Private vs. Public Credit Competition Intensifies

As the year gets underway, we are seeing an aggressive rotation from growth to value stocks, triggered by Fed tapering. Will 2022 follow the patterns of the ‘taper tantrum’ of 2013?----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 10th at 11:30 a.m. in New York. So let's get after it. 2022 is off to a blazing start with one of the most aggressive rotations from growth to value stocks we've ever seen. However, much of this rotation in the equity markets began back in November, with the Fed's more aggressive pivot on monetary policy. More specifically, the most expensive stocks in the market were down almost 30% in the last two months of 2021. Year to date, this cohort is down another 10%, leaving 40% of the Nasdaq stocks down more than 50% from their highs. Is the correction over in these expensive stocks yet? What has changed since the turning of the calendar is that longer term interest rates have moved up significantly. In fact, the move in 10-year real rates is one of the sharpest on record and looks similar to the original taper tantrum in 2013. However, as already mentioned, equity markets have been discounting this inevitable move in rates for months. Perhaps the real question is, why is the rates market suddenly waking up to the reality of higher inflation and the Fed's response to it - something it has telegraphed for months? We think it has to do with several tactical supports that are now being lifted. First, the Fed itself likely increased its liquidity provisions at year-end to support the typical constraints in the banking system. Meanwhile, many macro speculators and trading desks likely shut down their books in December, despite their fundamental view to be short bonds. This combination is now reversed and simply added fuel to a fire that had been burning for months under the surface. Based on the move in 2013, it looks like real rates still have further to run, potentially much further. Our rates strategists believe real rates are headed back to negative 50 basis points, which is another 25 basis points higher. From our perspective, real rates are unreasonably negative given the very strong GDP growth. Therefore, the Fed is correct to be trying to get them higher. It's also why tapering may not be tightening for the economy, even though it's the epitome of tightening financial conditions for markets. We have discussed this comparison to 2013 in prior research and made the following observations as it relates to equity markets. First, the taper tantrum in 2013 was the first of its kind and something for which the markets had not been prepared. Therefore, the move in real rates was much more severe and swift than what we would expect this time around. Second, valuations were much more attractive in 2013 based on both price/earnings multiples and the equity risk premiums, which adjust for absolute levels of rates, which are much lower today. Listeners may find it surprising to learn that the price/earnings multiple for the S&P 500 is actually higher today than when the Fed first announced its plan to taper asset purchases back in September. In other words, valuations have actually increased as the tapering has begun, at least for the broader S&P 500 index. This is also similar to what happened in 2013 and makes sense. After all, Fed tightening is a good sign for growth and evidence that its policy has been successful. However, this time the starting point on valuations is much higher as already noted. More importantly, growth is decelerating, whereas in 2013 it was accelerating. This applies to both economic and earnings growth. In this kind of an environment, the most expensive parts of the market remain the most vulnerable. This argues for value to outperform growth stocks. However, given the deceleration in growth, we favor the more defensive parts of value rather than the cyclicals like we did during the first quarter of 2021. This means Healthcare, Staples, REITs and Utilities. And some financials for a little offense to offset that portfolio. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

