Portfolio Intelligence podcast: will the impressive stocks rally in Q1 continue?

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.

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John Bryson:

Hello and welcome to the Portfolio Intelligence Podcast. I'm your host, John Bryson, Head of Investment Consulting and Education Savings here at John Hancock Investment Management. Today is March 21, 2024. Stocks are off to a good start this year; bonds are a bit more of a mixed bag. Today starts March Madness for basketball and, soon, hockey. So I've invited Michael Scanlon of Manulife Investment Management to the podcast. Michael runs balanced portfolios for Manulife. He went to Boston University and teaches in their MBA program. Michael, welcome to the call.

Michael Scanlon:

Morning, John. Thanks for having me. I'm looking forward to a good chat here.

John Bryson:

You got it. So, a lot of people are talking about their brackets today, their men's basketball brackets. But you're a hockey fan. You went to BU, you teach there. I think you're more focused on hockey. What do you ... what do you think about the hockey tournament this year?

Michael Scanlon:

Well, it's I guess it's pretty predictable where I'm heading with this, but we're coming up on the Frozen Four and I’m feeling pretty good about BU heading into that part of the season.

John Bryson:

Fair enough. As a Boston College grad, I'm going to put my money on them hypothetically anyway. And since this is recorded, one of us will want to hear this podcast in the near future. All right. Perfect. Hey, listen, broadly speaking, 2023 turned out to be a very good year for balanced portfolios. To what extent do you think that's put to bed the narrative that the 60/40 portfolio was dead?

Michael Scanlon:

Yeah. So obviously, you know, a couple of years ago, we were in a lot different interest-rate environment, right. And I can't tell you how many people forwarded me those … those news articles that were writeups in the Wall Street Journal or whatever, talking about how the 60/40 was dead. And, you know, I think that lasted for about six months.

So, you know, I think there was obviously some just recency bias around where we were from an interest-rate perspective and those kind of things. But, you know, the world has changed pretty materially. And, you know, nowadays I think you look at it, I mean, if you look at stocks, right to the economy in the economic data kind of flatlines to improve from here.

You know, that's the kind of environment that you would think stocks would do pretty well in. If things do get worse and the Fed cuts rates, or the market starts to discount future cuts by the Fed, you know, fixed income has the opportunity to do pretty well. And, you know, in this environment, that flexibility to be able to allocate back and forth and actively manage portfolios on either side of it, you know, that's a pretty attractive solution for what we're seeing out there today.

John Bryson:

That's great to hear. And I think that's continued into this year also. So you mentioned opportunities. Let's talk about opportunities. Where are you seeing the best opportunities globally? Let's focus on equities and what gets you excited about those opportunities.

Michael Scanlon:

Sure. So, at a very high level, we've obviously had very dramatic outperformance in the U.S. versus the rest of the world over, really, the last 13 or 14 years. I don't see anything telling me that we're on the cusp of that ending for a number of secular reasons, right? Whether it's the U.S. having very strong demographics relative to the rest of the world being the innovation economy, a number of other factors.

But I think the … the opportunity set out there continues to skew domestically. And I think that despite the dramatic outperformance going forward, I think that it's the best opportunity set continuing. If I take it one step lower, I think the greatest opportunity in the equity markets today is just picking stocks, right? I mean, if you look out there at the universe, I think this idea of just riding the beta wave that worked so effectively after the financial crisis through, say, roughly 2019. I think that's over.

You know, we kind of hit an inflection point around 2019 where stock picking started to matter a lot more. And I think that that's going to be the biggest driver going forward. So I think if, you know, a lot of people like to talk about chasing factors or that kind of stuff, I don't see that as adding any value. I think you just want to have a portfolio of individual stocks rather than chasing factor bets.

John Bryson:

And it's interesting you say that the active over passive, we're seeing that inflow right now. So I wonder if we're at the cusp of more and more people getting on board with that. And that's—

Michael Scanlon:

Interesting. If you look at it. I mean, the last handful of years, which has been, you know, that period after the financial crisis was a pretty challenging environment for active management, right. So what is ... what was the reaction to it? A lot of active managers started to hold a heck of a lot more stocks and dilute down their active share than they had historically. And now we've hit that inflection point where stock picking and actively managing the portfolio matters a lot more. So now you have people—kind of—that need to react to that and chase back to the active management.

