Panic selling gives way to fear of missing out

In a year already marked by unprecedented and historic events, we asked four portfolio managers to share their perspectives on how we got here and what lies ahead.

Our roundtable gathered virtually on June 4 to discuss the financial markets, the pandemic, government stimulus, social unrest and what an economic recovery might look like.

The panelists included Linda Duessel, senior market strategist at Federated Hermes; Anne Mathias, senior rates and foreign currency strategist at the Vanguard Group; Vince Montemaggiore, lead portfolio manager of Fidelity Advisor Overseas at Fidelity Investments; and Jeffrey Sherman, deputy chief investment officer at DoubleLine Capital. The roundtable was moderated by Jeff Benjamin, InvestmentNews senior columnist.

Following is an edited and condensed version of the 90-minute conversation.

Jeff Benjamin: Linda, can you set the stage of where we are now and how we got here?

Linda Duessel: We came into this year very strong here in the United States, and actually around the world, we saw economic green shoots going on. We were looking really good, fully employed here in the United States, and made our way to a record high stock market as of Feb. 19.

And I have to say, what we’re going through is unprecedented. You never shut down an economy outside of war like we have. It is a big economy.

The fact that the government went big this time and bigger than we could have ever imagined takes out the Great Depression, which was one of the first things that people worried about.

Once the Fed said they’re going to buy high-yield ETFs, there is some moral hazard to deal with, but it is very, very difficult to go against this amount of stimulus — unprecedented — and around the world. But that takes us to where we are now, where we as investors, all panicked, sold in a waterfall decline, and then with massive stimulus, there’s a fear of missing out. And that’s where we find ourselves today.

JB: Vince, can you shed some light on the international landscape?

Vince Montemaggiore: We came into the year in international developed markets with fairly sound footing, from a macro perspective. Companies were doing well, the valuations were high. And then all of a sudden, as we all know what happened with COVID, things came to a halt.

I think of it as a wave going from east to west, where this started in China, where the recovery is coming sooner and already on the other side of it in China, it’s actually now seeing the small, albeit nascent, recovery in Europe and U.S. will probably lag.

Equity prices were severely sold off, particularly cyclicals and banks or anything that is geared to what the market was bracing for, which would be a credit cycle and bankruptcies across the globe.

What we’ve seen since is a similarly sharp rebound, and I think that caught a lot of people off guard, because it’s a bit of a head-scratcher. There’s a ton of stimulus at the fiscal level and at the central bank level, even in Europe and Japan. Not as much as the U.S. but they are quite supportive. And that’s really what seems to be driving markets and equity valuations today.

JB: Anne, can you summarize what this all looked like from the fixed-income side?

Anne Mathias: I think what Linda was talking about, what the Fed did was really just an absolutely massive liquidity intervention that cleared out the plumbing that was really having a lot of problems right at the beginning of the virus impact in the United States.

You had some really significant dislocations around everywhere in U.S. Treasuries. You didn’t get 10-year yields rising into a crisis like this. In corporate credit you had people selling shorter-dated, high-quality corporate credits, so the corporate-credit curve flattened, and you saw it in MBS, where mortgage rates did not fall the way they should have and mortgage spreads widened dramatically.

A lot of the Fed intervention to date has resolved those plumbing issues. I think the big question going forward is will there be a more proactive, longer-term QE-type program on the part of the Fed that they could conceivably announce later in the summer, or maybe not even until after the September meeting. I do think between now and September, there’s an opportunity for the markets to get actually disappointed in what the Fed is doing.

JB: Jeffrey, how do you see things unfolding?

Jeffrey Sherman: The Fed’s response mechanism has been strong. They went big, they went early, they have pledged an infinite amount of support for the market when it comes to QE and the likes.

When I look across the data set, I don’t see a V-shaped recovery, I don’t see a U-shaped recovery, and this is not a fiscal problem, this is a health problem. And I’m not sure that the tools of the Fed can address that. We’ve seen Congress respond, we’ve seen the fiscal authorities step in, but those fiscal things, those aren’t stimulative, those are just plugging gaps.

JB: Are the markets overly optimistic and out of sync with reality?

JS: They’ve been extremely optimistic. I think they’re way ahead of themselves. The markets are looking through this crisis. I see that we’re still about 35% or 40% below the consumption levels we were at pre-COVID.

We have problems in this country, and we need to address them. And we’re seeing people act out and try to represent voices that are not being represented. What that can do is cause an overhang for society in general. And who wants to go out and consume and spend when we’re dealing with bigger issues?

I think that could be another challenge to recovery.

LD: The market is saying, ‘This is a valley that we can easily see through.’ And thanks to the fact that we have low inflation in the U.S. and around the world, we can print money like we have never printed money before.

JB: How does this economy escape inflation?

AM: You have huge Fed stimulus, huge Fed interest rate cuts, dollar weakening; all of that is inflationary. The Fed has been telling us that it intends to be inflationary post-crisis, that it will keep rates lower for longer in order to raise inflation expectations.

I think there are a lot of inflationary influences coming and no one is going to stand in the way. And if the yield curve gets too steep, the Fed is going to flatten it.

LD: Indeed, the most common question I have when I talk to the end clients is, ‘Are we going to have a big inflationary problem?’

And now here in the developed markets, the only way you have trouble with inflation is if you have a weakening dollar. And people are calling for the U.S. dollar to weaken now, because we’re printing and printing away when we just heard big news from Europe. And that’s why we’re now saying, instead of don’t fight the Fed, it’s don’t fight the Feds. And our dollar has a hard time getting weaker.

JB: How do you grade the government’s response to the economic challenges that resulted from the pandemic?

JS: I think they failed as usual, but I don’t ever have a positive view on how the government responds to things. But at least they put money in people’s hands. They were trying, so, I’ll give them a solid B for effort.

I’ll give kudos to the Fed for stepping in and being aggressive and quick. I don’t like their programs. I don’t like the fact that they’re backing the corporate bond market, that levered companies get to be bailed out and the small businesses don’t.

VM: The European response was surprisingly positive. I think the Fed gets an A, Europe gets a B+, A-, and we’re seeing the details actually trickle out in real time on their fiscal package and what the ECB is doing.

I think the central banks have done a really good job. When I think about 2008 and 2009, there was a big moral hazard issue, everyone was reluctant to really throw everything at the wall because they didn’t want to be viewed or perceived as bailing out the people who got us into this.

JB: Where do all the stimulus spending and Fed rescue efforts take the economy?

JS: Now, the problem is they keep talking about more stimulus. And instead of getting to the root of the problem, we’re going to test this modern monetary idea. I can’t use the word theory because it’s not a theory.

It seems that everybody’s embraced that we’re going to test those limits now. And I think the experiment is out of the bag. There’s no sense in talking about balancing budgets, but it’s an economic problem and we need to address it.

LD: I was very nervous when the Fed said they’re going to buy muni bonds and high-yield ETFs. All right. I throw in the towel. I mean, they’re backstopping everything, and we’ll deal with some moral hazard later, but they obviously learned their lesson from the Great Recession in so far as doing stimulus.

I would not be as critical of the fiscal side of this. And if I had to be in any country and go into the pandemic like this and the uncertainty that’s related to it, I’m glad that I live in the United States. And so far as the election is concerned, I’ve started to believe that it almost doesn’t matter anymore who wins because we are all modern monetary theorists now, and the MMT experiment has gone global. So that means that it’s an experiment that’s uncertain. If we’re printing and printing away, and so is the rest of the world, then I don’t need to worry about my dollar crashing because we are the strongest and that’s good by me.