US Bank senior portfolio manager Eric Wiegand sat down with Business Insider’s Sara Silverstein to discuss the recent stock market meltdown which he says does not mean the markets have turned. Following is a transcript of the video.
Sara Silverstein: What is going on in the markets?
Eric Wiegand:It’s – I guess the question is, “what isn’t?” Certainly, we’ve seen a tremendous amount of volatility come back to markets. And importantly, it’s not just the equity market; it’s also the fixed-income markets. We’ve seen rates really move higher on a year-to-date basis and vacillate and that’s had a ripple effect into the equity markets.
Silverstein:So equities and bonds haven’t agreed, necessarily, on the outlook. Are they starting to agree now on what’s going on?
Wiegand:You know, it’s interesting that, you know, a lot of the return has been correlated. It’s, you know, we’ve seen a little bit of friction more recently. Clearly, you know, looking at the 10-year treasury as a benchmark, we’re coming off that 244 level at year-end. You know, last week on the labour figures, the numbers got up to about 285, so that was a little unsettling for investors. The prospect of inflation coming back caused a lot of investor anxiety and consideration to the impact on equity markets, so we saw broad volatility. But, you know, the more interest sensitive and – particularly financials – were adversely impacted with that.
Silverstein:So is this spike in volatility – is this a turning point? Are we going to see more normal markets or was this a blip?
Wiegand:You know, we had gone from a period of much below historical level volatility to finally seeing volatility back. You know, to our way of thinking, you know, the the pendulum doesn’t swing from one extreme to another and then just stop. We’re likely to see it potentially moderate. We wouldn’t be surprised to see volatility, you know, on a comparison to last year remain at elevated levels. But that does help create opportunity as well.
Silverstein:And so you don’t think that the stocks are going to start going down or that this will continue?
Wiegand:We could see it, you know, certainly we’re seven sessions removed from a new high in markets. So, you know, a consolidation of eight per cent, and then it’s recovered some is, you know, certainly wouldn’t be unusual to see us maintain some of this a little bit more time at these or even potentially lower levels. We think what actually serves to keep the markets at current levels or higher is a favourable backdrop. You know, what we had seen driving share prices last year was broad economic growth. While it may not have been robust, it was synchronised and firm and self-sustaining. So we’re encouraged by that. And the follow-through into corporate earnings and, importantly, revenue growth certainly was supportive of share prices.
Silverstein: And we still are seeing earnings growth and we’re expecting to see more earnings growth in 2018.Can valuations stay at the level that they are or is the stock performance going to be capped at how much earnings growth is?
Wiegand:You know, so much, you know, 2016 – it was much more of a story of multiple expansion. The quality of earnings growth really came through in 2017. And we did see revenue growth each of the the quarters. So that allowed for expansion of – inflation of asset prices without necessarily seeing expansion in multiple. This year, you know, the big indicator will be how pronounced will inflation be? Inflation tends to be a great determinant as far as the market multiple is concerned. We’re not calling for an expansion in the market multiple. We do think that share prices will follow earnings growth more, you know, more closely.
Silverstein:So what are you worried about? What could derail the market?
Wiegand:You know, it’s usually the normal list of concerns – is there the potential for a policy error, whether that be fiscal or monetary. And the other more important issue over the, you know, the near to intermediate term will really be inflation and inflation expectations as far as market participants.
Silverstein:And what would a fiscal policy error look like?
Wiegand:Well fiscal policy is, again, looking at, you know, from a tax standpoint, we’ve got a new tax plan legislation in place. We are seeing that feed through into more robust corporate results as a result of the lower tax level. Will we see more aggressive spending whether that be infrastructure spending? And at the same time, we’re financing some of this with deficits. So it could put more pressure on interest rates to rise as we have more supply coming to the market.
Silverstein:And what else do you like? Do you like other stocks outside of the US as well?
Wiegand:We do. You know, our posture has been for over a year that we’ve maintained the mindset that it really is a glass-half-full type environment. We favoured equities over fixed income. We continue to have that bias. Within equities, we do like US and we do like developed international.
Silverstein:So 2018 you expect US Stocks will continue to rise and what range do you think volatility will be in?
Wiegand:You know, we fully anticipate that volatility will move -migrate higher. You know, we’ve gone from one extreme at very low levels to historic levels at the beginning of this week as we saw some of that volatility trade unwind. Importantly, while that was taking place the last time we saw volatility spike like that, you know, we were facing recession – global recession. We don’t see that as a backdrop. So we would expect it to moderate to more historical levels.
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