In this episode of RHP Market Talk, Natalie Picha and Glenn Royal are joined by special guest, Meera Pandit, CFA, J.P. Morgan, Vice President, Global Market Strategist.
Meera shares her insights on international markets, housing market volatility and J.P. Morgan's market forecast for the remainder of 2021.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
In this episode of RHP Market Talk, Natalie Picha and Glenn Royal are joined by special guest, Meera Pandit, CFA, J.P. Morgan, Vice President, Global Market Strategist.
Meera shares her insights on international markets, housing market volatility and J.P. Morgan's market forecast for the remainder of 2021.
Experience the difference of working with a firm that empowers your life—a firm that focuses on what matters most—you.
Whether you are beginning your financial journey now or have already taken steps toward your ultimate life goals, we are here to guide you.
https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530
Hello, and welcome back to RHP Market Talk. I'm Natalie Picha.
Glenn Royal:And I'm Glenn Royal.
Natalie Picha:And with Michelle Jones, we are the founding partners of Royal Harbor Partners Wealth Management. Today, we are joined by a very special guest Meera Pandit, Vice President and Global Market Strategist on the J.P. Morgan Asset Management Global Market Insight Strategy team. Meera is responsible for delivering timely market and economic insights to institutional and retail clients. Conducting research on the global economy and capital markets and running economic forecasts. She is also responsible for publications, such as the guide to the markets and is a contributor to the J.P. Morgan long-term capital market assumptions. Meera earned a BA in English from Tufts University and holds her Series 7 and and 63 licenses. And as a CFA charterholder, Meera was featured as Market Watch's Forecaster of the Month in February of 2020. Meera. Welcome to RHP Market Talk.
Meera Pandit:Thanks for having me. Excited to be here.
Natalie Picha:Absolutely. Before we just jump right into markets, can you tell us a little bit about how you work with RIAs, like ourselves, your role at J.P. Morgan? And we would love to hear about being named forecaster of the month in February of 2020 in the early stages of a global pandemic.
Meera Pandit:Yeah, absolutely. It's been a really wild year, but I'd say that the role has been the same and in particular important in the last year or so, where we're not trying to predict the future. We are just trying to see the present with clarity. So, my job is essentially to help RIAs understand our economic and market outlook, whether it's the U.S. or abroad, from different asset classes to different economies and, you know, RIAs have so much on their plate, every single part of the process. So, if we can just be one part of the process to help shape the investment dialogue and inform investment decisions, then, that's our main aim.
Natalie Picha:Well thank you for that, because that is so true. I know that, we do have a lot of resources out there, but you guys, and especially your work, is really important to us. And I know Glenn and Jason both, use you guys quite a bit.
Glenn Royal:Yeah. I'm absolutely delighted to have you here on this podcast Meera. You're our first guest, that we've had come on this podcast from the investment community. And that says a lot. We wanted you to be the first one, because we do value your work, everything you do with the guiding the markets, and the time you spend with Jason and I and discussing market outlooks.
Meera Pandit:Yeah. I love it. I appreciate it. Thanks for having me again.
Glenn Royal:Yeah. So, okay. One of the things I do whenever I get someone like you in front of me is, I go to town and pick your brain. I want to know what you're thinking here. Right?
Meera Pandit:Great. Let's do it.
Glenn Royal:So, here we at this market cycle that I had a 5% CPI Print a month ago. I think Tuesday, we have another print coming on, CPI expecting to still be, I think about 4.8. But, the bond market responded in an unusual fashion, at least in my experience, about 35 years of managing money. I didn't expect that bid as strong as it was to take the prices of bonds up and yields down on an inflation print that came in at 5%. I would expect that the other action. Can you tell me a little bit about J.P. Morgan's thinking on where we are in the current market and that light?
