Decoding Mixed Signals in the Economy and Markets with Invesco's Kristina Hooper

Episode 79 of the Investopedia Express with Caleb Silver (March 28, 2022)

Table of Contents
Table of Contents

Make that two weeks in a row of gains for the U.S. equity markets, but it wasn't pretty. Investors fought off tough talk from Fed Chair Jerome Powell, who said the Fed may have to consider more aggressive rate hikes at future meetings to fend off inflation. Commodity prices are on course to post our best year since 1915. Woodrow Wilson was the U.S. president and the Red Sox won the World Series that year. The Fed's flex put another scare into government bond yields as the yield on the 10-year U.S. Treasury note top 2.49% on Friday, the highest level since May of 2019. That's when the trade war with China really got hot. Returns on government bonds are having their worst year since 1949. The Yankees won the World Series that year and Harry S. Truman sat in the Oval Office.

Larry Fink, the chairman and CEO of BlackRock, the largest asset manager in the world with $9.5 trillion in assets under management, wrote in his most recent letter to shareholders that the Russian invasion of Ukraine has put an end to globalization we have experienced over the past three decades. He writes, "We had already seen connectivity between nations, companies and even people strained by two years of the pandemic. It has left many communities and people feeling isolated and looking inward. I believe this has exacerbated the polarization and extremist behavior we are seeing across society today." If you listen to the rhetoric from countries including the U.S., China, and inside the European Union, you're hearing more talk about depending less on other countries for key commodities, semiconductors and economic dependance. It may be too late to roll back globalization completely, but nationalism and independence are on the rise.

Meet Kristina Hooper

K

Image courtesy Invesco.

Kristina Hooper, CFP, CAIA, CIMA, ChFC, is Invesco's chief global market strategist. In this role, she leads Invesco’s Global Market Strategy Office, which has strategists on-the-ground in North America, Europe, and Asia. Prior to joining Invesco, Ms. Hooper was Allianz Global Investors' U.S. investment strategist. She has regularly been quoted in The Wall Street Journal, Financial Times, The New York Times, Reuters, and other financial news publications, in addition to making regular appearances on CNBC & Bloomberg TV.

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There are mixed signals coming in every which way from the economy and the markets, and the winds of spring are getting very disorienting. We know the temperature has change in the stock market as rates rise and ice gets thinner around riskier assets. But we don't know how all of this will play out in terms of expectations for our own returns. It's a good time to call on some expertise, and we have just that on the show as Kristina Hooper, the chief global market strategist from Invesco, joins the show to help us decode these signals. Welcome to the Express, Kristina. 

Kristina:

"Thanks so much for having me, Caleb."

Caleb:

"Good to have you here. Like Investopedia, Invesco really has its finger on the pulse of investors, both institutional and retail. You have index funds, and your ETFs are so widely held around the world. But what are you picking up as that chief strategist from your clients and your customers in this market environment?"

Kristina:

"Well, I think it's a combination of confusion and exasperation. If I can... hopefully I'm accurately depicting that. I mean, I think what we're seeing and hearing are clients who feel like they just got through the pandemic. This was supposed to be a better year, a year of returning to normal. That's what we all expected. And then, of course, Russia invades Ukraine, and we have another crisis on our hands, which is exacerbating the biggest risks to the economy right now, which is inflation. So, it's frustration, and it's also confusion about how important this horrible geopolitical event is to markets and one's investment portfolio."

In Russia, which has been economically cut off from most countries except its closest allies and China, the Russian Stock Exchange reopened last week for the first time since late February to offer very limited trading. Shares rose 4%, but that does not tell the whole story. To prevent a steep sell-off, Russia's central bank banned short selling and blocked foreigners who make up a huge chunk of the market from selling their shares. The Kremlin also directed a Russian sovereign wealth fund to buy around $10 billion in shares.

Caleb:

"Let's talk about the yield curve, right? We spent some time last week on the show talking about the flattening yield curve, but now the drumbeat is getting louder that the yield curve may invert. That dreaded yield curve inversion, which typically precedes a recession if the Fed gets too aggressive with its rate hikes. What are the probabilities in your mind and in Invesco's mind that that happens? And what should investors know and do if that's coming?"

