The Adviser You Can Talk To Podcast
January 12, 2022
Investors enter 2022 haunted by many of the same headline risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. that dominated 2021—including another rising wave of COVID infections impacting the economy. But as Chairman Dan Wiener and Chief Investment Officer Jim Lowell explain in this episode of The Adviser You Can Talk To, this year looks to be very different than the last. Dan and Jim discuss the key trends and indicators we’re watching, including:
Jim and Dan give their thoughts on why we still believe in bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., and our overall approach to diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. in what we think is likely to be an even more volatile 2022.
In this The Adviser You Can Talk To Podcast, Chairman Dan Wiener and I, Chief Investment Officer Jim Lowell, look back at 2021 and ahead to 2022’s well-known litany of potential risks and potential returns that we think we’ll need to maneuver through on the road ahead.
Hello. This is Jim Lowell and I’m the chief investment officer at Adviser Investments. I’m here with The Adviser You Can Talk To Podcast—our first of the new year. I’m joined by Dan Wiener, chairman of Adviser Investments.
Good morning, Jim.
Good morning, Dan. Today, we’re inviting you to join us as we both take a look back at 2021 and ahead to 2022’s well-known litany of potential risks and potential returns that we think we’ll need to maneuver through on the road ahead. Dan, let’s begin where we clearly expected to be but hoped we wouldn’t be: Still in the throes of the COVID pandemic, whose official start date was March 11, 2020. Since then, however, even the current variant of the virus we’re contending with is different and, overall, it feels less frightening. But what else is different this time and, for that matter, what’s the same?
Well, what’s different to begin with is I didn’t know that we had a March 11, 2020, start date. Where did we get that date?
That was the official start date, according to the CDC. That’s when the pandemic began, almost two years ago, Daniel.
I know, but we have start dates for recessions and start dates for bull markets. I didn’t know that pandemics could be put on a certain date. All right, the difference, okay, that’s different. But I think the big difference is that there’s now talk of COVID being endemic rather than pandemic. 2021 was that year when most of us got our first jabs of the coronavirus vaccine, and many of us got a booster shot as well—I know I did. Last year was also a year of substantial hesitance to vaccines. There was little raw data to back up what the scientists were saying was good for us, not bad for us.
Today, despite this recent surge in omicron infections, we know much better that vaccines work, that they aren’t causing anybody to grow a tail or extra toes, and that those who have been vaccinated are at a much reduced risk of serious illness or death. So from an investment standpoint, even as COVID shut down the global economy in 2020 and caused lots of disruptions with supply chains in 2021, the virus turned out to really be almost a nonevent in the stock and bond markets. I know it’s hard to fathom, but it’s true.
You and I talked about infections and inoculations last year quite a number of times, and I think during one of our quarterly webinars, we brought up this third “i,” which is inflation. We said then that inflation would be much more important to investors longer term than either infections or inoculations, and I think it’s going to be the underlying theme for much of what happens in 2022—from economic growth to economic policy, market returns—much more so than infections or inoculations. So it’s that third “i.” I’m anxiously awaiting the most recent inflation read from December because November, we saw 6.8%. Would be nice to see the number either flatline or start to come down a bit. Rebound themes, economic growth, transitory inflationary pressure, etc. What’d I miss?
You cast a wide net and caught most of the significant fishes in it. I would say that one of the things that we’ve been paying a lot of attention to—as have the markets, as has the economy—is what the Fed is or isn’t doing. Not just about inflation—but, of course, they’ve broadcast the fact that this year, they’re going to start tapering faster. Expectations are for rates to rise between three and four times. The Fed’s data-dependent; they’ll do what the data suggests is the wisest move on their board. But we clearly are entering into a period where the Fed is saying that they see enough growth, enough strength in our rebounding economy, even if that growth slows off of a torrid pace—which we fully expect—and becomes a more normalized sort of slow-growth (not no-growth) environment. The Fed still sees enough growth, enough health in our economy to begin to take action, to try and just tap the brakes a little bit. That, of course, is different in 2022, even though they began broadcasting it the latter half of 2021.
