Show Transcript
Stock markets rallied on hopes for a COVID-19 vaccine and news that Joe Biden claimed victory in the U.S. presidential race. Kim Parlee speaks with Michael Craig, Head of Asset Allocation, TD Asset Management, about what investors should be watching for on the vaccine front and whether the incoming Biden administration will be investor-friendly.
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It was a jubilant day on the markets so far this week. The combination of finding out that Joe Biden has been elected president, combined with some calling a Goldilocks scenario with what looks to be a Republican Senate, combined with the fact early this week that we had news that Pfizer had come out with a COVID-19 vaccine with 90% efficacy, was enough to cause a lot of movement in the markets today. And here to tell us what he thinks of that and where he sees things going, Michael Craig. He's Head of Asset Allocation with TD Asset Management.
Michael, good to see you. I want to start with that, just-- we saw a fairly, I'd say, almost violent rotation, and a big move up with many stocks that had been dormant for a while. Do you see this rally having legs?
Well, I think to start off, it was very much a short covering, kind of aggressive move where a lot of people were covering positions rather than taking new ones. And this could go on for a little bit. Just before this happened, we were kind of at real extremes between what you call growth, or technology, and value. And so this type of reversal, while violent, is quite helpful in the sense that it does restore some degree of market discipline to the marketplace.
My sense is that this is probably not the beginning of a new trend. You're going to need to see much better news flow on the virus front for it to be sustainable. And so I'd rather be cautious here, and be a bit more diversified in our approach than trying to jump on to a new factor trend.
Let me lay-- I mean, I know, obviously, news flow is one thing you look at, but certainly not everything when you're making your decisions, but I do expect we're going to be hearing lots of news coming up to the inauguration. Do you expect to see some volatility there?
The market is really just ignoring some of the sideshow as far as that transition goes. I think it does bear to watch a little bit. This is not going to be a smooth transition of power. The fortunate thing with this is that Biden has been in Washington a long time, so he knows how it works. He's well-connected, so that is a real benefit for the Democrats. But I think you need to wait and see and watch. Highly unlikely you're going to see any change in the outcome of the election, but it is going to lead to probably a lot more of a circus than anything else. But so far, the market is totally ignoring it and moving on.
Well, let's talk to what the market is paying attention to, and it was the vaccine news. And I was reading earlier today that Dr. Fauci said that if everything goes smoothly, you could see Pfizer applying for an emergency use authorization within two weeks. Does that change the trajectory of the pace of the economic recovery from your standpoint?
It'll certainly usher in some degree of optimism amongst market participants. I would be hesitant to get too carried away. This is a long, complicated process, and in many ways, maybe-- perhaps we're not going to be working from home for three years, maybe just be one year. It will take time. Logistically, it's incredibly challenging to deliver the drug. It is a two-dose drug and requires to be stored at negative 70 degrees, which provides some real logistical challenges.
And so it will take time. I think this is kind of the beginning of the end, in many ways, but the end is still quite a ways away. And while this is all happening, case counts in the northern hemisphere have been quite severe, and so we are still facing a much less robust economic backdrop currently, and will continue for a few quarters more.
Hmm. I want to go back, if I can, to the US election. And I know you said that the market at this point has been ignoring some of the-- I'll say the drama that has been unfolding between the current president and president-elect. One thing, though, I know that many are watching there were the Senate races. I know there's some Senate runoffs coming up in Georgia. Suddenly, we're all becoming experts in the nuances of American politics. I know there's another Senate race where it looks as though it flipped-- or stayed Republican, I should say. I know Democrats had a high hope for that. How close are you watching that?
So the outcome. So Georgia will have a runoff vote in January that has to be completed before the inauguration on January 20. Typically, you would expect Georgia to go Republican. It has been Republican for a long time. Stacey Abrams has done a phenomenal job organizing, though, and is very much a formidable organizer on the Democratic side. So while I would expect the Republicans to still hold the Senate, there is a slim chance that they could split 50-50, in which case, Kamala Harris will be the deciding vote.
My sense is, though-- and I believe this is not an outrageous view-- my sense is that the Republicans will hold onto the Senate. They have gained seats in the House, and then you've got-- but it's still run by the Democrats-- and then you've got Joe Biden on the executive front. So probably less constrained, will not be able to do many of the things he campaigned on. And the market likes that, because they think they're-- the market, I believe, thinks it's going to get some degree of infrastructure deals, but not the accompanying tax hikes. And that's probably why we're rallying short-term.
And let me ask you, then, so when you back up and take a look at your outlook, my understanding is that you're moderately positive over the next 12 to 18 months on equities. What's going to move you in either being more positive on equities, or I'm going to say less positive on equities? What are you watching?
So our game plan pre-election was that the worst-case scenario would've been a severely contested election where we didn't have a winner, and that would have dragged on. That was kind of a tail risk, but a risk nonetheless. Now we have some certainty, and I think short-term, the markets I think will do OK.
Longer-term, I'm not 100% in love with the idea of divided government. I know historically, over the last 40 years, it has been good for markets. I don't think we're in a similar period that we have been in the last 40 years. We're not in a Goldilocks era anymore. We are-- growth is challenged, demographics are not supportive for growth, and we're dealing with unprecedented times with regards to a virus.
