In this week’s episode we speak with Larry Light, editor for Chief Investment Officer and writer for Forbes.com, to discuss how the current political and economic turbulence influence the markets and what socioeconomic variables create the largest volatility.
Jeffrey Freedman: Hello and welcome to the RP HealthCast by RooneyPartners. I am your host Jeffrey Freedman.
Jeffrey: If you follow the financial markets, it seems that any piece of significant news right now creates a much larger than normal swing in stock and index prices. But this is understandable- I mean people are nervous. Market players are always nervous about not being in the game and missing a big run, and conversely between a pandemic and an ugly political season. Really need nerves of Steel to even be playing at all.
Jeffrey: There is so many huge levers that could be pulled at any moment that could create big change- a big ticket items that affect our economy, such as what could happen in a U.S. presidential change, or if there is also a change in control on the Congress.
Jeffrey: What happens if our employment numbers do not continue to dramatically rise? And what is going to happen to our economy or our entire industry sectors like travel, or to entertainment if there is a delay in creating or distributing a vaccine? Well to answer these questions and to break it all down for us this week, is our guest Larry Light. And Larry is a thirty-year veteran of the financial markets. He has written for institutions such as the Wall Street Journal or Forbes, BusinessWeek and Money Magazine. Larry is currently the markets editor for a chief investment officer and a writer for Forbes.com.
Jeffrey: Larry, thank you so much for joining us today.
Larry Light: Glad to be here.
Jeffrey: Now, you have been a financial writer for over thirty years, right? You have been writing for the likes of BusinessWeek and Forbes and the Wall Street Journal to name a few of the companies.
Larry: That is right.
Jeffrey: Knowing the markets like you do and what readers want to read, how do you find or identify story ideas for your columns week after week? I mean, there is so much going on. What do we look for to make an interesting story week after week?
Larry: Right now I work for chief investment officer magazine, which has high-end clientele. So in other words, they are their financial professional. And although it is available to the public it is a free site.
Larry: What I am always looking for is something that is not what you have read elsewhere. I try to be contrarian. Now, some contrarians just are just, “you say either as I say either” I want to make sure that if I am saying that something is not- there is some aspect of something that has been in the news that you have not really looked at, the way you might, that is farther for me. For instance. I did a story this week on SPACs which are Special Purpose Acquisition Companies, which is the latest alternative to an IPO and they are very popular with companies that want to go public like for instance DraftKings, which is a really hot company because it is online betting sports.
Larry: They went public by aspect but I pointed out that there is some problems with SPACs. It is not as investor-friendly as you think it is great for the issuers but leaves something to be desired for the average or an institutional investor. So that is the way I go at it. I am looking for something that you do not know about or you have not heard about, so that is what I try to do.
Jeffrey: And that is what keeps it interesting. That is great. Now, with the market, you know, SPACs coming to market IPOs are flying off the shelf. Like we saw today. Some have argued that the U.S. stock market right now that it is priced perfection and I guess you can always say that right? Supply always has to equal demand.
Jeffrey: From my point of view, with the continued spread of the coronavirus with about eight and a half percent unemployment, where is the perfection? We are trading at almost to thirty times multiple right now. Can you make some sense of those?
Larry: Sure. Well the stock market anticipates the future or what it thinks that future will be like and it is much rosier than life appears to be in the ground on the economy. It is as you say high unemployment with GDP for the rest of the year projected to be down. But if the stock market does not say, “Yeah, but it is going to get better”, projections are that the GDP will be down on the third quarter and we will be down on the fourth quarter, but not as much. It’s descent is slowing and next year, the projections are that it will be positive GDP. And of course that is what the stock market anticipates. It also looks at the virus vaccine efforts and takes heart in that. There has been a lot of positive noise from the pharmaceutical company about this and so that stock market looks at that.
Larry: Then of course, there is one other thing. The leadership of the stock market, it is dominated by top-tech stocks and that has not represented the entire market but they are the ones that are winning right now because they are, for the most part, immune from the vaccine- people are staying at home. So they want to be on Facebook more. They are ordering more stuff online. So that helps Amazon, etc.
Larry: And if you back that out of the stock market, the stock market is not doing this well. Take the S&P 500, it is up over five percent this year. But if you do equal weight it, it is down four percent. In other words, the outsized asset size of the tech stocks, is distorting what we see. But the S&P 500 is as I weighted. So, Apple which has an asset valuation of much more than many countries, is just pulling the train and it’s brothers are so. Frankly, we saw a hiccup last week for the tech stocks because some thought that they were too good that they were getting ahead of themselves. But that seems to have turned around because you know, they are so popular and momentum is a powerful force right now in the market.
Jeffrey: It really is. Now, I want to talk about this tech stocks and I will a little bit, but I want to talk about what you mentioned earlier about the Pharma companies came out with good news about a vaccine, a positive news and there was a hiccup, AZ’s halted their trial, you know in the market reacted now they restarted the trial and I guess that is the good news, but there is also growing concerns that the election calendar rather than science may be driving the timing of an approved vaccine, right?
