Special Podcast: Dan Wiener and Jim Lowell on the Election

Jim Lowell:

Hello, this is Jim Lowell and I’m the chief investment officer at Adviser Investments. And I’m here with The Adviser You Can Talk To Podcast. Today I’m joined by Dan Wiener, chairman of Adviser Investments. And we’re recording this on the morning after election 2020.

Dan Wiener:

The morning after the day of.

Jim Lowell:

Dan…

Dan Wiener:

Waking up uncertain.

Jim Lowell:

To say the least. I mean, let’s talk about the knowns and the unknowns this morning, the day after one of the most tumultuous elections either of us has ever experienced. What we know, we saw record early voting, perhaps some of that not surprising given COVID-19 fears and the greater promotion of ways to vote remotely. But that number, almost 100 million votes cast, certainly significant, as we know, still being counted. And we thought the probability for this election being contested was high, and we think it remains high, but first the counting of actual ballots has to be completed. So, given the consensus among pollsters, the closeness and the divide between the two contenders may be a bit surprising, but our job is to manage the risks of the near term model, and stay focused on the long-term opportunities that any kind of fear and confusion present. On that note, Dan, what are your thought?

Dan Wiener:

I think we could say that just about any time, don’t you?

Jim Lowell:

I do.

Dan Wiener:

The markets, there are always hard near-term muddles and fears. I don’t think we’re going to be the first and I don’t think we’re going to be the last to have an opinion on this. And really, I think the most important thing is that it’s all opinion. The facts are that the votes still have to be counted. We know about some Senate races, we know about some house races. The Big Kahuna, we don’t know about that one yet, but from an investment point of view, yesterday’s market rally seemed to me, it felt like a collective sigh. It was like a sigh of relief. Whatever happens, at least the voting will be over. Right?

Jim Lowell:

Correct.

Dan Wiener:

The market was up almost 2%, depending on how you measure it. But when I look back, election days, I guess are always fraught. And so you always, I guess, get some kind of a relief rally. Election day 2008, the S&P was up over 4%; 2012, it was up a little under 1%; 2016, the Trump election, the S&P gained just half a percent. And yesterday we had another decent day. So really the question is, what happens next?

Jim Lowell:

Absolutely. And one of the things that I think you’re absolutely right about is that the market is very quick. The market is a manifestation of all the investors in it, very quick to price in either the sense that uncertainty and/or volatility is going to be on the increase or going to be on the decrease. And there also is always that moment of relief when one big unknown is thought to be removed from the table. Clearly, this big unknown has yet to be removed from the market’s slate. But overall, I think you’re right. Investors are sensing that the end of that macro-uncertainty is near and given that 2020 has seen a preponderance of uncertainties swirl into the marketplace, it certainly will be welcome once we know how that election dust settles no matter who wins.

Dan Wiener:

Well, we’re falling into a trap, Jim. We’re falling into the same trap that so many people do, talking very, very short term. Oh, the market was up on Election Day. Oh, what’s it going to do over the next day or two? We’ve always, I think prided ourselves on being long-term investors, having a long-term focus, telling our clients to always have the long term in mind. And around presidential elections and stock market returns, I’ve been keeping track now for quite a while of how the stock market’s done over the last few elections, both from Election Day, as well as from Inauguration Day. And boy, you can pretty much run the numbers any way you want.

Dan Wiener:

From Election Day going forward, comparing Trump’s first term with Obama’s first term, the Trump performance is better by about 20 some odd percentage points. If you take it from Inauguration Day, the Obama period, better by about 40 percentage points. So what that tells me more than anything is that the short term can determine which way things go. But if you take a long-term view over both presidents’ terms, the market was up. It’s just if you try to make comparisons over very short periods of time, you pretty much can run the numbers any way you like.

Jim Lowell:

So Dan, you founded Adviser Investments 26 years ago, a period that’s now included six presidential elections, and you just covered those bases wisely and well. And it’s not that we ignore elections, and we certainly don’t ignore policymakers because policies can have a dramatic impact on whether the economy grows or shrinks, whether jobs are created or lost, whether free trade is increased or decreased. But we always take a deliberate, reasoned, disciplined and, key word, diversified approach to investing. Maybe you can say a little bit about why we do that and I can chime in as well.

