Following a bitterly contested election, investors still have questions about where the stock and bond markets are headed and how political events could shape investment decisions. Our panel of experts from Nuveen Asset Management and TIAA Investments cover the economic and market implications of the November elections and offer perspective on how the results might create areas of investment opportunity.
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Duration:
0000 - 00:46
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Friday, November 11, 2016
Transcript:
Brian: Good afternoon, and welcome to Nuveen’s live event hosted by Asset TV – “Election 2016, What the Result May Mean for Markets.” I’m Brian Nick, chief investment strategist for TIAA Investments, and I’m joined by three of my distinguished colleagues from Nuveen Asset Management, none of whom look remotely sleep deprived after a long night of returns last night. Just to my right, Bob Doll, portfolio manager and chief equity strategist; John Miller, senior fixed income strategist for the firm’s municipal business and co-head of fixed income; and Tony Rodriguez, the other co-head of fixed income who is head of the firm’s taxable business. It’s finally over, and it’s not the result that many of us expected. Donald Trump will be sworn in on Jan. 20 as the 45th president of the United States. He will enjoy majority support from his Republican Party in both houses of Congress. Given that this was not the result that many anticipated, investors are asking understandably what it means for the US economy, what it means for their investments, and how they should proceed from here, and whether any changes might be in order for their asset allocation. We absolutely want to have a fruitful discussion here, and we want to hear from you. You will have a chance to ask questions throughout the discussion by using the field on your computer screen. We’ll receive those as we go, and we’ll sprinkle them into the discussion as we can. I do want to start off not spending too much time purely on politics, but maybe just getting a quick thought from each of you on what the results mean, what things happened that may have surprised you – maybe that’s an obvious question after last night. But Bob, let me start with you. What’s your take away from what we saw?
Bob: Clearly the event of perhaps our lifetimes when it comes to presidential politics. The media bubble and pollsters really didn’t understand the mood in America. They want change – change in the economy, change in the way we interact with other countries, etc., etc., etc. And Donald Trump took it. This is now a big moment, because he is the candidate that’s from the outside. He has a mandate for change, so it’s going to be very interesting to watch. I think we’ll have a much more “interesting” – and I put quotes around that word – four years with Trump then we might have had under Hillary Clinton. I didn’t say better or worse, just more interesting.
Brian: That phrase “May you live in interesting times” can be read both ways. John, what about you?
John: I completely agree. Hillary Clinton was more the candidate for consistency with the last eight years, and there was an undercurrent of people wanting something different. Particularly I would say the biggest surprises were places like Ohio, Michigan, and Wisconsin – the industrial Midwest. That probably relates to things like the auto industry, exports, and certainly tapped into some anger around international trade, would be one of the big reasons for the big surprise.
Brian: Tony, what about you?
Tony: Certainly now we find that probably pollsters are going to make interest rate forecasters look good. I do think while we’ve kind of reduced some uncertainty, because we know the outcome of both the presidential election and obviously the House and the Senate, we have now just made a little bit different type of uncertainty as to what exactly the policies are going to look like in terms of positions that were maybe set out in the election process and beyond that. What might actually be able to be accomplished? What does governing really look like from a policy perspective? I think that’s really going to be some of the more interesting questions to see answered over the next couple of weeks and months and quarters.
Brian: We may try to answer some of those over the next 45 minutes to an hour. My take away – a few of you mentioned pollsters. As someone who is guilty of hitting refresh compulsively on some of these higher profile pole aggregator sites, it’s interesting to see just how far the results the verge. There were literally states where there was not a single poll that Donald Trump ever led in that he ended up waiting in relatively convincing fashion last night. Although the popular vote might end up being pretty close to the plus-two or -three that was reflective for Hillary Clinton, the distribution of those votes was very highly inconvenient for her and especially good for Donald Trump. What that’s going to mean going forward with another popular electoral vote split, we can remember 2000 when there was a lot of divisiveness about that in calls to and the Electoral College, which of course didn’t end up happening. Let’s get to how this election might impact financial markets. Bob, you’ve done a lot of work on this. How does policy uncertainty and market volatility…? How do those two things interact, and how might you apply that to what we’ve seen in the last 48 hours or so?
