Portfolio Intelligence podcast: market outlook—what's changed since the election?

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John P. Bryson

John P. Bryson

Hello and welcome to the Portfolio Intelligence podcast. I'm your host, John Bryson, head of investment consulting and education savings here at John Hancock Investment Management. I can't believe it. But today is November 15^th, 2024. The year’s flown by and I have invited back Emily Roland and Matt Miskin, our Co-Chief investment strategies here at John Hancock Investment Management, to talk about what is happening in economies and markets around the world. Emily. Matt, welcome.

Emily R. Roland

Hey, John. Great to be here.

Matthew D. Miskin

Thanks for having us.

John P. Bryson

All right. Hey, Emily, I'm going to start with you. Walk us through what has happened in the markets since November 5^th.

Emily R. Roland

So I'd actually even extended John to prior to the election because, as the new administration or as Trump's odds of winning the election increased, we did start to see a rotation in markets, as investors started to … to price those potential political scenarios in. So we saw it across both stocks and bonds. You know, some of the areas that have outperformed, have been U.S. equities.

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We've seen credit do well. The idea being there's potential … “potential” for lower, corporate taxes, with this Republican sweep. We've also seen riskier areas like regional banks outperforming on the thought that there could be potential for deregulation, some pro-cyclical policies coming onto the horizon here. Regional banks have a large allocation and small-cap stocks … so that was, a relative winner.

Areas even like lower quality and more speculative companies also saw a bid, I think notably cryptocurrency reaching new all-time highs. There's been an element of sort of animal spirits or positive sentiment kind of taking hold here. And then the dollar, we've seen the dollar rise. A lot of that has been due to the backup and Treasury bond yields.

So we do have higher relative rates here in the United States versus other areas across the globe which are seeing some weaker growth. So some of the areas that have struggled, high-quality bonds, most notably, there have been investors who were … expressed concerns around potential deficit spending, the potential for tighter immigration policy to potentially push up wages.

Pro-cyclical policies also hurting high-quality bonds in a relative basis. And then non-U.S. stocks, investors pricing in potential for, you know, more tariffs. The stronger dollar has also had a negative impact on non-U.S. stocks. There have been some proposals … the potential proposals from the administration, around “America first” that have also … hit non-U.S. stocks on a relative basis.

So a lot of politically-driven sentiment moves. I want to be really careful to say that … sentiment and I know we'll get into this … It isn't the best way to … to think about positioning portfolio. So we are looking past a lot of this noise and focused on the economic data and the fundamental backdrop to make cross-asset decisions.

But to answer your question, these are some of the big moves that we've seen across markets. I will say they've taken a bit of a breather here over the last couple of days after some really sharp moves in either direction. So we'll have to see if some of these trends continue or we start to see a fade of this initial, pre- and post-election response across markets.

John P. Bryson

Thanks, Emily. You've set up a number of things that I want to get into. Matt, I'm going to pivot to you. Emily mentioned animal spirits. I kind of want to talk about U.S. equities right now and to Emily's comment like we've run a lot. Have we gone too far and too fast? And then I want to hear your thoughts on the bond market.

Matthew D. Miskin

Yeah John, the price-to-earnings ratio on the S&P 500 has pushed up to about 22 times. This is about how high we got in 2000 and in 2021—other periods that were, in essence, overvalued markets. The trailing price-to-earnings ratio is 27 times. That again, is really … only times in history … were 2021 and 2000. So the valuation of U.S. equities has increased.

There hasn't been any change in earnings as of late. Earning, for Q3 are coming in at about a 3% growth rate but really haven't grown since 2022. So it's … it's really sentiment. It's, you know, investors just, pushing into equities more. And what we saw actually, which is kind of a good sign … is that, the diversification between stocks and bonds has increased.

So bonds have become more negatively correlated to stocks, which is also in essence, showing investors selling hedges, selling more defensive things, and going into higher risk things. One of the best probably indicators of this are measurement sticks, if you will, is high-yield spreads. So this is the high-yield bond … junk-bond yield versus the Treasury bond yield.

And that is now 2.5%. That's the lowest in 17 years. So the amount of return compensation from yield that you get for taking the additional risk is the least since 2007. And this is another sign of the times … in times like this, when everywhere is, you know, more risk-on positioning and valuations of riskier markets get more elevated.

