Markets, Supply Chain, And Remote Work In 2022

undergraduate university was the University of virgin Richmond. One of the reasons I went through had a really good undergraduate business school. And our next guest is also a graduate of the University of Richmond. And then she went and she had an MBA from the University of Virginia. The wah, Who's they work really hard at the darting school. I remember that when I went from my visit. Rebecca Felton, senior market strategist for Riverfront Investment Group, joins us. Rebecca

fellow Spider, Welcome, Happy New Year. What am I doing in two with my four one K? Well, thank you so much for having me in the Spiders. Um, we we are little constructive on stocks, so we're still leaning into stocks over bonds. Using bonds really just to protect us on the downside in terms of volatility, but heavy on the US simply because we believe the economic picture remains stronger here and more consistent, if you will, versus the rest of the world. What what do you think

about the forty six portfolio? Well, I mean we we for many of us, that's sort of where we are from a demographic standpoint, right in terms of what our risk tolerance is UM. But we're we're still in that portfolio probably again five to ten points overweight equities UM and still a little bit overweight cash rather than putting that money to work in fixed income right now, So we're up at about full precent cash, I think, which is which is a larger than normal position for us.

So we still would like h stocks and cash over bonds. All right, Rebecca, Where do I go here in the equity markets? You know, I've I think a lot of us, a lot of the folks listening have been you know, since even since a financial crisis, you know, long the big tech names, the Apples, the Amazons of the world,

and they've done really well. But a lot of folks that have been maybe pretty adept here in the financial crisis have done quite well with the cyclical trade, you know, maybe some of the energy, the financials, some of the reopening stories. How do you think about that over the next couple of years, Well, all of the above, if you will. In terms of, you know, the barbell trade that you've been hearing so many people talk about, that's where we are. We've been there for the majority of

the last six to nine months. So we are still overweight technology, particularly in our longer horizon strategies, with an emphasis on software willing to pay up because of the consistency of Womanton revenue growth. On the flip side, we have added back to financials and we have the stuff exposure to industrial, specifically in the infrastructure space, so we and we also have discretionary names that play into um

both reopening and stay at home. So not trying to ride the fence here, but since we still know that we are in an uneven trajectory, bumpy but up, it seems to make no sense in terms of the Omicron scare. I mean, the numbers are eye popping, but it doesn't seem to be bothering anybody in the market. Does this seem like the end to you? Well, it could be a prolonged end. I mean, I certainly don't know that much about the medical aspect of it, but what we've seen is that um it is it is less severe,

more cases, but fewer hospitalizations. But that doesn't mean it won't be disruptive in the near term. So you're seeing, you know, sporadic shutdown, sporadic UH places where people are being told go ahead and work from home a little bit longer, and that's going to have some implications for that supply chain congestion that we've had, but that doesn't mean it's permanent. That's your point. The vaccination rates are up, the booster rates are up, and this seems to be

a less severe strain. Rebecca, how concerned are you that this federal reserve may get it wrong, may find itself maybe behind the curve which some people are suggesting, and maybe be forced to kind of be more aggressive, and that could be a problem. Well, we we believe that they have been again measured throughout. We think that the market seems to be signaling that they don't believe that the BED is UH making a mistake, whether they think

that the BED is striking an appropriate balance. Obviously, those UH minutes that you'll get UM. I guess this week are going to be telling because people seem to be sensitive to anything that's a little more hawkish than what was priced in. But net net folks seem to be expecting both tightening and uh, you know, tapering next year. So I think that or this year, I guess I should say, we still have to get used to it. What what kind of I mean, how important is it

to you to think about the balance sheet unwind? Is that too in the weeds or do you think it's going to have a serious effect on the market or do you think they're not going to really do it well? I think that I think it's going to be data dependent. Obviously, this week's UM employment and report will be very important in terms of UM if it does hit that four

percent number or even below UM. But then again, the Federal Reserves definition of full employment, we still don't know it, and we expect that it's a little bit lower than where we are. But I think that we we we all have this day of reckoning where this is the year where the policy is going to change, and so UM you know, whether it's priced into the market or not.