Bob: Markets don’t like surprises. Markets don’t like uncertainty. And we’ve had both. Yet curiously – at least in equity land – after selling off 800 Dow points in the futures market overnight, we had from that low more than a 1000-point rally, closing up a couple of hundred-plus points today. We don’t think it’s a straight up from here. There are uncertainties, things we just don’t know. What are his priorities? In what order are they priorities? Who is going to be in the cabinet? Who’s going to be responsible for doing other things? The questions will all get answers. With Hillary Clinton, we kind of had a pretty good idea on some of those things. I like to stay with Hillary Clinton, the outcome was going to be similar in the zone. With Donald Trump, it’s more like this. So we could have – back to “You live in interesting times” – could be good interesting or not so good interesting. Only time will tell.
Brian: The one thing I was always trying to stress to people who asked about the election – and they been asking about it for what? 18 months now – is that these typically are not market-moving events. Presidential elections are not big events for the markets. Brexit was a big event. Central-bank decisions that, changes in policy – you can actually see those on a graph, “This is when the Fed decided to do quantitative easing in 2009.” It’s very hard to find that with presidential elections. This one looked like it might shape up that way, but to your point, today’s trading – if you went to sleep last night at midnight and woke up at 5:30 or 6 in the morning, things improved a lot in the equity markets globally while you were asleep.
Bob: No question. I think the bolster your point, I think what it says is economy and earnings are what matters. Presidential elections, interesting; and presidents and congresses affect economy and earnings, but it’s the companies’ reported earnings that moves stock prices.
Brian: We’ve just come out of earnings season, just in time for the election. Tony, what about interest rates? We’ve seen a big move just today in interest rates, maybe not in the direction that people would have expected of you had told us 24 hours ago that Donald Trump was going to win. How much do you attribute the election results as your outlook for interest rates, not just what happened today but going forward?
Tony: You’ve got a combination of things. I think going in the assumption was going to be around a Trump victory meant a little bit of a risk-off market, negative equities. That was the initial reaction. That would be one that of course would lead to flight to quality, rally, and treasuries. The minute the equity market turnaround, it certainly pulled away that leg of a possible rally in yields. You had yields backup pretty dramatically as equities turned around. Then I think the market also began to look at “What do I want to price and from an expected policy perspective?” It seems like the initial take here that the market is pricing in is more that Donald Trump presidency of fiscal spending, tax cuts – which all in some ways lead to potentially again higher deficits or better growth are more inflation, and therefore higher rates are merited as a result of that. I think that’s where we are here today in response to the equity market and in interpretation around growth, deficits, and inflation. Whether that holds true going forward, we’ll see. We happen to be in the camp that while we expect rates to certainly push higher over time from where we were 24 hours ago – call it a 185 – we’re now in the camp where we were going to say 100-basis point increase in rates so today’s 20/25 is going to continue to happen on a daily or even weekly basis. There’s a little bit of a lid on rates, given what we see for growth in the US and globally, given where interest rates globally are another large liquid markets – like in Japan, like in Germany. A lot of the effects that I think will help to keep a little bit of a lid on how much higher they can go from here.
Brian: John, I want to connect this rising rate a story to question we got from Kristin. It says “Many of my clients continue to be concerned with rising rates. In some cases, we’ve started shortening duration. What are your thoughts on how municipal, and high-yield municipals in particular, our position to stand up to rate increases – especially if we do get more days like we had today?”
John: First of all, I agree with Tony’s comments and Bob. We did have a Brexit-like a vote in the sense of completely opposite of all predictions and initial flight to quality, but we saw the markets recover from a Brexit vote over the course of several weeks to a month or so. This was compressed in time and immediately went into this theoretical very stimulative policy environment, which of course is a little premature and we don’t know that yet. Ultimately when it comes to munis’ duration, muni high-yield, we’re looking at the fundamentals. We’re looking at the fundamentals of the vault, which are coming down. We’re looking at the tax benefits that are still extremely favorable. The asset class has shown lower correlations or just pure rates, because it is a more credit-sensitive asset class. We’ve seen historically when rates rise, at a certain point the economic data start to slow down. Inflation starts to slow down. We’ve had a possible 1.85 to 2 percent top end of the trading range on the 10 year treasury, so this set of events just in the last 12 hours or so – we went about two percent on the 10 year treasury. Tony makes a great point, which is born rates in pure countries and the sovereign bond market haven’t actually moved very much – a few basis points here there, but no major policy shifts in Europe or Japan. So foreign money will be, I think, coming in to add allocations to US fixed income and treasuries. Probably have priced in a lot of physical stimulus that doesn’t exist yet, and make it a little bit of – the economic growth trajectory and inflation trajectory hasn’t actually changed at all. We focus on the fundamentals and focus on credit spread over and above AAAs, and default are coming down. All of those things, I think, speak positively longer-term.
