This is Bloomberg Business Wait inside from the reporters and editors who bring you America's most trusted business magazine, plus global business, finance and tech news. The Bloomberg Business Week Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Live at Schwab Impact twenty twenty.
Three here in Philadelphia. And we just turned Charlie wrapping up.
The markets right now.
But the S and P five hundred still headed toward its toward it's lois since May gauge briefly crossing the threshold of a correction, down ten percent from its July peak. So I'm curious what Jeff Klinapp has.
To say about all of this.
He's chief Global investment strategist at Charles Schwab and he's here with us on site.
It's good to see you. It's been a while.
Thanks for having me.
Yeah, it's great to be bad.
So what do you make about I don't know.
I don't know whether it's smart to ever look at one day, given trend, day of trade or really think about kind of where we are from the summer, Like, how do you look at it?
There's been a lot of days like this Carol, though, that's what I'll say.
Recently, Well, and this is a wacky one where we got aggressive growth data backward looking, and then yields moved lower.
So how do you look at it?
Yeah, they came down, and those Magnificent seven stocks weren't so magnificent today. They were the Keystone cops, I guess, just tripping over themselves. And I think that's one of the interesting things I've noticed, particularly in recent months, but.
Really over the last year.
The average international stock is outperforming the average US stock. So if we look at the equal weight of benchmarks, the equal weighted ETH index outperforming the equal weighted SMP five hundred, and I think because doesn't have those Magnificent seven stocks in it, but also because they're more value oriented, right, lower valuations. But interestingly, in the third quarter, what do we get today? We got really strong US economic data. Not true in Europe. Germany is probably in its fourth
quarter of negative economic growth. But that's what central banks want to see. And so you know, we're seeing probably a clearer path to rate cuts over seas than in the US.
I think that's favoring those equities.
All right, So wait a minute, though, so it doesn't.
It feels more dire overseas, right in terms of the economy, economics, so right economically, so it makes sense that those stocks are under more pressure versus what we're seeing in the US.
Note, Well, what I'm saying is they're outperforming on an equal weight basis in almost every sector, which is counterintuitive looking at the economic and earnings picture. But they're undervalued, and I think, looking forward to great.
Cuts, outperforming undervalua.
So essentially they're ahead of us when it comes to great cuts from their own central banks. And perhaps that's why we're seeing, in your opinion, opportunity there.
Yeah, I think so. I think that's where I want to be focused for next year. And there are a couple different reasons. One valuations, they're braced for more difficult environment. I really do think we're going to see it turned down in the job environment. You know, there's so many leading indicators of a softening in the labor market. I think we're starting to begin to see beginning to see that, and I don't think the US markets are as well positioned for that that overseas.
We did just hear from Mark Bitzer, the CEO of Whirlpool, who said you know, we're not at the same place we were when it comes to employees over the last two years. I mean, you know, raises aren't the same. It's not as difficult to get them as they've been. But still, I mean, look at Jeff the data that we get each week when it comes to the jobs market, and then each month we're still adding more than two hundred thousand dollars two undre thousand jobs a month in the US.
Yeah, it's interesting. I think there's a bit of a lag. And what we're seeing is, you know, credit conditions tightening banks are the tightening lending standards. We're hearing more from CEOs that we moved out of a labor shortage environment to maybe a labor glut, and that's maybe that's overstated.
I haven't heard about a glut yet.
But they've talked more about, you know, just tracking the number of mentions of layoffs or headcount reductions or euphemisms for layoffs versus those for hiring in recent quarters has really started to pick up, and we're now seeing more layoff announcements than hiring discussions or talking about jobs being difficult to fill. I think that's the start of a turn here that what may see towards the end of the quarter.
I will say our Bloomberg Economics team, I was just looking through my notes. The surgeon continuing unemployment insurance claims indicates workers are find finding it increasingly difficult to find new jobs. So if you start to parse through, as just the CEO of Worldpool said, go below the headlines, like you start to see some weak points, all right, So hmm okay, So I'm want to go back to international.
So if they are out performing even though their economy is underperforming, are investors they're already factoring good news or good news to come at some point because they're starting to kind of trade on what their expectations of kind of where things go.
I'm trying to get an idea of yes as being a forward looking mark.
Yeah, that's a good way to put it. Rampant pessimism in Europe. We've got war recession beginning to turn around, some signs of improvement. Some get tied to China's economic growth actually showing some signs of improving. I like to watch air pollution in China that's been on the rise for a couple of months now.
That's depressing, but that's like a good news.
It's good news.
I'm just going to throw that up right, like.
What the different metrics you what you watch yet?
But sort of the Magnificent four in Europe are luxury good stocks and they benefit from a stronger Chinese consumer, So they're already starting a price in that turn.
So we've had a mixed bag with some of that luxury guys we have.
I mean, I think it's early to count on that, but I think they're beginning to price in a better twenty twenty four.
