2022 Market Outlook
Episode 6115th December 2021 • Human-centric Investing Podcast • Hartford Funds
00:00:00 00:45:16

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What surprises may lay ahead for investors? Nanette Abuhoff Jacobson shares her outlook and positioning ideas for the year ahead.

Transcripts

John Diehl: [:

Julie Genjac: [00:00:02] and I'm Julie. [00:00:03][1.3]

John Diehl: [:

Julie Genjac: [00:00:09] Every other week. We're talking with inspiring thought leaders to hear their best ideas for how you can transform your relationships with your clients. [00:00:18][8.7]

John Diehl: [:

John Diehl: I've worked with Nannette for a long time, but never would I have guessed that I'd expect to see her pick up, pick up a guitar and start playing in a band. Right, so it's but what's always

amazing to me, Julie. I don't know if you've experienced this or not.

lways admire people that do. [:

Julie Genjac: [00:02:40] I wholeheartedly agree. I was. I was going

ionals as we can possibly be.[:

Julie Genjac: [00:08:53] We're so excited to welcome Nanette, Oberhof, Jacobson today. She's managing director and multi-asset strategist at Wellington Management Company and global investment strategist for Hartford Funds. With over twenty five years of

solutions. Welcome, Nanette. [:

Nanette Jacobson: [00:11:48] Thank you, Julie, it's a pleasure to be here. [00:11:50][2.0]

Julie Genjac: [:

Nanette Jacobson: [00:12:19] Wow. Well, thank you, Julie. I appreciate the question because it makes me reflect and think about like, how did I get here and what was the path? So a couple of things. First of all, you know, from my bio that my background is computer science. And so I definitely have a penchant for the geeky stuff, like analyzing data and figuring out what it all means. So

there's that part of my brain. And then there's the other part, which is that I love communicating. And so being able to communicate dense, analytical topics in a clear, understandable, accessible way is

really creative for me, and I love doing it. So that's one piece of the second piece is that I come from a family of teachers. Both my

genetic trait. I don't know. [:

John Diehl: [00:13:44] Well, then it's great to see you again, by the way. Question I have for you, as you mentioned teaching and often times when we're teaching, we're talking about things that have already happened. Right. But you're in this unique role of not only reflecting back, but oftentimes I'm sure the questions you get are where do we go from here? And so if I could ask you just to think about client portfolios for a moment and reflect back on where we've

s are positioned these days? [:

Nanette Jacobson: [00:14:29] So first, thank you, John, it's great to see you again. And let me start by a quick flashback to this past year, which has been remarkable because we have, from an economic standpoint, come out of the depths of the terrible, terrible health crisis and recession, and we've come back with flying colors in most parts of the economy. But I would say that all of the measures that policy implemented, the fiscal measures, the monetary measures really did support the economy tremendously in a crisis that was a

completely exogenous event, a pandemic. No one could have prepared for that. But we've come through it, you know, relatively quickly. And consumer demand is coming back. The unemployment rate is coming down. You know, we're headed toward we're around four and a half percent now, just coming up to an employment report. And so, you know, the economic backdrop has been incredibly good. Now the other thing is that even while there have been dealt a variance, we have had some hiccups along the way. Granted, but markets really haven't

stopped hitting records. We've had momentary slips in equity markets, but generally it's been an incredible year, with returns so far

around 25 percent in the US equity markets and not far from that in non-U.S. markets as well. So to your question, what do we do now? You know, I can't talk about the future without bringing in a key risk which we're dealing with right now, which is a new variant called Micron. And we at as we're sitting here right now, we have so little data to analyze. We need to respect the fact that this could be a

risk to the recovery not only in the United States, but all over the world. Hopefully, we will find in a week or so more about the contagion and, more importantly, the virulence of the disease, because we really don't know if this particular variant could escape vaccine effectiveness, and that is really key. this variant will not derail the economic recovery and that markets in equities and non

ere and turn it back to you. [:

