Thu, 18 Jul 2013
Morningstar markets editor Jeremy Glaser's five biggest takeaways since The Friday Five's first episode almost four years ago.
Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the 200th episode of The Friday Five: five big takeaways from the last four years. Joining me as always with The Friday Five is Morningstar markets editor Jeremy Glaser.
Jeremy, thanks for being here.
Jeremy Glaser: You're welcome, Jason.
Stipp: So it's been almost four years since we started The Friday Five. We've seen a lot of big changes. You have five of the biggest here today.
Glaser: The things we're going to talk about today are: the recovery, Washington, Europe, corporate America, and finally, the pace of change.
Stipp: Sitting here four years ago, there were a lot of questions about the recovery, the double-dip, all the issues that were still out there. But now we can say with certainty that this recovery is real.
Glaser: There were quite a few worries. If you remember, in 2009 we were talking a lot about "green shoots." Any little positive piece of economic data was scrutinized as maybe a sign that the economy was finally pulling out of the tailspin that it had been in since the onset of the financial crisis.
I think over the last four years that's been one of the big recurring themes, that the recovery is in fact real--that it has legs, that it wasn't a house of cards that was just ready to collapse--even if the pace was excruciatingly slow at times. We've seen that across a bunch of different sectors and a bunch of different metrics. Look at things like consumer spending, you look at manufacturing and autos and how that's really come back, how housing is starting to come back in a big way in many parts of the country.
But that being said, [the recovery] is at a very slow level, and you see that in employment most clearly. … In 2009 we were still losing potentially hundreds of thousands of jobs every month, and that's obviously turned around. But we are not adding jobs at a very robust pace. Things are getting better, but we're still far from pre-recession employment levels. We were having a lot of people drop out of the workforce, some of that because of demographics, but some of that just because it's difficult to find work. [There are] lots of long-term unemployed, which is something that we haven't seen in quite some time.
So even though the recovery is real, and we've seen it and it's been manifested through a bunch of different avenues, it's still not really a robust recovery that people can get incredibly excited about. I think that it's still going to be a story for a while, waiting to get back to true normalization.
Stipp: Over the last four years, Washington, D.C., the government, has had a big hand in both the markets and the recovery, both through monetary and fiscal policy, regulations and reforms. You say, on balance, that's been a mixed bag.
Glaser: It really has. When you look at fiscal policy, it started off with a lot of expansionary policy, with the stimulus after President Obama took office. Then that really started to reverse course, and we saw the federal government starting to make some cuts; we lost jobs in federal government, in state, in local. It has been one of the drivers of that slow employment growth. And I think that's had an impact on economic growth.
But at the same time, we've also had some self-inflicted wounds come from Congress and from the president--things like the debt ceiling debate that led to the S&P credit downgrade of the United States sovereign bonds. You have some of the fiscal cliff issues that took so long to potentially resolve and created so much uncertainty there at the end of 2012. These are concerns that certainly did not help the recovery very much. I think the fact that the economy has still grown through all of this is a sign that it is relatively robust, and it's not just going to be knocked over easily. But I think when it comes to the Congress, and it comes to the executive branch, there could have been more support there in keeping things going.
On the other hand, the Fed has been much more accommodative and much more flexible when it comes to making sure that their easy money policy really stays in place. So it's everything from new quantitative easing programs, thanks to more robust communication, to try to convince the market that rates are going to be very low for a long time. Obviously the Fed is going to have to exit from this eventually. We got a little test run of this exit just a few months ago that was a little bit rocky. But I think the fact that the Fed tried to walk that back almost as quickly as they rolled it out is a sign that they are paying attention to what the market is doing. They are paying attention to the potential consequences of their actions. And they're not going to pull back before they really think the economy is ready, and that's potentially a good sign.
Stipp: Across the pond, Europe has taken us on a real rollercoaster ride over the last few years, and you say that ride is still going on, but maybe the biggest thrills, the worst of the thrills, have passed us at this point.
Glaser: Europe is still bit of a mess, but it's more of a functional mess than it was just a couple of years ago.