So you're saying, if you have new money to put to work, you would go to Europe?
I would you would go to Europe?
And so what's your exposure to the US, Like how much of you scaled back? I'm assuming you would still suggest some position to the United States? People are are you saying, no.
What the right allocation is to international versus US? And I'm just saying more international than you have. Now it's been fifteen years, it's probably time to reconsider that and rebalance back into it. So I think almost any exposure is going to benefit of portfolio.
Okay, that's interesting because sorry.
Go ahead, Well, but then I want to get an idea of like, what would you say in terms of the US exposure?
You know, I worry a little bit more about the very narrow US market. So I think if you can get away from those, you know, the thirty percent of the market, the magnificent seven, I think the market's looking better. But I would favor energy and financials in the US, which are where you can find the more attractive values and the stronger cash flow, which I think is going to be king of all right.
So you're not going to say thirty percent US. I know it's all individual, but I just try and get an idea of how aggressive you are saying Europe VERSUS are outside US versus US.
I mean, I think you could look at it in the way you might look at the all country world, right, which is like sixty percent US and forty percent international.
I don't think that's a bad allegation.
Okay, what would you say to someone who would push back on you and say, wait a second, if you look at the stocks in.
The S and P five I say, wait a second, Wait.
A second, that so many of the stocks in the S and P five hundred have huge exposure internationally. I mean, especially those those big you know, big ones like Apple, you know, the majority of its revenue comes from outside of the US.
For example, They're huge international companies that have a lot of US revenue. So I think what it really comes down to is where is the investor base. For example, NESLEI, I think, is the second largest stock in the EF index. Compare that to Coca Cola. They stealt beverages and snacks to literally the same people around the world. Their revenue growth is almost exactly the same every year, but one trades three or four multiple points above the other Coca Cola.
Why Because eighty percent of Cokes investors are US based, about eighty percent of Nestle's investors are European based. And again, recession war, their pessimism is giving you a cheaper valuation.
I think those converted opportunities.
Okay, how confident do you feel about making calls right now? Well, you know, do you even have like the federals, You know, you have Jay Powell to talk about. Listen, there's multiple that the idea in terms of what kind of scenarios could come why, you know, I forget how we said it, but there's a lot out there in terms of how we could move from here globally in markets, in the economy.
Obviously, his focus is on the US.
So I think the.
Thinking was like, all right, so how confident does he feel about making forecasts?
How confident do you feel at this point?
I think that benefits a broader allocation rather than a concentrated one. Right, when you're super confident in an outcome, you can concentrate. I think now broader global acid allocation makes even more sense in a more uncertain world.
Yeah, when's the last time you made that kind of call?
Oh gosh?
I mean, so we liked international in the two thousands, right in the twenty tens, a long time. We were in a different cycle where interest rates were so low and barrow, you know, borrowing was so cheap. Now you want cash rich companies, You're going to find more.
Of those overseas.
China. You like China too, You know.
China's a tougher call. I do think the economy is improving, but you have political risk is such a wild card over there, and the stocks can swing sixty percent on you know, up or or down.
We we've even seen that this year.
I know, I'm more confident in developed markets than Yeah, Okay, well here's.
The develop market that's close to home the US. Are we headed into a recession or are we in a recession? Are adding?
I think we are in a cardboard box recession. Manufacturing and trade are inner recession things we put in a box. If you can't put it in a box, it's not in a recession. I lived three miles from Walt Disney World. There's no recession at Space Mountain right now, and so I'm a little worried that services slide into a recession and meet we're manufacturing is rather than a rapid rebound in manufacturing. So I'm gonna watch for that next year.
Jeff, what do you think we've got thirty seconds left? What every investor should be asking themselves at this.
Point right now?
I think I think asking themselves about their you know, their allocation international. I'm going to come back to this because when international is in favor, it tends out performed five six hundred basis points a year. That's important to stay on track.
To You're find I have to say, when I started, I feel like we used to talk about international investing.
So much more.
And you know, our global investing, including the whatever you know but it's just interesting how it's gone kind to the wayside.
Yeah, Timer, what's good reason?
Maybe, but maybe it's a different environment. Jeff, thank you so much, my pleasure.
Thanks for having me.
Really fun.
Jeff clientop Chief Global Investment Strategies at Charles Schwab obviously onsite with us here in Philadelphia at Schwab Impact twenty twenty three. A lot going on, Carol Master, timstead of It, a lot more interviews to come actually from the Saved.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or watch us live on YouTube.
So much going on in the market environment, and we've got a great guest. Chloe Berry is Managing director and head of the Infrastructure Income Strategy over at Brookfield Asset Management firm, very well known to our audience, of course, run by Bruce Flatt, and she joins us here at Schwab Impact.
Welcome, Welcome, so nice to have you. Thank you, it's great to be here.