Meera Pandit:Yields have, have been on a wild ride this year for sure. We started the year with the U S ten-year treasury yield at about 90 basis points. It went to about 1.75 in March, and now we're at about 1.35. So, we've had some twists and turns here. And I'd say in terms of where we are today, there's a macro element to this, but there's also a technical element to this. So, our ride up to March, was essentially expectations about inflation, growth. We had a big stimulus package, all really surprising to the upside and fueling higher yields. But, in the macro perspective where we are today is that there's not that many upside surprises left. The GDP print we're likely to get in the second quarter is probably going to be the highest we see this year. Yes, it's still going to be pretty strong throughout the rest of the year. But I think that there's this realization that we're moving from recovery to recovered, and that's the same with inflation, even if that stays elevated, we're likely to see that moderate, into the next year. So, from a macro perspective, I think it's more that things are coming off the boil. Not necessarily that there's a recession on the horizon or anything really challenging. It's more a reflection of moving off of this period of rapid recovery. Now from a technical perspective, I think that that's really, what's driving yields a lot lower in the more recent weeks. So, there's a couple of things here. One, the federal reserve is adding about$80 billion in treasuries to its balance sheet every month and actually treasury supply was net negative most recently. So, they're basically buying up everything that's out there. And that's really putting downward pressure on yields. The treasury has a bank account at the federal reserve and it ballooned. It's usually pretty small, but it ballooned throughout COVID so that they had that money on hand to deal with the crisis. And now that that balance is coming down, that's increasing bank reserves, essentially increasing liquidity in the system and basically pushing yields down even further. And then on top of that, you had a number of people short, longer dated treasuries, and those people are being forced to cover those shorts, which accounts for that really rapid fall itself. So, right now, actually those technical factors are probably outweighing the macro factors, but they're probably not going to last forever. Especially because you're likely to see the fed start tapering down its balance sheet. And that's going to start sending yields up a little bit higher.
Glenn Royal:You know, whenever we see changes like we're in the midst now, peak growth, peak GDP that we're coming off of because of the stimulus programs and we're gonna slow our growth rate. Do you think we're in this process of coming off of peak growth and adjusting the markets or adjusting to from a 6.6% estimate in 21 GDP down to 4.1? There's going to be that little transition. Do you think we're in the midst of that now?
Meera Pandit:Absolutely. We're probably at this peak of the U. S. recovery and markets are forward-looking. So, they're looking beyond the phase we're in now as strong as it might be to what happens in a couple of months? What happens into 2022? How do we position ourselves best for that and how do we revise our expectations for a more normal circumstances?
Glenn Royal:So, repositioning. So, that's what I'm seeing a lot of in the last four weeks. You know, we had the reflation trade is all about the reopening, the spillover effect of growth being plentiful in all businesses, rising small companies, value stocks, things of that nature, the cyclical names. But then, with that spike percent print, everything went back the other way. We went back to the secular growth, the tech, the big tech, that still drives earnings. Is that again, I'm starting to see this kind of as a market that perhaps is wobbling a little bit, as it makes that transfer to a lower growth rate. But also understands that growth is still going to be here, on an absolute level. Still very high compared to past years. Does that feed us, to continue this rally for the next few years? Do you see a recession on the horizon? Do we continue to move forward?
Meera Pandit:I don't necessarily see a recession on the horizon. You know, the fundamental backdrop again is pretty strong. We're probably just going to go to a more normal environment, where growth is 2%. Inflation is probably two to 3%. And to that effect in portfolios, returns will probably be constrained. You know, equities across the board are fairly expensive. Fixed income is quite expensive. It doesn't mean things need to crash, but it probably means that people should moderate what they're expecting from their portfolio in the years to come. Now, that being said, what we've seen more recently in terms of the S and P 500 returns, so far year to date. Is most of what's driving that return, is really robust earnings. We're actually seeing that multiples component, basically the sentiment, you know, rising tide lifts, all boats, you know, that is really waning and actually multiples are detracting from the overall return. It's really all about earnings. And I think that to your point about value and growth, you can find quality earnings in both. But that's the key metric, where are you finding the best quality earnings. And the companies that will hold up best in the future.
Glenn Royal:So, putting on our stock picker hat, we need to focus more on core fundamentals of a company in terms of balance sheets and profit margins. Is that a fair statement, going forward? You can't just be more of a broad market participant, a lot passive indexing. You may have to put a little bit more active stock picking.
Meera Pandit:That's right. And what we see under the surface, you know, valuations of course, on the headline are pretty high. But what's driving up valuations of the overall market are a select number of stocks that really rallied pretty hard last year. So, if you look under the hood, the dispersion of valuation, especially o f t he top and bottom stocks is really wide. And that actually makes it a pretty rife environment for a stock picker, because there is that disparity out there among different companies.
Glenn Royal:Natalie and I have been talking about the old 60/40 portfolio. Natalie, what do you think about that?
Natalie Picha:Well, we've talked a lot about in the past, we have a lot of clients who ask us about, where do I need to be in terms of my asset allocation, right? Where am I in terms of how much stocks, how much bonds, where do you think this, what this current environment means for that traditional 60/40 balanced portfolio? And what does that look like over the next couple of years, as we returned to a more normal environment?
