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MARCH 27, 2020 – FINANCIAL MARKETS INSIGHTS

Podcasts

  • Transcript

    Introduction:

    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, Jennifer Fox, president of BMT Wealth Management.

    Jennifer Fox:

    If you’ve ever been on a plane you’ve heard or most likely ignored, like I do the emergency instructions, I mean seriously, who can’t figure out the seatbelt. However, in every emergency speech there is a bit of life wisdom. It’s often given very dryly unless you are lucky enough to get that special flight attendant on Southwest who’s a comedian just waiting to break out. The advice is this. In case of sudden cabin depressurization, oxygen masks will fall from the overhead. Please be sure to put your own oxygen mask on first before attempting to help anyone else. Then breathe normally. I think it is fair to say we’ve experienced our version of sudden cabin depressurization. We had a really strong start to the year on all fronts and then suddenly beyond our control, things have changed. I don’t need to tell you, you know and are hearing more often than you want.

    Jennifer Fox:

    All the details. The oxygen masks have dropped. So far, we focused on helping everyone else with their masks, our kids, our pets, our family members. We have a lot of people looking to us for advice, counsel help and how to make a peanut butter and jelly sandwich for lunch. It’s starting to feel heavy and harder to breathe. It’s really hard to do this without taking care of ourselves first. Find a way to put your own oxygen mask on. I want you to enjoy this early spring weekend by taking care of you and what is important to you. Sleep in if you can, get fresh air, go for a walk, take a bubble bath, workout, breathe in deep. All that helps you to relax. Breathe normally. Allow yourself to create the space you need to recharge. If we don’t recharge, we won’t have the energy to help those we love or help those who need us. At Bryn Mawr Trust Wealth Management, we are taking the weekend to put on our oxygen mask. Our mission is to connect you, our clients to your purpose and promise. Please do not hesitate to contact your relationship team. Do not hesitate to contact me at [email protected] We are recharging to be here for you. I’m going to turn the podcast over to Jeff Mills, BMTs chief investment officer for perspectives on the markets.

    Jeff Mills:

    Okay, well here we are with another podcast and here we sit at the end of another really interesting week. We wanted to make sure that we continue to be out in front of everyone and as things change day by day, if not hour by hour, we’re putting out our latest thinking as we continue to digest new pieces of information. Like I said, it’s been an interesting week. I don’t think many investors would have expected a a 20 plus percent rally or so this week. But, but here we are. And, and let me just jump right in by first saying that these kinds of rallies from deeply oversold conditions 2025, even 30% within the context of a bear market are not uncommon. We saw it in 2008 and again, these kinds of rallies are certainly a fixture of bear markets throughout history.

    Jeff Mills:

    So I think that’s exactly what we’re seeing right now. And maybe it shouldn’t be a surprise to us as things move so swiftly to the downside. But as we got incremental good news, uh, the fiscal stimulus package passed that the market was poised to at least have a little bit of a relief rally. I think the question now is have we seen the bottom is the worst over? Mmm. Look, nobody knows is the honest answer. Our point of view is that we think it’s going to take a little bit more for stocks to move sustainably higher. I think once we move into the third and fourth quarter of this year, as we start to see economic data improve and as investors start to look to 20, 21 where I think the earnings outlook is going to look far better than it does now for 2020, that’s when markets are going to be able to move higher in a way that doesn’t involve the kind of volatility that we’ve seen over the past couple of weeks.

    Jeff Mills:

    You know, in the very near term, when I think about the few days that we’ve had to the upside, it’s certainly nice and it comes as a welcome relief, but I would actually take a lot more comfort in a few days where stock prices were only up a percent or two were only down a percent or two. I think the wild swings up and down that tells me that investors still can’t quite figure out what’s going on. You have these massive swings in price as new pieces of information are digested. And again, it tells me investors simply can’t find what they believe to be the right price that is reflective of the most likely outcome over the next couple of quarters. So again, as as it relates to really feeling like the market is calming down and that we may have seen the worst, I would prefer to see a much more contained market moves.

    Jeff Mills:

    Even though the market has moved up so dramatically in the past couple of days, I also looked at the credit markets. I think there’s a fair bit of wisdom to be gained by what’s going on in the bond market. And although credit spreads have come in a bit, I wouldn’t necessarily say that they’re consistent with dramatic move higher and stocks that we’ve seen. We’ve seen an improvement, but the correlation between what’s going on in credit and what’s going on in stocks doesn’t necessarily line up with a fair bit of stress still being reflected in the credit market. So that’s something that we’re watching really closely as well. The Fed has now stepped in and is supporting credit markets and I think that’s certainly a positive and I think it does effectively cut off some of the downside risks to equities. I think if the credit markets remain contained and you don’t see a whole lot more deterioration there, then valuations and equities at least have some sort of a floor.

