Dan Wiener and Jim Lowell: Why Are Markets Rising in a Recession?

Jim Lowell:
Hello, this is Jim Lowell and I’m the chief investment officer at Adviser Investments and I’m here with another The Adviser You Can Talk To Podcast. I’m joined by Dan Wiener, chairman of Adviser Investments. And today we’re going to talk about rising markets and falling economies. Before I begin, let me send out our heartfelt and healthful wishes from all of us at Adviser Investments. The past two months have obviously set an unprecedented stage where human, economic and market dramas have played out.

Jim Lowell:
And although we think we still have many acts ahead of us—some certainly will be positive, some no doubt negative—know that we remain fully operational in committing to helping you manage current events wisely and well so that you can better secure your financial future. Dan, the last time we spoke, we discussed reopening risks and opportunities. Since then, the economic risks have multiplied yet market prices have gone higher and higher. What gives?

Dan Wiener:
Yes, they have. A couple of numbers first. The S&P index is still down 9.6% for the year. But it’s up over 30% since hitting that trough in late March. And I think we’re all a little bit stunned by how quickly the markets have rebounded. The number I’ve been looking at is that over the past 12 months, so from the middle of May last year to today, the S&P is up about 4.5%. Now think about that, over the last year, the market is up 4.5% and yet, as you said, the economy, we’ve gotten more and more data, more and more indications of how deep this recession is that we’re in. So how is it that the market is higher?

Dan Wiener:
Well, the easy answer is that the stock market’s a discounting mechanism, that it is looking ahead, that prices are based on what we have or what investors have for expectations down the road. But here’s my question, and I’ll pose this to you, Jim, we know earnings in 2020, corporate earnings are not going to be better than earnings in 2019. I mean, that’s almost given. So is the stock market looking ahead to 2021 when we may see earnings better than 2019, or they’re looking ahead to 2022? And how far ahead should investors be looking in terms of figuring out the right price for stocks? I think the bottom line for me is we should remain quite cautious because I think we may be getting ahead of ourselves a little bit here.

Jim Lowell:
I think we probably are getting a little bit ahead of ourselves on not just a hopeful kind of optimism, but probably also the inability to stay in a panic state for a period of not just weeks, but what has eventually turned into months. We’ve also seen some more hopeful signs in terms of economic data and the potential for not just antiviral interventions, but also early successes in very small sample sets of what may or may not turn out to be a vaccine. Obviously, a vaccine would be the golden ticket for everyone to return back to the factory, but we are not just weeks and months away from that, we could be in fact a year or more away from that. So I think you’re right to strike that cautious tone.

Jim Lowell:
And you’re also right, markets clearly have been building a bridge over troubled economic waters on the assumption that that bridge will be able to land on a bank of better economic times, whether that’s the end of this year, somewhere into next year or the following year, a lot’s going to depend upon the industry in which you find yourself invested. Airlines, for example, may take much longer to come back whereas we already know technology companies, healthcare companies aren’t just managing well, but they’re hiring more people and may in fact turn out to be more profitable than many have suspected. But nevertheless, the economic data that we’re getting is clearly pretty bleak in the near term.

Dan Wiener:
Well, I think something you just said sort of sparked an idea for me. You were talking about the airlines. I think that investors are going to have to be very cautious about headlines and headline numbers. So for instance, if we’re… Let’s talk about airline traffic. Airline traffic has virtually disappeared, right? So when we look at some of this high frequency data like the TSA data of how many people are actually going through TSA checkpoints in U.S. airports, we see that the numbers have dropped from the millions per day to 150,000 to 200,000 a day. Any slight uptick from that 200,000 a day is going to be a huge percentage gain.

Dan Wiener:
And if we start seeing headlines touting big percentage gains from these deep, deep lows, we get a mistaken thought about exactly what’s going on. I’ll give you an example: GDP numbers, the gross domestic product, the measure that we all use to look at how big our economy is and whether it is growing or whether it is contracting. The thing about headline GDP numbers is the number comes out every quarter, but in its reporting, it is annualized, which means that they’ll take one quarter’s worth of data and make an annualized or annual yearly number out of it. So if we see for instance, in the second quarter, which we’re in right now, when the numbers start coming out as to how dramatic the economic decline was, those numbers are going to get annualized to something like 20% to 30% or even greater declines in the economy.

