Transcript: Recent volatility reveals well-functioning market
Jared Franz of Capital Group says the underlying lesson is to diversify and stay invested
- Featuring: Jared Franz
- August 27, 2024 August 20, 2024
- 13:01
- From: Capital Group
iStockphoto/wildpixel
Jared Franz
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking with Jared Franz, economist with Capital Group, about market volatility. We talked about sector trends he’s seeing, how 2024 could play out, and we started by asking about recession fears.
Jared Franz (JF): Yeah, there have been quite a few weeks here that we’ve gone back to the recessionary question. And this has been a recurring, really, a theme, since 2022 in my view, when the yield curve first inverted. As we know from history, the yield curve has this uncanny ability to predict recessions. So, we’ve been living with this fear for two years now. But despite all these fears, GDP growth in 2023 was 3.1%, which is pretty darn good for the U.S. So, I think you’ve got to go back to why some of this is happening. I think a part of it is just half of the investors that are currently in the market now have lived through the GFC, which was a pretty dramatic recession. And the other half of the market has only seen the Covid recession, which is the shortest recession on record. And so, we’re really not even used to what a normal cycle feels like anymore. And then you add on to this all the impacts that have gone on via Covid, whether it’s through the labour market or it just through working from home. That’s just really changed the dynamic of the U.S. economy. So, when I look at the economic picture — at least in the U.S. — I’m less seeing signs of an imminent contraction or a recession. I’m more seeing signs of slowing economic activity, which, to be honest, would be kind of normal, relative to where we have been historically.
The recent volatility
JF: This question of whether markets have overshot to the upside or to the downside is, again, one of these perennial questions that we get every year, really. Because it’s pretty normal to have 10% corrections. I looked back and, through my career, just tried to take the number of 10% corrections you have in any given five- or 10-year cycle. And it’s almost too many to count. You pretty much get these two or three times a year. They’re perfectly normal. These pullbacks, I see them as a good sign that the market is functioning well. So, I’m less worried these 10% pullbacks, these 5% pullbacks, even smaller. I’m really looking more at the fundamentals. Now, that said, we are in the summer season. A lot of folks are at the beach. That tends to take a lot of liquidity out of the market. And so, we do tend to get this overshooting, if you want to call it that, or kind of more volatility in these time periods. But at the end of the day, the economy is in good shape. We’re not in recession and the economy is just moderating and not contracting, and corporate fundamentals are okay. And earnings can remain healthy and markets can be in good shape this year and next year.
What sectors are poised for growth.
JF: If I’m right about where we are with interest rates, that we’ve reached the peak, and we’re heading lower, then interest rate-sensitive sectors like housing and autos are two areas that could actually do quite well. As interest rates come down, the cost of financing a house, the cost of financing a car go down as well. Those are two sectors that do well instantaneously. Now, other sectors that we’ve been thinking about as well, that will also do well when interest rates come down, are banks. And banks have had a lot of headwinds over the last couple of years. They need to provide the funding to reconfigure this new economy that’s coming out of Covid. I think the banking sector is an area that also could improve in the near term.
And finally, what’s the bottom line for investors?
JF: The way I think about this, from a big picture, is that we are in a fundamentally different economic environment than we have been in the past. And there’s a lot of analysis out there, a lot of commentary out there about, “This is like the 60s because of big government projects.’ Or, “This is like the 70s because of inflation.” Or, “This is like the 90s because of technology.” At the end of the day, it’s such a unique time right now that it’s not like any of these at all. It’s a unique investing environment, unique economic environment, unique geopolitical environment that has no precedent. And so having a diversified all-weather portfolio is very important, and that’s something I think investors should really take to heart. And I think at the end of the day, it’s just important to stay invested and not try to time these markets. From the analysis we’ve done at Capital, when you’re trying to time these markets, you just really lose sight of the long term. Just stay invested. It’s kind of one of the most important things.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Jared Franz of Capital Group. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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