Brian: The rising rates today was unlike recent weeks, pretty much a US-specific event. You haven’t seen rates go up by nearly as much across the rest of the world. In the past, that’s incentivized foreign investors to come in and take advantage of the high yields when there’s been a selloff. You mentioned fundamentals, and it’s a great segue to the next question I wanted to ask, which is about where we’re economically, especially in the US. The last couple of new presidents we’ve had to have common to office at very challenging times. Obviously Barack Obama in the middle of the financial crisis. George W. Bush took over really just as the tech bubble was bursting, and we were going into recession. Even Bill Clinton came in just at the tail end of an economic downturn. He sort of had the wind at his back when he came in. Donald Trump is arriving sort of in the middle of an economic cycle. We can argue about just where in the middle we are. Do you think this does anything to change the outcome for the US economy in terms of how long it might be before we get a recession? Does this hasten things along, or does this just have no impact? Bob, why don’t you start?
Bob: The status quo, and assuming Hillary Clinton was elected and be the third term of the Obama administration, we were destined probably for 1.5 to 2 percent real GDP as far as the eye can see. The probability now of stronger growth does exist, assuming trumpet moves forward with the pro-growth agenda that he’s talked about – some rationalization of regulatory issues, perhaps some corporate tax reform, maybe some repatriation of the money that’s over seed, and perhaps some individual tax reform – all of which probably mean we can grow little faster. I think that’s part of the reaction we’re seeing in the market today. My colleagues have already said about the move up and interest rates is part of why equities moved up as well. Maybe the E in earnings is going to be a little better than we thought, and these are the things that could get us there. I think the probability of higher growth moves from not very much to “This is possible.”
Brian: Tony, a Trump campaign on a 4 percent growth rate. Do you think we get there, or is it just give it the old college try?
Tony: I think that’s a great campaign line. It’s a great objective.
Brian: Four percent growth seems unachievable.
Tony: I don’t think we can achieve that. I do think though that there’s a possibility certainly for the trajectory. We’re kind of in the camp of this 2 percent plus or minus growth. It’s really what we been stuck in for seven years now. I think that will likely remain the case. There definitely policies around reduced regulatory burden and tax reform on the corporate side and the individual, some spending that could potentially help to raise that modestly or even somewhat significantly. That’s where some of the uncertainty comes in. If the policy focus instead is on more anti-trade protectionist abuse or anti-immigration – all those kinds of things are little bit growth-reducing obviously. It’s a little bit hard to know as to what the priorities will be, even once those are determined to. What can effectively be implemented through the policy process of DC, which clearly …? While it appears that we don’t have gridlock from the standpoint of who controls the three houses, but there is still some gridlock in our minds as we talk about it, because the Republican Party itself isn’t a high solidarity monolithic group that all have the same policy agenda. There are still some Tea Party activists. So the party itself I think leans a little bit toward some gridlock, and therefore moderation – or hopefully moderation in any extreme policy implementation taking place. At the margin, maybe the easier things to get done governance are going to be some of the more growth -positive ones. I think that’s what the market is concluding right now. Those are going to be the first easiest steps – corporate reform, regulatory burden declining, and maybe some other – not just corporate tax, the broader tax return. I think there’s a little bit more of a consensus for getting something like that done.
John: To your point, Paul Ryan probably saves his speakership, because the Republicans didn’t lose that many seats as is expected in the house. He’s been focused for the last couple of years and debt reduction and fiscal discipline. Now you have Trump, and he’s had some bitter fights with Trump. Now you have Trump coming in, saying “We should cut taxes, maybe spend a lot more money on infrastructure.” The analysis will start to show that some of those things would blow up the deficit, and everybody is very concerned about the deficit. Republicans have been more concerned about the deficit. I don’t think you can just say “We’ve elected a new president. We’re going to start blowing up the deficit,” and all the Republicans are going to go along with that – particularly with Paul Ryan as the leader of the Republican Party in the house.
Brian: The other thing – I wanted to ask you about this, given that you focus on municipals. The other thing Paul Ryan is always focused on his tax reform. We’ve spoken mostly about corporate tax reform, but obviously if there’s any kind of reform at the individual level in terms of marginal tax rates, that could affect the relative attractiveness of municipals. If there’s anything sweeping in terms of the legislation, that it affects potentially the taxability of municipal bonds. That’s something we would obviously want to know. You see anything like that happening?
