Taking Stock: Dan Wiener and Jim Lowell’s Mid-Year Market Assessment

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. Today, I’m joined by Dan Wiener, chairman of Adviser Investments, and we’re going to present a mini mid-year market assessment on where we have come from and where we think we’re heading for the second half of the year.

Jim Lowell:
Of course, to say the least, the first half of this year has been surprising, volatile, frightening and hopeful. With medical data reflecting reopening risks, alongside morbidity rates that are less drastic, massive Fed and fiscal stimulus measures providing a safety net underneath the economy and, by extension, the markets, investors may be feeling that the worst of times are behind not ahead of us.

Jim Lowell:
Dan, do you think that that means investors should throw at least some caution to the wind and not fight the Fed?

Dan Wiener:
Well, there are two questions here, Jim. The first is this fighting the Fed, let’s talk about that first. The old belief on Wall Street is you can’t fight the Fed. In other words, if the Fed is cutting interest rates or they’ve left interest rates very low, that’s good for the stock market. It is one of the reasons we’ve seen the stock markets continue to rise in the face of this pandemic.

Dan Wiener:
That you can see. What you can’t fight is what you can’t see, and that’s the coronavirus. You talked about morbidity rates having been less drastic. That is true, but we are seeing a resurgence of cases across the United States and that is concerning. So, what do you say to that?

Jim Lowell:
That’s right. We’re even seeing across the way, Australia, Melbourne, going back into shutdown mode, lockdown mode for, I think, another six weeks effective today. So really, as we talk about the global pandemic and its impact on economies and markets, there are so many unknowns that impact the kinds of drivers that fundamental managers like us are well-schooled in following. Things like earnings, economic data, inflation gauges, all of which are relatively suspect.

Dan Wiener:
Right. You talked about throwing caution to the wind. I think that there’s been a little bit of that recently in the stock market, particularly because we’ve seen a couple of one month, sometimes two months’ worth of data, economic data, that suggests this very, very dramatic V-shaped rebound off the bottom of what was a very dramatic decline, right? The start of the recession was in March. We saw March and April data, it just cratered, and so we’ve seen these quick V’s off the bottom. The question is whether these are bounces that are going to lose momentum in the coming months or not.

Jim Lowell:
Correct. A V-shaped recovery means as quickly down, as quickly recovered. Certainly, some of the data that we’re seeing from June, obviously more meaningful than May or April data, suggests a recovery trend from the worst of times to slightly less worse times, but they don’t suggest that all the difficulties are behind us. In fact, as we know, as you just mentioned, we’re in the midst of either the ongoing first wave or a second wave, depending upon how you characterize it, en route to another flu season without a vaccine for COVID-19.

Dan Wiener:
Yeah, and I think all this conversation, this argumentativeness about first wave versus second wave. Heck, what about new wave? It doesn’t matter what you label it, the question is are infection rates rising? Are death rates rising? Are hospitalizations rising? Do we have enough equipment to keep people alive if they suffer from exposure to and catching COVID-19? That’s what really matters.

Dan Wiener:
Now the big debate, of course, it’s early-mid-July and the big debate is, are we going to reopen the schools? There’s a part of the government that’s saying, “Yes, we just have to open the schools, doesn’t matter.” I’m very fearful of what this … the teachers don’t want to go back to school if there aren’t plans in place to protect them, and I’m very fearful for the kids. I’ve got two grandkids, I’m not ready to see them go back to school, and I know that their parents, my kids, are not ready to send them back to school either.

Jim Lowell:
Extrapolate the particular to the universal, and what we know is that all of the states that opened early and on scale are precisely the states, southern and southwestern states, that are experiencing, not just a dramatic resurgence of infection rates, but a record setting rate of infection. So schools, one epicenter where clearly the virus can be spread, sports arenas another. The sense that life is going to return to normal quickly, I think, is overblown.

Jim Lowell:
That of course, doesn’t stop the daily headlines from basically going in two directions. I woke up this morning before this podcast and on MarketWatch, I saw two headlines right on the main page. The first was, “Stocks are poised for a 40% drop,” warns one economist, who says the current climate feels a lot like 1929. Then the second headline was, “The stock market is setting up for a summer of gains,” another forecaster predicts. Dan, how do you sort through that?

Dan Wiener:
I love the 40%, right? This is the old 40% rule. For those who aren’t familiar with this, when you see predictions of 40%, it’s the old rule that, well, I’m not saying it’s absolutely going to happen, but if it does happen, I’m going to look like I predicted it. But if it doesn’t happen, I didn’t give it a better than 50/50 chance. I mean, this is a famous, famous rule among forecasters, just predict 40%. 40% chance. It blows my mind.

Jim Lowell:
So, another persistent headline is one that claims that value stocks are going to make a comeback. I know we’ve talked about this in the past, but these headlines persist. Value versus growth stocks, headlines claiming that effectively all growth stocks are way overvalued, all value stocks are way undervalued. What do you think?

Dan Wiener:
One of my favorite topics. I mean, this is the old stopped-clock thing. A stopped-

Jim Lowell:
Yeah, right twice a day.

