LVMHF - 3 Market Trends To Watch Amid Heightened Volatility

2023-03-24 00:47:00 ET

Summary

• Volatility has picked up, but is still tame by historic standards.
• Positive trend for semiconductors and homebuilders has continued.
• Luxury goods makers have also held up well.

Amid the recent heightened volatility in the markets, three underlying trends have held steady. Greg Bonnell discusses what to watch for with Ben Gossack, Portfolio Manager with TD Asset Management.

Transcript

Greg Bonnell: A year of aggressive rate hikes had some investors worried about unexpected stress points showing up in the economy. While markets have been volatile in recent days amid the turmoil in the US regional banks, our guest today says the underlying market trends are still intact. Joining us now, Ben Gossack, Portfolio Manager at TD Asset Management. Ben, always great to have you back on the show.

Ben Gossack: Great. Thanks for having me back. And I always feel like I'm back on a Fed rate decision day.

Greg Bonnell: So you're the precursor to all that. It's been interesting in the past two weeks, and we've had plenty of things going on in terms of concerns about the health of not only the US regionals, but, of course, the Credit Suisse ( CS ) situation is all, the effect of everything that we've seen in terms of policy. And people just worried that something would show signs of cracking. Well, something did. And the market reaction, obviously, on the headline was volatile. What's it look like underneath?

Ben Gossack: Yeah, I think it's quite interesting that we've had four banks fail, there's another on life support, fears about where to park your money. And yet, from a volatility perspective, from a dollar flight perspective, it's been quite pedestrian. And I think it goes back to we've kind of been on this doomsday clock or this 11th hour for almost a year, given how much we've hiked rates.

We have a war that started in February of last year. We thought there would be an energy crisis and Europe would be in recession. Even in September, we were worried about the impact of UK pension plans related to the UK budget. So if anything was going to break, it felt like it was going to be last year.

And then that fear of something breaking, well, we may not like what broke, but that fear of something breaking has happened now. And so I think the market is kind of like, OK, now I know what I was worried about. I can deal with this and try to see what happens going forward.

Greg Bonnell: Let's talk about what's happening going forward, what you've even noticed beneath the surface in terms of what has been happening in the markets. I'm not sure what you want to start with, maybe just the volatility gauge.

Ben Gossack: Yeah, so we'll start with volatility and kind of what this looks like in keeping to historical issues. And then what we see going forward is kind of what we've been seeing for quite some time, which I find very fascinating. So in terms of our first chart, this is the VIX. That's the standard sort of volatility measure for the S&P 500.

We saw a jump to about 30. And that's quickly dissipated. Again, in times of crisis, we've seen this go as high as 80. Somewhere around 40, you'd be like, wow, things are really bad. But again, I think it goes back to the fact that the reason why the volatility seems somewhat contained and we're not seeing dollar flight is that we've been on this watch waiting for something to break.

And again, I don't know if anyone had forecasted this specific failure, but we have seen some type of failure. And so, yeah, what we knew was going to happen, happened.

Greg Bonnell: OK, let's talk about other parts of the market right now. Homebuilding is interesting. Considering how much the cost of borrowing has gone up in the past year, you would think there'd be an impact. And there's been an impact in this country. US homebuilders, what story is that telling?

Ben Gossack: So this is the part that I find fascinating is that the trends that we had identified at the end of last year going into this year were unwavering in all of this volatility last week and this week of the banks failing. And we're actually on the anniversary of the first Fed rate hike. And it seems very counterintuitive and almost like a counter trend to the prevailing wisdom, but the time to go long US homebuilders-- and these are the most sensitive to interest rates-- was at the time of the first Fed hike.

Greg Bonnell: Does feel very counterintuitive, but here's the chart right here.

Ben Gossack: So what we're looking at is I call these ratio charts, but think of them as a tug of war chart. So if it's going up and to the right, it means that the homebuilders are winning the battle against the S&P 500. So if you're going long homebuilders, short S&P 500, you'd probably be considered an all-star hedge fund manager on this particular trade. But what it tells us and what is informative about this specific chart is that the market in all of its wisdom knew housing was going to be a problem because we did see 7% mortgage rates, we have seen existing home sales slide, we've seen new homebuilding applications come down.

And it has absorbed all of that bad news, even though the bad headlines didn't come until almost 8 months, 9 months, 10 months later. And we found that very informative, especially with other areas that are, again, early cycle start to bottom and lift up.

Greg Bonnell: When I think about the next picture you have to show us about the semiconductors, this one should be sensitive, as well, to the economic cycle. We've had a lot of concerns in recent months too about, is there going to be a recession? What's it going to look like? How deep is it going to be? How wide is it going to be? What have the semiconductors been telling us?

Ben Gossack: Right. And semiconductors are also early cycle. We did see an extended cycle through COVID with supply chains and shortages. But then that cycle broke and we had oversupply. And so while we still haven't seen a bottom in the earnings for semiconductor companies, from our charts-- again, our ratio relative to the S&P 500-- they bottomed in October of last year and they continue to improve. And again, looking at our chart, they got even stronger last week.

Again, four banks fail, everyone says, oh, here comes the recession. But is this the recession on top of the recession that we've been talking about since last year? Again, similar to our housing example, the semiconductor stocks have already looked through some of this noise and slowdown and recession and continue to get stronger relative to the market.

Greg Bonnell: Let's look at this chart. This will be interesting in terms of times of economic stress and of concern, maybe you don't spend on the big, expensive things. You get down to basics. But luxury goods, what story is this telling? Well, that's quite a story.

Ben Gossack: So we're looking at the LVMH ( LVMHF )( LVMUY ), which is the preeminent luxury, let's say, house, with brands such as Dior, LV, into spirits, everything. But this is the preeminent house. This has gotten stronger. It even started last year-- but luxury has worked relative to the market and also got stronger last year.

But I could also show you Hermes ( HESAF )( HESAY ). I could show you Ferrari ( RACE ). Every luxury stock has improved. Part of it has to do with there is a secular growth trend in luxury and it can grow top line 8% to 10% every year.

The other part is that the people that can afford these types of items have been unaffected by inflation. And even with a bit of concerns around regional banks, again, their wealth, again, will not stop them from buying the next marginal purse or the next other sort of leather good. But it does tell me a lot that, given fears about economic recession, luxury has looked through this and says, yeah, there might be bad news.

I'm not saying, Greg, that there isn't bad news, there aren't concerns, there aren't slowdowns. There might be a rise in unemployment. I'm just saying the wisdom of the market has said, yes, we've taken that into consideration and we still see strengths in these areas that I would consider to be of early cycle sectors.

Greg Bonnell: Truth be told, even before the central bank started hiking aggressively about a year ago, my family really wasn't in the market for a Ferrari just yet. Maybe a couple of years down the road. So we take all these things together, what do we make of the underlying movements in the market compared to all the headline whipsaws we've had recently?

Ben Gossack: Yeah, so, look, we still remain vigilant about the market, and employment, and valuations. And we'll always stay that way. And we always skew towards quality. Prior to the banks failing, we had already started to increase the cyclicality within our portfolios-- again, given the green shoots and the trends that we were seeing.

And so coming out through last week into this week, we haven't changed anything. And the fact that semiconductors got stronger, luxury got stronger, it just gives us further confidence that there is still bad news to come. But the market, again, in its wisdom has sort of factored that in. Now, you never know the magnitude, so maybe we factored in this much and there's this much more. That's always the risk in terms of portfolios. But a well constructed portfolio following a process, and ours is quality, and cash flow, and compounding, I feel very confident that this green shoots thesis or better than fear thesis that we've been working on continues to have legs.

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