that’s going on — the Russia-Ukraine conflict, market volatility, inflation and rising rates — it’s little wonder that individual investors are feeling nervous. Brad Simpson, Chief Wealth Strategist, TD Wealth, tackles the biggest questions on investors’ minds today.
Print Transcript
Not since the Second World War has there been a military conflict with greater global implications. That is according to our next guest. So here to tell us about what he's seeing with that in the markets as we move ahead is Brad Simpson, Chief Wealth Strategist at TD Wealth. Brad, great to have you with us. I was reading through your note and you make the comment, rightfully so, that nobody is paying a higher price of war than the people who are living in the Ukraine right now. It's unquestionable. It's been a horrific situation. But when you take a look at the markets right now, you have the hypothesis that in periods of extreme uncertainty, you believe that maybe perhaps we're closer to the bottom of a correction rather than the start of one. And I know you have got some charts you want to show us. So how's that for a long hello? Welcome, and what do you think about it?
Hi, Kim. Nice to see you. Indeed. Very clearly these are pretty heady times that we're in. And so really what we're looking at on the screen here is rightly so, if you go out and you survey retail investors right now. They are bearishness at levels as much or more than we've seen since the Great Financial Crisis. And there's an awful lot going on in the world where that makes a lot of sense. And so all we did is we went out and we looked at that and we took the S&P 500 against the Economic Uncertainty Index. And really what it shows us is that the way this uncertainty index works is that they go out and they peruse leading newspapers and they look at the language that's being used, words like "uncertainty" and "economy" and "markets" and "uncertain markets" and the usage of that spikes up. And then they look at what forecasters are saying and forecasters, when it's spiking up like this, the use in the press of this language goes up. And then prognostications on the direction for CPI start to kick in, and they're saying, well this consumer is scared. The consumer ultimately is going to slow down, and this really spikes up the consumer of this uncertainty index. The net result of that is that if you actually trace it back, what happens, and you and I have talked about this in the past on this, is that we get consumed on the immediate but that's not how markets work. How markets work usually is they function on this, as they say, look these are really dark times, we're just not going to accept these dark times. Things are going to happen. Things are going to be implemented, policy is going to happen. There's going to be military action, there's going to be intervention. We're going to see all of things we've seen since February 24th. And lo and behold, markets actually kind of hit their bottoms and they really moved from there. And if we kind of look at where we are today, you look at the S&P 500 mini futures, they hit their lows on the 24th at 4,094 and it kind of moved up 13% since this time and 10 of our last 12 trading days have been really kind of positive. And for the VIX, it hit highs of just under 40 and now it's kind of back down to that 19 level. And so this is kind of been, as difficult as this has been, the way the market's reacting has been really textbook.
Let me ask you then, so based on that textbook reaction you're talking about you. You contemplate two scenarios. You're assigning a higher probability to a bull case than a bear case, but maybe just take me through both of those.
Sure. And these are fluid, right? I think that's one of the other things we make in article we wrote is to say, be really careful of any kind of really grandiose 'this is what's going to happen in this scenario', because this is ever changing between the geopolitical, between the military engagement and then the ongoing change from central banks. So the more bullish case of this is that, despite of all this going on, you get a normalization of the supply chains, which really takes on inflation and inflation in the middle of all this is really something causing so much heat in the market right now. And although you still have elevated energy and food costs, that inflation starts to fall off, maybe not down to the levels we've seen in the past, but not kind of the peaks that we see today. And so as the economy is starting to slow, the Fed kind of backs off maybe some of its interest rate hikes that it has planned. And then basically you go from there and say, typically we usually get what the Fed is going to do wrong, we usually overstate that when we're making projections on what's going to happen there, so that's kind of continuous. And then you look over and you go well, in China, which has been in the exact opposite scenario than North America, there reflation efforts start to kick in. And that really helps getting the world economy kind of balance out as well. And we kind of land out into a much better place. We wrote that as a kind of a 70% scenario. I would say that's probably somewhere in the 50 and 60 zone now, which you can see when the trend is there is difficult. Well, the more bearish case of this is that we have a prolonged war. And this really, really heightens the premium demanded for investors, and it pushes corporate earnings lower and the spending weakens. And you kind of get that cycle that you don't want downwards. From that you get food and energy inflation. Let's say it continues to move higher and spikes and that flows through to all the rest of kind of goods and services. And ultimately, that kicks into wages. And then you're even at higher inflation levels that we have now and you have a market that's more difficult. And those really are, I would say, the way the market actually trades on let's call it a day to day basis. The market really kind of oscillates between those two tails.
And we do see that oscillation Brad. I've only got 15 seconds, so this is not a fair question. But given when you think about equities, fixed income alternatives, the 15 second take on that, given your views.
