Year-End Market Update with Paul Zemsky

In this episode Bill is joined by a repeat guest back by popular demand, Paul Zemsky, chief investment officer, Multi-Asset Strategies and Solutions at Voya Investment Management. With talks of inflation, recessions and markets looming, Paul joins today to give us the latest and greatest on the market and what to expect in the year ahead. Paul shares his perspective on what’s happening in the markets today as well as the long-term implications for retirement savers.

Bill Harmon is a registered representative of Voya Financial Partners, LLC (member SIPC). 

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Transcript

Speaker 1: 0:01

You are listening to the Hire Through Retire podcast with Voya's Bill Harmon tackling all things from 401ks to HSAs and everything in between. We are talking to the best and brightest in the industry to bring you the latest in benefits, savings and investment trends in the workplace. Come along with us on our journey to help all Americans become well-planned, well-invested, and well protected.

Speaker 2: 0:24

Welcome back to the Hire Through Retire podcast. And well, here we are, we're approaching the end of the year. We've got World Cup on and all the excitement, but there's also a little bit of the anxiety as you wrap up the end of the year. So one of the areas of anxiety and that's something we need to talk about and that's, that's the markets. And so we've got a great market update lined up for you today. And returning for a second time on the pod is boy's own Paul Zeki, who is the Chief investment Officer, multi-asset strategies and solutions for Voya Investment Management. Paul's a frequent guest in contributor of many financial outlets, media outlets that is including the Wall Street Journal, Bloomberg tv, and CN BBC to provide his insights and outlook on what's going on in today's markets. Paul, that's that's great stuff and there's a lot to talk about here. So thank you so much for joining us today. I guess we didn't scare you off that first time around.

Speaker 3: 1:20

No, not at all. And, uh, thank you Bill. It's, it's great to be back and, uh, I'm really looking forward to our discussion today.

Speaker 2: 1:26

You know, I guess when you're in the middle of today's problems, you look back and wish you had yesterday's problems. And so when we had you on in spring, well boy a lot's happened since then. We've had midterm elections, we've had all sorts of other things in the, um, in the market that we wanna talk about. But let's talk about the midterm elections. Has the outcome of that cycle changed your views or any projections for 2023

Speaker 3: 1:51

N not a, not a whole lot, bill. So we did, we are most likely gonna have divided government at the federal level. So we'll have, uh, most likely Republican house and, and probably a split, a split senate, which, which is not the worst thing in the world. It gives a little bit of checks and balances, which is, which is not bad. And so not, not so much about what's going on there in Washington. Of course, the big, the big news is Federal Reserve and what they're gonna continue to do, which we'll talk about in a moment. I would say the only thing that gives us a little bit of pause about the election outcome is that if we were to have a recession and we needed some fiscal stimulus, it's a little bit harder to get it through a divided government than it would be if we had say, all democratic, all Republicans, like the last time I believe we're all Republicans. So, so that, that gives us a little bit of pause that if we did need some fiscal stimulus, um, it might be a little hard to get at this time, but looking at the economy, it's unlikely we'll need it. But if we did, probably a little tougher.

Speaker 2: 2:42

That's good to hear that. But, but here's one of the hottest topics and that's inflation. And in fact, uh, I was just looking at a recent, uh, survey where employee sentiment around their own personal finance is back to levels that were right at the beginning of the, the pandemic. So people really feeling stressed out from that personal finance perspective. And when you look and dig deeper and say, well, what's causing that? The number one reason is inflation. And, and as it relates to kind of workplace savings, they're nervous about what inflation does with the impact it has on their ability to save for retirement. From your perspective, now we're hearing about the sentiment and how, um, Americans are feeling, you know, where are we in this trajectory of inflation just mentioned about the Fed and they're trying to cool things down, but where are we there? And you know, I guess let's even talk about how did we get here?

