Speaker 1: Hello, and welcome to What Goes Up, a Bloomberg weekly
Speaker 1: market podcast. I'm Sarah Pontzek, a reporter on the Cross
Speaker 1: Asset team, and I'm Mike Reagan, a senior editor on
Speaker 1: the Markets team. This week on the show, it's the
Speaker 1: last episode of so we'll take a trip down memory
Speaker 1: lane highlighting the most memorable market moments of the year.
Speaker 1: That's right, Sarah and confession to listeners were recording this
Speaker 1: in advance, so no craziest thing of the week unfortunately. However,
Speaker 1: I do believe our guests came prepared with the craziest
Speaker 1: thing he saw in markets all year, So I already
Speaker 1: gave my craziest thing in markets for the year last week,
Speaker 1: so we will focus on our guests. Then. His name
Speaker 1: is Matt Perrone. He's the chief investment officer for City
Speaker 1: National Bank. Matt, welcome to the show. Thanks, thanks for
Speaker 1: having me. All Right, Matt, we'd like to tease the
Speaker 1: audience with what the craziest thing of the year is,
Speaker 1: so we'll get to that at the end, but talk
Speaker 1: us through how you saw the year progressing. I mean, boy,
Speaker 1: it looked like things were dangerous there for a while
Speaker 1: in the middle of the year everybody was worried about
Speaker 1: a recession. How does as a as a strategist investor,
Speaker 1: how do you handle a year like this? I mean,
Speaker 1: was it a tough year to navigate? You know, it
Speaker 1: was in the sense that, well, we started the year
Speaker 1: with really a scare. Late December two eighteen was pretty
Speaker 1: tough on the markets, almost down. So for for us
Speaker 1: it was a kind of a head scratcher because the
Speaker 1: fundamental outlook just wasn't that bad. And yet the fear
Speaker 1: in the market was just and the fear in our
Speaker 1: clients and everyone felt that this was finally the end
Speaker 1: of this cycle. For us, you know, we had to
Speaker 1: do our job of hand holding clients, of telling them, really,
Speaker 1: the fundamental outlook isn't that bad. We do think the
Speaker 1: markets overreacting talk and there was a lot of that
Speaker 1: um but and and and we published a note called
Speaker 1: there will be Growth in the Spring borrowing from the
Speaker 1: Peter Sellers. Uh has some good and bad connotations, but
Speaker 1: the point to it was that, you know, we we
Speaker 1: did think there would be growth, and finally that came out.
Speaker 1: And then of course we had that mid year dip
Speaker 1: that you spoke about, So talk us through how your
Speaker 1: client sentiment has changed from then until now. You mentioned,
Speaker 1: as Mike mentioned, having to talk him off a cliff,
Speaker 1: things did get scary in the middle of the year.
Speaker 1: There was a lot of talk of potential recession, either
Speaker 1: at the end of this year or heading into Where
Speaker 1: do they stand now? Have they really come a long way? Yeah?
Speaker 1: They have. I think you've seen a lot of people
Speaker 1: now more comfortable. There are a lot of cash on
Speaker 1: the sidelines that have that in clients who have come
Speaker 1: and said, okay, I see now that this expansion still
Speaker 1: has some legs to it. Maybe taking some more risk
Speaker 1: does make sense. You know, with rates being lower, it's
Speaker 1: pressured a lot of people who have been in cash
Speaker 1: to say, how do I put my cash to work?
Speaker 1: And don't put me fully into equities, but put me
Speaker 1: into you know, higher yielding securities. So that's been a
Speaker 1: dynamic for sure for our typical client. Are you know,
Speaker 1: we've stayed invested and we've said that from the beginning.
Speaker 1: It's don't you know, it's time to be cautious and
Speaker 1: be up in quality, but stay invested. You know. Uh.
