MASTERCLASS: Gold - September 2020
September 3, 2020
Jenna Dagenhart: Welcome to Asset TV. This is your Coronavirus and Market Volatility Masterclass. COVID-19 cases continue to tick higher surpassing 200,000 globally and many more to come as testing becomes more widely available, and the United States has declared a national state of emergency. In addition to the human toll, the virus has also had a crippling impact on the markets. Here to help investors navigate this historic time are two expert panelists, Chris Davis, chairman and portfolio manager at Davis Advisors and Jeff Schulze, investment strategist at ClearBridge Investments.
Jenna Dagenhart: Gentlemen, thank you so much for joining us.
Jeff Schulze: Great to be here.
Chris Davis: Thanks so much. We're glad to be here.
Jenna Dagenhart: Yeah, glad to have you. Glad you could take the gloves off and get in here safely.
Jeff Schulze: The hazmat suits we've put in the closet there
Jenna Dagenhart: Exactly. Yes, hazmat suits are away for this masterclass, but take it to the core of what's going on. Setting the scene, we went from the longest bull market in history to a bear market. Stocks were trading more than 20% from their peaks in just a matter of weeks. The story and just how far we've fallen, it's how quickly. What do you make of this historic pilosity?
Jeff Schulze: Yeah, it's been absolutely breathtaking. If you think about the drawdown from a peak to a bear market, it's the fastest on record. It took us 21 days to get here. The next closest timeframe to hitting a bear market was 42 days back in September of 1929 heading into the great depression. We're here on historic times, and in fact, if you look at the market, you've seen 4% moves up or down for seven consecutive days. It's likely going to be eight given the market action that we're seeing today. It's important to actually stay centered, but I do believe that we're getting closer to a bottom. Because if you look at the last number of recessions that we've had going back to the 1940s, from peak to trough, the markets lost 32% on average. Right now, as we speak today, we're right at that 32% level. But until we get some more visibility on the path of the virus, I think there's going to be some more choppiness ahead
Chris Davis: Yeah, there are really two factors going at the same time and that's not uncommon. There's an economic factor that's working and there's a psychological factor that's working. The two of those come together and that's what shapes stock prices. Clearly, we're in a psychological panic. In a way, there's a lot that's analogous to what happened at 9/11, because it was something nobody had ever seen. It generated visceral fear, not just economic fear but visceral fear. I think we're in that environment where it bottoms there's going to be a parlor game trying to predict whether we're at the bottom, but what we know for sure is we know absolutely for sure, we're going to pick up the paper one day and it's going to say the number of cases is going down. The number of new cases has plateaued. We know we're going to see major league baseball reopens, that The Rolling Stones have announced a new concert, everybody getting together.
Chris Davis: We know that this is going to be behind us. Now, I think that that, in some ways, what people should be doing today is preparing for that thought because fear generates tremendous action, but it's also not sustainable for long periods of time. In a way, the underlying economy was much stronger than it was back certainly in the 20s and the 30s, the government policies are much more rational. I think we're in a period of time where we can have some conviction that this too will pass.
Jenna Dagenhart: The world will return to normal. It's just a matter of when.
Jeff Schulze: Well, I think you got to see a peeking out of the cases here in the US. Right now, we're just getting started to test the individuals, so we don't even know how widespread it is at the given moment. I like to call patient zero came back from Wuhan in the State of Washington on January 14th, got checked into the hospital on January 17th. It wasn't even on the US's radar, let alone the Chinese radar at that given point. I think the virus has spread a little bit further than what we think, but once we can get a handle on testing, we can get these infected individuals, we could get them care that they need and we can get a handle of the number of cases that are moving higher and it's starting to move lower.
Jeff Schulze: I think that's when you'll start to see some normalcy set back in. But the key is, if you don't have a vaccine for the coronavirus, I think people, when we get back to our normal lives, we may be reluctant to go to that baseball game or that concert until you get a little bit more visibility on a potential cure.
Chris Davis: Yeah, or until we find out that many people have had it and were never symptomatic and are now immune. Both of those things are perfectly plausible outcomes, but I go back to 9/11 as very powerful thing to think in mind because it really does begin to ... once you can see through to the other side, you really do start to say, "Well, what will we wish then that we had done now?" I think that's the mindset. Instead, what people want to do today is what they wish they had done two years ago, right? People say, "Well, I should've gone to cash, so I should raise cash now," or I should have bought very defensive safe stocks that wouldn't go down as much." That's what they want to do now.
Chris Davis: You'll see those stocks are ... but that's the wrong way. That's a loser's game in investing. What you should be thinking about is, what can I do today that'll be glad I did two years from now, not that I wish I had done two years ago. If that informs people's mindset, they're going to say, look, let's put this all-in perspective. Over the last 15 months, the market is up 3%. Really, we're in a real panic about that? If you had the worst luck of any investor and you bought at the absolute high, right before the financial crisis, you've compounded at about 4% a year from then till today. If you bought at the absolute high of the 1990 tech telecom bubble, you went through 9/11, you went through a recession, you went through the financial crisis, you went through the great recession, you went through the Euro crisis, you went through COVID, all of those things, you've compounded about 4.5% percent a year.
Chris Davis: Now, if you bought after the market had gone down 30% or 35%, your return instead of being 4% or 5% was like 7% or 8% a year through then, through today. I think it's this sense of people thinking that the world is falling, the sky is falling without saying, "Well, wait a minute. Wait a minute. The market over the last 15 months is up." Now of course, that's because we're starting that clock at the December crisis a couple of years ago when there was that huge market swoon in December, but what does everybody wish they had done by three months later? They wish they had bought into that crisis. What do we wish we had done in the financial crisis? People say, "Oh God, if only I'd bought when stocks were so depressed. Look at this 10-year bull market."
Chris Davis:What do they wish they had done after 9/11 they wished they had had the nerve not to panic to have bought into that, and why should this one be any different?
Jeff Schulze: You know what I wish I had done a couple weeks ago? Is buy a hand sanitizer and everything that's cleaned down on the grocery shops.
Chris Davis: You're absolutely right.
Jeff Schulze: I was a little late to the game on that one.
Jenna Dagenhart: Yeah, it's a ghost town when you get to the spaghetti aisle in the grocery store, certainly. I wonder, we'll get to more about emotional investing in a moment and also the importance of staying in the game. But before we get there, I wonder Chris, you've lived through a lot of really memorable moments on Wall Street. Drawing on that perspective, what do you make of this current volatility?
