Show Transcript
Volatility has returned to stock markets with indices reporting the biggest one-day drop since March, only to be followed by a swift recovery. Kim Parlee speaks with David Sykes, Head, Public Equities about the shape of the economic recovery and the strategies for various investment objectives.
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[MUSIC PLAYING]
- Dave, I just want to start off by taking a little inventory of what's been going on. We've had a meteoric rise in the markets after a huge sell-off, and then we're starting to see some daily sell-offs, but then bounces right back up. We've had unprecedented action from governments and central banks. We have, of course, a lot of-- seeing some social unrest in the States after some pretty devastating videos were out there, and the amplification of Black Lives Matter for very good reason. You've got COVID-19 emerging again with new cases.
How do you make sense of this as an investor? I mean, how do you balance all the conflicting signals?
- Yeah, so Kim, you're right. I mean, there are a lot of conflicting signals. And I've been doing this for a long time, 20-plus years. In my career, this is the greatest amount of uncertainty I've ever seen.
But I think the way you deal with that uncertainty is to take a step back and ask yourself, what am I trying to achieve as an investor? Many investors have different objectives. There are speculators. I don't put ourselves in that camp, but when you're trying to create high-quality portfolios that stand the test of time, these situations do give you plenty of opportunities.
Let me ask you about some of the data points that came out. I mentioned a few, but one of them were the job numbers that came out. Big surprise to the upside. What did you make of that?
- A lot of the forecasters were saying that in the US there would be significant job loss. And in fact, the forecasters were exactly wrong. And it was a big miss, and there were 2 and 1/2 million jobs created. Half of those jobs came back in leisure and hospitality.
I think the one thing to take away from that is to say, COVID-19 has a significant impact, but as we slowly begin to reopen the economy, those jobs will come back. And I think that's a really positive sign for the economy. 13 and 1/2% unemployment is still a really bad number. We're in a recession. But it does remind people to look forward and to say, we are going to slowly begin to improve economically as the economy opens up again.
- What about the Fed? They came out, and I think a lot of people are quite surprised by the length of time they are willing to keep rates at the levels they are at and the length of time they're willing to do many things. I mean, extended-- we're talking years here.
- Yeah, so the Fed chairman, last Wednesday they came out with their guidance. And the most interesting part was in the question and answer period. And the Fed chair was very clear. He said, we're not even thinking about thinking about raising interest rates. And so interest rates are going to stay very close to zero until 2023.
And I think that really does two things. It informs you that yes, we are in a recession, but it also informs you that the Fed is going to be unbelievably accommodative. Remember, monetary policy acts with a lag. But you're going to have very low borrowing rates, very low mortgage rates. That's going to stimulate housing and consumer borrowing. And again, it plays into this theme, slowly but surely we will come out of this and start to get back to a greater economic activity level.
- What are the implications of those low rates, though, on-- I mean, you mentioned mortgages, but dividends and I guess longer-term growth? I mean, you're going to see these spikes in different areas.
- Yeah, for sure, with lower rates for longer, this is not great for a saver. This is definitely good for a borrower. And I think one of the areas that investors really need to focus in on is, can I get a sustainable dividend today, and is that dividend going to grow in the future? I think if you can, that is certainly one way that I advocate to invest.
- Let's talk about the numbers we're seeing with coronavirus cases. We've of course got different rates of opening in different parts of the world. Some people are arguing we're still in the first wave, others saying we're starting to see more of a latter. How do you assess that? I mean, I know you watch the medical data-- this is a health care crisis-- very closely. But how do you understand what the impact is going to be on the economy?
- So this is interesting. And I think a lot of the debate is, will there be a second wave? And I don't think there is any debate. I think there will be a second wave. But I think what people need to understand is, will the second wave be as big as the first wave?
And I think we've learned a lot. I mean, we shut the economy down in March. But I think since then, we've discovered that wearing a mask can be beneficial. I think with social distancing, frequent hand-washing, there are ways to combat this.
And when we start to look at the US economy reopening, it is true that case numbers in certain states have gone up. You have seen positive cases go up in Texas and Arizona and Florida. But they've also come down dramatically in New York.
And I think one thing that I really focus in on is not necessarily the number of new cases, because we're testing a lot more than we used to. In the US, they used to do 150,000 tests a day. Now they're doing 500,000 tests a day. So you would expect the case number to go up. But what's really interesting, if you look at the severity of the cases, hospitalizations, intubations, deaths is actually coming down. And I think that tells us that we're doing more testing, we're discovering more cases, but they're not leading to as severe an outcome as we saw earlier on in the crisis.