Talking about the Fed for a minute, they’ve got three different weapons in their arsenal, right? They’ve got the ability to raise interest rates, to hike the fed funds rate; they’ve got the ability to cut back and end their stimulus bond-buying; and then they also can begin to run off their balance sheet if they feel that they need to do that as well.
Absolutely right, Dan. I think you could even add a fourth thing, and that is they can talk. When the Fed speaks, what they say often matters as much or even more than what they do, and they’re fully cognizant of it. I mean, when we were just starting out 25 years ago, we used to watch the thickness of the then-Fed chair’s briefcase to try and figure out whether there were more or less issues that they were contending with. Today, we don’t have to do that. We have live press conferences with Chair Powell on a recurring basis, so the Fed has definitely kept the markets apprised of what it is thinking and what it is planning on doing. You’re right; it has clear tools at its disposal, but still perhaps the biggest one is what it says, not necessarily what it does.
Right. I’m thinking back to the days of Alan Greenspan, where he could speak and nobody understood what he was talking about.
Yeah, you had to be a criminologist just to crack the code.
Yes, a Greenspanologist, correct.
Well, let’s get to the stock and bond markets and what we see for 2022 because I know that’s what everybody is most interested in. You’ve been saying that last year, 2021, was an anomaly. Care to elaborate?
You’ve been listening. Yeah, 2021 was a year that, in many ways, I thought looked a lot like the year leading up to the peak of the tech bubble in 1999 and 2000—and then the aftermath, when it burst. As far as I know—no one’s articulated this yet—but you saw this anomaly in the relative performance of small and large stocks and growth and value stocks.
I took a look at 12-month returns. The variance in 12-month returns coming into 2021 was extreme, and then it completely reversed to another extreme during the course of the year. By that, I mean growth-stock returns were abnormally strong relative to value-stock returns, whether you were talking about large or small, and then the market did a 180-degree turn and went to extremes in the other direction. The same sort of large dispersion was seen in small versus large stocks in general. There was this huge shift in sentiment in the stock markets that threw a lot of investors for a loop, I think.
Jim, I was talking about this variance in 12-month returns, but I think there was more going on in the market than just this sentiment shift from value to growth, or growth to value, large to small, small to large.
There absolutely was, Dan. It wasn’t just a question of what was going on inside of our marketplace, but also what was going on inside of the global marketplace, which had a very uneven 2021—with China, due to its own self-inflicted wounds, having its marketplace struggle fairly mightily over and against some selective opportunities that the international managers we like most were trying to pursue across a grid of established and emerging markets.
As we look at what transpired last year, that crush of a handful of large-cap tech stocks that really drove the basket of the S&P 500 stocks overall suggests to us that there are many opportunities inside of even the S&P 500 going into 2022. You’re going to have to be super selective. We’re not big believers in putting all your eggs into one index fund’s basket and we remain committed to our view that investing globally doesn’t only make long-term return sense; it’s also a way that you can diversify some of the risk inherent in any given major marketplace at any given time.
We know that valuations are a concern that we constantly are hearing about in the media, and, certainly, some companies look as if they are overvalued to us, but that doesn’t mean that there aren’t values inside of our own marketplace. It certainly means that there are more values inside of the global marketplace, beyond our borders. They’re just a lot trickier to pursue and, for some investors, probably increasingly difficult to believe in given that they’ve now suffered more than a lost decade of returns relative to what they could have enjoyed if they just stayed here in the U.S.
Well, you talk about opportunities. I mean, we’ve talked about this a lot. I saw a statistic the other day. We call it “The S&P Six” or “The S&P Seven,” these six or seven huge companies that drove the return of the S&P. But I saw a statistic the other day that as the S&P was hitting its last record high, something like two-thirds of the companies in the S&P were more than 20% below their own all-time highs, so this is that huge dispersion between the five or six or seven or eight, whatever number you want to use, big companies at the top of the S&P that were driving returns and everybody else, so there are values to be had.
Absolutely right. As our director of investment research, Jeff DeMaso, and his team are constantly pointing out to us, this is why we pay attention to active managers and to actively managing the markets we’re investing in. Because certainly, those top six, top seven names may be in bubble territory, but as you pointed out, with two-thirds of the S&P 500 companies 20% below their all-time highs, there’s some bargain-hunting even in a marketplace that, if you just read the headlines, you would believe was somehow overvalued in full.