    Jeff Mills:

    Do we know exactly where that floor is? No, but at least it does cut off some of that really severe downside, at least in our opinion. And looking ahead, the main issue for stocks still is the coronavirus and I think pricing equities, like I said, finding that that equilibrium level and not seeing these really violent swings in one direction or the other. It’s going to continue to be really hard to price equities properly. And we still have no idea how long the economy’s going to be shut down, how long folks are going to be quarantine and what the impact that’s going to be on earnings. I think until we see a little bit of clarity there, it’s going to be really hard to fundamentally price stocks. Perhaps we have seen the low in stocks. I think that that’s certainly a possibility.

    Jeff Mills:

    But I don’t, I think we should expect a ton of upside from here until investors have clarity. Like I said, specifically on future earnings. I think the government fiscal package has bought us a little bit of time in that regard and again, maybe cuts off that left tail or that really severe downside risk. But at the same time I think it’s going to be difficult for markets to move steadily higher. I do certainly think it’s possible that we test the previous lows from earlier this week thinking about looking for a market bottom. I wanted to talk about that in a bit more detail because that’s the question of the day. And everyone wants to try to figure out exactly where the market bottom is. And again, I’ll underscore the point that we won’t know where the bottom is until long after it’s occurred. But there are things that you can look at, try to figure out how much pressure maybe left to the downside.

    Jeff Mills:

    And one of the things that we pay attention to really closely in the short term is investor sentiment. Usually investors get most negative right at the bottom. So we pay close attention to readings of sentiment and surveys that are published to try to understand how negative or positive investors are in terms of their view of the market. So there’s a company called Investor Intelligence and they do a survey and they simply ask people, are you bullish or are you bearish on the stock market? And we finally saw the percentage of bears higher than the percentage of bulls in that survey. Markets never bottom without this occurring. Again, folks tend to get really negative just at the wrong time. So you never see markets put in a stable bottom unless the percentage of bears outpaces the percentage of bulls. So we finally did see that, which is a, that’s a check in the win column in terms of making a bottom.

    Jeff Mills:

    But that alone I would say isn’t enough to single to signal a precise market low. Some of the other things that we look at just some market internals under the surface, what’s going on. Last Friday was another really difficult day in the market. We were down over 4%. But interestingly, the number of declining stocks only outnumbered the advancing issues 1.3 to 1. So 1.3 declining stocks to 1 stock advancing. Typically with, with a magnitude to the downside of over 4%, you’d expect to see something like eight stocks declining for every one stock advancing. So to see a little bit of that selling distribution of bait and to see markets less pressured kind of across the board, that is a good sign. I think you can look at similar data points. The number of stocks that are hitting new one year lows.

    Jeff Mills:

    Last Friday it was only 19% of stocks were earlier in that week. It was something like 70% of stocks. So again, that really acute selling pressure, we’re seeing stocks fall across the board. It appears that under the surface that’s easing a little bit. And if, if you look at leadership also from, from the sector and industry perspective, I think we’ve started to see some tentative signs there of a rebound as well. So if you look at really cyclical stocks like semiconductors or small caps they’ve started to do better versus their respective industry respective indexes. So I think that’s also a good sign as well. I don’t know that we’ve seen enough of it. It’s certainly hard to know at this point if it’s completely sustainable, but these are things that we will look at under the surface to try to figure out how much selling pressure we think is left.

    Jeff Mills:

    And I think this is a start. There’s no indication that we’ve seen the bottom for sure. There never is. And it can often take weeks or a couple of months to put in a true market low, but these are some of the things that we’re watching to try to determine how much more downside may or may not be left. I think the bad news in all of this is that the economic damage that we’re seeing is going to be large and I think we are going to continue to see data points like the initial unemployment claims number that we saw yesterday. As I mentioned, it was over 3 million, the largest spike by a long shot that we’ve ever seen. And I think investors are going to have to continue to digest economic data points that in reality look like typos but are not. And, and as investors internalize those data points and as we start to understand the true impact on the economy you know, the market is likely to chop around a little bit.

    Jeff Mills:

    And I do think that the blind spot related to to how long and how deep the GDP contractions going to be, how long and how deep the contraction and earnings is going to be. It’s all still big enough that the is going to struggle to steadily move higher at least in the very near term. Although not guaranteed, I think a retest of the previous lows in the stock market would be the rule rather than the, rather than the, the exception. And what we do know from the past is that it often does take a long time for markets to reclaim their old highs. So we went back and looked at all 20% declines from all time highs in the S&P 500. And on average it takes about 25 months for stocks to reclaim those previous highs. So there is precedent or markets does struggle a little bit.

    Jeff Mills:

    Even though we’ve experienced a, a good few days here. So I thought that was really in point important to point out the good news and all of this is that the market will likely bottom before the economy does. We don’t necessarily need to see hard and fast data that tells us the economy has reached its bottom. If you go back and look at economic recessions versus market lows, usually the market bottoms about four months before the economy bottoms. So I think we can take a little bit of comfort in knowing that the market will anticipate the improvement in the economy before it actually happens. I wanted to switch gears a little bit just more specifically to certain areas of the market that we’re watching. I think if you look at mid cap stocks, small cap stocks, value stocks and municipal bonds, these are asset classes that we think are worth paying, particularly close attention to at this point in time.

