Emily Roland Shares Her Perspective - 12/2/24

Emily Roland, Chief Investment Strategist
Emily is responsible for developing and delivering timely market and economic insight to financial advisors and institutional investors across the country. She has been featured on CNBC and Bloomberg TV, and is quoted frequently in the financial press, including the Wall Street Journal, Barron’s, and the Associated Press. She is a highly rated keynote speaker at a variety of industry conferences and events.
Emily leads the development of John Hancock Investments’ flagship quarterly market outlook publication, Market Intelligence. In doing so, she oversees the firm’s investment committee, which sets the view by marrying insight from the firm’s global network of asset managers, independent research firms, broker-dealers, and banks with top-down fundamental and macro analysis.

In this episode of Paramount Wealth Perspectives, host Chris Coyle is joined by Scott Tremlett, Chief Investment Officer at Paramount Associates, and special guest Emily Roland, Chief Investment Strategist at John Hancock. Together, they discuss the economic and market implications of the new administration, exploring potential impacts on U.S. stocks, inflation, and yields. Emily shares insights on emerging market opportunities, particularly India, the importance of relative earnings growth, and why bonds might offer compelling value heading into 2025.

The episode also highlights key trends from the third-quarter earnings season, the resilience of the U.S. consumer, and potential risks associated with elevated market valuations. Emily provides actionable strategies for navigating today’s markets, from emphasizing mid-cap stocks and infrastructure to leveraging risk-mitigating alternative investments.

Tune in to gain valuable insights for managing portfolios in a dynamic and evolving economic environment!

Transcript

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Intro song game on. Hello, everyone. Welcome to paramount wealth perspectives. Your go-to podcast for the latest updates on global markets and current economic events. This is your host, Chris Coyle. Each week we strive to bring you expert analysis on market trends, economic shifts. And key financial developments from around the world. Whether you're an investor business leader. Or simply curious about the global economy. Our podcast is here to keep you informed and ahead of the curve. Now let's dive into the markets and explore what shaping the world of finance today. Here with us today. We have Scott Tremlett chief investment officer and managing partner. At paramount associates, wealth management. And today we are especially excited to have our first guest speaker joining us. Emily Roland from John Hancock. Emily is responsible for developing and delivering timely market and economic insight to financial advisors. And institutional investors across the country. She has been featured on CNBC and Bloomberg TV. And as quoted frequently in the financial press, including the wall street journal barons and the associated press. She is a highly rated keynote speaker at a variety of industry conferences and events. Scott and Emily recorded this last week. Now I'm excited to share with you what they have to say. So let's get started.