Speaker 3: 3:36

Sure, no inflation is, is a real issue and it's front and center and uh, our customers are kind of getting a double whammy cuz they're getting inflation is up so their, the buying power of their dollar is down at the same time the financial markets haven't been kind. So if you add it all up, thinking about what, what their inflation adjusted savings has done, it has has not been a great picture for 2022. But I, I am a little, I'm more optimistic for 2023. So the Federal Reserve has been very serious about focusing on inflation and, and using the really the one tool they have to, to control inflation, which is raising interest, interest rates. And we all see it in the marketplace. Interest rates have risen quite a bit and they're at the point where they are starting to impact growth, which is what the Federal Reserve wants. And once you start to slow the economy, you should see inflation fall. We are seeing that already. So we're seeing it more on the good side of the economy. So if you think of the economy, you can really split it into two parts, the good side and the services side. And the good side is really where inflation got really ramped up post covid as we had shortages and supply bottlenecks and all the things we, we hear about in the news and you know, prices of TV sets and cars and fruits and vegetables in the grocery store and meat were all going up as they were basically shortages. That's debating and that's the good news. So we're definitely seeing inflation starting to fall and I think we'll definitely see that continue on to the future. The service side is gonna take more time though.

Speaker 2: 4:56

You mentioned the Fed and, and I tell you everyone knows holds their breath when the fed chair's about to go ahead and say something. There's a lot of speculation on when or at what level. You'd said that, you know, a way to kind of ease things is to continue to, as the one lever they have is to go ahead and raise rates. So what is your take on how they're going to approach inflation with this one lever and how do you see the market reacting to the plan? Because they have sort of given some hints and the market reacted, uh, but now they're sort of doubting. So what are your thoughts there?

Speaker 3: 5:28

Yeah, so, so Powell and the Fed have have been more communicative lately about this idea of slowing the pace of, of tightening the Fed made it very clear that they were behind. We, we saw that because inflation rose, so they, they were behind, they didn't raise rates soon enough and they had a whole lot of catching up to do. So the rates basically raised rates by 4% in eight months, which is pretty much unprecedented and certainly in the one of the fastest, uh, rate rises we've ever seen. And that was to really catch up and to get policy to a place where it is gonna have that, that slowing impact on the economy. But the good news is they've done that and they're there and maybe we think they have maybe one more percent or a hundred basis points of increases to go and they've been very clear that what they've done, they know works of the lack. It takes some time for those increases to work through the economy. They don't wanna over tighten, they wanna get just the right amount, which is very hard to do, but they don't wanna overtighten, they know what they've done, it's gonna take some time and they're now on record saying we're gonna slow it down a bit. We think we can slow it down a bit. We've done enough to give us some luxury there and we expect them to maybe tighten 15 in December and then maybe 25 after that.

Speaker 2: 6:37

So then they're looking at that and, and obviously the markets react accordingly, but then there's this other word<laugh>, this other kind of economic swear word I guess if you will, that's been looming in that recession. So can you explain really what it actually means to be in a recession and whether or not you would consider us to be in it or even heading for it at um, in the near future? Are we heading for one now and how will it differ from maybe past recessions?

Speaker 3: 7:02

Well it's, it's very difficult to forecast a recession. Uh, you know, we joke that the economic models we have, we have pretty good ones have forecasted 12 of the last six of them. So it's very hard to, it's very hard to forecast recession and, and it kind of doesn't matter. We know we're gonna get lower economic growth going forward, at least for the next 12 months and that's the what the Fed wants. So we're gonna have a slower economy. Some people call a recession two quarters of back to back negative GDP growth. I tell you Bill, if if we get zero to a half percent GDP growth, it's gonna feel like a recession anyway. So, you know, we can define recession very precisely, but that's not what matters to our customers. What matters to our customers as you know, is what's inflation gonna be, what's the Fed gonna do and what does that mean for markets? The good news is that the fed is, is already done quite a lot. They're gonna pause, so hopefully we don't get a recession, but I also think that if we were to get a recession, it'll be a mild one. And why is that? Because this time around, we don't have what we call private sector overreach or what we also call bubbles. So we don't really have a lot of bubbles in this economy that when the fed tightens and they break'em, that's when you get those really deep recessions. I can remember back to 1993, we had these vacant office buildings that people would lend at more than a hundred percent on a dollar. So if the building was worth a million, they'd lend you 1,000,001. That was crazy. That was a bubble. Then we all remember the tech bubble and of course the great financial crisis and the housing bubble, we don't have that this time. So it's unlikely we break the banking system if and when we do have a recession and that means it's gonna be a lot easier to get out of it if we do have a recession, which may or may not happen.