Meera Pandit:Well, again, with valuations high in the U. S. In the equity market and the fixed income market, I think it means diversifying regionally, and also potentially dipping a toe into other alternative asset classes, to the extent that it's appropriate for your individual portfolio. So, on the international side, while we might be at peak U.S. growth, we are seeing that areas like Europe, Japan, parts of Asia are heading into a better phase of their recovery. You know, vaccinations outside of the U.S. were pretty low, which meant we really got back to normal in terms of activity, a lot faster than other areas. But the reality is the rest of the global market is only a few months behind. You might see emerging markets a few months more behind, but again, probably by the end of the year, into 2022, we're going to be in this environment of more global synchronous growth. And in fact, many other places outpacing U.S. growth. Which really gives some good opportunity outside of the U.S. And then thinking about alternatives a little bit. Look, if inflation is a big concern, we also want to think through slices of the portfolio that can provide a good inflation hedge, and some of the best inflation hedges are within sort of that real asset space. Whether it's infrastructure investing, or real estate, the other benefit to some of those asset classes is also pretty decent yield. So, you get a good income component, and pretty good diversification, so solving for a couple of different objectives. So, I think that taking a bit of a slice out of that 60/40 to accomplish some of those objectives could really enhance portfolios over time.
Glenn Royal:Very good. Hey, tell me, so you talked about international and, and I know that J.P. Morgan analyzes a lot of RIA portfolios that we do. We run it through your program there. Where do you see the average individual investor in the U.S. in terms of international exposure? I think historically, they've been underweight. You think you'll see that start to increase that rating international versus domestic?
Meera Pandit:We continue to see that investors are underweight international. And look to some extent, I understand it, because areas like Europe, Japan had not done great over recent years. So, it's hard to make the case for international outperformance. But, I think we have a couple of different catalysts ahead of us. So, from a tactical perspective, again, if we think about the next 12 to 18 months. Areas like, again, Europe, Japan, some of the developed markets outside of the U. S. Are highly cyclical markets. So, if you like some of that cyclicality that tends to be levered to economic growth and the recovery, then that is there's even more so that internationally at pretty attractive valuation. So, I think in sort of the medium to short term, some of those areas are going to become quite attractive. In the long term, I think that you've got a lot of growth ahead within emerging markets. While the emerging market recovery has been somewhat bifurcated. You know, you saw China do quite well last year and recover early. The rest of the developing countries are probably a little bit further behind. As you start to see again, global growth kind of converge in 2022, and we get back to a normal environment, you're going to want to look for standout pockets of growth. And I don't necessarily think that means thinking about specific countries or regions. It's all about themes. So, what I mean by that is as the middle-class grows throughout the world, particularly in emerging markets, one of the themes that we like is, European luxury goods, people are going to want and have demand for different types of goods and services, technology, education, health services, financial products. So, there's a lot of different, interesting dynamics that can be created from that. We've seen technology of course, do really well within the U. S. And there's a whole lot of really innovative technology coming out of emerging market Asia. So, I think we hone in on some of those themes for the long run and then find out who's doing them best.
Glenn Royal:Very good. I appreciate that. Something we've been doing more in the portfolios, is leaning more in international as we start to see that area grow vis-a-vis the U.S. The last decade. Evaluations are supporting that. I do want to kind of get you back into one little question, that has to do more with some changes that we're are seeing out of support out of ECB. They've just raised our average inflation targeting at north of 2%. Similar to that the U.S. is doing now. You also see this letter out from President Biden today on 72 competitive business practices. All these things at the margin, that we see going on, will these be beneficial for investment markets? Or does it matter?
Meera Pandit:I mean, look, ultimately I keep going back to the major fundamentals, because I don't think that there's enormous policy change in some of these announcements, you know, I pay attention to what the fed is likely to do, and they are going to start to ease off of their accommodation. That does impact what, how global central banks are thinking too. But of course they're acting sort of independently within their own remits. I think areas like Europe and Japan know, that it's, it's a little bit harder to generate growth and inflation there. They've got a little bit more of a recovery to go, and they are sort of in a bit more of a pickle in terms of where their rates are and what their bond buying programs have been. On the other hand, you see areas like Turkey, Brazil, Mexico, Russia, having to raise rates because they want to contain inflation expectations and inflation outcomes within their own countries, irrespective of necessarily where they might be in the recovery. So, I do think that internationally, the main central bank we're still concerned about for portfolios, is what the Fed's doing. That's really kind of squarely where our attention is. Because you will see a little bit of divergence based on regional situations. And ultimately from a fiscal policy perspective, that has been very generous, potentially could continue to be very generous. Again, earnings will continue to recover and, growth will be pretty strong into 2022. So, with those kind of fundamentals as a backdrop, I think that that is really what we're continuing to monitor if there's any change there.
