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Market Thoughts: Bashful bullsVideo

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Video Id: 2019-58 Market Thoughts May

Audio Description Video Id: 2019-58 Market Thoughts May_ADx_190514

Length (seconds): 387

Transcript: <p><b>JPM – <i>Market Thoughts May </i>– Transcript</b></p> <p>[low-key music]</p> <p><b>Nancy Rooney</b>: Welcome and thank you for joining me for a conversation with our Chief Investment Officer, Richard Madigan. Today we're going to talk about those top questions that have been on the minds of our clients. And so, I thank you for joining us.</p> <p><b>Richard Madigan</b>: My pleasure.</p> <p><b>Nancy</b>: You know, the last six months is probably the best period of time for reinforcing the idea of staying invested for the long-term.</p> <p><b>Richard</b>: Yes.</p> <p><b>Nancy</b>: And now we find ourselves, markets are making new highs, and sentiment feels totally different than we did in December. And I guess the question that I hear from clients is have we retraced too far and too quickly?</p> <p><b>Richard</b>: It's a great question. For the retracement, not at all. I don't feel that we've overshot. So you look at fourth quarter in December in particular, there was a huge overreaction in markets and we actually took advantage of that and bought U.S. stocks in late December and early January. The Powell pivot or the Fed pivot, to me, I think people miss some of the importance of that in translation. I think they did the right thing, realizing they had overtightened at the end of last year. So it showed humility and it showed facility. From my perspective, it actually sets us up that we can extend this cycle a little bit further.</p> <p><b>Nancy</b>: So you mentioned in December that you bought.</p> <p><b>Richard</b>: Yes.</p> <p><b>Nancy</b>: And I know you bought U.S. equities, and it's the largest overweight...</p> <p><b>Richard: </b>And then some.</p> <p><b>Nancy</b>: Exactly, in portfolios. Help me with the concept that we see globally growth slowing.</p> <p><b>Richard</b>: The reality is there's nothing new about growth slowing. It may be uninspired growth, so it's slower growth. I think some of the hysterics that ramped themselves up at the end of last year, they've slowed down to a point now where people are willing to look at risk again and stepping into markets. At a very high level, we continue to believe that stocks beat bonds. You pointed out our overweight in the U.S. I'm still a big believer in that, both in terms of playing offense in markets where I think there's some upside in terms of earnings expectations, also defense because I think the U.S. is still much better placed from a macro environment in the global economy. It gets a little bit trickier from there because we're focusing on sectors and even sub-sectors of opportunities in portfolios. That's particularly the case for our equity-only portfolios where we can play sub sectors. We still like technology, although we've shifted the overweight down a little bit and where we're able to do so, we've actually gotten a lot more granular in terms of what we like. So think the Cloud, think software. Energy has been something we've been leaning into. Energy in both U.S. equity markets and European equity markets. The contrarian trade for us right now, I think, is healthcare because given a lot of the political noise going on, that's a segment that not only is something we think of as defensive, but from a valuation perspective also offers a little bit of upside-- whether that's biotech, whether that's pharma, or whether it's managed care.</p> <p><b>Nancy</b>: So, overweight in equities, but within equities building some defensive characteristics in the portfolio.</p> <p><b>Richard</b>: Definitely and across the entire portfolio.</p> <p><b>Nancy</b>: Right.</p> <p><b>Richard</b>: Shock absorbers are incredibly important at any point. I think later in this cycle, making sure that we're diversifying risk has been super important and a focus for us.</p> <p><b>Nancy</b>: You know, I think a lot of clients almost seek to calibrate risk themselves. And sometimes they'll add money to a portfolio when they see a lot of opportunity, but likewise when they're concerned, they'll take some money off the table. And yet, when I hear about everything that you do as a CIO, risk is the first thing that you take care of.</p> <p><b>Richard</b>: It's foundational. The best example I could give you at its extreme would be thinking back to 2007/2008. So when the world gets really bad, we probably shut down equity positions by 15+%. That's certainly not our positioning now, or view at all. If we were presented with something, I think, that cathartic again in markets, wouldn't be happy doing it, but really well armed to be able to address that.</p> <p><b>Nancy</b>: So, in a way, clients can kind of delegate that risk decision to you?</p> <p><b>Richard</b>: They do and that's literally what our team does.</p> <p><b>Nancy</b>: In your recent Market Thoughts piece, you called it Bashful Bulls. You're always very creative in your titling, and it referred in a way to clients who have money on the sidelines, right? That's a healthy backdrop to have or supportive technically.</p> <p><b>Richard</b>: Agreed.</p> <p><b>Nancy</b>: And you also talked about the number of stock buybacks that are out there. So is that part of your underlying view for the U.S. overweight?</p> <p><b>Richard</b>: So we start out looking at the world fundamentally. So I'm very much focused on where valuations are, where we are in the cycle, and where we see opportunity. But the issue of technical support to markets, I think to me is really important. The buyback question's a really important one to me. U.S. corporations, excluding financials, probably have something like $1.5 trillion sitting in cash still. And working with our investment bank, I think they estimate something like $850 billion of buybacks from those corporations this year. That translates to something like 2% of earnings per share of growth this year, which is why I said before I actually think there's an upside in terms of earnings growth this year.</p> <p><b>Nancy</b>: For the U.S.?</p> <p><b>Richard</b>: Yes.</p> <p><b>Nancy</b>: And so you keep your overweight?</p> <p><b>Richard</b>: Correct.</p> <p><b>Nancy</b>: So as an investor...</p> <p><b>Richard</b>: Yeah.</p> <p><b>Nancy</b>: ...would you consider yourself an optimist or a skeptic?</p> <p><b>Richard</b>: You will love this answer-- both. Optimist at heart...</p> <p><b>Nancy</b>: [laughter] That's cheating a little.</p> <p><b>Richard</b>: That's okay. Optimist at heart, because I think as a good investor you have to get up every day wanting to find the next good investment idea. Skeptic, I think really important because there aren't that many good investment ideas. So you've got to lack hubris and be able to challenge yourself on what makes sense and what doesn't. You can't be a cynic; the cynic never invests. But if I look at the world more broadly, I think I'm unemotionally focused, I'm a fundamentalist, and again, trying to figure out how much risk, when to take it and when to step back.</p> <p><b>Nancy</b>: Thanks, Richard.</p> <p><b>Richard</b>: Thank you.</p>

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