10 Tammi 20223min

The start of 2022 has brought a surge in COVID cases, new payroll data, increased geopolitical risks, and shifts from the Fed. Despite these new developments, we think the themes from our 2022 outlook still apply.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Asset Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the global investment landscape and how we put those ideas together. It's Friday, January 7th at 2:00 p.m. in London. Right out of the gates, 2022 is greeting us with a surge of COVID cases, a US unemployment rate below 4%, geopolitical risk and new hawkish Fed communication. Amidst all these issues, the question waiting for investors is whether the thinking of late last year still holds. We think the main themes of our 2022 outlook still apply - solid growth and tighter policy within an accelerated economic cycle. But clearly, there are now a lot more moving parts. One of those moving parts is the growth outlook. Our 2022 expectation was that global growth remains above trend, aided by a healthy consumer, robust business investment and healing supply chains. But can that still hold given a new, more contagious COVID variant? For the moment, we think it can. Our economists note that global growth has become less sensitive to each subsequent COVID wave as vaccination rates have risen, treatment options have improved and the appetite for restrictions has declined. Modeling from Morgan Stanley's US Biotechnology team suggests that cases in Europe and the US could peak within 3-6 weeks, meaning most of this year will play out beyond that peak. Having already factored in a winter wave of some form in our original economic forecast, we don't think, for now, the main story has changed. There are, however, some wrinkles. Because China is pursuing a different zero COVID policy from other countries, its near-term growth may be more impacted than other regions. And the emergence of this variant likely reinforces another prior expectation: that developed market growth actually exceeds emerging market growth in 2022. A second moving part is a shift by the Federal Reserve. Last January, the market assumed that the first Fed rate hike would be in April of 2024. Last August? The market thought it would be in April of 2023. And today, pricing implies that the first rate hike will be this March. An update from the minutes of the Federal Reserve's December meeting, released this week, only further reinforced this idea that the Fed is getting closer and closer to removing support. The Fed discussed raising rates sooner, raising them faster and reducing the amount of securities that they hold. Indeed, it would seem for the moment that central banks in a lot of countries are increasingly comfortable pushing a more hawkish line until something pushes back. And so far, nothing has. Equity markets are steady, credit spreads are steady and yield curves have steepening over the last month. The opposite of what we would expect if the markets were afraid of a policy mistake. As such, why should they stop now? For markets, therefore, our strategy is based on the idea of less central bank support to start the year. Our Foreign Exchange team expects further US dollar appreciation, while our US interest rate strategists think that yields will move higher, especially relative to inflation. We think that combination should be negative for gold but supportive for financial stocks both in the US and around the world. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts or wherever you listen and leave us a review. We'd love to hear from you.

7 Tammi 20223min

Despite last year’s strong showing for European equities, will the recent spread of the Omicron variant derail our positive outlook for the region in 2022?----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the recent rise in Omicron cases and whether this could derail our constructive view on European equities for 2022. It's Thursday, January the 6th at 2:00 p.m. in London. Before touching on Omicron and the case for European stocks in 2022, I want to start by looking back at last year, which ended up being a very good one for the region. True European equities did lag US stocks again in 2021, however, this is hard to avoid when global markets are led higher by technology shares given Europe has fewer large cap companies in this space. More impressive was Europe's performance against other regions such as Japan, Asia and emerging markets. In fact, when we measure the performance of MSCI Europe against the MSCI All Countries World Index, excluding U.S. stocks, then we find that Europe enjoyed its best year of outperformance since 1998 which, to provide some context, was the year before the euro came into existence. As ever, past performance is not necessarily a good guide to future returns. However, in this instance, we do expect another year of positive returns for European stocks in 2022, with 7% upside to our index target in price terms, which rises to 10% once dividends are included. This is considerably better than our Chief US Equity Strategist, Mike Wilson, expects for the S&P, while Jonathan Garner, our Chief Asian Equity Strategist, also remains cautious on Asian and emerging markets at this time. While we think the underlying assumptions behind that positive view on European stocks are actually quite conservative - we model 10% EPS growth and a modest PE de-rating - equity investors are likely to have to navigate greater volatility going forward, given scope for higher uncertainty around COVID, inflation, and the impact of tighter monetary policy on asset markets. The first of these factors was arguably the most important for markets through November and December, however, recent evidence that emerged very late in the year - that Omicron is indeed considerably less severe than prior mutations - has boosted risk appetite across the region, helping push bond yields and equity prices higher. From a more fundamental perspective, we are also encouraged that the sharp rise in COVID cases across Europe over the last couple of months does not appear to be having a significant impact on the economy. Yes, we did see quite a sharp drop in business surveys in Germany through December, however, this doesn't appear to be replicated elsewhere with the PMI services data in France and consumer confidence data in Italy staying strong for now. Going forward, we expect the driver of volatility and uncertainty to shift from COVID to central banks and the impact of tighter monetary policy on asset markets. While this issue will be relevant across all global markets, Europe should be less negatively impacted than elsewhere given the European Central Bank is unlikely to raise interest rates through 2022. In addition, the European equity market's greater exposure to the more value-oriented sectors such as commodities and financials, should make it a relative beneficiary of rising bond yields, especially if - as our Macro Strategy team forecast - this is accompanied by rising real yields (which should weigh most on the more expensive stocks in the US) or a stronger US dollar (which is more of a headwind for emerging markets). Consistent with this outlook, we maintain a strong bias for value over growth here in Europe, with a particular focus on banks, commodity stocks and auto manufacturers. While all three of these sectors outperformed last year, we think they are still cheap and hence offer more upside from here. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

