Check out our latest “Talking Markets” podcast to hear their discussion with our Jack Bailey. A transcript follows.
Jack Bailey: Wylie, Gene, thanks for being with us today. One thing that’s been puzzling since the whole pandemic started is this seeming disconnect between the market and the economy in the US. I mean, we all know the market and the economy are not the same thing, but until very recently, at the start of September where markets have been choppy, the recovery has been doing that Nike-swoosh thing. What are your explanations for this disconnect?
Gene Podkaminer: I think the part of the disconnect has to do with time horizon, the markets tend to look out quite a ways, more than the next month or three months, or maybe the six months, but they tend to look out far into the future and figure out what may the state of the world look like and discount that back to what we have today. So, the disconnect between markets and the economy could be due to more optimism in the future than today, which honestly, wouldn’t be too hard to find out there. There’s not a ton of optimism out there now. But then also understanding that at some point, humanity likely will find an answer in a vaccine. At some point, some sort of immunity, herd immunity, or otherwise will likely be the state of affairs. And that means that a lot of the consumption patterns that we’ve seen historically may come back.
The big question on everybody’s mind is at what point is that going to happen? And so when you look at just short term and you look at the volatility that we’ll likely be experiencing over the next couple of months due to perhaps false starts on vaccines, cold and flu season coming back up, the US presidential election and all of the ripples that that would have globally, there is certainly a case to be made for choppy waters ahead in the short term. But what the markets are telling us is that long term wise, maybe there’s a slight glimmer of optimism on the horizon.
Wylie Tollette: The other thing I would add to that part of the conversation is governments and central banks have been creating money and capital and pouring it into financial markets at really an unprecedented rate. So that started back in March and April and May, and has really progressed around the world. And there’s always a bit of a lag time for that capital once it’s created to flow into the markets. And so we saw that really hit with markets accelerating at the end of the second quarter and right through the third quarter now. And as you mentioned, the other thing that’s been kind of remarkable too, is just how concentrated this rally has been in just a few stocks and primarily tech stocks. And so like six or seven stocks have really dominated the market in the US and we’ve seen similar patterns say in China and other large capital markets, even in Japan, just a few stocks really carrying the rest of the index.
If you look a little deeper, what you’ll see in those indices is that really, sort of the broad stock market, the median stock really hasn’t moved very much. It’s just really been this top tier of stocks. Those are tech stocks; they don’t pay dividends. their earnings perspective is really very, forward-looking, very far out on the curve. And so if you think about that from sort of a mathematical standpoint, those are long duration assets and it doesn’t take too much of a change in forward-looking sentiment to discount those future earnings in a different way and cause a pretty dramatic shift in valuations in the near term. So, the type of volatility that we’re just now experiencing really, I think, is to be expected. I think we’re going to see quite a bit more of that with the election coming up, with coronavirus vaccine false starts and watching the sort of process of distributing that around the world. There’s obviously going to be challenges and hiccups doing that for the entire population of the globe. I think we can expect in the short term for things to perhaps be a bit rockier than they were through the summer.
Jack Bailey: So, I would be remiss if I did not ask about the upcoming election here in the United States. What are your views on the election, maybe on a potential Biden win or a potential Trump win, or maybe it splits, and one party takes the White House and the other takes the legislature?
Gene Podkaminer: Before even talking about what the ramifications are for one party to win or another, I’d like to talk about the process itself, right? So, forget about the results and let’s, let’s talk about the election process for 2020. That’s what I’m concerned about, that we’re going to have a contentious election with relatively close calls and maybe some wide margins of error. And there will be situations where we’ll have recounts or maybe we’ll have the judicial system involved. That is an environment that is ripe for risk and to have that sort of contentious process, especially given all of the other tensions that are happening within US and of course, globally as well, should give investors pause about how this whole thing will go down, irrespective of who actually wins.
Wylie Tollette: I would echo that. I think that’s my broader concern sort of, regardless of your political leanings, Republican or Democrat. I think one of the things that the market takes comfort from is the stability of the underlying system and the institutions that hold up our democracy because, you know, our democracy and the rule of law is really quite central to the success of the capital markets. The capital markets are built on top of that foundation. And if there’s even a hint that that foundation has cracks in it, I think you could see pretty dramatic impacts on the capital markets—stocks and bonds. And so that’s really what we’re looking at and a bit worried about over the next three to four months until there’s clarity. I think what we learned in 2016 is that sort of the typical polls that predict one thing or another are notoriously inaccurate when people actually go to the polls. And so I think we’re looking to see a pretty difficult, contentious and potentially contested election season, which I think will be disruptive for capital markets. Looking through that. So let’s port ourselves forward in time, regardless of who wins, I think it’s fair to say that our country has never been as politically divided perhaps as it is right now, and the degree of dialogue and the tone of that dialogue in the political sphere that is just really, really difficult and challenging and contentious right now. I think that that is a real cause for concern longer term, because again, capital markets, our economy, the success of our system is really built on arriving at broad consensus views.
Wylie Tollette: Politicians come and go, and they tend to overestimate their impact on the real world and the real economy. And I think deeper than that, it’s important to look at the actual, sort of, drivers within our society and try to find threads that give us an indication of the way society’s going to be moving going forward and supporting our economy and our political systems.
