AFMC - Making Sense Of The Markets And How To Position Your Portfolio
2023-04-17 22:18:00 ET
Summary
- How to recognize and prioritize market road signs.
- The importance of a diversified portfolio.
- Being nimble but keeping perspective when markets become volatile.
There is no shortage of mixed signals to cloud the investment landscape. Brad Simpson, Chief Wealth Strategist at TD Wealth, speaks with Greg Bonnell about ways investors can navigate the uncertainties while also positioning their portfolio for potential opportunities.
Transcript
Greg Bonnell: We have plenty of mixed signals in the markets these days. Some signs, of course, that inflation is easing, but also there's persistent threat and worry about a possible recession. So how should investors be navigating this uncertain environment?
Joining us now to discuss, Brad Simpson, chief wealth strategist with TD Wealth. Brad, always good to have you on the program.
Brad Simpson: Thanks, Greg. It's a pleasure to be here. And I was thinking on the way here that almost every time you invite me is when we have really super high volatility. So it was good to come over today when we don't have super high volatility.
[LAUGHTER]
Greg Bonnell: Takes a little bit of--
Brad Simpson: I feel like I'm always the fireman on this show.
Greg Bonnell: All right. So it takes a bit of the pressure off, so we can have a little more calm of a conversation. We're not dealing with a current crisis of the moment.
Brad Simpson: Yes, yeah, yeah. Crisis. Phone him!
Greg Bonnell: But we are dealing at a time for people trying to make sense of what we've been through. Yes, central banks hiked aggressively to try to bring inflation down. Yes, we are seeing signs in this country, south of the border, that inflation continues to roll off. But at what cost to the economy? I feel like this is the big question swirling in our minds right now.
Brad Simpson: Right, right. When I was a kid, I worked in Victoria at the docks of a ferry company. And one day we had a lot of storm, and there was a runaway sailboat. And it was just all over the place. The waves were going, the wind was going all over the place.
And that's kind of what the economic data is like. It's like sitting in this little sailboat, and you're getting thrown all over the place. And every once in a while there's this calm water, and then the wind picks up, and the big waves again.
And I think that when you look at the world in that way, or if you think about that, one of the things we spend a lot of time doing is that I often think that if you looked at an investment market a little bit like racing along a highway, and there's all these signs all over the place, but you don't know which ones to read. And you've kind of got to choose.
And that's what we do, is we say, OK. When we're doing this, and we're looking at the ballast of the things you want to look at that will help us determine that. And then it starts to take the noise away a little bit.
And partially what I would like to do when I come on this show is to go, if we can share some of that to go, here's how we want to start thinking about this. And so starting out is that the environment that we're in, well, when we really look at it, we chart it out, and we sit back, you can look at the economy. You can look at industrial production, which gives you kind of what's going on with your manufacturing. You've got the consumer spending you can look at. And then you look at the job market.
And when we look at this, you look, on the one side you can see, well, you see a lot of lines going down. And really the one that you see pretty good is the consumer and job market. So what is this telling us is, well, what we do is, every one of these lines is that we build and take every one of those line points and say, OK, let's look at Conference Board Leading Indicators. And we call it 100. And so 100 is perfect.
It's at 9 right now. 100 is perfect. 0 is out. Right. Yeah. So it's at a 9. So you'd go, well, that leading indicator doesn't look all that great.
Then you look, you go, what's your PMIs look like? Well, you're looking at that, you're into the 8s and 9s. So you go, well, for manufacturing, that's deteriorating. You look at the services, it's strong, but it's deteriorating as well. So you go OK, with the economy, well, when you're walking around in it, there is a lot of deteriorating going on. So that's the first one.
So you go, OK. Well, let's look at that and say, OK. So what about industrial production? And you look at that, and you go, well, let's look at new orders and inventories. We look at new orders and inventories, it's not very good. If we look at industrial production, it's not very good. If we look at sales to inventory ratios, not so good.
So the manufacturing is slowing-- and now, I'm just very North American-oriented. Now if we do that same thing, go through Europe, you'll see the same thing. If you go through China, it's positive. And it would be pretty darn good in each one of those.
So the good news is you have a diversified economy, which we haven't had for a lot of years. That's interesting, globally. The production side, it kind of lays out the same way.
So then it goes to the consumer. And the consumer is pretty darn good still. So when we look at that and we look at consumers' confidence, it's actually been improving. And now--
Greg Bonnell: Is the consumer just-- I don't want to say the word, "ignorant" always has a connotation-- blissfully unaware of some of those other things you're talking about?