John: I think the risks have gone from near zero. Again, the consensus as of yesterday would’ve been Hillary Clinton in the White House, Republican House, maybe a Democratic Senate. That would’ve had virtually no chance… That combination has virtually no chance of individual tax reform. Even today I would say corporate tax reform is number one on a tax reform agenda, including repatriation of corporate profits overseas, including – can we tie that into paying some infrastructure spending? That all I would say achieves some sort of bipartisan movement, perhaps within the next six months or so. Individual income tax changes – that could be possible, just taking the existing tax code and altering some of these marginal rates in brackets. That’s a possibility. But then when you start to get into deductions, exemptions, something sweeping, something radical – as you mentioned – that is incredibly difficult to achieve. Even in so doing, how would municipals fit into that? Infrastructure is a top goal on everybody’s minds. Recent analysts have said that we’re spending $1.3 trillion less on infrastructure than is necessary to maintain our current level, based on depreciation. That’s a gap that we should be spending more. Both parties and the new president elect to have said “I agree. We should find out ways to spend more.” So curtailing the municipal exemption is the antithesis of how you go about doing that, because that’s over 75 percent of all infrastructure spending that’s financed through municipals today. Anything additive is great, because there are needs for additive spending. But anything that subtracts from the municipal issuance would be a big negative.
Brian: Specifically it’s going to come down to whether it’s harder for these politicians to say no to their friends or to their enemies. Sometimes it’s harder to say no to your friends. Things that were not palpable for the Republicans under President Obama might become suddenly a great idea now that they have a friendlier face in the White House. I’m glad we’ve moved on the policy, because this is really what’s been thrown up in the air by this result, considering what President Trump’s policy agenda is going to look like. Bob, to your question before – what are his priorities? Not just what does he want to do, but what is he willing to sacrifice and what does he really want to get done? I think you’ve seen that reflected a little bit perhaps in the relative winning and losing sectors, just in the S&P 500. You want to talk about what you saw? It’s one day. It’s a snapshot, but it seemed to me to be very intuitive that this is the mix of performance that you would get with a surprise Trump win.
Bob: Yeah. You’re on to the story. While stocks were up, the real story is what happened inside the stock market. It’s rare you have hundreds of basis points of difference in performance on a single day across the sectors, and we saw that. Healthcare obviously doing well. Utilities and other income, safe yield, low-vol sectors doing very poorly.
Brian: Drill into healthcare. When you’re separating out services from pharma, it becomes another…
Bob: Exactly. Even within the sectors… Defense stocks did reasonably well. Infrastructure stocks did well. You’re right. The knee-jerk reaction, if I’m going to make a list of what Trump might do, though sectors behaved exactly as you would expect. But the magnitude of out in underperformance, I want to stress it was gargantuan today.
Brian: Do you expect the sectors to continue to benefit, or do you think this is a one-time, this has been priced out?
Bob: I would step back and say I don’t think we know what his priorities are. Therefore, I think there’s going to be a lot of toing and froing. It’s easy to say “This is what is going to do. Therefore…” and the market reacts, but maybe not. Maybe he’s got a different order of priority. I think there’s going to be moments where what happened today would be reversed in part, and they will come on again. What I’m suggesting is I think there’s going to be a lot of volatility in so we can sort out what he really stands for.
Brian: Do you think we’re going to know exactly what the priorities are? Tony, I will ask you this. Do you think we’re going to know before inauguration this is what Bill H1 and S1 are going to be? This is the flagship legislation? Sort of the way the stimulus package was, and perhaps the Affordable Care Act was for President Obama. Or do you think is going to keep us guessing, which I think he’s used that exact phrasing about other things in the past?
Tony: I would say my ability to judge what he will do is pretty low. I wouldn’t say have a crystal ball on that. However, I would think that we’ll have a very good picture on what his cabinet is going to look like, and I think – if he were rational about it – he would begin to identify a handful of priorities, and they would be relatively easier to accomplish than some of the more difficult items that might be on his agenda. I think you’ll see a little bit of a honeymoon, absent of the cabinet choices are so polarizing. Right now obviously we have a very divided electorate country. Anything that moves in the direction of maybe a little more unifying, a little more conciliatory – which I think you might be able to start to read into that through the selection of the cabinet – I think that would raise your hopes for maybe some policy that is more reasonable and able to be accomplished taking place, to the extent that those appointments may be are more insular to his group and polarizing around individuals and their policies. Then I think you might be a little bit more of a negative market reaction, because of what would then be an inability to pass any legislation or certainly moderate reasonable legislation.