Dan Wiener:

Well, I don’t think elections, per se, change our strategy. Every election yields winners and losers, both in the election itself and among the public companies that we’re investing in through these active managers that we work with. And we have a lot of faith, we have always had a lot of faith that we’ve been able to choose really, really top-notch active managers in this business who can make the choice between the winners and losers. And I haven’t even had time to talk to you about this yet, but I was just reading a paper that just came out. Vanguard did a paper—now Vanguard as you know, is the indexing king—on active management, they had a universe of 2,600 active managers of which almost half outperformed their benchmarks. This is Vanguard talking about half of active managers outperforming their benchmarks, which seems out of left field, given how often they claim that indexing outperforms active management, but they use stats that you don’t normally see.

Dan Wiener:

And they really, really dug into this. And what they said was, and this is something you and I’ve talked about quite a lot, is that there are periods of underperformance for active managers. And investors, to outperform, have to be cognizant of this, have to be educated that, yes, active strategies will underperform from time to time. But as you and I know, if you find a good manager, their outperformance will always overwhelm the periods of underperformance. And I think one of the most important things is that when you look for an active manager, you look for managers who not only are smart at picking stocks, but pick stocks outside of their benchmarks.

Dan Wiener:

If they’re just tracking a benchmark, then they’re pretty much giving you an index fund at a higher expense ratio. This out-of-benchmark management is some of the best diversification you can put into your portfolio. And I think I’ve taken this around the circle to basically say those active managers are the ones who are going to make the determination as to how this election and how the economy and the markets move forward, who the winners and who the losers are going to be.

Jim Lowell:

I think you’re absolutely right. And we know as active managers of active managers that diversification among them, not just in terms of capitalization, by which I mean blue-chip stocks, smaller-cap stocks, but also regional. We invest globally, our managers are looking for the best ideas, no matter where their domicile. And then another key component to our diversification discipline is in asset allocation. We’re always looking for ways to minimize, mitigate, mollify risk. One of the ways we do that, especially in virtually all the portfolios that aren’t 100% earmarked for equity, is to include bond buffers, sometimes cash reserves, which we currently have, not just as a defensive bulwark, but also to keep some powder dry for the opportunities that uncertainty and crises create.

Dan Wiener:

One of the things you didn’t say, and I think it’s critical, is you didn’t make that comment about, “Oh, we want value managers and we want growth managers.” We don’t. You and I talk about this with our investment team and our research team all the time. We have managers that buy growth companies and do it with a value orientation, looking for growth companies when they’re cheap. We have managers who look for the value-oriented type companies, companies that might have a big dividend or that might be selling at a low price to book or price to earnings ratio, but where they think there’s a catalyst for out of benchmark growth. So I think it’s always worth pointing out that when we talk about allocation, when we talk about diversification, we’re talking about strategies, we’re talking about global diversification. We’ve always had an overweight to healthcare because we believe it’s a sector that long term is really going to deliver and has delivered outperformance. But we don’t talk too much about growth versus value because it’s an artifice of the market. It’s not real world.

Jim Lowell:

Agreed. And of course, what we’re most interested in is managers who have a track record of being able to pursue opportunity and deliver on those opportunities, whether they’re found in the growth or the value side of the traditional marketplace. We also probably should point out that we’re diversified among fund families and the research that our team does, not just on managers, but also on the underlying companies to make sure that those companies are completely solvent, driven to shareholder interest, and low-cost services is something that’s of paramount interest to us. And while we’re probably best known for our expertise in Vanguard and Fidelity, we invest in a range of stellar fund families whose managers continue to help us further diversify, not just the portfolio in terms of holdings, but also the portfolio in terms of the thought processes that are included inside of each and every client’s portfolio and ours, of course, since we invest right alongside it.

Dan Wiener:

It’s all about the managers, right?