I would tend to believe it is, and that stocks still represent the best um alternative for long term growth just because of the potential again for earnings growth, the strength of US corporation's net net, and the fact that you know, lates go up, your bond prices go down. So um, not our favorite place to be. All right, thanks very much for joint answer back. Great having you on the program. Earlier today we had the I s M data came out with some manufacturing data came in

at fifty eight point seven. The consensus was first sixty. It's a little bit below consensus, but still fifty eight point seven. It's more than fifty. That means the manufacturing sector is expanding. Let's bring in Tim Fury, chairman Institute of Supply Management, a business survey committee. Has got his master's and NBA from Rents a Leer polytechnic institute. Those guys are serious math geeks up there at r PI. So Tim loves the numbers. Tim, what did the numbers

tell you today? Are you happy? New year? So seven? This is really a transition, mom transition meaning that we saw the input side kind of weakened a little bit. Supply to the livery number came down, Uh, inventory manufact human torment inventory came down a little bit too, primarily because of in your cash management issues. We saw the employment number gain again slightly, which you've been predicting for the last three months. So everything's really good in here,

no doubt about it. So the transition means that the production number didn't step up to the level that we'd hope that it would step up to, primarily because of the timing issues. Without the month of December, so I would have thought that production number would have hit sixty four or so with that employment number where it's at. Demand is still clean across all the different elements, the new new export orders, customer inventories, backlog, you know, new

order number all really good. And we saw the improvement on the input side, which is what we're hoping for. But we didn't see was the pop on the output consumption side, primarily because production in the step up like it should have, and that was primarily due to the fact that we had timing issues in the month of December. So, um, what do you expect then in terms of the forward looking numbers? Are we going to have an acceleration? Are we hanging around this pace? Um? Or are you worried

about a slowdown. Jeez, you know this is the problem. So we had the same issue back in March and April and in May of June. March enables when we fell off the cliff. Uh. May and June is when we climb back up the cliff. And these monthly surveys, which are great, they're the best and earliest syndicator that we have. At the time, I remember saying that I wish we were doing this thing weekly or twice a

month because things changed so rapidly. Well, what's happened since you know, these numbers were collected is that the omicron virus obviously is affecting a lot more people in anything that we've seen so far. The positive thing is that it's not as deadly as what we've seen so far, but it's affecting a lot more people. Of people being UH tested are coming up positive, which really equates to absentee is um on plan call outs, kids not being

able to go to school. In my own local area here where where I live, UH schools were closed yesterday and today because they couldn't enough bus drivers. So you know, we're now back into this another lumpy wave speed bump where employment numbers are going to be impacted. In January February, supply to delivy numbers are probably gonna end up going

back up. Uh. The manufacturing inventory will probably go back up to reflecting people holding more finished goods and more working process So, but as long as the demands stays strong, Okay, we'll deal with this. But you know, here we go again. We saw a similar thing in late summer with delta. This one is probably going to be a bit worse because it's affecting a lot more people. Tim What are your respond to saying about the supply chain? Is this

a full year two issue? Well, so, you know, we have really positive comments on the shortage side and on the lead time side. Both of those are early indicators. We had ten percent of the comments around shortage is saying that things are getting better compared to November, twelve percent of comments saying that lead times are getting better compared to November. Our comments around hiring were flat at

about seven percent improvement versus November and October. The difficulty in hiring had improved, saying it was difficult to seven percents it was difficult to hire fifty tent saying it was difficult to hire no number. The higher to force manage ratio is still at a really good level. But you know, it's all doesn't really mean all that much.

You have to really rely on what's happened in the last five to seven days, and that is that everybody knows somebody who's sick, and everybody knows somebody who's impact and then it's generally running through families. So that's going to impact the labor number, it's going to impact the employment number, and it's gonna impact the transportation efficiency as

well as this plier delivery number. So that's kind of the that's the Q one forecast at this point is that you know, we're gonna we're gonna stay probably at a pretty high p m I level one, but it was going to be driven again by the input side, not so much by the output side. Tim, great to get your take. Thanks so much as usual for spending some time with this, Tim Fury. They're from I s M. Let's talk about working right now in terms of this very lonely year Workplace Provider i w G. Formally, you

just you probably know them. I certainly do, as there's one in this building. Mark Dixon is the founder and CEO. He joins us to talk about, you know, what this business is like during or hopefully getting closer to after the COVID pandemic. Mark Um, how did I w G? How did we just deal with this last couple of years. Well, we've actually it's a good news and a bad news story.