We tend to think about pruning risk and redeploying capital in higher-quality parts of the market. So that's really what a lot of what Emily and I and a lot of the portfolio managers we're talking to right now are looking at, just after the … the recent move in markets.

John P. Bryson

All right. Perfect. Matt, digging a little bit more on the bond market though. Help me understand the dynamics going there. You mentioned correlations are coming down and differences in how the markets are reacting. How … how is the bond market, in line with the stock market … how is it acting differently?

Matthew D. Miskin

The bond market has repriced really to show a lot of growth into next year and so the bond market has been pricing in a good amount of cuts into 2025. You know, frankly, another 100 basis points was originally the thought, you know, just at the September Fed meeting. And now in the November meeting, you know, Powell kind of pushed back and said, you know, we might be close to done cutting rates for the time being.

We'll just have to see. And then he had an interview yesterday where he continued to say that that, you know, we're kind of closer to where we thought we'd be. The economic data has been on fire. We've gotten better employment data. The initial jobless claims dropped to 217,000. That's a really good level. We've gotten a bit firmer inflation in terms of CPI and PPI.

The retail sales report just beat. So, as the economy continues to do really well, bonds are seeing higher yields. It's less so about inflation. We are seeing still some disinflationary forces we think are going to play out in the next year. Oil prices are dropping. That's usually a good sign for bonds but what we think is the case is that we're getting kind of a pull forward in impulsive growth.

Again, a lot of it probably being sentiment driven. And it's in the price, you know, so bond prices are back down to about $0.90 on the dollar. Yields on high-quality bonds are back over 5%. And we're saying, hey, if we can do 5% in high-quality bonds over the next 5, I don't know … 3, 5, 7 years, we think that's pretty attractive.

Matthew D. Miskin

Returns stream with pretty low risk. So again, the highest quality parts of the markets are on sale. That's where we're doing the most look … most work looking for opportunities. And I … and that's really bringing us to kind of intermediate core and core-plus fixed income okay.

John P. Bryson

Excellent. Emily, I'm going to come back to you. You mentioned the stronger dollar, the risk on here in the United States. Let's talk a little bit more about international markets. How are they reacting?

Emily R. Roland

Yeah, international equities have underperformed, you know, meaningfully since the election and really over the past month and quarter to date broadly. You know outside of the election, the way that we look at this is … we want to find where the best relative economic growth and where the best relative earnings growth is. We still have allocations to international equities, but we're finding that emphasizing the U.S. has … has made more sense, given the fact that we've got better relative earnings growth trends here.

One reason for that is we have more of high-quality stocks here. So we do have a preference for quality companies with great balance sheets, good return on equity, ability to maintain margins in an environment where margins are likely to … to narrow from here. So we're simply finding more of that in the U.S. And then from an economic growth perspective, you know, Matt just hit on the fact that we have seen upside surprises to economic growth here in the U.S. and meanwhile we're seeing not terrible results. But, you know, more of a decelerating pattern in economies overseas … Europe, particularly in China. So, those trends are leading us to a preference for the U.S. as well as the dollar. That's sort of been the cherry on top of our analysis. It's really tough to make calls on, on currency markets.

But our base case has been that because there's better growth here, because our rates are higher than other developed markets across the globe. That should lead, to a strengthening dollar, more capital flowing on to our shores in the United States. So there may be, an election element to this, here based on sentiment. We're looking past that.

And fundamentally, we're … we're having, an overweight to the U.S.  Again internationally, we’re there, we have invest … we have recommended continuing to have diversification, with an allocation to international stocks. We're emphasizing growth over value given better relative earnings trends on the growth side internationally.

John P. Bryson

Okay. Thanks, Emily. Hey Matt, I want to dig on this. One of the one of the popular words we're hearing more and more is tariffs. I want to understand your take on the impact on our economy, our market, and then around the world. What do people need to be thinking about?

Matthew D. Miskin

Yeah. So this isn't necessarily a new policy that we're looking at, you know, in 2016, these … there was tariffs introduced post the 2016 election. You know, we went back and we looked at the data and frankly, the inflation rate under the Trump administration of 2016 … but this was before COVID. So this is just through 2019—inflation averaged 1.6%, and I'm talking core PCE. So really inflation did not come up as much as you might think based on … tariffs. Now it really depends, right? So we are looking at a lot of different things. There's a lot of different … you know … that's one kind of sample of … of tariffs being introduced.