Jim Lowell:

Yep.

Dan Wiener:

It’s really not about the fund companies, except from the standpoint of do they service those funds well? Do they keep their expenses low? What have you, but in the end, it’s really about the managers. Can we find, and I think we have found, some of the best managers in this business.

Jim Lowell:

It’s why we trademarked the phrase buy the manager, not the fund™.

Dan Wiener:

Correct.

Jim Lowell:

Once the election outcome is in fact behind us, we still won’t be off to the races. The pandemic is still among us and data suggests it’s getting worse in Europe. Second wave here, the economy may be improving, but we’re nowhere near where we were a year ago, much less where we could have been, if we’d simply kept growing at that marginal 2% annualized rate we saw in the last half of 2019. And our federal debt and deficit have obviously exploded trying to safeguard the economy from the pandemic. So, how do we address this in terms of our investing?

Dan Wiener:

I think it’s really a question about being cautious about understanding, again, that the short term is going to be full of noise. It’s going to be full of static. You have to have a long-term view and timeframe and objective, and you have to match your risk tolerance. We throw that term around a lot, but it actually is a question of can you handle the short-term risk that you inevitably will face on the path to succeeding at your long-term objective, your long-term strategy. And when I talk about that, I often think about investors who have shifted horses, or change horses midstream. Mixing metaphors here, to try and outpace or outrace what the market’s doing.

Dan Wiener:

It doesn’t work. You can’t do it. You can’t shift your strategy midway because of short term machinations in the market. 2020 is the perfect year. We had all-time highs in February and then we had the pandemic hit, and the market had one of its steepest drops in history. And then one of its steepest recoveries in history. We hit another record in September, and as of today, I think we’re about &% or 8% below that all-time high. This is what happens over the short term, but take a long term look at the market and all of the things that have hit us over the decades. And it’s a pretty strong, upward-seeking line if you’re a stock investor and you have a long term perspective. Gosh, we talk long term all the time, but it really… it’s not like there’s a new solution out there in the marketplace. This is it.

Jim Lowell:

One of the things that we talk about when we talk about long-term investing is, of course, in the immediate term, market prices reflect everything investors think they know. So that whole litany that we just ran through of worries and concerns and potential freshers aren’t unknown and prices reflect the fact that investors are considering whether or not, and to what extent they may or may not impact economic growth. What we have seen so far this year, especially climbing out of the second quarter’s pandemic hole, is that our economy thanks absolutely to Fed, fiscal and even furlough measures has been able to return to a slow-recovery, not no-recovery mode. And while we think that there’ll be challenges to that recovery, especially over the next, let’s say, six months, three to six months, which a vaccine may or may not alleviate in sort of an instantaneous manner. We have no doubt that we will see more stimulus, not less stimulus measures and not just domestically, but globally as the world economy really tries to write itself from the pandemic that really swept all economies off the table in, I would call it, a historic moment.

Dan Wiener:

Give me a V, man. We talked about the V-shaped recovery and the fact that the V is turning into something more of a K, it certainly is slowing down. But as you said, we have at least a slow recovery, not no recovery, but we’re now looking ahead to, we’ve already passed the V of vote. Now we’ve got the vaccine that we need to see, to really see our economy begin to open up again and see growth come back. We have a long way to go. And I think that that’s something that investors are going to have to keep in mind that it’s not going to be a quick rebound and off to the races again.

Jim Lowell:

I think that’s true. And I think that that gets us to the point of setting expectations because of course the stock market’s gains since the second quarter have been spectacular enough to see the market actually return to positive territory for the year. And that may give investors a false sense of the inevitability of this market continuing to gain. And while we certainly hope that that will be the case, we think that setting more realistic expectations would have one looking at, at best, sort of a stair-step pattern over the next six months or so in this marketplace.