Audio Only - All Participants: 1:33

Excited to have Emily Roland here joining us from John Hancock, and I think we'll just jump into the questions right now. I guess the first question is. What's been asked a lot by investors and a lot by the general public is talking about the new administration and what does the new administration really mean for the U S stock market, inflation yields, things of that nature. Maybe you can give us some color commentary on that. Yeah, sure, Scott. So great question. There's certainly been a lot happening from a political perspective that's been driving process of returns in markets. You know, some of the sort of post election winners have been areas like U. S. Credit. We've seen equities so seemingly hitting new all time highs every day. I think the idea. Is that there are, you know, some potential and by the way, I've never used the word potential. I don't think more in my career because we don't know how some of these policies are going to play out, but there are, you know, potential pro cyclical policies at play here, lower taxes or something that's been part of the campaign. So we've seen those areas of the market do well. Pretty remarkable performance out of areas like regional banks, which are a big part of the small cap indices. So regional banks up over almost 20 percent since election day here. The idea is that there may be some deregulation or deregulatory policies in the pipeline here. Um, lower quality and speculative companies also getting a bid from things like, you know, unprofitable growth companies to crypto currency to crypto related assets. So we've seen almost this sort of speculative frenzy building across markets since the election. Um, and then finally, you've seen, areas like the dollar really outperforming. So we are. In an environment now where there's better relative economic growth in the United States, we have higher interest rates and other sovereign nations around the world. And that's bringing a flood of dollars onto our shores, a couple of quote unquote, losers that have been emerging sort of just prior to the election and after. Bonds, I would say, is the primary one. We saw just a massive backup in bond yields. Um, really, a lot of that took place before the election is Trump's odds of winning improved in the betting markets. And you saw the really the idea that investors putting forward is that. You know, tariffs could potentially be inflationary. Tighter immigration policy could be inflationary. And again, more pro cyclical policies could be accretive to growth in the United States. So all of those things, pushing yields higher. They have started to move sideways a bit here since the election again. It was a really broad based, very sharp move higher. And then non U. S. equities have really gotten crushed here versus their U. S. counterparts on sort of America. 1st policies, the potential for higher tariffs again. We have to point out that a lot of this is. Speculative. We don't know whether these policies are a, you know, negotiating starting point. If there's something more substantive here, there's a lot still to be found, but the markets are telling you sort of how they're thinking about. Potential policies under this new administration. I will say that markets do have muscle memory. We actually have a playbook for this in 2016 and 2017, which of course was the last time we saw a Trump presidency. And we did see similar moves across currency markets, across unprofitable companies, regional banks, small cap equities. Um, a lot of those trades did happen very quickly. They were priced in the markets quickly. And then they faded from here. So I know one thing you were going to ask or we were going to chat about was, you know, what does this mean for investors longer term? I don't think it's that important. Um, I think investors are going to come back to fundamentals. They're going to come back to the macro. But for now, you know, some of these trades may be in sort of the 6th or 7th inning if you look back at the performance that we saw in 2016. So for investors that are looking to get more tactical over the next quarter or two, there may be something there, but we do think that investors should and will refocus on where the best relative economic growth is, where the best relative earnings growth is, you know, as we head into the bulk of 2025. Yeah, and I, I've kind of agreed with a lot of that I've been asked a lot about this, obviously, the last few months and my answer is always, well, the market could go up market could go down. It's just going to go back to trend. Um, but is there any meat per se? Financials could be a winner here, is there any meat that you see with policy administration, things of that nature that could actually push certain areas of the U. S. stock market? Yeah, I mean, there potentially is. But let's take financials for an example. Very similar again in 2016. And there was deregulation for financials. But during the Trump administration, frankly, it was not a great part of the market to own. Simply because interest rates were low, and that's negative for banks, net interest margins, and the earnings trends weren't there. Frankly, the best places to invest during the first Trump administration was tech stocks and growth because the earnings trends were better there. And that's the same thing that we're seeing today. In fact, if you look at the top 10 performing sectors under the Trump administration, our areas of the market indices, is Not only were technology stocks way up there, but so were Chinese stocks, even though we applied all of these tariffs to China simply because we were in a period of global synchronized growth, which means countries around the world. We're all growing at a quick, fast pace together. Those environments tend to benefit the most cyclical areas of the world. And China, of course, is the poster child for cyclicality. Likewise, if you looked under the Biden administration, the best sector to own by far has been energy. It's exactly the opposite of what you would have thought. Based on Biden administration policies around green energy and poor treatment of fossil fuel companies. So trying to use politics as an input to making these decisions is fraught with landmines. Again, we would be looking at at relative earnings trends, for example, large cap stocks right now. Are seeing positive earnings revisions. Earnings were up about 6 percent for the S and P 500 this quarter. Earnings for small cap stocks are negative negative 7 percent this quarter. Analysts are penciling in a total of negative 4 percent earnings growth for small cap stocks in 2024. The earnings trends just aren't there. So we want to try to gravitate to parts of the market where we're seeing Those profit margins stable, great return on equity, lots of cash, companies that can really navigate an environment in which corporate profits are coming back down to sort of following gravity back down from very advanced levels during the height of the pandemic and over the last few years. Yeah. And then I'm not a big bank guy. I've never been a big bank guy. My financial exposure is really limited to asset managers right now and insurance firms. There has been some momentum there. And I did read something that you said a few days ago, take profits where you can. I think that a lot of people become