Kristina:

"Well, we still think the Fed can engineer a soft landing this year, but a lot is dependent upon what it does going forward. So, certainly the odds of a recession have increased. There's no doubt about it, but there is still the potential if the Fed does it right. And right now, what we're seeing the Fed doing is to put a different spin on the old expression of speaking softly and carrying a big stick. The Fed is speaking loudly and may be carrying a slightly smaller stick. And if that is the case, it may very well be able to engineer a soft landing if it's able to maintain credibility and we don't see inflation expectations getting way out of hand."

"Now, I don't want to go off too much on a tangent, but we did get the University of Michigan Consumer Survey results today, and they showed that while inflation expectations for the one year ahead are high, they're just as high as they were in the estimated reading that came out a couple of weeks ago. And what we've seen is that for the three years ahead, they remain in check, in that they haven't changed from February. And so, that suggests that inflation expectations over the longer term seem to still be somewhat anchored. And that's good news. If we can continue to see that, that would give us, of course, more confidence in our view that the Fed can engineer a soft landing, but it will really be dictated by what the Fed does this year. And utilizing multiple levers... so, it becomes more risky. It's not just about hiking rates. We also have a fed that appears poised to significantly reduce the size of its balance sheet in short order."

Caleb:

"Yeah. So, when the Fed becomes a seller of the government bonds it has been buying for the last couple of years, they put that supply onto the market, you got to hope that there's a buyer out there, right? Do you think that that could be a potential problem?"

Kristina:

"Well, I don't think so at this point, just seeing that global investors are still interested in buying treasuries. And especially in this environment, we're likely to continue to see something of a risk-on/risk-off dual focus by a lot of investors. So, at this juncture, no."

"But what I think we do have to worry about is the impact on the stock market. Now, if we were to go back, since we've done this once before (a little differently), but the last time the Fed tightened, they waited a lot longer to start to reduce the size of the balance sheet. And then when they started reducing the size of the balance sheet, they didn't really get very far. It occurred over the course of two years. It was a pretty small reduction over those two years. But we saw the stock market actually go up during that period. I think the big fear before the Fed started to reduce the size of its balance sheet that time around was that we would see a significant stock market sell-off as a result of it. So, we can only hope that history in some way rhymes and that we could see the stock market continue to move upward, even though the Fed is reducing the size of its balance sheet." 

Caleb:

"Let's shift gears a little bit here. Larry Fink, the chairman and CEO of BlackRock, the largest asset manager in the world, said this week in his letter to shareholders that Russia's invasion into Ukraine and the economic sanctions that followed represent the end of globalization as we know it. Do you agree? And if so, what is the significance for investors? Those are important words."

Kristina:

"I think that if we look over time at the path of globalization and we chart it out 20 or 30 years from now, what we're likely to say is that over the last few years, globalization took a step back. It started really with the pandemic and that desire to move from just-in-time supply chains to just-in-case supply chains, which meant increasing one's inventory and factories in areas closer to home. So, it wasn't as global as it had been before."

"But I think that we're part of a long march towards greater and greater globalization. We're just experiencing a hiccup right now. It could last a few more years, but capitalism has a funny way of forcing companies and economies to become efficient. And part of that is really greater and greater globalization."

Caleb:

"I really want to switch gears one more time here. You've had a very interesting career. It's Women's History Month. We're celebrating women. We always do here at Investopedia. But looking at your career, you have more degrees, Kristina, than a thermometer. And you have an alphabet soup of credentials and certifications, and I mean that in a great way. I'm just going to list a few of them for our listeners, but I have a follow up to this question. I think it's important. I think you and I both have teenage kids, maybe some of them going into college. So, you earned your Bachelor of Arts degree cum laude from Wesley. You got your J.D. from Pace. You have an MBA in finance from NYU. You have a master's degree from the Cornell University of Industrial and Labor Relations. You're a Certified Financial Planner, a Chartered Alternative Investment Analyst, a Certified Investment Management Analyst, and a Chartered Financial Consultant. Of all those degrees, which one has served you the most in your current role as chief global market strategist for Invesco U.S.?"