John Diehl: [00:18:26] Well, yeah, and I guess then I guess I think about it, you know, it seems that long ago we were talking about the risks of deflation, but now we're talking about inflation. And I guess my question is for for folks that have been around the markets

for quite a while when markets start setting new highs and new highs, new highs, even if we don't boldly say so, I think there's a little part in the back of our mind that says, should we be waiting for that next shoe to drop? And I guess my question to you, man, it is, as you consider inflation going into next year, is that the other shoe

in your mind at this point? [:

Nanette Jacobson: [00:19:16] Right. Well, I'm sure all of us have experienced some form of supply chain disruption. You ordered something and you thought it was going to come in a few days and it's taken months and months. I can give you a big list of items on my shopping list that have been delayed for months. So, you know, the causes of inflation are twofold. One is these supply chain disruptions, which are coming from very high prices and commodities. It's coming from labor shortages and also the issues of the freight issues that we're having at ports all over the world, which have either shut down because of COVID or are just incredibly congested.

And so that's the supply side. The demand side is that consumers are, you know, they're back in force and they want to buy stuff and they want to do stuff. And so consumer demand is very, very strong right now. So on balance, John, I don't think that inflation is going to, you know, be a shoe, the next shoe that drops. However, when I look

the way they are right now. [:

Julie Genjac: [00:22:18] Nanette, it's interesting we've only been together for a few minutes today, yet you've mentioned at least a dozen or more variables, obviously, that you're wrapping your arms around every moment of every day and for the financial professionals

with us listening today. I would imagine that that's the world that they're living in. All of these variables, their clients have access to such a velocity of information, namely from these devices. How do you engage your team on a day to day basis to take in all of this information, process it and then make sense of it in order to help guide all of us? I'm thinking that the financial professionals with

ion flow day in and day out. [:

Nanette Jacobson: I do think it's the biggest challenge that we face because the amount of information flow is just it is and I'll say it, it's overwhelming. And there's no possible way that anyone can cover and absorb the amount of information that's out there. So you know, how I how I do my own job and how the advice that I give

professionals on my team is to really be selective about what you read and figure out where is are the sources of really value added information? And it probably I mean, you can read whatever News Feed you want. I think it's really important to get different points of view. So, you know, I generally I try to read the Financial Times, which has a more global perspective. I read The Wall Street Journal

for us, a perspective and somewhat global. I read Barron's. You know, you have to just immerse yourself in the in the market's narrative.

e a different point of view. [:

John Diehl: [00:25:32] Now that if I could jump back to the conversation, we were just having a moment ago on allocations and obviously growth has ruled the day for years now. But when I hear you talk about potential risks out there, it sounds like you're saying that financial professionals need to at least respect the risks that are out there.

Nanette Jacobson: [:

a new regime and it's so easy to attach oneself to the old regime. And you're absolutely right, John. The regime that we're coming out of is one where disinflation, falling prices are strengthening China economy and and also fairly slow growth in the United States and elsewhere which and very low inflation. And so the trades, the

since the financial crisis in:

consumer discretionary. I would also put under that umbrella investments outside the U.S., so specifically European and Japanese equities. And actually, and this was sort of, you know, these have been stealth performers, but Europe has done has been very competitive with the U.S. in equity space. And Japan is starting to pick up also. So underneath the surface, we're seeing this rotation into more cyclical sectors, more sectors that are less sensitive to higher rates. And I'll get back to that and a rotation out of the

U.S. into international equities. And I think it's important to look at your clients portfolios and look at what their exposure is to the old regime, which was slow growth and low inflation, and how that portfolio was set up for the new regime, which is stronger growth and higher inflation. So part of that calculus is to change, modify your equity exposures. But the other part, John, is to look at an asset class and sector weights in the commodity sector, which is going to

and to discuss with clients. [:

Julie Genjac: [00:30:29] Then at a moment ago, you called it a health crisis, and I love how you phrased that as opposed to the global pandemic or some of the other words that have been maybe more frequently used. My my personal mantra during so much of this time has been structured yet flexible. I know there oxymorons, but I sort

of feel like that's the world that we're all living in and especially financial professionals as they talk to their clients. From your perspective, what are one or two themes or areas that might most surprise clients in twenty twenty two? And how might financial

ations in twenty twenty two? [:

Nanette Jacobson: [00:31:12] Yeah. So thanks for that question, Julie, I do think that what financial advisers will find when they look at their clients portfolios is a concentration in the mega cap stocks and mega tech stocks. And I'm not saying that you should get

rid of that exposure. I still think that having growth exposure makes sense, but you at least want to make sure that your clients

portfolios are exposed to a different environment than we've been in. Again, moving from a slow growth, low inflation environment to a stronger growth, higher inflation environment. And the problem with all that concentration and growth and tech is that if yields rise.

Those sectors are likely not going to perform very well. And we've seen this in various episodes. And the reason is that the multiples, the valuations that are supporting those companies are really based

tent than the markets think. [:

John Diehl: [00:33:12] Well, then given given that outlook, let's kind of change gears a little bit in the portfolio and look at fixed income, so obviously fixed income remains an important part of the average client portfolio. But would you be setting expectations differently with clients as we head into next year, given what you just said about the risk of inflation and rising rates? And then secondly, for the financial professionals out there as they review fixed income positions, kind of what are you recommending now that people take a look at in the fixed income area? [00:33:45][33.1]

Nanette Jacobson: [:

a half percent or lower. So you have some allocation to high quality fixed income that will cushion any sell off that we have in the equity markets. Number two, since we're in an environment where growth looks to be, you know, fairly robust, the I certainly would include credit instruments and my fixed income portfolio. But specifically with an eye toward valuations. So, for instance, a lot of spreads right now are very tight. But I do think that default rates are going to stay low. And so, you know, there is a terrific value in credit. But to the extent that interest rates are rising because growth is strong, spreads should be fine and maybe even

ond purchases and sometime in:

yield curve most that will probably benefit floating rate instruments that are pegged to a short term benchmark. So just to summarize, that keeps some allocation to high quality fixed income have some spread exposure for return and focus on floating rate credit. And I would be remiss if I left at munis. I think municipal bonds play a very specific role, particularly in individuals portfolios that need some kind of tax relief and muni bonds are about one of the few games left in town. So to provide attractive tax adjusted returns, I still think munis play an important role. [00:37:23][215.5]

Julie Genjac: [:

work setup changed the way you communicate? What impact has it had on you and and what are your thoughts on on that process going forward? [00:38:21][53.7]

Nanette Jacobson: [:

a productivity standpoint, we have really not missed a beat. In fact, I would say we're all maybe more productive working from home. You know, if you have the benefit of not being distracted by so many things that could be distracting from the lawn mower to, you know,

pets. But I think, you know, the thing that I've tried to be more aware of is what's going on in people's lives. And when you're in the office and you have more spontaneous interactions with with people, it's easier to know what's going on and, you know, at home or in someone's life or something they're struggling with. It's a lot

harder to do that remotely. And so I try I don't do a good enough job, but I do try to reach out to people separately from work topics and just see how people are doing and how they're managing and if they're facing any challenges. Because I did have a case of someone

where a colleague, he wasn't returning my emails. And, you know, when you start thinking like, what's going on? And then it turns out there was a problem, a health problem in his family. And I didn't know

es outreach and sensitivity. [:

Julie Genjac: I think focusing on the people side of your team, especially during this time, is is so important and probably has been a great reminder for all of us that, you know, we're talking about whether it's our background that we're seeing on video or trying to replace what I call the the doorjamb holding the cup of coffee conversation that we used to have and we all took for granted. I

thank you for sharing that. [:

Nanette Jacobson: to the extent that you can take a walk outside with somebody, you know, I don't know what everyone's situation is at at work or but I've been doing that where either the couple, if there are days that I am at work, I make sure that I schedule coffees or lunches with people. And if I'm at home, I reach out to people in my neighborhood to ask them if they want to take a walk. And that I think we all crave relationship. So anything that you can do to nurture that, I think is a good thing. [00:41:43][36.7]

John Diehl: [:

Nanette Jacobson: [00:42:23] Yeah, it's a great question, John, and

so my experience is that you need to let your brain rest and you need to have space to think creatively and think outside the box. So and whatever that is, you know, we could be on a run exercising. For me, music is a great escape. And so it's either listening to music or actually making music. And I find that it's a great way to just completely again use different parts of my brain. And then I find

that that relief just opens up a channels of creativity.

