Lessons From the Pandemic Year

Jim Lowell:

Hello, this is Jim Lowell and I’m the chief investment officer at Adviser Investments. I’m here with another The Adviser You Can Talk To Podcast and I’m joined by Dan Wiener, chairman of Adviser Investments.

Dan Wiener:

Hey Jim.

Jim Lowell:

Hey Dan. Today we’re inviting you to join us as we look back over the past pandemic year of fears and ahead to what now looks to be a much brighter future. Dan and I are going to talk about some of the key lessons learned over the past 12 months and how we’re applying those lessons to your portfolios and our own, today. We’ll also discuss recovery investment themes and how we’re angling to catch them inside your portfolios. Dan, a little over one year ago, on March 11 to be exact, the pandemic was declared and its scope was a widening gyre whose reality and fear encompassed the globe. Today, despite the reality of the third wave in Europe, and of course disastrous mismanagement and South America, I’d say hope is the all-encompassing modus operandi. So let’s review how we got from fear to here.

Dan Wiener:

Yeah. Fear to here, no question. Fear to here and what a year. I think we have to give credit where credit’s due. The biotech and pharma companies rolled out these vaccines in an unprecedented fashion, really fast they got them tested. Then the government botched distribution, right? We got them approved and then distribution was just a total mess. And more than 530,000 people have died because of what I’m calling reality avoidance. People just didn’t want to believe, but we are on the road to recovery. I read, I think this morning, that something like 30% of the population of the U S has now gotten at least one shot. I’d love to say that our overweight to healthcare stocks have benefited dramatically. So far, it hasn’t, but I think our thesis holds that more innovation is going to lead to more treatments faster, which eventually will lead to more profits for the companies that we’re invested in. And so ultimately, I think we’ll benefit, our clients are going to benefit.

Dan Wiener:

But as I say it was a year, there are a lot of lessons here. First of all, I think the lesson to take away from the past year, number one, market timing. I know you’ve got plenty to say about market timing. I won’t go deep into it, but obviously Tuesday marked the bottom, the one-year bottom of the pandemic panic. And it just seemed like the markets were going to go into a further tailspin. In fact, they bottomed on March 23, 2020 and then started recovering very quickly. And just a little note on that, 78% total return year over year, March 23 to March 23, that is crazy. The third lesson I think comes from the second one, which is the point in time performance numbers are lousy barometers. As I just said, on a year-over-year basis on Tuesday, the market was up 78%.

Dan Wiener:

I don’t think I have seen a one-year return of 78% in the 30-plus years that I’ve been doing this. Cathy Woods, ARK ETF, the one that has been in the news so much lately, one-year return, 180%. You really just can’t look at numbers like this and think, “Oh, this is how it’s going to go, going forward.” So point in time performance numbers, not very good from an investor’s standpoint in terms of understanding what the markets can deliver over time. One more lesson: Lockdowns led to too many people spending too much time online and the birth of the Reddit trading, non-fungible tokens, Wall Street’s ability to create trendy opportunities like SPACs. Wow. Into the vacuum came all these crazy investment opportunities. And I think Jim, it speaks a lot to how human nature can upend the markets. You often have a lot to say on that. So hit me.

Jim Lowell:

All right. Good. That’s an excellent review of lessons learned by the way, Dan. And in terms of human nature in the market, of course, the market is a composite of all the humans that are behaving within it. And no question about it, we’ve seen dramatic momentum, velocity of money, trend-following into in particular large-cap growth technology names. And of course, trend-following always begins with that self-fulfilling sense of heading in the right direction because everybody else is heading that way. And then the danger is the longer one heads in that direction without any real disruption. You’ve had almost 12 months of a hockey-stick recovery in the markets.

Jim Lowell:

The more one may actually think that it isn’t the acting of everyone heading in the direction that’s determining where you’re going, it’s the actual goal that’s drawing you to it. But that simply is not the way investing works. Long-term, believing that heading in the direction will enable you to achieve the goal of gains is different from a disciplined plan and approach to achieving your particular goal. Following an objective to a goal is very different than following the herd, wherever they wander, first up the cliff. But then eventually as we know, if past is prologue, over the cliff, something we would not recommend.

Dan Wiener:

Well, you’re seeing that right now. GameStop, the poster child for the Reddit Robinhood trading phenomenon that you and I have been talking about for a couple of months now. And we’re not alone, everybody’s been talking about it. But GameStop reported their earnings yesterday. Remember earnings? Remember earnings were supposed to be the thing that moves stocks? Not herd mentality. They didn’t have a very good report. And the stock is, for those who were pushing, saying that GameStop was going to 1,000, I hate to tell them it’s down in the hundreds now. Reality finally bites. And when it does, we’ll lose money or already have.

