A Look At Markets And ESG Investing

manager at hood River Capital Management. They have three and a half billion dollars under management and UM on a day like today, when we're seeing some volatility but not a lot of movement in stocks, does it feel peaky to you? Does it feel like we're hitting um the top As far as this market is concerned, we don't think it's peaky. We're constructive at this point. I think the market has just been digesting huge games over the

last twelve to eighteen months. Folks are worried about inflation starting to pick up with with the economic backdrop flowing somewhat, but we think earnings revisions are gonna be positive from here. Most companies that we talked to, we talked around four public trade companies every quarter. In small cap, we think demand is really strong and costs are relatively contained. Street

estimates to move up and valuations three attractive. So we think as earning season plays out this quarter and over the next couple of quarters, the market will move up with earnings and and you want to be in stocks. You guys are in small caps, smaller caps, small big caps, Bryant, UH give us a sense of how those performing, how

you think they should perform going forward. So year today, small cap has lagged the S and P five hundred, the Rustle two thousands behind approximately five basis points of the Rustle two dozen growth, which is our primary benchmark,

where small cap growth investors is only up five per cent. UH. We think that the value we should for small cap versus large cap is particularly attractive, especially we look at small cap growth valuations on a relative basis or a parody on a pe basis for next year, usually at

the premium because you have higher growth. Which comes back to what I said earlier, where if earnings come through in small cap companies and in large cap companies, they're both what they're gonna move up, but small cap is gonna move up more than large cap. What are the biggest head winds to that? To earnings growth, Inflation is probably the biggest headwind um. Also, if you get to slow down internationally in places like China, that that that would be a that would be a head wind um.

And so far companies are managing it pretty well, especially in small cap. They're pretty nimble. They've been able to adjust. But if wages move up significantly and demand slows down, that would also be a bad recipe. But right now

we aren't seeing evidence that that tilts us negative. The CEO of Phillips this morning said his problems are chips and ships, so he's having a real problem getting stuff shipped around h Prices are very high for that and he's having a real problem getting the chips he needs to put in his products. Yeah, so I don't think that's a surprised anyone or any of the companies we talked to at this point. They've been able to navigate

that situation. And that's baked end of people's estimates going forward, which again that's why I come back to it. Demands better and supply chains us enough, which I think in general that's going to happen. Uh, then you can see an upper provision to earnings estimates as that works through the system over the next nine to twelve months. All right, Brian, you mentioned earnings were just starting to get really into the thick of things here. We had some good numbers

out of some of the big financials last week. What are you going to be listening for and looking for this quarter? So what we like in small cap is that you can find stocks that are and efficiently priced, where the analysts estimates uh tend to be a little bit stale, you have less analysts are covering them, and so you can buy good companies with good valuations where the fundamentals for the companies that we buy or be

better that with embedded in street expectations. So we have around a hundred stocks of the portfolio and we're gonna be monitoring the amount a case by case basis bottoms up as to whether or not delivering on the on the key performance metrics for for that particular business and in general, I expect things to be really strong across the board, which which I think is good in almost every sector. UH, based on a lot of macro factors that you've talked about, kind of baked in the numbers,

demands super strong. When you look at I mean speaking of consumers, when you look at the savings rates here, do do they spend it back down to the historical average? I think so, Um, we're overweight consumer right now. UH. There are a lot of UH stocks in small cap where they're priced at median or historical valuations, and we're seeing the consumer come back and a lot of stocks that we are one of our biggest positions to Sea World, for example, which which has been a really good stock

and demand is accelerating. They're based on consumers wanting to get back out and about evaluations attractive and they've really worked through a good margin profile business. I like that one. All right, Brian, thank you so much for joining us. We always appreciate chatting with you. Getting an update on the world of small cap stocks. Brian Smaller. Brian Smaller principal portfolio managered Hood River Capital Management three point three

billion dollars in assets under management. Looking at the small cap stocks and again is Brian was mentioning they've underperformed UH this year. But I think a lot of you know, fund managers have exposure to the small caps, particularly if you, you know, part of your cyclical trade, particularly part of

the reopening trade. A lot of fun managers looking for exposure with small cap stocks think that they can get some better bank for the buck in terms of a reopening economy and the impact that that could have on smaller companies. Now, let's bring in David Diets out of Summit, New Jersey's a managing principle and senior portfolio strategists at Peapack Private Wealth Management, where they have nine point eight

billion dollars of assets under management. David, I find today's market really interesting, as we're seeing such a jump in rates globally on the short end of the curve in it mostly in two years and in some five years UM and we saw here in Europe a sell off in stock so it was bonds down, stocks down, and everyone this morning was talking about the sixty forty portfolio.