Tell us about your world and how you think about the environment that's out there in a day where you know, we get a hot GDP report and yet guilds go down, like things don't always make sense, and we're trying.
To read the tea leaves. So tell us how you guys see it.
Yeah, so look in infrastructure. The beautiful thing about infrastructure is that it's really an assa class for all cycles. Right, So so current environment to only plays a small part in what we're looking for, because infrastructure are essential assets. They're the backbone of the global economy. They're you know,
electricity transmission lines powering the buildings we're sitting in. It's the telecom towers you know, pinging the signal for this call, or the you know, data centers housing our photos, and so these are essential assets with long term contracted revenues, inflation linkage and downside protection through these stable cash flows.
And so infrastructure is really like what we like to say, is an asset class for all cycles, and so we don't have to predict what's going to happen tomorrow to have a stable, predictable cash flow stream.
To what extent do you watch governments spending around the world affecting your asset classes.
So it's a really good question, because so much is going on in that right now. Right We've seen the Inflation Reduction Act, the Chips Act, the Infrastructure and Jobs Act. It's all positive. We love people talking about infrastructure. They should be talking about infrastructure. We need to modernize our infrastructure, and so it's great that it's more of a household topic.
And all that influx of capital, all the incentives that the government is putting, multiple governments are putting really into the infrastructure sector is really a tailwind. We at Brookfield, we don't rely on those, you know, to make an economic return r in our investments, but they are huge tailwinds.
For the sector.
But what one challenge with rising interest rates, of course, is also the deficit. And there's a concern too that Washington might pull back on some of the spending as a result of rising rates and as a result of look, you know, there's no other way to put it, but disagreements between Democrats and Republicans. Things are pretty frack even within parties as we speak. How does that concern you?
So so again we're not relying on you know, the government programs to to earn our return that we're looking you know, with the you know down to it, we are economic investors looking for a return, and we don't
rely on that. It's helpful, but really we're looking, you know, for assets that withstand that and and and I think just more generally, it's you know, the interest rate environment and capitalized or i should say more constrained balance sheets, whether that's governments or corporates right that are trying to
de lever in this environment. That creates opportunity for us because we're private capital investors, and there's a huge deficit in what these governments and corporates who have traditionally funded infrastructure can spend in today's market relative to the trillions of dollars that needs to be spent to upgrade our infrastructure. And so we play a really critical role and opportunities are opening all the time.
Because of that.
We're more opportunities public or private infrastructure.
So we're predominantly private market infrastructure, right, but we see opportunity in the public markets to take assets or companies private. What that really allows us to do is take a longer term view on the asset. Right, we're not subject to the whim of the market and the shareholders on any one day or what is the sentiment of that day. We can drive value and really long term compounded growth over significant periods of time instead of making decisions based on really what's on vogue today.
When I do wonder what expands or reduces maybe the expected timeline for returns for your investors. Right, you guys do these massive fundraises and I think there's is it one hundred billion dollars twenty twenty three your goal for is it going to happen?
So, look, infrastructure, I think that number is across Brookfield more broadly in the infrastructure space. Look, we're raising huge amounts of capital and it's still coming in. It's still coming in. Look that you know, capital is more constrained than it has been in the past. But infrastructure assets
are what people are looking for today. Inflation linkage, right, so topical, Maybe we're peaked on inflation, but it's still high, right right, interesst rate protection rates all the higher for longer, all that sentiment. These are assets that can be financed with long term fixed rate debt, and so the assets are protected from that interest rate environment. And when we buy new assets, you know, we're pricing that in to the assets that we're buying.
What would you say, Chloe, are the most interesting assets out there when it comes to infrastructure investing that you guys are just really keen on. You're known for, you know, certain trends and plays, but what is it in particular?
So so we like to talk about what we call the three d's, and this is decarbonization, deglobalization, and digitalization. And so really this is about dec urbanization. It's everything from you know, more renewable power generation of course, you know that's an obvious one, but it's going beyond that. It's building out electricity transmission lines to connect that renewable power to population centers or to the grids, and it's
in our homes. It's residential infrastructure, rooftop solar panels, heat pumps, generators, ev charging stations.
What about nuclear?
So nuclear where we like to play in nuclear is on nuclear services, right, So nuclear generation itself is often done by governments or government utilities because projects.
So this is again where public drives it. But you guys find.
Exactly will we will service it and be around the ancillary, but we will not generate the nuclear pack.
Where do you rely on that in terms of like do you believe more of that will happen in the US or those projects too big and too daunting for local governments to take on just the last thirty seconds that we yes, So.
We believe that nuclear will pay a critical role in decarbonizing our environment and really you know, energizing the world of the future. It's really critical for that baseline power even.
In the US. Yes, really do you see signs of it?
