By Jonathan Burton, MarketWatch
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.
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 /zigman2/quotes/210599714/realtime SPX +0.74% — 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.