What's your take on the age old construction? Well, I mean, you know, I think stocks are making at least the United States here hugging the flatline after one of the strongest weeks since July. Pretty good showing, given um those concerns on on inflation and and so forth, that you just mentioned Um, you know, I think equity investors have to take a long term view here. Valuations are high, blasphemy all the time. Is this the right time to

invest in? All I can say is this is the wrong time to be in cash and and most of fixed income, because of course, you know, the only thing more expensive than stocks are our bonds, the fidel cash reserves yielding one hundred of one percent. And we know inflation is here. Inflation is gonna get worse. We don't know how transitory or permanent maybe, but this is a

tough time to just be sitting there in cash. And so I think we're seeing, particularly among retail investors that continuing by the diet mentality, and of course we just had to kick off their earnings week last week. Um of the companies of reports so far top earnings per share expectations that should be a great earning season, and

in so things actually look reasonable for equity investors going forward. Here, David I c W T, I Crew Oil and North of Barrel, How do I play this in the stock market? So Um, I think that UH investors should of course stay diversified, and of course energy stocks are up six year to date, but there may be more room to go.

And and here's why. Although normally the cure for high prices is higher prices, we've got a situation here where energy producers don't want to produce because um, you know, governments, policy makers, banks are telling them, no, you've got to go green, and so they're saying, well, why should I invest it? Take advantage of these higher prices, because that's not the future. So you could have a situation and I think we do have a situation where supplies kind

of dwindle or stay constant. Meanwhile, and and therefore, but consumers and users cannot switch over to green sources as quickly as possible. And of course, what we've heard from the UK is some of the hope for green sources, for example, wind have not been as productive as hope because wind speeds have died down. Who knew, but that's what we have. It hasn't been very windy here. Apparently. Let's get to your stock picks, David, Um, what do you like in the US? We'll gets you pumped in

the morning. What do you what do you what are you excited to recommend when somebody asks um for a pick? So you know, tying into that energy theme. We do think that UM energy stocks are still well off their all time highs, have great dividends, are being very conservative about spending money for new production and rather returning money to shaubles in the form of higher dividends and stock buybacks. You know, one of the bluest of all the blue ships is Chevron Um, you know, with about a four

percent dividend, very low price to earnings ratio. The stock was at one point well over on thirty. I think it's in low hundreds right now. UM even if some energy even if there's volatility and some energy companies go under, you know, that just works out better for your your ultimate blue chip here, which is Chevron. So that's one we would like. The other areas, I think investors have to look at his healthcare and I'm not quite sure why.

I think there's a couple of reasons, but a lot of the healthcare stocks, despite the fact that is the healthcare companies that are getting us to the other side of the valley in terms of COVID nineteen, are just way out of favor by investors. So one I would say here is Bristol Myers squib is at a fifty two week low. Uh, you've got like a three point seven percent divid in which is more than twice which the yield on the s trading about eight times earnings.

And what I like about Bristol Myers is they fine tune their focus onto oncology into immunology. Those are the areas of the healthcare thing where people don't worry about prices. When you've got cancer, people will pay what it takes. And so they've got the highest origin focus here. And what I like is they've got a great R and D pipeline, but they're great in terms of acquiring other companies to augment that pipeline. Of course, they made a big deal with Selgy not too long ago, which gives

him all the cell gene products. So Bristol Myers fifty two week old, great dividend. What's not to like here? David Diets, thank you so much for joining us. We always appreciate chatting with you, getting your thoughts on these markets, on some specific names that you like at this time. David Diets is a managing principle and senior portfolio strategist at Pepeck Private Wealth Management. They about nine point eight billion dollars in assets on their management. Uh, and he

is located in the bucolic town of some of New Jersey. Matt, maybe you should think about Summit. We come back to the do you know I absolutely love Summit and um no, seriously, and some of my closest friends lived there. The thing is, I don't want to commute to Penn Station. Yeah, good point. I can't imagine the worst place to go than Penn Steve, But I'll give you this, mat there really finally finally doing a huge renovation of pet Penn Station. So we

can only done by the time my daughters in college. Exactly. I've been waiting for this for thirty years, but they're finally starting to get it done here, so we'll see what happens. Now, let's get over to Janelle Woodword, president of Mackay Shields. They have hundred six two billion dollars in assets under management, and Janelle, I think it's interesting you have tested some market correction scenarios, all of which don't seem terribly unlikely. A resurgence of the virus, persistence

