Shawn Snyder, head of investment strategy at Citi U.S. Wealth Management, says markets have adapted to COVID-19 news over the months, and talks what else is fueling an upwards trend in markets.
- We want to discuss more on the markets with our next guest. Shawn Snyder is Citi's US Wealth Management Head of Investment Strategy. He joins us now. And, Shawn, taking a look at the market action this afternoon, taking a look specifically at the VIX here now down 19% to below 22, do you think the worst is behind us here for the market volatility?
SHAWN SNYDER: It's starting to look that way. So I think what we're seeing is that investors have developed some sort of herd immunity against COVID news, and we've effectively been dealing with COVID for approximately two years now. So while COVID has learned to mutate and adapt, so have we. And I think we got encouraging news this morning that some of the antibody therapies appear to be effective against the Omicron variant.
And we also got some news coming in-- it's not-- again, sort of speculative. It's not necessarily confirmed yet but that perhaps the symptoms are more mild and that hospitalizations appear to be being held in check. I think all of those are encouraging news. As far as whether this can last, we're just 60 points shy of where we were on the Dow Jones before the Omicron variant was discovered. I think it depends on what happens with some of the popular vaccines and whether or not they're proved to be effective or not.
ADAM SHAPIRO: And can I jump to the headline that we just started with? The fact that it looks like we're going to avert the needless battle over the debt ceiling. Is the market going to get a boost from that, or is it already priced in because we knew eventually they would have to raise it?
SHAWN SNYDER: Well, I think financial markets have gotten quite good at playing the game of chicken as well, and I think they understand that Congress essentially needs to act or it would potentially head towards a serious disaster or crisis. No one really quite knows exactly what would happen because the White House and Congress has acted 98 times since the World War II to modify the debt limit.
So this is not surprising that they swerve at the last minute again, and I think financial markets were sort of prepared for that. Does it take a risk off the table? Absolutely. And I think that's a positive, but I'm not sure we get a significant boost from it because I think most investors thought that this would eventually happen.
- So, Shawn, with the developments in Washington in mind, with the latest that we have now on the Omicron variant, what are you telling clients to do in terms of how they should be positioned going forward?
SHAWN SNYDER: Well, at Citi US Wealth Management, we've been telling our clients to upgrade the quality of the portfolio, and what we mean is focus on companies that have strong earnings growth, potentially lower valuations, companies that would fit into the quality bias. Global health care shares we like. Again, really strong revenues and earnings growth even if there is an economic downturn, which is not our base case, but it helps to provide kind of a buffer to volatility in your portfolio. We also like longer-term trends, like digitization, cybersecurity. Those are things that we don't think are going to be influenced as much by these near-term noise, so to speak, and more a long-term secular trend that will continue for quite a while.
ADAM SHAPIRO: When we talk about what you're advising your clients, the other thing is that keep 10% of your portfolio in companies with strong dividend growth. Are you advising people to go to the dividend aristocrats or just anybody who in the last quarter might have had a good dividend yield? Which is it?
SHAWN SNYDER: Well, we do like dividend aristocrats. We also like UK equities. You see a dividend yield there that averages about 4%, whereas it's lower here in the US, so it depends where you want to go to get it. But we think in general, if you look at cash generators or dividend growers, they've outperformed the S&P 500 by about 60 percentage points over the past 30 years. And we think that we're-- this is sort of an abnormal return to normal, but we think we are kind of on the path towards normalization and more in the mid-cycle phase of the expansion. And those companies tend to do better in that type of environment.
- And when you talk about this sort of return to normalization here for the economic recovery specifically, we're about to get some key inflation data out at the end of this week. Consensus economists are expecting to see an acceleration in the consumer price index for November on a year-over-year basis, but you mentioned that it's possible that this inflation print might mark the peak in the CPI for this year. What are your expectations going forward, and how do you think the market might respond to some of this incoming data?
SHAWN SNYDER: Right. So we get the Consumer Price Index this Friday. Last time we got the Consumer Price Index, it jumped to about 6%, and the market sold off pretty sharply because they weren't quite expecting it. The consensus is that it jumps to 6.8% this Friday, which I think will make for quite a strong headline. That's the highest inflation print, if accurate, since the late 1970s.
But there's a potential silver lining with Omicron variant in the sense that energy prices have fallen quite sharply. They're down over 20% since, I believe, November 8th or November 9th, and that will eventually drag down the CPI inflation print, potentially December and maybe even January. Now it's hard to say definitively that we've seen peak inflation, but I do think there's some early signs that maybe supply chains are improving a little bit.
And then, again, energy prices and commodity prices have come down quite a bit, so maybe we're getting there. Maybe we're not quite there yet, but I think we're getting there. That said, we'll be relevant to the Fed. They have a decision coming up December 15th. So if we do see a high inflation print, maybe they'll feel more confident about accelerating the pace of their bond purchase tapers.
ADAM SHAPIRO: Whether they accelerate the pace and even if they move up lift off on interest rates, what do you want investors to know about history and what happens when the Fed does move interest rates higher?
SHAWN SNYDER: Yeah, I'm glad you asked. I think historical examples are really relevant here, and it's often that people think the first rate hike is a very negative thing for financial markets. And I do think it does create some volatility, but if you look back to the S&P 500 performance going back to 1963, what's happened is that the market has went on to return an additional 35% over about the next two years beyond that first Fed rate hike, and that's when it tends to peak.
So it doesn't-- there's no real sign that the market's going to peak right around the time that the Fed decides to hike interest rates. So whether it hikes interest rates in June next year, September next year, history suggests that the market continue to move higher, at least for a fairly lengthy period of time. The shortest period was four months but, on average, about two years.
- All right. We'll have to leave it there for now. Shawn Snyder, Citi's US Wealth Management Head of Investment Strategy, thank you so much.