Podcast: Episode 3
Where do we go from here?
Listen to learn how progress in four key areas may influence the path to economic recovery.
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TIAA Perspectives Podcast Episode 3: The case for optimism in 2020 Hosted by Jim Daniello, CFP®, wealth management director for TIAA. Joined by John Canally, Jr., CFA charterholder and Managing Director with TIAA. - [Jim] Hi, everyone, I'm Jim Daniello, Wealth Management Director for TIAA. Thank you for joining me for another installment of TIAA's Perspectives Podcast, where we'll talk about financial planning strategies, money management tips, and steps you can take now to remain on track for your goals. As economies and markets worldwide continue to reel amid the economic uncertainties surrounding the COVID-19 pandemic, today we'll be talking about the case for optimism in 2020. Joining me is John Canally Jr., a chartered financial analyst and managing director with TIAA. John will share his insights on the markets and the economy including where we've been, what to expect going forward, the role health and safety play in getting our economy back on track, and how election year politics may influence the markets and the economy in the months ahead. Great to have you with us, John. - [John] Good to be here, Jim. - [Jim] Now, John, I'm really glad you're able to join me today because I know our listeners have just been bombarded in recent months with news on the economic and healthcare fronts. It can be hard to make sense of everything you're hearing, and what it means for your planning especially when it comes to the markets. Let's start there. Because I know recent market activity has been confusing for a lot of people. We saw a significant downturn earlier this year, and then as bad news intensified, the markets began to rally. I know that sounds counterintuitive, so I wanna get your take on what's happening and what the markets are most concerned about today. - [John] Sure, Jim. There are four key areas where the markets wanna see progress as it relates to COVID-19. They wanna see progress on monetary policy, meaning what the Fed is doing; fiscal policy, what Congress is doing; market functioning and liquidity; as well as probably the most important one which is health and safety. - [Jim] Uh-huh. - [John] And so we've actually gone through and graded each of these green, yellow, red, sort of in a traffic light pattern, based on how markets are reacting to each of these areas. So for example, monetary policy and fiscal policy both get a green light from markets. Markets are really happy with what's taking place on the monetary policy side from the Fed. We've seen a big commitment from the Federal Government on the fiscal side to do whatever it takes to assist the economy during COVID-19 through tax cuts and spending increases. And in fact, if you look at what the Fed has done, it's done more to support the markets and the economy in the six-week period through the end of April than it did in the entire three years of the global financial crisis between 2007 and 2009. And so all this continued financial support we're seeing for markets for large and small businesses and for households is really critical during this unprecedented time. - [Jim] Now, John, I love the way you frame that out especially with the simplicity of red, yellow, green. How does this compare to actions taken during previous downturns though? - [John] Now when we're talking about downturns like what we experience now, two other downturns come to mind. One is the 1930s, the Great Depression, and the other is sort of a 2007-2009. But let's start with the Great Depression. So in the early 1930s after the stock market crashed in 1929, the Fed actually raised rates, believe it or not. This time, of course, the Fed cut rates to zero. They did it really quickly and then they've also are doing or promised to do a massive amount of quantitative easing, and all that happened within the six weeks between kinda March 1st and April 15th. - [Jim] John, correct me if I'm wrong, but I believe Congress also did more to support the economy with tax cuts and spending increases in March than it did during the entirety of 2007 through 2009 financial crisis. Is that right? - [John] That's correct, Jim. If you look at the early years of the Great Depression again between the stock market crash in October of 1929 and 1933, basically at that time there was no unemployment insurance, there's no fiscal stimulus at all, there's no safety net. All those safety net things that we think of didn't really come into play until many years later. So what did Congress do during the Great Depression? They actually raised tariffs, which of course made things worse. Now this time around, Congress has acted very swiftly. They passed the $3 trillion stimulus package within six weeks of the start of the crisis here in the US. And that's already helping to support households and small businesses. - [Jim] Now, John, one of the topics you outlined earlier was about market function and liquidity. We've obviously seen a great deal of volatility in the recent months. What kind of a grade does that get? - [John] Market functioning is critical. If buyers and sellers in the marketplace can't get together to agree on a price, that's bare, that's when markets freeze up, everyone kinda suffers. So the first thing you ask yourself, are markets trading or are buyers and sellers in the stock market, the bond market, are they coming together? And I think the answer to that at the start of this thing, so if you looked at what happened sort of in the middle two weeks of March, the answer to that was no. Markets were really not functioning very well at all. - [Jim] Right. - [John] Now, I would say that that, we would grade that on a traffic-like scale, it was a red in the middle of March, now it's a yellow. So it's mostly functioning but there's some areas that are not functioning. So what happened to get us here, where the Fed came in to help, the treasury has come in to help, both of those entities came in and put together programs out of the 2007, 2009 playbook to help backstop some of the key markets to help them function better. And all of this happened really very quickly versus the 2007-2009 downturn. 