Bob: I think it’s also important to talk about what we’re not going to get that we might have gotten, had Hillary been elected and a let’s say a Democratic Senate. I put on the list that we’re not going to have a surtax. That was widely talked about. Raising capital gains. Maybe the House Republicans never would have allowed that to happen, but nobody knew for sure the house was going to stay Republican. No drug price controls, no public option for healthcare…
Brian: That reflected in what pharma did today.
Bob: Absolutely right. No financial transaction tax. There was a lot of talk about that. Breakup of the banks, reduction in fracking – Hillary was all over that sort of thing. I think part of the market reaction is “Whew! Breathe a sigh of relief this is not going to be done to me, and therefore…”
Brian: John, we’ve got a question about some specific municipal-related issues, specifically around California. This is a question coming from Matthew. What are the prospects for California muni bonds under the new administration? I think you can maybe widen that out. Are there other state-level things that happen with ballot referenda or changes in leadership at the state level that you think would impact the market?
John: A couple things were California is somewhat of a precursor to what’s going on in other states as well – three key things in California that were passed, some of which have relevance across the country. First of all, they passed an extension of the 13.3 percent income tax for high earners. That’s the top tax in the country for high earners. That’s going to last until the year 2030 at least, if it’s not extended again. That creates a permanent underpinning of demand the specialness of California bonds with wealthy people living in California receiving that much of a tax shelter on their California-based income. They also past $9 billion of bond authorization for schools and community college districts. For the country as a whole, $21 billion in new bond authorizations. That’s part of the infrastructure spending authorization that kind of goes on behind the scenes anyway, regardless of what’s happening in Washington DC. Those are relatively high numbers of new authorizations for new projects – $21 billion for the country, $9 billion of that for California schools. They also legalized marijuana, along with several other states. That can create a tax boost and an additive to their sales taxes. I would say outlook as far as just those micro issues are concerned, that’s more supply, higher state-level taxes or continuation of tax benefits at the state level, and potential income boost.
Brian: I’ve got a lightning round question now on the Fed. I think this is going to concern everybody. Tony, I will start with you. I’ve been asked already just since the election – what do you think is going to happen with Janet Yellen? Do you think she’s going to tender her resignation, or do you think she’s going to finish out her term? Again, it’s hard to know what’s going on in her head. How important do you think the selection for the Fed chairs going to be? What might be the impact on just what the Fed does over the next year, if there is indeed an outgoing chairperson?
Tony: I think more important of who the chairman is, is there still a view that there is Fed independence. Fed independence is going to be important, and then clearly you have somebody as Fed chair who has high capability – which Janet Yellen did and her predecessors had. In that selection, as long as it’s one that’s not believed is a political operative or a low capability, I think you maintain some of the integrity of the institution. Now what will happen between now and then, I would think she would not resign and would kind of play out her term. Then I think the Fed – they have their playbook I think pretty well set, but they would like to tighten in December. They would like to continue to raise rates next year, but not quickly and not aggressively. I think that will still be their playbook, absent some very significant rational not to, which would be – as of 1 a.m. last night – would have been a massive equity market crash in the Titan financial conditions. Or if we were to get fundamental data – whether it’s around employment or inflation or around the global growth elsewhere, that would significantly the negative or positive – that would certainly again make them more aggressive or less aggressive. I think for now that playbook I expect to remain in place. I happen to think the fundamentals are going to still be consistent with that playbook generally playing out over the next 12 to 18 months.
Brian: John, the markets didn’t really give the Fed an excuse to pause. It looked for a moment there like they might have to derail their plans, but we’re kind of back to where we were.
John: Seeing the futures market on the Fed fund’s rate for December dropped from 75 percent chance to a 50/50 chance and then shot back up to an 82 percent chance as of now. I completely agree with Tony. Fed independence is critical. All the more reason for Janet Yellen actually to stand on and to maintain laser focus on the economic data, inflation rate. Have we hit certain benchmarks? If we have hit certain benchmarks, do we feel that it’s necessary to hit the brakes on monetary policy to some extent? A preemptive strike against future inflation – that’s going to be there areas of focus and trying to avoid any kind of election or politics-oriented focus, not be politicized.
Bob: Put the Fed in a context to what my colleagues have said. Donald Trump engaged in a lot of Fed-bashing during the campaign. Part of his challenge is to unify. I think his short speech last night, where he spent half his time praising Hillary Clinton, was a step in the right direction. During those few minutes, the future is improved by about 300 Dow points. The Fed is yet another area. He may want to make a change with the Fed, but he’s got to put it in a context and say “Look, there is someone capable at the Fed. They’ve got a plan in place.” I would hope you would see it through until next January, recognizing he’s not going to reappoint Janet Yellen and find somebody else.
