Surveillance: Market Timing with Bitterly (Podcast)

Global Maths Management joins us. Now, Christan just reading for your notes is the quote that just jumped off the page for me. Unfortunately, we do not believe that inflation will fall fast enough for the fair to recognize the cumulative impact of its actions in time to moderate its policies. What's the bottom line then, for the secondary market ranny we're looking at on the screens over the last week.

The bottom market for the bottom line for this rally that we're seeing is Unfortunately, I think we're going to see continued volatility and this type of price action is quite normal in bear markets. This is why we're big advocates against market timing, because when you see some of the worst performance in market, some of the biggest draw downs, they tend to be followed by then the best days. And so if we look at over the past fifty years,

we did an analysis. If you're just out of the market for the two best days of each calendar year, you a race. You erase your per annum returns by over nine point six percent. It's a basically an eight percent reduction in returns. And so in these types of markets you need to expect that type of volatility. And this right now, I think last week, I think we saw some short covering, we saw some defensive buying, But I don't think we're turning a corner until the market

knows that we have definitively avoided a recession. We're not there yet. We will stop the show here, folks, because what you just heard from miss Bitterly is a single most important thing of the first half of two thousand twenty two. Let's revisited Kristen, and this goes back to Capital Guardian Trust American Funds in Los Angeles and their landmark research fifty years ago. How many days if I'm in ash do I need to miss before I destroy my return because I didn't get the few ginormous days.

Say it again, So two days, just two days out of the market, and basically you've erased the majority of your per annum returns and that's over. Again, we've looked at a fifty year period. Now, sometimes people ask the question, well, what's the probability that I could actually pick those two best days and just be in for those two best days, And unfortunately you're better at playing the lottery, So that is no longer an investment strategy. That is pure speculation.

So Christian, that's the argument against cash. The other argument on the other side is there are certain parts of history that are aberrations, including the Great Depression where nothing works and where everything loses, including sixty How do you discern that type of period amide all of the gloom that we're hearing at a strategists, Yeah, so I think we have to look at actually some of the historic

anomalies that we've seen year to day. So one of the historic anomalies that we've seen is the fact that this is the first time in history that we've seen both equities and bonds declined by more than ten percent over a six month period. So to go throughout history and try to find other other examples of when have we seen this decline in tandem. We used the threshold of four and a half percent, and we've seen that.

There's been five other situations in history where you've seen that in tandem decline of equities and bonds by more than four and a half percent in the six months following. In five out of five of those scenarios, fixed income was higher, with an average total return of around ten point nine percent. Equities were higher only in three out of those five times, with an average return of five

and a half percent. So right now, I think, well, many people are questioning whether the sixty forty portfolio is dead. Over a five year rolling period, with the exception of the Great Depression, we haven't seen a negative return of sixty forty portfolio. So, Kristen, just to pick up on what you said, not just for sixty forty, but more specifically, why you have a little bit more confidence is it in the bond market relative to equities or equities to

to bonds. I think you need a balance now, John, But I think bonds have been so out of favor, which is why we're talking about bonds more so. Just three years ago, we had you know, over of the world's government that was negative yielding that's now around ten percent. So the sizemanship that we've seen in rates and the comfort and adding quality fixed income to our portfolios. So

we're looking at the muni market. We're depending upon what state you're living in, you're getting taxable equivalent yields in the ballpark of seven to eight percent investment grade fixed income where you're actually seeing priced into some of those spreads around the forty percent chance of a recession, so it's not ignoring that probability. So that's where we've been adding exposure over the past couple of weeks. Christ, and

this was awesome. Thank you. Christin Billy the a City clubal Weath Management, Lisa R and By with Us with Schroeder's head of US multisector fixed income, Lisa, do you hide in full faith and credit? I think you definitely want to have some of your your risk allocated to pure U S treasuries right now. Um. You know, well, we may have a little bit of a tactical bounce, just given how much things have underperformed in credit recently.

I think the path at least resistance from here is still tighter financial conditions, So I think you want to have a decent amount of liquidity in your portfolio at least with that in mine. What's the risk that we still haven't fully realized? Is it the earning story? What is it? I think the market is. I mean, you guys were kind of talking about the correlations between bonds and equities, and I think it's really relevant here. The market is still gyrating between is it a recession story

or is it an inflation problem? Which one do we have? Um And as you see, I do think that that the narrative will turn towards it's a growth problem. We're going to be heading into a US recession. We're not quite there yet, which means, um, you know, bonds and equities that those correlations can be a bit unstable, and I think you need a greater risk premium um afforded to riskier assets, and credit would be would be a

part of that. So you know, for us, it's it's it's lower it's lower duration credit when we take it. You know, I think the three to five year part of the market credit market, investment grade looks it looks attractive, reasonably attractive with the break evens there um, But it's it's higher quality generally it's like liquidity um and it's not taking a whole lot of risk right now because I don't think we're in a spread compression environment for

the foreseeable future. How much volatility do you think we have to tolerate through the rest of this summer? At least, it's been amazing to me to see how much a narrative changes on a single data point within a data point. When did we ever used to talk about, you Mitch reading of long term US consumer inflation expectations? When did that move to bond market by five ten basis points in either directions set the time for a FED that might go fifty or seventy five at any given meeting.