There's a lot … you know … you could see more tariffs, you could see broader tariffs, you could see less tariffs. There's so many unknowns. And I think Powell … you know, Chair Powell had a … a meeting yesterday and he was asked the same thing. And he said, until we know the policy we're not going to speculate because you're just wasting your time. Because you could just think through all these different “what ifs.”

And the other thing that he said, too, which I thought was great, was it is a massive, nearly $30 trillion economy. There's a lot going on. What we saw last time was the dollar strengthened. I mean, he was just talking about the dollar strengthening. The dollar strengthening is disinflationary. If the dollar goes up, we buy foreign goods and we're a huge net importer.

So we're buying stuff all over the world with a stronger currency that makes that stuff cheaper on a relative basis. Now with the tariffs often comes a stronger dollar. So you know, it's … it's massively complex. And in our view, you want to not overreact or not kind of have knee jerk reactions because of hearing of a potential policy.

You got to first see what the policy is. Then you got to see how does it actually implement … impact the economy. And again, there might be so many other crosscurrents that it might not even create the outcome that you're expecting. That's why, again, we're focusing on the earnings. We're focusing on the economy. And valuations frankly valuations right now are getting really stretched and they’re in essence an outlier.

And so that's a big input too. But it is something we're watching. But we wouldn't overreact in the short term until we see what actually is produced and how it impacts everything else.

John P. Bryson

Really helpful. That's why we have you and Emily on the podcast, is to really help us separate the noise from the important information out there. So we'll continue to have that conversation with you all. Emily, I want to pivot back real quick. We've talked, excuse me, all year around. What's the Fed going to do? Where is inflation going?

It's kind of gotten a little bit quiet now, but we've got a December meeting coming up. What are you hearing that we haven't covered yet around the Fed, the economy, and the chances of another rate cut in December.

Emily R. Roland

Yeah, it's certainly … the Fed meeting in December is a little bit more up in the air now than it was prior to…  to recent data that's come in as Matt talked about the strength of the U.S. economy. You know, we look back again at the, you know, sort of examples in which, you know, back in 2016 where, you know, Powell sort of, you know, took a break given potential, you know, accelerating growth potential inflation here.

You know, we've seen this big back up in rates. You know, the bond market is still placing odds on… on a 25-basis-point cut in December. But you know there's going to be some more data certainly between now and then. And … and we'll be watching the incoming data just as the Fed has suggested. But you know Powell has not committed.

It's all about will he commit, or will he not commit? And we just haven't gotten that commitment to a December cut. So we'll be watching closely on the incoming data, as I said. And you know, but there's a potential that maybe we'll have to wait until 2025 to see more … more cuts.

John P. Bryson

Okay. All right. Last question, Matt, to you. Let's pull this all together. How are you advising investors to position their portfolio for the rest of 2024 and then beyond?

Matthew D. Miskin

Yeah. So this is a great time to look at some of the winners that you've seen as of late, that it might be lower quality or don't necessarily have the fundamental strength of other parts of the portfolio and to trim into some strength. We are seeing in our yields really rise on … on higher quality bonds. You know, there was … you rewind three months ago and one of the biggest questions we got was “did we miss the bond rally?” Did we miss it? And we are getting a second chance. It's been a pretty big turn. Yields have gone from about 4% on the U.S. aggregate bond index to now nearly 5%. Investment-grade corporates over 5%. MBS is over 5%. And so I would, you know, take a look at, some high-quality bonds. And again, even if the Fed skips the December meeting and pauses, they stop …  they still can cut into next year and the years after that.

We still think that's likely the scenario. But you got to take a look at, you know, the … what's gotten cheaper, as of late? It’s high-quality bonds. So, taking a look at, you know, dollar-cost averaging or taking part of a portfolio and allocating additionally to there would be something we would consider.

John P. Bryson

Excellent! It's always great to talk to both of you. You give us great insight to what's going on. Even in volatile markets, you're really helping us separate the important information. So hopefully we'll have you back on one more time this year. But I want to thank you for joining us. Folks, if you want to hear more, please subscribe to the Portfolio Intelligence podcast on iTunes.

John P. Bryson

Or you can visit our website JH investments.com. You can get the podcast, you can read our viewpoints, on all things investing. You can get updates from Matt and Emily on where they see markets going. And you can get some great business-building ideas. As always, thanks so much for listening to the show. Have a great day!