Brian: I actually think that there’s a reasonable chance he may change his mind on this. If things are kind of humming along in the Fed is raising rates, which is really all he asked for during the campaign… Originally asked for the Fed not to raise rates, but then he thought…
Bob: Depending on the day.
Brian: Depending on the day. He said he likes higher interest rates, so I think that was a call back to his business. I also thought that the Fed was being too political and keeping rates low. But if the Fed is raising rates in the economy is coming along, maybe this is not something that he is so passionate about that he wants to poke that bear and find somebody new, if the market is happy there.
Bob: Very possible. I just hope that she sticks around, and he wants her to stick around through the term. That gives plenty of time for everybody to think about it.
Brian: Just over a year away. I think we should turn to… We’ve kind of talked about the political results here. We’ve talked about maybe some of the policy changes that are coming down the pike, the outlook for the economy. What is actually happening in terms of your preference for making changes in your specific areas of expertise in your portfolios? Are you dialing up risk, diving down risk, seeing opportunities that maybe weren’t there? Tony, I will start with you. Anything in the follow-up from the selection that would make your investment strategy change?
Tony: One of the things that we currently think is really an attractive area in the fixed income space given our view of moderate growth, rates that rise quite slowly so we remain in a low-interest world. Some of the best areas are the credit markets, the spread markets. So high-yield bonds in taxable space, investment-great credit [inaudible] like commercial mortgage-backed securities. That extra yield, that carry we think is going to be a pretty big contributor to performance for a fixed income portfolio. The key to that is the fundamentals being supportive of the credit risk you’re taking, for example. There I think that we’re likely to see 2 percent or better over the next 12 or 18 months. We’re going to see a default environment that will peak early this year and the client through the balance of the year. So the worst of the commodity oil bust cycle – I think we’re through that. So earnings will be supportive, liquidity is going to be supportive. Some of the reduced potential regulatory burden on financials in particular with Dodd Frank and what’s happening there – that I think will help a little bit as well in market liquidity. Just a whole and certainty of breaking up banks – those are big pieces of the credit markets. All of that I think works to the benefit of spread assets. I think that will continue to be a really strong performer relative to higher-quality, lower no-yield assets in the taxable fixed income space. Again, the biggest risk being that we go to recession. We have significant reduction in growth – or the opposite, that dramatic tightening from the Fed. Neither of those scenarios are our base case, and I don’t think the probability of those have risen dramatically. If anything, I think some of that probably has actually gone down a little bit. Those are the areas that we still like and are may be feeling better about them with a long-term horizon today then maybe yesterday with some still pretty significant uncertainty of how things are going to play out.
Brian: John, any trends worth highlighting in the muni world either before or after the election?
John: I think we’ve been focusing on cushion and income. By cushion, I mean cushioning volatility of interest rates through higher coupons – 5 percent municipal coupons are higher – tends to moderate that volatility. In addition, more credit in the portfolios with more credit spread. Defaults are down. Ex-Puerto Rico defaults are down this year pretty sharply. That can generate more income with less volatility, and income does tend to be the biggest driver of returns over the long run for municipal bonds. On the credit side as well, essential service revenue bonds, transportation doing well. Healthcare has done well. Education continues to do well. I would add specialty states continue to be in favor – New York, California, being the biggest. The demand for paper in those states does not go away. That can also help cushion the volatility portfolios as well.
Brian: Bob, where should people hang out in the equity markets while they are waiting for the next earnings season and the next presidential administration?
Bob: Let me answer that from a sector standpoint. There are lots of ways to cut it obviously. Favorite cyclical sector is technology. I still think in a slow growth world, free cash flow matters big time. Technology generates better free cash flow than any of the other sectors. Selected consumer discretionary and industrial names – I want that cyclical, but not the cyclical exposure. The least favorite cyclical sectors are the ones that require strong global growth and pricing power, energy, and materials. Favorite defensive sector is healthcare, for some of the reasons we talked about earlier. Those stocks have been horrible performers over the last 12-plus months, for a lot of good reasons. But now they are inexpensive. With the election, at least parts of that are doing very well in the short term here. My least favorite defensive sector are particularly stocks that look like bonds. Utilities would be the prototype. I think the expensive part of the equity market – yield, perceived safety, and low volatility. That’s where the prices have been bid up to in some ways crazy levels compared to other choices you have.