Jeffrey: If these fears are born out, people are afraid of the vaccine, they are going to avoid it and possibly not take it, that could prolong the spread of the virus and that would have economic consequences and I understand what you are saying about the tech stocks and they may not be hit, but it is still our economy. People need money to spend and buy the technology. So if there was a second wave of the virus in the fall or if this wave is extended what would such a scenario mean to the market? What are the consequences and what are the expectations now?
Larry: Well if that occurs, then would count as a surprise and Wall Street and investors in general hate surprises and they have one narrative now and it is popular, that everything is going to be fine, that everything will work out well. But as you say there is a big resurgence of the virus and we can not manage it. The way we have been at least in certain parts of the country recently, then I think the stock markets going to take a big hit and it is not going to be pretty.
Jeffrey: I mean that makes sense. Sticking with like AstraZeneca and other Healthcare stocks, this past week, both political parties had very strong voices about pharmaceutical drug pricing. Do you think that is just political rhetoric or do you think either administration will really be able to bring a change or have an impact on drug pricing and I know Trump is now talking about price conformity between countries. Now if that happens, what would that do to healthcare stocks? Is that priced in or not?
Larry: Not yet, no. Because nobody believes it is going to happen. If it does happen, that again will be a big downside for Pharma and Healthcare stocks in general. The thing is that we have been talking about this for a long time. Trump has been saying this for a long time even when his party had both houses of Congress he was saying, but it never seemed to happen. Why? for one thing, the Pharma lobby is very strong. And for another, they make an argument and it is not something that is easily dismissed. And that is, yes, we pay more for for drugs and for health care in general in this country than others do. We do not have as good health as some of the other countries do which had “socialized medicine”, but we in effect are subsidizing the health care of the world and especially the Pharm aside.
Larry: So, the argument that the drug lobby makes is, “Look. Yeah, you want to take that away. We will just, you know, health care will not be as good for all. And besides in most cases, most people do not pay for health care. It is their companies or it is the federal government or somebody else, the third party payers, who cares.” And that combination has worked in the past to stymie control of Pharma prices from prices and probably will again. I am highly skeptical that we will ever see or at least near term see government mandates, their whole down by Fiat, the prices of drugs because what will happen will be. And Pharma people are not wrong that their innovation will not be as robust as it has in the past.
Jeffrey: Okay. So a lot of rhetoric, I guess both parties have to talk about it. But the ability to take action on it is probably pretty limited.
Larry: Yes, it is.
Jeffrey: So staying with government intervention. I heard last weekend, the Attorney General’s office is about to launch or will launch a large antitrust case against Google right before the election. Could this also have rippling effects throughout all large tech companies and the Fang stocks and the Fang indexes?
Larry: A lot of them are under the gun. Facebook in particular, because of politics because it is alleged and for good reason that it is being used used by Russian trolls and whoever else to harm our electoral process, but in terms of Google, it reminds me of the IBM antitrust suit against Microsoft in the 90s and they both emerged but they paid a fine. They said they were not going to do certain things but IBM continued for a long time as a dominant player until history just caught up with a bad. Nothing new with the antitrust. Same thing with Microsoft. Microsoft paid a fine of I do not know, something slightly under a billion dollars which for them is around in there. And so it did not hurt them. It did not hurt them at all. The things that he has said, “Okay fine. So when we sell a suite of our software we will not automatically favor Microsoft apps in there. Okay, we will give you that.”
Larry: But they still win, they still continued to dominate for a long time until they granted some trouble but then they resurrected themselves, by going heavily into the cloud. Point is, I do not think that history shows that attacks against big tech ever really works very well. Yes, there will be some cosmetic changes. But the big boys will still be the big boys.
Jeffrey: So again, probably a little more political posturing and if anything happens, it will not be for years- [cross-talk]
Larry: That is right. Until forever.
Jeffrey: All right, so then let us stay with political questions. Recent observers and political pundits are raising the concerns that if President Trump, would not concede the election in a close race, that would prompt a constitutional crisis. What would happen to the market? So you think if the final results dragged out until December?
Larry: Yes, that is another one that will hurt the markets because right now the market is not looking at that possibility. I mean, there has been a lot in the news about preparations in both parties for litigation, in many states contesting he had come. I would not be too surprised to see that kind of a disaster which would not be good for the markets. But there is one thing the Constitution says that there shall be a new president sworn in on January the 20th. So unless that is somehow changed and I don not see how it can be, there has to be an end point to it. In other words, it can not drag on into the new year and to 2021 forever, month after month. There has to be an endpoint. And I suspect that if November the third comes and goes, where there are lots of recounts and then there is Tolkien tested and then everybody is in court and what not, I can see that being a two and a half months of nightmare. But then it will end somehow.
Jeffrey: Okay. And being the market looks forward, not present, we would probably find a lot of volatility but not necessarily finding a direction swing because of that.
Larry: Yeah. Well, it will be volatile all right.