Jim Lowell:

Let’s talk about valuations. You just mentioned PE, the most common indicator of where one may or may not want to head. Let’s unpack that a bit because you’re absolutely right. When it comes to whatever the GameStop trader name is, Roaring Kitty, I always want to call them Hello Kitty, and others. There’s a real danger to following the momentum, the velocity, that the day-to-day trading gambit. They’re really gambling with money, not investing it. But there are areas of the market that have real companies, real earnings, excellent management, necessary goods and products, and technology certainly falls into that camp. But are we in an overvalued point in this market, in the U.S. market in particular?

Dan Wiener:

I don’t think so. I think obviously there are always pockets of the market that are overvalued. But I feel like you’re leading me on here, Jim. You want me to talk about this value versus growth, the value versus growth argument that we have all the time. I shouldn’t call it an argument, it’s a discussion because I think we’re on the same page on this. But you’re seeing it play out right now in the markets. Since about the beginning of September of last year, there was a very noticeable flip in the types of stocks that were rallying ahead around September of last year, large-cap and even small-cap value stocks, the stocks that are typically considered value stocks, industrials, financials, the stocks that populate the popular value indexes, began outperforming the growth stocks, the big techs like you were talking about, and the consumer discretionary companies.

Dan Wiener:

So the meme, which is something I’ve been talking about a lot lately, the meme was that value has rebounded, has returned, and that now we’re off to the races and value will outperform growth. And we saw that meme pop up two or three times in the last six months, recently it’s turned the other way. The meme is still there, but in fact, growth stocks have begun to outperform again. And this all goes to this question of overvaluation. Is the market truly overvalued? If we look ahead, it’s very hard to tell because companies are still pretty cautious about making predictions about where their earnings are going to be. And if they’re cautious about where their earnings are going to be, it’s very hard to put a PE or a price earnings multiple on the market or on stocks. And so again, it strikes me anyway, that this is, as I think you often say, it’s a market of stocks, not a stock market. So it’s stock by stock.

Jim Lowell:

One of the things that we certainly know from being 30 years in this business is that there’s always the new, new thing, whatever is shiny and glittering is naturally eye-grabbing. And certainly paying more than $60 million for an NFT from the artist currently known as Beeple is a phenomenon worth watching. And as an historical artifact, people’s piece may hold value, but I’d rather wait and see it in a nano museum for the price of a day’s admission rather than for $60 million.

Dan Wiener:

All these meme-type investments have been losing value lately. A lot of SPACs are now trading under $10, which was their offering prices. A lot of these NFTs are beginning to lose value. The meme stocks, like as I mentioned, GameStop, are losing value. And I attribute this again to the fact that the economy is beginning to reopen, that people do have vaccines in their arms, that the weather is getting better. And if people go outside, then I really recommend go outside, breathe some air. Don’t sit in front of your computer. As these people get away from their computers, we’re going to see, I believe, less interest in some of these silly investments that have driven the headlines, but have also driven a lot of investors to despair.

Jim Lowell:

One area of the market that we know is a constant source of headline-grabbing salaciousness is the bitcoin issue. And I just want to talk briefly about that quickly and then also just quickly revisit the value versus growth debate that you brought up. Ultimately, we think digital currency is in the not too distant future. In fact, the future’s really been here for more than a decade. Bitcoin entered our atmosphere in 2009 before rocketing to the stratospheric prices we’re seeing today. And we know that Fidelity, major banks, even the Federal Reserve are not only weighing the ways one can construct a digital currency that has the characteristics of current currency, something bitcoin doesn’t, namely fully regulated, fully transparent, stable store value.

Jim Lowell:

Federal Reserve Chair Jerome Powell said this weekend that Bitcoin might be a kind of replacement for gold and other kinds of speculative instrument, but not for the dollar. But still we think that we’re not far off, maybe even millennial children, our grandchildren will likely go off to school, not just high school, maybe elementary school with digital wallets for lunch. So it’s a phenomenon that we’re paying a lot of attention to because it will have significant market weight, when in fact, it devolves into a currency one can trust.

Dan Wiener:

Listen, I can totally get on the bandwagon for the notion of a digital wallet. When the Federal Reserve chairman says that bitcoin is a replacement for gold, I say, okay, I don’t like gold. I’m certainly not going to like bitcoin. The current story or narrative is that bitcoin will replace gold as an inflation hedge. Well, sorry, but gold has not been an inflation hedge. Gold at its peak back in the ‘80s was over $2,000 an ounce on an inflation adjusted basis. Where is it today? It’s nowhere near that. So I don’t understand how people can say that gold is an inflation hedge. And if bitcoin is going to be the replacement for gold, sorry, it doesn’t resonate for me.