Brian: I will just mention, because we haven’t talked about it, international equity markets as well. This is something I’ve been looking at. You see risk premiums the incentive for taking risk in the equity market over fixed income come in. Today they came in quite a bit in the US, but they are still very wide outside of the US. There’s a lot to like in terms of valuation about the equity markets overseas, but they are more sensitive to global growth. They tend to be more cyclical and perhaps more volatile. You have the currency to deal with as well. But if you’re looking at uncertainty in the US with respect to the politics and you’re looking at what’s happening overseas, maybe a little bit more accommodativeness from the European Central Bank coming in December, some positive things happening with the economy there. That’s another area to look at. I would like to get your opinion on those.
Bob: At the margin, yes. I think Europe, for example, has awesome structural problems that aren’t going to get resolved overnight. As a result, it is a lot cheaper than the US. To play it for a trade is fine. Japan, same thing – even worse structural problems. Then the emerging markets will struggle if the Trump policies lead to a stronger dollar, so we’ll have to watch that carefully.
Brian: The structural problems you alluded to, some of that is demographics related to the banking system. The hope is that the trade work with respect to the banking system improving before you start to hit the demographic break at a lot of these countries.
Bob: Correct, as well as the structural problem of the euro. One monetary policy, one currency, but a different fiscal policy for every country. We’ve seen that collision with Greece one, two, and three.
Brian: As I said, remember when we couldn’t talk about anything other than the euro? I wonder if that’s in store for us in 2017. It’s been a while since it’s been on top of mind.
Bob: It’ll be back.
Brian: Is there anything you think we’ve missed in this discussion, maybe not related to this discussion – maybe related to the election, other things you think are important for investors to be thinking about other than the election? I can’t imagine there are any at this point, but I imagine there are one or two. Tony, you want to start with your final thoughts?
Tony: I would say that probably one of the things I would say is not to allow the election to distract you from the fundamentals. Ultimately I really do think that it’s those fundamental drivers, and there will be changes to those possibly, depending on policy focus and success, etc. But it is ultimately those fundamentals that are going to determine the interest rate environment, the risk premium environment, the liquidity environment. I happen to think that what we’ll see over the next six to 18 months is one that is relatively attractive for spread assets and fixed income. I think credit, you’re being reasonably well compensated for it. The fundamental underpinnings of it – which are earnings, cash flow – are also fairly steady to improving. I think that is to not get distracted from those fundamentals, or conversely laser-focused any policy political opinions and views on how they impact those fundamentals and not beyond that. The markets will ultimately end up in that place. It’s how the fundamentals drive that particular company currency or sovereign investment.
John: I would just add that all politicians say a lot of different things in order to get through a campaign, get votes, get elected. Then things can change a little bit once they’re in office. Focus on actual realistic priorities. I think we’ve highlighted a theme here that the Republican Party isn’t one monolithic block. There will be elements of realistic “We can get this done” components of all the numerous things that Donald Trump has said over the last year. I think some of those more realistic things, maybe some rollback or banking regulation could be a positive for markets in terms of liquidity and risk-taking. I think infrastructure spending is a positive. Tax reform, probably more on the corporate side, perhaps less or little marginal tweaks on the personal income side. When it comes to munis, a couple quick things. First of all, the low end of the 10 year treasury, about 1.53 percent midsummer, back up to 2.10 now approximately. So 75 basis points selloff, that’s pretty meaningful. It creates attractive new entry points. Simultaneously, municipals have had near record new issue supply. The combination of those two things have really cheapened up the market and created greater opportunity set with which to put some money to work, using today selloff as an additional point.
Bob: In equity land I would talk about the end of the earnings recession. I think the preoccupation we’ve all had with the election has obscured the fact that we had an earnings perception caused by lower oil and the rise in the dollar, and that ended in the third quarter with positive earnings compares, the first revenue positive comparisons 2014. I think the earnings news remains respectable from here. It’s not going to be great, but it’s going to be good enough.
Brian: Do you think what the markets priced in consensus earnings for the next 12 months are for 2017 is realistic?
Bob: I think so. I don’t think the market believe some of the big increases people have for next year. Although as we’ve said, if we get a little more growth given the new administration, perhaps those bigger numbers will happen. But if they do, it probably means we suffer on the PE side because rates will have gone up some more.