Look, there's there's opportunities kind of around the world where we're seeing it. You know, we we just looked in Poland and got some opportunities there. You know, geopolitical concerns around the world that's really driving you know, on shoring of critical industries and energy security and so you know, could it happen?
Yeah?
I think so.
Really interesting. Chloe, thank you.
So much for the infrastructure.
Come back. So do we come back into here, come back and join us. We do love it infrastructure.
Chloe Berry, she's managing director and head of the Infrastructure Income Strategy over at Brookfield Asset Management. Joining us here live in Philadelphia at Schwab Impact twenty twenty three.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Easter on Bloomberg Radio, the Bloomberg Business app, and YouTube. You can also listen live on Amazon Alexa from our flagship New York station Just Say Alexa playing Bloomberg eleven thirty.
You know, earning is certainly front and center right now, especially in the blackout period as we wait for the next FED meeting. Having said that, one of the things we continue to talk about here at Schwab Impact twenty twenty three is all about the fixed income market higher for longer rate environment. We heard Janet Yellen, former FED official head of the FED, obviously US Treasury Secretary, making some comments. Well, it continues to be top of mind
for investors. And what's interesting is Schwab has actually done Schwab Asset Management a survey specifically on ETFs. They do it an annually survey and it's called ETFs and Beyond. So we want to bring in David Botset to talk about it. He's head of Equity Product Management at Schwab Asset Management with us in Philadelphia. I'm stumbling through because I want to get to you. There's a lot going on.
This is our world, So forgive, forgive, forgive, we're going to watch earnings and bring them to our our audience. But you guys did do a survey about millennials and ETFs.
Tell us about that what you found.
Yes, so this is a survey we've been doing for over a decade. So not only do we get great results this year, but we can compare it to past years. And one of the things we're seeing you mentioned fixed income, is the increased interest and familiarity with fixed income ETFs and millennials in particular, using more fixed income in their portfolios than what we're seeing from Gen X or baby boomers.
I mean, is there anything hotter out there right now than TLT?
There isn't.
Okay, that's what I thought. Let's just get right to the Let's just get right to it here. Even though losses, you know, it's anyone who's invested in TLT this year has just gotten hammered.
They have.
But right they're really thinking about the future. You mentioned the FED. Where they going are they stopping? We clearly we're on the precipice of perhaps a pause.
We're closer to the top.
We don't know if it's the top, but I think they're looking at where do I position my portfolio for what comes next?
When the millennials start talking about fixed income, does it just mean that the error is over and then.
It's time to sorry saying peak read the peak?
Now?
I do wonder, like, how do you guys read and interpret that?
You know, when we think about what the millennials have gone through, think about the Great Financial Crisis. You know, some of the older millennials have hit the tech boom and bust. They've seen what their parents have experienced, and in some cases we believe they're a little bit more conservative with their allocations that when we're seeing with the older generation they are conservned.
You know, it's funny.
I was listening to I think the team on Surveillance or maybe it was Paul and Matt on Markets Today, But this whole idea of you have this generation, the millennial generation that came out of the crisis that was really rough. They saw maybe the impact on their parents, they saw themselves if they were entering the job market not easy. And then to see kind of coming out of the pandemic.
T me to keep going student loan debt.
Yeah, it's crippling, bumped out right, Yeah.
Like I mean, you know then you to try to buy your first house and then mortgage rates hit eight percent.
Well thanks, be pretty great. They but let's look at the flip side. Suddenly income is part of fixed income investing again. So we're out of your interest rate environment. You're looking at duration, you know, intermediate term five six percent, ending on where you're going. So it's a much more attractive opportunity in your portfolio today than it was two years ago.
Okay, there's a glad glasses always tough full.
Well, well, I always do wonder what you guys do with like these studies and like you know, we've been talking to many members of the Schwab investment team, you know, who are looking at the markets and trying to fig We talked, you know, figure out what goes next. Jeff clientap talking about like overseas like not you know, non us. How you now, maybe it's time to start looking at it.
So does it mean that in terms of the thinking and strategy, this whole idea of fixed income right, that it is going to be a strategy that sticks around a lot longer than everybody.
May be anticipating.
Absolutely so from an asset management standpoint, for Swab, asset management.
We use this type of data to inform the type of things we want to bring to market.
Right.
Earlier this year we launched the Schwab High Yield ETF and recently we reduced the expense ratio to three basis points of that product responding to client needs.
Does it just go to zero eventually?
I don't think it goes to zero.
Is there a race to zero?
I think we're getting very close to the bottom, right.
There's always going to be costs that we're going to need to be able to cover for the product, and we're going to need.
To have an expense ratio that's going to cover those costs.
But that makes it tough, right to be very careful in terms of the pricing.
You have to be very careful, and you've got a price at a level that you're expecting a certain asset level to get to.
You know.
One of the things that we keep hearing too and I feel like we heard it for a while, David, and then I feel like it went away.
But this whole idea of.