Jeffrey: So let us talk about direction swing. So another election scenario, suppose there was what they call a blue sweep, if Biden wins and the Democrats reclaim the Senate and retain a house, what would a blue sweep mean for the stock market? I guess there would be great in some places it would not be so great in others. Who do you think would be the winners and who would be some of the losers?
Larry: Well infrastructure would probably be a big one. Biden wants to spend and so do the Democrats in the house and the Senate. We have blown through any restraints that we ever had. The Republicans have been happy to go along with it, at least for the first round. For the second round, because we are getting close to the election, they are being much more conservative. But even so, they still want to spend heavily, just not as heavily as the Democrats. In other words, there is a spending tilt that is now taking effect and it is largely by parts of thought.
Larry: If we get in, Biden will go heavily in infrastructure. He said that will probably trim back some of the the military spending that Trump has fattened up, but not a lot of it, and some of the Weapons Systems might be drawn out in terms of when their delivery dates are so they do not have to pay as much this year this kind of look like you don not play games. But I do not see a massive shrinkage of the military. So you will also see a bid to enhance Obamacare which will be costly, and nobody is talking about single-payer plan other than Bernie Sanders and AOC and those guys. But I suspect the one thing that will come out of it, there will be more Health Care spending which is good for Pharma, it is good for health insurers who will probably be still administering the healthcare system in paying for it. So those would be some of the winners right there.
Jeffrey: So I have been hearing you say a lot about spending. A lot of spending here, a lot of spending there. From a government point of view after the pandemic here, we have laid out a lot of money. The only place this money can come from then is from taxpayers. Right?
Jeffrey: So if we pay more money in taxes, we are spending less money, on Main Street, so would there be a negative effect on those other type of retail establishments and Retail stocks?
Larry: Yeah that could happen. I mean there is no Biden says and I suspect he will stick to this, because he would be suicidal if he does not, that he will not raise taxes on the “average American”. He will raise it on the rich folks and he wants to boost up the corporate income tax. It was thirty five percent for a long time and under the trunk tax cut, it went down to twenty-one, and Biden wants to put it up to twenty-eight notice, not thirty-five. One of the reasons it was reduced was so the U.S. would be more competitive in trade terms against countries that have lower corporate income taxes, which is just about everybody else. So that would still keep us competitive. So I see a move to try to soak the rich, but I think once again it will be less effective than the Biden would have us believe. Now if Trump wins, there will not be any tax increases at all. He wants to give some special tax breaks to specific industries to help them keep jobs in the United States or possibly determine which. It will be a cold day in hell but because it is still cheaper over there than it is here. So I can see that would just be a stasis, whereas Biden will try to increase taxes and may be able to and but it
will be marginal.
Jeffrey: All right, so far all the possibilities we have been discussing suggest a tough stock market outcome for a little while or at least a ton of volatility and swings, right?
Jeffrey: What is your insight on- what will it take for the market to continue this upward trajectory that we are seeing- what is going to happen?
Larry: Well, it will take it in an effective vaccine. It will take an increase in economic activity, people going back to work in offices and factories and so forth. It will take a turn around in the travel industry, although that is going to take a long time if people do not trust it. Well, then a lot of people do not want to get in an airplane, but what it takes is just some notion of an upward trajectory, which we have seen some of but right now it is mostly based on hope but we will have to see some actual increases in GDP as opposed to drops in GDP. And if everything comes true, and indeed it is so important that they get a vaccine that really works, P.S., I do not think that everybody is going to get inoculated at once. I do not want to get inoculated at once. I want to see what happens, and I am sure a lot of people will be like that. But over time, if more people will get inoculated and it is effective, then that will really help.
Jeffrey: I agree. I think that is great. Last question, as markets now are still at all-time highs and if people are now worried about retaining their market gains if they are afraid of this volatility coming up potential short-term dips, what can they do to protect these markets, the gains that they have there? What is your best advice on how to thread that needle?
Larry: A friend of mine said back in April, he said to me, he does not know much about the stock market, but he said, “Look, I am thinking about going all cash” and I said, “Do not do it. Just stick it out. Look, the market goes up, the market goes down, but the trajectory of the United States since after World War II has been generally a better economy and pants a better stock market. The only time that we saw a stock market that just went nowhere, but down was at was during the Great Depression from 1929 to 1952 to get the stock market back in 1929 levels, because of the Great Depression and of course World War II.”
Larry: So those are cataclysmic events. Who knows we might we might have another cataclysmic event that dwarf even covid. Who knows? but if things go down, my advice to anybody, is just to stick with it. And of course be sure you have a well balanced portfolio. The classic one is sixty-forty, you know sixty percent stocks forty percent fixed income or equivalent. And that is your ballast with stocks being the window and the sub-basement. And I happen to have a none other than Warren Buffett himself who agrees with that. So if it is good enough for Buffett, it is good enough for me.
Jeffrey: On that note. Thank you.
Larry: Glad to be here.
Jeffrey: We hope you enjoyed this week’s podcast. If you have any questions, comments, or future story suggestions, please reach out to us on social media. Thank you, and we hope you enjoyed the RP healthcast.