6 Tammi 20223min

As 2022 gets underway, investors are concerned about the Omicron variant of COVID-19, yet markets are taking developments in stride, with higher stock prices and bond yields. Is this economic confidence misplaced?----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, January 5th at 10:00 a.m. in New York. As we settle in for 2022, the early line of questioning from clients regards the impact of the Omicron variant of COVID 19. It's been shattering records for infections globally and in the US, disrupting air travel as workers stay home sick. So why then are markets so far this week taking this in stride? Higher stock prices and bond yields reflect more economic confidence than concern. Is that confidence misplaced? Not necessarily, in our view. That's because while Omicron is clearly a serious public health risk, the data suggests it may not trigger the level of public policy response that sustainably crimps economic activity, such as indoor capacity restrictions on service establishments or stay at home orders. Since the pandemic's onset, such responses have largely been dictated by state and local governments, and as we pointed out in this podcast a month ago, in most cases where restrictions were tightened, rising COVID hospitalizations and lack of bed capacity were cited as the culprit. So far, the data suggests hospital capacity may not be a problem with Omicron. Consider studies from the UK and South Africa, which have shown that Omicron is substantially less likely than the previously dominant Delta variant to land people in the hospital. This likelihood is lessened even more if an infected person was previously vaccinated. So even as case counts soar above those prior waves, it's not surprising to see that measures of hospital capacity stress across the US are yet to exceed those of prior waves. Further, as our colleagues in the Biotech Research team point out, the contagiousness of Omicron and subsequent protection against reinfection that the infected develop, at least for a time, has led to bigger but shorter infection waves in places like South Africa. This is why US government officials point out that Omicron could peak and fall quickly sometime this month. In short, the wave and any attendant economic risk could be over quickly, and this may be why investors are looking through it. Hence, we expect markets will refocus on inflation and Fed policy as key drivers for 2022, continuing to push bond yields higher this year in line with our team's forecast. Thanks for listening. If you enjoy the show, please share Thoughts on the Market with a friend or colleague or leave us a review on Apple Podcasts. It helps more people find the show.

