Back in February, Erin Riley of Goldman Sachs’ Markets Coverage Group was our first podcast guest to discuss the coronavirus and its implications for markets. In this episode, she’s back on the show to discuss the current state of things and where investors go from here after the equity market’s stunning recovery. Riley says her clients are looking ahead to two key milestones: the U.S. election and the potential for a COVID-19 vaccine, both of which have the potential to kickstart thematic portfolio rotations.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
Welcome to our exchanges: Ginger Goldman Sachs markets of for FRY October. Second, each which had been leader across the firm together, could take on what here is watching and markets objects. You go ahead of corporate communications. The firm and then led to be joined by Aaron really of the market's coverage group in our products. we'll management business. We laugh at around on the show in February in February, which seems like a lifetime. Nobody was a lifetime ago. Errand was actually the first package guest talk about run of ours, and I see that as a different world than the one where zooming from today today will get earns. Take on key issues on my the per clients for market volatility to the upcoming presidential election. In the U S to the post Maxine, economy and much much more welcome beggar thanks for joining us today. Thanks for having me. So One year on February, you talked about how you watching the vexed witches measure volatility
Trojan virus situation around the world started to worsen that in extension of thirty five at the time and proceeded to climb up eighty in March, which is an elevated number, to say the least, the highest since the financial crisis what's happening, that makes sense. And what can we read into that? it was certainly a very different world. When we last spoke, New York was several weeks away from the lock down and terms like we'll distancing itself, isolating and and ninety five were barely in our vocabulary. The market just starting to sound some alarm bells, but the world was still operating in a relatively normal fashion. So when meat tapes was in the MID thirties and the Essen P was around twenty nine fifty, despite all that happen sense today, the vexes actually lower in the mid twenties and the Essen P is higher in the high thirty three hundreds of weeds
and the last seven months on a desert island, not looking at the news which might have been preferable at first glance, and we might look at the stock market today and assume that not much has happened. As we all know, this has been a year of x, the ordinary economic and social disruption and the stock markets, ability to weather and recover from that has been truly remarkable. Terms of what we can read into this. I keep thinking about that Donald Rumsfeld quote about no knowns known unknowns and unknown unknowns, loathing twenty two he has taught, or at least reminded all of us something about the unknown unknowns and the inherent unpredictability that can sometimes come in to markets and life and as investors braced themselves for the rest of twenty twenty. I think we are now in an environment characterized much more by known unknowns, and what I mean by that is. We ve
and the last seven months, obsessively processing risks around corona virus, the upcoming. U S election and government support and, as a result, the market has just become much more familiar with and prepared for the very unique challenges of this year, which explains in part why the stock, It has experienced such a huge recovery and the banks is move lower, since we last spoke, of course, slow rates, government stimulus and retail buying have been added talons without saying The legs does remains far above levels that we would consider normal in them. the twenties, it's about ten points above its average for the preceding five years, which tells US that uncertainty is still quite high. with markets having recovered, what's on the mind and investors, and what are you thinking about next, as they look at their portfolios, so Esther horizons have changed a lot in the last six months. The question
that we are getting a shifted from. What's going to happen next week to how will the world looks next year? and beyond that, uncertainty is now more centred on longer term, more philosophical questions and I'll walk through some examples. Clients. Today, they too are questioning the consequences of ultra low rates and significant fiscal stimulus b The environment is also calling into question the viability of a traditional sixty forty stocks versus bond portfolio and has clients king about how they should be gains and maintain upside, given very limited return opportunities outside of equities. sleep. There are just a lot of deeply existential questions about what segments the economy will remain permanently changed by the pandemic. We ve observed rents
cleaning and done cities as people move to the suburbs, temporary lay offs becoming permanent and areas like retail that have trouble, navigating an increasing digital world and players, increasing flexibility around work from home, where some surveys tell us that the number of full work days performed at home will gruffly triple in the post, and I make a kind of me to us How these questions are influencing long term market expectations. They are Pew one year straddle, which means the cost of an at the money, put and call currently asked about nineteen percent. That means can participants expecting. Nineteen percent higher or lower over the next one year in a normal environment that levels around thirteen percent, so what that means is, while the current level of the equity market paints a picture of a pretty rosy recovery, the derivatives It is reminding us that caution is still above normal levels. It spent,
berry, while dear, to say the least, and it has raised a lot of questions that are still quite unresolved, so unresolved for about a month out from the US election, and we had our first presidential debate this week. If you can call that a debate, I don't know what it was exactly How are you applies position themselves, the election and in the aftermath so before the pandemic, commanded the world's attention, the? U S, election was the main market event. My clients were focused on this year. now I would say it's one of the two remaining milestones: investors are watching for the other, being a potential vaccine announcement and after What was a very chaotic debate, to say the least on Tuesday evening between President Trump and former vice President Joe Biden, these short term market reaction to the debates showed poles in favour of Abiden when, by about seven percentage points In terms of how to stock market could react on election day, options