Personalization in terms of portfolios, does stuff come out of the survey on that as well?
Yes, it has greatly. So that's one of the questions we ask is about personalization. And when we think about the personalization, we think about it in a couple of different ways. One is what type of ETFs investors are using, So using things like thematic ETFs to get exposure to specific areas of the market where they may not want to take the individual stock rist of an Amazon, Afford and Intel, right, but they want exposure to that.
Industry very narrowly within their portfolio.
So thematic is a play other things like ESG is playing forward as well.
Is ESG is as a try active or interesting two millennials or others at this point, Yeah, I think know the reckoning and we all keep talking about where people want to really kind of understand what exactly is e SG so that when I invest, what is it really doing?
I think that's one thing the industry continues to be challenged with. Everybody defines it in a different way. If we had a common nomenclature that everybody could get behind, it would be much easier.
Does money back off because as a result, I don't think so. It's also a performance like I think. I think when when it was a cheap money environment, everything seemed to do well.
It did, but you still look at that differentiation by demographics. The younger generation continually looks at that opportunity and they want to be closer to investing as their values.
How long do you think we're going to be in a high rate environment?
Oh?
Boy, if he knew, he would not be talking to him, you.
Would still be out with us. Were cool, We talk about TLT, we talk about new ETL.
So I don't know how long we'll be in a high rate environment.
I set through a session yesterday and they ask the group of rias that were in the room how many of them thought interest rates were going to be come down from the FED in the first half of next year. Yeah, I'd say it's probably ten to fifteen percent of that audience. Okay, they ask about the second half of that of next year, it was like ninety percent of the audience. So I think it's telling from the community and from the professionals we have at this conference what their view is.
Yeah, but remember was it earlier this year that if you had done that, you probably got the same response, like when the regional bank.
Crest is very true, it's just been a tricky environment.
It is a very tricky environment. The numbers came out this morning. The US economy much stronger than anticipated. I don't think anybody's necessarily lower.
Yes, So it's really fascinating. Great to check in on survey. Thank you so much, Thanks for your patience.
As we were going through kind of all of the earnings completely understand.
Thanks for the time, so appreciate it.
David Bwow.
David Bot said he's head of Equity product Management at Schwab Asset Management. Onsite with us here in Philadelphia.
You're listening to the Bloomberg Business Week podcast. Catch us live weekday afternoons from three to six Eastern on Bloomberg Radio, the Bloomberg Business app and YouTube. You can also and live on Amazon Alexa from our flagship New York station, jo Say Alexa playing Bloomberg eleven thirty.
We are live at swap in Back twenty twenty three, and there's a lot of.
You might hear some stuff in the background. It's like, you know, we're getting toward the end of the keynote here, people are packing up, the wine is out, the Wi Fi is working really well because people are starting to leave. So's that's we're just setting the scene here.
Actually before we went on air, They're like bringing us wine, which was like yes, no, yes, no wine until six o'clock, Carol, we can't do all right, We're gonna talk.
We're gonna get serious for a moment.
Because the markets, Charlie was breaking down some of the earnings, a lot of stuff. We saw a rebound in tech giants kind of fading in the after hours, Amazon whipsawing around.
It's a hard market to make sense of.
Bringing Kevin Gordon Hello, Hello, senior investment strategist at Charles Schwab. I'm curious after two days they are wrapping up, but there's been tons and tons of conversations about kind of where we are and where we go from here. So tell us about some of the chats you've had and have you had all kind of altered your outlook about maybe the next.
Six months into the market.
Know, we kicked it off on the big stage Tuesday night. I took Wi Jeff klentop Are chief global strategist, and Mike Townsend, who's our man in Washington, And at the time it was.
Who's going to be the speaker?
And you know, in Washington fashion, it's got solved, you know, pretty quick as no one was expecting quick as not took a quick catch a few weeks After a few weeks, yeah, but after so many you know, disruptions and trying to figure out who it was going to be. But you know, I think the outlook actually hasn't really adjusted in my view, because you've got these really interesting opposing forces at work in the at least the US equity market, which is
you know what I focus on where since July. Definitely it's been exacerbated over the past month, but since the July peak for the SMP, you've had a pretty significant washout and sentiment both on the attitude and on the behavioral side, and the degree of pessimism we're starting to see in all the metrics that we track would actually start to lay the groundwork for a pretty nice rally.
I like when people get down on the market.
The only yeah, and the only trouble with that is you need a catalyst to get you there. And so the opposing force for that is that you don't have bread statistics that are acting well at all, whether you're looking at the percentage of you know, S and P five hundred members, rustle two thousand members above their fifty or two hundred day moving a yeah, exactly not so that deteriorating bread puts more downward pressure on the market. And that's the two opposing forces right now.
So what could be that catalyst? I mean, does it have to be a rate cut from the Fed?
