After seeing declines of nearly 10 percent in equity markets in December, investors are breathing a sigh of relief as markets stabilize and recover some of the losses. Will this relative calm last or will volatility return? Kim Parlee talks with Bruce Cooper, CEO and CIO at TD Asset Management.
Hello, and welcome to the show. After seeing declines of nearly 10% in equity markets in December, investors are breathing a sigh of relief as markets stabilize and recover some of those losses. But what has changed in one month to calm investors’ nerves? And will this relatively calm outlook right now last? Or is volatility going to return?
Joining me now is Bruce Cooper. He is Chief Executive Officer and Chief Investment Officer at TD Asset Management and one of our favorite guests. Great to have you here.
Nice to be here.
Things change fast these days. I feel as though before Christmas, there was a lot of glum faces. And then after Christmas, we saw things move up a little bit. Let's take a look at the three month Dow to give us a little perspective. Do you think-- what happened? The sell-off happened. Was it overdone and we just recovered?
Yeah, there was a lot of crazy trading right over the Christmas, New Year's holiday, there. I think we have to recognize very thin trading that time of year, a lot of people on holidays. When you've got a lack of liquidity, you can get these extreme moves magnified. So I wouldn't read too much into that trading that happened right around Christmas.
But look, there are lots of things out there that are causing that volatility. And I'm sure we'll get into some of those in this conversation.
Well, let's do it. Again, you've put out a note. You also have some changes in terms of what you look at, in terms of equities and fixed income. We're going to get into all of that. But I want to start with that what we've done before, which is notable or noise. I'm going to bring something--
One of our favorites.
Yes, one of our favorites. We're going to bring one up, and you tell me whether you think what I'm talking about is notable or noise. So number one, let's start with what's making headlines. President Trump-- the intensifying Mueller probe. Notable or noise?
Noise from a market perspective.
I just don't think it's going to have a big impact on the economy or earnings. There's lots of concerns from a long term perspective. On the political front, you've got polarization, societies-- these are big issues. But the Mueller investigation, itself, I don't think has a direct impact on the markets.
The US government shutdown, now the longest in history-- notable or noise?
I'm hesitating a bit, but I'm still going to say noise. Unless it goes on-- if it went on, for example, for another couple months, for sure it would have a big impact economically. But the stock market's trying to look 6 to 12 months out. And I think the best guess would be this would be resolved within weeks. So in that sense, I would say noise.
I think I know the answer to the next one. A slowing Chinese economy. Notable or noise?
Notable. We've talked a lot about this. The Chinese economy's probably growing more slowly than it has any time in the last 10 years. Of course, you don't get that from the government statistics, which always say roughly the same thing. It says it's growing around 6 and 1/2 percent. We've got another number. I think it was earlier this week. 6.4 it said.
But when you look under the hood at some of the data, things like car sales, and real estate, electricity consumption, railway loadings, all those kinds of things that we can actually look at, it does appear to us that the economy is growing quite a bit slower than the official numbers. See, it's hard to say exactly how slow, but probably low single digits would be my best guess.
And when you talk to people in China, which we do on occasion, it certainly seems like the slowdown is much more pronounced there than we've seen any time over the last several years.
Brexit, notable or noise?
I think notable. Wow, this is a pretty crazy situation. We're a long way from the first vote, and we still don't have any clarity on how this is going to unfold. So I think in its own right, it's notable. For Canadians, from an investment perspective, a little less, because most Canadians probably don't have a ton of money invested in the UK. But I think it also highlights the political divisions that are growing throughout the world.
And so in that way, the UK is a little test case that we're seeing play out on a broader stage.
Extreme volatility-- these big intraday market swings. We haven't seen as many in the past few days in the markets. But for retail investors, these 1,000 point swings are a little hard to stomach on the best of times. So again, notable or noise?
Noise. Volatility was higher in 2018 than it had been the previous year. But in our minds, it was actually more normal than 2017. 2017 was weird, because there was almost no volatility. Last year, it got back to kind of historic levels. When you buy stocks, you're kind of signing up for a certain level of volatility. Not the kind you saw December 23 to December 27 or whatever it was, but the kind of volatility we saw through last year-- that is normal.
And it's why we encourage people to take a long term perspective, understand what your financial goals are, buy things you understand, buy things that are within your risk tolerance, understand the time horizon you're operating within, and you'll be in good shape.
Fear of a recession.
I think it's notable, but we don't think you're going to get a recession. But the debate about whether there's going to be a recession is, for sure, an important debate in markets today.
You talk about and you have been talking about for a long time on interest rates and where they're going. And I know through discussions we've had, you had talked about the fact that they're getting back to normal levels. But are you feeling as though we've stopped?
Yeah, so the way we phrase that is we've been firmly planted in the lower for longer camp for a long time-- really, since the financial crisis. And by that, really, I mean longer term interest rates, 10 year yields we thought would stay quite low. At the same time, central banks, of course, spent the last couple years kind of slowly coming back to normal, particularly the Fed.