pricing in volatility going higher roughly a three point: six percent wondering move for the Essen Pew five hundred important The options are also telling us that there could be higher volatility in the weeks following the election. That's because of increased male and ballot use, which could mean it takes longer than normal to determine the election results. Interestingly, the expected use of mail and ballots differs hugely between the right and the left. Some survey suggest eleven percent of trumps of borders plan to vote by male verses. forty, seven percent of Biden, supporters and dick. sure. This extended period of uncertainty, we ve seen a number of clients initiating hedging strategies with tenors beyond the November election day. In addition, while I would say that clients that I speak too are sceptical about the reliability of poles, given these surprising outcome of twenty sixteen, they are
guess, on understanding what a democratic policy agenda could mean for us and pay five hundred earnings and to take a step back on where we are from evaluation standpoint. The sp market, multiple, is expensive by historic we'll standards, it has been he ninety percent of the time. Historically, the bulls contend that this is sustainable because of the current period of low inflation and low rates, but berries argue that a decline in earnings, doo, Doo policy enacted post election could strain a multiple, it's already pretty high one potential policy outcome that could lower earnings as corporate tax reform. The right in his report lifting the domestic corporate statutory tax rate to twenty eight percent from twenty one percent and, Research has estimated that this tax plan could reduce Essen P earnings next year by roughly nine percent, however, offsetting night. One policy item that could increase earnings as fiscal expansion guidance,
land includes seven trillion and expenditure that includes coconut related stimulus, as well as infrastructure spending all of this in mind. Investors are spending a lot of time on themes for the post election world sectors, potentially at risk from a higher tax rates, are communication, services, health care and info tech, whereas sectors that could benefit. Fiscal expansion are areas like infrastructure and clean energy. Now reason, performance of these channels of the market has been somewhat mixed, which tells us the market is still fairly on the fence regarding what it and tissue paper for November Ultimately, we just may not have visibility in early November on the election outcome or the resulting policy. It's likely to take longer
so you mention beyond the election. The other main factor people watching is the vaccine available for vaccine. Our investors focused on the way right now, which were experiencing some at some level in the U S in Europe or are the only looking beyond that to a vaccine in the aftermath of that, so regarding a second wave. Investors are definitely monitoring corona virus data, which has become more worrisome recently. as an example. The daily positive test rate and New York exceeded three percent a couple of days ago for the first time since June. Alongside the absence of certainty on the next leg of the stimulus is very. Concerning, however, question. My clients are most focused on right. Now is how and when to position for a post vaccine world. This is because
Well. The equity market has recovered all of its coded nineteen losses. It remains massively by forget it. Under the surface. On the one side, you ve got a market that has rewarded technology stocks this year in a big way, the five biggest stocks in the Essen P, which our Apple, Microsoft, Amazon, alphabet and Facebook, or a forty percent. Your debate on it rich. The other side has been left in the dust we ve seen significant under performance of cyclical equities, particularly energy and financial, which are down fifty percent and twenty percent respectively. So there, essentially to economies trading, which suggested Market remains very sceptical, of any semblance of a return to normal alot of Instead, I speak to our still constructive on growth technology stocks, which, particularly owing to the low rate environment and the acceleration and trends ignite
advise stayed home orders but low valuation stocks now treated their largest discount to high evaluation since the Tec bubble and tactically many clients think at some point. This gap simply needs to converge so we're seeing guess on the rotation trade that could happen whenever Maxine, as announced that could translate to better economic growth, potentially higher earnings, rising inflation and a and steep reeled curve terms of where we are in the process majority of super forecasters expect there to be enough doses even after approved coping ninety vaccine to inoculate twenty five, in people some time at the beginning of next year. In terms of the trade that what we are seeing is certain values, sectors like food and beverages exists, very high, positive correlation with rising vaccine probabilities. There also other areas of the economy that are still deeply depressed. Verses prepared,
at levels that could be well position: for a catch up. Those are men, like transportation, sports, hotels, restaurants, hospitals, we're having a lie. Fascinating conversations on the desk right now about what returned to normal will look like in a post vaccine world mobiles. back to normal and what may simply never be the same. so lesson. You're only talk a little bit about gold and gold uncertainty as uncertainty crept in the market. What do? Go now what other hedges, our investors, using with interest rates really at rock bottom gold apps But we continue to get a lot of attention, around sixteen hundred announce when we last spoke, and it then went on to hit an all time high in August and well, it's back off those levels in part, due to the lack of progress on governments, stimulus still up over