5 Tammi 20222min

As the Omicron variant spreads across Asia, renewed lockdowns and other earnings outlook disruptions have investors on alert, reinforcing our approach of cautious patience in the region.----- Transcript -----Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and Emerging Market Equity Strategist for Morgan Stanley Research. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the impact of Omicron on China and Emerging Market Equities. It's Tuesday, January the 4th at 7:30 a.m. in Hong Kong. As 2022 begins, our approach to Asia and EM equities remains one of cautious patience. Although these markets underperformed their peers in the U.S. and Europe last year, simple arguments of performance mean reversion in 2022 are not strong enough to warrant anything more aggressive at this juncture. We hear a lot these days about a turn in the Chinese policy cycle as a catalyst. And it's fair to say that historically one would have been more optimistic at this juncture of the monetary and fiscal cycle for the outlook for domestic demand in China. This demand is crucial both for China's own growth outlook to stabilize, as well as to give a boost to most other markets in Asia and EM. But this is not a normal cycle. China's ‘zero COVID’ approach must now face off against Omicron. As this episode is being recorded, Xian - a major Chinese city with a population of over 13 million - is in its 12th day of a lockdown, which is now more severe in terms of restrictions on normal daily life than any seen in China since the original lockdown of Wuhan at the start of the pandemic. Two global companies with major semiconductor plants in the city have recently warned of production problems. And though there's no formal national policy to curtail celebration of Chinese New Year at the end of this month, domestic media is already beginning to broadcast a message of staying at home and avoiding long distance travel. In China, as in EM, we're continuing to track earnings estimates that are declining, which undermines the case for valuations - now roughly in line with long run averages - being sufficiently attractive to reengage. The situation is slightly better in Japan, where estimates are tracking sideways and individual markets - notably India and parts of Asean and Eastern Europe, Mid East and Africa - have been doing better than the EM overall. However, disruption caused by Omicron could change individual economic and hence earnings outlooks over the short to medium term. For example, India's most recent COVID case count was up 35% day-on-day, with Omicron now present in 23 of 28 states. Maharashtra, Delhi and Tamil Nadu have reimposed restrictions on visits to public parks, beaches and other public spaces. Indeed, most of the countries we cover that had moved to a "living with COVID" approach are now having to reverse course. Take South Korea, which in mid-December, as ICU usage rose significantly, reimposed early closing restrictions on nightlife and a rule limiting public gatherings to no more than four fully vaccinated persons. Finally, our weekly track of flows to dedicated Asia and EM equity funds is now showing steady and persistent redemptions, as some of the very large inflows from this time a year ago start to reverse course. Those flows were driven by the notion that a strong, synchronized upswing was underway globally, which it was argued would lead to outperformance by Asia and EM, whose economies generally perform strongly in a global economic upswing. We argued at the time that 2021 would not be like 2006/07 and 2016/17 when that narrative did hold true. As 2022 begins, the global and local economic outlook is clearly weakening again, and hence our mantra of continued cautious patience. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

4 Tammi 20223min

With a new calendar year, the narrative in markets may not be shifting but there are still opportunities for investors to consider as growth rates, policy proposals, and interest rates shift in the coming year.----- Transcript -----Welcome to Thoughts on the Market and Happy New Year! I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, January 3rd at 11:30 a.m. in New York. So let's get after it. A new year brings new investment opportunities, even if the narrative isn't changing. More specifically, tightening monetary policy and decelerating growth supports our large cap defensive quality bias - a strategy that has worked well since we first started recommending it back in mid-November. On the first score, the Fed and other central banks appear to be determined to remove monetary accommodation in the face of higher inflation. Not only is inflation turning out to be an economic issue, but it's quickly becoming a political one given this is a midterm election year. What this means is the Fed will likely turn out to be more hawkish than investors expect, and that hawkishness is likely to be front-end loaded so markets have time to recover by November. As for the second part of the narrative, we think growth will decelerate this year as most of our leading indicators point to that outcome. Furthermore, this dynamic should be supportive of defensives outperforming cyclicals amid large cap quality leadership. This week, we expand our analysis to the industry level and illustrate that within defensives, Health Care, REITS and Consumer Staples tend to be the best performers in a decelerating but positive growth regime. As we reflect on 2021's strong performance from large cap U.S. equity indices last year, it's hard to get too excited about any remaining upside this year. Having said that, most individual stocks have gone nowhere since March, with many in a deep bear market. In many ways, 2021 looked a lot like 2018 - a year of rolling corrections and rotations as investors continually sought out higher ground in the high-quality S&P 500 index. As we enter 2022, the key question for investors is to decide if they want to stay with the relative winners, or is it time to go bottom fishing? New calendar years tend to support the latter strategy as the pressure of keeping up with the index eases. Hence, the new opportunities for investors. While we continue to favor the large cap defensive tilt that has been working, we recommend creating a barbell with stocks that have already corrected but still offer good prospects at a reasonable valuation. Over the past nine months, the quality bias has driven more and more money into a handful of large cap growth stocks - further highlighting the importance of favoring large over small since March. But as we already noted, this crowding has left many smaller stocks behind. A few areas we think make sense to consider include consumer services and other businesses with pent up demand. In the more growth-y segments, we think biotech and China Internet are good bottom fishing candidates. Meanwhile, we would still be careful with very expensive tech stocks that remain unprofitable. One final development to watch closely is long term interest rates. With a significant move higher in inflation and the Fed's pivot on policy, we think long term interest rates look too low. The sharp move higher today looks like the beginning of something more meaningful, and it could lead to new 52-week highs in short order if our technical view is correct. As such, we remain positive on financials as our sole cyclical overweight. A backup in rates is the reason, and that could be happening now. Bottom line, stick with a large cap defensive quality bias as we enter 2022, but balance it with financials and small mid-cap value stocks, particularly with the Fed and other central banks tightening policy faster than investors expect and rates likely back up. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