'Cause in that case it took the Fed many months, even years to put in these programs into place. Of course in the Great Depression, neither the Fed nor Congress did anything to help market function. - [Jim] Yeah, and it helps put things in perspective, John. Now, your fourth point was health and safety. I'm curious where you think we stand there. I know that's a huge concern for many of our listeners. - [John] Jim, unfortunately, now safety is still red. - [Jim] Now, I'm gonna ask you a more difficult question: What would it take to get to yellow in that space? - [John] Before this one can go from red to yellow, we need to see a continued decline in hospitalizations related to COVID-19 along with the increased availability of testing. - [Jim] So, not gonna let you off the hook yet. What would it take now to get to green with health and safety? - [John] Sure, red, yellow to green, that all make sense. A green light here is you're going to need to see, markets are going to wanna see introduction of new drug therapies to combat the symptoms of the virus and then ultimately an FDA-approved vaccine to safeguard against actually getting the virus. So we are watching progress on this very closely. And I can say that the markets are watching progress on this literally minute by minute, that those things are the key to helping the markets here when the economy is going to reopen. So that health and safety portion is really key right now. - [Jim] Now, John, I mentioned a minute ago that markets were rallying amidst all bad news on the economy and the health front. Why is this happening? Can you tell our listeners why that is? - [John] Jim, that's a tough one to explain. I think the simplest way to talk about this is that markets are a discounting mechanism. Essentially, they're gonna look ahead. And so as the market fell between mid-February and mid-March, they fell 35%, that priced in an awful lot of bad news on the health front, on the corporate profits front and on the economic front. So basically, markets priced in a severe recession. And so for example, on the health front, as markets declined, they were pricing in all the bad news on hospitalizations and all the unfortunate deaths that we were gonna have, but also priced in all the disruptions around the economy shutting down and the impact that was gonna have among corporate profits, rising unemployment. And then right now what's happening is as the Fed and Congress took its actions as corporations began to navigate this a bit better, as markets see a path to reopening and restarting the economy, markets have now looked past what happened in February, March, and are now looking ahead perhaps to what the economy and corporate profits and the health front are going to look like in 2021. - [Jim] I think that's important summary. Markets are looking at the forward-looking perspective, not the rear view mirror. Now, it's also important, John, to remember that we entered this period with a very, very healthy economy. Is that right? - [John] You know, that is, and I think that is getting overlooked in many respects. So heading into the downturn. So if you look at what would the economy look like at the start of 2020, we were at a, the lowest unemployment rate in 50 years, household saving rates were the highest they've been in 10 or 15 years; corporate balance sheets were in good shape. And I think most notably there were not a whole lot of imbalances in the economy. Meaning that people were not using their houses as ATMs as they did during the mid-2000s that they weren't overborrowing or they weren't overconfident. Businesses were not overleveraged. You saw all those things were in place in the mid-2000s prior to the 2007-2009 downturn. And then of course in the roaring 1920s, many of those imbalances were also in place. So none of those imbalances were in place as 2020 began. And on top of that, most of the key components of the economy were in the best shape they'd been in 40 or 50 years. - [Jim] Right, and we've actually received a lot of questions from clients recently about whether or not they should be worried about their banks. Now, can you comment a little bit about your take on the banking system? - [John] Sure, and I think that's a valid concern because the banking system really is at the heart of the economy. If the banking system is not functioning as a lender to both consumers and to businesses, the economy freezes up. That's essentially what happened in 2007-2009. So let's put the health of the banking system in perspective from historical standpoint. So if you look at, heading into Great Depression as well as heading into the 2007-2009 financial crisis, the health of the banking system was I'd say poor. Now, if everyone remembers what happened in the aftermath of the 2007-2009 downturn, regulators on the banking side, especially on the Fed, put in a lot of guidelines and regulations to help stress test the banking system. And so over the past 10 years, we've had really slow economic growth by historical standards. Some of that is due to all the increased regulation that was put on the banking system between 2009 and 2020. That's the bad news. The good news is the banks have been poked and prodded and stressed test like they have never been before and they're in fantastic shape to weather the storm that we're facing now. So just to repeat without a functioning financial system, which is the heartbeat of