How did you-- and then I guess for all of this, these are big data points. What's your approach in taking all that data in? And again, you've got a-- we've talked about this before-- three-to-five-year horizon in terms of when you're looking out there. And it looks as though the market sometimes is completely discounting everything that's going on right now and moving straight out to the three to five years-- well, maybe a shorter time ahead. But how do you decide what's material when?
- It's always difficult. I mean, there's so much information coming at you all the time. But again, it comes back to the objective. And for us, it's let's create a portfolio, high-quality names that are going to make it through tough times. They're going to generate free cash flow, return that in dividends, and grow them over time. And so there's lots to be made currently about Robinhood investors and millennials and day traders and speculators.
And that's all fine. They have their place. But that's not what my team and I try to do. We're really focusing in on what are the great companies that probably are trading at a discount today, and they're going to be around in the long run? And maybe today they don't offer value, but maybe tomorrow they will. And so we're constantly monitoring, but we may not be reacting all the time in terms of our buying or selling.
Last question for you, David. The US election-- what has happened has obviously ignited a number of movements. It's somewhat-- even more, I guess-- unpredictable in terms of what's going to be happening with the US election. Do you have any sense, and more importantly, what either side winning could mean for the markets?
- Yeah. So in terms of how it's going to go four and a half months out, it really is a coin toss. I think it's going to depend on a lot of the so-called swing states. There are many of them, but if you follow Michigan, Pennsylvania, Wisconsin, Florida, it's really going to come down to those battleground states, and I think it is too close to call.
I think if it is the same administration again, if Trump is re-elected, I think we'll know it's a pro-business agenda, lower taxes, less regulation. I think that's somewhat certain. Of course, whether or not the Senate goes Republican or Democratic, that's up for debate.
And I do think, though, if it is a Biden executive branch and a Biden White House, he has been very clear that he would like to see corporate tax rates go back up. He has talked about 28%, not 21%. He's definitely talked about a greener agenda, more regulation. So I think from that standpoint, it's safe to say, less friendly for business, less friendly for markets.
But again, you don't want to put too much into this, because people thought Obama would be terrible for markets, and he wasn't. And people thought George Bush might be great, and the markets kind of muddled through under Bush. So it's very hard to draw a definite line. But I would say, Trump, more of the same, Biden, probably a little less business-friendly.
Dave, always a pleasure. Thanks so much.
- Thanks, Kim.
[MUSIC PLAYING]
- Dave, I just want to start off by taking a little inventory of what's been going on. We've had a meteoric rise in the markets after a huge sell-off, and then we're starting to see some daily sell-offs, but then bounces right back up. We've had unprecedented action from governments and central banks. We have, of course, a lot of-- seeing some social unrest in the States after some pretty devastating videos were out there, and the amplification of Black Lives Matter for very good reason. You've got COVID-19 emerging again with new cases.
How do you make sense of this as an investor? I mean, how do you balance all the conflicting signals?
- Yeah, so Kim, you're right. I mean, there are a lot of conflicting signals. And I've been doing this for a long time, 20-plus years. In my career, this is the greatest amount of uncertainty I've ever seen.
But I think the way you deal with that uncertainty is to take a step back and ask yourself, what am I trying to achieve as an investor? Many investors have different objectives. There are speculators. I don't put ourselves in that camp, but when you're trying to create high-quality portfolios that stand the test of time, these situations do give you plenty of opportunities.
Let me ask you about some of the data points that came out. I mentioned a few, but one of them were the job numbers that came out. Big surprise to the upside. What did you make of that?
- A lot of the forecasters were saying that in the US there would be significant job loss. And in fact, the forecasters were exactly wrong. And it was a big miss, and there were 2 and 1/2 million jobs created. Half of those jobs came back in leisure and hospitality.
I think the one thing to take away from that is to say, COVID-19 has a significant impact, but as we slowly begin to reopen the economy, those jobs will come back. And I think that's a really positive sign for the economy. 13 and 1/2% unemployment is still a really bad number. We're in a recession. But it does remind people to look forward and to say, we are going to slowly begin to improve economically as the economy opens up again.
- What about the Fed? They came out, and I think a lot of people are quite surprised by the length of time they are willing to keep rates at the levels they are at and the length of time they're willing to do many things. I mean, extended-- we're talking years here.
- Yeah, so the Fed chairman, last Wednesday they came out with their guidance. And the most interesting part was in the question and answer period. And the Fed chair was very clear. He said, we're not even thinking about thinking about raising interest rates. And so interest rates are going to stay very close to zero until 2023.