of inflation, credit problems in China. What's your biggest concern? What's the biggest headwind. Yeah, sure, I think that's a great point. I mean, I think if we look back over the third quarter of those scenarios, we tested um and we saw some volatility of the market, but really we saw investors continue to engage in sponsor risk assets. So because there's some competence as we see some headline related noise that investors are going to to need to

stay engaged. But to your question, what are we watching? Certainly right now, we're watching inflation data, UM, We're watching rates, and we're watching the fed UM as we look forward to really you know how we'll wait expect markets to unfold over the bounce of one and into twenty two. So I'm actually a big believer in the wall of warrior. I'm a natural warrior, Janelle. Given that, how should I

be thinking about these markets? What are you guys doing in terms of positioning your portfolios here given what we do know about all those macro issues you just mentioned. Yeah, I think what we're really thoughtful about is is creating flexibility and optionality, And I think one of the things that matters right now a lot is liquidity. Both as we think about the unknown to the market is as you rightly highlight UM but also appreciate that that markets

continue to trade to trade pretty well. But we want to make sure that we have liquidity freed up to take take advantage of volatility as it presents itself. UM. I think actually when it comes to fixed income, we're looking for some inflation protection structures and portfolios staying a little bit shorter interest rate UM. But we do remain fundamentally constructive, and we think that there's still significant opportunity

in in credit markets in particular, we're we're in credit markets. Yeah, I think you know, some some areas that we're really focused on is on the consumer side, the housing side, UM, and we still think there's some select albeit less opportunities

in some of the COVID recovery sectors. UM. So some of those are some areas that that we're focused on UM as we kind of construct portfolios, But we certainly do appreciate when we step back and look at aggregate spreads and what things look like that markets are certainly

not as cheap as they were several months ago. All Right, given that valuation concern, which I think a lot of people certainly have, UM, it makes this earnings period that we're really starting to get into the teeth of right now. This week all that more important for many investors. Do you know, what are you looking for from these earning reports? We had the fanciers last week, pretty strong numbers across

the board. What are you looking for going forward? Yeah, I think I'd hadlight two things that we're looking for. The first things we really are watching the margin story, and this ties back to the earlier conversation on inflation, on how supply team pressures and energy price pressures in particular are really flowing through earning statements and to what extent those are not being passed on to the end customer. I think the other thing that we're watching from a

fixed income perspective is really thinking about balance sheets. The strength of corporate balance sheets has been really important for the overall credit sector to whether this period, and now we're at the point of time where we're looking how how our entities redeploying cash um and are they doing in a way that that is supportive of both long

term business trends but also savor bolt of creditors. What um how much return can you back to be from real focus on E s G. I mean, do you give up some return in order to do the right thing, or can you still make as much money as you want to and you know, um not invest in big E S G centers. You know, it's it's a great question, especially if we think about credit markets through that lens and recognize who issues in those markets and what does

it look like. And I will say, you know, going back to portfolios, we are seeing a broadening of what it means a fiduciary duty and what it looks like and how do we think about materiality specifically within within fixing com portfolios. And it's something we're very thoughtful about. I think the academic studies have been mixed and are still evolving in terms of this potential trade off between returns and E S and G factors. But it's really interesting.

You know, we've recently I worked with Excellnal consulting firm to do a survey of some of our institutional clients and we're seeing that Mike, that that begin to shift. We're seeing that investors actually believe you can get both and on a risk adjusted basis, investors are better awful or at least uh position the same to include E S G factors within their investment mandates, and you know

that was something that really stood out to us. Do you know one of the issues I hear about E s G investing is, you know, the data is just not great to help me make a decision here, like for traditional financial analysis of my income statement, balance sheet, casual statement, but nothing comparable in terms of breath and depth on the E s G side. How do you guys think about that? It's a great point and something

we ask ourselves every day. You know, we've been investing a lot in our E s G data architecture and making sure that we get that in and the truth is the data is still very much evolving. One of the things we're looking for UM is really looking for more guidance from regulators in terms of providing clarity on terms and death A missions and objectives to bring some

better clarity to some of these data points. UM. So we've been really thoughtful on what we've seen to be material to date, UM, but make sure that we're continuing to build that out and think about it UM and not be too prescriptive as we look forward. Right, And I'll note on the f A function on the Bloomberg terminal financial analysis. There is a data tab for E s G data, so Bloomberg certainly contributing to the data and analysis there. Janelle Wouldward, President McKay Shields located in

