Portfolio Intelligence podcast: looking beyond mega-tech

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.

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John P. Bryson:

Hello everyone, 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. Today is July 17, 2024. And I have invited Matt Miskin, our co-chief investment strategist here at John Hancock Investment Management, to the podcast to talk about what's going on in the market and economies around the world. Welcome, Matt.

Matthew D. Miskin:

Thanks for having me, John.

John P. Bryson:

Hey, listen, first off, your co-chief is not here. Emily Roland is not here. What's going on? Is she on vacation?

Matthew D. Miskin:

She is? Yes, yeah. So, she is up, off the coast of Maine right now and enjoying some nice, cool water, in the ocean. We've been lucky to take a little bit of time here, but it is a difficult time, frankly, John, to take a little time off because these markets are moving fast. And you can take your eyes off for a second, and there's been some huge moves in this last week.

John P. Bryson:

Well, I, I hear you we're going to talk about that. I just want to make sure you're okay that she didn't invite you on vacation because you two together so much. But as long as you're okay, I'm okay.

Matthew D. Miskin:

I'm okay.

John P. Bryson:

All right. Perfect. Well, hey, listen, you mentioned it. There's been a lot of action going on. First, you know, in the first half of July. Walk us through it. There's a lot to cover.

Matthew D. Miskin:

Yeah. So we've come off the most concentrated market in the history of the United States. So the S&P 500 top 10 stock weighting was over 30%. So it's never been that concentrated. Meaning the weighting of the top 10 stocks have never been that big relative to the other parts of the index. That was going on and then we got a CPI report, inflation report last week that actually saw a deceleration of inflation.

Pretty meaningful, frankly. And that caused this massive core rotation that has been fast moving. So, the larger cap tech stocks have seen some modest selling pressure. Well, there's been a huge boost to small-cap stocks measured by the Russell 2000 Index, which is just a broad small-cap index. And that was last week. This week it actually gained further momentum.

Now, over the last five days, we have seen the largest outperformance of the Russell 2000 versus the S&P 500 ever. It's about a 10% gap between the two. That is the biggest weekly divergence we've ever seen. And then the Russell 2000 is the most overbought we've ever seen. So historic moves on the Russell 2000 coming out of historically concentrated market.

So it was basically a market in our view that was set for broadening. We've been talking about mid caps a lot over the years and just talking about how concentrated the market is. Now it's gone down into more, I would say, speculative parts of the market. We've seen this huge rotation, but it is something to take note because if this rotation continues, you really got to think about your equity positioning as the year goes on.

John P. Bryson:

Okay. So, playing that out. So, CPI is softening a little bit ... so that portends a cut in rates going forward. We've been talking about cutting rates, multiple rate cuts all of last year, most of this year―are we finally there or is that still going to be pushed out like it's been in the past?

Matthew D. Miskin:

Are we there yet? Are we there yet? You remember what I mean … it feels like, you know, the kids in the back of the car when you're on a road trip? Yeah, we're getting pretty close. John. So, the bond market is now pricing in 100% probability of a cut in September. It can change, right? You know, I mean, we could see a July CPI report that actually comes in hotter or even potentially, August. But August … there isn't a Fed meeting. They're unlikely to cut in July here just because it's so close. So, September is setting up to be the first cut. Usually, the Fed listens to the bond market when it's pricing in 100% probability of something. But look, things can always change. The bond market is also pricing in three cuts now.

September, November, December. 25 basis points a pop. And so, it is likely to happen. The bond market funny enough hasn't rallied that much on this. We still think there is gains to be had in bonds. They're kind of asleep here, not repricing much on a potentially, Fed cutting cycle. But what we've seen actually as of late is this potential Trump trade.

So, the election obviously coming up, you're getting these crosscurrents across the market, and one of them is that maybe under the Trump administration, you get deregulation, you get tax cuts would increase the deficit, that would increase Treasury issuance, it would also make the economy a bit stronger. And so that's causing a bit of the steepening of the yield curve, meaning the 10-year is going up a bit more than the 2-year yield and that's also playing out in the background. So, it is a convoluted, backdrop for rates right now. But at the end of the day, the most important thing is inflation coming down. And that is likely happening. The Fed is likely cutting in the back half. That's going to be good news for bonds no matter how you slice it.

John P. Bryson:

Okay, so rates coming down, inflation coming down. Good news for smaller-cap stocks. Good news for bonds. Still some volatility in the market. We can … we can expect we're at all-time highs. So these … these periods can be rocky. Is that a fair summary/

Matthew D. Miskin:

Yes, exactly. And yeah, so what we're seeing too, is just a huge rotation within the market. So it's … it's all of the above.

John P. Bryson:

All of the above. All right. So I want to broaden it a little bit further. One of the other things I think you're probably paying attention to is the U.S. dollar. It's actually weakening lately. Talk to us about why and what impact that's having on your views―the U.S. market versus international markets.

