Portfolio Intelligence podcast: finding value in today's market

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speakers, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

MF3687287

John P. Bryson:

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, head of investment consulting and education savings at John Hancock Investment Management. Today is June 17, 2024, and I have invited Emily Roland and Matt Miskin, our co-chief investment strategists here at John Hancock Investment Management to the podcast to talk about what's happening in economies and markets around the world. But first, let me ask Matt Miskin, how is your Father's Day? Happy belated Father's Day.

Matthew D. Miskin

Yeah, same to you, John. It was … it was a great one. The weather was great, you know, I ended up going to my favorite dive bar on Friday night to watch the Celtics game, and they got walloped. I mean, that was one of the worst losses I've ever seen. But look, we still got, you know, we're ahead on this series. And it was a great night. The restaurant or the bar … restaurant/bar was empty. So, I don't know if that's an economic indicator. That's … that's kind of how my mind works on everything I go to. But overall, it was great weekend. Thanks.

John P. Bryson:

Nice, nice. It could be an economic indicator. It could be your choice of locations. But we'll debate that on a different podcast. And hopefully, the Celtics bring it home on homecourt tonight. Emily, welcome to the podcast. How was your weekend and Father's Day?

Emily R. Roland:

It was great celebrating the dads doing what we love, which involved my husband and my son fishing the entire weekend. So, they brought us back some different species. We had some cod. We made ceviche with some striped bass. So overall, it was a good time for everyone.

John P. Bryson:

Nice! Excellent! I also had a good Father's Day. My oldest offered to get me coffee in the morning  which I thought was great, and my youngest, right out of my playbook, said, hey, I got you something, but it hasn't arrived yet. I love that approach. All right. Hey, let's jump in. Emily, because it was Father's Day, I'm going to give Matt all the softball questions and give you the hard ones. Okay? So, I'm going to … I'm going to start with you. We had a busy week last week—we had a CPI print, we had initial jobless claims report come out, and we had a Fed meeting. Can you maybe recap for us, all the things that are going on.

Emily R. Roland:

Yeah, John, that CPI was huge last week … just because markets have been so sensitive to inflation readings. And what we saw was that headline CPI for May came in at 0% month-over-month down to 3.3% year-over-year, and it missed by 0.1 percent, as did core CPI, which came in at 0.2% month-over-month and is now at 3.4% year-over-year.

And markets loved it. All you got to do is missed 0.1% … and, you know, we see risk assets rally. You know, we still see inflation, particularly the shelter component ... just driving the number. It's still higher, coming down a little bit, but shelter was up 0.4% month-over0month. So housing is still pretty stubborn here and, obviously, that's a big chunk of people’s spending and it's just not going down. But regardless, people loved … investors love the report. We also saw PPI producer price index readings the next day confirm the disinflation traction that was taking place, but it was really interesting to see initial jobless claims, later that day on Thursday, rising to the highest level, in almost a year.

You know, there were some caveats to the report. There may have been some distortions because of Memorial Day weekend. California was the biggest contributor to the rise and they had some minimum wage hikes there. So there could have been some … some one-off anomalies. But markets didn't love it. We kind of went from … from bad news being good news, meaning that the Fed could potentially cut, to bad news, maybe, being bad news.

In other words, seeing some signs that the labor markets cooling and that, you know, we are seeing a decelerating growth backdrop as we see more and more cracks in the labor market here. So pretty interesting week ... kind of a rollercoaster ride for investors. And then, of course, we had the Fed meeting. We did get a new summary of economic projections.

It was a pretty hawkish Fed meeting. In the late … in the previous summary of economic projections, they had indicated there may be up to three cuts this year. And then that went down in the report to one to two. So, you know, and then we had the press conference and, you know, we saw a more balanced approach from … from Chair Powell there. But it really was pretty notable to us that it was less about the Fed meeting this week and really more about that inflation print. And so, we're still looking for a rate cut in September. Bond markets looking for another one in December here, but certainly a lot to digest here as we contend with kind of you know, the data here really chopping around in sort of classic late-cycle fashion.