collectors of investments. And they never sell things and they from time to time. Well, you had mentioned China. I think that's probably a good leeway over to international markets. I have my own rankings. I am a big fan of India have been for a while. I like more of their small mid cap area. I think there's just more to choose from on the industrial side. Specifically you talked a little bit about China, but there's other. Countries regions that are going to be affected by potential, tariffs, you know, what might mean stuff for Europe might mean things for Canada. Um, maybe you could touch on some of that. Yeah, sure. So, I mean, markets are certainly telling you that and, you know, you've seen like the Canadian dollar taking a beating today based on something that Trump posted on, you know, his social media channel. So it's really hard to kind of discern the signal from the noise right now. Um, so we would be really careful trying to kind of make guesses about how tariffs are going to impact different parts of the world. Frankly, we don't know yet. When we look more structurally at these areas, China's got problems. Their property sector is very, very challenged. Now there's demographic issues there. They're moving away from capitalism, which is a very business friendly. Political regime. So we want to be mindful of China. The earnings trends aren't there. Now, India certainly to your point is a bright spot within emerging market equities from an earnings perspective. One way to think about it in terms of portfolios though, is yes, we can talk about India. We can be overweight India within emerging markets. We have to be mindful of the fact that, you know, the United States is really very concentrated right now. We need to think about how powerful the impact of the earnings growth and the returns and the multiple expenses. So we're modestly underweight emerging market equities. We modestly underweight China. India would be a bright spot. But again, that the power that we've seen out of the US mega cap tech space is kind of hard to stop here. obviously, there's momentum right now and some of those names that we're all making money on no matter what we're invested in really. But, you know, if we looking at the underlying aspects for inflation. growth is by 1 model productivity plus immigration per se, or new jobs, and if we shut down, new people coming into the country, just talking about. Economically don't have to come from somewhere. So I do kind of feel like there's going to be some pain felt somewhere along the line. If it's something drastic on that realm, and that could push up wages. Is that how you see it? Or, what are you thinking? Yeah, actually, if we didn't have immigration, our monthly jobs, growth numbers would be negative. And while that could have a modest impact on on wages, it's actually growth negative, which is disinflationary. So, immigration has helped the economy grow at an above trend pace that could reverse if we, if we have much tighter immigration policies, some of the other things that are driving. Disinflation in our view are actually wage growth is one. So we've gone from a high of about 6 percent average hourly earnings a couple of years ago, down to four and slowing. We're seeing corporate profitability come under pressure that ultimately should push wage growth even lower from here. That's disinflationary. The housing market, um, we're seeing, some changes there, particularly in those sort of COVID hotspots that people move to, think about Texas and Florida, they were very much overbuilt. And now inventories are up up nationally about 25%. Year over year, remember all those people that moved to Texas. Now they've got to go back to their Manhattan and their California company that they work for because they want folks to be in office. So we're seeing that contribute eventually to some disinflation within the housing or the shelter component of CPI. And then finally, commodity prices. If you're expecting some kind of. significant reacceleration and inflation that has to come hand in hand with higher oil prices, higher energy prices, and we're just not seeing it. They're just moving sideways right now. Um, and I think, you know, that's notable even during a time where we've had some flare ups in geopolitical issues over the last few years. Few weeks here, we just haven't seen oil prices go up. So in our view, all of those things are disinflationary. And the great, the great news about that, even though it doesn't sound that great, that wage growth is slowing, is that bonds are offering a lot of value here. Given the backup and yields that we saw, you know, we were approaching four 50 on the 10 year treasury briefly. That's come down a bit. But we still think that the aggregate bond index around four and a half to 5 percent offers a lot of value right now. The bond market is just so myopically focused on these potential political outcomes that it's not sniffing out all of these pretty significant disinflationary forces that are at play. Remember, inflation was your worst enemy as a bond investor. And in our view, it's actually going to start to become your best friend as we go into 2025. Well, that's interesting. I hadn't thought about it from that side. I appreciate you giving you that commentary. So we're looking at inflation coming down, potentially over the next year. What does that mean for the Fed? What do you feel about, the Fed and their path? Yeah, I mean, December is going to be really interesting. I don't think it's a done deal for the Fed. You know, the things they have on their side are that, you know, they've got some, the disinflation traction that we already talked about. And then they've got, you know, the unemployment rates creeping upward 4. 2 percent and they've said they don't welcome any further cracks in the labor market. So we know that. So as far as the Fed's dual mandate goes, Um, you know, I think they've probably got the room to cut given inflation's low enough, that they can do that. You know, the challenge, of course, is that we have seen this modest reacceleration in economic growth and in animal spirits. The Fed's job is kind of being done for it in terms of keeping the economy afloat right now, given the fact that we've seen not only some upside surprises in the economic data, I mean, the U. S. services side is on fire. We got a 57 services side PMI. And for those that don't follow PMIs, I get it. There are their monthly business surveys that tell us about the health of the underlying economy and anything over 50 is expansionary and 57 is quite extraordinary. The consumer is doing well. There's a massive wealth effect going on. The S and P five hundreds up roughly 25 percent year to date for the second year in a row. Um, and that's been great for investors, portfolios, the jobs market's good. So a lot of things are happening, are good in terms of the economy right now, which I think sort of limits the feds flexibility here. Um, I do think they'd like to cut, but they also, you know, you heard chair Powell last week sort of address. This potential for more, more stimulus, more pro more pro cyclical policies. In 2016, the Fed did pause. If they pause, I think that would be the equivalent of a hike. Uh, the bond market is telling you that it's about a 60 percent chance of a cut, 40 percent chance of a hold. We still have