The Eurozone has not dealt with a lot of the structural problems that have caused some of these flare-ups in interest rates and flare-ups and worries about the Eurozone collapsing over the last couple of years. You still have fiscal policy being determined by individual governments, but monetary policy being determined out of Frankfurt. That's something that really is potentially a challenge--that structure is a challenge--until they find a way to build new institutions and ... to fix some of those structural competitive problems. It's always going to be an issue.
However, the ECB went from being somewhat unhelpful to being quite helpful, with Mario Draghi, the head of the ECB, saying that he'll do whatever is necessary to the keep the euro together. That's kept yields low; that's allowed the peripheral countries some breathing room to try to make some of the changes. But we keep seeing flare-ups here and there--things like Cyprus, things like Portugal, and there will probably be more of those in the future. It's going to be a multiyear process until they figure a way to really work it out. I think they've created a roadmap, and they've created the room to do it, but there are still potential problems in the execution and problems that could pop up.
Stipp: Back here at home, we have that sluggish economy, as you mentioned, but one bright spot has been corporate America, which is maybe as strong as it's ever been.
Glaser: It's been a bright spot in a few ways. Corporate earnings, certainly, have come back in a big way from the recession. Corporations were able to cut costs very effectively--part of that is why unemployment is so high; they were able to shed so many workers--but that did translate into better corporate profits.
They were able to get rid of unprofitable arms, and really nationalize their businesses. Most managers did a pretty good job of recovering from, in some cases, near-death experiences in 2008-2009 to really being much more robust and much more safe companies today.
We've also seen a bright side in terms of stewardship. We've seen a lot of capital being returned to shareholders, either through dividends or share buybacks. Instead of going out on acquisition sprees--which was something that we were worried about with all this cash building up and with the low interest rate environment--they've been returning that cash to shareholders, and part of that is because shareholders have been demanding it, because there just isn't that much yield elsewhere. But it seems like corporate boards are being a little bit more active, are being a little bit more hands-on in making sure that the stewardship is there and that they're not taking on risk that they shouldn't be. I think that's a good sign from corporate America.
Stipp: Also, Jeremy, although we've seen a lot of changes over the last four years, you say one thing that's maybe even more surprising than the changes themselves, is the pace of those changes?
Glaser: Sometimes we think that change happens relatively slowly. But I think there are a few cases over the last few years where whole industries have shifted very quickly. Look at tech. The tech industry is an area where, of course, you expect change, but the rise of tablet computing caught many people, including myself, off guard. We even said when the iPad launched that it just looks like giant iPhone--you just stitch nine together and you're basically there. But obviously, it turns out that lots of people wanted a big iPhone. The drive of tablets really helped Apple continue to grow and become the behemoth, in terms of market share, that it is. But it also had knock-on effects in that there are many fewer PC sales. PC sales have been under some pretty extreme pressure over the last couple of quarters and over these last few years, and a lot of that is because of smartphones and tablets and more devices.
You look at the natural gas industry, where it looks like potentially in the next couple of years the United States will become a net energy exporter, which is something that would've been unthinkable for many just a few years ago. The rise of fracking has created really low natural gas prices and has created a big flow of energy. This has big effects on manufacturing--they can get cheap energy--and lot of other industries potentially. I think that's a story that is just beginning to be told, but it's having huge impacts on a lot of different places.
You look abroad at emerging markets: China goes from the growth darling to something that we're worried about their growth. Even if it's still going to be positive, is it growing fast enough to support a lot of the economies around it, to support commodity markets? What's going to happen with Chinese real estate, with the Chinese banking sector? A lot of those questions weren't top of mind just a few years ago.
I think the big takeaway from that pace of change is that it's very difficult to time the market. Even if you have the insight right, exactly when some of these changes could happen is difficult to pin down, when it comes to consumer adoption or when comes to what any particular commodity price is going to look like on any given day.
I think it just speaks to the importance of being more of a buy-and-hold investor, having a good asset allocation, [but] keeping track of your investments, making sure that it's not" buy, hold and forget," and making sure that some of these trends aren't derailing the thesis of why you bought various securities. But being there for the long term can help weather these big changes as they come.
Stipp: Jeremy, 200 informational episodes, four insightful years. Thanks for joining us every week on The Friday Five.
Glaser: You're welcome, Jason.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.