David Rosenberg is a checks-and-balances type of market strategist. He checks Mr. Market’s current mood against the reality of economic data and history, and strives to keep investors balanced as Wall Street’s bulls and bears tug at our emotions and wallets.
Rosenberg is president, chief economist and strategist of Rosenberg Research & Associates, the Toronto-based firm he founded in 2019 after serving in a similar capacity at Gluskin Sheff and Merrill Lynch.
Rosenberg’s respected “Breakfast with Dave” newsletter is a daily must-read for investors who understand that managing portfolio risk smartly can bring the greatest long-term reward. Seasoned pros know that with investing, what you keep ultimately matters more than what you make, so situational awareness is key. As Rosenberg often says: “Forewarned is forearmed.”
Now, with the coronavirus pandemic surging in the U.S. and Europe and a vaccine in sight, Rosenberg is cautiously optimistic about the prospects for the U.S. stock market and the economy in 2021.
In this recent telephone interview, which has been edited for length and clarity, Rosenberg tagged market sectors he likes, explained why he’d be a buyer of U.S. Treasurys and gold, dissected the U.S. election outcome, and cautioned investors not to get too excited about the so-called Great Rotation to value stocks from growth stocks.
MarketWatch: Many market strategists see the promise for a coronavirus vaccine within months as a fast track to the post-pandemic recovery. Do you agree?
Rosenberg: There are all sorts of issues to take into account. We have to assume there won’t be a mutation of the virus. It’s one thing to make 40,000 doses and another to make a billion doses. Then there are constraints around transport and storage. We’ll wait and see as to what’s going to be happening in the next round of tests and what else is going to happen in terms of therapeutics. But the point is this: With a vaccine that’s proven at such a high efficacy rate, people will go to concerts and restaurants; people will fly again for leisure. It’s hard to say as to whether those things will go back 100%, but for a lot of people this will be a game changer. There’s no reason why with a safe vaccine that you wouldn’t go back to the office. What I’m trying to convey here is the economics of fear. The less fearful people are, the more they’re willing to engage in the economy.
‘If inoculations start in the first quarter of 2021, we’re going to get a huge boom in the second quarter.’
I cater to portfolio managers and CIOs (chief investment officers) and people who manage risk for a living. Risk means examining the extent to which probabilities are changing over time. Here’s the situation. I had a forecast where my base case was, at best, a second-half-of-2021 story. If inoculations start in the first quarter of 2021, we’re going to get a huge boom in the second quarter.
Anything that can take COVID away is going to cause a change in behavior. It probably doesn’t take us back to where we were but might go back to a large extent of where we were. A lot of secular changes have taken place during this pandemic. A significant number of people feel comfortable and productive working from home. A growing number of employers are going to let people work from home. People are saying they believe they are more productive. This does suggest to me that the last thing that’s going to come back, even if we return to some semblance of normalcy, is office real estate. There’s going to be less need for office real estate and less inter-city travel.
MarketWatch: How would this affect the work-at-home stocks and an investment theme that has dominated 2020?
Rosenberg: The work-at-home theme is durable but the work-at-home stocks got way overpriced. The embedded growth estimates in these companies was never realistic as far as I was concerned. At some point they’ll get back to some reasonable valuation, and once they do, these will be growth companies with utility-like characteristics that you want to own. One thing to keep in mind about Zoom
is that there are competitors out there. It’s not like Apple or Microsoft. Those mega-cap tech stocks truly trade like they are utility-like with limited competition.
In the market and the economy, you have to examine everything at the margins. In this period of stay-at-home and work-at-home, we all became cooks, for example. What flew off the shelves in the past eight months? Cookbooks, cooking utensils, small appliances. So while you will again go out to eat, you will not go out to eat as much because you learned how to cook.
One of the silver linings of the pandemic is how we became a much more self-reliant economy. We can do things we never thought we could. Take a look at sewing machines, bread makers, everything related to rewiring your home to become your office, remodeling your home, your backyard. A lot more people redid their backyards as a form of vacation property. Why did the homebuilding sector go up so much? People are buying second homes. A lot of people were saying our new vacation property is going to be a second home. It doesn’t mean we’re not going to vacation again, but people bought cars and minivans and trailers because, at the margin, the future will be traveling through the U.S. as opposed to flying somewhere.
People are still going to be flocking to the airports to travel, but at the margin, people have already sunk their money into their house, so they’re not going to go downtown. People bought Peloton bikes; they’re not going to renew their gym memberships. Gardening supplies is a growth industry because people are looking at the future and the security of food supply became very important. Is that going away because of a vaccine? I don’t think so.
‘The future will be “buy what you need, not what you want.” ’
MarketWatch: Do you expect Americans to become more frugal and less inclined to spend or will they simply buy different things?
Rosenberg: The post-pandemic new normal savings rate is not going to be 7%; it’s going to be closer to 10%. We’re going to level off at a much higher savings rate that comes at the expense of consumer spending. When you’re talking about 70% of the economy and the new normal savings rate is three percentage points higher than it was pre-COVID, that’s pretty important. That’s telling you that as you invest in the consumer discretionary part of the stock market, be very selective. I favor the brand names that cater more to consumer staples.
