Ugh! Not Politics Again!

SMP five hundred from its lows in March. We'll talk with a veteran investment strategist and economist about what an unusual summer it was and how, like the changing of the seasons, markets maybe in store for some less favorable weather, and as always, will close out the episode with our tradition the craziest thing I saw in markets this week? Sarah, I got a warning. I'm double dipping on the crazy things this week. That's good because I really am lacking.

So maybe I'll have to take one of yours, A good good Actually I got one from our collie, Emily Barrett. Well maybe you can use hers. But uh, and as you said, returning to the show, Uh, really a great guest I like this guest because every time we see her, she makes me think and makes me laugh about markets and just the world in general. Her name is Nila Richardson and she works at Edward Jones. Nila, welcome back to the show. I think this is your third time,

is that right? Thank you, Mike. It's so great to be here. And I wasn't sure you were talking about me, so thanks for confirming that. No, I gotta say, I'm also happy to have you this week because I know you're a proud resident of the Great Garden state of New Jersey. And our friend Sarah here, believe it or not, has just discovered the Jersey Shore for the first time in my life. I went to the Jersey Shore, and

I can say I will be going back. Sarah's from Florida, and I think the Jersey Shore is basically like Florida with with colder water. Yeah, I had a hard time getting in the water. Used to like eighty degree water in Florida. Wasn't the same up here. So, Dila, the first question has to be what's your favorite Jersey short town? Jeez, I don't know if I have one. I can't say that I have one, but I can say that in Florida you probably see a lot of New Jersey people, right,

I mean, isn't it basically the same people? Right? The people are the same, the beaches are different. Do you have a favorite? Oh that's a loaded question, you know. Sarah asked me that, and I unloaded with about a four thousand word in response with footnotes. I like your diplomatic answer though. That was a good one. You can. It's a touchy subject, the most pressing question of the entire podcast. That's right, that's right. But I'm very excited. I think Sarah is gonna end up being a Jersey

woman eventually. I can see it coming. Work on that hair. You need to work on getting that hair a little higher, work on it, tease it up. But Neila, you know, as Sarah said in the introduction, Wow, what a crazy summer it was. I mean, you know, this ferocious melt up in the stock market. I guess now this week we're looking at Thursday, a massive sort of sell off, the market coming back to earth. I mean, was that inevitable? Do you think? And how much should we worry be

worried about this latest volatility in the market? In your mind, it was inevitable, and we shouldn't worry about it. I'll tell you. I mean, this is the early stages of what we think is a bear market recovery that could turn into the next bowl market. It's an early bowl. It's gonna wobble before it walks. And it's been so fast this rally that the economic fundamentals haven't had a chance to catch up yet. So I would frankly worry

to see the rally continue in this relentless way. We should expect some occasional sell offs, an occasional pullback that would not be outside of historical precedent for any year, especially a year with so much economic inncer outanty is the one we're in now. So like you said, it was inevitable. I mean, you look at some measures of momentum for the SMP five hundred, for the nasdack reaching

the highest level since January. I mean, there's no doubt that we had seen this unbelievable runs pretty much just relentless since the March bottom. Does this open up a window for a new regime? Though, I know a lot of people have been talking about this rotation, and the self we saw on Thursday was very much tech lad

Can we possibly know that yet? Not yet, But this is what we expect, and this is why we're telling our clients to maintain a diversification, maintain exposure across asset classes and sectors, especially those sectors that are poised for an economic recovery. So that's international, small cap and sectors like financials and industrials. People say it over and over again because it's true, and it's true, and it's true. You can't put your eggs in one basket, even a

kept friendly basket. It's better to be diversified across sector so you can actually gain in in sectors that have been hurt by the pandemic but poised to rise in the recovery. I always wonder about that. I mean, what do you have a different basket in each hand when you're carrying your legs. It's it's very complicated. I don't know how you you actually do that. But no, let's

get back to that economic data. I mean, it seems like there is uh you know, one day there's a data point that looks great, whether it be say housing, um retail sales, something like that, and then the next you know, we're still looking at if you round up to something like a million jobless claims a week. What's the disconnect there? Can that data continue to improve on sort of the rosy end of the economic spectrum as this labor market still seems to struggle to get its