Glenn Royal:So, how does that relate into J.P. Morgan's forecast for returns for the rest of this year, perhaps in the next year?
Meera Pandit:I have, you know, every single year we see about 14% of a correction about 14% every single year back to 1980. And so we haven't really seen much volatility this year, and I'm not saying there's any specific reason we should be seeing it. It could be anything, whether it's more talk of tax reform, inflation fears, valuations. But I would expect that at some point we might start to see a little bit of choppiness as the market, again, goes through this realization that we're moving from recovery to recovered. That being said, what we also see is that the market ends up positive, most years, in fact, in 31, out of the last 41 years, the market has ended up, up. So, I do think again, since the fundamental backdrop is strong, if we see a little bit of volatility, it's not necessarily the cause to sell. And I'd also say that again, overall things look pretty good, such that while you might not see a calamity on the horizon you are going to see this transition from really strong returns to probably somewhat middling returns in both equity and fixed income, because we pulled so much of that return stream forward. That being said, you know, we also had really strong returns in the first year or two after the financial crisis. And that continued for the rest of the decade. You know, when you look at annual returns of the S and P 500 alone, over the last, you know, 10 or 12 years in many years, they were double digits. And even in recent years where we've had sort of poor returns, I pick out 2018, for example that really turned around within a couple of months, as some policy changes came into effect. So, I would still say that investors are often rewarded for kind of sticking with their plan. And when there is trouble on the horizon, you know, essentially portfolios are built to withstand that, you know, 14% or more or less of volatility a year.
Glenn Royal:One of the areas we're also seeing volatility in is home prices. Natalie, you and I have been talking about that. You've been reading some of Meera's work.
Natalie Picha:Yeah. I noticed that you mentioned, how residential home pricing was kind of figuring into, that inflation story and in our Houston market right now, we're hearing stories of people literally unable to buy a new home without offering 10 or even 20% above asking price. What do you see that, or how do you see that playing out over the next couple of years, as we see current commodity prices and things within the supply chain, starting to kind of level out? Where do you see that retail housing market going as part of that inflation story?
Meera Pandit:So, I think after the financial crisis, people are always kind of looking out for, are we going to see a housing bubble? And I don't necessarily think despite the really frothy environment we're in, we're in that we're on that path. And a big reason for that is you did see a lot of building pre-financial crisis. Then you saw the housing bubble burst, and you never really saw building properly recover. And you didn't really see demand recover. A lot of millennials were living at home, still renting, not wanting to move out of cities. And now you're seeing that demand really come through with a lot of first-time home buyers, particularly again, a lot from that millennial cohort making up for years of not having that demand. And therefore we didn't build enough. So, we really have to kind of catch up from an inventory perspective to get enough housing supplies. So, we're in a bit of a challenge here where everyone has dashed to the suburbs or new cities, and we don't quite have that adequate supply. So I do think that the housing market can be pretty robust over the next couple of years, as we continue to kind of catch up. That being said, as commodity prices kind of come down a little bit off the boil that should facilitate, a little bit of a, an easier time, hopefully for home buyers and in prices. And also as the fed starts to ease off of some of its purchases too. Because not only is it purchasing$80 billion a month in treasuries, it's purchasing$40 billion a month in mortgage backed securities. Which essentially has pushed down mortgage prices and really, or mortgage rates, and really supported that market almost to the extent that it's becoming prohibitive for some, areas of the population, you know, housing affordability is becoming a really big issue. So we're going to have to see some of those dynamics even out. And I think that slowly but surely they will, but the housing market still could be pretty strong for years to come. I think. Maybe not quite at this level. But overall, I don't think it's going to result in a crash.
Natalie Picha:Well, and I think that brings us to a really a great conversation, that I've seen or been hearing a lot about is what's the difference between this recovery period and the recovery period, just following the financial crisis. What are your thoughts on that?