Speaker 2: 8:36

You know, and I, I really, and I'm sure our listeners do appreciate their, that you've got a lot of balance, um, and kind of calm to your responses and to your outlook and so on. And so that's nice to hear because obviously many are reading, um, different articles that aren't as balanced and calm as as you are, but I gotta imagine them when you look, look at this, you and your team. Um, but we take all of what we've just talked about and then talk about how you apply that for what you do day in and day out. And so you oversee a large number of target date solutions. And so now that we've got a good sense on some of the larger trends that are moving the market right now, how do you see all these factors then coming into play and how you and the team are thinking about asset allocation really from a long term view?

Speaker 3: 9:19

Yeah, well, you know, you're exactly right. You don't get a lot of clicks these days on websites by saying things are gonna be okay<laugh>, but they will be okay. But, but in all seriousness, one of the, one of the nice byproducts of of rising interest rates is that bonds look a whole lot more attractive than they did just 6, 7, 8 months ago. You know, can remember back to the 10 year treasury yielding 1% money, markets were at 0% long-term corporate bonds were 2%. Uh, that was a very, very tough time for savers and people in retirement. So we've been through now these higher rates and you could actually live off the coupon that you're gonna get from a bond fund or a long-term corporate credit fund. And you know, high yield was yielding better than 9% just recently and it's, it's fallen a little bit as as market conditions improve, but still there's a lot of good yield out there. And when we look at our target day products, we're recognizing the value in the fixed income market. And as we look into 2023 and update our long-term forecast and our strategic asset allocation, you'll probably see us have, uh, more bonds in the portfolio, maybe what we call more duration, which is interest rate sensitivity. So the big news this year versus last year is that bonds look a whole lot more attractive on an individual basis for savers and retirees. And from an asset allocator's perspective, which is my perspective when I'm looking at all the asset classes out there,

Speaker 2: 10:32

And probably a really good view considering an aging workforce to go ahead and, and take that lens there of looking at some of the coupons on bonds and I mean putting some more into the portfolio right there for a little bit of stability. So when we had you on the pod last, you had mentioned that Voy investment management had forecasted lower returns for equities as well as um, most of the risky assets for about the 10 years ahead. And workers are certainly seeing some of that playing out now in their portfolios today. So, you know, what, what could employers do to help their plan participants best navigate this unprecedented inflation and then this potential recession as they watch their balances on this roller coaster ride that we've been in recently?

Speaker 3: 11:15

Yeah, I think it's a few things to do. First, first is just keep calm. This economic environment has a beginning, a middle and an end. We're past the middle and probably closer to the end, uh, than the middle at this point. And, and we'll have positive returns, again, not in the not too far distant future. It really comes down to risk management and my my view, making sure that that the funds that the participants are in, that they could handle the downside, have volatile markets going forward and making sure especially those near retirement can handle the downside from here and making sure they have the appropriate amount of risk in their portfolios. If you've got 30 years, 20 years to retirement, you're gonna be absolutely fine. I'm very confident stocks will be higher, you know, 10 years from now, 20 years from now. But if you've got just one year to go two years ago, you really gotta focus on that downside risk. And again, the message don't overlook the bond market. It was something we could overlook for 10 years, right? Rates were so low, but there's a lot of attractive options out there for generating an income. So if you needed a certain amount of equity last year, you might be able to get by with a little bit less this year and still meet your income targets and meet your retirement goals.