John P. Bryson:

Okay. That's really helpful. Hey, Matt, I'm going to ask you to go a little deeper, talk about the market reaction and maybe kind of like recap in, in the sense of the whole year, where are we seeing strength? Where are we seeing challenges. Where do you see us going.

Matthew D. Miskin

The technology sector and the S&P 500 continues to absolutely dominate the markets and it is becoming unbelievably concentrated. Now, 37% of the S&P 500 is allocated to the top 10 stocks in 2000-ish it was just over, let's say about 25%. We are at 37%. So, it's unbelievable how the top ten stocks have been driving the market.

The technology sector is the only sector out of 11 that have outperformed the S&P 500 over the last five years so it's not necessarily a change in regime. But last week was another—technology stocks up, the rest of the market more mixed, global equities struggled a bit … earnings from the technology companies have been great. Earnings in Q1 are up 25% for technology companies.

But from here the street is forecasting about 20% earnings growth to close out this year and then about 20% earnings growth next year, which seems optimistic, frankly. And then the valuation on the technology sector just broke out. It's not like a technical term for a price. It's for valuation. The P/E ratio went up to 31 times forward PE.

The only time that has happened other than right now is the tech bubble. So, we are at the highest valuation since 2002. There's frothiness around tech. We get it. But these are good quality companies, good solid balance sheets. We just look down into mid-caps though, and we're seeing much cheaper valuations. You can still find quality companies.

So look, we understand they’re high-quality companies, but there is a good amount of froth surrounding some of this tech leadership that has really been dominant so far this year.

John P. Bryson:

Gotcha. Yeah, it's really been the story. But you're seeing opportunities you're seeing down in the mid-cap space. So, and so … pick up, pick out the quality ones, pick out, the ones that maybe a little bit valuation. Is that what I'm hearing?

Matthew D. Miskin:

That's right, that's right.

John P. Bryson: Very good. Hey, let's, let's shift overseas. you know, we're hearing from folks that 2024 could be the year of the elections. I think there's more folks, around the world voting for a local election than any other year in history. We saw some volatility in Europe. Emily. Maybe walk us through what's happening there.

Emily R. Roland:

Yeah. So, like you said, just some … some pretty remarkable political headlines coming out of France over the course of the past week or so. What we saw was President Macron called for the snap election—which is kind of looked at as a risky gamble. And the fear out there is that this far right party is going to gain a majority and push for things like a potential exit from the EU.

There could be some economic chaos around it. It’s kind of the fear that was priced in the markets and we saw French assets, you know, really responding to that. And most importantly, we saw currency in Europe feeling the … the impact of that. So we saw actually a modest strengthening of the U.S. dollar, which is a trend that's continued since the start of this year.

And that's really kind of a key element that we look at. You know, we can't really handicap that the … the outcome of these snap elections, but we watch currency market … currency dynamics here really closely. And if you do continue to see a dollar-strengthening regime that typically is not great for risk assets. So with these weaker dollar regimes have really corresponded closely with risk assets rallying.

So really the idea is that you see, you know, the U.S. dollar, it's basically like a global liquidity release valve. When it weakens, there's cheaper global funding, there's less tightness of financial conditions. It helps corporate earnings. But in that stronger dollar environment, the sort of the opposite happens. And it's not the best backdrop typically for risk assets.

So that's something that we're … we're watching closely as it relates to some of these political dynamics that are playing out, you know, also putting some pressure here on European equities. We do continue to maintain an overweight to the U.S. … we of course will need to contend with some potential, volatility around elections here. But we've got some time here until November.

And again, just given the modestly better economic and earnings backdrop here in the United States continuing to have an overweight to domestic equities.

John P. Bryson:

Okay. You've talked about that overweight Matt, I've heard you talk recently about if you're investing international, there is some compelling opportunities on the value side of the equation. Does that change much with the dollar strengthening or is that longer term, opportunities still play out.

Matthew D. Miskin:

We believe it is still there. And, you know, you're just trying to go outside the United States and find the best earnings that you could find because it's been cheap for decades, frankly. I mean, saying international is cheap isn't providing anything new. But what you're trying to do is find things that are on sale but have a catalyst to improve and a lot of times, that's what our bottom-up strategies are looking for, not just, hey, it's got a low P/E ratio.