Chris Davis: Well, that's what's really wonderful. In a way, I was really lucky to learn the business at the feet first from my grandfather, who of course was born in 1907. When you think about what he lived through, what he invested through, he opened this firm in 1948, so going through the end of the war and the beginning of the baby boom, but the nuclear missile crisis, the Cuban missile crisis, the idea of everybody duck and cover building nuclear bomb shelters, the certainty of loot, fear of nuclear war, and let alone presidential assassinations, impeachments, resignations, stagflation, the oil crisis, the hostage crisis, all the way up until ... My father started around 1958. Our firm is 50 years old this year, a little just passed our 50th anniversary.
Chris Davis: That really helps us have a perspective, because when you look at the long march of progress over that time and you draw on there, there's the Cuban missile crisis, there's the Arab stagflation, there's the hostage crisis, there's the tech telecom bubble, there's 9/11, there's the great financial crisis, the financial crisis and the great recession. There they all are and yet, there is that onward march of progress. I was teaching my youngest daughter to drive. I don't know if you've had that experience. It's so nerve wracking because they're looking right in front of the car and they're overreacting to every pothole and you're swerving, and you just keep telling, "You look farther down the road. Take a longer-term view," and what happens? The ride becomes much smoother and much calmer and you realize that really it was looking right in front that was creating the chaos.
Chris Davis:I think if there's one thing we've learned over this long period of time is the old saying, if it bleeds, it leads. There's a very good new book out called The Power of Bad that I really recommend. It's a terrible title, but it's a very useful book, about why it is we tend to react as a species very strongly to negative things versus positive things. What are the evolutionary reasons and so on? Well, we're in that world, right? It is in a world where people are focused on the bad news. I always say the weather channel is not in the business of predicting the weather. What is their business? They sell ads. To sell ads, what do they need? Viewers. Well, to have viewers, what do they need? Excitement, drama.
Chris Davis: Think about what's happened when you watch the weather channel. The storm of the century happens two or three times a year. The storm of the century. That's supposed to be once every hundred years, two or three times a year. We don't have a snowstorm, right? We have snowpocalypse, we don't have a heat wave, we have a heat dome, and so they create this drama and it feeds into people's fears. The same thing happens in politics, and the election cycle negativity, sells negativity. Fear moves voters. We're in a world where we're surrounded by this negativity., and just like my daughter learning to drive, if you can lift your eyes up, look farther down the road at that long march, it can restore a sense of equanimity and a sense of that we will get through this and you'll look back and say, "We're glad you didn't panic."
Jenna Dagenhart: Yeah. How are you Jeff staying focused on the long-term as well and I'm trying not to shift off the road?
Jeff Schulze: Yeah, we're trying to focus on signs of bottoming. I think a lot of the velocity of the sell-off that you've seen here recently is a function of two things. First, equities were overvalued coming into this downturn. The markets are clearly priced in, a soft landing that earnings' growth was going to return to 10% in 2020. Obviously, now there's recession fears out there and valuations need to come down very dramatically, but also, systematic investors have been selling at a very robust pace. Think about risk parity fund, CTAs. When correlations go to one, these funds are forced to delever and delever very quickly. More importantly though, if you look at the mutual fund investor or ETF flows, ETF flows have been flat over the last month and you've seen about 30 to 40 billion come out of mutual funds, which is not very robust.
Jeff Schulze: What we're looking for is to flows and the delevering to stop out of those systematic investors, but also, to see the mutual fund flows, which can become a little bit more negative, which will be signs of a potential bottom.
Jenna Dagenhart:Yeah. While we're discussing the current market environment, I do want to talk a little bit about the VIX as well as correlations. What are you making of the current correlations? It's certainly heading towards one, as you said.
Jeff Schulze: Yeah. Heading towards one. That's where you're seeing all distortions and fixed income markets. Again, I think that's a key why you've seen such a robust and a quick soft compared to history as well. Because if you think about risk parity, for example, risk parity funds on one side they buy equities, on the other side they lever up bonds with the assumption that if your equity sell-off, your bonds will be able to save you. But if both are selling off at the same time, these types of players are forced to liquidate in a very aggressive manner. I think higher volatility is likely to be with us in the near term. If you see some signs of, again the incidence peaking out from coronavirus, maybe the market overshoots to the bottom of maybe negative 40%-45% where it's clearly priced in a very aggressive recession. I think you could see some value buying there. But unfortunately, I think the volatility genie is let out of the bottle.
Chris Davis: Yeah. I think Jeff's really onto something too. When you look across asset categories, I think that what you're going to see is we can have an enormous amount of equanimity about equities in general, and of course specifically about the portfolio companies we own. We can look through at the balance sheets, the resiliencies, the business models, the liquidity and feel enormously confident that they're going to weather this storm, that their equities are incredibly well priced at this level and that there's an overreaction driven by psychology and so on. When we broaden out and we look across asset classes in general, I think we feel a fairly high degree of conviction that they're going to be some real bizarre anomalies out there. We were in a world where there was a different type of correlation going to one on the way up, which is that nobody was pricing in risk.
Chris Davis: Certain types of equities still made people nervous because they remembered the financial crisis, but when you looked at fixed income, when you looked at some of the things people are doing in high yield, you look at levered funds being created, I would say a bank debt, the way bank debt was trading yields on commercial real estate and so on, there was a lot of priced for perfection in there. Where we would have said we don't understand equities look unbelievably cheap relative to these other categories given the relative risk profile of the underlying business, not the volatilities of the asset classes, but the real risk to the businesses.
Chris Davis: In this world, what I would say is the equities have discounted enormous amounts of risks. They look very attractive. I still think there's a lot of catch up here that hasn't happened or is happening now but will continue. I think when we come through this store is going to be, well, equities look pretty good. We don't know what we were thinking about some of this levered high yield stuff that was priced as if there was never going to be a recession again, when of course, there's going to be a recession.
Jenna Dagenhart: That's inevitable. We just don't know when.
Chris Davis: Exactly. Right.
Jeff Schulze: It's like Death and taxes, right?
Jenna Dagenhart: Yeah, and recessions. I think too, you bring up a good point with just the amount of selling or gains that we've seen on any given day about 4%. It's hard to remember what a normal day in the stock market looks like now.
Jeff Schulze: Yes.
Chris Davis: Well, it wasn't normal to have so low volatility, that wasn't normal either. It just started to feel normal because we had it for a while. I think that's one of the strange things. Of course, volatility of prices is a long-term investor's friend. That's what you want. You want greater volatility of prices is fine, provided you have conviction that the underlying businesses have certain characteristics. Imagine an apartment building. If you owned an apartment building and you paid $10 million for it and it's producing $1 million of income every year. If somebody came along and said, "Hey, I think it's a bad time for commercial real estate, I'll give you 5 million." You wouldn't feel you had lost 50% or price is down 50%. That's your bid, 5 million. But you wouldn't feel poor, it's making $1 million a year. I'm certainly not selling it for five.
