By Saumen Chattopadhyay, Chief Investment Officer, Carson Partners
Don’t just do something, stand there! This twist on a classic phrase is something we might want to take to heart in uncertain times.
Choppy markets, spinning headlines and dizzying statistics can disorient us as investors and tempt us to act rashly, especially as so much about the impact of novel coronavirus (COVID-19) remains unknown. But panic isn’t a strategy – wisdom, waiting and weighing the evidence are our smarter options.
We put together a roundtable discussion of experienced investment professionals across financial disciplines to give us some insight on the current markets. This group represents decades of experience in the fields of investment management and financial research and strategy. Their keen insight into markets at home and abroad can help you find your bearings.
- Tom Logan, CFA – Investment Strategist, BlackRock
- Bob Carey – Chief Market Strategist, First Trust Portfolios, LP
- Joe Kalish – Chief Global Macro Strategist, Ned Davis Research, Inc.
- Jeremy Schwartz – Global Head of Research, WisdomTree Asset Management, Inc.
- Matt Bartolini, CFA – Managing Director, US SPDR Business
You’ll find excerpts of our conversation below, which have been edited for brevity and clarity.
This isn’t the first time we’ve seen bear market behavior. How does this compare to downturn markets of the past?
Bartolini, US SPDR: Trying to draw a corollary to past bear markets is quite difficult, and that’s one of the bigger reasons for the market drawdown – a lack of information.
In prior bear markets, there are structural underpinnings that lead to a market decline. In the swift market decline we’ve seen, while the price action may be similar to something like in 1929 or 1987, the economic underpinnings are quite different.
So it’s really hard to draw that corollary back to past bear markets, and there’s really no information advantage for investors. We see EPS forecasts out there or recessionary forecasts – again, this is hard to predict. While we do know that economic activity is likely to be impaired, the duration of that is unknown.
What can we learn from other countries who have seen similar circumstances?
Kalish, Davis Research: I’m encouraged somewhat by what we’re seeing going on in China since they were at the leading edge of this.
And I also looked at the Japanese experience with their tsunami in 2011. And that was a very large drawdown – about an 8.4% drop in economic activity from February to April. And we saw economic activity contract about 5.5% annual rate in Q1 and then 2.5% in Q2.
We seem to be taking the steps in trying to corral this thing now that this will have a limited life. I agree, though, to try to make forecasts at this point, it’s really hard to do that.
What is your thought on emerging markets and where we are from a recession standpoint?
Schwartz, WisdomTree: With the shutting down of activity, it’s hard to say how we’re not in a recession. It seems clear we’re going to be in recession.
And I think a lot of people here have already commented on China as a leading indicator in all this, because they were the first one in the crisis, first hit by the virus. But China is also one of the markets that I think gives us some signs of how you can expect to rebound from it.
And if you listen to what the Chinese are saying – whether or not you trust the data, whether or not you trust the Chinese GDP – China hasn’t changed their target for GDP growth for the year.
So I expect that China will most likely ramp up stimulus, throw everything they can to try to get this sort of final three quarters of the year looking better.
What do you think is the magnitude of drawdown that we’re going to experience from here, given that the market is already down north of 20%? We are seeing 10% wild moves every day.
Logan, BlackRock: The inability to have some type of confidence around the information and developing outlook really cannot be overstated and is one of the key determinants that separates this sell-off from past sell-offs.
I’m hard-pressed to say that anybody can make a credible economic forecast right now.
When you think about this drawdown, there are a few different dimensions. One is the speed. And certainly, the speed of this drawdown has been very fast. I think it’s been perhaps surpassed only by the 1987 crash or maybe the 1929 crash.
The other dimension would be the duration of the drawdown. How long is your portfolio underwater? Some of the sell-offs happen when you go to bear market inside an expansion and never enter recession. And the drawdowns can be very sharp but short-lived.
What do you think plays into how quickly the markets recover?
Bob Carey, First Trust: Well, we need a couple things to happen. I believe we do need the number of cases to begin to abate and, at the same time, we need economic activity to begin to show some signs of improvement.
