Watch Market Perspectives
Hi, I'm Kevin Barr, Head of SEI's Investment Management Unit. When the COVID-19 crisis first began to spread across the globe, events in the financial markets were happening almost too quickly for the news cycle to track. Since that time, financial markets have calmed substantially. We've adapted to new ways of working, and I'm pleased to report that SEI's operations are continuing in a business as usual environment. Given all that transpired over the last few months, I've asked Jim Smigiel, our CIO of Non Traditional Strategies and Head of the Asset Allocation team to join me today. Thank you for joining me today, Jim. It's been a while since our last conversation, and quite a bit has changed since then.
Thanks Kevin, good to see you as well, at least virtually. And you're exactly right. Quite a bit has changed. In fact, I think the last time we spoke, we were right about mid-March, and quite frankly, probably only a few days away from the market bottom at the time. When we last got together, the Fed had just come out and revisited the zero bound in terms of cutting interest rates all the way down. They had just announced another quantitative easing program, so ramping up bond purchases. And in fact, in this case, ramping up bond purchases to basically an unbounded level, so buying as much bonds as necessary. You know, market volatility continued thereafter, and then the Fed stepped back in with a laundry list of programs designed to kind of ease financial conditions and liquidity conditions in different parts of the economy and in different parts of the capital markets.
I think we have a visual for our viewers today, which kind of lists out the alphabet soup of different Fed programs that were brought out and rushed to market, if you will, in a fairly impressive fashion early in the depths of that crisis. So, really addressing a lot concerns, everything from small businesses to lack of liquidity in the municipal and in even the corporate credit market. The headlines that kind of jumped off the page back then is the Fed buying corporate credit in the primary and the secondary market, providing a backstop to the municipal market as well, even buying ETFs of corporate bonds, which several central banks around the world have been doing that for a little while. But for the US Fed, is a bit of a crossing of the Rubicon. So a lot has changed is definitely a bit of an understatement.
In addition to those programs, and the dramatic developments in terms of Fed policy, the US Congress has also been busy since we last spoke.
Yeah, that's exactly right to the tune of $3 trillion in fiscal stimulus. Much of it well placed again, trying to address the needs of those unemployed, extending unemployment benefits, trying to address the issues being faced by small business. There are additional stimulus measures and other packages currently being debated, also to the tune of another $3 trillion. So, that's absolutely right, not only did the Fed come out firing, but Congress matched them nearly with their own bazooka, quite frankly.
And for good reason.
Exactly, and we're just starting to see now the full extent of the economic impact from the global lock downs. So, we did see first quarter GDP come in with a negative 4.8% here in the United States. That total of course only included really the tail end of the quarter was affected by the lockdowns. If we looked forward, the Philadelphia Fed run's a professional forecast survey. And right now that is showing second quarter GDP estimated to be down over 30%. So a very, very, severe change in economic activity that is coming in, hence why the Fed and Congress felt the need to really get these stimulus programs, up, running and out the door as quickly as possible. If we switch gears a little bit from economic activity and take a look at an employment, everyone is probably aware we've been in a Goldilocks environment as it relates to the employment situation, historically low unemployment levels around the world.
We did get the first measure of unemployment statistics in April, which totaled 20 million jobs lost in that month alone. So, I mean, these numbers are just amazing. They're shocking. I think we have a schematic for our viewers as well, looking at the broadest measure of unemployment. So, this isn't just those that are unemployed, but this is those who are unemployed, as well as those that are, for lack of a better term, underemployed. Say they have a part-time job but would prefer to have a full-time job. And you can see that measure had been running at around 7%. So, the end of 2019, that was at 7%. And, thus far, that has now increased to close to 23% U-6 unemployment level. So, just a massive change in the economics here in the United States. And these kind of statistics are also not unique to the U.S. They are duplicated around the world.
So, let's talk about the stark contrast between the still bleak economic picture, and the market that has dramatically improved since we last spoke.
That's right. So, as we spoke last time, the market is really a forward looking kind of discounting mechanism. And that's what we're seeing here. The economic statistics that I mentioned are clearly backward looking. And what investors are doing at this point is they're trying to discount what is the market going to look like, not just in the second quarter, but the third quarter and the fourth quarter as well. How long are these lock downs and the economic impact going to last, how deep is the impact going to be, and that's why we're really seeing this exceptionally stark contrast between the lagging economic data that is coming in, and really, quite surprisingly strong risk asset data that we're seeing every day, including today.