Chris Davis: The change in price wouldn't concern you because you would understand that the value of the asset is driven by the economics of the underlying business, in this case, the apartment building. Stocks are exactly the same. When you look at a business, I'll just pull a name out of the air, United Technologies, Otis Elevators, Carrier Air Conditioning, now Raytheon, Pratt and Whitney, boring, durable businesses, business plans that could be carved in stone, high amounts of recurring revenue. The value of that business does not change 30% or 40% just because the stock goes up 40% or down 40%. It creates an enormous opportunity if you can have conviction and value and separate it from price. Therefore, volatility and this upturn in volatility is really your friend.
Jeff Schulze: Yeah, as active managers, if you look at where active managers outperform passive indices, it's periods of single digit returns in the markets where there's high dispersion. That’s typically late cycle ends the cycle type of dynamics. But also, in these volatile markets where you really can separate the winners from the losers, focus on strong balance sheets, free cash flow generation, low debt, that moat, as Warren Buffet would say, around your business. Obviously, we're in that period right now.
Chris Davis: Yeah, my grandfather, he had a great expression and we have it framed with a picture of him in the center of our research conference room. It says, "You make most of your money in a bear market. You just don't realize it at the time." It feels terrible. The psychology, I wouldn't underestimate the second part of that saying. You don't realize at the time. It feels hard. It's hard to buy when people are selling. When you feel like there's all this uncertainty, that's when you make your money. You make your money in a bear market. I think you're exactly right, Jeff, about active in general. But just for that, if investors can get that behavior under control, this is the market that they would wish for. Nobody would wish for this virus and the pain that it's going to inflict, but you would wish for volatility in prices.
Jenna Dagenhart: It's scary for investors right now given that we are currently in a bear market, but that being said, we're seeing this spike in the VIX that's also Wall Street's fear index, many people call it. How do you think about the VIX and how are you watching the VIX?
Jeff Schulze: The VIX it's the tail that wags the dog at this point, given that VIX is an investible asset class. You have these levered portfolios that you can bind the VIX with. It may not have as much information value as it once did, but again, it's something that we're watching for. Generally, when you see VIX spikes of this nature, I think a couple of days ago we had the highest VIX spike in the history of markets. It usually represents capitulation or you're getting close to that point where everybody has sold, and then buyers are left, and it forms a pretty good long-term bottom. It doesn't mean that market is not going to be choppy, it doesn't mean that the market is couldn't move further lower from here, but I think we're rapidly approaching that point where it's a pretty good long-term buy as long as you have a three or five-year time horizon.
Chris Davis: Yeah, Jeff, that's exactly right. If you wanted to put it differently, you'd say, look, the VIX is really a coincident indicator. It measures really what people are feeling right now. The market is a discounting mechanism. The stock market is looking ahead. Long before there is a headline that says the number of new infections is going down, the change and the rate of change is positive. Before that happens, the market will begin discounting that. The market is looking ahead, right? The market is now pricing in bad news for some period to come. The VIX tends to be coincident. It tends to reflect what's happening right now. I think in a way, to me, the VIX is really uninteresting for that reason. People misprice volatility all the time because what happens is when there hasn't been volatility for a long period of time, they underprice it.
Chris Davis:When there has been a lot, they overprice it, and they forget that volatility, like everything else, is cyclical. But the market tends to be more, we often say the VIX is a thermometer, the market is a barometer. The market is recording or trying to tell you something about the perception of the future. The VIX is reflecting the fear index right now.
Jeff Schulze: One thing I'll say is the market is a forward-looking mechanism and discounting mechanisms, if you will. Right now, the market is pricing in the obviously slow patch, the recession that's likely to happen here, but it will bottom well before we get out of that recession. The market usually will start to price in a recovery about six months prior to we actually getting out of that particular recession. There's an old adage out there is when the NBER, the official institute that calls recessions, when they actually call a recession, it's usually a pretty good time to buy stocks.
Jenna Dagenhart: Let's talk a little bit about pullbacks versus crashes. Jeff, what do you think we're experiencing right now?
Jeff Schulze: Yeah, so we would define a market crash is a bear market that lasts longer than a year. Since the 1960s, we've had six market crashes in US history. Five out of six of those happen to be recessionary. The only one, ironically that wasn't a recession was the market crash of 1987, but are known as Black Monday, that timeframe. But pullbacks we think of any other large drawdown, it's less than a year. 15% plus drawdown. When you compare the crashes versus the pullbacks, it usually crashes lasts a lot longer. The drawdowns are more severe. But again, they have that much higher probability of an actual recession. Thinking about where we are today, I think the sell-off that we've seen was so pronounced and so quick.
Jeff Schulze: I think we'll likely find a bottom some time over the next couple of weeks, maybe in the next month and the market will start to price in that recovery as we get to the back half of the year. I have a hard time to believe that the markets will still be down 20% by this time next year. In my opinion, it's probably going to be a pullback rather than what our definition of a market crash is.
Chris Davis: Yeah, I haven't heard that distinction before. I think it's an interesting one. What I would say is, depending on your time horizon, there has never been a time in history where the market has gone down where it didn't increase your returns to buy after it had gone down versus buying before it went down. In other words, every single time the market has come back to a new high. You could bet that this will be the first time in all of market history that it will go down and stay down, but it'd be a pretty crazy bet to make. In a sense, every time the market goes down 10%, people should be thinking, well, my future return just got better. Whatever my return expectation was for my IRA, I should raise it now.
Chris Davis: When it goes down another 10%, I should raise it again. Each time the market goes down, you're increasing your future return. Going back to your apartment building, $10 million that yields $1 million. If you were able to buy that for 5 million, what would your return be? Well, instead of being 10%, it would be 20%. You would have doubled your return by buying the same asset at a lower price. It's so obvious when you think about a business, and yet somehow when people buy United Technologies or something, they think it's something totally different. Oh, it's a stock, it wiggles around, but the return is driven by the return of the underlying business. If you think like that apartment building, that business is going to produce a stream of cash next year, the year after, 10 years, Otis Elevators is going to keep producing cash and so on.
Chris Davis: If you had that, then the lower the price, the higher your future return. Of course, that's the environment that we're in today.