Dan Wiener:
Even a stopped clock is right twice a day. The value is going to surge and growth is going to fall back argument has been made, Jim, I don’t know, how many times in the last five years? Twenty times? Every time you get one two-week period of value outperforming, it all comes back. But I have a couple of questions about this. Number one, why does it have to be either/or? Why does it have to be value or growth?

Dan Wiener:
Also, I’m not really sure how investors are supposed to define one or the other. Yes, there are indexes that purport to be value indexes. They look for companies with low-priced earnings, a low price-to-book, versus growth indexes which are looking for high earnings, growth rates on companies.

Dan Wiener:
But the bottom line for us has always been, let’s find some managers who use a value orientation to buy growth stocks. One always wants to have a company that is able to grow its earnings faster than the market. It shows that the company is dynamic, it shows that the business is dynamic, it shows that there is growth here and investors will pay up for growth. But wouldn’t you like to buy that growth when it’s on sale? When a company is not looking particularly good at the moment, but has some prospects down the road. I always talk about growth managers who have a value orientation.

Jim Lowell:
Absolutely right. We’d love to buy great growth stocks at deeply discounted values. Certainly harder to do at this moment in the marketplace, the market having recovered so dramatically well with specific regard to technology names. But there are other growth stocks that we love as well, particularly in the healthcare sector. Since we say that medical data’s really going to be the most important criterion for framing our assessments of economic and earnings data, what are your thoughts on the health care sector and how it relates? Not just to the COVID crisis, but to an investor’s long-term portfolio.

Dan Wiener:
We have always run an overweight to health care in our clients’ portfolios and in our own portfolios. The reason for that, I mean, it’s a multi-legged stool, everything from the diversity within the health care sector. You have pharmaceutical companies, biotech companies, medical device companies, you have companies here in the US, companies overseas. Health care representing, I think, about 20% of overall economic activity in the US. It’s a huge sector, lots of great companies there.

Dan Wiener:
Also given the demograyphics, which is a term that we coined, which has to do with demographics of a graying population, that this is a sector you want to overweight, that there will always be demand and there will always be lots of R&D. This is not like a utility, where there’s just this constant demand for electricity. You can’t really innovate too much in electricity, beyond maybe setting up a wind farm, but there’s so much innovation going on in the medical area.

Dan Wiener:
To bring it back to today’s headlines, there are going to be winners and losers around fighting the coronavirus and fighting the pandemic. But also as you said, we’re looking a lot at the medical data. I mean, you follow this stuff very, very closely. When you look at the medical data, what does it tell you about market prospects and economic prospects?

Jim Lowell:
It tells me that the market, as it typically is, is ahead of the actual data that can often lead the market to price out three to six months ahead of what we in fact will come to know. The medical data, obviously, is of a bedrock concern. If we see a massive second wave that leads to a massive second wave of re-closings, that would be very concerning to us. If we see any sort of mutation in COVID-19, if we see as we start to head into flu season, September, October, a dramatic resurgence in infection rates and also an uptick in morbidity rates, that would be concerning.

Jim Lowell:
The good news on the front fighting COVID-19 is that our first responders are now dramatically more experienced, better equipped, better able, more safely able to respond. But this is a pandemic whose scope, scale and toll has yet to be fully known. Not just in terms of its toll on the human level, but also in terms of economic and market damage.

Jim Lowell:
We continue to think that while we have some pain to go through, that we really are ultimately going to come out on the other side of this pandemic with a vaccine. Hopefully Dr. Fauci’s right, as soon as the end of this year, sometime early next year, they will give us much greater confidence in the fundamental data on a going forward basis. But we’re probably 12 to 18 months away from being able to really sit back and say that we know what the medical data portends, we can then better frame the economic and earnings data in a rational manner.

Dan Wiener:
Well, you’ve already got the pharma companies, the biotech companies, trying to enlist people in first-stage testing of these vaccines that they’re developing. So it’s coming, but it’s not coming quickly. Jim, I want to go back on the headline issue that you were talking about. You were looking at MarketWatch and you saw these two opposing headlines. I think if there is any rule that we would want folks to think about going into the second half of this year, it’s that you need to be very, very skeptical of all of the headlines you see, and the fact that they will change, if not every hour, certainly every day, and the reasons behind that.

Dan Wiener:
I mean, a lot of it doesn’t have to do with the fact that the news is actually changing, it has to do with the fact that print journalists have column inches to fill.

Jim Lowell:
Yep.

Dan Wiener:
TV journalists have airtime and ads to sell, airtime to fill. Whether it’s the headlines on healthcare stocks, whether it’s … I saw a story the other day in The Journal where they were cherry-picking performance numbers to make a claim about health care that was negative on health care. Of course, when you look at the data, what you see is they were focused on a very narrow period of time. You get past the end of that point of time they were looking at, and in fact, health care once again was outperforming.

Jim Lowell:
There are other risks too. I mean, there are other risks that we are very focused on. It’s not just the pandemic, we know that we have tensions between U.S., China, we know we have a very contentious election year, which is only going to lead to greater and greater fear-driven headlines. To your point, Dan, the fact that the media really is in the business of fear-mongering, at least as much as they’re in the business of fact-finding, means that sources of news that you can trust are increasingly far and few between.