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Going into this crisis, over half of the U.S. household sector did not have enough savings to get through three months of idle economic activity. I don’t think that’s going to happen again. The savings/spending relationship is going through a secular alteration. I expect a multi-year process toward greater frugality and wiser choices. The future will be “buy what you need, not what you want.” I like utility characteristics within the S&P 500
— strong dividend yield, dividend growth, recurring cash flow — in companies that have strong balance sheets and cater to what you need. Big brand names including Big Tech — it’s not just consumer staples.
MarketWatch: The U.S. presidential election will see a change in the White House, but not in the Senate, at least as of now. What does the election outcome mean for the financial markets?
Rosenberg: The election result was really interesting. Everybody was expecting the “blue wave.” The party of the new president didn’t take the Senate and also lost representation in the House. I always look at the House first and thought there was a good chance that Donald Trump would be in trouble based on the election of 2018. That is actually why people are saying this was a message to the left. Losing seats. That’s a big statement especially when your president won the election. That’s a real message that this is still a center-right country; it is not center-left. That was the message coming through from what happened down-ballot.
We know [President-elect] Joe Biden’s record, and we know he’s a centrist. But he got pushed toward the left of center and really out of his comfort zone because of Bernie Sanders mostly. To win over the left wing of the party he had to toe a certain line. In some sense he’s fortunate that he’s dealing with a Republican Senate because it means he can move back to the center.
We had Donald Trump come in and had four years of tremendous unpredictability and a chaotic administration. Now we’re going to have something that is going to be hopefully more stable. Also the one thing we do know is that although they’re political adversaries, Biden and [Senate Majority Leader] Mitch McConnell get along extremely well. That’s good enough news just not to have the high drama 24/7 and reality TV in your face from the White House every single day. A lot of people aren’t going to miss that too much. More from the standpoint of policy, we have two dealmakers. When people talk about gridlock is good, they mean a check-and-balance divided government with two people — in this case Biden and McConnell — who know how to compromise.
For the markets, this election had a good result. The last thing the markets wanted was to have this nagging concern about higher taxes on capital gains and corporate income and dividends. That would have been a constant overhang for the market even if it didn’t come right away. But make no mistake, over time the United States and other countries are going to have to deal with income inequality. You can only kick that can down the road for so long without creating even more social instability.
‘The backup in Treasury yields is going to offer up a very nice buying opportunity because I don’t think inflation is coming back anytime soon.’
MarketWatch: Going into the new year, what areas of the stock and bond markets are most attractive?
Rosenberg: I want to buy either the debt or the equity of companies that I have a strong conviction that they will be around, that they have earnings visibility, a strong balance sheet, reliable and recurring cash flows, and pay a reliable dividend and a decent yield in the context of an ultra-low interest rate environment. You can construct a decent portfolio out of that across different sectors, both value and growth. Just be very selective.
I also think the backup in Treasury yields is going to offer up a very nice buying opportunity because I don’t think inflation is coming back anytime soon. The output gap is just far too large for that to happen. One percent today is what 4% was 10 years ago. You wanted to buy the 10-year note at 4% 10 years ago. We’re getting a nice re-entry point for Treasurys. There is indeed duration risk in long-term Treasurys but you want to own them for their very unique payment-safety characteristics.
The Treasury strip is the benchmark risk-free asset for funding actuarial liabilities. It is the only investment vehicle with no default risk, no call risk, and hence no reinvestment risk. It is the only thing you can buy where you know exactly how much money you will have 30 years from now.
And I still like gold as an insurance policy and compared to the runaway growth in the world money supply, the more stable and predictive production trend in gold gives it an allure as a currency that is not a liability that a central bank can simply have forgiven or a currency that can simply be printed by government fiat.
MarketWatch: Everyone is talking about the resurgence of value stocks and that it’s different this time. Where do you stand on this so-called great rotation to value from growth?
Rosenberg: My recurring theme is we have a trade in value stocks right now that probably has a few more legs. But it’s called a value trade for a reason. It is a trade, not a trend.
Think about what returning to normal will look like. Nothing is going back fully to normal but if you want to think about what normal was before COVID, it was low growth, low inflation, low interest rates. If you ask me what’s going to outperform, once we get these mega-cap growth stocks to valuations at more appropriate levels, I expect that growth once again will dominate value. I like utilities, consumer staples, many parts of health care, and big-cap tech with utility-like characteristics but with more appropriate valuations, and thankfully, that process is already starting.
So we can enjoy the value trade right now and it looks like it has some legs because there are so many sectors that have lagged and are cheap. The banks — do you want to own them for the next five to 10 years? No. But for next six to 12 months they probably have more upside than downside. It’s no different from 2009. The banks are not getting bailed out this time but they are getting the benefit of a steeper yield curve and they’re trading very cheaply. At some point, and probably soon, the undervaluation gap in the banking sector will close.
On top of that if you’re really looking at the new normal it seems to me that China is going to be capturing an increasing share of global GDP, and I’m not really sure there’s anything that anybody can do about it. It’s ironic that the epicenter of the pandemic is the economy that has emerged the strongest, and Beijing did not have to blow its brains out on fiscal and monetary policy to get through it.
So one of my new normal themes is called “Go East, Young Man and Young Woman.” Not only are there superior valuations in that part of the world, as in much of Asia, but that’s where the growth is going to be. Productivity in that part of the world is booming, in contrast to the near-stagnation in the West. If you’re looking for true growth at a reasonable price, you ought to be moving into China and Southeast Asia where you don’t need to make a decision between value and growth — both segments are very well-priced. In other words, you probably have a much wider menu to invest in that part of the world than you do in the West.