Best of the Long View 2020: The Pandemic and Investing

Episode Summary

Executive Summary: This 'best of' episode of The Longview features clips from interviews with leading economists, portfolio managers, and investment experts discussing the COVID-19 pandemic's economic impact, policy responses, inflation risks, bond portfolio construction, investor behavior, asset allocation, ESG investing, stock picking, sequence of returns risk, and competitive advantages. Key insights include the importance of fiscal over monetary policy during crises, the need for liquidity and diversification in bond portfolios, the resilience of long-term investors, and the evolving role of ESG and international stocks.

Main Topics: COVID-19 Economic Crisis and Policy Response (Priority: 5/5): Mohamed El-Erian and Rick Rieder discuss the appropriate fiscal and monetary policy responses, emphasizing that monetary policy should address market failures while fiscal policy supports households and strategic sectors. They note the uncertainty in corporate guidance and the emergence of green shoots in some regions like China. Inflation Risk and Bond Portfolio Management (Priority: 5/5): Dan Fuss warns of inflation risk due to massive monetary expansion, while Mary Ellen Stanick details how Baird Advisors managed bond portfolios during the sell-off by ensuring liquidity, quality, and diversification, likening portfolio construction to loading a dishwasher. Investor Behavior and Asset Allocation (Priority: 4/5): John Stein of Betterment reports that during March volatility, only a 2% increase in withdrawals occurred, with more customers making deposits than withdrawals. Burton Malkiel argues for reducing the traditional 60/40 allocation's bond component due to low yields, suggesting higher equity exposure and bond substitutes. International and Small-Cap Value Stocks (Priority: 3/5): Jim Dahle (White Coat Investor) expects international and small-cap value stocks to outperform US large growth over the next decade but advises sticking to a written plan rather than timing the market, citing the bond market's unexpected performance over the last decade. ESG Investing and Stock Picking (Priority: 3/5): Charlie Ellis discusses the demand for ESG investing, noting that genuine commitment to doing the right thing can attract better talent and lead to superior performance. Will Danoff shares his approach to sourcing investment ideas, emphasizing openness to new trends and the value of attending user conferences. Sequence of Returns Risk and Target-Date Funds (Priority: 4/5): Jerome Clark explains that higher equity allocations in target-date funds at retirement can lead to larger losses in bear markets, but the preceding bull markets often result in higher balances overall. He highlights the correlation between bear and bull market severity. Competitive Advantages and Secular Headwinds (Priority: 3/5): Michael Reckmeier and Matthew Hand discuss how secular headwinds like Amazon's disruption accelerate during downturns, and they avoid industries with such headwinds, focusing on companies with durable moats like home centers.

Key Arguments: Monetary policy should target market failures directly (e.g., emergency funding windows) rather than cutting interest rates, which are ineffective during a pandemic-induced economic sudden stop. Fiscal policy is crucial for supporting household balance sheets, protecting strategic sectors, and preventing liquidity problems from becoming solvency issues. Inflation is a real risk due to massive monetary expansion, but the US has tools to fight it; however, political will to slow the economy may be lacking. Bond portfolio construction should prioritize liquidity layers (cash, Treasuries, agency MBS) and diversification to withstand stress, as demonstrated during the March 2020 sell-off. Investor behavior during the pandemic showed resilience: only a 2% increase in withdrawals, with more customers making deposits, especially younger investors viewing it as a buying opportunity. The traditional 60/40 portfolio may need adjustment: lower bond allocation due to low yields, and include bond substitutes like dividend-paying stocks or real estate. International and small-cap value stocks are likely to outperform US large growth over the next decade, but investors should stick to their long-term plan rather than trying to time the market. ESG investing can be valid if driven by genuine corporate commitment to doing the right thing, which attracts better talent and leads to better decisions. Sequence of returns risk is mitigated by the fact that bear markets are often preceded by good markets, and the severity of the bear market correlates with the subsequent bull market. Secular headwinds (e.g., Amazon's disruption) accelerate during downturns, so investors should avoid industries with such headwinds and focus on companies with durable competitive advantages.

Data Points: Interest rate cut impact: 150 basis points cut - Mohamed El-Erian noted that the Fed's 150 bps cut was ineffective because lower rates don't address fear or mortgage payment issues during the pandemic. Withdrawal increase during March volatility: 2% - John Stein reported only a 2% increase in withdrawals at Betterment during peak volatility in March 2020. Deposits vs withdrawals ratio: 26% more deposits than withdrawals - Betterment saw 26% more customers making ad hoc deposits than withdrawals in March; for millennials, it was 37% more deposits. Stimulus check usage: Less than 15% towards near-term goals - Most Betterment customers deposited stimulus checks into long-term savings (IRAs, retirement goals) rather than spending. Target-date fund loss in 2008: -26% vs -22% average - T. Rowe Price's 2010 fund lost 26% in 2008, more than the average target-date fund's 22% loss, but had a higher balance due to prior bull market gains. Betterment's 10-year anniversary: May 2020 - John Stein mentioned Betterment was approaching its 10-year anniversary in May 2020, having been born out of the 2008 crisis.

Pivotal Quotes: "I've argued that monetary policy should aim at addressing market failures and the most efficient way of doing that is by targeting them directly. And that's why the series of emergency funding windows that have been introduced for commercial paper, for the money market sector, and others are absolutely essential. I've argued that cutting interest rates now will not do very much." — Mohamed El-Erian: Discussing the correct policy response to the COVID-19 economic crisis in March 2020. "We always say in tough times, good times, investing is like putting a puzzle together. And you look for those missing puzzle pieces. Do things make sense? I grew up with a father who always would say to my mother, Catherine, these kids are all brains and no common sense." — Mary Ellen Stanick: Describing Baird Advisors' approach to bond portfolio construction during the pandemic sell-off. "I think the key to being a great investor is being open to new ideas, learning from new ideas, and finding that right balance between waiting for the right moment. But again, you know, circle of competence to me means you know your companies well, but you also know certain sectors particularly well." — Will Danoff: Explaining how he sources new investment ideas and balances opportunity costs.

Implications: Investors should expect continued low yields and consider adjusting traditional asset allocations, maintain liquidity and diversification in bond portfolios, and stay disciplined during volatility. ESG and international stocks may offer opportunities, but long-term planning and avoiding market timing remain crucial. The pandemic has accelerated secular trends, making durable competitive advantages more valuable.