the economy, the economy can't ever recover. But now banks are trusting each other. They are lending to each other that those types of things will ultimately foster or recover. - [Jim] So it feels like the banking system is pretty well prepared for the scenario. Now, another big question a lot of people wanna know is if we've seen the bottom of the market yet, what's your take on that? - [John] I think the most important thing to understand here, Jim, is that market bottoms are a process, not an event. So for example, no one's gonna come out and wave the green flag and say, all clear. And so that is one of the many reasons why you don't wanna try to time markets. And let me give you a couple of historical examples here. Let's go all the way back to World War II. And we talked earlier about the fact that markets are discounting mechanisms and they're going to look ahead. So during World War II, the stock market bottomed in April of 1942. Now if you remember your history, World War II itself did not end until September of 1945. So there were three-and-a-half years of really bad news on the war front. You had rising death toll, bombings, and invasions. All those things happened between when the stock market bottomed in April of 1942 and when the war ultimately ended in September of 1945. So that kind of reinforces the idea that markets can look ahead. So by April of 1942, they saw that the US was ultimately going to win the war that that's when stocks started to move higher. - [Jim] You know, John, you've been referencing a lot of points in history here as we talk about making sense of today. The historic view is really important for people to try to make sense of really where we stand right now, don't you agree? - [John] Yeah, and I think a lot of the questions that we're getting now, we also got during 2007 to 2009. And I think since that episode's a little more fresh in people's mind, let's point out some historical examples there. So as I just said, the stock market bottomed in April of 1942, three-and-a-half years before the end of World War II. Same thing happened in 2007-2009. It wasn't quite that lag time. - Right. - [John] But stocks bottomed out in February and March of 2009. The economy didn't officially hit bottom until June of 2009. And the economy didn't really get back to its prior peak until 2011. So it was another two, two-and-a-half years from when the stock market bottomed to the economy got back to its prior peak. So this just reinforces that markets tend to bottom well before the worst news of the economy and that helps to explain why markets are rallying now amid all this bad news. And I think the other point to make here, Jim, is that these market bottoms don't happen in a day or a week, they happen over a course of months or even quarters. And I think what's gonna help most this time around is when markets can get a grasp around, some certainty around when how the economy is gonna reopen and if that reopening can be sustained. And this goes back to what we talked about before. Is there enough testing capacity? Are there drug therapies? How soon will a vaccine be released? All those things are gonna feed into and inform the market bottoming process that we're in now. - [Jim] So something on everyone's mind, John, is when are we gonna see a turning point? Now do you have an expectation for when we'll actually see this type of turning point? - [John] Again, I think this goes back to the idea that market bottoms are a process, not an event. I think if you're looking for one single event here, it would be that if we get a vaccine approved by the FDA that's widely available, I think that would be the event. Now, what's happening now in markets as we described earlier is that markets are sensing that that is going to happen at some point. It's just a matter of when that those happen. - [Jim] Now, John, every day we're hearing more and more about how we'll reopen the country and get people back to work and business up and running again. We're actually starting to see in some states the reopening of America. What's the most likely scenario for a recovery here? What do you believe this is gonna look like? - [John] Yeah, these next couple of weeks, Jim, we're going to be critical as some states start to reopen and then of course the overriding fear there is what is the, is there gonna be a second and third wave? So with that in mind, I think there's a couple of possible scenarios. They do take the form of letters. So we're gonna talk about the letter L, the letter U, the letter V, and the letter W. Let me explain. So if you think about an L-shaped recovery, that means we kinda headed straight down on both the economy and markets. That kinda happened in March and then you head straight down but then you just stayed there for the next couple of quarters or even for the next year. So I think given all the stimulus the Fed has put into place, given all the stimulus that Congress has put in place, given that economies are starting to reopen here in the US and around the world, I think the L-shaped recovery has got a pretty low probability of occurring. But let's take the next one though. The U-shaped recovery where you head straight down, like we did in March, and then you stay there for a year or so and then come flying back. I think that one also is unlikely. It's a little more likely than the L shaped, so that U-shaped recovery is, you know, I think that's probably the next highest probability after the L-shaped. Now what a lot of people are talking about is this V-shaped recovery, meaning that we just came right down in March and April and we're gonna zoom right back higher in May. I think for that V-shaped recovery to take place, that would mean that we need to see a FDA-approved drug therapy, like, today and an FDA-approved widely available vaccine, like, today. That's