What Goes Up

Exchange-traded fund managers have seen massive inflows into fixed-income ETFs in recent months. As the dust settles from the bond market’s worst year on record, ETFs focused on safe and simple Treasuries have attracted the bulk of the money. Stephen Laipply, the US head of fixed income ETFs at BlackRock, explains this state of affairs on the latest episode of the What Goes Up podcast.

Many investors who follow a standard strategy of investing 60% of their portfolio in stocks and 40% in bonds have found it to be the right time to “fix” that 40% segment, Laipply says. “Investors are looking at this market, the public fixed-income markets, and realizing that they can ‘fix’ their 40 by de-risking it to varying degrees,” he says. “You don’t have to have the majority in high yield to get a certain yield target. You can allocate to the front end of the Treasury curve and get yields that you were seeing at some point in the high-yield market. So it really is an opportunity to get back to what that 40 was supposed to do, which is diversify your risk assets.”

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The stock market may be off to a great start in 2023, but investors should be “mindful about not being bullied” by the rally, says Wealth Enhancement Group’s Nicole Webb.

She warns that it won’t last.

The S&P 500 is up 7% so far this year, while the tech-heavy Nasdaq 100 has surged roughly 15%. Webb, a senior vice president and financial adviser at the firm, joined the What Goes Up podcast to discuss her views on the market and the speediness of the recovery.

“To us fundamentally, does technology make sense from a valuation standpoint?” she said. “Much of this rally in mega-technology—or if you even want to just call it a Nasdaq rally year to date—it’s a little bit of an unwinding of the selloff of last year, probably closely followed by a bit of a FOMO rally.”

“We’re not bullish on the stickiness of this as we don’t see any type of Fed pivot” from rate hikes in the near term.

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ChatGPT has taken the internet by storm, spurring all manner of experiments and examination as to what extent the artificial-intelligence model can supplant humans and daily tasks. But it’s also being used on Wall Street, where a number of exchange-traded fund issuers, including State Street, have grasped onto the concept to help put together innovative products. 

Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, joined the What Goes Up podcast to talk about using AI in portfolio construction. His firm’s SPDR S&P Kensho New Economies Composite ETF is up roughly 20% this year. 

“The reason why we went down this path of using AI is that we wanted something forward looking—something dynamic—because back in 2018, we understood that, in the ETF world, there weren’t a lot of strategies that were this forward-looking, innovative-type paradigm,” Bartolini said. “The AI process was able to deliver that for us.” 

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Morgan Stanley’s Jim Caron joined the What Goes Up podcast to dissect this week’s US Federal Reserve meeting and analyze how markets may have misinterpreted the message being sent by Chair Jerome Powell.

“This is a guy who’s worried about inflation; this is somebody who’s not done tightening by any stretch of the imagination,” said Caron, the co-chief investment officer of Global Balanced Funds at Morgan Stanley Investment Management. But Powell’s comments triggered rallies in stocks and bonds amid speculation that the central bank was getting more dovish. “This is one of the risks that I think that we have coming up over the next few weeks,” Caron said. “That if the intended market reaction doesn’t match what the intended statement was supposed to convey, then, as is typical, there’s going to be some walking back of this.”

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The rare bright spots for investing last year were those strategies that follow trends in markets rather than fundamentals. This successful approach included the AlphaSimplex Managed Futures Strategy Fund, which returned more than 32% for the year. Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group, joined the What Goes Up podcast to discuss her firm’s strategies, and what she’s expecting in 2023. 

“We do really well when there’s massive trends, when there’s dislocation, when things are uncomfortable,” she says. “And last year was definitely uncomfortable, particularly fixed income.”

One development she expects may make investors uncomfortable this year is the likelihood that inflation bottoms out at around 4%, rather than the Federal Reserve’s target of 2%. At that point, Kaminski says, “the Fed either has to say, ‘well, we’re no longer going to try’ or ‘we’re going to have to keep trying.’ And people are not going to like that either. So I think that that’s the challenge.”

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The stock market got off to a roaring start this year with the S&P 500 at one point clocking a year-to-date gain of more than 4%. Truist Wealth Co-Chief Investment Officer Keith Lerner, however, is skeptical of the New Year bounce. He says the possibility of a recession and dwindling liquidity make the rally unsustainable. 

Lerner joined the What Goes Up podcast to explain why he’s advising clients to take a defensive posture with investments, and what he believes is the best way to execute that strategy. “Being defensive from a stock, bonds and cash perspective is being overweight fixed income relative to equities. And then—in the fixed-income component—keeping it simple: keeping it with high-quality fixed income and not really taking a lot of credit risk at this point.”

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Get ready for some bad earnings-season news. That’s the call from Savita Subramanian, the head of equity and quantitative strategy at Bank of America, who is expecting a 10% drop in earnings that will likely keep a lid on the S&P 500 in 2023.

She joined the What Goes Up podcast to give her outlook for the market and explain why she thinks analysts’ earnings estimates are too high: “We are going to see those estimates come down, and it's likely to happen after companies guide more aggressively lower around 2023 earnings. I think where we're going to see pressures are in companies with more labor intensity, like services companies, companies where you're really seeing cost pressure remain high. Those are the areas where we think that we're going to see some downward guidance on margins.” 

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The US Federal Reserve’s commitment to higher interest rates and the potential for a recession in 2023 will combine to damage corporate earnings—damage that likely will cause the stock market to revisit its bear-market lows, warns Jurrien Timmer, director of global macro at Fidelity Investments.  

Timmer joined the What Goes Up podcast to discuss his outlook for the year, and explain why he thinks bonds will resume their role as a source of protection for investors in balanced portfolios. His take on stocks? This year “is going be kind of a choppy, sideways market where we’re going to revisit the lows maybe once or twice as the fear grows that there’s an earnings wave coming.”

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Before his FTX cryptocurrency empire collapsed, many of Sam Bankman-Fried’s public statements indicated that he made decisions “as though he had no risk aversion,” according to Victor Haghani, the founder and chief investment officer of Elm Partners Management and a co-founder of the Long-Term Capital Management hedge fund. 

Haghani joined the What Goes Up podcast to discuss how Bankman-Fried’s tolerance for risk made him highly unusual under the “theory of choice under uncertainty,” and how the causes of FTX’s implosion differ from what triggered the failure of LTCM. Haghani also discusses his own approach to assessing risk when investing client assets at Elm Partners. (Note: This episode was recorded in early December, before Bankman-Fried was indicted for his alleged role in FTX’s failure.)

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The decades-long trend of globalization has come to an end and the fracturing of geopolitics will have huge implications for capital markets and investing in 2023, according to strategists at JPMorgan Chase & Co. Jared Gross, head of institutional portfolio strategy at JPMorgan Asset Management, joined the What Goes Up podcast to discuss how everything from supply chains to industrial policy, energy and defense will feel the impact.

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