another nonfarm payrolls report. We have another CPI report. We have more information probably coming out about how these policies might look. So there's a lot of data for the Fed to contend with. But I think, you know, it's certainly not a lock at this point, 3, 3 plus weeks out here. Yeah, I think I kind of agree on that, too. I think it's all data dependent. I do appreciate the fact that they're willing to be data dependent and not just sticking to their guns because they say so. I appreciate that very much to be. Yeah. I guess, tariffs are tariffs. We will see how that all works. We talked about the wage and job market, I guess, where are the cracks? You see, because when I'm reading about earnings and I'm seeing, the averages of beats and I'm seeing that your revenue growth and everything is kind of below 5 year, 10 year averages, and I think, obviously earnings don't completely follow the revenues and sales, but there is some sort of equation to that. What do you think about earnings going forward? Yeah, it's a good question. You know, we're heading, we just had a pretty decent earning season again, about 6 percent earnings growth for the S& P 500, which was a little bit better than expected, but the bar was really low. And that's the last time we're going to have a low bar. The expectation was for 3, 4 percent earnings growth. From here. We're just starting a series of quarters where analysts are penciling in double digit earnings growth. So the bars just gotten a lot higher. I certainly think that there's companies that can clear the bar. we're emphasizing areas like, U. S. Large cap stocks, U. S. Mid cap stocks, which are seeing some pretty robust earnings trends benefiting from an overweight to the industrial sector. I know you mentioned earlier, That's a favorite of yours. We see that benefiting from the fiscal spending that's playing out the manufacturing renaissance that we're seeing in the United States. So I certainly think there's pockets of the market that can. That can clear that bar. You know, I think the biggest challenge right now in terms of risks into 2025 is that the consensus is so one sided Lee positive, you know, that that corporate earnings are going to continue to soar. See double digit growth that stock prices are going to continue to go up. The growth is going to modestly reaccelerate that inflation is going to come down. It's like that in this utopia that you're seeing and cross investors is going to continue. That might all happen. And I hope it does. Hope's not a great investment strategy, by the way. I hope it does. But the problem is that markets are already priced for it. The S& P 500 is trading at 22 times forward earnings, 27 times trailing earnings. This is about as expensive as stocks have been over the course of the last decade or two. So we want to be mindful there as markets may be priced for perfection. Bonds, on the other hand, I don't think are priced for perfection. Um, again, with the focus on these potential political scenarios. We've seen yields back up and they represent a really attractive entry point right now. So we would look at areas like treasuries, mortgage backed securities, investment grade, corporate bonds. You don't even need to dip down into credit anymore to generate these yields that are close to 20 year highs. So we would be leaning into an area. Of the market that, frankly, hasn't done well, um, that offers a lot of value here. That's probably not priced for the economic reality that we're heading into into next year, which is a modest contraction and economic activity. So that's the way we think about this. Where is the best relative value that you can find across markets? And right now, we think that bonds can probably do some more heavy lifting in portfolios into next year. Yeah, and I think that diversification is key right now, just to not get caught up too much in the momentum because it can turn on you quickly. And if everybody owns the same stuff, and they're all selling at the same time, it may not feel very well when you're going down. Exactly. How about alternative space? I know you have to jump off here in a couple of minutes, but any thoughts on alternatives, and how they kind of fit going into 2025. Yeah, sure. So we, we sort of bucket alternatives into a couple of different pieces. Um, you know, 1 would be sort of capital, more sort of capital appreciation type strategies, riskier ones and then risk mitigating strategies. So areas of alternatives that can provide a volatility buffer, a dampener. And really a diversification benefit and we're favoring risk mitigation strategies right now, you know, sort of given where we see the economic environment going into next year. So an example would be, we've already talked about. Things like infrastructure. I think, you know, looking at private credit versus private equity makes a lot of sense in portfolios. Now, given the income that's available there, embracing a multi alternative strategy that's going to sort of help smooth the ride out. Within an alternatives bucket, I think would all be sort of good potential ideas as we look into next year to help really buffer some of the potential risk after a couple really, really great years across risk assets. Well, thank you. Thank you. I know you have to jump over to Bloomberg anything you want to leave us with here. You're 1 of my favorites. I appreciate you taking the time with us today. Anything you want to leave us with. Oh, well, thanks for saying that. You know, again, I think it's just about kind of managing emotions, which it always is. And you and the team are so great at helping your clients do that. It's so hard during times like this, you know, not only with the election, but, but also with, kind of the, the excitement, I think that's permeating markets right now. so, continue to think about, I think, pruning risk, trimming into strength, looking to redeploy assets into areas that are, that offer, better fundamentals, mid cap stocks in the United States, um, we didn't talk much about, but infrastructure, more defensive areas like utilities, and then just taking advantage of the backup and bond yields that we've seen, I think, are all potential. You know, great ideas for portfolios into next year. But I know you continue to do a great job, you know, managing risk and finding opportunities with your clients. So best of luck to you and the team into next year. And I'm sure we'll be in touch. Thank you, Emily. Appreciate it very much.

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Thank you to both Scott and Emily for the informative update on what they see coming in 2025. We are incredibly grateful to Emily Roland for sharing her knowledge with our listeners. And we eagerly anticipate her return to our podcast next year. Please remember that the views and opinions expressed by guest speakers are solely their own. And do not necessarily reflect the views of paramount associates, wealth management. The information provided by external speakers is for informational purposes only. And is not intended as solicitation or recommendation for any particular investment strategy or any product or service. For now. Stay informed. Stay ahead and join us next week. For more key updates shaping the global economy. Thank you for tuning into paramount wealth perspectives. We hope you all have a fantastic week.