    Jeff Mills:

    So first the stock market mid and small cap stocks, value stocks, these are areas of the market that have struggled or the past year, but also in particular during the sell-off. So we wanted to take a look at these areas just given how attractive the evaluations are to try to understand how they typically perform after major market sell offs. So we went back and looked at data from the tech bubble, from the financial crisis, from the European debt crisis in 2011 from the oil crash we experienced in 2016. And then from that bed in do sell off that we saw at the end of 2018 and interestingly if you look at small and mid cap stocks relative to the S&P 500 and if you look at value stocks relative to growth stocks, you see some, some consistent outperformance from mid and small cap stocks is as well as value during the 12 months following those market bottoms.

    Jeff Mills:

    So I think especially now considering how far the rubber band has been stretched for small and mid cap stocks and value stocks and the downside that you have this combination of really good value in those market areas as well as the fact that they tend to simply do well after a market low. I think it’s very much worth paying attention to those asset classes. And if you are underweight those asset classes in your portfolio, this may be an opportune time to start to add exposure there. Turning our attention to the fixed income markets, you know, the municipal bond market has been been a very interesting place for buying opportunities in our opinion. If you look at where interest rates are in municipal bonds relative to other fixed income sectors, I think you see the most dislocation there, meaning that credit spreads have widened the most in municipal bonds versus investment grade credit and other areas.

    Jeff Mills:

    And that’s unusual. Typically municipal bonds are thought by investors to be a little bit safer, so you’ll see less credit spread widening there when compared to corporate credit. But what has happened is there, there was an illiquidity problem in the municipal bond market. We really think that was driving the increase in interest rates there as opposed to a real deterioration in credit fundamentals. So as the fed has stepped in to provide more liquidity in the fixed income space and in the municipal space in particular, we feel like those spreads are likely to come in more so maybe relative to other areas of fixed income that were not quite as dislocated. So we’re actively looking for opportunities in municipal bonds as well. I just wanted to end the podcast with some common sense advice. I know that we talk a lot about behavioral finance and our investment philosophy and our publications and, and even in past podcasts.

    Jeff Mills:

    But I do think it’s worth touching on again, because really the way that investors behave during markets like this, it might be the most important element of their future investment success. I think the decisions that are made now during markets like this, they tend to have a really big impact on the future investment success of those investors. So I just wanted to underscore underscore a couple of points there because we are getting more questions from clients. That sounds something like why don’t we just get out of all of our stocks now and we’ll get back in when the dust settles. That doesn’t work in reality. It’s simply too hard to ex execute. And, and really the main reason is you won’t know when the dust settles. Nobody rings a bell at the bottom, nobody tells you. Okay, things are definitely all clear and it’s time to go back into stocks.

    Jeff Mills:

    And that’s what makes it so hard. I think you can feel really smart and getting out of stocks as the market continues to move lower, but it’s that second decision and putting that money back into the market that you really need to get correct and make it all worth it. And I think back to 2009 and a lot of investors I spoke with, they felt really smart because they sold at the right time or at least at a time when the market then continued to go down lower and lower. So they felt vindicated that they had made the right decision. The problem was those very same investors then struggled to put that money back into the market as things bottomed. One, two, three, four years later they still had cash on the sidelines and they’d missed out on new record highs in the markets they had missed out on you know, hundreds of percentage points of gains in the market.

    Jeff Mills:

    So again, having to get both of those decisions correct is extremely difficult to execute in real time. And especially with what’s going on in the market now. And the daily swings are so violent. I think it’s a perfect example. You know, folks who sold when the S&P [500] was last at 2,600 probably felt really good about their decision after that. As the market continued to move lower and we bottomed a little bit below 2200 on Monday the issue is now all of a sudden in the blink of an eye, we’re back up to 2,600. So the question is, what do you do? Do you buy everything back today? Do you hope that stocks roll over again? And then that gives you another chance to buy them back lower? And if you do get that opportunity, will you actually pull the trigger?

    Jeff Mills:

    You know, these are all really important questions that in reality are extremely hard to deal with. So I, I just wanted to underscore that point because it is so hard to time the market. It is so hard to get out and then back in. And these strategies where you go all in or all out usually not a good idea. And you’ll usually only time them, right if you’re lucky. So I felt like making that point was was extremely important. I understand that the stay the course mantra that the do nothing mantra it can start to become frustrating when markets continue to go lower and lower. And as I mentioned, we are looking for opportunities to take advantage of what’s going on in the marketplace. But dramatic changes to your overall asset allocation are just really hard to execute in reality. So I’ll end with that. I always appreciate folks listening. We hope that these podcasts are useful. Please, if you have any questions, reach out to your investment advisors. Reach out to me directly. We’re always happy to help. And we appreciate you listening. Thanks so much.

    Closing:

    This has been a production of Bryn Mawr Trust. Copyright 2020. Visit us online at bmt.com 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.

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