head back above water. Is there sort of a meeting in the middle that will have to come or you know, some of the better data going to cool off as this labor data improves, or you know, what's what's your outlook for how to read the upcoming economic reports? You know, I think of it as a rally. It's like a

four legged rally. The first leg of that rally was ran by the Fed when they cut interest rates, when they dived into the credit markets and promised to buy basically everything that had a cupon except for the lowest of the junk bonds. Um They were the first leg of the rally. And then it was followed very quickly by fiscal stimulus, bipartisan fiscal stimulus, almost four trillion dollars. That's a lot of stimulus. We're still waiting on the completion of that leg. And then the rally. The next

leg was the stock rally. So quick the fervency of that rally from the March twenty three low. So now we're waiting for this handoff from the fiscal stimulus from the stock market to the economy. We're waiting for the economy to take the baton, so to speak. The problem is the data we've seen has shown a slowing momentum. You can see that in the jobs market, for example,

the pace of job gains has slowed. And so the question, and this is going to be where you're going to see the volatility and the disconnect, is can the economy keep up enough to grab that baton and keep running. I think it's too early to do that without some stimulus, without some help, so we're going to need I think at that fifth round of stimulus that's stalemate NG sitting on the sidelines in Congress to really get the economy

shirt up for a sustainable recovery. So this handoff that you're looking for, that and from the stock market to the economy to really take the baton and show that this was all worth it. The rally that we have seen off the bottom was worth it and made sense as well. How much patience should investors have? I mean, how long might that take? Especially considering we have not yet seen another fiscal pack cage, and like you said, the economic data is is a little bit mixed. Well,

let's be fair, Sarah. Investors have been rewarded by being patient and they didn't even have to be that patient. What was it too bad weeks and then we saw this huge rally. I mean, patients hasn't even been required the summer for investors. But investors are going to have to get used to not flinching by a daily move. I think that the market has been actually rather complacent given how dire the economic fundamentals are. So this is a time for for investors to get real in terms

of their expectations. If you look back for the last three years, Uh, going into this week, stocks had been returning the last three years, even before the pandemic. We did not expect that level of stock price return for so we need to reset our expectations for more reasonable growth going forward and occasional pullbacks and volatility and not

let that shake us from our strategy of a diversified approach. Yeah, Neil, I was reading some of the notes you sent over before this interview, and one of the things you mentioned was, you know, if you're if you have a balanced portfolio, say a sixty percent stocks bonds type of portfolio, obviously right now is the time to rebalance that your your stock portion of the portfolio has gotten way above six to you know, whatever it is currently after this melt up.

But the reason I bring it up is I helped edit a story for the magazine last week talking about sixty portfolios, and there's been sort of I wouldn't know if i'd called it backlash, but a lot of people on Wall Street out there saying sixty forty is not the way to go going forward, given that treasury yields are so low, no one really expects them to go negative, and you know, so you could get that sort of less leg of capital appreciation, and the stock market valuation

is so high that both of those are sort of foreboding for for future returns. I mean, the obvious question then is a tough one. What do you do to replace a sixty forty? And I think that could be the subject for about a five hour podcast. But I'm just curious, from where you're sitting and talking to clients of Edward Jones, has it reached the level of sort of the individual investor yet that they're worried about the classic approach to a stable, balanced portfolio like sixty forty?

Are they asking about alternatives about sort of you know, taking a little more risk besides say an index fund or or a real conservative mutual fund. Is there any interest from sort of the mom and pop investors and institutions even to go beyond sixty to say well, this worked great for the last I don't know, forty years, but yeah, yeah, however long you measure it. Is this

a false alarm? I guess to finish off my thirteen part question, it's also a false false alarm about this sort of the outlook for a sixty type of strategy or is it worth considering sort of branching out and looking at some alternatives. It is a real placeholder of perspective for clients. I will say that, look, we are in this current environment that is likely to stay with us for a long time of lower for longer interest rates.

