Why the market bottoms before the economy does: RDM Financial Group

U.S. consumer spending increased by 8.2% in May. RDM Financial Group at Hightower Executive Director and CIO Michael Sheldon joins Yahoo Finance’s On The Move panel to discuss.

Video Transcript

JULIE HYMAN: So we've got this pullback today, which seems to be a combination of the banks and some of the coronavirus data. I know that you're also watching the economic numbers closely. And as I mentioned, the numbers today weren't bad, right? Consumer spending in particular rose by 8.2%. I guess the question is how sustained some of these increases in spending that we've seen can be. What do you think?

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MICHAEL SHELDON: Well, it's interesting. I mean, a common question we get from clients all the time-- we're a registered investment advisor-- is why is the market rising while the economy is really not doing that well. That sort of fits in with your question. So I mean, historically, if you look back at a lot of the data, the markets tend to bottom before the economy does. So we know for a fact, for example, that second quarter GDP is going to be really terrible. Corporate profits are going to be very weak. Retail spending is going to be very weak.

But in our opinion, we probably hit the lows back in probably about April or so. And third quarter numbers will look better than second quarter numbers. And next year's data overall, even though it's not going to be off to the races, next year's data will likely look better than this year's data. So markets are looking ahead. And overall, we are seeing a little bit of a pullback in the market today. I think that's only reasonable after the strong advance we've had over the past three months or so. But I think you have to look ahead at the next 12 to 18 months or so as opposed to just the next week or two.

ADAM SHAPIRO: Michael, if you do look ahead though, and a lot of us were hoping we did bottom out in March, April, May-- well, April. When we see Texas rolling back its reopening, if this phase of the coronavirus gets worse and then we get the anticipated second wave, what's to prevent further rollback and then, you know, a kind of slowing down of that which you think it's going to propel us forward?

MICHAEL SHELDON: Sure. Well, the spread of the virus, or the increase in the number of states recently is definitely disconcerting. And I think the important thing is we never really thought it would be a straight line forward. There would be some bumps along the way. We had a number of risks that we were thinking about. One of them is the additional spread of coronavirus in the fall. I didn't think it would really come out this soon. But it actually is starting to come up in a number of states.

We are looking at other risks, for example, the relationship between the US and China is obviously not doing that well. Then we also have the election later this fall. So there definitely will be some bumps along the way over the next few months.

RICK NEWMAN: Hey, Michael, Rick Newman here. One of the things I have been paying attention to is a number of businesses whose existence is threatened. I mean, if the stimulus runs out or doesn't get the job done, I mean, we could have-- I've seen forget projections of nearly 1 million failed small and medium-sized businesses. Now, these are not represented in the S&P 500 exactly. But they represent a lot of demand and a lot of employment. Is that part of your scenario?

MICHAEL SHELDON: Well, I think the PPP and the part of the stimulus plan that was passed a few months ago tried to address small businesses, which are certainly a major important part of the economy. A large number of jobs are derived from small businesses. One of the risks is that the number of people who have been unemployed does not come back as quickly as projected over the next several quarters or so. And that's definitely something will need to be watched.

The $600 in additional money going to people who have been unemployed rolls off at the end of July, excuse me. And there's lot of questions about whether that will be renewed or not. Our feeling is that there'll probably be another stimulus plan out of Washington. So far, we've seen about $6 to $7 trillion in spending from both the government and monetary policy to help really provide a bridge until the economy gets back on its feet. But if we don't get additional money out of Congress, that definitely could lead to slower spending and more uncertainty in the fall for a period of time.

KRISTIN MYERS: Hey, Michael, Kristin here. So I want to ask you about recovery. It wasn't too long ago that we were talking about V-shaped recovery, very deep V, but a V-shaped recovery nonetheless. If we start to see this second wave, states start to go back into that lockdown, what exactly do you think is going to be happening to the recovery going forward?

MICHAEL SHELDON: Well, as you said there are a lot of questions about a V-shaped, a U shaped, an L shaped. There may be some others. I've heard of square root as well. Our thinking is that, again, the economy likely hit bottom in April. And we're starting to see some pretty strong data right now. But that's after a big downturn in the economy.

One example is the retail sales numbers which came out last week and were up about 17% or so, which was an all time high. But that's after we already saw some significant weakness. So I think when you look at the data, we're going to see the economy started to open up. And obviously we're starting to see a little bit in the way of rollbacks in some states. But because the economy is starting to open up off a very low base, third quarter GDP and third quarter economic data will look pretty strong compared to the second quarter.

From there, the question is what the economy looks like in the end of this year heading into 2021. So at this point, I think there are a lot of question marks. Our feeling is that the economic growth will not be as robust as some think. I think a V-shaped recovery where we're off to the races for a number of quarters is probably unlikely. So we should see some more sluggish growth but still growth as we head into the end of the year.

JULIE HYMAN: Michael, because some of your reservations about what the growth trajectory is going to look like, you're recommending that people stay diversified. We've been hearing that refrain quite a bit, actually, from investors over the past several weeks. But what does diversification look like to you?

MICHAEL SHELDON: So we're investment advisors. And we create a financial plan. And you know, we figure out the rate of return that clients need to meet their long-term objectives. So then we create an asset allocation that each client can live with over the ups and downs which inevitably come with investing.

So in our portfolios, we think you have to have some technology. That represents secular growth. And you need some growth within your portfolios. Technology is benefiting from a number of trends. We like things like 5G and artificial intelligence and robotics, software as a service. The spread of e-commerce is certainly a trend that's going to continue.

And then we also, on the GARP side of our portfolios, we like health care, sort of growth at a reasonable price. So within that we have some other things sprinkled in like biotechnology within health care. We like financial payments. But that's all sort of within a broadly diversified portfolio.

JULIE HYMAN: Michael, thank you so much. It's good to see you. Michael Sheldon is RDM financial group and Hightower's executive director and CIO. Thank you.

MICHAEL SHELDON: Thank you.

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