Ong-ad Nuseewor
How should investors be thinking about the recent run higher in stocks? MoneyTalk’s Greg Bonnell discusses with Brad Simpson, Chief Wealth Strategist with TD Wealth.
Transcript
Greg Bonnell: Despite plenty of risks out there, the markets have climbed into record territory. But can that run continue? Joining us now to discuss is Brad Simpson, Chief Wealth Strategist at TD Wealth. Brad, great to have you back on the program. You’ve got a new quarterly report out. It’s called “The Great Wide Open.” You talk about investors being like pilots. They’re trying to gauge– look at all these gauges, trying to get a read on it. What’s the thinking behind that?
Brad Simpson: Well, thanks for having me, by the way. And I mean, I think on the intro on the way in, what a great starting point of the S&P 500. [INAUDIBLE] almost at 5,000. I mean, that’s just– everyone’s got to stop for a second. And it fits really well into our quarterly strategy that we just published. And “The Great Wide Open” is this idea that for the last three years– three years ago, for about a year and a half, you knew one thing. You had COVID-19. You knew we were going to deal with it, but that’s the thing– that was just front and center. And of course, on the other side, we had inflation. And so it’s not terribly complicated, right? What’s going to happen with inflation? So when we were working on our strategy this quarter, it was like, we don’t have these two big things, right? You see the odd person with a mask, but nobody’s really spending a lot of time talking about COVID anymore. And inflation– well, I’m not saying it’s gone, but it’s not front and center.
Greg Bonnell: And it’s not 8% or 9%.
Brad Simpson: Yeah, right. So the idea of this is that– when we think about it is that– I was doing a sit-down, a presentation with our chief economist, and we were trying to explain what is the difference between our two jobs. And Beata does an unbelievable job saying, over the next year and following years, this is what we think the economy is going to do in Canada or the United States or in China or globally. What does that look like? My team thinks about it kind of like flying a big airplane and says that, OK, well, we’re flying from A to B. And when we’re flying our flight plan, we’re kind of thinking about what her team said and said, OK, this is what we think the train’s going to look like. But we got to fly there, right? And when you’re flying from A to B, you’re going to kind of be off course all the time. And so what I said is that, we took off, and we’re in the air right now. And it is this incredibly big wide, open sky, but you know that you’re going to be off course, so things are going to come at you. But you know it’s not going to be the two things that hit you in the past. And there’s also going to present all kinds of opportunities. And so that, to me, is that– so we started asking all these questions like, OK, well what would that be? So we started out, and I think we brought a chart for this. And I always– I’m the guy who always comes out and says, hey, I think I brought a chart, but we started out, and we actually went out– and I don’t want to say like this was a big, formal poll. We just went out to our advisor community across Canada and said, what is your client’s big fear that you’re hearing about?
Greg Bonnell: Like, what’s the bottom line?
Brad Simpson: Right? Like, what is that thing? And so we actually– so informal survey. Here’s how it shaped out. Came out, and should not be a big surprise– AI, artificial intelligence. You hear things like, could replace human beings. This is a pretty big subject. And so we kind of– OK, that made sense. And then the second one that came out was deglobalization, which kind of makes sense. And then tied for third and fourth was climate change and world war. And these are your 7 to 10-year big concerns.
Greg Bonnell: These are big ideas. These aren’t minor issues, are they? These are big ideas.
Brad Simpson: Yeah, right? And then we looked at this, and we said, OK, well, those are the big ones. And the more– when I do Q and A’s with clients and investors out there, that is– I had a meeting like that yesterday with a bunch of our clients, and that is top of mind. And then you go to, what are the short-term concerns? Like, what are the things here that– if I suggest to you that inflation is a lot better, COVID’s not a concern, what’s your concern?
Greg Bonnell: It’s my opinion?
Brad Simpson: Yeah.
Greg Bonnell: I mean, off the top, we’re talking about this market rally, right? No shortage of concerns, and yet market’s near record territory. So I think people start to think, what’s going on here? Can this play out any longer?
Brad Simpson: Yeah. And the ultimate answer to that is, well– and through all this blue sky, the answer is, yeah. There is a lot of reasons why it could. And I think you see this ominous number of the S&P at 5,000. You got to kind of then start breaking that down and go, how do you get to that number? And I think some of us know that– I don’t think it’s any secret that a huge part of that driver is only in a handful of names. And for the last– let’s call it since last October, now, it’s starting to spread out a little bit. And I think that the reason it’s starting to spread out a little bit is that if you were going through a checklist of the things that you would want to be getting better, they start to get pretty good, right? You and I could be here– Last year at this time, we could have been reasonably having a discussion, which we were, on a concern that we could be in a deep recession in Canada, a recession in the United States, and so forth– and in Europe, the same. Well, that’s not what we’re having. Today, we could be very reasonably having a discussion about stagflation. So you could say that we have really slow growth. We have super high inflation. And now we’re starting to see unemployment go up. We don’t have any of that. So you can kind of go, well, that’s a real positive. Yields and inflation are both down. So we’re not talking 10% inflation. We’re talking 3%. So when we’re talking interest rates– now we’re talking about rate cuts. The argument is, are there going to be rate cuts? The argument is.
Greg Bonnell: Yeah, let’s talk about this idea– if you get a soft landing, do the central banks have to be in a rush? Jerome Powell doesn’t seem to be in a rush because he keeps pointing to the economy and saying, the labor market is strong. GDP growth is strong. What would force our hand, really?
Brad Simpson: Yeah. Right. Well, that — and I mean, that — if anything, if you wanted to find a risk, one of the risks — and I think it’s a reasonable one is not if they would raise rates or if — how many rate drops would there be, one of the risks might be, what if they didn’t? Right.
Greg Bonnell: That thought’s been entering my head every once in a while. It’s still early in the year. But what if they didn’t.
Brad Simpson: Yeah, I think that’s a reasonable risk that’s in the marketplace, that we think that there’s going to be three to four drops and we think it’s going to be, instead of in March and April, that this will be looking into closer into May and to June. But I think sometimes when people read the things like people like me say is that, but we’re always playing on probabilities, right? So we’re saying, there’s a 60% probability that this will happen–
Greg Bonnell: 40% chance it won’t.
Brad Simpson: Yeah, and there’s 40% chance it won’t. And I think that one of the things that we do that I think is a way of changing that is that going back to the economics view of things. Ultimately, when you’re allocating capital, you’re thinking about what’s happening in the economic environment now and going, you know, 6 to 18 months forward, say. When you’re doing that, an economist is going to say, here’s our expected growth, or here’s our expected lack of growth, or here’s whatever that term is going to be. What we do is we’ll look at that and we’ll go, OK, well, we think that’s the most likely scenario. But what we do when we allocate, we say, lookit. Most of the time, we know a simple thing, that there’s going to be a rising growth environment, a falling growth environment, an environment where inflation is going up, and an environment where inflation is going down. I’m going to allocate into — And I think we’ve talked about this before — I said, it’s a little bit, when you’re a kid, you used to play the game foursquare. And for us, we actually put, we literally break it down and go, in that game of foursquare, you have each one of those elements, and when you have each of those, we’re going to actually say the ball is going to hit each one of those four squares —
Greg Bonnell: At some point.
Brad Simpson: — at some point. And I can allocate to each one of those squares. And then if I think that there is a higher probability that we’re going to have a soft landing and that as we get closer to that soft landing, interest rates are going to start going down, I’m going to allocate more into that box where I think you’re going to have a slowing environment, but not too slow, where inflation is in control and not deflationary. And I’m going to, on the margin, make a bigger allocation there. And I can tell you, if investors could figure out that’s what we’re saying, it would change everything, right? Because you and I will talk and we’ll say, we’re neutral equities. Well, I think people translate that goes, oh, they don’t like the equity market. No. It means that when we’re allocating to it, we’re allocating less to it, because we think the probability of where you want to go is less. And so for us, I think that when we’re saying where you would want to think about how you’re going to allocate, there’s many things that would point to, this is an environment that if you have a soft landing, which a lot of things, especially in the United States, that’s pointing to that, and you have a consumer that is in pretty good shape, little bit stretched, their job is pretty rock solid. And the good news is, their job’s rock solid, but it’s not as rock solid as it was, which means they’re less inclined to go in and walk in and say, I need a raise, which causes inflation. Instead, you kind of go, well, I’ve got a job and it’s a pretty good one so I might stay where I am now. Economies love that, right? And then if you start seeing equity markets start to broaden out and say, well, if you have a good, healthy economy, look, you run into a bunch of growth names, because you believe you can’t get growth anywhere else. If you start thinking, well, wait a minute, things are better than what they were, I can maybe not have to pay so much to get that growth, that’s a pretty good market environment. And to me, when we look into The Great Wide Open, those are a lot of the attributes that it has right now.