Brad Simpson: Yeah, because I think the first two is, they have a lag effect. It takes a little bit, a while before you see it. I was having a couple of nights ago-- this was my conversation before bedtime. I was up and talking to one of my adult children, instead of talking about weather and sports, we had a 45-minute macroeconomics discussion. I was going like-- and I said, one of the big things is, his question was, has this recession fear subsided?
And I said, no. And I said, the fear of it has. But there's lots of inputs that continue to point that way. The consumer's in good shape, in their confidence side. But if you look at their spending, it's still pretty good. But if you look at their balance sheet, it's not so positive. And so if you look at it through that lens, you start to say, well, that's probably going to be making it slow as well.
So then it comes to jobs. Jobs are very positive. I mean, it is the greatest employment market in 30 years. It's hard to add all those other things up, extrapolate that nine months out, and go, that'll probably slow.
And so I think if you look at it in that, people go, oh, this is bullish or bearish. It's neither of those. It's actually a reality of going, OK. Now that I'm racing down that road and looking at these signs-- I think when people get really caught up in the short term of things, the problem is, you just are making stuff up. You're going with how you feel about something, or a headline that you read.
Two or three days ago, the headline is, "IMF Hard Landing." Well, you've got to read the whole thing. Yeah, that's one of the outcomes that it could be. But you just kind of gloss that one. And then that enters-- And then yesterday, well, "Yellen's Positive." Yellen's positive.
And so I think for a starting point, if you can consistently say, I'm going to look the economy this way. I'm going to look at the manufacturing this way. I'm going to look at how the consumer is doing in this way. I'm going to look at the job market this way.
And if I keep going back when I'm racing down that macroeconomic road and looking at that way, I can have a really honest view with myself on how I'm going to make decisions.
Greg Bonnell: All right. So you make that honest view of how you're going to make decisions. That takes you back to your portfolio--
Brad Simpson: Right.
Greg Bonnell: --and how people are approaching their investments. So with all of that in mind, what should they be thinking about in terms of their portfolio?
Brad Simpson: Well, I think the starting point is that you probably should look at this in terms of saying, OK, all of those things point to a slowdown. And always remember, recession is something that-- like, a bell doesn't go off, or somebody sends you a note and says, oh, by the way--
Greg Bonnell: It has begun.
Brad Simpson: Right.
Greg Bonnell: Here we go.
Brad Simpson: So what you know in that environment is-- one of the things that in our principles, risk priority management, is we always say, you've got to think like a business owner. And if you think like a business owner, one of the things in your intro you said is the Nasdaq heavy continues to be very positive.
Well, why is that? And why is that is, well, my first things that I've walked through is, I think in many ways that there's a lot of people in the market today that have actually never experienced a recession, have never experienced a slowdown, have never thought of it in that way. But what they have seen is a low-growth environment.
And in our low-growth environment, big tech was the only game in town. And so I think there's a camp writing algos right now that says, OK, great. We're just back to those days again.
And when you look at the performance of the Nasdaq or if you go through the S&P 500, you can see that the majority of names are just absolutely going nowhere. And you have these names that are written, which I would just call for the most part quant trading going on.
And I think what you do is, you go, OK, well, I'm not going to get caught up on bullish arguments or bearish arguments. I'm going to actually sit back and go, what if I took and I extrapolated that out, and I said that I'm not going to be investing for the next 24 hours or two weeks, but said, this is when you actually can make money because we know that there's going to be a slowdown. We know that we're going to do the things to get on the other side of it. And we know when you come out of the other side of it that there are an awful lot of names that you could go out and you could look at it in areas of the market to invest in.
And so I think when you look at that in terms of the equity market, first and foremost is that you say, I'm not to go all in. And so you go, whatever usual amount I'd invest in, I'll be a little less than that. And then you look at that, and you go, so then I'm going to diversify that.
And I just said, China's in a different economic cycle. So hey, why don't I add a little bit more to that? And you go, oh, yeah. But I read in the press every day how difficult it is there. Well, it is difficult there right now. There is geopolitical strife going on. The market still runs, though.
So the way I look at it as the starting point is that I would say that in the equity market, let's think about being underweighted. You don't only have to own investments that are on market going up. You can also run investments that are market neutral, are long/short. You can be long and short, shorting the market to offset your risk that you're doing, using hedging strategies.
I think in the equity market today that's a really wise thing to do. And that then I would be positioning myself as such there, if we're starting off talking about equity markets.
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Making Sense Of The Markets And How To Position Your Portfolio