We might be getting to a point where maybe there's a return at some point to
fundamentals in investing. Where do you see that happening when you
see that happening and what will that mean for investors.
Well I do think that I said earlier that that market's trying to figure out a
bottom. You know bottoming process is not
precise. It takes time.
Investors have to sort of feel their way if you will in the dark at the bottom of
the trough. But I think we're I think we're in that
that kind of mode. And once that really happens then
investors will start to think about OK what does the world look like going
forward. And you know the argument is is that
growth is probably not going to be robust broadly speaking.
But investors will start to look for companies that have sustainable cash
flow growth sustainable business models and opportunities for earnings to grow
with some degree of confidence. And that's where they're going to start
to invest. And that's when you're going to start to
see the headlines recede and the fundamental investing come to the fore.
When that is it's hard. That's a hard call.
But the catalyst for that will be when the market starts to find a bottle and
that's when I think investors will move to the fundamental point of view.
So it doesn't help me with that. What does it mean to turn to the
fundamentals. Does that mean sort of slow and steady
wins the race when you don't have a lot of growth coming your way.
So I think in a growth constrained environment you do want to look for the
types of factors that highlight if you have either that sustainable growth or
in a declining earnings revisions environment like we're in right now for
the broader market the companies that are bucking that trend and have positive
earnings revisions. I'd echo what Peter said about strong
free cash flow yield in a rising rate environment which we're clearly in right
now healthy balance sheets with lower debt higher cash.
There's going to be times though when you get to the point where there's a
more definitive bottoming in economic activity.
And I think in this cycle that's probably only going to come when we
start to see stability in housing. And I don't think we're there yet.
I think we're still in the deterioration phase.
Then there's an opportunity to go a little bit more cyclical and develop
that leverage to a turn up in the economy.
But in the near term I'd stay focused on those kind of hybrid growth and value
characteristics kind of quality wrapper around them.
That's been our mantra for much of this year.
Peter we heard from Jay Powell the Fed chair this week that he really was
intent on getting inflation down but it looks things are going to take a while
to get that done. Are we looking at a higher inflation
environment for the foreseeable future. If so what does that say about your
investments. Yeah absolutely.
I mean I've been of the opinion and I'm not been right in terms of timing but
we've had 30 years of declining interest rates since Volcker and since the last
time we had very high inflation by the way.
If you recall in those time periods there's inflation rates while they were
high. We're also pretty sticky.
They didn't come down that fast. So the chance that we are going to go
back to sort of a very benign inflation environment or even a declining
inflation environment where rates continue to bump along at the bottom and
are not really much of an issue I think is not in the frame.
I think we're going to have inflation. I don't think it's going to be 5 6
percent or even 4 percent. I think it could easily be in the 3s.
I think there's going to be dispersion between regional growth rates between
Europe the United States China emerging markets.
That's going to make central bank activity less where needed more
dispersion between currencies. And I think that's a marketplace where
investors will actually thrive where active investors will actually thrive
and some investors will do well. But I think those smart investors who
can be flexible in in the kinds of factor rotations if LaSalle is talking
about I think will actually do well here.
But I David Westin to go ahead there. Yeah it's just gets harder.
But I think it's wrong to conclude that we're in a an environment where the Fed
is going to go back to being the Fed put it.
The Fed is not going to do the Fed but the Fed is going to increase interest
rates and they're not going to create the kind of liquidity they had for the
last 14 years. And David I think there's a
characteristic associated with what Peter is talking about to the extent
he's right and I believe in this too that we're we're now in the beginning of
a more secular environment that that has a higher kind of landing point for
inflation. If you go back to the basically the 60s
70s and 80s it was an environment of a negative correlation between bond yields
and stock prices because typically when yields were rising especially sharply in
that environment it was because of an inflation problem or more of a toxic
environment for the equity market there of the Great Moderation.
You flipped that on its head and you had a positive correlation because yield
pops during that era of great moderation that 20 or so years preceding the
pandemic was because growth was picking up without that concern about inflation.
That's a great backdrop for the equity market.
So I think the tell will be if we're in a more sustainable period of that
negative correlation between bond yields and stock prices.
And I absolutely agree that taking more of an active approach not just on the
equity side but on the fixed income side is is a way to navigate a very different
environment than what most people are used to at least looking at the past 20
years. Let's then pick up on Peter's point
about dispersion in currencies and nations.
We've seen that sort of geopolitical risk right now.
So the other factor is goodness knows Europe is in a very different position
on that stage was in a very different position with China.
What does that say when you're investing.
How do you take advantage or at least not get burned by that dispersion.
So I do think that we're in the beginning of a more volatile era.
And I would say that not just in terms of asset markets but more geopolitical
volatility more economic volatility and shorter cycles in terms of of both the
length of expansions but the frequency of recessions.
And one way to navigate that for investors is first of I'll go back to
your disciplines around diversification and rebalancing and want greater
volatility affords you the opportunity to do is use volatility based
rebalancing or portfolio based rebalancing.
Let your portfolio tell you when it's time to trim and test strength.
Add into weakness. There is an opportunity these days to be
much more diverse in terms of asset classes that even individual investors
can have in their portfolio and a low cost very easy way versus the standard
old fashion. Our options are stocks bonds and cash.
So I think there's a way that individual investors can take advantage of just a
broader swath of offerings out there in order to boost that diversification.
So Peter help me with this. Just what it was and just said in that
World War it's not just stocks and bonds cash.
You look at alternatives you're looking at real estate.
Are you looking at going longer in duration.
Where do you go that the other people are not.
Look the renaissance going to be expensive for investors for the next
couple of years. At some point duration will you know
will give you value at least it will give you a coupon.
But I think you need to look at your portfolio and assume that there is a 3
to 4 percent inflation rate over that time period.
You're going to hold an asset and you have to decide that that asset will
actually do well in that inflationary environment where let's put it this way
in a more inflationary environment than kind of the benign world that we are
living in that could in fact be real estate.
But real estate today is a very challenged asset class because Covid has
had a huge behavioral impact on office properties and on how people use
offices. So the the adoption of the office market
to the Covid behavioral shifts and less than five day working and working from
home and the flexibility that's come with that that hasn't hit the bottom
yet. We haven't seen that stress work its way
out. So you know real estate's going to be a
tricky asset for the foreseeable future. And that's something that I think will
be interesting too to take advantage of. So listen briefly wrap this up for us.
Gives a little hope for growth. Where would it come from.
So I think we may be shifting into an environment eventually not in the near
very near term of a more investment driven economy and less a discretionary
consumption driven economy. And if that's correct I think that's a
that that's a more optimistic outlook longer term for the economy than just we
went back to that consumption model purely.