John Diehl: [:

Nanette Jacobson: [00:43:54] All right. So I started playing guitar when I was seven years old and I've been singing for as long. And then, you know, life gets in the way. I got married, I had kids and I really. And I was working, you know, intensely for many years. And so I backburner that for quite some time. Recently, well, a few years ago, I decided to pick up my guitar again and and pursue a different style of music. I used to play and sing folk and pop and that those kinds of genres and I've been in a jazz ensemble. So I'm playing jazz guitar, I'm singing jazz standards and, you know, scatting even, dare I say so. And you know, please don't ask for any. Don't ask for any demonstrations. [00:44:56][62.1]

John Diehl: [:

Nanette Jacobson: [00:45:10] I did not insist that discovery.

[:

Julie Genjac: [00:45:17] If we wanted everyone to log off immediately, I would start singing. That's all I'll say. [00:45:21][4.2]

Nanette Jacobson: [:

John Diehl: [00:45:31] Well Nanette, when we think about that portfolios and the conversations that financial professionals are going to be having with their clients coming up, I mean, this is probably something many of us are thinking about right now, which is what changes do we need to embrace? How do we communicate those to our clients? I may be asking you to rehash a little bit, but if if there's a couple of things you would tell financial professionals to

ery important to get across? [:

Nanette Jacobson: [00:46:09] Well, the first thing I would do is make sure you set up a meeting with each client and that the purpose of the meeting is to take a step back and to look at your portfolio allocations and to see what those portfolio allocations imply about your view of the economy and markets over the next year or so. And then, you know, tease out of that discussion, oh, this portfolio really is saying that I'm expecting growth to be slow and inflation to continue to be running at two percent. And if that's the case.

Start thinking about ideas, do you want to shorten the duration of your fixed income portfolio? That could be one fairly easy move to do. You want to rotate into some sectors of the equity market that are more cyclical and more value oriented? That could be commodity type exposures or cyclicals or financials or energy. And three. Do you want to own some equities outside of the US? You'll notice I did not include emerging markets. I think there are some deeper issues there for emerging markets to recover from a health standpoint and

infrastructure standpoint, but certainly in other developed economies like Japan and Europe, the there are better valuations and opportunities in the equity markets. And then finally, direct inflation protection, which would be either through commodities or inflation linked bonds. And of course, just overarching

recommendation that I know a lot of strategists say that municipal bonds are expensive, but I still think that they play a very important role for better tax adjusted yields, particularly in an environment when government bond yields are so low.

Julie Genjac: [:

Nanette Jacobson: [00:48:49] Yeah, sure. So I would say there are three trends. The first one is definitely more activity on the commodities and inflation protection side. So clients looking for more direct inflation protection through either commodity related

assets or infrastructure, anything that looks like a real asset could be real estate. Also again, so long as the real estate investment is adjusting for higher inflation. So that's one conversation. The

look on the expensive side. [:

John Diehl: [00:50:35] So I can't let you go, Nannette, without asking, because every time I try to read about crypto currencies, I start to get a headache. But I have had more individual clients, some of whom are relative novices in investing. Ask me about crypto in the past six months than probably ever. But, you know, at the same time,

I as a as a financial professional, have a hard time grasping how these things work and how I should think about them. Well, where does Wellington stand on crypto? Is it time that advisors really ought to be thinking about crypto as a as a separate asset class to be allocated to in a typical client portfolio? Are we still too early

for that? How should financial professionals be thinking about it?

