Please give us a quick review of last year in the market.
Lisa Erickson, U.S. Bancorp: We are on target so far as ending potential level for the S&P at 3,100. I think, though, where we actually got it wrong is the internals underneath. So our original target was based on a multiple of 18 times an earnings target of 175, and while we’re still ending up hopefully at the same absolute place, again, the composition is different. The other thing we thought was that it would be a more volatile year, and I think we certainly saw that happen. The calm, complacent markets that we had through much of the prior several years have likely to come to an end, and that did prove to be the case.
Martha Pomerantz, Evercore Wealth: At Evercore, we said last year that we didn’t think we were in the last innings of the game, and I think that’s proved to be true, that, in fact, we avoided a recession, which was great. Growth turned out to be OK, but not terrific, which we expected. Inflation was low, and the Fed ended up pivoting to begin to get lower interest rates, and it’s all those things that helped the S&P achieve such a high goal this year, and it went a lot further than we thought.
Jim Paulsen, Leuthold Group: Well, I think we got very, very close to ending the bull and the recovery last year in the very traditional way of doing it. That is, you reach full employment; you have a synchronized global boom; you overheat the situation; you face inflation; pressure and cost pressures necessitate tightening; you have too much optimism, which leads to very high valuations, 23 times earnings in January; you radically alter the pressures of rates and inflation over a very short window against that optimism. And we cracked it, and we darn near probably killed it. But what we did was cured all the problems that faced us, basically. We paused the overheat. We revalued the market. We gave a good old gut check to overconfidence. And then we brought the full policy cavalry to the rescue, because all the policy officials were just as scared as everybody else. So when you get that combination, I think we bought ourselves another leg. I think ultimately overheat is going to get us, but it’s probably a little ways off.
Dave Kuplic, Securian Asset Management: But we’ve had a very low inflationary environment. We’ve had very low interest rates, and not only just low interest rates, but credit spreads have tightened a lot through the year, and if you look at your single A, triple B or high yield sectors, any of them, spreads have contracted a lot. What does that do? It provides businesses with very cheap funding. And so from a business standpoint, they’re able to roll off higher expensive debt with less expensive debt, and that’s a catalyst. And so I think that catalyst helped in some way in building the equity market returns, certainly built on the fixed-income returns.
How are investors responding to climate risk and other long-term ESG (environmental, social and governance) risks?
Mansco Perry, CIO State Board of Investment: I do think that something happened that we took a lot of notice of this year. I do believe CEOs are hearing it. Business Roundtable came out with a proclamation [which redefined the purpose of a corporation to benefit a broader group of stakeholders — not just shareholders, but also employees, customers, suppliers and communities], which tells me that they hear what a lot of people are saying. They just haven’t put stakeholders in the caboose at that point, which is causing a lot of problems. And I do think that there’s pretty widespread recognition that these issues are important. The difficulty is that they take time to research, implement and put into practice, and we’re finding out that younger generations, if you don’t do it in a nanosecond, then you need to be [out].
Justin Kelly, Winslow Capital: The big positive here is that there’s been a real shift in leading investors’ mind-sets that good ESG policies actually make better long-term economic outcomes, and that is just a material guidepost for moving things forward. Our message to CEOs when we dialogue with them is: “Get on board with managing your company for all stakeholders, not just for shareholders, because that will actually result in better long-term economic outcomes.”
Todd Hedtke, Allianz: For us, climate risk is going to impact us, obviously, from an insurance business through our entire investment portfolio. And I think, quite frankly, the U.S. has been behind in this space for a number of years, and I think we are finally starting to get it a little bit. The asset-management community is largely driving that, and I have some particular reasons for the economics behind that and why that’s happening, but you really do see a shift. And so, I guess I think it’s going to change all of our models. For those of us who do take that seriously, do build it in, I think it also presents a lot of opportunity as well.
Carol Schleif, Abbot Downing: Historically, there hasn’t been a reliable way to try to get the metrics out of companies so that you could compare them across the board. That’s starting to change. There’s an awful lot out there.
Have trade wars and tariffs altered global trade?