And I think that really does two things. It informs you that yes, we are in a recession, but it also informs you that the Fed is going to be unbelievably accommodative. Remember, monetary policy acts with a lag. But you're going to have very low borrowing rates, very low mortgage rates. That's going to stimulate housing and consumer borrowing. And again, it plays into this theme, slowly but surely we will come out of this and start to get back to a greater economic activity level.
- What are the implications of those low rates, though, on-- I mean, you mentioned mortgages, but dividends and I guess longer-term growth? I mean, you're going to see these spikes in different areas.
- Yeah, for sure, with lower rates for longer, this is not great for a saver. This is definitely good for a borrower. And I think one of the areas that investors really need to focus in on is, can I get a sustainable dividend today, and is that dividend going to grow in the future? I think if you can, that is certainly one way that I advocate to invest.
- Let's talk about the numbers we're seeing with coronavirus cases. We've of course got different rates of opening in different parts of the world. Some people are arguing we're still in the first wave, others saying we're starting to see more of a latter. How do you assess that? I mean, I know you watch the medical data-- this is a health care crisis-- very closely. But how do you understand what the impact is going to be on the economy?
- So this is interesting. And I think a lot of the debate is, will there be a second wave? And I don't think there is any debate. I think there will be a second wave. But I think what people need to understand is, will the second wave be as big as the first wave?
And I think we've learned a lot. I mean, we shut the economy down in March. But I think since then, we've discovered that wearing a mask can be beneficial. I think with social distancing, frequent hand-washing, there are ways to combat this.
And when we start to look at the US economy reopening, it is true that case numbers in certain states have gone up. You have seen positive cases go up in Texas and Arizona and Florida. But they've also come down dramatically in New York.
And I think one thing that I really focus in on is not necessarily the number of new cases, because we're testing a lot more than we used to. In the US, they used to do 150,000 tests a day. Now they're doing 500,000 tests a day. So you would expect the case number to go up. But what's really interesting, if you look at the severity of the cases, hospitalizations, intubations, deaths is actually coming down. And I think that tells us that we're doing more testing, we're discovering more cases, but they're not leading to as severe an outcome as we saw earlier on in the crisis.
How did you-- and then I guess for all of this, these are big data points. What's your approach in taking all that data in? And again, you've got a-- we've talked about this before-- three-to-five-year horizon in terms of when you're looking out there. And it looks as though the market sometimes is completely discounting everything that's going on right now and moving straight out to the three to five years-- well, maybe a shorter time ahead. But how do you decide what's material when?
- It's always difficult. I mean, there's so much information coming at you all the time. But again, it comes back to the objective. And for us, it's let's create a portfolio, high-quality names that are going to make it through tough times. They're going to generate free cash flow, return that in dividends, and grow them over time. And so there's lots to be made currently about Robinhood investors and millennials and day traders and speculators.
And that's all fine. They have their place. But that's not what my team and I try to do. We're really focusing in on what are the great companies that probably are trading at a discount today, and they're going to be around in the long run? And maybe today they don't offer value, but maybe tomorrow they will. And so we're constantly monitoring, but we may not be reacting all the time in terms of our buying or selling.
Last question for you, David. The US election-- what has happened has obviously ignited a number of movements. It's somewhat-- even more, I guess-- unpredictable in terms of what's going to be happening with the US election. Do you have any sense, and more importantly, what either side winning could mean for the markets?
- Yeah. So in terms of how it's going to go four and a half months out, it really is a coin toss. I think it's going to depend on a lot of the so-called swing states. There are many of them, but if you follow Michigan, Pennsylvania, Wisconsin, Florida, it's really going to come down to those battleground states, and I think it is too close to call.
I think if it is the same administration again, if Trump is re-elected, I think we'll know it's a pro-business agenda, lower taxes, less regulation. I think that's somewhat certain. Of course, whether or not the Senate goes Republican or Democratic, that's up for debate.
And I do think, though, if it is a Biden executive branch and a Biden White House, he has been very clear that he would like to see corporate tax rates go back up. He has talked about 28%, not 21%. He's definitely talked about a greener agenda, more regulation. So I think from that standpoint, it's safe to say, less friendly for business, less friendly for markets.
But again, you don't want to put too much into this, because people thought Obama would be terrible for markets, and he wasn't. And people thought George Bush might be great, and the markets kind of muddled through under Bush. So it's very hard to draw a definite line. But I would say, Trump, more of the same, Biden, probably a little less business-friendly.
Dave, always a pleasure. Thanks so much.
- Thanks, Kim.
[MUSIC PLAYING]