Speaker 1: Some notes you sent over you made a really good
Speaker 1: point about the multiple expansion in the equity market, the
Speaker 1: share I mean, that's basically all. We got very lackluster
Speaker 1: year for earnings. Um, so now we're looking at on
Speaker 1: something like twenty times trailing earnings for the smp UH
Speaker 1: forward earnings something a little less than seventeen. I think
Speaker 1: the last time I check, does that make you nervous
Speaker 1: at all? I mean, are we really pricing in a
Speaker 1: rosy situation for with that that aggressive multiple expansion? Well,
Speaker 1: the multiple expansion was certainly farther than we anticipated it
Speaker 1: would be. I think we've had a you know, just
Speaker 1: about all of the appreciation in the markets this year
Speaker 1: came from multiple expansion. The way we frame that out is,
Speaker 1: you know, it's somewhat textbook if you look at the
Speaker 1: impact of rates on the multiple, Well, it actually did
Speaker 1: what it was supposed to do with rates coming down
Speaker 1: to where they were, and you flow that through to
Speaker 1: either a regression model or a discounted cash flow model
Speaker 1: with low rates and an equity risk premium of four percent.
Speaker 1: With four percent growth, you get to about today's price.
Speaker 1: So it's not completely disconnected from reality, but it's an
Speaker 1: optimistic view that this will continue now for a long time.
Speaker 1: So one of the stories of two thousand nineteen. Back
Speaker 1: to your earlier question, we went from real pessimism and
Speaker 1: fear to now all things are gonna be okay for
Speaker 1: the foreseeable future. I want to get your thoughts on
Speaker 1: this talking about multiple expansion and then compared to the
Speaker 1: e of the PE ratio and how earnings fit into valuations.
Speaker 1: I was looking at some research recently from ned Davis Research,
Speaker 1: and what they found was that in really gang buster
Speaker 1: earnings is typically you don't have great equity returns, and
Speaker 1: it's because typically those returns are pulled forwards. And we
Speaker 1: saw that happen in seventeen where we had a great
Speaker 1: year of earnings last year, but then we really had
Speaker 1: a great year of returns for the stock market in
Speaker 1: seventeen ahead of the tax cut. And then this year
Speaker 1: we've got a no earnings growth, but at the same
Speaker 1: time we've got an unbelievable returns within equities. Do you
Speaker 1: think it's saying the same thing potentially about earnings for
Speaker 1: next year that we've had such great returns this year.
Speaker 1: First of all, I agree with that that view. It
Speaker 1: is kind of counterintuitive that you would see appreciation ahead
Speaker 1: of the market gets in front of it does a
Speaker 1: good job of sniffing out earnings growth ahead of time.
Speaker 1: So it's what we call it pre trades it if
Speaker 1: you will, um and but so yes and no. I
Speaker 1: think it's seeing a return to earnings growth. But I
Speaker 1: don't think the market is yet pricing in a big
Speaker 1: uplift in earnings. Um. You know, by our measure, it's
Speaker 1: pricing in you know, five or six percent earnings growth
Speaker 1: next year. Right. As as you said, uh, pas often
Speaker 1: are a function of the the interest rate environment. You know,
Speaker 1: low interest rates, you're you're willing to pay up for stocks,
Speaker 1: pay a little higher evaluations. Is there a treasury yield
Speaker 1: that would sort of make you worry that, uh it
Speaker 1: will start putting a lid on equity gains, you know
Speaker 1: at three on the tenure or something like that. Yeah,
Speaker 1: I think you're right. That's where you start to see
Speaker 1: the union yang of higher yields will mean typically higher growth,
Speaker 1: so you can start pricing that in. But then when
Speaker 1: you start raising the interest rate input, if you will,
Speaker 1: that caps the multiple, so they off set each other.
Speaker 1: I think we're we're above four percent, I think is
Speaker 1: where that starts. To get that math, if you will,
Speaker 1: gets tough, and so then you would see equities struggle
Speaker 1: a little bit more. So you say above four percent,
Speaker 1: I'll say our guest that we had on the show
Speaker 1: last week, she said she could see a tenure in
Speaker 1: the range of two to three, but likely staying towards
Speaker 1: the low end of that range. Do you see it
Speaker 1: as at all possible to get close to three on
Speaker 1: the tenure and maybe even close to that four percent range.
