Brian Jacobsen, Ph.D., CFA, CFP, is a senior investment strategist on the Multi-Asset Solutions team at Wells Fargo Asset Management. In addition to his role at Wells Fargo, he is an associate professor at Wisconsin Lutheran College. Jacobsen’s research and teaching center on economics, finance and investing. ETF.com recently spoke with him about his thoughts on the global economy and financial markets.
ETF.com: You’ve done research on previous epidemics to see how they impact economies and markets. What have you found, and what does it mean for the coronavirus?
Brian Jacobsen: The unique thing about the coronavirus is the way in which the Chinese government has been more open about it and how quickly and aggressively it appears as though they're trying to address the issue. That makes some of the historical comparisons a little bit more difficult.
If you look at SARS almost two decades ago, for a while, the Chinese government didn’t initially admit it was a problem. You went months with really not knowing what was being done to address the issue. Similarly, with the bird flu, there wasn’t an early concerted effort to address the problem.
That’s the good thing about the current episode. It does seem like the Chinese government has been more open about it and they’ve been more aggressive in dealing with it. Even globally, governments have seemed to really rally around the idea that this needs to be dealt with quickly, which makes us optimistic that, unlike in past times, where you could have the market effects being deeper and of longer duration, this could be a shallower effect and shorter-lived.
ETF.com: Given that you expect the impact of the coronavirus could be shallow and short-lived, should investors avoid making any portfolio adjustments based on the virus?
Jacobsen: That’s really a key question for a lot of investors to ask themselves—whether or not this may be a tradeable moment. Maybe you could see overreactions in certain stocks, or even under-reactions, that could present buying or selling opportunities. But that takes a lot of skill, and also a lot of resources to try to implement.
From a longer-term, more top-level allocation perspective, we think that it’s really not a reason to make any adjustments to the broad allocations.
ETF.com: Coronavirus aside, what’s your outlook for U.S. stocks after such a strong run last year? Will we see similar gains again this year?
Jacobsen: We started off 2020 with the situation in Iran. Then we also had the impeachment trial and then the coronavirus. It’s already been quite the year, and we’re only in February.
The market has shown that it’s pretty resilient, but we’re not expecting to see the same types of gains we saw last year. Last year, it felt like everybody was a winner; it didn’t really matter where you put your money.
A lot of that was driven by valuations expanding. If you think of price as being equal to earnings times the price-to-earnings ratio (P/E), last year was really a story of the P/E growing.
Often what you see in the following year is that you do need that earnings growth. Earnings don’t typically grow as much as what the P/E can. That’s why this is probably going to be a year in which, while we’re expecting to have positive gains overall across asset classes, we think they’ll be lower. It’s going to be more driven by fundamental catching up to the valuations, as opposed to valuations running ahead of the fundamentals.
ETF.com: Are we going see more of the same in terms of the sectors and the factors that have been working, things like tech and momentum and growth?
Jacobsen: It’s quite likely that we’ll see what outperformed last year continue to outperform. We’re overweight tech relative to the broader market. But we’re also overweight consumer staples relative to the broader market.
We’re overweight tech because we think we could see sentiment continue to improve, we could see earnings improve, and tech companies seem to have a pretty decent earnings quality.
But at the same time, we’re aware that this type of market is one where you can have very low volatility for a while, and then volatility can jump out of nowhere. That’s where we wanted to have some of that defensive exposure with consumer staples relative to the broader market.
ETF.com: We’ve seen Treasury yields fall pretty significantly this year due to the coronavirus. How do you reconcile the yields hitting lows while the stock market is at record highs?
Jacobsen: There are really two reasons we’re seeing stocks hit new highs and Treasury yields move lower.
The first is that, over the last year, we've seen many central banks ease monetary policy. That tends to push yields lower and asset prices higher. At the same time, equity market investors seem to be looking out over the long term. They think that, to the extent the virus causes a slowdown, it’s only going to be transitory.
ETF.com: How should investors think about their fixed income portfolios in this environment?
Jacobsen: It’s tough for us to get too excited about Treasuries or the investment-grade fixed income market in general. For our team, we’re not afraid of a little duration exposure, because we don’t think we’re going to see yields move above the highs that we’ve seen over the last three years. We do think yields are likely to move higher, but not markedly higher.
The key for us is that we think we can do better than Treasuries when it comes to generating income. Treasuries still provide a really good diversification benefit to an overall portfolio. But if the role that you want the fixed income to play isn't necessarily about the diversification, it’s more about the income, then, with credit spreads so narrow, we’re finding more attractive opportunities in things like dividend-paying stocks, REITs, MLPs and structured products.
We always ask, what’s the job that you want done? And then, what's the right tool for that job? If the job is diversification, we still think Treasuries can play that diversification role. But if the job is to generate income, we think there are better tools in the toolbox that are outside of Treasuries, and even the very-high-quality investment-grade arena.