Billion-Dollar Fund Managers on What Could Calm Wild Market Ride

(Bloomberg) -- It’s the Fed. It’s the economy. It’s snowballing investor pessimism gone way beyond anything that is warranted by either. So say a quartet of money managers trying to assess how markets got so crazy and what it will take to calm them back down.

No single thing explains the rout that has zapped $4.4 trillion from U.S. equity values, and no magic bullet is likely to stop it, they say. Still, a few things might dial down the overall velocity, among them an end-game for trade negotiations and a general lessening in reflexive panic. Below, they ruminate over what’s driving the moves.

  • Kate Warne, investment strategist at Edward Jones, which has more than $1 trillion in client accounts: investors are too pessimistic; growth won’t slow as much as they think.
  • Phil Camporeale, managing director of multi-asset solutions for JP Morgan Asset Management, whose team manages $260 billion: concerns over one or two issues snowballed into larger worries about the economy and cooling growth.
  • Peter Mallouk, co-chief investment officer of Creative Planning, with more than $35 billion under management: trade talks with China have deteriorated over the last month; the market is worried negotiations could go on for a long time.
  • Richard Saperstein, chief investment officer of HighTower Advisors’ Treasury Partners, with around $8 billion in assets: the tape is ugly but the Fed could moderate its rate hikes.

Investors Have Become “Overly Pessimistic”: Warne

  • “The worries have exceeded or are overwhelming the actual solid news -- which is yes, growth is slowing but it doesn’t look like the U.S. is headed into a recession. It certainly doesn’t look like the rest of the world is headed into a recession. Investors have become overly pessimistic about the outlook even though when things slow, you worry about how much. But we don’t think growth will slow as much as investors are fearing.”
  • “Once investors begin to feel uncomfortable about the outlook, certainly in an environment where the economy and markets have been very good for a while, we’re seeing investors react without assessing the situation and, as a result, this is actually an opportunity for investors who need equities to once again add them at lower prices.”
  • “With emerging markets already in a bear market, we’ve become more favorable on emerging markets. So we continue to recommend investors add international developed market equities but now we’re also suggesting they add emerging markets as well. We continue to like equities, but we also think that investors who hadn’t already re-balanced their portfolio and are feeling nervous need to get back to the right mix of stocks and bonds based on their comfort with risk.”

Concerns Have Snowballed: Camporeale

  • “The world looked a little bit different on September 30, and then what started in the first week or so of October, which is Jerome Powell coming out and saying we’re kind of far away from our neutral rate. What started was that and people feeling nervous about that morphed into tech not being a flight to quality trade. And then that morphed into what everyone knew was going to happen in 2019 which was a combination of slowdown in growth, and the slowdown in earnings.”
  • "The trade stuff has actually gotten a little bit more positive, but it’s been overwhelmed by folks discounting this slowdown of global growth into next year.”
  • “It’s this time of year, nobody really wants to be a hero and catch a falling knife, but at the same time, 100 percent we agree with rightsizing risk. We have less equity in the portfolio than we did coming into the fourth quarter, to the tune of 12 to 15 percent. Markets fluctuating between gains and losses, December liquidity is always a little tight and I just think that folks before Wednesday, if the Fed does this kind of shift in their language, just want to get their risks rightsized.”

China-Trade Issues Deteriorating: Mallouk

  • "The big thing that came into this is the tariffs discussions and the market at first wasn’t concerned about it," said Mallouk. "But China thinks in generations -- not election cycles. And even though China is feeling more pain, it’s willing to take on more pain to send the message that the next person that decides to get into it, there will be economic and political consequences. You take all of that and you add a fresh recollection of what the last recession was like and you add talk of impeachment and how much further the Mueller investigation has gotten. It’s created a lot of uncertainty in the markets."
  • "If you look at the issues with China, it’s deteriorated a great deal in the last 30 days. We’re not seeing a clear path for resolution. The market is saying this could go on for a long time -- most people weren’t expecting that."
  • "Part of what drives markets is what people think will happen in the future. The other part that impacts it is fear. The volatility has gone on long enough because of tensions with China -- you take the average investor who’s looking at that and you can start to build a more pessimistic narrative. It’s easy to see how that’s working its way into how the typical investor might say, ’I am going to sit on the sidelines and wait for it to work out.’"

Fed Becomes Tailwind in 2019: Saperstein

  • "Our view is rather different -- the tape is ugly, rallies are being sold, credit spreads are widening, and Libor is going higher. I get all that. There’s a lot of ugliness out there. However, a $20 trillion economy does not turn from 3 percent GDP growth levels to negative so quickly -- it doesn’t happen so quickly. The benefits of tax reform will unfold over many years. Companies that are going to perform significant capex can’t do it in just one year. It takes time to lay out plans and schedule all that new investment. We think that investment leads to economic benefits over time."
  • "This week we get a Fed that tightens and reinforces the fact that the Fed is data dependent. I think we’ll see two hikes next year. I believe this economy will continue to grow," he said. "The Fed becomes a tailwind in 2019. The pace of tightening slows, we get more dovish language after they tighten. They’ve tightened eight times since 2015 -- in 2019, we believe they’re going to moderate because they’re moving towards a neutral rate."
  • "Global weakness is a concern -- in spite of a lot of forecasts, Europe remains mired in a low economic growth scenario."

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