unlikely. It's not impossible, it's unlikely. So that's why if you think about letter shapes, I think W is probably the most likely scenarios. In other words you'd get a series of rolling reopenings. Maybe there's some backsliding here or there on you reopen a section of the country and then cases spike. And those kind of things are gonna cause this to kinda undulate a bit. They're gonna go up, they're gonna go down. Markets are gonna rise and fall on the promise of new drug therapies, the testing of the vaccine. So that I think naturally leads you to that W-shaped rather than the L, U, or V shaped. - [Jim] Right, so we'll hope for a V but we'll expect and plan for a W. Now, John, we know that increased uncertainty often leads people to getting out of the markets and heading to the sidelines, if you will, to wait out the volatility. Can you talk for a minute about why that would be counterproductive when it comes to pursuing long-term goals? - [John] Yeah, I think the first thing to say here, Jim, is it's very difficult to time the markets. You have to get so many decisions right. You have to decide when to sell, what to sell, how much of it to sell, where to put it. And then on the other side you have to decide, okay, when do I buy, what do I buy, how much do I buy? So that's six or seven decisions right there. You have to get all those right to effectively time the market. Getting even a couple of those right is really difficult. Getting them all right is impossible. So just to put it in a different way, market timing is when you move your money in and out of the market or an individual investment to try to capture the performance highs and avoid the lows. And as I said, it's difficult, if not impossible, for anybody to time the markets. That's why we like to say time in the market is preferable to timing the markets. And I can give you an example just from this year. So this year's been a pretty volatile year. If you go from January 1st to April 24th, the S&P was down 12% for the year. However, if you miss just the best five days of the performance this year, you'd be down 42%, not 12%. So that's just missing the best five days just this year. And so that's I think a really strong example of the difficulty and the penalty for being out of the market. So if you're thinking about trying to time the market, I would really urge you not to. No one's gonna, as we've discussed, no one's going to come out and wave the all clear. And it's just very, very hard to pick which day or which week that you're gonna invest. So I think the wrap up there is don't try to time the market. - [Jim] It's a real eyeopener, John. Many of our clients wanna know if the recent economic downturn puts us in recession territory. I know that the financial press often defines a recession as two consecutive quarters of decline in real GDP. How does that definition compare to the National Bureau of Economics Research's dating procedures. - [John] I would say here, Jim, that the investors would be best served not to focus on the semantics of a recession. As you mentioned, the National Bureau of Economic Research, that's an economic think tank based in Cambridge, Massachusetts. And it's their job to tell us when the economy entered a recession and when the economy exited a recession. Now, it's almost certain that we're in a recession. It probably started in the first quarter of this year. It's going to extend into the second quarter of the year. And so that group, the National Bureau of Economic Research is sifting through a wide variety of data on GDP, on incomes, on employment to determine when the recession actually started. So they're gonna look at a wide variety of things. They don't really have a specific definition of consecutive quarters. They're just looking at a broad decline across a number of economic indicators. That's what they're looking at. But the key for this, Jim, is that they might not tell us a recession started until later this year. So they might not come out and say, a recession began in March until maybe October or November. But here's the thing, when the recession ends, it might take them another nine or 12 months after it ends for them to tell us that the recession's over. So the point here is that you can't really depend on the National Bureau of Economic Research to tell you when to get in and then when to get out of the market. So I think that really tells you what you need to do is just stay focused on your own long-term plans, stay focused on your long-term goals. And while it's difficult to block all that noise out, I think in this case it is worth doing. - [Jim] You know, John, that's really important information for people to understand it. It goes back to some of your earlier points, whether you're trying to time the markets for the recovery, there's potential you could increase instead of decrease your risk exposure as a result. Don't you agree? - That's true, Jim. I mean, that's why you really wanna make sure that your decisions are aligned with your long-term goals and plan and you're not simply reacting to what's happening in markets now or last week or last month. - [Jim] Right, and I wanna cover one more thing before we wrap up, John. With so much coverage of the pandemic, it's hard to remember that we're also in an election year. To what degree do you see election year politics influencing the markets and the economy in the months ahead? - [John] Yeah, I'd first say that yes, we are in an election year. And I do think the fact that we're in an election year helped to get all these stimulus faster than it would have otherwise, so that was helpful. I think the other points to make are that in a typical election year, markets don't tend to pay much attention to the elections until after their political convention. So that would be normally from late August through November. And that