Bad news stories. Clearly, you know, it's very hard to combat government lockdowns where people are stopped from coming into an office. But you know that's the bad news story. The good news story is the entire world has has of work, has really experienced sort of remote working. Um, it's working other than sort of commuting to a central office to carry out your activities and look at it works. I mean, the whole world didn't all over in the

last two years. In fact, companies have become more efficient, people have become more efficient, and so I'm working remotely has really become something that's mainstream. From being something that was sort of on the edge of what companies did, it's now absolutely mainstream. And that's the good news story. So we've seen consistent growth throughout one We're going into

twenty two very strongly. So you know, we're optimistic on The outlook is more companies change mark, you know, assuming we're going to get through this omicron variant in relatively short order. That's kind of what we're hearing from some of the experts in reality. On the other side of this, what's the office work you know kind of landscape? Are people ever going to go back to the five days in the office kind of thing? Or is hybrid slash work from home the new norm? It's going to be

the new norm. It is the norm today and it's going to stay. Look, seventy seven percent of employees are saying that a place to work closer to where they live it. Look, it's not always working from home. A lot of folks don't want to work from home. They've got too many interruptions, they can't get the job done. But what they're asking for is somewhere close to where they live to work. What the enemy is the long commute, The enemy is the expensive commune. People don't want to

waste their time doing that. So seventy seven percent employees are saying that it's a must have for their next job mode. They absolutely want it. And this, you know, you can talk to any large corporation or any growth company, and they're saying, look at this, what new talent are asking for? An existence talent in talents asking for So it's absolutely going to become the norm. Look, who would ever vote for a one or two hour commute every day? And mean it's an absolute waste of time and money?

Don't doing it for thirty five years? Yeah, but you're you're than a normal pert for more business trips, you vote for a fewer vacation days. You you're strange mark in terms of um looking for real estate right when you're when you are looking for new sites to put offices, are you looking more suburban then now? Absolutely? And we have been looking. We specialized and we have done really

since our inception thirty years ago. Getting full national coverage and national coverage is not about being in New York City and San Francisco and Dallas, etcetera. It's about being in every city in America. And that is what we're working on. Every city in the world, every town in the world. That is what we're working on. Today. We operate in eleven hundred cities. We were operating just over three and a half thousand buildings, but eleven hundred of city.

It's the coverage people are looking for. So we're in full growth mode going into twenty two. We're still opening up, by the way, in the big cities because it's the buying opportunity of a generation, because you know, the cities are depressed worldwide. People there's a lot of space. Prices are coming down. But our focus more than ever is on the suburbs and the deep suburbs, the countryside because that's where people have moved to in the past two

years and they're not coming back. They're not coming back. That's a that's a very very interesting and it kind of drives what we hear from a lot of employers as well. Mark Dixon, founder and CEO of i w G p LC. So let's think about twenty two. We had a great one. We're talking to SMP, but all right now I gotta start all over again. We reset Brian Well and he's a co chief investment Officer and

in general's portfolio managic TCWS Fixed Income Group. Brian, I know you guys are TCW, you know have been really I would say caution, it just kind of feels to me a cautious outlook here. How are you thinking about the fixed income markets? In two, where are opportunities for fixed income investors? Yeah, well thanks for having us. Um, I don't know, I there's a lot of opportunities. Talking about a great year in one, I mean that was for equity and a lot of other things. You know,

it was well my friends that trade trade credit. I'm like, what do you guys do for a living? I mean, what do you do? I guess that isn't so bad for most people for a bond manage, you know, and even like we don't like to put any negatives in front of our parent numbers, but but nonetheless that's what we had. You know, it's a it's an interesting year. Um. You know, outright, yield levels obviously are not not attractive.