Jenna Dagenhart: To quickly follow up on that, Chris, I wonder, as an active manager, how are you taking in these short-term challenges while still focusing on the long-term? You mentioned it's like teaching a teenager how to drive and keeping your eyes down the road. Not on every little bump.
Chris Davis:Yeah. Well, Peter Lynch wonderfully said, "The most important organ for successful long-term investing is the stomach, not the brain." This the environment we're in. I would say that, temperamentally, we aren't doomsayers, we don't wish ill on people. We don't pray for hard times, but what we know is they're an inevitable but unpleasant part of the landscape. The market on average goes down 20% every three years or so. It's nothing that unusual. It's gone down 50% or so twice since 2000. Right? Once in the early 2000 and 2007. My father, of course with our 50-year history rode through the bear market of the '70s, my grandfather going back to the '30s. It is an inevitable, but unpleasant part of the landscape.
Chris Davis: When you have that mindset and a stoicism about that, then it's not that you're delighted to be in an environment where there's fear and pain, but you realize that this is an opportunity where value is created, where wealth is created. What do I want to do today? I think as an active manager, we tend to be fully invested. We're not trying to time when the market's going to go up or down. It's more what we look at in a time like this is, there are parts of the portfolio that have held up well. Those then become a source of cash. They've done their job. They were defensively postured. Investors felt like, oh well, I'm scared, but I can hold that, because that's sort of say, and then you look for what are the things where people are panicked but you have deep conviction that they're going to ride through this cycle?
Chris Davis:Then you're taking the proceeds from the things that have held up well. They may be down, but they aren't down nearly as much as the things where there's panic. Now, the price going down where the panic is, doesn't mean that it's a safe investment. You have to do a second layer after that, which is say, okay, it's going down a lot, is there a risk in this business where the business could be permanently impaired? You then need to go over and say, no, this is a durable business. It doesn't need to issue equity in this pricing. Like your apartment building, I don't need to sell when the price is down in half.
Jenna Dagenhart: It's still going to generate that income.
Chris Davis: It's still going to generate that income's coming in. Going back to your apartment building, you may say, well, look, it's a time where I've got some vacant apartments and I'm going to have to let a few tenants slide on the rent to get through a couple of tough paychecks. Your 1 million might go down a little bit. But the earnings power of it didn't go down just because you lost three months or four months or six months. I think as an active manager, this is an exciting time to be dynamically repositioning, looking for durability at distressed prices and selling out of things that durability where it's widely recognized.
Jenna Dagenhart: There certainly are some silver linings through all of this heightened volatility too, also good for options.
Jeff Schulze: Sure, but options are probably pretty expensive. Call options are pretty cheap right now, but it's all about optionality. When you have some cash, you can take away from some of the areas that has held up in that type of downturn and then redeploy it in areas that are more distressed. What we've found is if you're looking for areas to hide out in into the equity markets, there's really three sectors that have historically done the best. We've looked at the last seven 15% plus drawdowns that we've had, and three sectors outperformed on a relative basis and their hit rate was 100%. That was consumer staples, healthcare and then also utilities as well. Consumer staples was the best. On average, it outperformed the market by 20% on a relative basis. But again, each and every one of those timeframes, they outperformed. You're looking for areas to weather the storm, I think those three sectors are going to be the ones that should be high on your list.
Jenna Dagenhart: Good places to hide out right now.
Jeff Schulze: Yes.
Chris Davis:I think what Jeff says is right. I would only then add the last chapter on that story is there will be a time when that will no longer be the case. There are two possible reasons. One could be that there could be companies in those sectors that are now differently positioned than they were in the past. That may be because they're over levered. We've all seen what happened at Anheuser-Busch, for example. That was a consumer staple, absolutely bulletproof through recession after ... It's in trouble, right? Kraft Heinz. These are companies, because their balance sheet put them in a vulnerable position, but there was something else happening. Buying large companies in that sector have significantly increased debt over the last five years, so they're not as safe as they once were.
Chris Davis: But then there's something else, in fact, which is a change that every advisor out there watching and every one of their clients sees every time they go shopping, which is when you go to Trader Joe's, when you go to Whole Foods, a lot of those brands aren't available. People aren't drinking Budweiser the way they used to. You're seeing a huge secular change in consumer behavior that's been driven partly by how people consume advertisements and so on. You take higher leverage and maybe shake your fundamentals, and Jeff is exactly right. These stocks have held up well, it's where people feel safe. I would say if you look through, there's a lot more risk there than there used to be. This may be an exciting time to then look at those and say, "Okay, now within there, what do I want to avoid if I want to do stock?"
Chris Davis: Or more to say, it's held up well, what parts of the market have the opposite characteristics where the businesses are in very, very strong shape, but there's a perception that they're vulnerable and therefore they're very cheap? I'd say that's exactly where the financials come in. The banks had the highest capital ratios in their history. They are absolutely bulletproof. The banks are leaning into this crisis like how do we lead? How do we get payments out there? Do we waive mortgage payments for a period of time? I think the banks are going to come out of this period as heroes of working with their clients because they can, they can afford it. They've got a huge excess capital. I think we're going to see, and yet they're down more than almost any other sector. I was looking at a bank today that's down 65%.
Chris Davis: It's one of the top banks in the country. It's a wonderful overcapitalized, well-run bank, but there's just panic. I think that that's where the opposite side of that consumer, where the consumer companies in aggregate may be a lot riskier than they look. The banks are a lot safer than they look. I think that is the opportunity that we'll move into. Now, I don't know the timing is today or a month from now. It certainly wasn't a week ago. I was early.
Jeff Schulze: [crosstalk 00:30:17].
Chris Davis: A month might not be too soon, and it might be three months, or it might be six months, but ...
Jenna Dagenhart: I won't ask you to answer that.
Chris Davis: If you can buy these high-grade banks at five times earnings, four times earnings if you can buy them at 10 times stress cast test earnings. I looked today, and I'm trying to finish the math on this. Right now, if you do the CCAR, the stress test that the banks have put through, 50% decline in the stock market, 10% unemployment nationwide, declines in residential real estate. Huge consumer defaults, commercial defaults, spreads blowing out, all of that is in the CCAR test. The banks are discounting more than that in their current valuation. To me, that a really exciting time. We're leaning into them in our financial strategies and our large cap strategies, not just here, but also globally, whether it's the largest bank in Singapore buying it with an 8% dividend or the largest bank in Norway. We think this is an exciting time to be looking at where people somehow are pricing risk when there's enormous durability, resilience and safety.