Dan Wiener:

All you have to do is look at gold’s price, for instance, over the last six months or so as expectations for inflation, and we haven’t even talked about that yet, as expectations for inflation have been rising, gold’s price is actually not even kept up. It’s fallen. So I don’t really get the gold as inflation fighter asset. You want to put a little gold in your portfolio, buy a necklace, put it around the neck of someone you love. But as far as an investment, sorry, I don’t buy it.

Jim Lowell:

We like to say that it’s not an investment, that it’s effectively sort of a tradable speculative move. But you’re right, it has failed to deliver on any sort of inflation-hedge definition. Of course, we haven’t needed to hedge inflation. And since you brought it up, maybe we’ll go there next, which is that fear of inflation, I’d say even of hyperinflation seems to be gaining a lot of headlines, mainly due to all the stimulus activity that’s been safeguarding our economy and helping the global economy. Do you think such fears are well founded and why is inflation feared as much as it is currently?

Dan Wiener:

Inflation is feared because everybody looks back to the ‘80s and says, “Oh my God. We’re in trouble if it soars.” But hello, I heard about inflation being right around the corner in 2008 during the great financial crisis. We heard about it last year when the government started with huge stimulus packages. We have not seen any inflation. We’re getting a lot of inflation talk now again, because Larry Summers, who is pointing to the current $1.9 trillion stimulus package and saying, this plus a big stimulus around infrastructure spending is going to cause inflation. Let’s be very clear. First of all, the biggest inflation fighter in this country, the Fed, is not quiescent. They’re very, very on top of what’s going on in the economy.

Dan Wiener:

Unemployment remains very high. The headline number may be going down, but we may be lacking something around 10 million jobs relative to where they should be. Growth in the economy, even as we’re recovering, it’s subpar. It’s nowhere near where we would be if there had been no pandemic. Yeah, we may recover. GDP may recover by year-end to its pre-pandemic peak, but it’s not going to be anywhere near where it should be had we not gone into an economic lockdown to begin with. If you want to talk about inflation, as you and I have, let’s talk about bitcoin and let’s talk about those digital NBA videos. And I don’t know, Jim, do you have a sneaker collection? If you do, there’s probably quite a lot of inflation there. But again, we don’t have to get into these crazy other assets.

Jim Lowell:

Well, I have a sneaker collection, Dan, but I think my most expensive sneaker costs about $22. In terms of inflation housing maybe, the housing sector, which we certainly pay attention to, it’s a huge job creator indicative of economic health, clearly continues to go like gangbusters, even though we just saw new and existing home sales dip a bit in February. That was due to what we call a growth problem, namely the fact that there’s not enough inventory and some weather-related impingements as well as some supply side issues for the construction materials. There’s definitely inflation in terms of housing prices as a result of that supply versus demand squeeze, and there’s inflation in prices relating to things that go into construction, again, due to supply demand squeeze. And you’d already talked a little bit about the potential for inflated stock prices and the need to pay attention to valuations in that, in your comments on value versus growth.

Jim Lowell:

Let me just revisit that one more time because I think it’s important. It’s we see this story literally every day of value stocks about to be taking a turn for the better versus growth stocks. And from our view, from our investment view, its really valuations, not value versus growth. And if you look at some of the more popular factory ETFs, say Vanguard, Fidelity, iShares value factor ETFs, they all have value in the name. A third of their holdings are tech stocks. Managers with track records of finding great companies or better valuations in the market and peers add real value, that’s capital appreciation, over time, even if they don’t have value in the fund’s name. So we were just opening up a line of thinking about the way in which the velocity and volume of money pouring into the S&P 500 large-cap names is creating an unwanted problem for investors seeking to buy trustworthy high quality growth. And for that matter, value names as well at reasonable prices.

Jim Lowell:

And so from our purview, that means, well, if the S&P 500 is rising both, is floating both growth and value prices ever higher, we need to look elsewhere for better valuations for both growth and value names, mid, small cap, domestic, foreign. So that’s what we do. And we also know that none of our current managers funds have quote unquote value in the name, but that each manager’s pursuing values in their respective marketplaces and that one of our standing core portfolio managers that’s often thought of only as an aggressive growth fund shop has historically, and is currently holding names in the most beaten-up value sector of all, namely airlines. So I guess that’s a long-winded way Dan, of saying that just because value is in the name of a product, and just because value isn’t in the name of a product doesn’t mean that it owns or doesn’t own value stock. From our point of view, it’s valuations that matter most and it’s investing in managers, right alongside our clients, who have a track record of being able to find good values in the growth and value marketplace.

Dan Wiener:

That’s exactly right. As I like to say, I like growth managers who use a valuation metric to buy growth when it’s cheap. I’m going to shift this a little bit, Jim. If we’re talking about values, let’s talk a minute or two about the bond market. Okay? Yields are rising. So if yields are rising, bond prices are falling, they’re better value there. You think bonds can give stocks a run for their money?