twenty per cent near to date and the high eighteen hundred context. The reason clients are focused here is because gold can perform well in feared, driven environments and many see it as a potential beneficiary in the event of increased stimulus, double policy and you dollar weakness, whilst some would consider it as the market starts to price inflation raised. Our investment strategy group has found that gold actually has quite an unstable correlation with core inflation and equities had more consistently outperformed for investors, who are focused on long term protection, should we experienced a late cycle, inflation overshoot, we ve seen focused shift towards hard assets, especially those that are income, producing financial assets and operating assets. With regard to Hedges one theme that has been resonating for cautious investors,
collars on single stocks, which means selling a call to buy it through the summer. What we saw was a huge uptake and buying volume of short dated call options, particularly in popular retail, analogy stocks, which me, in colouring relatively attractive for investors, who are looking to lock in gains and those names, picking a bigger step back. Protecting port LEO's against drawdowns is a real struggle for investors right now in the first quarter, a sixty. Forty stop bond portfolio experienced one of its laws. this drawdown since the nineteen sixteen, so we have very recent scarring evidence that traditional, fixed income is not always functional as a hedge, and this is especially a challenge in the current low rate environment and probably partial explains why we have observed money, market outflows of clothes, Two two hundred billion in the last seven weeks alone through
what is. The training does feel like our interactions with your colleagues how they changed during the pandemic and having found some creative ways to connect. Probably bend the most interesting you're my career on the trading dusk training, thus thrive on information flow, their fast paste, they're allowed their very team oriented and clients rely on us being and that environment so that we can be their eyes and ears in the market, and it was frankly Shocking in a good way to learn that it was possible for this to function remotely, let alone in one of the most volatile markets in history. The decision connected. My team has been using zoom a little bit like a walkie talkie. We leave an audio line on all day, so we can talk to one another and share information, real time and with clients, dusk has done a lot of zooming for virtual round tables conferences, investment discussions, that sort of thing and more certainly some distance socializing, such as outdoor dining by creating money,
was actually my first day back physically and the office in New York, and it was really great to see my colleagues who is going to become my work, family over the years about things have changed, were sitting every other desk now distances in place when reflecting on them six months and also very grateful for some of the silver linings of working remotely. I spend part of June in Zaire and with my sister hiking in the evenings Afterwork, it's really. Beautiful areas of the country that I wouldn't otherwise have gotten to visit this year I love that part of the world outside your day. Job aside from hiking you're, a certified yeoman structure and you ve been working with our wellness team here on meditations for the women's network. Talk a about how that came about. What's your vision for how meditation and mindfulness can help and stay healthy and productive, not just during the pandemic, but hopefully brighter days that thank you so much for asking so I became a yoga instructor
four years ago, through a two hundred, our teacher training at a studio on and as part. That training- I somewhat unintentionally became a practitioner of yoga philosophy which put into writing over two thousand years ago and is really rooted in meditation and mindfulness for me practicing. mindfulness has been truly transformative, bows person. We and professionally on a more concrete, side of things, I've discovered it's a tool to habituate the brain for joy being present and working more effectively and animal spiritual level, it's a path which is not always an easy one of knowing oneself better. My next here is to learn a type of meditation called the Pastrana unattended silent retreat at the end of the month. Here it Goldman I've, been truly amazed by how mindfulness is opened doors to connect with a lot of people in all regions of the world.
were also exploring this interest in finding it very helpful to them in environment such as the one we are currently during the down. I was very grateful to work with golden imbalance to arrange couple of virtual meditations for the firm wide women's network on a scale that probably wouldn't have been possible in an in person environment. My hope an vision which I think many at the firm share is to continue building. unity and contributing to open dialogue around mindfulness and its role in the workplace, I think we are real they just getting to the inflection point there. He also addressing a lotta see, as we have recently have talked about this topic and in very open about their conversion, as it were so Aaron thanks for joining us again. Thanks for having that For this week's markets update on exchanges, Goldman Sachs in case you missed it check out or other podcast this week with Map Mc Clure, co head of our global industrial group in investment, banking division,
on how that sector has been innovating dropped, the pandemic and what kind of deal activity he seemed in airlines, crews, arose and more spoiler alert. We did not talk about meditation with map thanks for listening and hope everyone has a great weekend. This podcast was recorded on Thursday October first, two thousand and twenty. Thank you very much for the all price references and market forecasts correspond to the date of this recording. This podcast should not be copied distributed, published or reproduced in whole or in part the information contained in this pot. Does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed
this podcast or not. Necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too that listener, nor to constitute such person a client of any Goldman Sachs Entity
Transcript generated on 2021-07-01.