Jeff Schulze: Chris, you brought up an interesting point of risk that I think is going to manifest itself in the coming weeks and months, is the fact that investment grade is no longer what our grandfather’s investment grade was. If you look at the Triple-B Space and investment grade back in 1973, it was about 9% of the index. Over the course of the last 45 years, it's ballooned up to closer to 50% of the index. You mentioned Kraft-Heinz here getting downgraded very recently. They're the seventh largest fallen angel in the history of the high yield market. It was about 1.7% of high yield. The problem with that situation is you go from a $6 trillion liquid investment grade market to a one and a half trillion-dollar ill liquid high yield market. When you have systematic stress like we're seeing today, it becomes even less liquid than it already was.
Jeff Schulze: My fear is I feel you're going to see a lot of more fallen angels because of the sudden and aggressive stop of economic activity that you're going to see here. That could cause some distortions in not only fixed income markets, but also the underlying equities of those credits, so a valid point. I do think that it's an underestimated risk. It's something we've been talking about for quite some time. These companies have taken on a lot of debt, preferred share buybacks, higher dividends, would that day come home to roost where the economy fell out of bed and they would have a difficult time being able to service that debt? I think we're going to get a good glimpse on whether or not that's the case in the coming months.
Chris Davis: I think you're absolutely right. We talk about liquidity. It's not liquidity if it's not good when you reach for it. I think that high yield in particular, was being priced as if there were deep liquid markets and there are not. By the way, when people sitting on the sidelines start getting interested ... There were two companies during the financial crisis, Harley-Davidson and Sealed Air were two of them, where we participated in financing them, even though we're equity guys in our strategy because we were able to get a 15% five-year non-call from ...
Jeff Schulze: That's like a Warren buffet deal.
Chris Davis: They were that kind of deal. In fact, Berkshire participated in both those deals. In a sense, when there's a junk credit that was yielding five and a half or six and people say, "Well, it's gone down a lot. Now, it's yielding nine." It can go a long way before people are willing to step up because in this environment, your liquidity is precious. Those that have the liquidity to go in and step in, and I just think that is when you look at people who are owning a lot of these things, especially in transactional, I think ETFs, there'll be indexes. It'll be interesting to see how that plays out. That's, as I say, why as an equity investor, I'm feeling fairly complacent because whereas the financial crisis was sort of ... there was a lot of ground zero in the financial sector, right?
Chris Davis:As an equity investor in financial stocks, that was ground zero. Now, they are enormously well-prepared. This is in a way, the environment that I think is going to make their reputations for the next 20 or 30 years. This is not impressive, it happened after the great depression, right? The financial institutions that survived the depression, then World War II comes along, no problem. By the 1950s, banks were considered like your utilities, safe, boring, center of the plate investments for a boring institutional retirement account, that sort of thing. They traded at 15 times earnings. Well, banks now are trading at five or six, utilities are trading at 20- or 21-times earnings. That's a big spread. I love that opportunity here.
Jenna Dagenhart:I'm glad you bring up ETFs too. Do you think ETFs are playing a role in terms of the liquidity equation?
Jeff Schulze: Well, I think it depends on what type of ETF you're talking about. If you look at the last 10 years of inflows or outflows, ETFs have seen about two and a half trillion dollars worth of inflows which is quite a hefty number. The ironic thing is that the biggest inflows into equity markets had been shared buybacks, believe it or not. It's been about $4 trillion. One of the things I've been watching for is to shared buybacks to drop. If you do see companies retrenching from the equity markets, I think you're going to see higher volatility and a much lower share price of the S&P 500. Buybacks have actually held up well considering the volatility that we've seen.
Jeff Schulze: We haven't seen them fully retrenched, but at the end of the day, ETFs are now a very much bigger part of the market and it allows investors to get in and out of positions and discriminately very quickly. I think that's one of the things that are bringing this dynamic of faster selloffs, faster recoveries, the change of market structure overall is that ETFs are a much larger part of that equation. Think back to the last big sell-off that we saw, which was fourth quarter 2018. It took us three months to go down 20%, which is a very fast sell-off in its own right. Then market shot back up right after Christmas and didn't look back. The previous large sell-off [crosstalk 00:36:30].
Jenna Dagenhart: Until now.
Jeff Schulze: Until now. Previous large sell-off was back in February of 2018 with the short vol unwind, it took us six days to go down 10%. Similar to today, I think the selloffs are going to be much quicker because of these new players and these new products that are dominant in the financial market system, which are ETFs. But again, putting the shoe on the other foot, I think the rebounds are going to be quicker as well. Again, it just adds to more volatility at the end of the day.
Chris Davis:It's interesting because ETFs are not an asset class. They aren't really even a product. It's essentially a regulatory structure and you can put it on all different types of assets and asset classes. MLPs is another example. People think, oh, you own MLPs. Well, there are some ... An MLP is also just a structure that can be put on all different types of assets, some of which it's very inappropriate for. I think what an ETF promises to the investor is this instantaneous liquidity you can buy, you can sell, there are some tax efficiencies. Yet, you would say that there are, for large cap equities, of course ETF is wonderful. The underlying assets are enormously liquid. If there is a discrepancy between the price of the ETF and the price of the underlying securities, it can be [inaudible 00:37:57] out instantaneously.
Chris Davis: You would expect that to be a liquid type market. But if you were to put in an ETF things that are very illiquid, where somebody for example might give you a quote on a notional amount of some security, but if you went to sell a large amount of that security, there would be no buyer, right? Then you get into a liquidity spiral and that can happen. I would say for ETF investors, it's being thoughtful about recognizing that really are the underlying assets that are in that regulatory structure, are those assets make sense to own in these? Can I trust the marks in those? Or are they things where when I go to sale, if I need to go to sale, you could get these enormous gap outs? Of course, we've seen that in some of the levered ones or thinner asset classes, and I would expect to see more.
Jenna Dagenhart:Yeah. Jeff, I wonder, you've touched on sectors that you like during this period. How are you recommending that investors position themselves during a bear market and during this heightened volatility?
Jeff Schulze: Yeah, obviously those favorite sectors obviously are the ones that we like to say to hide out in, if you will. We did an analysis of every 5% plus drawdowns since 2004. There's been 24 of those types of drawdowns. The analysis came back with some interesting conclusions and it goes counter to what most people think. In the style box, the morningstar style box, the two areas that had the highest rate of outperformance, relative performance versus the market, and the lowest drawdowns were large cap core and then large cap growth as well. Out of all other aspects of the style box, those were the only two that were about 50% hit rate of being able to outperform.