Would you attribute a lot of the market's reaction to the amount of stimulus that's been injected into the marketplace?
That's correct. No doubt. And I think that's both directly, so there's a direct effect there, and then there's a bit of an indirect effect there. So, directly as we mentioned, those areas of the market that were really experiencing some liquidity pressures, like the municipal market, and the corporate bond market, with the Fed stepping in that really cleared that up. And that also had the indirect effect, where actually issuance is back, so companies can get back to the debt markets. They can issue debt again. They can get over any funding issues or funding pressures that they may have had. So, since the Fed did that, and investors kind of, you know, started diving back into those markets, where the Fed was involved, so in other words buy what the Fed is buying, we've even seen troubled companies being able to tap the debt markets again, and really alleviate any financing needs that they may have had.
Jim, can we speak a bit more on the forward looking nature of the markets? Do we really have more clarity than we did a month ago? On the surface it appears that equity markets, may be getting ahead of themselves with the rebound.
I think that's a really good point. We have more data every single day, but certainly there's still a ton of uncertainty out there. It seems that every earnings release that we had for the fourth quarter was accompanied by pulling of future guidance. So, there's really not that much for investors to hang their hat on, as we head into, into these summer months.
I think there’s a lot of investor angst about the sustainability of this recent rally. Things have really bounced quite a bit off the bottoms that we saw in March. But what’s interesting about that is there a real bifurcation if you’re just looking at the headlines, particularly here in the United States, our large-cap headline indices like the S&P 500 have done extremely well. A smaller subset of that, look at the top 100 names like the NASDAQ 100 here in the United States again, those names have done extremely well. But again, below the surface, look across the capital markets. Look at different capitalizations. Let’s look at midcap or small cap. Let’s look at different regions around the world. Let’s look at Europe or the emerging markets. Or even just focus on sectors. Financials. Energy as an example. There are parts of the capital markets that are still pricing in a significant amount of opportunity because they’re still pricing in all of the uncertainty that we still see out there in the markets. While the headline may be screaming “green light, all is normal,” and maybe investors are getting a little bit nervous about the performance of equity markets, just a little bit beneath the surface, you can see that there’s widespread dispersion amongst equity markets around the world.
So there’s a lot of dislocation within the market. There’s still a lot of uncertainty priced in that investor may not see if they’re look at the headline names of the S&P 500 and particularly those megacaps.
What are some of the takeaways for investors?
It's a good question, I think the first takeaway, given that we're in this bifurcated market of kind of the Haves and Have Nots, is that this should really be an excellent time for active management. So, when we have a lot of dispersion within the market, amongst individual names, amongst different regions, amongst sectors, that's really where we would expect active management to start shining. So that's an area that we're really keeping an eye on and really having high expectations for active management in the equity markets for the remainder of 2020. In addition, just given my role, I would certainly be remiss if I didn't mention kind of diversification being very, very key in a market like this. In fact, I think we have a visual for our investors.
It's been really interesting given the outperformance of the mega caps here in the United States. That we're at a point now where the top-five names in the S&P 500, and these are names that are going be familiar to everyone, the Microsoft's, the Apple's, Facebook's, and the Alphabet's or the Googles of the world. They now represent a bigger percentage of the S&P 500 than they ever have, greater than even during the period of the tech bubble in the late 1990s. So roughly about 20 to 22% of the S&P 500 is made up just those five names. So, you have this increase in concentration going on, within even the U.S. market. So again, one takeaway for us is that we always have tell investors to stay diversified. Of course, we would love our investors to be diversified, kind of globally across the capital markets. But just be aware, even within your equity exposures, we like to see regional exposures. We'd like to see all caps, not just the large or the megas, but also the mids and the smalls as well, to make sure you're getting that kind of diversified exposure even within the equity markets.
Jim, traditionally, the summer months have been slow for the market. How do you see the next three to four months playing out in terms of both market activity and also on the global economy?