Speaker 1: I think four percent is going to be tough. Three
Speaker 1: percent possible, And is you know anything you know cyclical
Speaker 1: could happen. Our base case is more aligned with your
Speaker 1: guest from last week, that will be somewhat kept in
Speaker 1: that low two percent range. We should get some uplift
Speaker 1: from a recovery UM in the manufacturing sector in the
Speaker 1: non US economies, which, by the way, is another big
Speaker 1: story of two thou nineteen, the tale of two economies,
Speaker 1: And that's another story that that I think is Who's
Speaker 1: going to change in two thousand twenty? Oh yeah, you
Speaker 1: think the rest of the world will sort of play
Speaker 1: a little catch up? I think so. So if you
Speaker 1: look at UM this year, and you look at either
Speaker 1: in the macro and the micro right the macro data
Speaker 1: manufacturing was soft. We saw that in the p M
Speaker 1: I S, etcetera global p M I S in the
Speaker 1: in the micro data in the sp F, companies with
Speaker 1: domestic exposure generally had flat slightly up earnings and companies
Speaker 1: with more than the revenues outside the US had earnings
Speaker 1: down on average. And that probably has moved through the cycle.
Speaker 1: That that was driven by an inventory cycle, that was
Speaker 1: driven by the trade dynamic, and both of those were
Speaker 1: moving through. Hopefully on the trade moving through the end
Speaker 1: of that. And if that, even if it doesn't uplift,
Speaker 1: it will be the removal of a negative and you
Speaker 1: could see um a reversion there and people will it'll
Speaker 1: be more balanced in terms of the global outlook. One
Speaker 1: thing in your notes I found interesting is you say
Speaker 1: dividend stocks are cheap now. Um, when I hear dividend stocks,
Speaker 1: I immediately default to thinking utilities, which part of the
Speaker 1: year they got very very expensive. Uh less, so now
Speaker 1: I think they're back below a multiple of the SMP
Speaker 1: trade netted discount. Consumer staple stocks got pretty expensive. And
Speaker 1: then on the other end of the risk spectrum, I
Speaker 1: look at MLPs. You know, the messter limited partnerships which
Speaker 1: are cheap ast heck, but very risky obviously. I mean,
Speaker 1: I think there's several MLPs that not too long ago
Speaker 1: we're at like double digit dividend yields. So walk us
Speaker 1: through what dividend stocks you kind of have your eye
Speaker 1: on right now that look cheap and not just cheap.
Speaker 1: But but you know, if you're buying a dividend stock,
Speaker 1: obviously you want that safety. You want to see that
Speaker 1: dividend keep rising or at least stabilized. So where are
Speaker 1: you seeing good opportunities there? First of all, the the
Speaker 1: dividend stocks are relatively attractive, they are um versus the
Speaker 1: rest of the market, but it's in Wharton to look
Speaker 1: at them on a sector cross sectional basis, and what
Speaker 1: I mean by that is balanced across the sectors. You're right,
Speaker 1: if you look at it, where are the high dividend yielders,
Speaker 1: the utilities and the reats those and the staples those
Speaker 1: have typically been more expensive if you don't balance around
Speaker 1: the sectors. But if you take a balanced view of
Speaker 1: every sector technology, energy, as you mentioned, then in general
Speaker 1: the dividend stocks bisector um are there's there's lots of
Speaker 1: opportunity in there. So we can find opportunities within every
Speaker 1: sector and create a balanced portfolio around that. But yeah,
Speaker 1: and then you bring up you know, some of the
Speaker 1: energy patch is getting very interesting. You see some uh
Speaker 1: good yields there. We've been very selective, adding very selectively
Speaker 1: in that sector as well of late. Even financials for
Speaker 1: a while this year had some really surprisingly strong dividend yields.
