Recently, Evan Harp sat down with Alex Varner, Director of Research with Main Management to discuss the challenges facing Investors. Varner dug into reading the recession tea leaves, where opportunities could be found, and more.
Evan Harp: What do you think is the biggest challenge facing investors right now?
Alex Varner: I think I think it’s hard to put your finger on just one. It seems like there are quite a few out there. The debt ceiling is front and center at the moment. But there’s also just this increased level of volatility that we’ve been seeing in markets in general. People are really jittery coming off of what happened last year with the markets, both equity and bonds down double digits.
So there’s been a lot of readjustment around that. A lot of clients we’re talking to are still shell-shocked from that and gun-shy when it comes to fixed income in particular. In equities, you’re accustomed to that sort of volatility, but down 13% for the Barclays Agg poised a huge challenge for people last year. It really shocked some of them who have been in the market for 20-25 years and have never seen a bond bear market like that.
You add inflation in, that’s still remaining high, I think people fail to grasp that things move really quick on the upside, and then take a while to unravel on the downside. There’s this question of why did it go up so quickly? Why is it not coming down as quickly? There’s a lot of stuff that’s still shaking out from the pandemic, from those effects, that people are working through the Fed’s path.
Looking forward and thinking about rates – are they going to cut? There’s a range of outcomes that could occur there. Then we have the ongoing war in Russia and Ukraine. I saw something today. In Italy, pasta prices were up 17% Last month, and 16% again this month. That’s because they’re just now selling through the inventory that was made when the wheat prices spiked.
The producers and the merchants paid elevated prices and they have to pass those on to consumers. This has been 18 months and it’s still working out. There are pockets here and there where it’s really hard. And you keep hearing these headlines pop up. I think it’s like Whack-a-Mole where investors and clients that we see are trying to tackle one thing after another. It’s hard to navigate. It’s a challenging environment.
Where Varner Sees Opportunity
Harp: I think you did a really great job outlining how there are multiple, concurrent challenges in the market. But where do you see opportunities that the broader market is overlooking?
Varner: Internally, we’ve had success with taking advantage of the elevated volatility in general. So this is sector/country agnostic. It’s more of a volatility environment. We have a covered call strategy (the BuyWrite strategy, available as an ETF) and if you were able to find ways to take advantage of that increased volatility, as a broader asset class that overlays, equities, fixed income, commodities, currencies, that sort of thing.
That’s something we’ve seen be more successful in this type of environment, just because it’s one of the few overarching themes across everything is just more elevated volatility. If you’re able to stay at that upper level and not try to go in and pick and choose equities versus fixed income, etc. you’ve got a broader opportunity set there.
Recession Outlook
Harp: I also want to pivot over to recession. I was curious what Main Management’s recession take is – will it manifest? And if it does, how long and how deep do you think it’ll be?
Varner: Yeah, so one of our pieces that we put out monthly, and it’s in our Weekly Market Note, we call the recession dashboard. We’re looking at inflation, yield curves, employment, that sort of thing. We argue over it a lot.
I think that is very telling as to the recession environment because one or two things might be pointing to a recession. But then the other four or five are not. Those have rolled through over the last six, seven months and we anticipate that continuing. So, we’ve taken to calling it a rolling recession, which is just affecting different parts of the economy at different times. It’s not going to be something like the Great Recession, or the Great Financial Crisis, where everybody feels some massive weight on them and then slowly the whole economy comes out of it. It’s affecting different areas at different times. That makes it really hard to define.
The NBER is the official gatekeeper of the recession designation. And their term for it is a downturn that, broadly, probably affects a lot of people. And it is profoundly felt or something and you’re like, “Well, what does that mean?” Who decides what that means?
I don’t envy them. Because we could have been in a recession when we had two consecutive quarters of negative GDP last year. But that’s not the technical definition, because the technical definition is an umbrella term. So, you look at that, and I think you could say, “Hey, we’ve been in a rolling recession since then.” It’s probably going to keep going for quite a bit more and now official calls are pushing it out to the first half of 2024.
I don’t know if we’ll ever get an official one and it doesn’t matter if they go back and retroactively designate a recession, if you’ve already come through it. It seems like it’s more useful when you’re in it to know. We come back to a rolling recession. We think that different areas of the economy are being affected at different times and at different severity, as well. That goes back to that first answer where there are a lot of things going on that keep coming up and affecting different parts of the economy at the markets at different times.
Harp: That’s a great answer. A “rolling recession” is a smart way to put it. My last question for you is whether international equities have been getting a lot of attention lately, at least anecdotally. What are the possible upsides and downsides to looking international right now?
Varner: So, we have an international strategy. We run it in the same manner with the same process that we do domestically – where we’re looking at fundamental valuations combined with macroeconomic catalysts.
From a process standpoint, it’s very similar. You can run the same sorts of analysis on Europe, China, Japan, Latin America, Canada, and all the different areas.
The dollar plays a big role in that the currency side of things, and the dollar had some really big moves in 2022. Well, two big moves – up and down. If nothing else that’s providing less of a headwind than it was last year at this time. That’s a positive.
There was some concern around differentials and growth rates – emerging markets tend to have a higher growth rate. But the caveat is that they have a lot more uncertainty and more volatility from geopolitical standpoints. So, it’s a very similar approach. We’ve seen, you know, the International space has performed well, there’s a lot of talk about that, you know, multi-decade US outperformance relative to international and we’re looking for that to change a little bit. We’ve seen some of that. The question is does it have legs to run or not? And again, it remains to be seen.
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