Matthew D. Miskin:

Yeah. So, the dollar has been in a trading range really since the beginning of 2023, bouncing around and … And really, it's been not that volatile. It's been kind of nice to see currency markets cool off and just see lower volatility. But as of late, what's happening is the Federal Reserve was really, holding tighter policy much than the rest of the world in terms of central banks.

So you had the ECB cut. Bank of Canada cut. You had a lot I mean … China has … has lower yields on their government bonds. And the Fed had kept rates where they are. So the dollar had been relatively, I would say firm, during this period but as inflation's coming down and now we're pricing in Fed cuts, the dollar's starting to weaken. That interest rate differential is potentially narrowing. And a weaker dollar really helps non-U.S. equities that are unhedged because you're … you're taking and getting exposure to these other currencies whether it's the euro, the pound, the yen and so on and so forth. And that can be another tailwind for U.S. investors beyond just the equity market. So, if you're buying Japanese stocks in yen, you could get the equities to rally and you could get the currency to rally. So it's almost a double benefit for you as an investor.

Now of course that can go the other way, but what we're seeing is a weaker dollar really helps non-U.S. equities rally. You've seen some of the French political risk that had really come about in the second quarter start to dissipate. I'm not saying it's gone, but it's just not as big of a market distraction as it was just even a couple of weeks ago.

That's strengthening the euro. So we do have non-U.S. equities in the … in our views. It is something that, you know, we're looking at as opportunities. You just got to be thoughtful there. The earnings aren't as strong as the United States. And frankly, where we're seeing the best earnings growth is on the value side, not the growth side, which is counterintuitive.

But on the non-U.S. equity front, we do look at opportunities for the currencies and also the equities. We're just tilting a bit more value in that exposure.

John P. Bryson:

That’s very good. So things may be shaping up for a rotation in U.S. equities. It's also shaping up a little bit that the international opportunity may be opening up with the rates in the U.S. falling, and then the dollar weakening. So some … some shifting sands if you will. So we've covered a lot. What are your other final thoughts around how you can position portfolios for the second half of the year.

Matthew D. Miskin:

Yeah. So I mean really the market has been one sided and it's been really a tech, U.S. large cap, tech, and everything else. And it's the everything else that looks to be gaining some traction here. It's very cheap you know. So even if you think about mid-cap stocks in the U.S. or small cap, they're trading really cheap versus large cap.

They're relatively cheap versus their own history. non-U.S. equities are … have been cheap for a long time. We want to find good earnings there, but … also that is really relatively inexpensive. And then even the bond market’s relatively cheap. You know I mean we're looking at some of the best yields we still have had in the last 20 years on high-quality bonds.

So, there's a lot of opportunities across the asset-allocation landscape beyond just large cap tech. And we are talking about trillions and trillions of dollars that are in the valuation of those large-cap tech companies. And even if you get a modest rotation where I'm talking, let's say one of those companies lose a third of their value, which would be significant, but some of these are up over 100% year-to-date. So even if they dropped a third, you'd still be up a good amount year-to-date. But a third would be almost $1 trillion of money that would be flowing into these other parts of the market. To put it in perspective, the S&P 600, which is a small-cap index as well, we just have the market value data. That market capitalization of all those two 600 stocks is about 1.3 trillion. So one stock in the S&P 500 is worth 3X what the 600 stocks are in the small cap-space. And if you got even a modest rotation, there is massive capital that can move these parts of the market. So, to us, you know, it's thinking about those opportunities.

We still like high-quality U.S. large cap stocks. We're not, you know, trying to say that that's something to totally avoid. We have earnings here, we're going to have to see how they do. But there … there's a lot in the price. There's a lot of good news in the price and incremental dollars. We prefer mid-cap, some bonds, and finding opportunities across global equities for the time being.

John P. Bryson:

So, you mentioned earlier the question, “Are we there yet? Are we there yet? Are we there yet?” You and Emily have been talking about the opportunity in bonds. You've been talking about the opportunity in mid-caps, and you've been talking about the opportunities in high-quality earnings, whether it's in the U.S. large-cap space or the value space or the international space. So, it might be time to kind of double down on that and think through, your portfolio. So, folks, keep it in mind, you know, looking for the opportunities out there. They exist. Now might be a great time to reassess.

What I'd encourage you to do after, I thank Matt for joining us today, is to keep an eye on what Matt and Emily are up to. They are posting weekly on LinkedIn so they can keep you up to date with what's going on.

As always, you can check out our website for the latest thoughts and viewpoints on all things investing, and if you're interested, you can go and subscribe to the Portfolio Intelligence Insights there, or on iTunes or wherever you download your most popular, favorite podcast.

As always, thanks so much for listening to the show. We'll talk to you again soon.

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.

The Russell 2000 Index tracks the performance of 2,000 small-cap companies in the United States. It is not possible to invest directly in an index.