Paulsen: I think this trade war we’re having with China is just the first of what’s going to go on for another generation. We introduced a lot more players [to global trade], but now we’re going back and making sure that that’s fair trade, not just free trade. That’s probably going to take 25, 30 years, and there will be constant political turmoil. But the good news is, I think, that the military Cold War is over, and the reason it is, is because the players have too much skin in the game. China is not going to unleash a military option, but they’re going to fight like hell on economic options. And so we’re going to have massive economic wars, because there’s no other alternative to the Cold War, and that, to me, is a major step forward.
Hedtke: To be honest, I think this is really more about the battle for who controls the technology. So to your point, the military Cold War, that probably is an artifact of the past, but the technology war is very much at play, and to me, that’s actually the underlying piece that hasn’t been talked about a lot. It’s not actually so much about the tariffs — and I tend to agree probably more with Jim’s point, it hasn’t had that big of an impact — but who gains control of the technology in 5G and so forth.
Schleif: The good part about investor memories is they’re pretty short, so they’ll just get used to the fact that trade and tariffs are an issue and we’re going to go on anyway and focus on fundamentals.
What are the implications of persistent low interest rates, and could the U.S. see negative interest rates?
Paulsen: I think the net result of what created this cycle is a colossal, wonderful thing down the road in the out years, and I think we’ve put too much fear into this. So what if rates remain low? I’ll tell you what, one of the greatest periods in recent history was a lot of the ’50s and ‘60s, when we had rates that weren’t too much higher than what we have today. They just sat there for a long time. That was what we called the golden years of post-World War II.
Erickson: The Fed has actually said that they probably wouldn’t go the negative interest route, and I think that’s realistic, because as of today we’re about, what, 1.8% on the 10-year. So there’s still quite a bit of room that they can cut before we even get into negative territory, and they also have quantitative easing. So I think they have other tools before they ever get to that point.
With half as many public companies as there were a decade ago, what effect does that have on institutional and individual investors and new investment products?
Schleif: Regulation Full Disclosure was passed in like ’98 or ’99, and the number of publicly held shares peaked in ’98, and it’s down 48% from there. There’s not even 5,000 companies to make up the Russell 5000, and there’s more indexes than there are publicly held companies now. The private-capital funds, especially the smaller ones, can get very creative and pull in a lot of expertise to really deeply analyze different micro subsegments of business, and that’s interesting for institutional or large portfolios to be able to invest in that. But it is tough for the average individual investor to participate.
Kelly: At Winslow Capital, we have rolled out an institutional product in this new asset class we call growth capital, which is late-stage private growth equity, so thinking of the Airbnbs of the world and so forth, the growth companies that have chosen to stay private longer, which has, again, reduced the number of companies in the public markets. This new asset class has evolved in part because the Jobs Act allowed an expansion of the shareholder base of many of these companies, allowing them to stay private longer before they had to file and go public. And so what’s happening is the wealth creation is increasingly accruing to the private market investors vs. the public market investors. And so we’re going to be rolling out products to the retail market here over the next year or two to participate in this market, and we’re pretty confident it’s going to be a sustainable asset class based on the number of companies that we continue to evaluate, because they’re all kind of using the same theme, which is to use technology and the digital platform to disrupt existing businesses.
Hedtke: I don’t pretend to have all the answers on those different structures, if you will, but I look at the importance of venture investing, and I know we started a venture fund ourselves just to make sure we could keep pace with the expansion of technology in all the different aspects of our business. So I think this is very natural, and, again, I think the outcome is fewer big companies, more focused companies, and I go back to it’s mostly driven by the technology.
Kuplic: I think on the private-equity side, a lot of it is the technology and building of companies doing that. Private debt I think people know has been around for decades, and our company, like a lot of insurance companies, is a big investor in private debt. It’s, in some insurance companies, 40% of their balance sheet. And it provides a better rate of return than public debt. It’s as simple as that. What we’re finding is more and more people are getting more interested in it, maybe a little bit more on the pension side, because it pays 25 to 50 basis points more.
