In a seemingly perpetually late economic and market cycle environment, your clients may wonder, “How do I ride this out?” Multi-asset class strategist Dr. Brian Jacobsen provides insight.


 

Jon Lagerstedt: We’re talking about when investment cycles don’t line up with investment emotions to help you navigate a seemingly perpetually late economic and market cycle. I’m Jon Lagerstedt.

Todd Crawley: I’m Todd Crawley.

Jon: And this is The Essential Practice podcast. Dr. Brian Jacobsen joins us. He’s a senior investment strategist with the Wells Fargo Asset Management Multi-Asset Solutions team. Brian, as always, welcome back. Hopefully you’re enjoying the snow!

Brian Jacobsen: Yes. Well. Thanks. Although I don’t know how much I’m enjoying it!

Todd: The last time you joined us was in October of 2018—a lot of water has come under the bridge since then—and we were talking about market volatility. That episode is #417 in case our audience hasn’t downloaded it yet. And a couple gems in that episode included: How an alternative risk premia approach helps act as a diversifier and my personal favorite, “The value of patience goes up when markets go down.” Are both of those still true?

Brian: Oh, yes. It’s a very good reminder. The benefits of thinking outside of the box in terms of how to diversify a portfolio, and then also, remembering that sometimes you have to be patient when you think that the next downturn is around the corner, or you’re in the midst of volatility, patience is still a virtue.

Jon: Let’s get to the topic at hand, and let’s talk about where we are at in the economic and market cycle. You know, on one hand, we’re hearing about how late in the cycle we actually are, and then on the other side, you hear the astute observer say, “Well, we’ve been in the late cycle since 2012.” What are your thoughts?

Brian: Yeah, you know, it’s one of those things where, as an economist, I have to remind myself that I have to be really humble about trying to figure out where the economy is going. Mainly because we don’t really know where the economy is at any given moment. If you look at, say, revisions to a lot of the economic data, these things can be substantially revised from one month to the next. And then even, say, for GDP numbers. Every year they go through a revision process where they revise numbers from the previous five years. And then, periodically, they will even revise the entire series. So, sometimes people who maybe were calling for this being late in the cycle in 2012, we have to remember that if you cry wolf a little bit too long and too loudly, people are going to, I think, get a little deaf to that. And so I am always just a little hesitant to really make any bold call about there we are in this cycle. I’m taking things one day at a time. And I will stick to my knitting of sticking to a strategic plan here.

Todd: Exactly. You know, we talk about cycles, late cycles, early cycles, and extending the cycle—the economic cycle. You know, the rules of the past, are they really applicable, I guess, Brian, in today’s environment?

Brian: Sure. I think we have to critically think about: “What were those rules?” A lot of times people will look at stocks and bonds as an example—say the S&P 500 and the 10-year Treasury. I’ve looked at this going back to 1950. And it seems to me that the conventional wisdom is that in a correction you want to be overweight in bonds, or something like that, because they are going to help diversify risk. Well, if you actually look at the change in the yield in the 10-year Treasury during each one of the corrections or bear markets, it’s kind of a 50/50 split. I think that central banking has gotten more credible as far as hitting inflation targets, reducing some of that uncertainty, and so, on average, we have seen bonds diversify stocks during those corrections, but maybe not to the magnitude that a lot of people would like. And that’s why I like looking at alternative ways, besides stocks versus bonds, for trying to diversify a portfolio to help manage some of the emotions around the possibility of market drawdowns.

Jon: I wonder if we can tackle the headline “When investment cycles don’t line up with investment emotions”. What’s out of alignment here?

Brian: Well I think, if you kind of visualize a timeline, you’ve got the economy trudging along, right? It’s doing its thing—you’ve got this economic cycle that’s hardly predictable. But, the market tries to anticipate movements in the economy. So, the market’s going to likely move well before the economy does. Now, our emotions—maybe we’re a little jaded, maybe a little scared from previous drawdowns in the market—maybe we, kind of, are skeptical as to whether or not a rally in the market is genuine. So I think sometimes our emotions run ahead of the market and try to anticipate what’s going to be anticipated. And we can get a little caught up in that. And financial advisors, I think, almost really need to be life coaches as far as helping people to navigate or to manage those emotions.

Jon: Excellent point.

Todd: Yeah, that’s a good point. Brian, what’s the multi-asset solution view on helping advisors get their clients better aligned in environments like this?

Brian: We’ve been doing quite a bit of research around how to position portfolios when we don’t know, exactly, what’s going to happen next. For us, that means trying to say what are the underlying economic exposures. What happens if we see an increase in interest rates, or a decrease in interest rates? Then stress-testing it against an increase or decrease in inflation. Similarly, with growth. So, kind of, for those three main macro drivers—growth, rates, and inflation—stress-testing the portfolios against it to, hopefully, provide a little bit more balance going forward. Just like a balanced diet, right? It’s not just going to be equal amounts of calories, it’s going to be balanced as it relates to the goal that you’re trying to achieve.

Jon: That’s a great way to look at it. You know, Brian, that’s all the time we’ll have today, but as always, we want to thank you for appearing on our podcast.

Brian: Oh, it’s always my pleasure, thanks so much for having me.

Todd: Get more from Brian on our companion podcast On the Trading Desk®, or on our blog AdvantageVoice®, and at wellsfargoassetmanagement.com. So, a variety of ways to get Brian’s commentary. So, until next time, I’m Todd Crawley.

Jon: I’m Jon Lagerstedt.

Todd: And this is The Essential Practice podcast.

 

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