Our feeling now is that the central banks in North America are pretty close to the end of their hiking cycle, which would have been a surprise, I think, to people, say, six months ago when I think there was a broad expectation that you get multiple interest rate increases here, in 2019. But today, we look at it. Inflation remains very much under control.
And there's a variety of market measures of expectations of inflation. And they are mostly pointing down instead of up. So inflation's under control. We think a lot of that has to do with technology, which is just broadly disinflationary and debt, which I think is deflationary. So inflation's under control. Growth is decelerating on a global basis, for sure.
Now, we have central banks. Fed Chairman Powell came out just before the new year and said, we're not on a preset path. We're watching the data. I think if you watch the data, you'd say, well, the data is slowing. It would tend to tilt you towards doing less as opposed to doing more. So yes, we think we're probably close to the end of the hiking cycle and that long term yields will also be relatively stable around these levels.
So if you're close to the end of the hiking cycle, I think most people, when they listen to what's being said on media, they think it's like, oh, that's good for markets when the hiking is ending. At the same time, the hiking is ending because the growth is slowing. And I guess the next piece here is earnings growth. We've actually seen, I'd say, for the first time, we're getting more of a mixed picture on earnings.
Totally. Yeah, and so I think this gets to the heart of the issue is, is the economy slowing but to a stall? Or are we going into recession? And from our perspective, we do not expect recession. We expect a slowdown. And a couple of things that I would highlight-- when I think about the risk of recession, I think about the risk of what I think of as imbalances.
Something big happens that creates huge distortions in the economy that need to be corrected. So a great example would be before the financial crisis, real estate in the United States. Just the enormous number of houses being built. People taking out crazy amounts of debt to buy those houses. And then the whole thing kind of comes unwound.
In the late 90s, we had another example. Remember the tech and telecom bubble? And there was just enormous spending by companies on things like internet, and cable, and telecom equipment. And both of those bubbles were accompanied by huge amounts of debt. And that debt is what I think of as an imbalance. So I don't see that kind of imbalance today.
And part of it is because the economic recovery in the last 10 years has been what I call a slow motion recovery. People have been nervous. They were so bruised by the financial crisis. There hasn't been a lot of investment by companies. Hasn't been a lot of debt taken out in the United States. Households have actually de-leveraged.
And so I think, for that reason, we're going to get a slowdown but no kind of cataclysmic recession.
It's funny, because when you say that, I hear-- and maybe it's wishful thinking on my part-- like this sounds like a sweet spot. It sounds a bit of like it's slow enough that you're not getting rate increases, but about good--
For sure, it still comes with challenges. I should have picked up that you mentioned earnings. Like look, earnings will slow, which is not awesome.
I personally think that's why the market went down last year. Last year's decline was kind of foreshadowing this year's economic slowdown and this year's earnings slowdown. And we're seeing that in the fourth quarter. We're going through the fourth quarter earnings season now, which is OK. But--
The guidance isn't so great.
Guidance isn't great. And normally, companies kind of set the bar, and then they get over that bar. And a typical number would be actual earnings come maybe 3%, 4% higher than estimates. This year, it's like 1% higher. So earnings aren't quite as robust. The guidance isn't quite as good. Earnings are slowing. That's not all great.
But I say, I think that's the reason stocks went down last year. You have to remember that stocks are kind of a forward looking, discounting mechanism. And really, it's about what's going to happen later this year and into next year.
I know someone is probably watching us saying, yeah, yeah, get to it. Tell me what you're going to recommend from here. I was going to let people know, we are going to get there in our third part. We'll talk about what this means for equities and fixed income. One thing we haven't talked about, though, is trade friction, which just seems to me to be accelerating.
Yeah, for sure. This is one of the biggest risks out there. We've written about this literally since the day Donald Trump was elected. I think it's a serious issue. His administration-- it's not just about Donald Trump. Members of his administration, Robert Lighthizer, Peter Navarro-- they're very serious about these issues.
And the kind of construct we think of it is kind of a collision course between China's Made in China 2025 Program, which is kind of the roadmap they have to accelerate their own development into things like technology. So you got that on the one hand. On the other hand, the United States, which is the preeminent technology power in the world today, wants to preserve their leading position.
And they're coming to a head around issues like patent protection, intellectual property--
Rights, spying. The fact that you have to enter joint ventures if you're a foreign company to enter into the Chinese market in a big way-- so a lot of these are legitimate issues. But there's no easy fix. And so we've talked about we expect trade frictions to be persistent. It's a sneaky little word, which we just think means quite a long time.
So you've got this March 1 deadline. I think the probability of all of the issues being resolved by March 1-- pretty low. There is an optimistic possibility, which is they kind of come to agreements on some issues. And they kick the can down the road on the rest. There's absolutely a possibility. Or of course, it's still a possibility it all falls apart.
But even if they come to a relatively positive outcome, it doesn't mean all the issues are resolved. I think they're going to be quite long running.