No matter what index you look at, the news is about the same. Stocks fell 3% to 5% overall last week, and gains for the year are pretty much wiped out. The good news is that’s not necessarily how money managers view or even trade the markets. And, at least according to Advisors Capital Management’s recent outlook, market volatility isn’t as bad as the headlines would report when looking at current fundamentals.
In an online roundtable, several portfolio managers from the RIA discussed recent volatility and what it means for current and future portfolios and markets. Here are some key points of their discussion:
1) The economy is still strong.
Charles Lieberman, chief investment officer of ACM, is upbeat on the economy despite recent volatility. He said that GDP growth has been “unsustainably rapid” at 3.5%. A slowdown wouldn’t mean a recession, and he sees 2019 going to an average of 2.5% GDP. “That’s still too fast,” he said. “When we grew at a 2% rate for the past several years it was enough to drive the unemployment rate down from 10% to below 4%. So if we go back to 2%, we’re still going to be putting downward pressure on the unemployment rate.”
2. Stocks have good fundamentals.
Lieberman also pointed out that the stock market doesn’t translate — at least in the short term — into how the economy is doing. A recession typically means an economic decline by 1% or 2%, while a strong economy is 3.5% growth, he noted.
“And yet the stock market in a good year can be up 30% or more, in a bad year can be down 30% or 40% or more. The stock market is just dramatically more volatile than the economy. And yet the underlying value of the stock market is based on the economy. It shows you how important psychology is.“
He added that the price-to-earnings multiple of the “whole market” is around 15, with many stocks trading at 13, “which is below average … But people don’t necessarily want to buy cheap. They want to buy what’s going up, and that’s part of what creates the opportunity.”
He says for the most part stocks are still “cheap,” and “if there is a bubble, the bubble is in the bond market.”
3) Don’t believe the yield curve inversion story.
Kevin Kelly, ACM’s portolio manager of fixed income, disavowed the talk of an inverted yield curve meaning a coming recession. “We just don’t see the economic fundamentals pointing to a recession in the near term,” he said, adding that in the past 40 years, the 2- and 10-year Treasuries have inverted only five times.
“What people say is every recession has been preceded by an inversion. That statement is correct. But it is not correct that every inversion is followed by a recession,” Lieberman added. “The average length of time between an inversion and a recession is over two years.” He said the inverted yield curve-to-recession link is “not a great investment tool … it’s really almost useless.”
Kelly added that “we’re looking at short-duration bonds [of] high quality because we’re not getting paid to go too far out.”