Dan Wiener:

At the moment, with the stimulus and the Fed on our side. Tomorrow we have another… well today they started a two-day meeting. Tomorrow, the Fed’ll come out and tell us that they haven’t changed anything, but that’s probably par for the course and also the right way to think about it. But we’re in a period of low bond yields, that’s one area that investors are concerned about, rightly so. And I think one of the most critical things for investors today is to protect themselves from reaching for yield, by taking too much risk in an effort to find higher yields in areas where either they are unfamiliar with the asset class and the way it moves, or where they simply are cutting off the legs of a well founded and supported investment strategy. Bonds still have a place in a portfolio despite their very low yields, but you have to have realistic expectations about both what the stock market gains are going to give us, as you said a second ago, and also how bonds and various types are going to be able to protect you in the months ahead.

Jim Lowell:

As our bond guy, Chris Keith, likes to tell us when it comes to bonds, the yields are always highest before there are no yields, meaning the companies go belly-up. So there certainly is that risk of investors reaching for yield in places that they simply don’t know enough about.

Jim Lowell:

Dan, we’ve been saying for months that medical data is the most important criterion for framing our assessments on the economic and earnings data. And I think we can say that that’s still true, but that now with both more current earnings data, we’re beginning to see that the safeguards are working. Companies’ managements are definitely right-sizing rapidly, in some areas to meet increased demand, in other areas to try and offset dramatically decreased demand. So what are your thoughts on a vaccine and maybe even what no vaccine over the next three months, if that were to be the case could do to expectations in the market?

Dan Wiener:

Even if tomorrow, some company said, “You know what, we have a successful vaccine that’s been approved, we’re going to begin manufacturing it.” It’s going to take months to distribute it. And it’s going to take even longer before we can inoculate enough people. I was joking with someone the other day, sort of like these stickers that people get when they vote, they get a little sticker that says, “I voted,” are we going to see stickers that say, “I’ve gotten the vaccine?” And so, people have the vaccine, are they going to walk around without masks on and could this prompt another wave of infections if we don’t have enough people inoculated at the right time or right away. I’m going as stir crazy as everyone else trying to stay home, keeping a mask on, not seeing friends, but I think we have to be prepared for many, many more months ahead before the economy can really, really open up.

Dan Wiener:

We’re heading into winter, a lot of the restaurants that were able to do outdoor dining and keep some people employed and keep people happy by having some outdoor opportunities now are going to have to shut down in this cold weather. The tenting doesn’t really work because obviously if you tent, you are trapping the virus, if someone is sick within the confines. So I think we have to be realistic about what to expect over the next few months, but again, we have to take a longer term view as investors, and I would love to see a vaccine tomorrow, but I don’t have my hopes up that it means I can go to my CVS in a week and get a shot.

Jim Lowell:

We’re in agreement on that. Dan, let’s each give a final thought. Words of wisdom, perhaps on a more positive note from you about where we are and where we may be heading.

Dan Wiener:

Well, I’m an optimist. I’m an optimist. I believe that U.S. companies are some of the best companies in the world when it comes to innovation. I believe that there is just a ton of R&D going on right now that will improve all of our lives, both here and abroad. And I think that keeping a diversified portfolio of excellent, active managers, understanding the risks that you’re taking, but taking a long-term view. I think, I think that is the way to build wealth over time. And isn’t that really what adviser investments is all about and what these podcasts are all about, which is to talk about how to get through the day to day, the week to week, the month to month, and keep a long-term perspective on maintaining and building wealth as we go through life.

Jim Lowell:

Excellent. On a concluding note, I’ll just say that whatever challenges we face as individuals, communities, nations, there’ll always be those who strive to lead us through difficult times to better days. And of course we count ourselves among them as your adviser. And one thing is absolutely certain. We haven’t changed our investment discipline based on what others fear. Instead, as Dan just spoke to, for 25 years, we’ve invested based on the facts we know, and no matter how volatile the next 25 days, 25 weeks, 25 months or years may be, we look forward to helping you secure your financial future every step of the way. On that note, this has been Jim Lowell…

Dan Wiener:

And Dan Wiener.

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, and of course your feedback is always welcome. And if you have any questions or topics that you’d like us to explore, please let us know at info@adviserinvestments.com. Thank you for listening.