At the Fortune Investor Roundtable This month, business-friendly election results and positive news about potential COVID vaccines met, propelling stocks to new record highs. Our panellists look forward to helping their customers capitalize on an economy that, with luck, could return to normal in 2021.
But they are not without worries. The tensions between China and the USA and between political opponents on the state side have led several members of the group to feel cautious after a divisive election. Others are concerned about the ramifications of doing too good: If a strong economy causes interest rates to rise (as is often the case), it could hurt stock performance over the long term.
We were joined by Savita Subramanian, head of US equity and quantitative strategy and head of global ESG research at Bank of America Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management; David Eiswert, best performing T. Rowe Price Global Stock Fund head; Sarah Ketterer, CEO and core portfolio manager, Causeway Capital; and Mallun Yen, founder and general partner of the Operator Collective venture capital company. The following is an edited excerpt from our conversation.
Fortune: Where do you see the greatest opportunities and risks in the coming year?
Sarah Ketterer: So many companies have used the pandemic to cut costs and increase operational leverage, and many of them are likely to have higher profit margins than they did before the pandemic. The catalyst behind this isn't just vaccines, therapies, and tests, however. We had $ 10 trillion in monetary and tax support from central banks around the world. This typically hits economies with a delay of one to two years, so we haven't even seen the full impact. It is materials inventories, consumer discretionary, financials, and industries that will emerge from them.
The risk that worries us most is US-China relations. We have just opened an office in Shanghai and I want to make sure that ideas and knowledge are free. We can learn so much from private sector companies in China and vice versa. If that's cut off and we Balkanize, the world will be worse for it.
David Eiswert: We now know that there will be multiple vaccines. We will beat COVID. I am fairly confident that this will be the case on a 12 month and 18 month basis. That is the goal. But the road is rocky. You have to suffer in the short term along the way in order for you to make money in the next two or three years. I think social unrest is a big risk. I don't understand our country right now. I don't understand people's beliefs and how contrary they are. I think that makes us vulnerable. And I'm worried about the interest rates. At the moment we live in an interest-free country. Real estate prices are off the hook – what's the 30-year mortgage lately 2.8%? When that is gone, all asset prices will fall. Do we have an economy that can sustain growth with a 10-year treasury of 3%? Because that will cause pain.
"We're in a very rich part of the market cycle. What happens after that?" – Sarah Ketterer, Causeway CapitalPhotograph by Robyn Twomey – Redux Pictures for Fortune
Mallun Yen: In September 1.1 million workers left the labor force, 80% of whom were women. And the reasons are the fact that a lot of the supports we have for working parents, like traditional childcare and traditional schooling, have gone away. How do we make sure the workforce we worked so hard on to become equals isn't wiped out so that you can have Sonia Syngals and Lisa Sus in the next generation?
For working parents, single mothers, it is very difficult to fit into the rigid corporate structure in which they commute and work from eight to five. So I'm very encouraged that people are now used to the fact that you don't have to fit into this rigid, traditional corporate structure. We can work a little more flexibly.
Savita Subramanian: In particular, the S&P 500, which we all consider a barometer, has acted really weird in terms of price volatility. We see events with eight standard deviations every other day – these are said to occur every hundred years. And maybe that's because of the democratization of the market, which is good – but it also means that you have the option to put a bet very quickly and confuse the market.
Average rate on a 30-year fixed-rate mortgage for the week ending November 5th – an all-time low. Some investors fear that when interest rates eventually rise, stock and other asset prices will fall.
But there is also an opportunity there. In the S&P 500, if you buy and sell the market in one day, your chance of making money is slightly better than a coin toss. However, if you extend this time horizon to 10 years, your chance of losing money is less than 5%. Hence, thinking about the market from an old-school buy-and-hold mentality rather than acting as aggressively could be your greatest chance of making money.
Josh Brown: I am giving you a very big risk. What the Fed has done this year has likely been essential. But it could have set a really bad precedent. Ordinarily, in a recession the size of ours, we would have been in the middle of a wave of corporate bankruptcies. And in fact there are almost no bankruptcies. And of course we did so so that the companies keep their employees and the wheels don't fall off. But we had a recession without a recession. And I don't think we have completely processed that mentally.
And here's the problem: we're going to have another recession. It could be in three years, it could be in 12 years, I don't know. But the pressure on policy makers will be to simply repeat what we have just done. And people will say, “The last time you just gave everyone money. Why wouldn't you do it this time? “Well that was a pandemic.” “Oh, well, this time it's an alien invasion. I think that's just as bad. "It's insane, but Whirlpool sold more bathtubs in a recession than an extension. Or look at GM's revenue. It's bananas. How can we avoid that? And here's the thing: every time, if we do, debt goes up. We've always been in that trap. But now we're really in it.
Here's the problem: we're going to have another recession. And the pressure will be on policymakers to just repeat what we just did.
Josh Brown, Ritholtz Asset Management
Here is a profound opportunity. Direct indexing (buying diversified portfolios of many individual stocks instead of index funds or ETFs) will change our industry massively and fundamentally. We have started to switch pure ETF households to direct indexing. And I can't tell you what the level of customer satisfaction, the improvement in performance, the tax loss harvest, the ability to remove non-gender equality companies, the removal of arms manufacturers, and the retirement of oil companies that are not trying to improve their environmental impact, etc.
All of the new wealth in the United States is now being generated in Silicon Valley. The new people with high net worth see and feel and speak and act and think differently than the boomer generation. What they all have in common, however, is that they come to asset managers like me with net worth of $ 10 million, of which $ 8 million is in Facebook shares. And I can't tell that person, "Let's buy (a Nasdaq ETF)" because I'm only increasing the risk of concentration in Facebook stocks. The same goes for Apple, Salesforce, Google, Microsoft. By directly indexing, we can give them the Nasdaq minus Facebook or minus web advertising companies.
Every major asset manager thinks this way because they know the ETF is a '90s technology in the 2020s.
Thank you for giving us so much to think about.
Three things to be upset about and three things to worry about
Look forward to
Stocks in emerging markets and Europe are 20 to 30% cheaper than US stocks relative to their earnings, which gives them more upside when the economy improves.
Finance, old or new
Financials appear well positioned to rise as COVID-19 wears off. Ironically, so do the fintech stocks that want to steal their market share.
Their desire to invest in and work for socially responsible companies is changing corporate priorities – and affecting stock prices.
Central banks kept interest rates low during the pandemic. If interest rates normalize again as the economy recovers, stock and house prices could fall.
Tensions between the US and China
Trade wars and intellectual property battles could escalate and harm multinational companies that depend on global supply chains.
School and childcare closings have driven millions of women from the workforce, with unpredictable economic consequences.
More from the Investor Roundtable
How to play the 2021 recovery, according to investment experts
IPOs, SPACs and direct listings: Silicon Valley opens the doors to more investors
Why investors like socially responsible companies
A version of this article appears in the December 2020 / January 2021 issue of Fortune with the headline "Investor Roundtable: Smart Money Is Planning Its Next Step".
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