No, I actually don't think that's what we need. I think definitely more clarity on whether we've got the pause in place, But I don't think that matters for the equity market at all because actually what's interesting is if you go back in the long history of the FED and tightening cycles and when they've been done, you know, you could look at an average move for the S and P and yeah, it's up just a little bit six and twelve months after that final hike, but there's
a huge range around that, with the max up thirty percent, that then the men down thirty percent twelve months after.
So you never want to use.
The FED you know, final hike as or the first cut as a signal for the market itself. I actually think the catalyst is probably somewhere within it, because.
I feel like so many other people like, hey, as soon as the FED stops, that's like, you know, yeah, historically, what.
He just said, we just he just said what the catalyst is and I didn't hear.
Well somewhere in earning season. But to Carrol's point, I will say, you know what's interesting is I keep hearing this narrative where well, as soon as the FED is done, we're off to the races. That's not the case, as you know, as history would show, and history is actually
consistent in saying that every single time is different. And what I mean by that is, if you know, we got used to in this kind of great moderation era, you know, sort of post two thousands, early two thousands, in those tightening cycles, from start to finish, what was normal for the US equity market was from you know, the first hike to the last hike, stocks went up
the entire time. It wasn't until after where you really started to see the long and variable lags kick in and then the market was looking ahead and that's when you turned over into a bear market. So what kind of confused this whole situation was that we had a bear market last year as the FED was aggressively tightening. That was not normal for the past decade or so.
I feel like we've had a market that is at point looking ahead and then all of a sudden kind of smacked down.
And you know, I think looking ahead actually, and what's interesting is that everything has sort of been masked by the super seven that we all know now has been
doing so well this year. But actually, if you just peel that market, you know, onion layer back one just one bit, I think out of the surface, the market's telling almost the same story as the economy because our view, and you know, I work for Thos Anzander's our chief investment strategists, and what we've been thinking about and how we've been explaining the economy for the past year and a half is that we've been suffering from rolling recessions.
Different parts of the economy have been deep in recession, like housing, housing related consumer goods, while you've had the offsetting strength from services in labor. And that's actually kind of what the market's telling you too, where if you take out the big players, the sort of beneficiaries of rates even going up because they're earning more on their
cash than they have to oh on their debt. When you take all that away, SMP equal weight it is, you know down here to date, Russell two thousand is now retesting its lows from last summer breaking through, So that is more consistent with the economic message in my mind.
So US market, do you what's your advice to investors?
You know, we've been a lot more as getting away at least in this environment from kind of your traditional sector focus and to factor focus, you know, investing where you know, I'll give an example right now. The biggest worry for the economy, arguably aside from everything going on geopolitically, but if we want to look domestically, is the interest environment, the interest expense environment, where rates are going, what companies have turned out their debt and don't have to suffer
from it as much. And I think actually one of the reasons that energy has been the outperformer since the July peak in the market is not only because of oil prices, but is also because it has a high and rising interest coverage ratio and it actually scores pretty well on some of those profitability metrics. So you can find you can screen for that metric or that factor and find it in any sector.
So that is that is that your only factor that you're no, not.
The only one, no anything quality profitability based, So looking at forward profit margins, what the expectations are for companies also trailing profit margins to show that they actually have some strength. But I would also add in there, and back to my comment earlier about earning season kind of being the little gem or the little catalyst, is revenue growth.
You know, for all the cheering in the second quarter, when we had an earnings beat rate that went up closer to eighty percent, you had a revenue beat rate that was still trending down and you actually had almost no revenue growth for the entire market, and an inflation
adjusted terms, it was down for the third quarter. Yeah, So I think that's going to be the thing to watch for because if you have revenue growth that's continuing to slow, but you have earnings growth that keeps rising, that just means you're aggressively cutting costs and you can't cost cut your way to glory. So I think you need to show actually right.
So, your colleague Jeff Kinetop was on with us a little earlier, and he was very bullish on European equities and said he wouldn't give us a target, but he basically said, you know, if you have in your portfolio you need you need to increase your allocation to European I mean, do you guys like duke it out because you're the US guy.
No, I mean this is this is our you know, not just I mean I think that it's a time to check you're wrong. No, definitely not. I mean I think no, I think the world of Jeff no pun intended.
I think he is. I mean, he's he's right about this aspect.
And I would I would weave in our Collie Kathy Jones on the fixed income sites, Yes, because you have to think about where we're at across the spectrum of asset classes for fixed income now, I would I would actually just point to fixed income almost as a way of playing defense as an equity investor, because you have an income in fixed income again, and at a time when risk reward for equity still doesn't look as good
from a valuation perspective. You know, all the valuation metrics we track for the market here are still relatively expensive. Even you know, with all of the selloff that we've seen in the past few months, you're still looking pretty expensive. So I just think international, Yes, when we go through something like dual cycles, what we call dual cycles, where you've got you know, some form of a recession, some a form of a bear market, which we did have
last year, and arguably we're still in that process. It tends to usher in new leadership. It's not this instant, you know, turn the switch and then you go into new you know, sort of new leadership. But I think you need to start considering that because you know, x US fixed income have been shunned by a lot of investors, and for some investors in a younger generation, these yields are sort of a new thing.