Meera Pandit:We had a lot of untangling, lets call it after the financial crisis. Consumers were not in great shape. The banking system had to be rethought or re-regulated to some extent. A lot of job losses, very slow to get back to decent growth, to recover from a labor market perspective. There was essentially a demand driven recession in which there was excess demand and that popped, and therefore we had to kind of really pick ourselves up. This time around the economy was in a fundamentally healthy position, pre COVID. And we had this completely exogenous shock in which all of the supply shut down. People still had demand. People still want to go out and spend and buy and invest, but ultimately everything was shut down for several months last year and was slower to come back. It's still coming back, but you're seeing as these valves open, people have been waiting on the sidelines with that pent up demand. So, you're seeing that come through. That's why we're seeing that growth and activity, jobs are coming back very quickly. We also have been really supercharged in terms of stimulus. Both on the fiscal and monetary side. So, I don't think that it's necessarily that the monetary side was totally unprecedented in terms of action. It's just that the rounds of bond buying we've seen this time around versus after the financial crisis, were very accelerated. You know, three rounds of QE essentially have had equal the, what we've done over the last year, the feds doubled its balance sheet and started purchasing different, um, areas of the fixed income market that they hadn't before. And on the fiscal side, what we've spent in the last year, has been four to five times what we had after the financial crisis. So, all of that has really supercharged the recovery. And I do think that that is all helpful for now, because we're not quite seeing that economic scarring that can really take years to undo.
Natalie Picha:So that is another conversation that we could just, and again, we could talk for hours and hours. And Meera, we so appreciate you coming in and sharing all of your knowledge. Where does this take us when we think about, where the government and all that government spending, there's this deficit scare. We're never going to be able to catch up. Do you have thoughts on that?
Meera Pandit:I'm not sure that we can continue to spend at the rate and the magnitude that we're spending without consequences. So, given what has happened with our debt and deficit, our deficit has really spiked as a share of our overall economy in 2020 and into 2021. Although it should come down kind of naturally over the next couple of years, because a lot of that was one time COVID expenses. That excess deficit gets added to our national debt. And we are at over a hundred percent debt to GDP ratio. So, at some point, unfortunately, we're probably going to have to see higher taxes and spending cuts. And it's going to be a multi-decade effort to really get us back to a reasonable place. But the sooner we do start to make some efforts in balancing our federal finances, the better, because otherwise we do risk things down the line, like higher inflation, and other such challenges. I think, regardless again, we're going to be in an environment going forward where returns are a little bit more constrained on both sides. So, we have to get a little bit more flexible and creative with our portfolios
Glenn Royal:Meera, I want to ask you this. My last question for you here. And it's one I am asking a lot of folks right now. Do these opportunities with the fed, reflating the economy, government stimulus coming in for the first time, more so than 2008, are we at a point where the fed can hand off its support of the economy, to the government, through normal fiscal spending policies, rather than support through monetary policy?
Meera Pandit:I think that the wind down process has to be done carefully. But ultimately the fed has to keep their eyes squarely on where inflation is and where it's going. And where the unemployment rate is and where it's going. And has to act in accordance to that. I do think that as you start to ease things off, in a measured way, and, and even as fiscal policy kind of meanders as it may, higher than lower, these are all sort of realities that we need to contend with because ultimately we have seen a lot of the, you know, not necessarily true inflation until recently, but a lot of asset inflation and ultimately all these assets are a claim, are a claim on something else. So, I do think we have to be a little bit conscious of financial conditions and conscious of the overall asset market, so that we're not constantly reliant on all sorts of forms of accommodation. Unfortunately, we're gonna have to get back to normal at some point, and we're going to have to sort of embark upon that now.
Glenn Royal:Meera, I just want our listeners here to understand how much we value your opinion. And they can see why after these conversations that we're having here. I am so thankful that you're here with today. We appreciate the efforts you do on behalf of our work that Jason and I do on the portfolios. And, look forward to working with you many, many, days in the future.
Meera Pandit:Great, thanks again for having me.
Natalie Picha:Well, I just want to say thank you to our listeners for listening to Royal Harbor Partners Market Talk. We want you to feel confident about your financial future. We are devoted to our relationships with multi-generational families, for the creation of successful legacies. Through our one-on-one conversations. We can help you discover a clear path forward for your personal wealth management and investment journey. How different will your life look with the right advice? Call us today, or visit our website www.royalharborpartners.com to start your conversation. Thank you, Meera. Thank you, Glenn. Great conversation.
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