John Scanlon:

Yeah, that totally makes sense. All right. So let's dig in a little bit deeper on equities. What themes you focused on and most excited about.

Michael Scanlon:

Yeah, So I think there's great opportunity right now in individual stocks. And then, you know, outside of that, there are some more broad themes that I think are pretty attractive, right? I mean, if you think about the the opportunity for advertising dollars to continue to shift from traditional vehicles such as linear television, print media, those things to online, I think digital advertising is really poised to do well, especially if we do have, you know, at some point, the most anticipated recession in history,  and that, you know, direct response, digital advertising will be the last thing cut.

Right? Because if you're an advertiser and you buy, say, an ad in a big game for a sporting event or something like that, you don't really have the ability to measure the return. So that's the kind of stuff that gets cut quickly. Whereas if you have, you know, click here on this link to buy something, you can measure the return on those advertising dollars very quickly.

So, as you've seen, you know, bigger companies that have been around that weathered a couple of recessions in their lifecycle at this point, that tends to be a pretty good place because those, again, will be the last advertising dollars cut. And then on the commodity side of things, you know, I do think that the energy offer opportunities are pretty robust out there.

And in addition to that, I also think something like copper, as we think about the transition to the electrification of everything, you know, there is no transition to the electrification of everything without copper. And so I think that, you know, some companies that are poised to benefit from stronger price appreciation in the copper market are great investments as well.

John Bryson:

Very good. One more equity theme I want to ask you about. You know, there's a lot of talk on weight-loss drugs there in the news that that's the next big drug and a lot of uptake. What what's your take on it and what else is on your radar, and healthcare?

Michael Scanlon:

Yeah. So on the GLP-1 category of drugs, I think there's obviously ... I don't know if hysteria is the right adjective to put on it, but we're in a pretty unique time with it. And you're certainly ... there's a lot of excitement about the drug class. What I would tell you is I think some of it might be a little bit overdone.

Like you look at companies that are, you know, carbonated-beverage companies are kind of traditional, middle-of-the-grocery-store type companies that have been under a lot of pressure with this thesis that, you know, everybody's going to be on these GLP-1s and never buy, you know, high-sugar food or that kind of stuff. I think some of that … that reaction has been overdone, especially at the company-specific level.

But longer term, it's it's incredibly attractive, right? And you know, we do have ... there's a number of companies that you can get exposure to the group in. But another place that I would also say that's been overdone is there's a lot of negative rhetoric around this idea of, well, people are never going to need hip replacements or knee replacements anymore because all of a sudden everybody's going to be so much lighter and not carrying around weight.

The problem with that thesis is that if you look at the traditional drivers of that, it's more active lifestyles. So if you're somebody that is going to be in better shape because you're not going to be carrying around all that extra weight, you're going to probably have a more active lifestyle, which means, you know, unfortunately, at some point you're probably going to need a new hip, knee, shoulder, whatever it might be.

So it's opened up a bunch of different opportunities as we're kind of in the stage of hysteria today. And keep in mind that there is another leg to this, right, that you know, right now, these are drugs that have to be cold, chain delivered, right? It has to be maintained in a low temperature and delivered to the ultimate customer.

But there are a number of drugs in development on that side which are in pill form. And that makes it much easier in terms of a deliverable. So there's still a lot of opportunity there going forward.

John Bryson:

That’s a really interesting take on ... on that asset class and that's awesome. We mentioned earlier you run a balanced fund. You talked about liking the flexibility to move assets back and forth between equities and fixed income. What's your take on the Fed right now and how is that shaping your current approach?

Michael Scanlon:

Yeah. So on the fixed-income side, I mean, I think it's … you're in this part of the cycle right now where you've got diverging global central bank policies, right? And my opinion would be that I don't foresee the Fed doing anything this year. I think they're just going to sit on their hands and ride it out. I think everyday that ticks by makes it more and more difficult for them to actually make a move just because people get more and more concerned that the Fed, which is supposed to be an apolitical body, is now influencing the election in one direction or the other.