And we thought they couldn't go any lower. They actually went lower in and they're likely to stay there longer. If you really think about what the Federal Reserve has done cutting rates near zero. Yes, okay, that's the first thing, But then introducing a whole new concept, a whole new level of flex ability in terms of saying, we are not going to start raising interest rates as soon as we see inflation creep up to two. We're actually gonna let it creep up, and we're gonna let it creep

up for some unspecified amount of time. What that basically did, um when the FED announced that last week average inflation targeting policy, said we're going to keep interest rates, short term rates very low for a very long time past and perhaps even longer. And so what that says to clients is, WHOA how am I going to get income on my bonds that are paying me nothing? And so bonds have really two purposes, right, One is for income and the second is to cushion against volatility, and both

of them are. The income one is for sure lower when you have lower yields, but also the volatility cushion isn't as strong as if you can't see the interest rate decline a thousand basis points like like we've seen under certain economic environments, there's not a lot of room to move for interest rates to go lower. So the question is how do I get that kind of growth? How do I get that kind of yield, and this

is why diversification matters. When you see a move like you have seen recently with a text sell off, it's important not to abandon that growth strategy because you're going to need it in your portfolio. This is an environment where you have to play both offense and defense because you're going to see volatility, So you need to have some defensiveness in your portfolio. That's fixed income, that's utilities, that's consumer staples, which you're going to have to play offense.

And the last thing I'll say is people who get close to retirement think, oh wow, I'm going into retirement my distribution stage of life. I need to really pay attention to markets now. And I think what gets lost in that thought process is that you could spend twenty five years in retirement. Uh. If you think that there was a bear market every three to four years, you could see eight bear markets in retirement. So so to give up on growth too early could be a mistake

for your long term enjoyment of your retirement. Eight bear markets sure, and retirement is not by that that you're going into retirement. No, I'm never going to retire. That's the only solution retire. You know, Mike, I think Nila needed more patients though for that question you asked than stock investors maybe needed all year that it was the long one. She answered, that's not bad. That's that I'd give it an a plus. Nila, I do want to ask you a hypothetical though, and kind of put you

on the spot. Oh, that wasn't putting me on the spot just now with Mike, Okay, the entire time, Nila lives on the spot. Right. So it's very early on. We don't know if this volatility that we have seen is going to continue to the extent that we have seen what we saw towards the end of this past week. If we were to see this continue, is it possible old that we could see the Fed at its meeting this month do something more or say something more to try to ease the situation. And if they do, what

would that mean from a portfolio perspective? You know, there's a variety of ways to answer that question. I'm going to answer it this way. I would like to think, and I do believe this, that the Fed will not be swayed by market moves. They know that they have done what they intended to do by their action, which is to add liquidity to the market and to improve credit market functioning, so we could continue to see the

flow of credit to hard hit consumers and businesses. Beyond that, to change policy to make sure that markets keep climbing is not part of the two pronged mandate that the FAN has. That mandate is to price stability and and full employment. And so what I hope you see is what's in that input function for the FED is the unemployment rate, which is still very high, and we know

it's higher for our minority groups. And so I think what the FETE is doing actually is really taking a deep look into its practices of full employment and making sure that that is as broad based and reaches as many communities as possible. What you might see, though, the volatility do in terms of actors is to nudge Congress, which is sitting on a fifth round of stimulus that

you know, we're gonna quibble over these numbers. But if the Republicans initial bid was a trillion dollars in new stimulus and the Democrats was three trillion, look, it's still a trillion dollars in stimulus. That's a lot of stimulus and Act five of the bipartisan legislation would do so. Um, I think that's what vulnerable households are waiting for. But you might need a market nudge, unfortunately, to get policy

makers to that point. Yeah, that's a big bid esk spread there between a trillion and three trillion, But you're right, it's you know, starting with a high base. You know, Neila, they say not to talk about religion and politics. I'm not gonna ask you about religion, but you you did bring up the politics, and I think we can't help but have to talk about it these days. Uh, the

election coming up in November. Um, we've had a few stories out at Bloomberg talking about the way people are sort of trying to hedge the event risk of the election. Really almost unprecedented hedging taking place across all asset classes. But you know, how do you communicate to clients about

the risks and opportunities ahead of the election. Um? Does it make sense to sort of take some risk off the table to to try to sort of, you know, book some profits ahead of the election or is is that a fool's errand to try to do that given how how this market has just been melting up anyway. You know, we've had one and very consistent message about elections and election years, even elections in UH don't play politics with your portfolio. I'm gonna grant a number of things.

