October may have a bad reputation as a jinxed month of negative market returns, and September has already been unkind to investors. Kim Parlee speaks with David Sykes, Head of Public Equities, TD Asset Management, about why there are still reasons to stay positive on equities.
- Unless you've been trading energy, the fall has not been kind to investors so far. The S&P 500 and NASDAQ have fallen 4.8% and 5.3%, respectively, which is the worst monthly performance since March of 2020. This has got a lot of people worried about what could be coming from the markets. But our next guest says there are lots of reasons you might want to stay positive.
David Sykes joins us. He's head of public equities at TD Asset Management. Dave, nice to see you. I'm going to get right to my list of all the things that are wrong right now, the things that are feeling quite negative, and maybe you tell me why you think they're material or they're not.
But the first one is, could we see the Fed tapering soon? And what does that mean, really?
- Yeah. So a lot of folks have taken the news from the Federal Reserve. They hinted at their last meeting that they would taper, probably, in November. But I think if you step back, that probably means they're going to taper their bond purchases because the economy is improving. It's probably a sign that the unemployment rate has dropped. We're getting people back to work. And to me, that's a sign that the economy is doing much better than it was, say, a year ago.
- That is positive. Number 2 on my list, peak earnings-- are earnings as good as they will get, or as-- with Delta starting to recede, I hope, are we going to start seeing earnings move up again?
- So in my mind, there's absolutely no question this is something that's been misunderstood. The market this year has done incredibly well because earnings growth has been so strong. The actual market multiple has contracted. But the earnings have really, really grown.
Now there's concern that we're at peak earnings. I think that's a fair comment if you're thinking about earnings growth. The year-over-year rate of change in earnings will not be as strong next year and the year after as it was this year. However, earnings can continue to grow, primarily because the economy continues to do well, and we are improving from, say, a year ago, six months ago, on the Delta variant and COVID in general.
- I'm going to come back to that and put an asterisk when it comes to supply chain, but I'm not going there right now. I want to first ask you about-- I'd say global tensions in China. We've had a regulatory crackdown, Evergrande, whether it's systemic risks or where it's ring-fenced by the Chinese government. And just so that theme-- how could that impact things going forward?
- So there's absolutely no question that China is a huge contributor to global growth. And, in fact, they've driven global growth over the last number of years. But I think if we look at Evergrande, if you look at common prosperity, I think there's no question that can cause the Chinese economy to slow somewhat, perhaps, which cause the global economy to slow somewhat.
But if you think about the remaining tools in the toolkit of Chinese government, I think it's definitely in their best interest to allow the economy to continue to grow. And so we're-- have to pay attention. I don't want to sweep that one under the rug. It's an important variable. But to me, there is room there for the government to stimulate it and turn the economy.
- Number 4 on my list goes back to that second one we were talking about in terms of earnings, supply chain crunches. I keep seeing these videos everywhere I turn of ports around the world with all these tankers or large container ships that can't get in, which means people can't get their stuff shipped, one way or another. So how is that going to impact everything?
- So the supply chain issues are real, and you're starting to see that in every aspect of our lives, whether you're looking for a new car, whether you're looking for certain clothing items. The supply chain issues are real. But to me, that really is a sign that demand is there. People are looking to switch out of their goods and into their services. But people are still buying. People are still seeking goods as consumers and as businesses. And I think that's a sign that, again, coming back to COVID, which is really the root cause of this, things are improving.
It's going to take some time. I think it's not going to be done in a month or a quarter, and it's probably going to take a lot longer than that. But I think the supply chain issues on the positive side are slowly, slowly improving-- going to take a while. But I don't think this is going to be around for the next five years.
- Last on my list, and we're going to get into a bit of detail on this in a few minutes, but rising oil prices-- we've seen natural gas prices skyrocket in Europe. We're seeing oil prices go up. It's an input into making stuff. So what is that going to mean for inflation and growth?
- So clearly, it's an input, as you mentioned, Kim. It's probably going to hurt corporate profitability or hurt margins. It really is an input to almost everything. But I think, again, it's a sign that demand is picking up on the supply side. We're a little constrained, again, because of COVID. But I think for me, underlying all of this is, if we think back where we were a year ago, and we didn't even have a vaccine announced, and now we understand the virus so much more. We have multiple vaccines, we had an antiviral come out last week, or at least good data on that. We're going to see some more. And so to me, those supply challenges can be addressed. And the demand is very, very firm.
- So when you take a look at all this-- I've listed a lot of negative things, and you are sounding constructive-- I would put it that way-- weigh on equities right now-- there's a lot of volatility for people to stomach right now in the markets day to day. But what's your outlook?
- It's impossible for anyone to have an outlook for the next day or month or week. Let's not be foolish and think we can do that. But I think if you look out on a one-, two-, three-year basis, we're starting to heal. And I mean that quite literally as individuals, as a country, as a society, as a globe. And we're starting to come back. And I think what that really means to me is that corporate profits can continue to grow. And as long as corporate profits grow, I think that's going to bode good things for stock prices.
Are we going to go up anywhere near what we've been up in the last year? Probably not. I think that's a big stretch. But the one thing that people really need to understand is the health of corporations. Corporations have incredible balance sheets. We've taken the COVID time to refinance our debt levels. Interest rates are much, much lower for corporate borrowers. Balance sheets are in great shape. And companies are, once again, cash flowing and returning that cash. And to me, that's a real positive over the next 18, 24 months.
- Dave, thanks so much.
- Thanks very much, Kim.