Dan Wiener:
The same thing’s going to happen if, I should say, if the third quarter sees any kind of rebound in growth, we’re going to see annualized compounded numbers that are just going to give people a false impression about how quickly and dramatically things are recovering. What do you think about that?

Jim Lowell:
I think you’re absolutely right. You’ve really got to understand that an increase of 100% in air traffic from today’s lows would still be woeful news in any given month or quarter for the industry. So you’ve really got to be able to not just parse the data, but do what we did, Dan, in our earlier incarnations as financial journalists and always consider the source, always consider what’s going into the shaping of the information that’s being projected and often loudly discussed in the media. I mean, no question investors seem to assume that the economic shark in the waters is going to bite someone else, but there are still plenty of sharks in this coronavirus waters that we’ve got to be mindful of.

Jim Lowell:
And to your point about economic data, May data obviously matters more to us than March or April data. June data will matter more than the May data, July data is going to matter as much or more as June data. The more current economic data we get, the more we’re going to be able to piece together a picture of not just where we’ve come from, but where we are. And once we have a much better fundamental sense of where we are, we can begin to map out where we may head, but it is still awfully early days to claim that you could have anything like a clear, forward-looking vision either for the economy or for that matter for the markets.

Dan Wiener:
Well, I think we’re facing a lot of near-term risks. I mean, I think at this point, it’s all health-related and the health-related risks are going to drive the economic risks. I think one of the biggest risks is the unrealistic expectations that there is a cure for the COVID right around the corner. And we got a great example of that this week, Moderna, the biotech company drove a rally in the stock market and in its own stock obviously when it reported on a very, very narrow study that suggested that their drug could create the antibodies or antigens, I’m not sure what the term is, that would give people the ability to prevent getting COVID.

Dan Wiener:
Then the very next day, when an independent research outfit said that the testing schema might not be completely valid, the stock dropped and the stock market dropped. So, I think people are getting unrealistic expectations on a day-to-day basis. They’re letting their emotions drive their buying and selling habits. There’s another unrealistic belief I think that we can stop all this social distancing right now. And I think it’s the summer, the warm weather apparently makes the virus less acute. And I’m worried that this is going to lead to another surge of cases once flu season begins in the early fall. So let me just say, I have one bit of optimism here, and that is that if we, and I think we may see a resurgence in cases, I think we will be a little better equipped to handle them.

Dan Wiener:
I think we are finally getting the personal protective equipment we need, the hospitals are now better staffed and better equipped, but I think it will be a devastating psychological blow for people if we see another big bloom.

Jim Lowell:
Yeah. I know we’re in agreement on that, and we’re also in agreement on the fact that we will at least be better prepared to manage what is very likely to be a recurrence of the crisis. As we head into the next flu season without a vaccine, it’s inevitable. The more, of course, markets think a vaccine is nigh, to your point, the more likely they’re going to remain high, potentially go higher, but we know that hope of and for a vaccine doesn’t guarantee immunity from economic nor market slides. And of course, we prepare our portfolios as we have been doing for 25 years with all of the risk assessments and analysis of current facts that we can know already in mind.

Jim Lowell:
It’s one of the reasons why our portfolios almost always have bond buffers, even cash buffers. And of course, the managers we invest in alongside of our clients also selected and imported into our portfolios based not just on our assessment of their return potential, but also on their track record of managing a myriad range of risks. Many of the managers we invest in have been managing money, not just for a handful of years, not just for decades, but their whole career.

Dan Wiener:
We’ve been talking to them constantly since this began. I mean, we do anyway, but we’ve gotten some pretty good analysis out of them as to what they see coming down the pike. And also, I think it’s important to remind investors that this is still a very short-term phenomenon. Yes, it is and it has been incredibly dramatic from a market standpoint, from an economic standpoint, from, heck, from a labor standpoint, it’s just, the drama’s amazing. But we will get through this, whether it takes six months, 12 months, 18 months to come up with a vaccine, given my decades of being focused on the health care industry and the biotech industry, I am completely convinced we will have a vaccine. I just can’t tell you when it will be here.