Gene Podkaminer: And markets certainly hate uncertainty. So if there is a candidate that has a bit more certainty around policy measures, whether it’s a continuation of what we had over the last four years, or it’s something new that’s well-defined and well understood, that would be a positive for markets. Just being able to predict what may happen over the next two or four years, with respect to relations with other economies, trading partners, accords, all of that kind of stuff is really helpful for markets to have clarity on.
Wylie Tollette: I think that’s right. And the impact of the coronavirus and the pandemic on the political landscape and eventually sort of the investment landscape—it’s hard to underestimate that impact. We’ve seen markets recover. So, it looks like many investors are kind of looking through the pandemic and trying to figure out which stocks are going to win, but there are some longer-term impacts that we might see. I think we’ve already talked about potentially the change to work from home and how that might change big cities. People are saving more now than they did prior to the pandemic and not consuming and traveling and flying and using hotels like they used to. Those could be long-term changes that are going to fundamentally change our economy and the investment landscape. And you mentioned earlier, Jack, the Nike swoosh-shaped recovery.
We actually are evaluating a hypothesis that’s out there, that’s calling this a K-shaped recovery. So if you can picture a K, where the folks that have investments and significant capital in stock markets, and jobs that are able to be sustained and effective working from home, their incomes and their wealth has actually rebounded quite nicely. But folks that don’t have investments, folks that have jobs that can’t be done from home as easily, or maybe they lost their job, this pandemic has been very, very difficult. So it’s kind of the tale of two cities.
Gene Podkaminer: Picking up on something that you said earlier, the consumption habits of folks during this crisis have been really interesting to watch, and yes, saving rates have definitely increased as people are not spending as much on experiences and travel and going out to eat. And for that matter, any clothes whatsoever to speak of now that we can all wear tee shirts to work. Uh, but what’s fascinating is that there still is a considerable amount of spending going on—just in different places. I’ve got kids that are doing distance learning at home. They need devices to do that on, so you see hardware manufacturers doing fairly well. You see athleisure companies doing well. There’s pockets of real success out there and the question is, do those have legs? Is that going to persist beyond this current crisis? But whether that happens or not, it still is interesting to see that spending is actually taking place—that not all of forgone consumption is going straight into savings. And yes, our savings rate has gone up somewhat but not fully. And so to account for that, people are still spending money out there.
Jack Bailey: Let me bring up one other topic, and you touched on this briefly, Wylie. There’s a notion out there that cities are over—big cities like New York, San Francisco. This work-from-home situation has proved that companies don’t need to be in a big office building downtown and everybody’s going to migrate out to cheaper locations and work remotely. And as a result, the notion of the big American city has just gone away. I’d be curious to hear your thoughts on that hypothesis.
Wylie Tollette: Yeah, it’s a great question. Right now, I’d bet on the suburban apartments, they’re defensive, people are liking the room that they have in the suburbs. They like the slightly more open space. You’d be able to sort of get away from other folks. I think that that is probably at its peak right now, and that, that will abate somewhat as people get more comfortable, start to develop vaccines and herd immunity. I don’t think cities are going anywhere is the short answer, But I do think that they go through secular trends. You might remember in the 70s and 80s, people were moving out of cities because of crime. That changed and people moved back into the cities. Well, now a lot of those people that moved back in are having kids. And when they have kids, they tend to want to move back out to the suburbs because the schools are better. And it’s kind of a secular trend where cities go through these things. But fundamentally, if you look at the longer-term trends, cities continue to grow larger and larger, and I don’t think that the pandemic is actually going to change that. I think that will continue. There’s too much dynamism. There’s too much innovation. There’s too much, sort of, potential for creativity that comes from locating a lot of people in a small amount of space. And they’re fun and dynamic and occasionally dangerous, but super interesting places to visit. So, I think longer term, cities are going to continue to grow.
Gene Podkaminer: And cities historically have been incredibly important and have continued to mature over time and still remain interesting. So, going back a really long ways, not just to the 1970s, but going back to Greek times or Roman times, you still had people congregating in cities. And most people were working out of their homes then, right? This is pre-Industrial Revolution. So perhaps you were a farmer, or you were merchant or whatever it is that you did, you probably did it pretty close to your home. And yet still the compulsion to be next to other folks, to be able to participate in arts and culture, to be able to eat well, to be able to experience trends and artifacts from other places was super powerful. And so, you saw this throughout modern history of people congregating to cities. Cities growing larger and larger and larger. Certainly, rural areas becoming less populated. And the suburbs around the cities oftentimes became cities in their own right as well. So, we should take the long view here in understanding how population trends from reactions to the coronavirus may or may not impact the way that cities have been emerging over time.
Wylie Tollette: But in the short term, I do think downtown office space, particularly downtown office space served with public transit, is going to take a hit. It already has, but longer term, I think cities aren’t going anywhere.
Jack Bailey: Well guys, it’s been a great pleasure talking to you both again today. As always, informative and helpful.
Wylie Tollette: Thank you, Jack.
Gene Podkaminer: Thank you so much, Jack, for having us.
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