Jeff Schulze: I think those areas are areas that you naturally want to look for in your portfolios. We think dividend paying equities or equities that you want to have in your portfolios. If you look at the only two decades where you didn't have any capital appreciation in the equity markets, it was 2000 and then the 1930s. That dividend provided that positive return overall even though you saw capital losses because of the large selloffs. So, you want to focus on what you know, high quality stocks, dividends are going to be a core part of that portfolio. Dividend growers, traditionally, give you the best risk adjusted returns, but if you're looking at it from a pure style box perspective, we think large cap core and then large cap growth are the ones that you want to own.
Jenna Dagenhart: Yeah. How about you and the Davis strategy?
Chris Davis: Well, I'd highlight sort of four areas of opportunity in this world. I think the first one is what I would call the durable global industrials, right? What happens is, we were talking earlier about consumer companies. People somehow feel consumer companies are very safe because people go out and buy their staples every day. Whereas if they think of an industrial company, the underlying business may be just as durable, just as stable, even more difficult to obsolete. But because there is some lumpiness in how customers purchase those items, they're considered cyclical. Now they aren't cyclical. They may be a little lumpier, but if you looked over Rolling three-year periods, they would be a perfectly nice, smooth line rising to the right, just like consumer companies. But within three-year periods, there can be ups and downs, right?
Chris Davis: When you get a world that talks about trade wars or recession or slow down, these things tend to get killed. Yet, as I mentioned with the example of United Technologies, the underlying businesses probably have more resiliency than a lot of the consumer durables that people love because the consumer durables are facing some real headwinds of fragmentation and store brands and all sorts of other things that has really hurt some of the global brands. These, in a way, whether it's Otis Elevators or Carrier or Pratt & Whitney at United Technologies, some of the companies that make up Berkshire Hathaway, for example, companies like I spoke yesterday with Applied Materials, which makes manufacturing equipment for the global electronics and semiconductor industry. There's nobody in a garage that is going to displace Applied Materials. It is absolutely the global leader in what they do, and yet, there it sits at about 10 times earnings.
Chris Davis: All of which are cash, bulletproof balance sheet market leadership. Call that category sort of global industrial leaders that are bought because people overreact to fears of recessions, which are just a normal part of the landscape. Category two, I hit hard financials. The banking system is as strong as it's ever been. Capital ratios are ready. This is their environment to prove themselves. They're going to do great. They're going to keep paying dividends, I believe. The top banks have said they aren't going to buy in stock during this period. They certainly could, but they have made this commitment to show that they are putting the clients first and customers first, they'll make credit available and they'll get paid for that over time. Everybody's afraid about interest rates, credit, regulation, they're in terrific shape.
Chris Davis: That's a second big theme. The third theme I think really gets at what Jeff was talking about, which is sort of the longterm durable growth companies. There are a lot of growth pretenders out there. Utilities don't grow much; the consumer companies don't grow anymore a couple of percent. But when you think about tomorrow's blue chips, the Googles of the world, Amazon, Facebook, they have enormous growth rates that are going to play out, not just for two years or three years, but five, 10, 15, 20 years. It's sort of the blue chips of the next generation. A lot of them are only 10 or 20 years old now. That's a category, if you don't on them, this is the world to be looking at them, you can buy them a little cheap.
Jenna Dagenhart: Amazon's probably busier than ever right now too.
Chris Davis: Absolutely. Absolutely.
Jeff Schulze: I they're hiring thousands of employees right now.
Jenna Dagenhart: Yes, for the warehouses.
Chris Davis: 100,000. They also want to prove themselves in this environment, so they'll come in. Then, the last category is the hardest. It's where are the headlines the worst? Where do you run your Geiger counter over the debris? Think after the tech telecom meltdown, you could've bought Amazon, of course Google came out of that. Really, where the headlines were the worst, where the blood was great, after the financial crisis, it was certainly looking at financials. Those were some of the cheapest stocks. So where are the headlines bad? It might be by individual company. Think of Facebook, Wells Fargo, company specific. It might be an industry. Think of energy. Energy is a lot like tobacco. It is loathed, it is hated, but there is a global addiction to their product that even if people get off it, it's going to be a long gradual decline and people are going to need energy for all of our lifetimes.
Chris Davis: So low cost producers bought at distressed prices. I'd look, so an industry it can be in the headlines for risk and you could find out. Then last, countries can be in the headlines for risk. So we have strategies that are global and international, DWLD or DINT. They're looking at China. China led through this, they've come out, you've looked at how the internet companies have done, their Tencent, how Alibaba have done. We think, that last category, that fourth theme is wherever the headlines are, that makes people lose sleep. It gives them ulcers. It's part of an overall portfolio at our strategies, but those are the big four themes that we're taking advantage of right now.
Jenna Dagenhart: A lot of energy investors losing a lot of sleep right now, I'm sure too, with everything with OPEC in Saudi Arabia and Russia.
Jeff Schulze: Well, look, if we're not getting ... the global addiction to oil is not going to end anytime soon. Now, everybody talks about peak oil demand. Well, you've seen peak oil demand in the developing world for the last 10 years, the developing world had peak oil of about 50 million barrels. We're down to 47 million barrels in the developed world. It's really the emerging world that has had this thirst for oil. If you look at your average individual in developed markets, we consume about 13 barrels of oil per year. The average consumption in emerging markets is about 3 million barrels, but there's 6 billion people in the emerging markets, and they're going to eventually consume more oil and that's going to pile a lot of pressure to produce more oil over the next 10 or 20 years, even though you have all of these green initiatives that are going to move forward, but it's certainly not going to displace that demand.
Jeff Schulze: I don't know if now is the best time to buy energy yet, because again, because of all of the supply that has been pushed onto the markets because of ROPEC, Russia and OPEC at the given moment, I think you're going to see a lot of bankruptcies, a lot of consolidation, but from the ashes that are going to be born from this situation, I would think that would be a pretty good long-term buy five, 10-year type of situation. I like that. It was Warren buffet that said, when everybody's greedy, be fearful, and when everybody's fearful, be greedy, and nobody is greedy right now in the energy market.
Jenna Dagenhart: Yeah, especially with ROPEC on all of those risks right now. It's not just a demand issue on it. Building off of your comment about global demand, what are you making in terms of, or what is your global outlook right now?
Jeff Schulze: Yeah, I think we're going to have a global recession. The definition of a global recession is GDP growth going below two and a half percent, given the fact that China has gone offline and we haven't seen the official Chinese GDP print here, but it'll probably be in the 1% or 2% range, the unofficial number. But just doing a back of the envelope type of calculation from the drop of manufacturing PMI that we saw in 2008 versus the drop of PMI that we saw here recently, that would suggest that GDP growth dropped by about 10% in the first quarter for China. The real number is probably closer to a negative 5% print versus what they'll say officially. Obviously, South Korea shut down, Italy's shutting down, the US is shutting down. So, I think a global recession is a foregone conclusion, and more importantly, I think a US recession is a foregone conclusion as well.