[:

Nanette Jacobson: [00:51:24] Yeah, you know, we are looking at what the features are of bitcoin and how it meets the criteria for a separate asset class. I think right now we as a firm are certainly keeping on top of the area and indirectly we are making investments in companies that offer bitcoin as a form of payment or an exchange that is dealing with bitcoin transactions, though we don't have any specific fund that accesses cryptocurrency. My own view is that the technology is fascinating. I do think that the technology will serve a long term purpose. But right now, for any individual, investor or client that an advisor speaking to, I think the first thing you need

to look at is the volatility of the asset class. And we know that the volatility has been upwards of 80 percent annually, 80 to 100 percent in bitcoin. So the first question if a client is interested in cryptocurrency is, can you whether that kind of volatility because

you need to be prepared for that? And because of that volatility and the extent to which cryptocurrency has appreciated this year, I certainly think that it has speculative qualities. And so it's very difficult at this stage to separate what role bitcoin plays in a portfolio because of the extreme volatility and the fact that it has behaved like a speculative asset. So for now, you know, it's all based on your risk tolerance. I do think the technology will evolve and look, you know, regulators are involved, the government is

involved. So that's a sure sign, as any, that the technology has

ation which I fully respect. [:

Julie Genjac: [00:54:07] I think that's great guidance, Nanette. Thank you for that. And before we wrap up today, I'm curious, how do you plan to change the way that you work after after the remote work environment that that we've all experienced? As you look forward, I my operative word is to have maybe a more balanced world, whatever that may shake out to be in twenty twenty two. What changes will you make to your systems and processes and communication based upon what you've learned in the past? [00:54:34][27.1]

Nanette Jacobson: [:

energizing and you end up with a better recommendation if everyone is speaking openly, honestly challenging each other in respectful ways. So I think that would be my parting thought and what I will try to hold on to as we return to the office and have more human interactions, which I'm looking forward to is to just, you know, keep communicating, keep building relationships because the sum of the parts is really not as valuable as the entire team. I may have gotten that expression a little wrong, but I think you know what I mean. [00:55:47][68.8]

John Diehl: [:

Nanette Jacobson: [00:58:41] It's my pleasure, John and Julie, really appreciate being able to share my thoughts and wish all of your clients well and a successful New Year. [00:58:41][0.0]

Julie Genjac: [:

John Diehl: [00:24:51] And if you'd like to be a guest and share your best ideas for transforming client relationships, email us a guest booking at Hartford Funds dot com. We'd love to hear from you. [00:25:01][10.2]

Julie Genjac: [:

Spreads are the difference in yields between two fixed-income securities with the same maturity, but originating from different investment sectors.

Duration is a measure of the sensitivity of an investment’s price to nominal

interest-rate movement.

Past performance does not guarantee future results.

Important Risks: Investing involves risk, including the possible loss of principal.

•Fixed-income security risks include credit, liquidity, call, duration, and interest-rate risk. As interest rates rise, bond prices generally fall. •Loans can be difficult to value and less liquid than other types of debt instruments; they are also subject to nonpayment, collateral, bankruptcy, default, extension, prepayment and insolvency risks. •Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Although municipal securities may be exempt from federal income taxes, investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable. •The value of inflation-protected securities (IPS) generally fluctuates with changes in real interest rates, and the market for IPS may be less developed or liquid, and more volatile, than other securities markets. •Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets. •Investments in the commodities market and the natural-resources industry may increase liquidity risk, volatility and risk of loss if adverse developments occur. •Investments focused in specific sectors may be subject to increased volatility and risk of loss if adverse developments occur. •Integration of environmental, social, and/or governance (ESG) factors into the investment process may not work as intended. •Focusing on investments that involve sustainable initiatives may result in foregoing certain investments and underperformance comparative to investments that do not have a similar focus.•Different investment styles may go in and out of favor, which may cause an investment to underperform the broader stock market. •Diversification does not ensure a profit or protect against a loss in a declining market.

The views expressed here are those of Nanette Abuhoff Jacobson and Wellington Management’s Investment Strategy Team. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views, and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), Member FINRA. Certain funds are sub-advised by Wellington Management Company LLP. HFD is not affiliated with any fund sub-adviser.

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