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  • Transcript


    Welcome to the Bryn Mawr Trust Wealth Management podcast, providing commentary on what’s moving the financial markets, financial planning, and other timely business and monetary topics. Please welcome your host, Jeffrey Mills, Chief Investment Officer at BMT Wealth Management.

    Jeff Mills:

    Thanks for joining us again for another podcast. I know we’ve taken a little bit of a break, but given the market moves that we’ve seen over the past couple of weeks, we definitely wanted to hop on here and put forth our point of view in terms of how we’re thinking about the market, how we’re thinking about the economy, and digesting some of the news that we’ve gotten over the past couple of weeks. Clearly volatility is still the order of the day. Volatility is both upward and downward. We’ve had the upward variety lately, so that’s been a welcome change for sure. But I want to dive into a couple of important points in terms of how we are thinking about the way forward and what we think is most likely for the market and the economy in the coming months. So I think number one, just to start, there’s still simply so much we don’t know. We got some news last night that Gilead was doing some clinical trials of a drug, remdesivir and showing some positive signs in terms of, of being a useful therapeutic for the Corona virus.

    Jeff Mills:

    So that’s absolutely great news. This is something that we need to start to see, think about reopening the economy. But what I would say is even with therapeutic like this, it’s not going to be like flipping a switch and turning economic activity back on overnight. I think this is going to be slow. It’s going to be staggered. And even when things are quote open, the question remains, how fast are we actually going to return to previous levels of activity? I still think that’s a big unknown. Going back a couple of weeks ago, maybe even a month ago you know, internally in our research group here, we were contemplating what we would do if faced with this exact situation. We were near the market lows and we pose the question, what would we do if we got a really rapid market rally to the upside. I think at that point in time, most folks weren’t considering that reality.

    Jeff Mills:

    But I think now that we’re there, having a plan is extremely important. So clearly the interpretation of the rally for us would depend on the news of the day and what had transpired over that period of time. But ultimately we felt like if the market moved to this magnitude to the upside this quickly that it probably would be some sort of knee jerk reaction that wasn’t necessarily founded upon fundamental. So here we are today and I think our conclusion then in our conclusion now is that we would use this as an opportunity to actually slightly reduce risk in client portfolios. We don’t feel like chasing the market higher here makes the most sense. Obviously we’re longterm investors. We’re, we’re along the market all of the time. We feel like timing the market is extremely difficult. So we usually preach and always preached, that sticking with a well thought out plan really is the most sensible way forward in all situations. But in terms of where we are today and what we think might make sense in portfolios, I do think that using this as an opportunity to take a little bit of risk off makes the most sense given that we’ve been given a second chance to do that with the market up, some 30% from the lows and we are faced with potentially one of the slowest economies that we’ve experienced in our lifetimes and really at least some of the most rapid deterioration that we’ve seen in economic data in our lifetime. I think you also have to believe at this point that with the markets this high this quickly that some of the incremental good news like the remdesivir drug is reflected in stock market prices.

    Jeff Mills:

    So that being a catalyst for another material move higher is at least in our opinion, not likely. I also think that it’s interesting, I’ve mentioned kind of the speed of the move that we’ve seen. It’s interesting to think about this move in relation to what we saw after the most recent significant sell off before this in late 2018. So at that point in time, the market rallied from Christmas Eve to about 30% off of those lows, but that took seven months. We’ve seen that same magnitude of rallies, so about 30% in just about four weeks this time. And this time we’re faced with, like I said, potentially one of the sharpest economic slowdowns that we’ve ever seen. And when you’re looking at data like initial unemployment claims or retail sales or manufacturing housing, we’re seeing changes in this data that we haven’t seen in a very long time, if ever, in terms of the swiftness of the contraction.

    Jeff Mills:

    So I think that’s a very interesting and important perspective in terms of investors not necessarily assuming that the worst is over just because we all of a sudden find ourselves a 30% or so from the bottom. So I wanted to make a few points related to that in terms of what we’re seeing under the surface in the markets and why we believe we might need a little bit more time to heal versus just going in a straight line back to all time highs. So the first point would be looking under the surface a little bit in terms of how stocks are reacting below the broad index level. And it’s interesting to see that investors are still putting a huge premium on stocks that I’ll say trade like bonds. So growth stocks, stocks with a high stable earnings consumer staple stocks, healthcare there’s no real reflationary trade or economic rebound trade to speak of looking at sectors like financials or industrials or materials.

    Jeff Mills:

    These are areas that you would usually expect to outperform coming off of a market bottom after a recession. And that’s simply something that we’ve not seen yet. If you look at sector performance this past week, there was a very clear bifurcation between those growth, more defensive areas and the more cyclical areas of market with the cyclical areas still underperforming. And that is and would be very unusual for a firm and stable market low. Usually markets don’t behave in that way, so that’s one thing that we find interesting. I think looking at the credit markets is always informative as well. This is not caused for huge alarm right now we have seen some healing and credit, but we have seen as small divergence in high yield credit the last few days as the market has continued to rise, high-yield credit is actually rolled over a little bit. I’m somewhat unusual.