3 Tammi 20223min

Original Release on August 24th, 2021: Recent developments in space travel may be setting the stage for a striking new era of tech investment. Are investors paying attention?----- Transcript -----Andrew Sheets This week we are bringing you 4 encores of deep dives into different kinds of investing we consider at Morgan Stanley. Thanks to all our listeners for a great year and happy holidays! Adam Jonas Welcome to Thoughts on the Market. I'm Adam Jonas, Head of Morgan Stanley's Space and Global Auto & Shared Mobility teams. With the help of my research colleagues across asset classes and regions, I try to connect ideas and relationships across the Morgan Stanley platform to bring you insights that help you think outside the screen. Today, I'll be talking about the Apollo Effect and the arrival of a new space race. It's Tuesday, August 24th, at 10:00 a.m. in New York. In May of 1961, President John F. Kennedy announced America's plan to send a man to the moon and bring him back safely to Earth before the end of the decade. This audacious goal set in motion one of the most explosive periods of technological innovation in history. The achievements transcended the politics and Cold War machinations of the time and represented what many still see today as a defining milestone of human achievement. In its wake, millions of second graders wanted to become astronauts, our math and science programs flourished, and almost every example of advanced technology today can trace its roots in some way back to those lunar missions. The ultimate innovation catalyst: the Apollo Effect. 60 years after JFK's famous proclamation, we once again need to draw on the spirit of Apollo to address today's formidable global challenges and to deliver the solutions that improve our world for generations to come. The first space race had clear underpinnings of the Cold War between the U.S. and the Soviet Union. Today's space race is getting increased visibility due to a confluence of profound technological change, accelerated capital formation - fueled by the SPAC phenomenon - and private space flight missions from the likes of Richard Branson and Jeff Bezos. We think space tourism is the ultimate advertisement for the realities and the possibilities of Space livestreamed to the broadest audience. The message to our listeners is: get ready. This stuff is really happening. Talking about Space before the rollout of the SpaceX Starship mated to a Super Heavy booster is akin to talking about the Internet before Google Search, or talking about the auto industry before the Model T. We are entering an exciting new era of space exploration, one that involves the hand of government and private enterprises - from traditional aerospace companies to audacious new startups. This race is driven by commerce and national rivalry. And the relevance for markets and investors, while seemingly nuanced at first, will become increasingly clear to a wide range of industries and enterprises. The Morgan Stanley Space team divides the space economy into 3 principal domains: communications, transportation and earth observation. Our team forecasts the global space economy to surpass $1T by the year 2040. And at the rate things are going, it may eclipse this level far earlier. When I first started publishing on the future of the global space economy with my Morgan Stanley research colleagues back in 2017, very few people seemed to care, and even fewer thought it was material for the stock market. I would regularly ask my clients "on a scale of 0 to 10, how important is space to your investment process?" And by far the most common answer I received was 0 out of 10. A lot of folks said 0.0 out of 10, just to make the point. Not even four years later and, oh my goodness, how things have changed. The investment community and the general public are rapidly embracing the genre and becoming aware of its importance economically and strategically. So whatever your own area of market expertise, this next era of space exploration and the innovation and commerce that spawn from it, will matter to your work, and to your life. But beyond the national competition, the triumph, the glory, the failures and the many hundreds of billions of dollars that'll be spent on launches, missions and infrastructure - is a reminder of something far bigger that we learned over a half a century ago during the Apollo era - that Space is one of the greatest monuments of human achievement, and a unifying force for the planet. Thanks for listening. And remember, if you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