Speaker 1: You know. You you figure, you know, with the sort
Speaker 1: of less of a focus on regulation and and fed
Speaker 1: stressed to it's maybe those those will even be sort
Speaker 1: of stronger growing dividend stocks than than you would have
Speaker 1: guessed a few years ago. Well, they just trade with
Speaker 1: the yield curve and with the yeld curve flat, you know,
Speaker 1: the al goes kick in, and you know, and I think,
Speaker 1: on um, you know, on an unwarranted basis, the algales
Speaker 1: really I don't want to blame them too much, but
Speaker 1: I think they don't listen to the shows. It was
Speaker 1: tick by tick, you know, they were, you know, rates
Speaker 1: rates down, financials down. It was kind of too much
Speaker 1: lockstep to be anything. But but I think and then
Speaker 1: and that misses the dividend story, which is quite strong,
Speaker 1: and the earnings yield on those is quite impressive. So
Speaker 1: the capital return story at the banks has been tremendous,
Speaker 1: buying back a ton of their own stock. So it
Speaker 1: really is a total return, total shareholder return story there
Speaker 1: that I think was missed for a while when the
Speaker 1: curve was laddening. So do you think it's a miscommunication
Speaker 1: or at least a mistake for people to generalize when
Speaker 1: they think of dividend yielding stocks. A lot of people
Speaker 1: will just think of your classic bond proxy is the
Speaker 1: ones that Mike mentioned real estate for example. But the
Speaker 1: idea that you can actually find companies with higher dividends
Speaker 1: across any sector, you just have to do the work. Absolutely,
Speaker 1: I think that's right. I think I think what happened
Speaker 1: was yet um both of phenomenon. I want yield and
Speaker 1: I want safe yield because the world is ending, right,
Speaker 1: so utilities and reads hit that low volatility high dividend
Speaker 1: cross section, if you will, and so people gravitated towards that,
Speaker 1: and I think they're missing the the shareholder yield and
Speaker 1: the dividend yield available in other sectors um. More broadly,
Speaker 1: that's so that's something we focus on, is a more
Speaker 1: broadly diversified high dividend strategy. Alright, MA, I gotta say
Speaker 1: this is my favorite line in the notes you provided us. Uh.
Speaker 1: Tons of our ultra high net worth clients are calling
Speaker 1: and saying, I missed this. How do you get me
Speaker 1: back in with low risk? Now, me being not exactly
Speaker 1: an ultra high network. Uh, but let's pretend I am.
Speaker 1: How do you get us back in? Is it is?
Speaker 1: Do you have to talk these people sort of uh
Speaker 1: down from the fomo effect here? Um? Yeah, And I
Speaker 1: don't know if I had used the word back If
Speaker 1: I did, that was a typo. But I meant to say,
Speaker 1: how do I get in? Because many people have been
Speaker 1: sitting out and for years and they're finally saying, you know,
Speaker 1: at least I want more yield. Maybe don't don't put
Speaker 1: me into the equity markets, but get get me some
Speaker 1: more yield. So we are seeing a lot of of
Speaker 1: calls from clients who really want to participate in at
Speaker 1: least yield instruments and get out of cash. Basically, So,
Speaker 1: is this on the equity side, more so on the
Speaker 1: fixed income side and credit? How would that be? It's
Speaker 1: more on the fixed income side and credit people, it's
Speaker 1: too far to go from pure cash to equities, especially
Speaker 1: at this point in time. So move me up the
Speaker 1: credit spectrum, uh, in terms of you know, more yield
Speaker 1: and in the credit dimension. Um. But but safe yield
Speaker 1: is really the question. It's an interesting thing because when
Speaker 1: the world seemed like it was, you know, barreling towards
Speaker 1: a recession earlier in the year, those cash shields were
Speaker 1: pretty attractive. I think the money market funds were at
Speaker 1: about two in a quarter around there for a while, so, um,
Speaker 1: a lot of people really parked out there. It sounds
Speaker 1: like among your clients they did, you know, two and
Speaker 1: a half was okay? And then the fit took took
Speaker 1: that away, right, And so that's really what's driving that dynamic.