I mean, let's be honest. For you and me, well you know.
And hey, well it's fine, it's fine.
But Carol, you make this point all the time, Carroll, with with people who I'm trying to think myself, I'm trying to think myself out of a hole available with the truth here. But you make the point all the time, Carroll,
that there are many people on Wall Street. There's an entire generation of people on Wall Street, not just people media really talk to media, but there's an entire generation of people on Wall Street that have not seen a market like this, that have not seen rates like perspective.
I was listening to Matt Miller and Paul Sweeni on air, you know, and Paul just got a mortgage and it was I think six percent or something or four percent, I don't know, four six percent, and he was like.
It's pretty good.
He was complaining, this was this was a few months ago. He was like complaining, and then he's like, no, I actually feel pretty good about it right now. So it's like perspective, best investment thought right now, idea thirty seconds.
Don't get caught trying to time the market.
And I say that not as just general advice, but because last year at the October low, a lot of people are comparing this most recent action today with the October low we saw last year in the S and
P and we've just passed the anniversary of it. So what I would say is pay attention to bread statistics, the fact that we're a year off of a major market low and you are not seeing any action under the service that you would tend to see in the year after a major market low, whether it's a recessionary or a non recessionary.
Bear, I want to say.
It's different this time around. I know I'm going to get in trouble all that, but if.
You're done, respect it. If it's like, I don't know.
Did you did you ever live through a pandemic before?
In kind of it, the only thing I'll say is that take a look at bank stocks and small caps. They're never looking like this after a year you've made off of low I will say.
That interesting thoughts. This was fun.
Thank you so much, guys.
We got to run Kevin Gordon, Senior Investment Strategies at Charles Schwab right here at Schwab Impact twenty twenty three.
You're listening to the Bloomberg Business Week podcast. Catch us live. We do Nunes from three to six Eastern Listen on Bloomberg dot com, the iHeartRadio app and the Bloomberg Business app, or wants just live on YouTube.
No secret when it comes to atfs that they've been gaining ground on mutual funds for years. You know, I actually started my career flows this news no on.
The mutual fund industry. It was a mutual fund show. It was twenty five thirty.
Year and you know what's pretty amazing.
Because it was like everybody all of a sudden had four oh one k's and they were investing.
What's the show that Bloomberg TV has now about funds etfiq etfi right, So we're not doing a mutual fun show. We're doing an ETF show.
It's really fascinating terms of the shift.
Yeah, the numbers are there to back it up. So the divide between flows into the two different investment types wide into an all time high in twenty twenty two, hitting a record rift carol of one point five trillion dollars. It's between bonds or exceeds me between ETFs and mutual funds.
From nine hundred and fifty billion and twenty twenty one. That's according to our own Bloueberg intelligence.
It makes sense ETFs are tax efficient and a tray like stocks, But what about separately managed accounts, And that's what we wanted to talk about SMAs. Our next guest argues that they are even more tax efficient than atfs. Manji Brea is head of custom SMA Investments over at all Spring Global Investments.
He is with us on site at Schwab Impact. It's getting a little darker. They're bringing the lights.
Down, I know.
Yeah, end of the day, we say the best for last.
We like to do it intimately here, So talk to us, make your case about SMAs.
Sure, yeah. I mean, you know, as you were talking about the flows into mutual funds and ETFs. So what has happened Carol in the last call it like a decade or so, is the sms have actually tripled in size. If you look at the overall sm sizes about two point five trillion and growing double digits, so it's probably the second largest growing you know, kind of vehicle after ETFs. Yeah, and they're kind of three factors that are actually driving that.
So one is really I think from you mentioned, ETFs are tax efficient, but sms are probably relatively more tax efficient than ETFs. So tax efficiency in the SME vehicle is probably the most just because you're holy individual stocks and bonds, so you can harvest losses and you can kind basically maximize your after tax returns.
Right.
The second thing is customization. You've talked about like personalization, customization, you know, touching all aspects of investing. I think SMAs actually provide you a great vehicle to customize your portfolio based on investor needs, values, you know, risk tolerance, tax objectives. And the last thing is there is actually multiple trends in the industry that's actually helping assets move from legacy
portfolios into kind of more tax official wealth exactly. Yeah, the great transfer of wealth, you know, moving assets from like brokerage to more managed solutions in the wirehouse space. So for that again, SMAs is a great vehicle to do that. So those three factors.
Yeah, But what happens when a lot of retail interest is in stuff that's kind of easy, which is like ETFs, And don't don't SMAs have to be served by advisors?
