The Road from Here

Rally, risks, pandemic patterns, and emerging markets’ attractive valuations are part of this lively conversation with Bloomberg’s John Authers.

In this Natixis Access Series video talk, Esty Dwek, Head of Global Market Strategy for Natixis Investment Managers Solutions, sits down with John Authers, Senior Markets Editor for Bloomberg. Below are some highlights from the June 25 conversation.

Esty Dwek: I’m very excited to be joined today by John Authers. He probably doesn’t need an introduction, but as you know, he is a Senior Markets Editor for Bloomberg, publishes the daily newsletter “Points of Return”. Before Bloomberg, he spent 29 years at The Financial Times, and was head of the Lex column and chief markets commentator. He’s also the author of The Fearful Rise of Markets and a number of other books. Thank you very much for joining us today, John.

How can we explain the speed and strength of this rebound?
John Authers: You had two effects that have helped avoid a solvency crisis; one is that the Fed’s generosity and other central banks’ generosity has been such that it really does look as though companies are going to be able to borrow their way through this. So, to use the very popular analogy, the zombies will keep walking across the earth; that’s arguably a very worrying sign for the long term and means that we have an ever less dynamic, ever less fair form of capitalism that will reasonably make people unhappy with capitalism. But it does mean that we avoid all-out serious recession and bear market. And then the second reason is that the coronavirus, even at this point as outbreak worries are mounting in some states and countries, has definitely not been as bad as the realistic worst-case scenario. There was a realistic worst-case scenario that every major city would already have had as bad an outbreak as New York has had.

Where do we go from here?
Authers: The S&P 500® Index at this point is exactly where it was a month ago. So the rally has paused for breath, so, which I can only say is a good thing, that we are seeing some sensible consolidation there. And we’re seeing other countries catch up, which given that virtually every other developed market has had a better record of dealing with the virus than the States does make a fair amount of sense. But in terms of where you go from here, we’re talking about asset allocation. If we’re talking about five- or ten-year views, valuations do matter. We had a worryingly expensive US market entering the crisis, and obviously some indicators are broken. I mean, price to forward earnings, price to this year’s earnings is just slightly below where it was at the top of 2000 now. But obviously, has gone absolutely through the roof.

Let’s talk a little about risk scenarios. What about concerns of a second wave?
Authers: Well, we certainly can’t call the first wave over here where I am in the States. You probably could call the first wave over in the New York metropolitan area. If the cases begin to rise again, that would be a distinct second wave. Plainly, I mean the whole topic has become so ugly and politicized in this country, it does make one despair. But, in broad terms, my personal suspicion, not being an epidemiologist, is that one of the big differences with the only real comparison we have, which is the Spanish Flu of 1918, is that we have air conditioning these days. We have a sun belt these days in a way that we didn’t have in this country 100 years ago. So the Spanish Flu went away during the summer. But, if there is a really good place to spread a virus, it’s an air-conditioned room. People in the sun belt spend most of their time in the summer in air-conditioned spaces. I’ve heard this from a number of the people I’m desperately talking to who do know about epidemiology. This is a phenomenon that, to be fair to the Americans, isn’t just about poor management.

Do you see any of these risk scenarios as really derailing the rally entirely?
Authers: I think at this point nobody can afford to ignore the virus. If the really worst-case scenarios on the virus happen, then we can retest the lows and probably go through them. Which would involve Europe having another wave as bad as the first one, which seems unlikely to me at present. But you can’t rule it out. And a second wave here in the States. If you really have worse effects on public health in the autumn than you had first time around in the spring, and you have a renewed serious clampdown on economic activity, no liquidity from the Fed, I just don’t quite see how you can justify paying current prices for assets. So I think that’s the biggest risk of a really serious move down.

Isn’t there a risk that we’re underestimating the US consumer, and Americans’ ability to spend?
Authers: I don’t know if you can hear the Amtrak train going past me in the background, but that’s one sign that America is back to business. Yes, there’s a risk that we’re underestimating the American consumer, yes. There’s also, however, a risk that we are underestimating the possibility that inflation makes a return further down the pike. If substantially all this money that’s currently bottled up actually finds its way into goods and products rather than into assets, that’s great for the economy. But it does actually mean we probably do get some inflation, which is not actually necessarily a bad thing, within reason.
This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary. John Authers is not affiliated with Natixis Investment Managers and is independently responsible for his expressed views and opinions. The views and opinions expressed are as of June 25, 2020 and may change based on market and other conditions.

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