30 Joulu 20214min

Original Release on September 30th, 2021: Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management, discusses the new shape of retail investing and the impact on markets.----- Transcript -----Andrew Sheets This week we are bringing you 4 encores of deep dives into different kinds of investing we consider at Morgan Stanley. Thanks to all our listeners for a great year and happy holidays!Andrew Sheets Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross Asset Strategist for Morgan Stanley Research.Lisa Shalett And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.Andrew Sheets And today on the podcast, we'll be discussing the retail investing landscape and the impact on markets. It's Thursday, September 30th, at 2p.m. in London.Lisa Shalett And it's 9:00 a.m. here in New York City.Andrew Sheets Lisa, I wanted to have you on today because the advice from our wealth management division is geared towards individual investors, what we often call retail clients instead of institutional investors. You tend to take a longer-term perspective. As chief investment officer, you're juggling the roles of market analyst, client adviser and team manager ultimately to help clients with their asset allocation and portfolio construction.Andrew Sheets Just to take a step back here, can you just give us some context of the level of assets that Morgan Stanley Wealth Management manages and what insight that gives you potentially into different markets?Lisa Shalett Sure. The wealth management business, especially after the most recent acquisition of E-Trade, oversees more than four trillion dollars in assets under management, which gives us a really extraordinary view over the private wealth landscape.Andrew Sheets That’s a pretty significant stock of the market there we have to look at. I'd love to start with what you're hearing right now. How are private investors repositioning portfolios and thinking about current market conditions?Lisa Shalett The individual investor has been important in terms of the role that they're playing in markets over the last several years as we've come out of the pandemic. What we've seen is actually pretty enthusiastic participation in markets over the last 18 months with folks, you know, moving, towards their maximum weightings in equities. Really, I think over the last two to three months, we've begun to see some profit taking. And that motivation for some of that profit taking has kind of come in two forms. One is folks beginning to become concerned that valuations are frothy, that perhaps the Federal Reserve's level of accommodation is going to wane and, quite frankly, that markets are up a lot. The second motivation is obviously concern about potential changes in the U.S. tax code. Our clients, the vast majority of whom manage their wealth in taxable accounts, even though there is a lot of retirement savings, many of them are pretty aggressive about managing their annual tax bill. And so, with uncertainty about whether or not cap gains taxes are going to go up in in 2022, we have seen some tax management activity that has made them a little bit more defensive in their positioning, you know, reducing some equity weights over the last couple of weeks. Importantly, our clients, I think, are different and have moved in a different direction than what we might call overall retail flow where flows into ETFs and mutual funds, as you and your team have noted, has continued to be quite robust over, you know, the last three months. Andrew Sheets So, Lisa, that's something I'd actually like to dig into in more detail, because I think one of the biggest debates we're having in the market right now is the debate over whether it's more accurate to say there's a lot of cash on the sidelines, so to speak, that investors are still overly cautious, they have money that can be put into the market. You know, kind of versus this idea that markets are up a lot, a lot of money has already flowed in and actually investors are pretty fully invested. So, you know, as you think of the backdrop, how do you think about that debate and how do you think people should be thinking about some of the statistics they might be hearing?Lisa Shalett So our perspective is, and we do monitor this on a month-to-month basis has been that, you know, somewhere in the June/July time frame, you know, we saw, our clients kind of at maximum exposures to the equity market. We saw overall cash levels, had really come down. And it's only been in the last two to three weeks that we've begun to see, cash levels rebuilding. I do think that that's somewhat at odds with this thesis that there's so much more cash on the sidelines. I mean, one piece of data that we have been monitoring is margin debt and among retail individual investors, we've started to see margin debt, you know, start to