When did it come to this? And that's and that's the problem. Right until you can figure out or until the market can call us around where the risk free rate block, how could we possibly decide on a path for riskier assets? You know, you you almost need to get some stability in that in that rate forecast before you can see any stability elsewhere. And I think, I don't know how you want me to measure that volatility question, John,

but I think it's more. I think the answer is more volatility continued volatility until we get some certainty that these inflation readings are going to start to trend downward. So, Lisa, if someone were listening to this entire program, they would have heard Christen bitterly make the argument that you don't want to be in cash and that you need to be fully invested because if you missed just a couple of days, you miss an entire eight percent ten percent return,

and it really is the winning moment. What is your argument against that in your quest for liquidity? I think you it depends on who you're managing money for, what use at class you're managing what your targets are. Right at the end of the day, we manage fixed income portfolios, and these are meant to be in many ways the ballast the sleep at night portfolios for people. UM. You know, so we perhaps have a different it risk budget and

and and sort of target then than than Christian does. UM. But yeah, you know, you can't have all liquidity, which is why I suggest, um a decent portion of your exposure be allocated to some of these really high quality investment grade companies at the short end of the curve where you can earn a four four and a half percent yield. You know, over the next couple of years, I think that's going to be a positive real return trade. Um, it's gonna take some it's gonna take some time to

get there, but I think we will. We will be paid and rewarded for something like that, and it gives us the opportunity to sort of hide out and wait and you know, wait for better opportunities to emerge. So, Lisa, when you say liquidity, how much is just pure cash? Pure cash is hard if you're managing relative return portfolios. But I would say, you know, you want a decent portion,

double digit portion of treasury exposure across the curve. So we manage relative return, so we're benchmark to the Barclay sac in most in most portfolios, in many portfolios. Um, And so that means we, you know, we want a high quality liquidity overweight, whether it be treasuries, agency, mortgages, some combination thereof cash cash itself. For us, it's hard if you want if you have an absolute return portfolio that certainly cash is is a is a better option. Lisa,

Thank you, as always, Lisa Holby, there A Shrowders. We start the program this morning with Lori Canvassin, in the head of US ancuity strategy at RBC Capital Markets and lower let's start with that bond market. What is the dominant factor behind lower yield in the last week or so, and what do you think the implications are for the durability of this equity market rally. So, look, it's a

great question. I'll tell you our rate strategy team has been looking for that peak in the tenure yield and they thought that as growth concerns and recession concerns built,

that it would weigh on that bond yield. And we've actually looked at that as something that could help stabilize the tech part of the market, which strangely ends up being a stabilizing force for the equity market simply because of the math of the market cap in terms of its contribution to things like market cap and net income. So I think, you know, it feels a little bit contradictory in nature, but I do think that is one of the things that has really been giving some stability

to market. And I'll tell you, John, as I've talked to investors the last couple of weeks, there's a real focus on the idea that if we get a recession, it will largely play out in the next couple quarters, and we won't have any lasting wounds and scars, and we can sort of get into three, still have a decent year, still have decent earnings. And so I think that kind of rip off the band aid now get through this economic pain. The Fed's helping that process along,

that sort of longer term optimism. One is something else that I've actually just seen in my conversations as lending some optimism to investors. Laura, you're on the road a lot. I want you to get out beyond two thousand twenty three and get away from the strategist game of what's going to happen by next Tuesday, and I want you to look long term. You're more qualified to do this

in anybody out of collegiate America. You lived in the most prestigious dorm rooms in America U v A. I want you to go back to Jefferson and say, how do you do this now for the long haul? How do you stay in the market and not not afraid

in cash right now? So, look, Tom, I think that when we go back and we look at the history of recessions, what we have to remember is that they do typically but get buying opportunities for longer term investors, and you know, we get a lot of caught We get very caught up in my job, you know, without some of my competitors and investors frankly on kind of what's the absolute downside, what is the end of the

year number look like? But if you actually go back and look over the course of recession stock at stocks actually go up a little bit. If you take the n B e R dates, you tend to see these very big pivots areas like small caps. These are historic buying opportunities for that smaller, riskier part of the market. So I think you need to keep those bigger, longer term pictures in mind. First off, the second thing I would tell you is, I think the conversation about recession,

yes or no, when does it happen? That's an important one. But we also as investors, if we're really longer term, need to be thinking about what things look like on

the other side, what's the longer term growth expectation. I'm talking to a fair number of people who think we exited this hot economy, this above trend economy that was boosted by stimulus, if that stimulus is lacking in this economy, in this economic recovery going forward, anticipate a slower growth backdrop which does typically benefit the secular growth sectors like technology. Those will be the two things I would focus you