Jeff Schulze: We've recently upped the probability of a recession on our recession risk dashboard to 75%. The reason why it's not 90% is it may not fit the technical definition of a recession as most people think of as two negative quarters of GDP print. Just a quirky way that the calendars work out right now. You had a pretty strong January here in the US, February was okay, but obviously March numbers are going to fall off a cliff. So, you may still have a positive first quarter print here in the US. I think next quarters print is going to be something like negative 5%, negative 6% very, very deep recessionary type of quarter. Then with all the stimulus that's coming out from the Fed and likely on the fiscal side of the ledger, we could have that re-acceleration of growth in the third quarter where that could print a positive number.
Jeff Schulze: That's why it's a 75% probability of a recession. But then again, the markets are clearly pricing in a recession at this point, so I don't think it really matters from a market perspective.
Jenna Dagenhart: But you think it'll be pretty shallow when you say, I don't think this is a crash, I think it's more of a pullback.
Jeff Schulze: I do. I do think it's going to be a shallow recession, similar to what we saw back in 1990, for example, wasn't a very strong recession. 2001, believe it or not, wasn't a very deep recession either. But I think if you look at the average recession that we've had, it's usually around 11 months. I could see this one being clearly like a six-month type of recession where you have this distortion. It plays out over the course of five, six months, and then life gets back to where it was prior to the outbreak of the coronavirus. The one thing that I've been saying though is I don't think it'll be a V-shaped recovery. I do believe, as I mentioned, that people won't go back to their normal behaviors until you do have a vaccine for the coronavirus.
Jeff Schulze:I would imagine it's going to be more of U-shaped recovery rather than a V-shaped recovery that you typically see coming out of these bottoms.
Jenna Dagenhart: A lot of people hear the word recession and panic immediately. I wonder, Chris, you've looked a lot at investor emotion, investor behavior, how would you recommend checking your emotions at the door and investing rationally during this time?
Chris Davis:Well, certainly a lot more money has been lost reacting to recessions, predicting recessions than has ever been lost in recessions. In a way, if people want a mental model to hold on, I think they have to think about what happened after 9/11 because you had one two punch. You had the tech telecom part of the economy just shut down. So, you had a real air pocket, very similar to energy in a way, just absolute free fall in an important growth sector of the economy back then. Then you had this psychological terror laid on top that literally froze everybody. I mean, in the sense that people couldn't fly, hotels shut down. But the snapback there was quite steep. Here, I think Jeff is exactly right. I think that here we won't ... this is going to be something that [inaudible 00:50:29] combines that with a little bit of what happened in the financial crisis.
Chris Davis: It will not be as severe as the financial crisis. The system is in far better shape. It's much more resiliency. This fear has a fixed deadline that we're going to go through because we're going to get improvements in cure rates and so on. We can-
Jeff Schulze: And the fed has reacted very fast.
Chris Davis: The fed has reacted, brought out the bazooka. It's going to be somewhat between those two in the sense that, I think you'll have a little bit of a longer period, but I think the psychology is going to recover much like it did after 9/11. The most important thing to realize is by, two or three years later when people looked back, what they said was, "Wow, we didn't realize how vulnerable we were. Thank God we're safer now." We have the Department of Homeland Security; every city has terrorism drills. People have been prepared about what they would do. Of course, there's going to be a department of pandemic prevention, response rates, test kids, hospital ships, whatever it is. There's going to be a huge amount of spending to make sure that the next one, which could be a lot worse that we're in much better shape for it.
Chris Davis:I think that sort of restore of optimism could really drive sort of a recovery fast. That's why I say, I think mentally it'll be between those two things, and what really matters is for people to keep their emotions in check, to recognize that what they want to do now is what they wish they had done in the past. It's too late. That ship has sailed. What will your future self be glad you did here? It's certainly not going to be saying, "Oh, I'm glad I sold when things were down 30% or 35%. It's going to be stay the course. Can I lean into it? Can I recognize that my future returns are going up because prices are lower? A big part of our job, and really the job of financial advisors, this is where the robos can't do this.
Chris Davis: This is the role of the financial advisor, right now. This is where they earn their money. If I say you make most of your money in a bear market, you don't realize it at the time as an investor, well, financial advisors provide most of their value in a bear market, but there's no fee for it, there's no recognition for it. It's helping their client maintain their courage, maintain their discipline, maintain their allocations if they're running a stock bond portfolio. Well, right now their stocks have gone way down. Do they have the discipline to rebalance? Rebalancing is key. Financial advisors, your robo investor, like your Fitbit can go off and tell you it's time to go to the gym, you may or may not do it, but your financial advisor can help you do it.
Chris Davis: I think this is exactly the environment where they can really serve their clients. Just think about what it means is if the market goes down, let's say market goes down 35% and a client gets out. Let's call that client A. Client B, the market goes down 35%. They stay in, the market goes back to where it started, even if it takes three or four years. Well, when it goes back to where it started, it's up 50%. So, how much value did that financial advisor create for that client by just keeping them in for that 50% recovery? Whatever it is, when people are talking about, "Oh, they charge this basis points or that," it pales in comparison to the hundreds, thousands of basis points that are lost when people panic. That is really the opportunity that advisors to have to serve their clients today and create enormous value.
Jeff Schulze: A good advisor's worth their weight in gold. It's easy to sell, but it's much harder to buy back in a once you've seen the market crash back down. But there's a good statistic out there that since 1936, even if you were the best market timer in the world and you were able to sell 10 months prior to a market peak and buy back 10 months after the market low, you would have been worse off than someone that just stayed, invested the entire time.
Jenna Dagenhart: Interesting, wow.
Jeff Schulze: That's what's the benefit of hindsight. We've run an analysis at ClearBridge, and if you look at every decade since the 1930s, your average price return during that decade was 114%. But if you missed just the 10 best days of the entire decade, so 10 days out of 3600 days, your return goes from 114% per decade and drops all the way down to 44%, so you would have lost 70% return each decade if you just weren't invested for the entire time. I hate to say it, but a lot of the big return days are at the very bottom of a bear market or a recession when you're coming out the other side or at the very end as the markets get euphoric and you have that blow off top.
Jenna Dagenhart: Really, illustrates your point about staying in the game, putting the fear aside, keeping your money in. In the same way that you mentioned a financial advisor is trying to get the client to have that confidence, have that calm, to stay invested. The fed is trying to do the same in a way. It's okay, we're here, we're stepping in. We've done too ...