I'm going to grant that we've seen an unprecedented prize this year in terms of the pandemic. I'm also going to grant that this is a very divisive election where because exacerbated by the pandemic, you're seeing social upheaval. You're seeing racial injustices being protested in the streets. You're seeing higher than ever before, jobless numbers g d P declining by the most since the Great Depression. So there's a lot going in to a vote in November this time around.

But if you look historically, it really doesn't matter over the long term who controls Congress, who controls the White House. UH stocks have performed on average ten percent regardless of who controlled what in Washington. And I know I lived in Washington for fifteen years. It's full of very important and very self important people. So I know that this is going to be heart wrenching to know that they

don't control everything in the economy. But it's really economic and corporate fundamentals that matter the most for a rally, so any reaction we see, and I do think we'll see a reaction to the November when it's likely to be short lived. It's likely to be a knee jerk reaction to what's going on, and it's likely to wash

out over the longer term. I do always wonder what that said, with the amount of research notes that landed my email in box this time of year, how much are people just almost forced to comment on election volatility because it's coming up, because it's a talking point, and you just have to have something to say. If you're a strategist or if you're a financial adviser. Well, I'm always warried of being prompted to say something I don't

have anything to say about. That's not a good But I think there is also a difference between policy and politics, and we conflate the two all the time. But you can talk about policy. Policy has an effect on companies. It has a disproportionate effect, and so the nuance is actually really interesting. But it's not a headline, it's not

a talking point that's easily given. It's so much easier to just make this bipartisan reference to Republicans, Democrats, Biden, Trump instead of digging into the policy details, because that's where the devil lies, and the devil is what controls the outcomes, Uh unfortunately in some of this policy legislation. So it's really digging into those details and seeing how that affects particular sectors and who benefits and wins. And that's hard work. I think we got the headline there,

Sarah Nili says, the devil's in charge. You know, as much as I try, I can't get the headline right. You you are very good at at uncovering the best headlines. That's that's our job. But I guess from a sector standpoint, maybe it makes sense to pay closer to the election, right. I mean, you got Biden is a clean energy guy. Trump's a dirty energy guy, and you know you could you could go down the list. Um is even that fullist you think to try to game that too much? Mike,

I would never say anything you said was foolish. But but I I know because I was a gut I was a government economist. I worked on the Dodd Frank legislation, and I know firsthand that what is promised on the campaign trail looks a lot different by the time it makes its way through Congress and into the government agencies which actually right and enact law. So again, then first response, the knee jerk response, it's it's too early, it's short lived.

Seeing how these policies play out as they moved through the democratic process is what's really important. This is why we're so lucky to have someone like you on the show. Alright, Mike, I I think it's that time, though, Is it time? Okay? Nearly? I know you're a veteran of the show, and you know it's time for the craziest thing. Stand clear of the craziest things we saw in markets this week? All right, well, I'll give you Emily Barrett's oar calliguet. Emily Barrett gave

us this one via Marty Frisden. So the year to date return on high yield debt turned positive in August, and the distress ratio, that is the percentage of bonds yielding greater than one thousand basis points over treasuries hit an all time low for recession. That's kind of a mouthful, but I guess that is a that is a pretty crazy thing. I guess not that surprising giving the purchases the Feds making in the in the corporate bond market. Um. But now, how do you pay close attention to the

credit markets? Uh? You know, as far as trying to suss out the prospects for the stock market. You know, I I did. But the credit the fixed income markets have been so appeased by the Fed. I mean, there's been a remarkable level of stability. So if they're telling us anything, they're telling us the same thing over and over and over and over over again right now. Um, So it's really a disconnect from what we're seeing in terms of Riley. The fixed income markets are staying high.