Speaker 2: 12:15

You know, and that's such a great thing to keep bringing up in the sense that that's what we were complaining about maybe, you know, a year ago, is to say, yeah, I'm getting zero from my bank from a cd, I'm getting zero from anything that has, uh, levels of stability to it. And now all of a sudden actually you are getting some there. So for that aging workforce that's getting close to that time, there are some options now where we didn't have that a bit ago.

Speaker 3: 12:39

That's absolutely right. When the Federal Reserve wants the economy to get going, they make the price of, of very safe assets very expensive, meaning almost no yield. And when they, when they want the economy to slow down, they make the price of really safe assets. Cheap meaning you get a lot of yield from them. And now with the Fed wanting the economy to slow down, those of us looking for safe assets, you're gonna get paid to do that. So the fed's on your side right now respect to safe assets,

Speaker 2: 13:01

I'd love that this really went towards, you know, that those safe assets and it's so easy for people to get so grumpy cuz that's where all the noise is and the news and say, wait a second, you're complaining you couldn't get any type of return on safe assets. Now you can. Absolutely. And so I I think that perspective's always good. I always have a who was I teasing if someone said, you know, like when you were in, I dunno, 12 and you wish things were as simple as they were when you were eight, do you wish you had those problems? Yeah, because the problems you have right now at 12 are astronomical, but then you turn 16 and you wish this is us right now. Like, oh, I remember, remember the problems we had back when we had, you know, no, uh, no return on safe assets. Yeah. But the market was, you know, flying. And you know, the other thing too is don't you have to believe in our economy as a whole, I believe in America, believe in the business and all that. I, I keep hearing that to say the second you get some of this, are we in a recession? What's going on in short term, uh, volatility, all of that say, but do you believe in just the overall economy here? We might be going through some of these, you know, cool it down times and so on, but I I keep looking. Corporate earnings are still there. Yeah. And that's something you look at and say, well that's gonna fuel look

Speaker 3: 14:15

The way I think about it's the economy is like a stretch string and if you wanna slow it down, you gotta put your finger on it. And that's what the fed's doing right now. When they take their finger off, the economy is gonna come right back.

Speaker 2: 14:26

Yep. Well we saw that just because he whispered something in the market, uh, jumped.

Speaker 3: 14:30

Yeah. And, and this this one is, um, they are engineering this slowdown, and when they stop, I think the banking system will be fine. Banks will make loans again, people spend money again, we're not gonna have a financial crisis like we had, you know, 11 years ago, 14, well, 14 years ago now.

Speaker 2: 14:47

Boy, Paul, this this has really been great and as always, we're so happy to have you and your your expertise here to help us better understand the markets, particularly when they're, they're so volatile. It really is so easy to get caught up in the short term or we said, read some of these, these articles that get you a little depressed. So I really do appreciate, uh, your perspective on not really just what's happening today, but what we're looking at for long-term implications. And it it's really good, like we talked about for some of these older savers that are really, have much of, more of a short-term horizon. So really, really appreciate your perspectives on this and I'm I'm sure our, our listeners do as well. Well,

Speaker 3: 15:23

It's absolutely my pleasure and I'll come back anytime you want me,

Speaker 2: 15:26

<laugh>. Well, I tell you what, the way the markets are, we'll always need you back. And so, uh, it'll be great to have you come back in and check in with us. So thank you so much and thank you again to our listeners. And don't forget, if you've enjoyed today's conversations, please follow and subscribe so that you'll be the first to know when new episodes drop every other Tuesday. We'd also love to hear your thoughts. So head on over to iTunes to leave us a review. Thank you again for joining us today. Please stay welcome.

Speaker 1: 15:52

This information is provided by Voya for your education only. Neither Voya North Representatives offer tax or legal advice. Any opinions expressed within, do not necessarily reflect those of the Voya family of companies or its representatives and are not intended to provide specific advice or recommendations for any individual. Please consult your tax or legal advisor before making a tax related investment or insurance decision.