Let’s flip to a marketplace that’s probably undervalued, unloved, potentially overlooked—but to the detriment of any long-term investor. That’s the income markets. It’s become increasingly difficult to deliver a safe and secure stream of income using government bonds alone. Are you seeing signs of investors chasing yield in areas where risks run high? Is this the only way to enhance one’s stream of income?
Yeah, it’s interesting that you asked that question, because I just got a call this morning from someone who listens to us very carefully and has been sitting on a high-yield bond, a junk-bond fund, and he says it’s worrying him a lot. I said, “Well, it should be, because you have to decide why you own a high-yield bond fund in this day and age.” The spreads between high yields or junk-bond yields and investment-grade yields are very narrow. People have really bid up the price of these bonds. Are you owning a high-yield bond or high-yield bond fund for the current income it generates, or are you owning it for growth? Because the factors that influence stocks also influence high-yield bonds in the same way, and it is not providing the kind of diversification that we think investors should have in their portfolios and should use bonds for when they’re looking to take some of the risk out of their portfolios.
I think a lot of investors moved into riskier portions of the bond market looking for yields and, yes, they’re getting them, but they’re taking on a lot more risk and I’m not sure that the risk-return balance is appropriate right now. There’s no free lunch in the bond market. It’s especially true when we’re in an era of super-low interest rates. Think about it. Money market funds—they’ve essentially offered no yield at all since late 2020. Even before that, the yields on cash were pretty tiny. But step out on the yield curve, take on a little more interest-rate risk, you invest in a 10-year Treasury bond, and at year-end 2021, that yield was at 1.5%.
We’ve seen a lot of flight—massive flight—out of Treasurys lately, and the yield’s perked up, but even… Oh, I’m looking at my screen right now and the 10-year Treasury’s yielding about 177. I mean, that’s not much reward for locking up your money for 10 years. You and I talk about this a lot. You don’t own a bond for its yield. You own it not as a wealth builder; you own it because it provides diversification and protection in a portfolio. Bonds are wealth preservers, they’re shock absorbers. They zig when stocks zag. You and I have often said they’re a critical part of a diversified, risk-aware portfolio. You want to add anything to that, or have I gone on too long on bonds?
I would just reiterate your last point, and that is that for 25 years, we’ve been using bonds and even a modicum of cash as bulwarks against stock market volatility, which we saw increase in 2021, as we thought it would, and we think it will increase even more inside of 2022. While it is difficult for income investors to eke out an income that is safe, you can use diversification inside of the bond market to mitigate some of the risks of taking on instruments that deliver a little bit more yield. But ultimately, with beautiful blue-chip, battleship-balance-sheet, dividend-paying growth stocks delivering four or five times the dividend, the yield on a 10-year Treasury… We think there are better ways for an overall portfolio to be managed to deliver not just the income but the capital appreciation you need to be able to sustain your lifestyle—not just this year, but for decades to come.
Yeah, as I often say, you don’t need income, per se, to pay for your groceries. Capital gains do a nice job as well and, frankly, you pay lower taxes on them. I’m going to throw this one at you because you started heading in that direction—and that is diversification. We talk about it all the time. I actually got an email yesterday from somebody on the Barron’s Roundtable who said they thought that our comments about diversification and sticking with an investment plan were right on and really the message investors should take away today. But for us, diversification isn’t just U.S. stocks and U.S. bonds; we also talk a lot about foreign stocks. Foreign bonds—that’s another issue entirely. I could go on about that. Talk to our listeners for a minute about foreign stocks as a necessary allocation in a diversified portfolio.
Different markets behave differently at any given time, different sectors within the markets behave differently at any given time, but one thing that we clearly have seen over the last 25 years is the emergence of a dynamically interlinked global economy and global marketplace. Today, you could look at your portfolio and think that you don’t own any foreign stocks. But by virtue of the fact that you probably have a preponderance in your large-cap space in U.S. multinationals, those companies are global in nature and clearly impacted by what’s going on not just in the foreign economies but also in the currency markets and the exchange rates between marketplaces.