Kristina:

"Probably the best education I've gotten is spending time with clients. That's really what has forced me to do a lot of the graduate work and certifications I have... is just the questions that arise and wanting to understand things and know as much as possible in order to go back to clients and have the right answers and have thoughtful guidance to provide them. So, I can't pinpoint one. It's more just the education of being in this industry. For 25+ years, that has certainly been helped by stepping away. I did business school at night, I did my Cornell master's on weekends, and I've, of course, done the certifications at night and summer vacations. But it wouldn't be as valuable if I wasn't working during the day and having exposure to clients and living all of this in real time for so many years."

Caleb:

"Well, if you're graduating college now and you wanted to get into financial services or the investment industry, which degree or certification would you pursue today, and what area of the industry would you try to enter as a 22-year-old you?"

Kristina:

"So I would recommend an undergraduate degree in psychology because so much of what we do is really behavioral finance at the end of the day. So, to have some kind of underpinning and psychology, maybe not a major in it, but a minor in it. Maybe a major in economics. But you can also always do a grad school degree in finance that can round out your education. I do think psychology is becoming increasingly important because it is people's behaviors that really can dictate how well prepared they are for important life goals, like saving for retirement. You can do as much financial education as you want, but if you don't understand the psychological dimension to investing, then you really aren't as valuable to clients."

Caleb:

"Great point. I was an art major, and now I'm the editor in chief of Investopedia. How does that happen? I have no idea, but here we are 26, 27 years later, just like you."

Kristina:

"That means you're well-rounded."

Caleb:

"And 12 years in the restaurant business. So, knowing people, knowing how to serve customer service, and knowing how businesses work, I guess that all helps in the long run. Kristina, we're a site built on our investing terms. That was our foundation. We still have that today, over 20,000 of those terms on the site. What's your favorite investing or finance term and why? Which one just speaks to your soul?"

Kristina:

"Stay the course, but I don't think that's an actual term. But to me, that is... and it goes part and parcel with my answer to the last question. It's about behaviors and understanding that humans can be their own worst enemy. I mean, some of the biggest mistakes that were made during the global financial crisis weren't people who stayed in the market and lived through the downturn. It was those who got out, who got scared and got out and didn't know when to get back in and missed out on a very, very strong market recovery."

"I think fear, and to a certain extent greed, are our biggest enemies. And so, to stay the course, to come up with a plan... I mean, I guess if I could answer the question again, maybe I'd say 'financial planning.' That idea that we set a plan and stick to it is absolutely critical. I mean, what's the expression that I love so much? People don't plan to fail. They fail to plan."

Caleb:

"That's right. And you're perfectly OK to use a Jack Bogle expression in 'stay the course.' That was the founder of Vanguard and so famous for saying that, and said it to us in an interview, so I respect that as well, and I agree. Financial planning, having the plan is so helpful, no matter what's going on in the markets. We so appreciate your perspective. Kristina Hooper, the chief global market strategist from Invesco U.S. Thanks so much for joining the Express."

Kristina:

"Thank you so much, Caleb."

Term of the Week: Monopsony 

It's terminology time. Time for us to get smart with the investing and finance term we need to know this week. This week's term comes to us from Jamie in Lafayette, Louisiana. Laissez les bon temps rouler! And Jamie suggests monopsony. We like that term because, as all this talk of globalization heats up and countries try to enforce more of their own commodities, we could see some monopsony popping up among big industry and the government. According to Investopedia, a monopsony is a market condition in which there is only one buyer, the monopsonist.

Like a monopoly, a monopsony also has imperfect market conditions. The difference between a monopoly and a monopsony is primarily in the difference between the controlling entities. A single buyer dominates the monopsonized market, while an individual seller controls a monopolized market. Monopsonists are common to areas where they supply most or all of the region's jobs. For that reason, monopsonies commonly experienced low prices from wholesalers and an advantage in paid wages. Good suggestion, Jamie in Lafayette, Louisiana. A slick pair of Investopedia socks are on the way to you for your next stroll around Vermilionville in lovely Lafayette.

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  2. BlackRock. "Larry Fink's 2022 Chairman's Letter."