Jim Lowell:
One of the things that I know you and I, and the investment team under our director of research, Jeff DeMaso, does so well is to remember the journalist credo from our days when we were journalists, 30 years back, Dan, and that is not just consider your source, but know your source. We do a lot of fact-checking on any headline that we think may or may not have an impact on the way we’re thinking about the economy, the market, the state of the world.

Dan Wiener:
Yeah, absolutely. I mean, I read The Wall Street Journal every day, I read The New York Times, I am less enamored of things like CNN and that sort of headline-grabbing. I mean, you gave the perfect example of MarketWatch. MarketWatch is a website, it’s owned by The Wall Street Journal, by Dow Jones, but they give you these opposing headlines. You really have to look deep underneath them to see what they’re talking about, and who are the people that are being promoted in these stories.

Dan Wiener:
I mean, I’ve been in this business an awfully long time. I’m older than you are, and you’ve been in this business a long time. A lot of times I’ve never heard of these folks, but if they say something outrageous enough, it’s going to get picked up.

Jim Lowell:
That’s right. But whether they actually manage money for a living, what amount of money they manage, what their track record is, these are all things you need to dig into and understand. I agree, The Times, The Journal, absolutely must-reads. I also like Barron’s and The Economist. I also still wake up every day, and just to get a mood read on the state of the world, I do look at CNN’s front page, I also look at Drudge Report. Between those two poles, I figure I’ve got at least a daily dose of what may or may not be making our clients, our friends, our colleagues, nervous.

Dan Wiener:
If you look at those two when you wake up, I mean, you must be just gripped by panic.

Jim Lowell:
I’ve developed a nice callus, but I understand why people are certainly nervous. We have just come through a remarkably difficult, emotionally difficult, physically difficult, and market-related difficult, even though it doesn’t feel like it now, time period in the marketplace. I think as we go through the second half of 2020, we are very well-prepared to address what we think will likely be an increase in volatility, the potential for a ratcheting up of fear-related issues that we just covered, and more.

Jim Lowell:
Don’t forget, we run our portfolios with risk buffers in place, not just because of the risks that we know, but also because we know that it’s almost always a risk that’s not on anyone’s radar screen, like COVID-19 this year, that can upend the market in the short run in a very surprising manner.

Dan Wiener:
I’d be hard-pressed to believe anybody is panicked over the stock market this year, given the coronavirus. I mean, the S&P is down about 2% on a total return basis. The NASDAQ, I mean, we talked about growth stocks, the NASDAQ is up over 15%. I mean, this is a great year in the stock market. I mean, it’s been a fantastic year.

Jim Lowell:
I completely agree. If we are just talking about the cold calculating way the market behaves, and it is our job to remain cool, levelheaded, calm, collected, when everybody else is running around with their hair on fire. Dan, as we wrap up, let me just ask you this. What was the moment that you felt you could seize the day, rather than be gripped by the pandemic?

Dan Wiener:
Oh, gripped by the pandemic. I don’t get gripped by panic. I panicked when I was scuba-diving and I came within feet of a reef shark. It was a different trip when I cornered a barracuda while I was snorkeling in a cave. I panicked when I got caught in an avalanche while I was skiing, and I panicked on 9/11 when my daughter was in school, a few blocks from The World Trade Center.

Jim Lowell:
Yep.

Dan Wiener:
But I’ve been through October ‘87, I’ve been through the bursting of the tech bubble, the great financial crisis, now this COVID calamity. They are unique, they’re special. Strategies that people come up with that say they’ve got something special to handle this. I don’t panic about these things, because I have a fundamental belief that if you invest in good companies that have strong demand for their products or services, that are well-run, and you do it in a diversified and intelligent manner, you’re going to come out well the other side.

Dan Wiener:
You just have to believe in diversification, as we do, time in the market, not market-timing, finding the best active managers, which I think we do a very good job of and ignoring the headlines. So, to me, that’s success. I don’t panic about the markets, I panic about all these other silly things. What about you? You panicked?

Jim Lowell:
No, not at all. The way in which our portfolios are structured is to address known and unexpected risks. You just talked about the principle of diversification, active management. We know that for 25 years it’s served us demonstrably well, and we certainly think it will serve as well for the next 25 years. I would say if I were in an avalanche or cornered in an underwater cave by a barracuda, I would likely panic as well. So be careful out there, Dan, we all need you.

Dan Wiener:
Yeah.

Jim Lowell:
I would say the moment that I felt like I could seize the day was when I was able to catch my first striper off the bow of my boat, just three days ago. That was the first moment where I felt like I got a little bit of breathing room between the pandemic’s potential toll and our ability to continue to navigate what are likely to remain fairly volatile shoals.

Dan Wiener:
Well, you see, you’re going to be able to feed yourself no matter what.

Jim Lowell:
Indeed. Dan, with that, this has been Jim Lowell and …

Dan Wiener:
Dan Wiener.

Jim Lowell:
From Adviser Investments, thanking you for listening to The Adviser You Can Talk To Podcast. If you’ve 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 info@adviserinvestments.com. Thanks for listening