    Jeff Mills:

    Usually you would see credit spreads start to tighten as the equity markets recovered higher. You’re actually seeing the opposite right now. So again, it hasn’t been a dramatic divergence, but it is worth keeping an eye on and it’s something that we’re paying very close attention to. Another thing that I pointed out this week to our advisors and folks internally, is that I think given the move in stocks, investors are assuming that maybe stocks know something that we don’t, in terms of the economy and I, I think answering that question is really important. The conclusion, at least in our opinion, stocks typically trade with or alongside leading economic indicators. They really don’t anticipate them with any material lead. So if you’re looking at leading economic indicators like manufacturing, housing, consumer confidence, small business, these are all things that tend to bottom along with the stock market. If you go back to 2009 every market bottom that we’ve seen since 2009 so after material sell offs in 2008 2009 in that 2010 to 2012 period, there were a few sell offs 15 and 16 and then 2018 as well.

    Jeff Mills:

    In all of those cases you saw leading economic indicators bottom along with equities. So I guess the question we should all ask ourselves is, do we feel like things like manufacturing, housing, consumer confidence, small business sentiment that we feel like they’ve bottomed or do we feel like there’s probably more downside there? I would guess that there’s probably more downside in some of those leading economic indicators. So it would be very inconsistent based on history for the market to have made a bottom while we still see material downside in some of those economic indicators. So I think that’s also something that’s important to think about. And, and very finally, I’ll just point to valuations. You know, I think investors have been trained over the past decade to assume that lower rates equal higher PE multiples or higher valuations. And the one thing I wanted to point out is this is not always the case when you’re in a higher interest rate regime, which we are clearly not in right now.

    Jeff Mills:

    A decline in interest rates is actually a reduction in risk. So companies are able to borrow more easily, there’s more liquidity and therefore that tends to be a support for equity multiples. The opposite actually tends to hold true in low rate environment. And those periods, higher rates are typically a function of improving, improving growth, a better economy. And that usually warrants higher multiple. So when you think about lower interest rate regimes in the 1950s, the 1960s, the two thousands rates falling has actually left PEs lower versus the other way around. So I think to assume that just because we’re in this low interest rate regime, that price to earnings multiples or valuations on the equity markets are automatically going to snap back to higher levels. I think that it’s, it’s certainly worth considering that that doesn’t happen or at least doesn’t happen extremely quickly because considering where earnings are likely to be and where equity markets are today, that would mean that PE multiples would have to remain quite high to sustain current market levels.

    Jeff Mills:

    You know, ultimately we always preach sticking with a well thought out plan. We always preach that timing. The market is very difficult. And this situation is certainly no different changes to portfolios or your asset allocation. These are things that should be in place and should contemplate difficult markets as it relates to your risk tolerance and the returns that you need from your portfolio to achieve whatever your future goals are. It is very hard to make tactical investment decisions that are predicated upon timing the market. The fact that we’ve decided to reduce a little bit of risk in portfolios at this juncture I think just reflects prudent risk management in an environment where the markets have moved a tremendous amount higher in a situation where we don’t believe the fundamentals necessarily support that. So we feel like we’ve been given an opportunity when faced with potentially one of the worst economic slowdowns that we’ve seen in our lifetime to at least reduce risks, some in portfolios.

    Jeff Mills:

    That doesn’t mean we should be rooting for the market to go down. I think sometimes investors can develop a sort of a biased frame of mind when they take a little bit of risk off the table, they start to root for the market to go down just so they can be proven, quote unquote. Right. I think all else being equal, we’re all better off if the markets continue to rise from here. Even though we’ve taken some risk off, I always use the analogy we shouldn’t necessarily hope that our house catches on fire just because we have insurance. And I think this is very much the case today. But I think our view is clear. We’re not sure that current market levels are justified and we do think that there is the potential for additional volatility. There’s so much we still don’t know predicting the markets in any environment is hard.

    Jeff Mills:

    And perhaps even more difficult today just given the uncertainty around the virus when the economy is going to reopen, how it’s going to reopen, and what therapeutics are going to be available as we move into the fall and next winter. And ultimately what the timing is on a vaccine. None. Those things are predictable and therefore the market’s reaction to how things evolve over the next number of weeks – certainly not predictable either – but we have to react and we have to have a point of view based on the data we have today. So ultimately that is where we stand. So hopefully that was useful. We always enjoy getting on and communicating with our clients in this podcast format. We hope you all find it useful and we appreciate you listening. Thanks so much.


    This has been a production of Bryn Mawr Trust. Copyright 2020. Visit us online at forward slash wealth. The views expressed here in are those of Bryn Mawr Trust as of the date recorded and are subject to change without notice. Guest opinions are their own and may differ from those of Bryn Mawr Trust and its affiliates and subsidiaries. This podcast is for informational purposes only and should not be construed as a recommendation for any product or service. BMT wealth management provides products and services through Bryn Mawr Bank Corporation and its various affiliates and subsidiaries, which do not provide legal, tax, or accounting advice. Please consult your legal, tax, or accounting advisors to determine how this information may apply to your own situation. Investments and insurance products are not. Bank deposits, are not FDIC insured, are not backed by any bank or government guarantee, and may lose value. Past performance is no guarantee of future results. Insurance products not available in all States. Any third party trademarks and products or services related thereto mentioned in this podcast are for discussion purposes only. Third party trademarks mentioned in this podcast are not commercially related to or affiliated in any way with BMT products or services. Third party trademarks mentioned this podcast are not endorsed by BMT in any way. BMT may have agreements in place with third party trademark owners that would render this trademark disclaimer not relevant.