Speaker 1: So in and I'm curious about the psychology here here
Speaker 1: because you said it's been years, so I imagine they've
Speaker 1: been waiting this out, waiting for a good opportunity to
Speaker 1: get in. And I think back to and you would
Speaker 1: have thought you had the SMP down nine percent almost
Speaker 1: the end of the bull market. You would have thought
Speaker 1: that would have been a good opportunity. Was there just
Speaker 1: too much fear surrounding as well that we didn't actually
Speaker 1: see investors who have been out sitting in cash take
Speaker 1: that opportunity to get back in, and that means they've
Speaker 1: then missed as well. I think that's right. I think
Speaker 1: putting aside a different client basis, I think when you
Speaker 1: look at the flow data, a lot of people were
Speaker 1: continuing to outflow, for they have been for a number
Speaker 1: of years into bonds, and they continued that even at
Speaker 1: the bottom of of two tho um and uh so yes,
Speaker 1: I think a lot of people have missed out on
Speaker 1: this rally um And now you know, you're starting to
Speaker 1: see the flow data reverse a little bit, so they're
Speaker 1: coming back in. So if you had to boil it
Speaker 1: down to sort of a asset allocation uh decision right now,
Speaker 1: what would you tell clients overweight certain assets underweight? I mean,
Speaker 1: are you uh it sounds like you're you're still bullish
Speaker 1: on equities, but maybe not hyperbullish. We think it'll be
Speaker 1: a coupon your inequities, just like you call it in
Speaker 1: fixed income, when you just collect your coupon, the spread
Speaker 1: doesn't change. That will probably be the same thing in
Speaker 1: in equities. You'll collect your earnings growth and your dividend yield.
Speaker 1: But don't expect another rerating of the multiple higher for sure. UM.
Speaker 1: What we're counseling to clients right now is stay with
Speaker 1: high quality. It's laid in the cycle to really you know,
Speaker 1: take risks. So large cap dividend pairs. As I mentioned UM,
Speaker 1: and there are cheaper parts of the global markets. We
Speaker 1: like Asia for example, especially e M. Asia is much
Speaker 1: cheaper and you have growth. They should be at the
Speaker 1: bottom of their cycle and you can see some growth.
Speaker 1: So we like that UM area on a relative basis
Speaker 1: growth versus that the value that you're getting there. So
Speaker 1: there are parts of the equity markets. In the fixed
Speaker 1: income markets we like, UH. Certain areas of emerging markets
Speaker 1: credit you get nice spreads with pretty tight covenants there.
Speaker 1: You don't have as much covenant light as you do
Speaker 1: in the US bank loans were we've got spots and
Speaker 1: bank loans that are UH that are good. There are
Speaker 1: some frothy spots and in the corporate credit markets, but
Speaker 1: certainly areas and in the bank loans that we'm kind
Speaker 1: of chuckling inside because it sounds like the covenant situation
Speaker 1: is are an emerging markets Well, if you're an emerging
Speaker 1: markets issue, where and you have to issue in the US,
Speaker 1: right you have to have a pretty tight covenant to Yeah. Yeah,
Speaker 1: that's interesting. So built up the hype Mike did at
Speaker 1: the beginning of the show your craziest thing all year long?
Speaker 1: So I figured, why don't we get to it, and
Speaker 1: then we can also talk a little bit more about
Speaker 1: it as well. What would you say twenty nineteen craziest
Speaker 1: thing that happened? Well, so I'm going to keep my
Speaker 1: comments confined to the markets, right because if I go
Speaker 1: into the sphere or anything like that, exactly, it was
Speaker 1: the crazy year all around. I'd say there was a
Speaker 1: lot to choose from in that dimension, but we'll stay
Speaker 1: with the markets. I think the craziest part was just
Speaker 1: the panic that of the recession that never came right,
Speaker 1: and we really had. I mean, just there was if
Speaker 1: you looked at the market, if you were on Mars,
Speaker 1: you would say, oh my god, there's a major recession
Speaker 1: or depression coming. We had two eight pricing in certain
Speaker 1: cases you'll curve coming, you know, flat, etcetera. That was
Speaker 1: kind of crazy because it was really disconnected from reality. Sure,
Speaker 1: there were soft patches in the manufacturing sector, just like
Speaker 1: in two thousand and sixteen, there was a soft patch
Speaker 1: in the energy sector um just like in two thousand eleven.