They do?
Yeah, so I agree. I mean, I think the knowledge base across the advisors is actually growing. It used to be the case that they didn't really understand what sms are. ETFs are easy, it's easier to buy its one line item versus like hundreds, right, But actually that has changed in the last few years, tim, So what has happened is, you know, direct indexing something.
That we all hear about.
Is that an SMA.
That's an SMA. So if you think about SMAs, there are three big categories, right, direct and xing Inequities is the largest, followed by munis and then taxable fixing.
Explain direct equities because I think a lot a lot of people they think about, okay, buy buying an s and P five hundred etf Right. Direct indexing essentially gives you tax benefits, but you're able to more control what's in that basket of stocks. Right, that's correct.
Yeah, so you're essentially tracking an index passively. But what you're doing is while you're doing that, your housing processes. So you might be holding two hundred stocks to track an S and P. Right, you're not holding all five hundred, but in the process, when markets go down or go up, right, depending on what's happening, there will always be stocks in that two hundred that you hold which are in losses,
so you can basically harvest them, right. And while you do that, you can accumulate those losses, so that actually helps you boost your after tax returns. Right. Twenty twenty two S and P was down eighteen percent. The after tax return if you had direct and xing was probably four percent better than that eighteen percent, Right, so tax alpha was close to four to five percent.
Yeah.
So if it's so good, why doesn't everybody do it?
Because it's catching you know, listen, it's catching hold. It's been a process. If you look at direct and xing, it's probably around two hundred billion or more.
But I think it's growing.
It's growing double digits, and to me, I think custom messim is leading with direct and xing is the future, right, That's where the direction of travel is. So I do think that it's going to pick up. But if you look at the advisors, there are three hundred thousand advisors in US. Yeah, I would say about forty percent of them I've actually embraged rerect and xing or heard of directing and xing, So there are sixty percent of them they
don't know what direct indexing is. So there's a huge education piece, right, So I think that's really where the opportunity set is to But is it.
Something you could do through your four OHEK.
You could potentially, yes, but it has to be if it's part of the plan.
If it is part of the plan, but it has to be a separately managed account, meaning you have to I believe some of them do they actually because I'm.
Just thinking that there's so much in terms of retirement assets what they want to impact an investment trend or if it makes sense, I feel like it eventually finds its way into four oh one K plans, And I guess that's my question.
Potentially actually, you know, if you think about the taxable and you can tell.
Me, oh, that's a really super stupid question.
I don't know. I haven't seen that yet.
But what I'm saying that eventually the trends find their way there.
It's definitely feasible. I haven't seen it yet, but it's feasible. It can definitely get into the four one case.
Is it always a passive strategy.
Direct indexing case.
But if you look at other parts of SMS, right, so like you know, text income ESMEs, they're actively managed. Some of them are like if it's a ladder, right, you can actively manage that. So you do have passive and active SMS. Direct indexing have to be a passive SM.
Okay, what if somebody's listening to this and they're saying, wait a second, what is the difference between this and a mutual fund or this in an ETF?
Right, So in an ETF, you're essentially holding, you know, a share class of a fund that you know that actually holds the usual stocks of bonds. Right in SMAs, you're directly holding the bonds or stocks, and you know, in an account, so you essentially have direct ownership of bonds or stocks, But.
In a mutual fund, you're directly on in the stocks too.
Right, that's right, but you're holding part of the Commingle fund, right, So you don't really actually have direct ownership of stocks a bond. So that's what like, you know, when they're basically capital you know, gains distributions and things like that, you get a piece of that right as part of holding the fund, but you don't really own like an actual share of Tesla or Apple for that matter.
What's been the biggest, biggest question you've gotten about SMAs at this event? We just got about thirty seconds left.
Yeah.
I think the thing people want to know is really what the direction of travel is, right, So I do believe personalization and private So the two trends that are actually facting retail essumes, you know, So personalization to me, it's all about custom esmeys and customer a sismie is all about like direct indexing inequities munis and taxable fixed income. I think that's really what the direction of probl is.
So people want to know where that's heading, right, So to me, I think the growth is pretty obvious.
Well, you're magical because you got the lights back on for us, although we just lost these lights.
Yeah that's okay, I can't win them on Carl.
Yeah, listen, this.
Was really interesting. I really appreciate it. Magic Break is head of custom SMA bestcas there at.
All Spring Global Investments, joining us here at Job Impact twenty twenty.
Thank you so much, Thank you so much.
Thanks for having me.
Yeah, well, good evening.
This is the Bloomberg Business Week podcast of a Little Apple, Spotify and anywhere else you get your podcast. Listen live weekday afternoons from three to six Eastern on Bloomberg dot com, the iHeartRadio app, tune In, and the Bloomberg Business App. You can also watch us live every weekday on YouTube and always on the Bloomberg Jermale