Jeff Schulze: Very forceful.
Jenna Dagenhart: Yes. The fed is really trying to say we're here. What do you make of monetary policy right now in these emergency rate cuts?
Jeff Schulze: Yeah, I think the fed did absolutely the right move. It's good to go in aggressive on the front end to try to stem the tide and ease financial conditions rather than play Monday morning quarterback and try to catch back up. I think it was the right move cutting rates to zero. They brought back a QE program, which surprised market participants of $700 billion, 500 billion of which is going to be Treasury's, 200 billion is going to be mortgage backs. If you looked at the mortgage back market, it wasn't functioning properly, even though 10-year treasury and 30-year treasury rates have come down dramatically, mortgage back rates or mortgage rates for the average American have actually been going up during the course of this time. But since the fed announced that program, you've seen rates start to come back down, which should be a boost for consumers to be able to refinance.
Jeff Schulze: They cut the reserve requirement rates to zero. I'm not think banks are necessarily going to lend right now because a lot of their lines of credit are the revolvers are being drawn down by corporations like Boeing in the hunt for cash and the fear of what's going to happen. Also, they opened up swap lines with a lot of developed economy's central banks, dollar swap lines to help ease a lot of the dollar funding issues that you're seeing right now. Then just recently, they opened up the credit facility, a commercial paper facility to corporations and also the primary dealer facility as well, which a primary dealer can bring any type of collateral to the fed, basically and get some sort of yield return back on that.
Jeff Schulze: The fed is bringing back the crisis programs of 2008, and I think that it's a very smart move. It's easy to try to calm financial conditions rather than have financial conditions get out of control and try to play catch up and ease them after it's already happened. I think the response was good. I think it was very much what the fed needed to do, and it'll be interesting to see what the financial market reaction is going to be as we get a couple of weeks from this point.
Jenna Dagenhart: Governments are stepping into with fiscal stimulus as well.
Chris Davis: Yeah. When we go back and think about that shape of the recovery and Jeff's point about a U versus a V, and I think that's a thoughtful view as I say, but there are two types of effects happening right now. There's demand that's going to be lost and it's just an air pocket of black hole. You're not going to get it back. If somebody was going to go out to a meal this Thursday, they're not going to go out for a meal, they aren't going to make that up in the future. They'll go back to going out once a week when life normalizes. But they won't say, "Oh, by the way, we postponed for meals so we're going to add those back there." That speaks to that sort of U-shape. But there will also be a lot of pent up demand in this period.
Chris Davis: There are things that will, I think very much more snapback, and those are the sorts of ... if you imagine somebody was about to buy ... their car is a rusty heap, they're about to buy a new car. Now everything's on hold for a month, two months three months, we'll see. When they go to buy that new car, the same person that was going to buy a car three months from now will be buying it. So, there'll be an accelerant in demand from that sort of pent up period. It's dangerous to try to say, "I'm going to wait for the bottom, because as we've said, the market looks ahead. What we know is a lot of measures are going to be taken to help people through this, what I'll call the air pocket period, right?
Chris Davis: The people that they've lost revenue and they aren't going to get it back. A lot of other industries are going to get it all back. Applied Materials is not going to sell less equipment over a rolling three-year period than they were going to sell without this period of time and so on, or Intel with servers and so on. I think the danger of saying, "Well, I'm going to wait until things look better and then I'm going to get back in," I think it's a very, very dangerous strategy, because the market will recover before the news is clear. As you said, when they announce that there's been a recession, the market will already be up. Things will already be moving long before it is clear that the ... but what people can go to sleep knowing is they can go to sleep knowing that it is going to get better.
Chris Davis: I would say after, in the great depression, in the financial crisis even, there wasn't necessarily that certainty. There was a possibility that the world could seize up in a way that nobody could really imagine after the financial crisis. If you were in the financial industry and saw what was happening, you were really scared there. If you were the man on the street, not so much. 9/11 was the opposite. If you were in the financial industry, you'd say, there was a recession coming from the tech telecom meltdown. Now we've got hotels seizing up airlines, but this is a fairly short-term effect. The fundamentals of the economy look pretty good. It was a paralyzing fear from a human citizen point of view.
Chris Davis: But within the financial industry you could say that it wasn't as terrifying a time. We're much more in that sort of period now. People know they're going to read the paper and see the infection rates capping out. They know major league baseball is going to reopen. If they can see that, close their eyes and see that, then the question is, okay, what do I want to own for the next 10 years? If I can buy that business 40% cheaper today than I could three months ago, well that's going to be pretty great for the next 10 years.
Jenna Dagenhart: Jeff, any final thoughts on your end?
Jeff Schulze: No, I'll just say that one thing that we're really looking for is the next fiscal package to come out, the third fiscal package. We think it needs to be a shock and awe type of package, bigger than TARP back in 2008, which was 700 billion. If you break down the US economy, and 70% of the US economy is consumer spending. That's about a trillion dollars per month in consumer spending, that's potentially offline as we move through the coronavirus. I'm hoping that the fiscal package will be $1 trillion plus. I'm hoping in the one, two, one, three range. I think anything lower than that, I think the market will revolt, and eventually bring Congress back together to give the package size that the market would like.
Jeff Schulze:But I think when you get some visibility there, I think there's likely going to be ... we're getting really close to a bottom at that point, and especially if you combine that with a peeking out of potential incidences here in the US, but longer term, the market goes through 10 to 20-year periods where the market goes nowhere, which is a secular bear market and they're always followed by a 20-year period where the market goes up substantially, which is known as a secular bull market. This dynamic has been going on since the 1930s, and if you go through this period, we're in firm belief that we exited the secular bear market of the 2000 and we're now in year 11 of a 20-year period where you're going to have outsized equity returns. I do believe the market are going to have a lot more all-time highs in the upcoming decade. I think aggressive monetary stimulus, fiscal stimulus, and the fact that bonds are so cheap compared to equities right now is what's going to end up fueling the next rise of equities.
Jenna Dagenhart: Well, we could clearly talk to you all day. Thank you so much for your insights. Stay safe, stay healthy, and thanks for joining us.
Jeff Schulze: Thank you.Chris Davis: Thanks for having us.
Jenna Dagenhart: Thank you for watching this Coronavirus and Market Volatility Masterclass. I was joined by Chris Davis, chairman and portfolio manager at Davis Advisors and Jeff Schulze, investment strategist at ClearBridge Investments. From our studio in New York, I'm Jenna Dagenhart with Asset TV.