John Manley: Taking Stock of the Equity Markets (Podcast)

by John Manley, CFA, Wells Fargo Asset Management

John Manley, Chief Equity Strategist with Wells Fargo Asset Management, joins us to take stock of the equity markets.

Brian Jacobsen: I’m Brian Jacobsen, and you are listening to On the Trading Desk®. John Manley, Chief Equity Strategist with Wells Fargo Asset Management, joins us to take stock of the equity markets.  John, great to hear from you again.

John Manley: Great to be back. Thanks, Brian.

Brian: Well, John, it’s that time of the year, and it’s that time of a presidential cycle in which people are looking at the first 100 days and looking forward towards what’s in store for us until we get to the next midterm election. But I wanted to talk a little bit about some political risks, and there have been a lot of them on the calendar. What’s your assessment of how the equity markets have reacted to these events and anticipated these events?

John: Well, I think they anticipate them very keenly. I think we’ve become a little bit inured to them because they haven’t had lasting impact. Brexit, Donald Trump’s election, all these things seem to be shakeups at the time, but they didn’t follow through on the downside. But things seem to hold together, and I think one of the things that are essential for a bull market to have legs is that we see the risk. When we expect the surprise, it’s kind of hard to be truly surprised.

So I wouldn’t say this is true in terms of causation, but I would say the stock market’s been hard to stop. It’s been hard to push down. It’s been hard to keep down, and I don’t see why that doesn’t continue. I think the stock market still has a few good things going for it.

Brian: And can you maybe outline what a few of those good things are that the market has going for it?

John: I think that the earnings seem to be improving. The Fed probably is moving towards a more normal rate structure, but that’s only because it thinks the economy can take it. Valuations are not particularly cheap anymore, but they shouldn’t be cheap. Things are getting better. They’re not outrageously expensive, either. So this seems to me to be a good environment for owning equities here in the U.S. and overseas, as well.

Brian: Can you talk about that overseas picture? Why overseas and why now?

John: Well, there was an old saying that if the U.S. catches cold, the world gets pneumonia.

I think it’s true in reverse that the U.S. economy seems to be getting some legs, for any number of reasons; the biggest beneficiary on the equity side may not be the U.S. market. It may be Europe and emerging markets, as well. Europe’s behind us in terms of what they’re doing, but they’re getting there. Emerging markets are one of the few values still around. I think almost anyone will admit to that. I think that’s a positive sign, so it’s good for the U.S., but it may be better for some of these overseas markets that really haven’t participated as much.

Brian: Now circling this back towards some of the political risks, you’ve lived through a lot of different political environments. From your perspective, what’s one of the better ways to position a portfolio given these risks?

John: Well, I’m tempted to say “ignore”, but that really wouldn’t quite be entirely true.

The U.S. will figure things out very, very quickly, and we’re good at getting other people to figure them out, too. So I’ve always worked on the notion that I’ll try to understand what I can understand. You have to manage through it. Don’t be afraid to react. Don’t be afraid to say, alright, something has changed. But the biggest beneficiary of the bull market is the person who has discovered it’s getting better. I still think it’s pretty good. A lot of concerns out there, but I don’t see them being undeserved. I don’t see them being surprises and I think the effect that it has been probably will continue to be limited on the downside.

Brian: One last question that I have for you is we’re in the early parts of earning season here in the United States, and it looks like earnings per share growth on a year on year basis are going to increase by about 9% or so. But that’s looking backwards, comparing to last year. What about looking forward? What’s your guess as to what things are going to look like on the earnings front a year from now?

John: I think things are getting better. I think U.S. corporations are showing they can become even more profitable than they’ve been. People look at that and say, well, they can’t get any better. We’re at the top of the cycle [in terms of] profitability. Well, that’s not quite true. The cycle hasn’t been that strong. Profitability is fairly high, but it’s because of issues that have nothing to do with the cycle. I think as the economy improves, and I think it will improve. As that happens, that should filter through into earnings. I think what’s going to happen is the biggest surprise of all, which is what normally happens. The economy gets better. Profits get better. Somehow we’ve been so smart; we’ve thought our way around that. I think that’s where the positive surprise is.

Brian: So things being somewhat normal could be somewhat surprising?

John: Heh. Yeah, it wouldn’t be the strangest thing. The old normal may become the new normal. We think we’re different. Every generation thinks they’re special. Everyone thinks things were never like this before. Things do change. There’s no question about it. But sometimes when you think they’ve changed the most, some of the old truisms are true for a reason.

Brian: Well, for our audience, I remind you there’s more from John Manley on our blog AdvantageVoice. But that is all the time that we have this week. John, thank you so much.

John: Thanks, Brian.

Brian: And until next time, I’m Brian Jacobsen; stay informed.