Speaker 1: You know, it was like ad it was a mini cycle,
Speaker 1: there's no question, as you will see, but a financial
Speaker 1: crisis almost was being priced in. That was odd to us,
Speaker 1: and I think as a representation of how far we've come,
Speaker 1: I think it is unbelievable you had an inversion of
Speaker 1: the yield curve these recession fears, and now as we
Speaker 1: do close out, you now have the steepest yield curve
Speaker 1: since all the way back in. So it's really come
Speaker 1: full circle. Ye. Absolutely, So what what kind of risks
Speaker 1: would you sort of put at the top of your
Speaker 1: list for the corporate market? Corporate credit markets are something
Speaker 1: that we're really watching. It's there's some frothy areas there.
Speaker 1: We're not seeing big uptick in defaults, but it's a
Speaker 1: bit of a coiled spring. When it goes, it's gonna
Speaker 1: go fast. So we we we really want to watch that.
Speaker 1: We're watching the corporate debt market and we're looking at
Speaker 1: every uh, every different lens of of credit levels, etcetera.
Speaker 1: For stress. But sorry, it's not just the end of
Speaker 1: the year. I can't believe it. It's the end of
Speaker 1: another decade, another Uh. I was born near the beginning
Speaker 1: of the nineteen seventies decades, so I don't like to
Speaker 1: see these go go buy so quickly. They keep going
Speaker 1: too quickly. But Matt, what what was the highlight for
Speaker 1: you of the whole decade? Uh? You know, it clearly
Speaker 1: was the longest. I forget all the stats. There's a
Speaker 1: million stats for it. But best decades since the fifties
Speaker 1: or something like that. In equities, so best decades since
Speaker 1: the fifties. If you look at the sharp ratio of
Speaker 1: the SMP, so steadiest gains to the upside risk adjusted returns.
Speaker 1: But I know, Matt, you also have some other statistics
Speaker 1: as well. Well, it was steady. I could see that
Speaker 1: sharp ratio making a lot of sense when the volatility
Speaker 1: level was unbelievably low there for a while, making the
Speaker 1: sharp ray show high. But I think it was the
Speaker 1: first decade with no recession. And but in terms of
Speaker 1: total return, so up two this decade the fourth best decade,
Speaker 1: nineteen fifties being the best at up four. So it's
Speaker 1: a way to go. Yeah, you could put it that way,
Speaker 1: but yeah, it's it's it's interesting when you know, when
Speaker 1: when you look through history that actually it's only the
Speaker 1: fourth best decade out there. That's pretty interesting. Yeah, I
Speaker 1: guess so as we start, we're already going to start
Speaker 1: keeping tabs on the next decade and see how we
Speaker 1: start off. We'll have a recession this decade, for sure.
Speaker 1: I think that we'll hold you to that. You remember
Speaker 1: you said that. Happy holidays, guys, Matt Round, Thanks so
Speaker 1: much for coming on the show What Goes Up. We'll
Speaker 1: be back next week. Until you can find us on
Speaker 1: the Bloomberg Terminal website and app, or wherever you get
Speaker 1: your podcasts. We'd love it if you took the time
Speaker 1: to rate interview the show on Apple Podcasts so more
Speaker 1: listeners can find us. And you can find us on Twitter,
Speaker 1: follow me at Sarah Pontzack Mike is at re Gutonomous,
Speaker 1: and you can also follow Bloomberg Podcasts at Podcasts. What
Speaker 1: Goes Up is produced by tober Forehead. The head of
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Speaker 1: next time.