Second Half Outlook 2023 - TD Financial-The Watch List with Antwone Harris July 2023
TRANSCRIPT
[00:00:00] TD Watch List: Let's continue our conversation about the market and bring in Antwone Harris, chief planning strategist, Platinum Bridge Wealth Strategies. Thank you for being here. So what eco data are you watching? I mean, for example, that ADP that came in at nearly 500, 000 jobs when the estimate was 220, it was more than double.
[00:00:21] I really surprised everybody on wall street today.
[00:00:25] Antwone Harris: You will think that the economic data that we've been seeing has been much more resilient than anyone had anticipated, frankly, and earlier this year, many pundits were expecting the Fed to cut rates. I have no idea why. I mean, I think data like this really supports the fact that we're going to be in a higher for longer environment, and I think it makes sense to kind of position portfolios for that type of environment for the foreseeable future. Um, you know, we've seen these inflation numbers come down a bit, but some of that decrease was really on the good side, which happened, which happened organically because some of those supply chain issues started to resolve themselves. But on the services side, That area has been very robust.
[00:01:11] You know, the consumer has been very strong. We see these strong jobs numbers, and people are going to continue to work, make money, spend money, and keep this economy propped up and inflation higher for the foreseeable future.
[00:01:24] TD Watch List: So where's the bullishness coming in?
[00:01:28] Antwone Harris: Well, I think the bull case is really, you know, they had, they had a revision to GDP recently from 1. 3% to 2%. As I mentioned, the consumer has been very strong and the consumer makes up 70% of this economy. We've had very strong momentum and going back to 1980 when the S and P 500 has been up over 15% in the first half of the year, 10 out of 10 times we ended the year up. So that's very strong momentum that really bodes well for the market here in the near term.
[00:01:59] But we've had some other signals that have been screaming recession all year long. And I know you've had people on your show talking about the inverted yield curve when those short term rates are higher than those long term rates, it's a very strong predictor of a recession. The leading economic indicators have been down for 14 consecutive months.
[00:02:22] Every recession that we've seen in modern history has been preceded by weakening leading economic indicators, and this is the lowest we've ever seen without a recession. So I'm still in the camp of thinking that we need to be cautious here. We've had these multiples expand. We need a very strong second quarter as far as earnings is concerned to support the price to earnings multiple on this market.
[00:02:46] If that doesn't happen, I would expect this market to contract.
[00:02:51] TD Watch List: And then the bearish case. You know, and I'm also curious is there one that you believe in more than the other? The bearish case? You talk about the Fed looming.
[00:03:03] Antwone Harris: Well, I think- as I mentioned, I think we've had an inverted yield curve. The yield curve inversion is not a strong predictor of when a recession takes hold, but it's a very strong predictor that you will enter a recession at some point.
[00:03:17] Now, the range between when a yield curve inverts and when you actually enter a recession is very wide. So it's anywhere from six months to over a couple of years. So the yield curve inverted in July 2022. So we're 12 months in. The median time from inversion to a recession is 11 months. So we're still on par within the average range; the normal range for when a recession may take hold.
[00:03:42] But what I think is more important is the markets recently had a almost a 30% gain from from the lows that we saw back in October. The most the market has ever returned in the midst of an inverted yield curve is 28 to 27%. We saw 28% back in 1979 and 27% from 2006 to 2007. So say we are at 30% from the bottom, that will put the s and p at about 4,500.
[00:04:11] So recently we're at 4,400. On the s and p, that means maybe on the upper limit, we have another 2% to go before we would start to hit some real headwinds there. I'm not inclined to put new money to work for a potential 2% return when I can get a risk free return well over 5%. What I think makes sense in this environment, you want to have some stock exposure, but any new money, money coming in, you want to put it in gradually; so average into the market. You also want to focus on some high quality types of investments. Typically stocks that pay a dividend, but have the wherewithal to grow that dividend over time. They tend to do well in more challenging environments and you want to get that fixed income exposure in place on the short end on the inner and on the intermediate side of the yield curve; we're able to get some income.
[00:04:59] You mentioned that the 10 years over 4% the short ends over 5%, you're able to get some income. When the Fed finally does cut rates, whenever that is, those bonds should also appreciate, because bonds move the opposite of where the Fed is. But in the meantime, you're going to get paid to wait for us to kind of sort this out.
[00:05:17] TD Watch List: So you have the dividend growers, the international play, these bonds where you're getting obviously, um, a good return as well. I wanted to get back to the dividend payers. I mean, that's been a way that people have done this forever, really. Right? I mean, my dad used to pick stocks because they paid a good dividend.
[00:05:36] What about, um, so I'd like to hear your thought on that. And don't know if you pick specific stocks, but certainly there are the aristocrats that people look at- avoid large U. S. stock tech stocks, right? What about emerging markets too? That's another area. Emerging market debt.
[00:05:52] Antwone Harris: Yeah, I think there's some, there's some opportunities on the international side because those valuations are better than what we've seen here domestically.
[00:05:59] Also, they've had a broader rally than what we've seen here in the United States. So typically what what's happened so far is that these tech companies, these large tech companies have led this rally. That's been great. I think there's some long term momentum that should be in play there. But the other parts of the market started to pick up a little bit in June.
[00:06:19] They've actually started to come back a bit the last few days. We haven't, we have not had very broad participation this particular rally. So on the international side, the valuations are better. The participation has been much broader, which is more sustainable. On the emerging market side, you have some really strong interest rates in emerging markets.
[00:06:38] Also, as as, um, those that interest is repatriated to to our currency that you could have a favorable exchange rate. So, as there's downward pressure on our dollar over time, earning interest in a foreign currency could bode well, and it actually prop up a part of that portfolio. Also, the several countries internationally actually started to raise rates before the United States.
[00:07:04] So they were a little bit ahead of this because they were seeing some inflation from commodity prices. That was impacted them a little bit more than what's happening here domestically. So they're a little further ahead in this rate hiking cycle that we're seeing. They may start to cut rates before the U. S., which again, when rates fall, the value of those bonds goes up. So having some, some exposure to some of those international bonds, specifically emerging market that may make sense. Um, would also think makes sense is to have some exposure to some alternatives. Again, this is a very uncertain market environment and you really is very difficult to predict.
[00:07:41] There's a lot of different cross currents happening here simultaneously. Some of those alternatives, meaning things that are based upon derivatives, et cetera, that are able to to not correlate with with the stock market. They also don't correlate with the bond market. They can add some additional diversification, provide some income for the portfolio and also help you whether there's very uncertain environment that we're dealing with.
[00:08:06] TD Watch List: Antwone Harris. Thank you. Platinum Bridge Wealth Strategies. Thank you.