Perry: We’ve been in private equity since 1981, and the primary reason that we stay there, we are building bigger allocations because we think that private companies are better managed. We think they’re better aligned with us than public companies are. And now that we’ve gotten significant premium over public companies and private markets, I’ve gotten to the point where if left to me, we’d probably reverse our ownership in private companies vs. public.
Pomerantz: I think this is not a category for the average investor, and what they really need to take from this conversation is that these are long holding periods. I mean, you could own these things for eight to 10-plus years, and you literally cannot get out. And so things happen that you can’t anticipate. The markets go down 15%, and then they have a capital call. And this is one of the reasons why people got into a big problem the last time we had a big downturn, is people had too many commitments to private equity investments.
How should investors view the 2020 election?
Kelly: One thing we can be sure of is that business leaders are going to wake up the next day, and they’re going to do what they did the day before, which is try to figure out how to grow their business, do it smarter and more profitably, advance their ESG policies. And if the rules change for a year, they’ll adjust. And it may be a negative impact, it may not be, and then we’ll all be growing off the new base. So it’s difficult to predict. It’s really unlikely a wholesale policy shift will actually be implemented, because that would require a level of regime change in Washington that’s very one-sided, and I don’t think most of us see American people as one-sided in their views.
Kuplic: I think if you just sort of tone down your own expectations of what the change will actually be vs. what people talk about what the change could be, you find you don’t need to do as much.
Pomerantz: Lots of things can change between here and there, and the most important thing is just to be a long-term investor and set an asset allocation you think is going to work for your circumstances and your pool of assets and stick with that over a long period of time.
Where do you think the S&P 500 Index will finish in 2020?
Erickson: We’re at 3,325, and the basis for that is continued earnings growth. We’re estimating 175 on the S&P 500 in terms of earnings per share times being able to maintain a decent multiple, so we’re thinking multiples stay around 19 times based on, again, the benign environment we’ve all been talking about. Interest rates will likely continue to stay moderate, inflation will stay moderate, and so there’s that support for the P/E multiples to stay up there.
Hedtke: Not probably too different in the rationale but probably a little lower on the earnings, so 170 on earnings, 18½ on the multiple gets me to about 3,150 or so. So that’s kind of where I’m at.
Pomerantz: I’d say 3,350, and our general thinking is that earnings will be moderate and we’ll get a little bit of expansion in the P/E multiple, because we think inflation is going to stay low. So as long as inflation stays low and interest rates low, and we’re on the side of easing, it should be like a good, long, slow period. It’s almost the perfect recipe for owning equities.
Kuplic: I’ll go with 3,300. I think it is just a reflection of the continuing the environment we have — reasonable growth rate, fairly low inflation leads to a reasonable equity performance. Maybe the main thing is it’s not going to be a straight path, but we’re going to be bouncing around as we get there.
Perry: 3,400, my basic 10%, but an excessive amount of volatility, but seeing the markets after the election kind of calming down and, regardless of who wins, just kind of getting back to — well, there is no normal.
Schleif: I’ll say 3,330. I am more worried about trade than Jim is, because I think if we throw more sand in those gears it causes corporate America to seize up, because the issue that they need — regardless of who wins in November — is some clarity about what the policy is. When they’re going down to the pitch, they need to know if they’re playing soccer or football. So the sooner we get to that, the sooner we can continue this long, slow-growth environment.
Paulsen: 3,500. I think we’re going to have a return to optimism again next year, and I think that carries us pretty high, maybe 3,600 at some point during the year. I don’t know if it will end there. I think that will be driven by earnings that accelerate, because I think the global economy is picking up, and I think it’s going to be the product of how it’s picked up always: You dump a hell of a lot of stimulus on it, you wait a little while and it picks up. I think it will probably work and we’ll kind of edge our way back.
Kelly: 3,330 — if the market holds its multiple and then you get the growth in 2021, so 18 times 2021 earnings. The tech sector likely continues to lead, but the manufacturing sector comes out of the recession, and many of the companies that are levered to that sector actually come back from the dead and produce good returns, so even a stock like 3M could have a double-digit return next year after underperforming for a sustained period of time. So that’s a pretty constructive backdrop. The 20 P/E that I predict in our lifetime probably happens postelection, after some clarity, so that’s why I’m not more bullish yet.