Total time: 9:15

00:00

Bob Smith: Good day everyone. My name is Bob Smith. I am the Chief Investment Officer here at Sage Advisory Services. And I'm very happy to be joined today by other members of our investment committee. Generally, in our investment committee meeting, one of the things that we like to do is very quickly review what might be a curveball – things that are perhaps unknown unknowns or even a known unknown. And I'll just go around the horn here and ask each one of our participants today to give us their worst nightmare in terms of something that didn't quite work out, that has a reasonable possibility and could impact the market? Rob?

00:45

Rob Williams: Yeah, I mean, look, there's a lot of things to worry about, we're hanging our hat on a recovery that is based on success of the vaccine and the consumer continue to spend, so something, some event that derails that earlier in the year would be catastrophic, right? If vaccines don't take hold, they're not distributed, they dropped the ball in some way, and we don't get off to a good start. Because a lot of positivity is baked into the cake here. We've been talking a lot about reflation and things like that and it’s based on activity coming back online, quickly and smoothly. And so, I don't know what would derail that. It looks good, but when things look good, often there's more under the surface that could derail that. So that would be something out of the gate and then many things later on in the year.

01:38

Bob Smith: Sure. So, I tend to agree with you, you know, science is science. And you know, that's why they have things called laboratories and if things don't work out, they kind of go back and have to figure it out again, going back to the drawing board. So, who knows? Maybe these vaccines aren't the wonder drugs that they are portrayed to be. And certainly, that has been featured in the valuations of securities around the world in the sense that there's great hope that's already priced into the market. So Thomas, what do you think is the worst curveball that you might have to deal with?

02:13

Thomas Urano: We had a conversation with the portfolio team this morning specifically about this. And I asked the same question – what is it that we think could cause some unforeseen turbulence or volatility in the market? And I think the answer was success in terms of recovery and policy leads to a withdrawal of said policy. And that I think might be an issue for the market in totality, like the successful implementation of monetary policy means that we need to withdraw that monetary policy, and we're running at a pace of $120 billion a month of QE purchases just by the Fed. That's an astronomical amount of money that has to get placed every month. And when the flow of that QE stops, there's a question mark on valuations. And I think that's a concern. Right now, in the here and now, in the forward looking six months, nobody's talking about when the Fed is going to pull the punchbowl away, so to speak. And I think, in terms of valuation impacts, that probably would be one of the things that I think can cause turbulence in the second half of the year. It's certainly not a known. Nobody knows when or how or in what fashion or what magnitude the Fed will taper purchases whether the ECB will taper purchases, whether the Bank of Japan will taper purchases, but at some point, if policy is successful, the natural consequence of that success is you withdraw the stimulus.

03:47

Bob Smith: Well, I hope that we don't have taper tantrum number two, like we saw back in the middle of 2013. That was quite an event for the bond market to deal with. And going back to those kinds of times wouldn't be a welcome sight for sure. What do you think, Jeff? What's the worst thing that would keep you awake at night, that didn't go right?

04:08

Jeff Timlin: Yeah, I mean, in addition to what both Rob and Thomas said, you know, it's interesting on the municipal side of it, it's a quirky asset class and the way that investors react to certain information is quirky as well. So where the taxable and the equity markets react to tangible information, or tangible projections, on the municipal side, it's a lot of hearsay, conjecture, and news articles, or what I would classify as headline risk. And if you really look back historically on munis, from a credit perspective, they've maintained a very solid and stable credit profile. You look at default characteristics and municipals, both from Moody's and S&P, and they're a fraction of what they are on the corporate side. However, when you have these little hiccups in the market, whether that be – and I shouldn't really say Covid is a hiccup – but when you have these events in the market, that where people should be flocking to munis, like they do to into Treasuries, they flee, like all other risk asset classes. And that's kind of where I'm going, is the major risk to munis is some type of headline risks that captures the municipal market, at least some segment of it and causes outflows in the market. What's been a major, I talked about this previously, a major driver of spread compression and lower yields is the amount of demand in municipal land. And if you look back historically, at inflow and outflow charts, outflows coincide directly with negative returns. Every other event, aside from say, 2008, which again, was a little bit more of a credit event, again, and the reason for that was the elimination of the insurers, the monoline insurers in muni land, so they had to reassess risk. But aside from that, munis are a stable credit, and really are just affected by flows in the market, and in particular, the outflows drive negative returns. So that would be my major concern. And again, but the nice thing about that is, even though it's a major concern, it's temporary. And those are usually areas of buying opportunities, or to deploy money at more advantageous levels relative to the credit risk you're taking. So, that's where I would say is the major risk for munis.

06:13

Bob Smith: Great, thank you for that insight. And Komson, let's finish it off in terms of what would be a real disappointment for you in terms of all the things that we think are going to occur?

06:25

Komson Silapachai: You know, I think the big disappointment for me would definitely be the recovery post vaccine. I think that market participants, I think everybody is expecting that. Let's say we have a rollout of the vaccine, you're going to see kind of economic growth snap back. And so, is there some friction, is there some event that causes us not to recover as fast? One thing that really keeps me up at night, even more than that is not really any one event, it's just the fact that the markets are more fragile today than they've ever been. Valuations, you don't have the valuation cushion at this point. And so, you know, whether it's a taper tantrum due to a tier two Fed speech or something that we would seemingly think is not a huge event and not a massive market movement event, at these valuations, anything can really tip the market and generate some volatility. Now, we think that stimulus will continue and will continue to kind of be around, especially during times of volatility. But that doesn't mean that, at these levels, you're not going to see wobbles in the market. We're looking at that environment as areas of opportunity for next year. And so, I think that the fragility of the market ultimately is something that I think I worry about more than anything.

07:51

Bob Smith: Okay. So, it sounds to me like we're going into 2021 with our eyes wide open and on the balls of our feet because anything can happen. But we are definitely pulling for a very constructive year. I would like to close by saying that we hope that you enjoy a much happier and indeed a very prosperous 2021. Thank you for listening.

8:17

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