So my sense is it's not terribly awesome for the US economy. Our thought process around this has been to move some capital away from the US and to the emerging markets, into China, into Asia, looking for other sources of return. And I think that still holds. That was the idea before the election. That still remains our core focus. We still have quite a bit exposure in the US, but are looking for ways to diversify that more so than perhaps 12 months ago.
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Michael, good to see you. I want to start with that, just-- we saw a fairly, I'd say, almost violent rotation, and a big move up with many stocks that had been dormant for a while. Do you see this rally having legs?
Well, I think to start off, it was very much a short covering, kind of aggressive move where a lot of people were covering positions rather than taking new ones. And this could go on for a little bit. Just before this happened, we were kind of at real extremes between what you call growth, or technology, and value. And so this type of reversal, while violent, is quite helpful in the sense that it does restore some degree of market discipline to the marketplace.
My sense is that this is probably not the beginning of a new trend. You're going to need to see much better news flow on the virus front for it to be sustainable. And so I'd rather be cautious here, and be a bit more diversified in our approach than trying to jump on to a new factor trend.
Let me lay-- I mean, I know, obviously, news flow is one thing you look at, but certainly not everything when you're making your decisions, but I do expect we're going to be hearing lots of news coming up to the inauguration. Do you expect to see some volatility there?
The market is really just ignoring some of the sideshow as far as that transition goes. I think it does bear to watch a little bit. This is not going to be a smooth transition of power. The fortunate thing with this is that Biden has been in Washington a long time, so he knows how it works. He's well-connected, so that is a real benefit for the Democrats. But I think you need to wait and see and watch. Highly unlikely you're going to see any change in the outcome of the election, but it is going to lead to probably a lot more of a circus than anything else. But so far, the market is totally ignoring it and moving on.
Well, let's talk to what the market is paying attention to, and it was the vaccine news. And I was reading earlier today that Dr. Fauci said that if everything goes smoothly, you could see Pfizer applying for an emergency use authorization within two weeks. Does that change the trajectory of the pace of the economic recovery from your standpoint?
It'll certainly usher in some degree of optimism amongst market participants. I would be hesitant to get too carried away. This is a long, complicated process, and in many ways, maybe-- perhaps we're not going to be working from home for three years, maybe just be one year. It will take time. Logistically, it's incredibly challenging to deliver the drug. It is a two-dose drug and requires to be stored at negative 70 degrees, which provides some real logistical challenges.
And so it will take time. I think this is kind of the beginning of the end, in many ways, but the end is still quite a ways away. And while this is all happening, case counts in the northern hemisphere have been quite severe, and so we are still facing a much less robust economic backdrop currently, and will continue for a few quarters more.
Hmm. I want to go back, if I can, to the US election. And I know you said that the market at this point has been ignoring some of the-- I'll say the drama that has been unfolding between the current president and president-elect. One thing, though, I know that many are watching there were the Senate races. I know there's some Senate runoffs coming up in Georgia. Suddenly, we're all becoming experts in the nuances of American politics. I know there's another Senate race where it looks as though it flipped-- or stayed Republican, I should say. I know Democrats had a high hope for that. How close are you watching that?
So the outcome. So Georgia will have a runoff vote in January that has to be completed before the inauguration on January 20. Typically, you would expect Georgia to go Republican. It has been Republican for a long time. Stacey Abrams has done a phenomenal job organizing, though, and is very much a formidable organizer on the Democratic side. So while I would expect the Republicans to still hold the Senate, there is a slim chance that they could split 50-50, in which case, Kamala Harris will be the deciding vote.
My sense is, though-- and I believe this is not an outrageous view-- my sense is that the Republicans will hold onto the Senate. They have gained seats in the House, and then you've got-- but it's still run by the Democrats-- and then you've got Joe Biden on the executive front. So probably less constrained, will not be able to do many of the things he campaigned on. And the market likes that, because they think they're-- the market, I believe, thinks it's going to get some degree of infrastructure deals, but not the accompanying tax hikes. And that's probably why we're rallying short-term.
And let me ask you, then, so when you back up and take a look at your outlook, my understanding is that you're moderately positive over the next 12 to 18 months on equities. What's going to move you in either being more positive on equities, or I'm going to say less positive on equities? What are you watching?
So our game plan pre-election was that the worst-case scenario would've been a severely contested election where we didn't have a winner, and that would have dragged on. That was kind of a tail risk, but a risk nonetheless. Now we have some certainty, and I think short-term, the markets I think will do OK.
Longer-term, I'm not 100% in love with the idea of divided government. I know historically, over the last 40 years, it has been good for markets. I don't think we're in a similar period that we have been in the last 40 years. We're not in a Goldilocks era anymore. We are-- growth is challenged, demographics are not supportive for growth, and we're dealing with unprecedented times with regards to a virus.
So my sense is it's not terribly awesome for the US economy. Our thought process around this has been to move some capital away from the US and to the emerging markets, into China, into Asia, looking for other sources of return. And I think that still holds. That was the idea before the election. That still remains our core focus. We still have quite a bit exposure in the US, but are looking for ways to diversify that more so than perhaps 12 months ago.
[MUSIC PLAYING]