New York City. We'll have more coming up. This is Bloomberg. Now, I want to get to Tim Gortney joining us now out of Oklahoma. He is a chief investment officer at Essential Wealth Advisors. They have four billion dollars in assets under management. And uh, let me first get your take on what we see today. There's not a lot of action in stocks, Tim, but there is a big uptake in rates, especially at the shorter end of the curve,

and I think increasing concern about lingering inflation and rising rates. Yeah, yes, and it's probably overdue, you know. I think so many other metrics have been showing these price pressures and and certainly uh, company managers have been talking about it now for several quarters. Um, and uh, you know, they've confirmed

it doesn't look like it's going away anytime soon. We've seen it in the in the prices of so many goods and services across the whole economic spectrum that I think now you know, rates are finally just acknowledging and reflecting the reality that that we've all kind of seen and known for for several quarters. And it's healthy. It

needs to go up. I think for not only investors who are in those fixed income investments who need to hold them so they can actually have a slightly better return and hold onto more of their per just in power, but um, it's also I think just healthy to have some rates move higher so that so many other assets like home prices and certainly the prices of stocks, can start to be valued more more fairly and not based

on you know, in essence zero interest rates. You know, Tim, when I when I think of Oklahoma City, I think of you know, oil, natural gas and w T I crude oil here over two of barrel. You're in energy country, oil country. What's the feeling in Oklahoma City when they think about where we are in the energy cycle. Yeah, well, you know, I think, um, I think so many people

are feeling a little bit better about things. You know, we had a really rough stretch and in many ways, you know, the energy industry was was victims of their own success. They were so successful at getting energy out of the ground that the supplies, you know, drove the prices down, and it was great time for con sumers.

As prices you know, between basically two thousand and fifteen and two thousand twenties stayed really low um, and you know, as such, producers were not as uh you know, not as incentivized to go invest in new products and open up new, um, new sources of a production. And so seeing the price move up, I think is is kind of like a bitter suite ending to what's been a

really rough time period. People are are are feeling much better about things, and because there have been such you know, so little investment in these areas and because companies are so hesitant to go open up new sources, I think you know, it's likely to stay maybe higher, for for longer. As we've been talking about inflation just in general, do you get the sense that people are still conservative? I know,

saving rates, savings rates nationwide have gone up, um. You know, even as government spending has soared, is is concerned about future tax increases and you know, just the volatility situation holding people back from investing in the future. Yeah, yeah, you know, I'm not sure exactly why there is so much cash and why um, so many people have made the decision to hold cash and and hold things like like short term bonds or bank deposits. Clearly, the banks

um are over you know, over capitalized. They don't necessarily need those extra deposits, and that's why they're not earning anything on those, um you know. I think we're probably going into a period of time in the markets where the last twelve to eighteen months have been very easy. We haven't had any corrections. Everybody has enjoyed the ride higher. It's been a fairly smooth ride. But now because of those things that you just mentioned, um, you know, the

government has spent, the government has gone into debt. It's likely that we'll have higher taxes moving forward, everything else being equal, that's going to be a drag on growth. I think people and companies have held a lot of cash reserves because they don't know exactly what's coming and it could be that, you know, growth is going to be slowing and then they want to have some some

more conservative holdings. So I think markets are going to find in the economy is gonna find we're gonna have to earn our growth going forward more than we have in the last year and a half, where it's been, you know, relatively smooth sailing. Tim, you mentioned higher tax rates. What are you telling your clients as they think about positioning their portfolios for an environment that will likely have higher personal and corporate tax rates. Yeah, so, you know,

we still obviously don't know the specifics. We know in general that the the trend is going to be higher, as you say, both on the corporate side. On the corporate side, that's going to lead all the other things being equal to slightly lower earnings than than they would have been otherwise. And then on the personal side, changes and things like capital gains rates, UM are going to probably move markets in in some way as people reposition their portfolios for the for the new tax rates that

we're gonna be living under. UM. You know, we're going to probably wait and see on on on portfolio management in terms of the way that these things come out. There has been some talk about the removal of the step up in basis rule, although I think that's that's probably dead. More more concerning to us are the planning text rules and UM, so we're gonna be watching more heavily on that side to see if people might need to make changes in their estate planning first and then

probably look at portfolio management second. All right, Tim, thanks so much for joining us and really appreciate you lending some of us learning your time to us. Tim Courtney, Chief Investment Officer, Except Wealth Advisors, located in Oklahoma City, Oklahoma. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter

at Matt Miller. Put on fall Sweeney I'm on Twitter at pt Sweeney before the podcast. You can always catch us worldwide at Bloomberg Radio