I mean, we might see some courage stepening, but they are at high levels and their price for the economy that we're in, whereas stock markets continue to drive towards the economy we hope to be in a year or two from now. All Right, Neil, Well, Sarah dropped the ball on the craziest thing. I'm really sorry, guys. Yeah, that means I'm the winner again, I guess, unless Nila you can come through with with something. Uh for us here, you have you seen anything crazy this week? I've seen

a lot of things crazy this week. Uh, schools just reopened in Jersey, enough said, but nothing market related, that's popping popping to mind. Sorry, Mike, you know what, I actually know, you know what. I do have one. I do have one. I'm sorry. So there was a lot of focus on the spread in implied volatility markets this week. If you look at implied volatility for the NAZAC one d compared to implied volatility for the smp SO, VX

and minus vix at the highest spread in sixteen years. Um. And this was happening leading up to the trading day on Thursday, which is kind of when we saw this complete unraveled, the NASDAC down more than five per cent. And there are a lot of theories kind of tussling around about why this is was implied vall for the NAZAC so high because people were hedging against something like this, or does it have to do with some serious out of the money call options that were being placed forcing

to there's a hedge. Um, so pretty crazy. And it's also it's it's gotten a lot of focus this week. That's pretty good. Is it? Is it those guys on Reddit again doing maybe if one of them listens they're gonna maybe if one of them listens, you can give us a call at our podcast outline and leave us a message and let us know to you those characters are acted up again. All right. I know Neil has got to leave us soon, so I'm gonna go through

mine quickly. So I thought this was gonna be the first time where I would take both gold and silver in uh craziest things. But you came through there. You came through at the last minute. But let me give you mine once again in the alternative assets space. And sorry, you're a millennial, so I often go to you to make sense of of millennial stuff for me. Is it

true you guys are all crazy about house plants? Um, I can tell you that I have a fake six foot fight histry sitting in the corner of my apartment right now. It's not a real house plant, but it does look like one. So yes, we do love house plants. All right. Let me tell you about this house plant in New Zealand. I'll left the New York Post headline, Uh really explains it all. Headline is some sucker in New Zealand just spent five thousand dollars on a house plant.

And apparently there's something called a mini Monstera which is a very fancy house plant that they've seen all sorts of interest in some auction site. House plant. Auction site has had more than thirty three thousand searches for this five thousand dollar house plant, and the post did the math for us um it doesn't have many leaves on it, so they said, if anyone counting that breaks down to about per leaf, I can't say that I would spend that much on a house plant. Mine was about sixty

dollars off of Amazon um. But people have different tastes, right, Maybe he should start making the fake Monstera plants that

that could be uh A little side. Okay, one other alternative asset class In California, with all the wildfires, private citizens are now buying fire trucks again, according to a New York Post with you know, the paper of record for crazy things, but they say, concerned over destructive wildfires, California residents are going to Kreigslist, the ultimate over the counter market, to buy fire trucks from a Sacramento company called Vans from Japan, including a sixty nine thousand dollar

peer built water truck. What's become of the world when private citizens have to buy their own fire trucks. This is distressing idea that what's going on in California is so sad. But we can always kind on Mike to come to us with the alternative investment strategies. Next thing you know, Nila, someone asks you about sixty, you're gonna say, O, why don't you go buy him on Sarah plant or maybe and a fire truck the ultimate and diversified assets. That's that's a free one for you, Nila. You can

use that you well. I mentioned our podcast hotline. Remember if you give us a call, when may play a message on the show. If you leave one, it's six or six three to four three for nine zero And unfortunately we are going to have to leave it there. Soney La Richardson, thank you so much for coming on the show today. Thanks for having me. It's always great to talk with you too. What goes up. We'll be

back next week. Until then, you can find us on the Bloomberg Terminal website and app or wherever you get your podcasts. We love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us and You can find us on Twitter, follow me at at Sarah pont Seck, Mike is that Reaganonymous, and you can also follow Bloomberg Podcasts at podcasts. Of course, thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City

Subway System. What Goes Up is produced by Jordan Gospore. The head of Bloomberg podcast is brincesco Levie. Thanks for listening, See you next time.