But beyond that, I do think that we need the price of oil to stabilize, even recover a little bit. And I think this has been something that has been talked about a little bit, but perhaps not as much as it should.
We have an incredible amount of assets held by oil-producing countries and their sovereign wealth funds in many cases. And obviously, with oil at these prices, the incomes for many of these oil producers have taken a hit already. And if we don’t get a recovery, and in that area, we are going to have credit issues on top of that.
Even (Wednesday), you could see the price of oil beginning to sell-off and that really began to lead to more losses in the S&P and the markets. I think it’s hard to tell exactly whether these funds are, in fact, liquidating, but I think the market is essentially anticipating that there’s going to be some liquidation of financial assets.
If we get some resolution in that area, the market begins to calm down and firm up, and I think we will see the recovery sooner than later. But I think it is the big wildcard – once again, it’s information that we just don’t have right now.
What role do policymakers play in all this?
Kalish, Davis Research: Part of the discussion is faith in policymakers. Why there’s this expectation that we’re going to see a rebound later in the year is that there’s confidence that policymakers are not only acting much faster, but they have learned their lessons from history.
If you lose your faith and confidence in your leadership, then that’s a very different story.
We do have elevated levels of volatility, and then it becomes a question of your time horizon. So if you have a long time horizon, we still think we’re in a secular bull market. So this is a cyclical setback, a cyclical bear market.
But when you look at the background factors that could support a resumption of a secular bull market – low inflation, low interest rates, technological innovation – all these things are not going away anytime soon. So if you have that long-term time horizon in mind, we think there’s going to be some better opportunities on the other side of this.
What do you see as a wise move for investors today, sitting at home in quarantine and watching the headlines?
Bartolini, US SPDR: For the most part, discipline is key. You have a long-term horizon, and you had that asset allocation mix two months ago, based upon your human capital and financial capital, it should largely stay the same from a long term perspective. Diversified mix of stocks and bonds, both international and domestic, but also including non-correlated strategies, which, during periods of these micro bursts of volatility, very macro-oriented stocks can help sort of lessen the drawdown.
Schwartz, WisdomTree: We’ve been structurally overweight in some of the emerging markets in our portfolios compared to some of the developed world.
In the short-term case, you say if earnings went to zero this year, how much should that move the stock and the markets? You could argue they are definitely moving a lot more than assuming earnings went to zero this year and earnings aren’t going to zero.
But even if they did go to zero, how much should they really be factored in it? It doesn’t seem like it will be a permanent dip. Now, of course, that could be overly optimistic but will it be permanent? It seems like we’ll be on hold for six weeks, eight weeks, and then we’ll get back to work, hopefully.
Carey, First Trust: This is something that we will get through. We’ve always recovered. The human spirit is not diminished on a permanent basis. We will continue to see innovation and we remain the most entrepreneurial economy and the most productive economy in the world.
And I think ultimately, that’s where the recovery will come from. We’ll get the policies in place so that the private sector can recover. And I think the same scenario that we’ve seen in the past when we’ve gone through these situations will play out again.
Logan, BlackRock: There’s an old adage on Wall Street, which is: Don’t panic. But if you do, just make sure you’re first. The implication being that it doesn’t do anybody any good to be the last person to panic.
What you’ve seen in equity markets and credit markets, interest rate markets, as well as the Fed for the past several weeks is panic. So for you to do that here, it’s late to the game. I think the way you build the portfolio now, as you have some hedges, you’d be defensively positioned. But that’s only for the near-term.
You need to stay invested. Think of volatility clustering: A big move today helps predict that tomorrow is going to have a big move. It’s the direction you can’t predict.
So you’ve only experienced big downside moves recently. Friday (March 13) was sort of the one standout. You need to stay invested, though, because this idea that you save for retirement, that’s only partially true. You really need to invest for retirement. You need to think about your investment horizon.
Not all contributors to this article are affiliated with Cetera Advisors Networks, LLC, and/or CWM, LLC. Opinions expressed by contributors may not be representative of Cetera Advisors Networks, LLC, or CWM, LLC.