Jim Lowell:

Well, yeah, in our view, of course, it’s not a question whether they give stocks a run for their money, it’s a question of how do we incorporate both into a client’s portfolio so that we’re best able to mitigate risks and manage reasonable returns over any long-term time period. And so bonds’ role inside of our portfolios hasn’t changed. In our growth-oriented portfolios, they’re there to help provide bulwarks against stock market volatility. In our income portfolios, it’s absolutely become harder to deliver reasonable income in a low-yield environment. With a tenure at 1.75% yield, does that give stocks a long-term run for their money? No.

Dan Wiener:

Not a chance, 1.75%. And actually yields have come down a bit since that peak. But to earn 1.75% over 10 years doesn’t look very attractive to me.

Jim Lowell:

It looks like you’re handcuffing yourself to almost a sure bet about losing the purchasing power of your dollar, versus just even a low historical average run rate of inflation of 2% or 2.5%. So not giving stocks a run for their money right now. One thing we haven’t talked about at all is China, Dan. And as you know, I’ve been spending more and more time trying to understand China, China’s economy, China’s culture, how it impacts not just their market, the global market, but our own market. And we know that the Biden administration, for example, just had a multi-day meeting, very high level, in Alaska, that went nowhere. That actually was almost as contentious as Trump’s meetings with China had been. Biden is really understanding that we need to toe a tough, but—hopefully the compared to the prior administration—a much more diplomatic and productive line when it comes to China, because China is the world’s second-largest economy.

Jim Lowell:

It’s not going to slow down. It’s not even going to play nice or fair. And this year, we know it marks the end of their first 100-year plan and the launch of the next 100-year plan. Oh, and by the way, according to China’s politburo, they achieved everything they set out to do in their last 100-year plan.

Dan Wiener:

Of course they did.

Jim Lowell:

Of course, they do. But technologically, militarily, geographically, look, China is expanding the range and reach of its power and influence, and China’s need for more energy, agriculture, clean water, construction, housing solutions, you name it, for their 1.4 billion population will obviously place increasingly greater demand on natural resource supplies than given China’s environmental and ethical track records. Some might think that China may pay a little heed to the environmental and ethical issues relating to feeding their own population’s and economy’s dragons. But that’s an oversimplification.

Jim Lowell:

We just saw the head of the People’s Bank of China, Yi Gang, say in a speech, “Studies show that climate change may make extreme weather more frequent and lead to greater loss,” said Yi. “Meanwhile, green transition may cause the value of carbon-intensive assets,” that’s oil, and coal “to fall and sour the balance sheet of firms and financial institutions. This will heighten credit risk, market risk and liquidity risk and further undermine the stability of our entire financial system.” So quite clearly, China is aware of the fact that its own impact on the environment could have a negative impact on its economy. Maybe that brings them around to greener thinking. But from an investment standpoint, anywhere China turns for its demand for supplies should be where investors would want to allot at least a portion of their portfolios; technology, robotics, digital currency, all themes worth pursuing. Not just globally, but with specific regard to the world’s two superpower economies. That’s the U.S. and China.

Jim Lowell:

So one of our managers is far more expert in China than we are, and thankfully so. Got a good track record of being able to turn over some of the stones in China. Do not make the mistake of thinking Chinese red chips are anywhere near the equivalent of our U.S. blue chips, but they may be over the next few decades. So it is an area of interest around the globe where Europe, of course, remains at least for the moment, in a reversion under its third wave and sort of a lockdown and a virtual shutdown of economic activity as they try, yet again, to combat COVID-19.

Dan Wiener:

Jim, I think we’re going to have to do an entire podcast just on your thoughts on China. But at this point, we probably need to take it out. I’m a big believer that you should keep podcasts short and sweet, not long and boring.

Jim Lowell:

Dan, I could talk about China for an hour’s worth of a podcast, but I completely agree, shorter is better and often sweeter. So let me take us out with these final comments. We continue to think that medical data is the most important criteria for framing assessments of economic and earnings data, but that barring a major negative on the vaccination front, economic, inflation and earnings data will begin to matter more and more as we push through this year. We further think that more stimulus is more, not less likely. Whatever it takes to safeguard our economy, we’re in favor of. From the Fed, its political fiscal partners, their equivalents around the globe. There are more reasons to be less pessimistic and to be more optimistic in 2021, but that doesn’t mean we’re letting our risk guards down.

Jim Lowell:

In fact, for more than 25 years, it’s been our focus on risk that’s enabled us to pursue reasonable returns in a calm and collected manner, no matter how volatile the current environment may or may not be. And so on that note, this has been Jim Lowell and Dan Wiener from Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. And if you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts, and your feedback is always welcome. If you have any questions or topics that you’d like us to explore, like China, please email us at info@adviserinvestments.com. And thank you for listening. And Dan, thank you again for a great conversation.

Dan Wiener:

Thank you, Jim.