I mean, if you were just to put the year to date moving perspective, if you were by the bond on New Year's Eve, uh, you know, we've moved up about seventeen basis points since then, so you've lost almost two years of coupon. Uh. And it just kind of tells you the vulnerability at these yield levels. So, um, not a lot of market opportunities yet, You're right, we've

been defensive. We've got our powder dry, um and I think, you know, the moving interest rates and what you're seeing happen in some sectors of the stock market reacting to higher rates, you know, it's probably indicative of opportunities to come in the bond market, particularly in parts of the credit parts of the bond market like corporate bonds, emerging market bonds, etcetera. So what are your clients, I mean, you're not managing a small chunk of change. Got two

dred billion dollars in fixed income assets? What are your clients looking to you? Are they mainly um hedging, hiding from risk? What's what's um? What's the interest right now? Yeah? Look, I think you know, you talk about bonds and the and the I think you're kind of alluding to the role that's supposed to play in the portfolio. I mean,

you know, let's kind of make it round numbers. I mean, you know, let's talk about the ten year you know, want one point seven percent um on an outright yield basis not that attractive, But you know, it's all about the portfolio. Uh. And you know, if we hit a scenario where you know, let's say we hit the parket of pocket of volatility and for some reason equities declined

basis points. You know, what you're going to get from your bond portfolio may not, on an absolute basis be what it provided in the past, you know, but you could still get a kind of an upward of close to a ten percent with positive return, you know, in an overall bond portfolio, um, which what should help kind of mitigate some of those losses. Brian, I know you spent some time at Donaldson Lufkin and Jenrette DLJ. They

had in the day. Yeah, feigned high yield effort there until my credit Swiss first Boston came in and bought you guys, and then it all just went south. But let me tap into your high yield expertise. I'm willing to take some risk. I'm willing to go into the high yield market. I'm willing to take some credit risk.

What sector should I look at? Be careful? Be careful, I mean you look, I mean, we just things have been so good, and you know, investors memories are short, and we just came off a year um where you know, the default rate in the high yield bond market, I

mean was basically zero. We're talking about twenty five basis points of a default rate, which you know, historically those numbers are kind of more like, you know, three percent to four percent uh, And it's just been what's such such a strong recovery, such supportive monetary and fiscal policies, you know, and it's not necessarily to say that that couldn't continue for another year. But you also it's like all risks, you got to decide what you're getting paid

for it. You know, in the yield right now in the high yeld bond markets, you know just above you know about four um so, meaning there's there's not a lot of extra spread compression to go. So I think you know ourselves. I think you talk to most you know, experts in the bond market, they're saying, kind of, you know, your returns for the next year in the high old bard market are probably at best a coupon clip, which is kind of that you know, four percent plus or minus.

But if we hit a patch of volatility, equity markets underperform, you know, maybe the Feds a little more aggressive than than the markets currently expect expecting um with regards the rate hikes or the balance sheet reduction. I don't think the credit markets, particularly the high old bond market is going to react to well, so you could see you know, returns you know, go down to the low single digits, if not negative. I want to just get your take on the FED quickly, and also check up on my

producers English language skills. He wrote here FED tapering too slow with one oh, but I don't know if he means FED tapering is going to slow or FED tapering is too slow with two ohs. Well, I don't think you're gonna get it better what they've offered now, which

is basically they're gonna end this tapering. And let's be clear with the listeners, right, tapering means they're going to slow the addition of assets to the balance sheet, which is already close to nine trillion dollars, so you know they're going to kind of end the growth of the balance sheet by March. I don't think you're gonna get anything faster than that. I think the bigger question now, it's not necessarily in today specifically necessarily about rate hikes.

You know, the marks expecting about three hikes next year starting you know, around May. Bigger question right now is, you know, once they stop adding to the balance sheet, are they gonna actually start to reduce it, like well they proactively look to sell securities into the marketplace or let the ones mature and not replace it. You know, that could have a big impact because a lot of the rate move we saw in the last three or four months of the year was about the short end

of the curve. What's the FED going to do with the FED hikes? If the Fed starts changing it's it's it's plan for what it does with its balance sheet in terms of reducing the size of it, that could really impact the longer end of the yield curve. And that has a lot of impacts, you know, across the economy, including the including markets like housing. Brian, I really appreciate your time. Thanks so much for stopping by. Brian Whale and co Ce i oh In General portfolio manager, TCW

Fixed Income Group. 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 on false Sweeney I'm on Twitter at p T Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio