On October 15th we had the chance to host a Zoom webinar with Chris Dillon, CFA, MBA, Investment Specialist for T. Rowe Price (TRP). Chris works in the Multi-Asset Division of TRP and communicates their investment philosophy with clients. We hosted a Q&A whereby listeners sent questions via Zoom’s “chat” function, and Brian Mars & Scott Jewett forwarded these questions to Chris. Below is our attempt at summarizing the conversation. Please keep in mind this is not a transcript, and some percentages & numbers have been approximated and/or rounded. The opinions expressed below are TRP’s and not the opinions of MarsJewett Financial Group. We are sharing these notes as many who couldn’t participate in the meeting itself have asked for a summary.
2019 was dicey from an economic perspective but global central banks saved the day by delivering 19 interest rate cuts. This positively impacted the global economy. Within TRP’s Multi-Asset Division, they deem a “Neutral” outlook as 60% in global equities. They began 2020 neutral. Then COVID-19 hit, and the global economy essentially stopped. Q2 2020 GDP was -32% annualized, the worst since the Great Depression. The stock market was down about 35%. The Federal Reserve (“The Fed”) had to plug a lot of holes. When there is uncertainty, there typically is high demand for the US Dollar. The Fed pumped a lot of money into the economy and kept the world going. The Fed funds rate is now down to 0% – 0.25%, which is why clients are getting extremely low interest on checking & savings accounts. The Fed’s balance sheet coming into 2020 was about $4 trillion, and it is now about $7 trillion.
The CARES Act was also passed in March. This was a big “shot-in-the-arm” for the consumer. There was $25 trillion in total global stimulus to combat COVID-19. Even though Q2 2020 earnings for the S&P 500 was -30% year-over-year, stimulus has helped the stock market increase. For this to be sustained, TRP believes there needs to be a vaccine and economic recovery. TRP used the opportunity in March 2020 to increase stocks to 63.5%, which is overweight. As of October 15th, TRP is back to neutral (60% in stocks). With COVID-19 picking up traction, potential stimulus (or no stimulus) will impact financial markets in a big way.
Election: This might be an election month rather than an election day. Markets don’t like uncertainty; there likely will be uncertainty regarding election results with more mail-in ballots than prior elections.
Question & Answer Section (Q&A)
Q: Are you seeing signs of economic recovery now?
A: The unemployment rate in May/June was 14%, it is now down to 8% due to partial re-opening. The hard part is going from 8% to less than 4% (where we were prior to COVID-19). TRP is seeing encouraging signs; Small Business Applications have spiked in recent weeks. As an example, Chris knew a landscaping professional not happy with his current compensation at a larger firm. He decided to start his own business using technology platforms for entrepreneurs. TRP ascertains that the individual consumer is creatively finding ways to innovate amid COVID-19. Businesses have quickly shifted to get their product(s) online/digital.
Q: Can you share insights on how a Trump win vs. a Biden win affects the markets?
A: TRP doesn’t know who is going to win. Polls say one thing, what happens is another. After COVID-19 hit, polls moved toward Biden. If Biden is president but the Republicans retain the Senate, that handcuffs Biden’s proposals. If a “Blue Wave” occurs, that makes tax increases likely. Under Trump the corporate tax rate went from 35% to 21%. A “Blue Wave” would likely increase corporate taxes to 28%. Higher taxes results in less net income for corporations. In TRP’s estimate, this shaves about 15% off the value of the stock market. However, relaxation of tariff policy could cut that impact in half. Currently global industrial companies are having a hard time determining capital expenditures, and they would welcome clarity as it relates to tariffs.
Q: Does TRP consider sovereign debt levels? How does that factor into future market performance? When does that become a concern?
A: Looking at the Great Recession, there was a 10% unemployment rate along with horrific headlines. As that was happening, the Eurozone had a sovereign debt crisis. Recently, the International Monetary Fund (IMF) said governments need to open their checkbooks to repair the economic damage of COVID. Governments are now embracing big deficits. Can this go on for 3-5 years and beyond? TRP thinks it absolutely can.
Q: Can you please discuss the energy sector, both oil & gas and renewable energy?
A: TRP thinks fossil fuels may last a bit longer than many people think. They are not constructive on the oil market long-term (10 years and out), but for the next five years, with oil at approximately $40/barrel, energy companies may be good investments. The global supply of oil has cut back a bit, which previously put downward pressure on oil. Energy stocks are now only 5% of the S&P 500. TRP likes some oil companies near-term because the price has been beaten down and there has been consolidation in the industry. Companies are becoming more shareholder-friendly and learning to survive in a world of $40/barrel oil.
TRP is also constructive on clean energy companies.
Q: Can you speak to the political proposals on both sides as it relates to infrastructure spending in the US?
A: There will be infrastructure spending with either party, but the kind of spending will be different. State & local municipalities are out $1 trillion due to COVID-19. Biden wants to deliver $1 trillion to state & local municipalities to “keep the lights on”. He would also prioritize spending on education and the expansion of the Affordable Care Act.
Trump would likely prioritize hard-asset related infrastructure spending such as rebuilding of bridges, etc.
Q: Are there sectors of the market you see benefitting going forward?
A: Facebook, Apple, Amazon, Microsoft, and Google now account for 22% of the S&P 500. Growth stocks have outperformed Value stocks by about 43% over last 12 months. TRP doesn’t expect a repeat of that over the next 12 months. There are currently three vaccines working their way through the FDA. TRP expects a real re-opening of the economy. The Fed funds rate is pricing in a 0% rate all the way out to 2023, which is a very accommodative environment. Because of these factors, TRP is currently overweight Large Value and Small Value. They also like some specialty strategies like Health Sciences as baby boomers will need more medical services. Also, the stocks that can maintain dividends through COVID-19 will be very attractive given the low interest rate environment.
Q: How does closing TRP funds impact shareholders?
A: TRP is focused on the shareholder. If TRP feels too much money under management will impact performance, Portfolio Managers (PM’s) can close the fund. The PM’s want to be able to adapt to environments as they change. Given that TRP is a $1.2 trillion global investment management firm, they do not want to own too much of any single company. When execution of a strategy starts to get impaired, they look to close funds.
Q: Are there competing alternatives to the US Dollar for the world reserve currency
A: Not currently, even with all the talk of digital currencies.
Q: Can you speak to why International stocks have underperformed the US for such a long time, and do you see that continuing?
A: From a Multi-Asset perspective, TRP prefers around a 30% allocation in International stocks. They believe International stocks are important. They’re not so constructive on Latin America, but they are constructive on North Asia and China. China is ahead of the US as it relates to economic recovery from COVID-19. Stocks are cheaper internationally, and they see continued weakening of the US Dollar which is good for International stocks.
Q: Can you share some perspectives on the aviation and related industries considering all the challenges they have been facing?
A: TRP pointed out Boeing and airlines were running as hard as they could with no reserves being held back before COVID-19 hit. To the extent that vulnerability came as quickly as it did for such important companies speaks to them surviving going forward, but in a manner that is not as heavily leveraged to the economic cycle. As a result, they feel it is unlikely Boeing returns to be a $450 stock any time soon, if ever again. However, at $160 with economic traction coming in a post-COVID world in the next year and a half, Boeing is an interesting investment from a strategic perspective. The same goes for United Airlines, which was running all out before COVID-19 hit and was a $96 stock. They believe it is also unlikely it will return to that level any time soon. However, at $35 in a consolidated and necessary industry they believe United is strategically interesting.
Against this backdrop, TRP stated while industrials have a deep hole to dig out of, they look to not only survive but are also adapting quickly from a cost cutting perspective which should add an additional tailwind when economic traction comes post-COVID.
Thanks to the nearly 60 participants who participated in the October 15 webinar. The chat feature worked well, and your live questions were excellent. Our next economic webinar is subject to speaker availability, but we plan to do the next webinar the second half of January 2021. We appreciate the opportunity to serve you.