I think the first one is equities is that if we're of the view we're still overweight equity, and we think that they could be muted, that a positive return by year end is still very possible. And I would just say that you don't have to get this absolutely right. We are using defensive, we're using hedging, we're using a lot of short strategies. And this is a market that makes a lot of sense to be doing that sort of thing. Fixed income markets are going to continue to be very volatile and so keeping our duration short makes an awful lot of sense. But still making sure we have good bond exposure makes a ton of sense for risk management. And we've been continuing to move our portfolios. We're now kind of overweight infrastructure as the economy starts to pick up globally, as we continue with the buildout that we went into this, with the rebuilding the global infrastructure. We think there's going to be continue to be a lot of opportunities, both in the private and public space.
Hi, Kim. Nice to see you. Indeed. Very clearly these are pretty heady times that we're in. And so really what we're looking at on the screen here is rightly so, if you go out and you survey retail investors right now. They are bearishness at levels as much or more than we've seen since the Great Financial Crisis. And there's an awful lot going on in the world where that makes a lot of sense. And so all we did is we went out and we looked at that and we took the S&P 500 against the Economic Uncertainty Index. And really what it shows us is that the way this uncertainty index works is that they go out and they peruse leading newspapers and they look at the language that's being used, words like "uncertainty" and "economy" and "markets" and "uncertain markets" and the usage of that spikes up. And then they look at what forecasters are saying and forecasters, when it's spiking up like this, the use in the press of this language goes up. And then prognostications on the direction for CPI start to kick in, and they're saying, well this consumer is scared. The consumer ultimately is going to slow down, and this really spikes up the consumer of this uncertainty index. The net result of that is that if you actually trace it back, what happens, and you and I have talked about this in the past on this, is that we get consumed on the immediate but that's not how markets work. How markets work usually is they function on this, as they say, look these are really dark times, we're just not going to accept these dark times. Things are going to happen. Things are going to be implemented, policy is going to happen. There's going to be military action, there's going to be intervention. We're going to see all of things we've seen since February 24th. And lo and behold, markets actually kind of hit their bottoms and they really moved from there. And if we kind of look at where we are today, you look at the S&P 500 mini futures, they hit their lows on the 24th at 4,094 and it kind of moved up 13% since this time and 10 of our last 12 trading days have been really kind of positive. And for the VIX, it hit highs of just under 40 and now it's kind of back down to that 19 level. And so this is kind of been, as difficult as this has been, the way the market's reacting has been really textbook.
Let me ask you then, so based on that textbook reaction you're talking about you. You contemplate two scenarios. You're assigning a higher probability to a bull case than a bear case, but maybe just take me through both of those.
Sure. And these are fluid, right? I think that's one of the other things we make in article we wrote is to say, be really careful of any kind of really grandiose 'this is what's going to happen in this scenario', because this is ever changing between the geopolitical, between the military engagement and then the ongoing change from central banks. So the more bullish case of this is that, despite of all this going on, you get a normalization of the supply chains, which really takes on inflation and inflation in the middle of all this is really something causing so much heat in the market right now. And although you still have elevated energy and food costs, that inflation starts to fall off, maybe not down to the levels we've seen in the past, but not kind of the peaks that we see today. And so as the economy is starting to slow, the Fed kind of backs off maybe some of its interest rate hikes that it has planned. And then basically you go from there and say, typically we usually get what the Fed is going to do wrong, we usually overstate that when we're making projections on what's going to happen there, so that's kind of continuous. And then you look over and you go well, in China, which has been in the exact opposite scenario than North America, there reflation efforts start to kick in. And that really helps getting the world economy kind of balance out as well. And we kind of land out into a much better place. We wrote that as a kind of a 70% scenario. I would say that's probably somewhere in the 50 and 60 zone now, which you can see when the trend is there is difficult. Well, the more bearish case of this is that we have a prolonged war. And this really, really heightens the premium demanded for investors, and it pushes corporate earnings lower and the spending weakens. And you kind of get that cycle that you don't want downwards. From that you get food and energy inflation. Let's say it continues to move higher and spikes and that flows through to all the rest of kind of goods and services. And ultimately, that kicks into wages. And then you're even at higher inflation levels that we have now and you have a market that's more difficult. And those really are, I would say, the way the market actually trades on let's call it a day to day basis. The market really kind of oscillates between those two tails.
And we do see that oscillation Brad. I've only got 15 seconds, so this is not a fair question. But given when you think about equities, fixed income alternatives, the 15 second take on that, given your views.
I think the first one is equities is that if we're of the view we're still overweight equity, and we think that they could be muted, that a positive return by year end is still very possible. And I would just say that you don't have to get this absolutely right. We are using defensive, we're using hedging, we're using a lot of short strategies. And this is a market that makes a lot of sense to be doing that sort of thing. Fixed income markets are going to continue to be very volatile and so keeping our duration short makes an awful lot of sense. But still making sure we have good bond exposure makes a ton of sense for risk management. And we've been continuing to move our portfolios. We're now kind of overweight infrastructure as the economy starts to pick up globally, as we continue with the buildout that we went into this, with the rebuilding the global infrastructure. We think there's going to be continue to be a lot of opportunities, both in the private and public space.