Michael, great to have you with us. I just want to start with, what are we seeing right now? Because we're seeing, at least in the morning, quite a deep sell-off in what I would call momentum stocks. It seems to have come back a bit right now. But what's happening?
- Yeah, there's a bit of a bifurcation in the market. The more tech-heavy momentum names, which had done phenomenally the last year and for part of this year, are really taking it on the chin. It's been a couple of days now. While your more cyclical names or companies that tend to be more sensitive to economic growth have actually fared pretty well.
So the bigger story, at the market level, yeah, you're seeing the NASDAQ's down quite a bit, but the overall market down a bit. But underneath that, a pretty violent rotation occurring the last few days.
- And you've talked, or we've talked, about this rotation before. What is this rotation? What do you expect to see?
- So a lot of this is based off what the bond market's telling you. The interest rate curve has really shifted upwards, meaning longer-dated debt has sold off. It was a big winner going through COVID, as people really fled to safety, and has been selling off quite a bit in the last six months. And with that curve steepening, it is really telling you that the economy is healing and that we should expect much stronger growth this year.
And the key thing here is that growth and the stock market aren't always in sync. The stock market's more of a forward discounter. And within the stock market, those companies that are more sensitive to economic growth that have really done well, or started to do well, are more value cyclicals. Whereas companies where maybe they make money, maybe they don't, but they're more growth year or hope for growth year names have suffered because that discount rate's gone higher. You're looking at long term yields now through 2% in the US. They were below 1% a year ago. And so that's really had an impact on growth names.
- Do you expect to see more of this rotation? I mean, rotation sounds like such a gentle word. It doesn't feel terribly gentle this morning for those who have some of those stocks.
- Yeah, I mean, when you think about rotation and then maybe stare at the dryer for a bit, that's what's really happening. It's very aggressive. And we would think that this year, cases around the world are dropping, I think you'll start to see reopenings in the spring. There's pent up demands. Savings rates have gone quite a bit higher. People are sitting on a lot of cash. And I think you're going to see a real-- we've talked about this-- mini boom, which is going to probably feel more like a boom, come summertime. And that's good for financial, it's good for materials. Not so good for tech. And I think that's probably the tactical position for this year.
Longer term, like if you had to pin me down and say, where do you want to be for 10 years? I think technology is still probably going to be a winner. But I think after seeing some phenomenal gains, you're seeing a bit of a retracement. This is very, very healthy, by the way. I mean, when you're up 200% on a name and they give back 10% or 15%, not the end of the world. In many ways, this is enforcing a bit of discipline. I think people started to feel like the markets were easy, anyone could make money. And it's days like this you're reminded that the market can kind of lull you in but be quite brutal when it starts to shift. And that's what's happening now. I think people are caught offside and are feeling it. So that's the key for us.
Last question for you. The Fed has come out and been, I'd say, clear in that they're in no hurry to move rates up any time soon and they keep reemphasizing that message. Is that helping with, I'd say, some of the volatility we're seeing right now? Because that's part of the reason we're seeing some of the excitement around momentum.
- Well, it's soothing things. There's a bit of a challenge here. The Fed is ultra dovish. The Treasury Secretary Yellen has been very, very aggressive on what they're going to do fiscally. So the big difference now is that you sometimes get policymakers always fighting the last war. After the great financial crisis, the mistake that governments made was they pulled back too quickly. In the UK, they went to austerity. In the US, they went to primary surplus quite quickly. And then you had, as a result, 10 years of somewhat anemic growth.
This time around, I think you're going to see the opposite, where policymakers are really going to push and really spend and so we should really be mindful of that curve steepening more. And at some point, the Fed might be tested here to come in and really try to maintain here, whether it be curve control or come in and suppress longer term rates. This is not a core view but it's not a zero probability either.
I think for risks, this is some risk I think we need to pay attention to in terms of at what point does the bond market steepen too much and people get a bit worried. We're not there yet but something I think we'll likely want to look into come the summer.
Mike, always great to talk to you. Thanks so much.
- It's my pleasure, Kim.