Brian: We do have time for a few questions. We got a few interesting ones coming in from the webcast. The first one is from Wyatt. It’s about a very specific issue. I’d like to use it to talk about a broader topic. “Trump is made statements about abandoning NATO. Do you think this or other geopolitical risks will rise in his administration?” I think keying in on the second part of that… We’re seeing a lot of geopolitical hotspots around the world, but they haven’t really permeated into financial market consciousness. We had a moment with Turkey with the potential coup. Obviously what’s going on in the Middle East, Syria, Yemen, and elsewhere. But has it really affected things from a broad macro sense? Do you think, Bob, with new administration coming in – admittedly with the new president that has not been tested politically in this way – that there is more potential for that to creep into what’s happening in the markets?
Bob: Certainly, although as you point out, we’ve had lots of tests and nothing seems to rattle the markets – at least over a longer-term timeframe. I think for the first part of the question, the trade issue is a real one. Donald Trump has talked about not liking trade or what he calls unfair trade. Sometimes it’s trade overall. How vitriolic is he going to be on that set of issues? That I think will have a lot to do with our relationship with important trading partners, as well as our economy. An important area to watch, and I put that above some of the geopolitical issues that permeate.
Brian: John, any thoughts on that?
John: Agreed. A president could pull out of NAFTA, could impose tariffs on China unilaterally. These are kind of shocked events that he said he would potentially do. No one knows how serious he might be about those things. I think that would be more impactful potentially on markets. 35 percent tariff on all Chinese imports is one of the things that he said. That’s probably a bigger deal for markets than a skirmish in an isolated hotspot.
Brian: Mexican peso traders seem to think he’s pretty serious.
John: Exactly. That’s a good point.
Tony: I think there are plenty of hotspots. Global financial markets are more interconnected than ever. Don’t expect there to be a low volatility world ahead over the next six to 18 months. We haven’t had one for the last 10 years. I don’t see that really changing. What exactly the driver will be as hard to say today, but there are plenty of possibilities. They will create market upheaval at some point, which gets back to that whole take the medium-term view. Understand the real fundamental drivers and earnings – cash flow, etc. – so you can see your way through those inevitable periods of volatility.
Brian: One more question about the Keystone pipeline from Jeffrey. He wants to know that given the sort of nonstarter under President Obama, could we now see this happen under President Trump? What might it mean for the energy sector overall? Tony, I will let you start with this. This is an area that has affected fixed income quite a bit in the last 24 months.
Tony: We’ve already seen in today’s market reaction some of the sectors specifically. We’ve seen, for example, coal companies have done really well in the debt space as a result in the expectations run policy there. I do think that’s going to be something. It was such a divisive issue that it will be revisited, kind of like [inaudible] Obamacare [inaudible] things like that. Where can go from here, we were in a very different price environment north of $100 on oil, which is today sub $50. That can obviously impact some of people’s views on what should take place with Keystone. I definitely think it’ll come back up in the context of broader energy policy. I’m not sure I know exactly what will really be the push to reverse the decision. A lot will depend on prices and how the broader economy is doing.
Brian: Bob, you mentioned it’s not your favorite sector. Anything policy-wise that could change that?
Bob: No question. Donald Trump wants to drill more holes in the ground, and now he’s going to take some of the regulatory hurdles way to do that – which probably creates the opportunity for some more supply. I’m not sure that helps the sector a whole bunch, because it keeps a lid on prices. I’m kind of cautious here.
Brian: A couple questions coming in about the Affordable Care Act. We touched on healthcare little bit. Again, this is one of those things that sort of binary, and it’s going to depend largely on how it gets repealed and replaced so to speak. Any thoughts on how that might impact the financial markets, certainly within the healthcare sector?
Bob: The healthcare sector already voted today, as we already discussed, Brian. That is to say I think the markets, assuming there is the death now coming to Obamacare – as you see hospitals and some of the other service companies struggle, where the product companies do a whole lot better. It’s not just a matter of canning Obamacare. It’s kind of – what are we going to do to replace it? That dialogue is a lot harder. Only time will tell.
Brian: All right, we’ve come up on the top of the hour. I want to thank everybody for joining us today. I want to thank Tony, John, and Bob for answer questions. Hopefully we’ve given you some context to deal with the aftermath of this election, which is still – obviously as you’ve heard today – continuing to unfold as far as financial markets are concerned. If you didn’t get your question read or if you further questions, you can talk to your relationship manager with either Nuveen or TIAA. A replay of this session will be up on both Nuveen.com and TIAA.org. Thank you so-so much for joining us.
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