There are a lot of variables to consider in the financial markets today – global supply chain impacts, central bank policy decisions, decelerating growth and a potential China real estate crisis just to name some. Lindsey Bell, the Chief Markets & Money Strategist at Ally Financial, looks to educate retail investors and get customers the proper content to help them navigate the market. She joined the ETF Think Tank to offer her thoughts from a macro view and discuss the current risks and opportunities present today.
At a high level, Bell notes that we may be at peak earnings right now, but that’s not uncommon coming out of a recession. We’re still looking at 8% earnings growth next, but she says that margins may be the key metric to watch going forward. Corporate America has gotten away with not giving workers noticeable pay increases over the past year, but that’s starting to change during the current labor shortage. There’s room for margin compression, but they could remain at average or above average levels, which would allow the markets to move higher.
A lot gets talked about regarding what’s causing the current supply chain issues, but Bell thinks it’s really a mismatch between supply and demand. There are delays in getting things into the end consumer’s hands, but demand has remained robust and that hasn’t helped. She notes that the Fed didn’t do anyone any favors by continuing to call inflation transitory because it gave the perception that the issue would soon go away on its own. These things will, however, work themselves out. Metrics, such as days at port and container costs, are very slowly beginning to come back down, but it won’t be solved quickly. It’s a good thing that the consumer is still flush with cash and can absorb higher costs for the time being, but it’s still too early to call how this will end.
The state of the fixed income market comes up often in this conversation, including how investors should be using bonds in their portfolio today. Bonds, she says, are clearly losing people money in real terms and it’s been hard for the retail investor to make a decent low risk return. This is part of the reason why so much money has and continues to flow into equities – the desire to achieve a higher return. Dividend-paying stocks, one would think, would be the logical landing spot for some of these investors, but they just haven’t been performing well at all. Most investors are still interested in the mega-cap growth trade.
Earlier this year, U.S. equities and Treasuries experienced a strong positive correlation for a few months. Bell doesn’t expect this to continue and sees the relationship already beginning to break down. In terms of current positioning, you really need to think about the investor’s time frame. If they’re younger, they need to be focusing primarily or even entirely on risk assets. The current state of the financial markets makes the financial advisor’s job more difficult, and it’s required some creativity to focus on long-term wealth creation instead of just what’s working at the moment.
What about fixed income alternatives, such as high yield bonds and preferreds? Bell believes that personal circumstances should dictate decisions, but young people should be thinking of fixed income today as more of a diversifier and a risk hedge. The reason to include fixed income in a portfolio today for this group is downside protection.
A few other thoughts…
- Bitcoin is an interesting asset class and could be at a “watershed moment”. The recently approved Bitcoin futures ETF could help the average investor, but it also creates problems. Most people don’t understand futures, how they work or how performance could be different from the underlying asset itself.
- Crypto education remains key, and Ally is working extensively to educate investors. Many customers are still participating in a lot of speculative trades, including crypto, Tesla, Apple, and the other FANG stocks. She’s trying to teach that there’s much more to the market than just this handful of securities.
- Retail investors care about ESG issues, but they don’t really get what it means in terms of investing. For the most part, ESG is confusing, and it can be packaged and explained better.
This week our guest will be Chris Sullivan, joining us to discuss the current state of the media and where people are getting their information from. Sign up here.
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