In terms of diversification, our discipline principle of diversification, we continue to think that there are attractive opportunities inside any year, pretty much inside any marketplace. The key is to not only actively manage the potential risks and returns that you’re trying to pursue in a global marketplace, but also to make sure that you are fully aware and focused in on active managers whose track records speak to their ability over the long term to be able to turn over the stones, find some good values.
We know that the marketplaces of the U.S. and China in particular, the world’s two superpowers, the world’s two super economies, are going to continue to dictate the fate of the overall global marketplace. But last year, despite the fact that foreign markets trailed on an absolute basis relative to the S&P 500, for example, they still delivered returns that, in any reasonable year, you would’ve been happy to receive, and they did provide diversification relative to that concentration here in the U.S. in our large-cap market.
We’re only a week into the new year, but they’ve actually done better—reduced losses so far this year—relative to the U.S. market.
We’re fully focused on managers who, especially in the international space, have a solid track record at managing risk, not just in terms of delivering reasonable returns. One area, Dan, that we saw basically get upended last year is a key focus of ours and has been for decades, and that’s the health care sector. It was struggling against the overall marketplace last year and absolutely taking it on the chin out of the starting gate this year. I like to say this is a great time for us to be able to see our managers add to their best ideas at discounted prices, but what do you think’s going on there? Should investors be nervous?
Well, I wish I knew. The health care market is so broad and has so many opportunities there, whether you’re talking about device companies, drug companies, biotechs, “Our research and development is number one in the world.” Of course, we saw the results from all that R&D and the smarts that we have in our health care sector when we saw how quickly vaccines were developed and then produced. So I’m a little surprised, I think, by the fact that biotechs and the health care sector in general have done so poorly. Yeah, there have been a few successes in there—biotech in particular—but health care in general, I think, is setting itself up for a real rebound here. I mean, the valuations—we talk to the managers who run some of the funds that we use at Adviser Investments and they think the valuations are extremely attractive. These are solid companies. I mean, these are not meme stocks, they’re not NFTs, they’re not cryptocurrencies. These are real companies. So yeah, I’m a little surprised. They’ll come back. We’ve seen this in the 30-plus years that we’ve been doing this. It happens.
Yep. But talk about battleship balance sheets, a great area, we think, to be able to add true value to one’s overall portfolio on a long-term basis. 2022’s shaping up to give us an opportunity to enjoy, as I said, our managers adding to their best ideas in that space at pretty notably discounted prices.
All right, so give me your bottom line, Jim. We could sit here and talk about the blue chip versus meme stock thing, we could talk about SPACs, we could—
Growth versus value, your favorite.
Yeah, yeah, yeah. We’ve done that before. I mean, it’s all over the map now. What’s the bottom line?
Overall, we think that vaccination success will continue to remain an important determinant for economic and market growth in 2022. We’re hopeful that the trend and trajectory that we’ve seen with vaccination success and with the stair-step return toward normalcy proceeds apace. We think that it will. Fundamentals, earnings, interest rates, economic data, the things we watch daily with our investment research team will continue to matter, even if they’re overlooked in moments of market fear and market greed.
We’re mindful of this, framing our teams’ analytical assessments of economic and earnings data based on what we know, not what others tell us we need to fear. Fear is not an investment plan. We’ve been in this business long enough to know that other people’s fears make interesting headlines but certainly make for very poor portfolio discipline. We continue to think that fundamentals will again matter more and more as we push through 2022, and we remain in favor of the Fed and fiscal policymakers doing whatever it takes to safeguard our economy, including tapering faster and raising rates further if conditions warrant doing so.
We definitely think, to go back to where we began this conversation, that even as we always have our eyes on long-term gains, we’ll never let our risk guards down along the path. In fact, for over 25 years, we think it’s been our focus on managing risks reasonably well that has enabled us to pursue reasonable returns in a calm and confident manner, and nothing about this market is going to change our disciplined approach to it.
With that, Dan, let me take us out and say that this has been Jim Lowell and—
—from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback really is always welcome. If you have any questions or topics that you’d like us to explore, please email us at firstname.lastname@example.org. Thank you for listening.
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Inflation is going to be much more important to investors than either infections or inoculations, and I think it’s going to be the underlying theme for 2022.
Inflation is going to be much more important to investors than either infections or inoculations, and I think it’s going to be the underlying theme for 2022.
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