the typical pattern that you see in a typical election year, I'm saying the word typical a lot, but we'll get to that in a second. So in a normal election year from call it late August, early September through November, markets tend to trade sideways to them because there's uncertainty about who's going to win. And then once the results of the election are in, markets can generally rally between election day and the end of the year simply because that uncertainty lifts. Now, this year's a little bit different. The pandemic is ongoing. There's not clarity around whether or not they're going to be conventions that there's gonna be the usual campaign stops and the stops at the state fairs over the summer and then into the fall. But from a typical election year standpoint, markets are probably not focused on now. But as summer turns into fall, they'll start to pay a little bit more close attention. - [Jim] John, in summarizing a lot of the great content that you brought to the table today, what should investors be thinking about now as they plan for the weeks and the months ahead? - [John] Listen, Jim, we're prudently optimistic regarding the progress in the areas that we've talked about today but investors need to be aware that what we anticipate might not occur. So it's possible that Congress could balk at spending additional money to help support the fight against the impacts of the virus. Financial markets could lose faith in the Fed and its ability to backstop key areas of the markets and the economy. - [Jim] Right. - [John] Progress on the vaccine or drug therapies might stall, and the easing of quarantines and lockdowns could lead to a second and third wave of cases. So all those things are possible. Now, on the other hand though, it is possible that the spread of the virus could end a lot more quickly than we now anticipate and that all the stimulus in the system could lead to a sharp rebound in economic activity and the stock market and perhaps even some inflation. But it's important to remember that none of us can predict with certainty what the markets are gonna do going forward. That's why it's really important to continue to focus on your long-term plan and financial goals. - [Jim] So amidst all this uncertainty, your emphasis is stay focus on the long-term goals. What does that look like for our listeners, John? - [John] A couple of key points here, Jim. It means working closely with your advisor to ensure that your portfolio was well-diversified. What that means is if you wanna help to manage risk in your investment portfolio, within your portfolio the asset should be spread out among a variety of investments so that an upswing in one investment could help the offset and downward movement in another investment as market conditions change. And then while not a guarantee, a mix of assets that could include stocks and bonds historically have offered growth but also a degree of stability over the long term. - [Jim] On that note, John, that's another area where our advisors have been working with clients in recent weeks reviewing their portfolio allocations to determine if they require rebalancing due to the recent market volatility. - [John] Rebalancing is key, because all the market volatility we've seen might have thrown your portfolio allocations out of whack and so it might be misaligned with your target allocation. You had that target allocation in the first place because that matched up with your long-term goals and plans. So that's key. But other point that I should make here too is that, well, it's probably not top-of-mind right now. Some investors might wanna consider if there's any opportunities to manage their investment related tax bills through tax loss harvesting. And so, Jim, as you know, all these areas are where your TIAA wealth advisor could help. - [Jim] That's exactly right, John. Our advisors are actively working with clients right now to review their planning and talk through steps that they can take to ensure their planning remains aligned with their individual goals and their risk tolerance. Among the things we're looking at is do you have enough income from guaranteed sources such as social security, a pension, or other guaranteed income solutions? Does it make sense to draw income from emergency savings to avoid cementing losses in longer term assets? And what about your goals? How would a short term reduction spending impact your ability to accomplish your short and longer term goals? Our asset location worksheet has been incredibly helpful in these conversations. The worksheet enables us to determine the purpose of each account that you own and whether assets are located in the right account types to best weather the current conditions. So there's a lot your TIAA advisor can do to help you not only stay the course but keep moving forward towards your goals. Now, as we wrap up, I wanna thank you, John, for sharing your insights with our listeners today. And for those of your listening, thank you for spending a few minutes of your time with us today. I encourage you to keep reaching out to your TIAA wealth advisor with any questions or concerns that you may have in the days and weeks ahead. That's what we're here for. Have a great day, everyone. Jim Daniello is a Registered Representative of TIAA-CREF Individual & Institutional Services, LLC. This material is for informational or educational purposes only and does not constitute investment advice under any securities laws. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Please consult your Financial or Tax professional before taking any action. Advisory services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services, LLC, a registered investment advisor. ©2020 and prior years. Teachers Insurance and Annuity Association of America College Retirement Equities Fund. New York, NY 10017 1165543