creep up. And that's another indication to us that perhaps this idea that there's tons of cash on the sidelines may, in fact, not be the case, that people are, "all in and then some," you know, may be something worth exploring in the data because we're starting to see that.Andrew Sheets So, Lisa, the other thing you mentioned at the onset was a focus on the tax environment, and that's the next thing I wanted to ask you about. You know, I imagine this is an issue that's at the top of minds of many investors. And your thoughts on both what sort of reactions we might get to different tax changes and also your advice to how individuals and family offices should navigate this environment.Lisa Shalett Yeah, so that's a fantastic question, because in virtually every meeting, you know, that I'm doing right now, this question, comes up of, you know, what should we be doing? And we usually talk to clients on two levels. One is on it in terms of their personal strategies. And what we always talk about is that they should not be making changes in anticipation of changes in the law unless they're really in need of cash over the next year or two. It's really a 12-to-18-month window. In which case we would say, you know, consult with your accountant or your tax advisor. But typically, what we say is, you know, the changes in the tax law come and go. And unless you have an imminent, you know, cash flow need, you should not be making changes simply based on tax law. The second thing that we often talk about is this idea or this mythology among our client base that changes in the tax law, you know, cause market volatility. And historically that there's just no evidence for that. And so, like so many other things there's, you know, headline risk in the days around particular news announcements. But when you really look at things on a 3-month, 6-month, you know, 12- and 24-month, trailing basis on some of these things, they end up not really being the thing that drives markets.Andrew Sheets Lisa, one of the biggest questions—well, you know, certainly I'm getting but I imagine you're getting as well—is how to think about the ratio of stocks and bonds together within a portfolio. You know, there's this old rule of thumb, kind of the 60/40, 60% stocks, 40% bonds in portfolio construction. Do you think that's an outdated concept, given where yields are, given what's happening in the stock market? And how do you think investors should think about managing risk maybe differently to how they did in the past?Lisa Shalett That's a fantastic question. And it's one that we are confronted with, you know, virtually every day. And what we've really tried to do is take a step back and, make a couple of points. Number one, talk about, goals and objectives and really ascertain, you know, what kinds of returns are necessary over what periods of time and what portion of that return, you know, needs to be in current cash flow, you know, annualized income. And try to make the point that perhaps generating that combination of capital appreciation and income needs to be constructed, if you will, above and beyond the more traditional categories of cash, stocks and bonds given where we are in terms of overall valuations and how rich the valuations are in both stocks and bonds, where we are in terms of cash returns after inflation, and with regards to whether or not stocks and bonds at the current moment are actually behaving in a way that, you know, you're optimizing your diversification.Lisa Shalett So with all those considerations in mind, what we have found ourselves doing is speaking to the stock portion of returns as being comprised not only of, you know, the more traditional long-only strategies that we diversify by sector and by, you know, global regions. But we're including thinking about, you know, hedged vehicles and hedge fund vehicles as part of those equity exposures and how to manage risk. When it comes to the fixed income portion of portfolios, there's a need to be a little bit more creative in hiring managers who have a mandate that can allow them to use things like preferred shares, like bank loans, like convertible shares, like some asset backs, and maybe even including some dividend paying stocks in, their income generating portion of the portfolio. And what that has really meant to your point about the 60-40 portfolio is it’s meant that we're kind of recrafting portfolio construction across new asset class lines, really. Where we're saying, OK, what portion of your portfolio and what products and vehicles can we rely on for some equity like capital appreciation and what portion of the portfolio and what strategies can generate income. So, it's a lot more mixing and matching to actually get at goals.Andrew Sheets As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people find the show.

29 Joulu 202110min