on right now. So, LORI, that brings us to John's point where he started off, asking are these scenarios consistent with each each other. This idea of a stagflationary spiral where you get slowing growth in a recession and and you also get inflation that doesn't cool materially and a recession that brings us back to where we before, where we were before, and then some so purse out what the difference is and whether there's still is a chance

of that sagflationary environment. So look, I think that there are two parts of the same timeline. I think this idea of recessionary fear sort of playing in the here and now. Frankly, so, I think that's something investors have

already been positioned for. If you look at defensive sector valuations that are at p versus cyclical and secular growth, small cap positioning, and the futures market is down below financial crisis lows, so you know it does feel like that is still playing out in the here and now, but the positioning the market already reflects that that longer term, sort of stagflationary type of environment is something investors can

still wrap their heads around. So perhaps you don't need to be as barished on things like energy as you did in the past, even if there are some pressures in the short term. So we're market weight on energy for for just that reason. Um, but you also do want to think about sort of that longer term backdrop and kind of how you want to be positioned for that slower growth environment, which frankly, I don't think it's gonna exit anytime soon. So I don't think investors are

being inconsistent. I think they're trying to put on different trades for different durations at the same time. Glory also to catch up as always, and great to stop the week with you, Louri Cavassin to that of obbising capital markets. Here's what we're gonna do over a weekend of emotion for American for international audience. It's difficult to calibrate the hortons of the decisions plural of the Supreme Court. We're gonna go to the expert. Mohammed units is editor in

chief at Gallup. They've been doing it longer, They've been doing it more measured, They've been doing it deeper and measuring the pulse in cadence of America. Mohammed, I thought Kate Zerinki in the New York Times was spectacular this weekend. I'm looking at the state legislatures, the Revolution of two thousand and ten, which was very much like Gingrich in

the fabric of America. And I want to go to a phrase that you know, which is try trifecta America, which was when a state is entirely democrat or a state is entirely Republican. Does Gallup presume that we will stay as polarized as we are now and frankly become ever more a trifecta America? There is That's a great question. First of all, Tomas always um there's no doubt that America is politically are divided than since we started measuring

it in the nineteen thirties. There's been no sign during these past um months of the Biden administration that that's improving in any way. However, we do ask Americans whether they prefer this kind of trifecta set up, at least in Congress. And what we find is that Americans, actually the majority of them um prefer a divided government. They

prefer there to be balanced between the two parties. But this decision, like you said, comic really can't overstate the magnitude of up ending fifty years of settled law in the United States, and the reaction has been massive. Completely unfair question, but I'm sure you will gauge it. What is the belief in America in the Union almost a Linclonian union back to eighteen fifty eighteen sixty. Do we believe in union or do we nudge towards some form

of separation. It's again we've never asked that specifically, but um, I would say that that the Union is still intact and will remain intact. And I say that because Americans are overall pretty positive on their own lives and on their local government. Americans are very disappointed in national government and that's really where we've seen the most declined in

confidence in institution in the Supreme Court, in Congress. Overall satisfaction of the United States hasn't been over fift in over a decade now, So Americans are very down on their national government, but there aren't signs necessarily of you know, dissolution of the Union in public opinions, and Mohammada does seem to be a galvanizing of local elections. However, people are looking to the national elections, to mid terms and

beyond to understand the overall trajectory here. Do you have a sense of whether some of these social issues could overcome inflation and economic issues. Is the main voter preference or motivator going into the midterm elections? Well, if you would have asked me to out on Friday before this decision came out, I would have told you that's very hard to believe. UM. Now, it's an open question and obviously depends on how bad inflation and the economy really

gets for main street moving into the selection. But right before this decision, we asked Americans how important abortion was to your vote, and we did see an uptake in those that that said they would only vote for somebody who shared their views. It's also important to remember this decision is not popular in America. Six and Kent. Americans did not want to see Roe v Waite overturned. UM fifty five percent of Americans described themselves as pro choice,

and that's been on the on the increase. So over the past couple of decades, America has really moved, if you will, to the left on abortion. And now this decision by the Court is really out of step with public opinion. Not that it's the long decision, that's not the basis upon which the Court makes its decision, but we know this is not going to be a popular decision with the public. Just a fun a question for me, do you find that is coming up in more than

one topic on several fronts. We often talk about in this country being very divided, but on certain issues it's really not. It's just Washington, d c. That's very divided, damn party lines. Do you sense that's becoming a bigger issue across a range of issues. I actually know. But these are the kinds of issues that really can um These social issues can really really become a focus and can divide communities, and we've seen that in the past.

But overall, Americans are rather positive on local government. They are not seeing their state governments as nearly as negatively as they see the national government. And that really now goes across the board. The Supreme Court just before this decision, after the league hit a record low of twenty percent confidence in the general public in the nineties that was much more close to sort of six year seven percent.

Mohamed one ft to catch up to get your views in the NiTi to off the bank of your appalling mohammate units have count of. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live we days from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud,

Bloomberg dot com, and of course on the terminal. I'm Tom Keene and this is Bloomberg