So I think as we get closer to that election date, it's less and less likely that they actually do anything. And right now, the data is telling you that they're not going to do anything. And it's remarkable, right? You think back to November of last year, I think there were eight cuts priced into the market, 100% chance of a cut in the March meeting.

And now we're down to a little over two cuts priced into the market. And obviously, we just passed the March meeting where they did not do anything. So, you know, I think my former partner on the strategy used to have a saying that if you get consensus numbers and a consensus thesis, that's a recipe for a short career.

I think anybody that's been following the Fed and just kind of saying, you know, the Fed's going to do what's priced into the market, there's been a pretty painful wakeup call. And, you know, if I flip things around and ... apologies for a long answer here, I think a lot of people are saying that, you know, when the Fed cuts, that's just automatically going to be great for equities.

I would be really, really, really cautious with that view. right? You've got to be careful what you wish for, because I would say right now, when you look at earnings, or when I talk to company management teams, I'm not seeing or hearing anything that's telling me that the Fed needs to be cutting rates, right? I mean, we've got 3.5% unemployment, just under 4% inflation, and the equity markets at roughly an all-time high.

That's, you know, the exact inverse of when the Fed typically cuts rates. So if the Fed did cut rates, somebody like me is going to take a step back and say, you know, my God, what is the Fed seeing that's about to steamroll me that I'm not seeing or hearing? And my only reaction should be, well, maybe I should start to de-risk things to get in front of whatever the Fed is seeing.

John Bryson:

But it's not a long answer. A great answer. Thank you, Mike. One last thing I want to dig in on. You mentioned it's an election year and that would probably put the Fed on pause as we get closer and closer. As an investor, how do you think about politics in an election year?

Michael Scanlon:

I have never heard anyone in my career or lifetime, actually, of being able to describe how you accurately position a portfolio for the outcome of some sort of election cycle. I don't know how you do it. Obviously, when you think about the companies that you own and the trends that they're ... they have tailwinds from, you know, there are certainly political influences there.

But, I mean, if you think about it, the U.S. has never been more divided politically than we have been for, say, you know, the last 10 years or so. The roots of that run pretty deep. And yet, you know, with both parties having been in power in the last 10 years and, you know, this divisive rhetoric, you know, the equity markets and has still done pretty well.

So I don't know how you position a portfolio for the outcome of an election cycle, certainly we're politically aware, but I would not say that that's the overwhelming driver in terms of how you manage a strategy, because it's really, really difficult to predict that outcome. And as we all know, the polling data has been horrific the last handful of election cycles.

John Bryson:

Yeah, great, great info on that one, Mike. But we get that question a lot from investors and advisors and we try to tell people, you know, that's more market noise than anything else, so try to not payas  close attention. It sounds like you're taking that same approach. So great insights.

Michael Scalon:

Yeah. Well, Michael Gerson, years ago, that said, you know, the world can only end once and this doesn't feel like that time. I think, you know, a lot of people would tell you, if Biden gets elected, people are telling you the world is going to end. And, you know, on the flip side, some people are telling you if Trump gets elected, the world is going to end.

What I would say is I think the world is going to be okay the next day and we'll figure it out.

John Bryson:

Yeah. Now, fair enough. Fair enough. The world only ends when the be your BU Terriers lose to the Boston College Eagles at some point later this season. Sorry. Quick side note, folks, I want to first thank Michael for being on the podcast. Great discussion today. Thanks, great catching up with you folks. If you want to hear more, please subscribe to the Portfolio Intelligence Podcast on on iTunes or you can find it on our website.

JH Investments dot com. You can also find tons of great viewpoints on all things investing and practice management there, so please check it out. As always. Thanks for listening to the show.

This podcast is being brought to you by John Hancock Investment Management Distributors, LLC, member FINRA, SIPC. The views and opinions expressed in this podcast are those of the speaker, are subject to change as market and other conditions warrant, and do not constitute investment advice or a recommendation regarding any specific product or security. There is no guarantee that any investment strategy discussed will be successful or achieve any particular level of results. Any economic or market performance information is historical and is not indicative of future results, and no forecasts are guaranteed. Investing involves risks, including the potential loss of principal.