You know, it's like, okay, great. Now how does it unlock that value with either a catalyst, a turnaround story, an improvement in earnings. And when we look at the growth side internationally, they just don't have the technology companies that are in the United States. Technology is a much smaller weight. Consumer staples are much bigger weight on the growth side, and healthcare is a bigger weight.

We actually like healthcare outside the United States, but what we're seeing on the value side is better earnings growth. Over the last three years, earnings on the value side has outpaced the growth side by nearly 20%. And value outside the United States is actually cheap relative to its own history. It's trading at like 10 times forward P/E whereas growth is trading at nearly 22 times for P/E, which is actually rich relative to its 20-year history.

So growth is expensive with less earnings growth, outside the United States. So, if you're going to take growth exposure, we would do it in U.S. large cap and use a quality way to implement that. Outside of that, going down in Cap, we prefer a modest value tilt. Outside the U.S., we’d prefer a modest value tilt. Because frankly, if you're going to do growth U.S. large cap supplies to do it outside the U.S., growth isn't growing much better. Opportunities on the value side.

John P. Bryson:

Very good. All right Emily, like I said, you're going to do the heavy lifting. But this one should be pretty easy. Kind of put a bow on it for us. What's your recommendation for investors as we approach the second half of 2024.

Emily R. Roland:

Yeah. So Matt did a great job highlighting this earlier. On the equity side we continue to look for quality. So, companies with great balance sheets, lots of cash, low interest burdens. The cost of capital is still elevated. It's taking time for the Fed to cut so notching up on quality but trying to find it at a reasonable price.

A really balancing that large-cap, mega-cap growth, style with places that are on sale, like U.S mid-cap stocks. We also see mid-caps as a key beneficiary of industrial production boom that's happening in the United States right now through onshoring, through fiscal spending that's happening, and things like semiconductor projects, EV investment here in the United States. So mid-cap industrials really being the sweet spot to play where the spending is happening. Emphasizing value on the international side, which Matt just talked about. And then just looking at bonds as an opportunity, you know, the P/E ratio on stocks is still fairly elevated. There are opportunities, but there's just been so much value unlocked on the fixed-income side.

After a rough few years as inflation was elevated, we can see that coming down. Now inflation's going from your worst enemy and starting to become your friend. And right now, you're getting paid. You know the fact that you can get 5, 6% income on high-quality bonds right now ...  to us is a really opportune time to think about taking advantage of an asset class that's really, you know, it's mispriced.

It's on sale right now. You know, the macro backdrop is giving us mixed messages. We're seeing the data continue to chop around here as we talked about to start the call. But we'd be looking at any back up and bond yields opportunistically here. This income is extremely attractive. The cycle is taking a while to playout here, but we love the idea of being paid to wait 5% to 6% income so we'd be looking to bonds to continue to do some more heavy lifting in portfolios as we head into the back half of 2024.

John P. Bryson:

Emily, I'm so glad you closed with bonds. I remember a number of conversations that the three of us have had, and I've had with a number of clients, that for so long we were looking for yield. For more than a decade. We were like, where can we get more yield out of our portfolios? I think now creates a great opportunity to consider locking in some great long-term rates. Perhaps you'll be very happy with that decision—five years out, 10 years out—to lock in the opportunities that we're seeing now.

Folks, Matt and Emily are always providing great content. I want to thank them for being on the podcast today. You can get their weekly video on LinkedIn and all the other content that they're pumping out.

If you follow Emily, it's Emily R. Roland, and if you follow Matt, it's Matthew Miskin and you can also get their content on our website JHinvestments.com, where you can also subscribe to our podcast, the Portfolio Intelligence Podcast. We'd love to have you as an ongoing listener. As always, I want to thank our audience for listening to our show and thank Matt and Emily for providing such great insight.

Have a great day everyone.

Important Disclosures:

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speakers, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index.

Price to earnings (P/E) is a valuation measure comparing the ratio of a stock’s price with its earnings per share. The forward price-to-earnings (P/E) ratio is a stock valuation measure comparing the current share price of a stock with the underlying company’s estimated earnings per share over the next 12 months.