Very true, I think it's worth noting, we don't expect the summer doldrums this year. Yeah, there's just so much uncertainty, so much going on, and we would definitely consider this market to be still a very headline driven market. We see positive news come out about this vaccine trial, or that therapeutic, or bad news coming out regarding kind of geopolitical risk going on, and the market can really swing one way or another just based on these kind of single headlines. So vol is elevated, volatility is elevated, it's been elevated, well it's kind of been drifting down from, from the highs, of course in March and April, but we certainly don't expect to revisit any of the low levels that we saw at the end of 2019. So, while you would expect volumes to be lower, as people are on vacation, everything is just so up in the air in 2020. We would be surprised if we saw those kinds of dog days of summer come into the market this year.
Jim, we stressed the importance of asset allocation and diversification. What's happening now in the global economy and global markets that put that emphasis even on a higher level of importance?
That's a great question, because we've been really taking the time during this crisis to also think about its role, perhaps even as an accelerant to these kind of longer-term kind of structural factors that have kind of been going on kind of closed economies, and markets over the last number of years. So, take for instance, we've all been dealing with the trade war and the rhetoric surrounding that for the last number of years. We thought we had somewhat of a detente at the end of 2019. And now of course, the relations between the U.S. and China, the two largest economies on the planet, are now seemingly at loggerheads again, and really deteriorating quite substantially. The implications of this, again, are very significant, as it relates to, where we are in terms of globalization, and where do we go from here. What does that mean for supply chains? What does that mean for unit labor costs? What does that mean for inflation, that everyone is seemingly very comfortable that's something that we just don't ever have to worry about again? So, this crisis may have long lasting effects from a kind of a geopolitical perspective, much more so than the actual economic impact of the global shutdown. So, we're seeing the situation with Hong Kong, get even more dire than it was in 2019. Maybe on the flip side, just to give a little bit of a silver lining, maybe in in areas like Europe, maybe we're seeing some positives develop where we just had an announcement, some fiscal stimulus potentially coming out of Europe. That's a step in the right direction, that's really been the Achilles heel of the Union, that certainly they're not out of the woods very yet. But with the ECB being able to issue bonds, to kind of provide that kind of fiscal stimulus to get out of the hole that the whole world is in at this stage. Again, that's a very, very positive development from our perspective. So, I think the point being and the, the point you brought up is an important one, we're really at a crossroads in a lot of different, very significant places. Here and the COVID-19 issue, kind of really may be a catalyst for a lot of different situations that may develop from here, and therefore if we could just sum that up, as being this kind of really, just significant level of uncertainty. Of course, the future is always uncertain, but it certainly feel a lot more uncertain today than maybe it has in the past. There's no better reason to maintain a globally diversified portfolio, than when you're really standing at, not just a fork in the road, but in multiple forks in the road. And I really do feel like that's where we are, and where we find ourselves today.
Thanks for joining me today, Jim.
Thanks, Kevin. Look forward to doing it again sometime soon.
Glossary of Financial Terms
- Diversification: Diversification is a strategy to mix a wide variety of investments within a portfolio to limit exposure to any single asset or risk.
- ETF's: ETFs is an acronym for Exchange-Traded-Funds. ETFs are investment funds (similar to mutual funds) that consist of multiple underlying securities (typically stocks or bonds). Unlike mutual funds, which trade only once per day, ETFs trade throughout the day, with prices updating constantly, just like stock and bonds.
- Fiscal Stimulus: Fiscal stimulus relates to decisions about government outlays to support the economy.
- Issuance: Issuance is the sale of securities, typically used with regard to debt instruments such as bills, notes and bonds.
- Monetary Stimulus: Monetary stimulus relates to decisions by central banks to promote the availability of capital.
- Municipal Market: Municipal market refers to bonds issued by local government agencies. The bonds are typically used to fund long-term projects. Investors purchase them in order to receive income in the form of interest payments.
- Quantitative Easing: Quantitative easing refers to expansionary efforts by central banks to help increase the supply of money in the economy.
- Tech Bubble: The tech bubble (also known as the dot-com bubble) was a period of excessive speculation in internet-related companies in the late 1990s.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.
Investing involves risk including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments.
Diversification may not protect against market risk. There can be no assurance the goals will be met.