Jim Lowell:
So I think that’s a very important point, especially given that the media continues to obsess over sort of the losers in the crisis and the dangers that this pandemic obviously presents. And we often address the degree to which our client’s friends should pay attention to the media as a source of rational investment thinking. And of course, the caveat is that you and I appear often on the media, I’ll be on CNBC later tonight.

Dan Wiener:
I saw an article today that sort of amused me. There was a piece about how, quote unquote, “growth stocks have been outperforming value stocks for so long” that they quoted a couple of value investors saying, “Oh, it’s time. There’s going to be a big snap back. Value stocks are going to start outperforming growth stocks.” Man, I think I could have read that same thing a year ago, two years ago, three years ago…

Jim Lowell:
10 years ago.

Dan Wiener:
Yeah. The bottom line for us is we’re not interested in growth stocks versus value stocks. It’s really a lot of the managers that we invest with buy growth stocks when they’re priced like value stocks. So I think it’s very important to let people know not to put too much value on these articles about how there’s going to be a snapback and a reversion to the mean, and growth stocks are going to disappear from the face of the earth and value stocks will be the leaders for the next decade. I just don’t buy it and I don’t invest that way either.

Jim Lowell:
And we don’t need to buy it because, as you say, we’re agnostic value or growth. We want the best ideas, the best managers pursuing the best ideas and the best economies wherever those economies, companies lie. So, we run global portfolios for a reason. I would say that this week, you mentioned Moderna, that was obviously a big news item this week that really helped lift the markets. The other was, of course, we have had the Fed here in the U.S. and equivalents around the world moving really not just in terms of unprecedented magnitude of stimulus, but also in terms of the swiftness with which they’ve been able to deliver it into the marketplace.

Jim Lowell:
And we heard Fed Chair Powell on “60 Minutes” speaking to media over the weekend saying, his quote was, quote, “You wouldn’t want to bet against the American economy.” And Dan, I think you’ve said exactly that going back for a few decades. I mean, we would agree, we wouldn’t want to bet against the American economy, but that doesn’t mean that we don’t look inside of it and try to avoid industries that may or may not have more risk, but also pursue those sectors within it that clearly have opportunity and greater prospects for recovery. And I guess it’s also important to note that Chair Powell in his “60 Minutes” moment wasn’t suggesting that everything was going to be wine and roses from here on out.

Jim Lowell:
Obviously more hardships, surprises are in store, but he did project a kind of confidence about being able to temper tough times and provide a path to better ones, but compared to the politicking of the COVID issue, which is obviously only to get more of a rise from both sides of the aisles. He really carved out a niche that at least for an instant reminded me what leadership really is about and why leadership matters in times of crisis. But to get to Dan’s earliest and I think most salient point, look, medical data is going to matter more in the foreseeable future than economic facts and market actions overall.

Dan Wiener:
The economic data is just, it’s all in the rearview mirror and we already know that the economy is in a recession and we can’t really know, without the medical data. We can’t really know how we’re going to recover. But let me ask you this question, Jim. Since we do know that eventually we will recover and the lockdowns will come off and travel will begin again, you’ll be able to get out on your boat again. I want to know, what’s the first thing you’re going to do when we return to more normal times?

Jim Lowell:
You just buried the lede, Dan, I’ll be back on my boat and I’ll have three or four lines off of the stern and I’ll be reeling up dinner and putting it on the grill and inviting my friends and neighbors over for what I hope fairly soon will be a Jim Lowell fresh fish-fry. How about yourself?

Dan Wiener:
I will jump on an airplane and go to the West Coast to see my kids and grandkids. That has probably been the hardest part of this pandemic shut-in for me.

Jim Lowell:
Yep. I completely agree. Seeing friends, family, neighbors, celebrating our strengths in times of vulnerabilities, we’ll make the celebrations all the sweeter. On that uplifting note, this has been Jim Lowell…

Dan Wiener:
And Dan Weiner…

Jim Lowell:
… 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 is always welcome. And if you have any questions or topics that you’d like us to explore, please email us at info@adviserinvestments.com. Thank you for listening.