Business Alum Sees Signs of Hope in Bleak Economic Picture

05/09/2020
By Ed Brennen

As chief investment strategist for Quantitative Management Associates (QMA),Manning School of Businessalum Ed Keon ’77 leads a team that oversees more than $50 billion in multiasset portfolios.

So professionally speaking, he’s as invested as anyone in how the markets and the economy are being impacted by the coronavirus pandemic.

Keon, who earned a bachelor’s degree in industrial management, recently shared his insights on the state of the economy with more than 100 members of the university community as part of the “Virtual Village” speaker series hosted on Zoom byAlumni and Donor Relations.

A regular guest on CNBC’s “Squawk Box,” Keon began his talk by acknowledging that the coronavirus pandemic is “first and foremost a human tragedy.” But it is also causing severe economic pain, with more than 30 million Americans losing their jobs and second-quarter gross domestic product (GDP) expected to plummet by 40 percent.

“We are clearly in the midst of a terrible recession, although we may be near the worst part of this,” said Keon, who is encouraged by the “incredible size and speed” of the Federal Reserve System’s response, which includes $3 trillion in emergency stimulus so far.

“The fiscal response is really remarkable by Washington standards, and it should be enough to fill the enormous hole in the bucket that we’re going to have as a result of this big drop,” he said.

Keon gave two reasons why the recovery may not be as vigorous as people would hope, however: a lack of pent-up demand and human behavior.

In a normal recession, people who remain employed still put wear and tear on big-ticket items like their cars, still go out to eat and still buy clothes. With nearly everyone in lockdown during this recession, “a lot of demand is being destroyed, not merely deferred,” he said.

“And that same human behavior that helped to flatten the curve, on the other side that may slow the economic recovery. Especially for those of us of a certain age, we’re not going to rush out to crowded restaurants, bars and movie theaters when things get better. We’re going to wait until there’s a vaccine.”

Keon touched on a wide range of topics during his hour-long discussion, which was moderated by Assoc. Prof. of FinanceRavi Jain:

On how the current crisis compares to the recession of 2008-09: “It’s fundamentally different in the sense that the 2008 crisis was primarily a financial crisis. ... In this case, the financial institutions are actually in pretty good shape, partially as a result of the regulations that were put in place in the wake of the last crisis. So from a finance perspective, it’s not nearly as dire as it was back then. There will be bankruptcies and losses, but the financial institutions are much better able to handle things now. ... There’s also a big difference in the public policy response. In 2008-09, we ended up focusing the aid on financial institutions because that’s where the problem was. In this crisis, the initial big stimulus program was focused both on individuals through unemployment insurance as well as on businesses.”

On the state of the stock and bond markets:“I’m not bearish — we’ve been pretty big buyers of stocks in the last few weeks — but I’m not terribly optimistic, either. It’s been an amazing ride with the markets — the most remarkable I’ve seen in my pretty long career. Stocks were down 35 percent but have bounced back within 15 percent of the high. ... The big tech companies have had a huge run-up, but I think that trade has run its course. There’s more money to be made in rotating into smaller caps and value stocks, at least at this point in the cycle. The bond market has also gone through an amazing few weeks. It wasn’t that long ago that the bond market was literally frozen — it was almost impossible to trade bonds at any price. ... So the Fed jumped in with both feet, agreeing not just to buy corporate bonds, but even junk bonds and junk bond ETFs (exchange-traded funds). What the Fed has done is truly remarkable.”

On the seeming disconnect between the rebounding stock market and the economy, which is sinking to levels not seen since the Great Depression:“There is a disconnect; there always is. The stock market and the economy are never exactly the same, mostly because the stock market is trying to look ahead, not just at what’s going on. So the terrible drop we saw in March was before we really knew how bad things were going to be. ... One thing we were looking at very closely was Italy. Italy was the first big Western democracy to be hit by the disease. The cases started to peak there just about when the market bottomed. So that showed that it was possible, with extreme social distancing, for a Western democracy to control the disease. That’s actually when the market started to recover. ... Of course, it’s still possible that we may pull back again. But it looks to me as though this bounce is based not so much on what’s happening right now, but what might happen more into 2021 and the future.”

On whether individuals should reallocate assets in their retirement portfolios — or move money into cryptocurrencies or gold:“Generally speaking, I don’t think it’s a good idea for individual investors to make major changes in their asset allocation. I think you’re better off deciding what your tolerance for risk is and what your needs are. You should be trying to allocate your assets so that you achieve your financial needs as you get older, to put kids through college and eventually retire. ... For most, I’d say to set it and forget it. If you wanted to hold a little bit of your money in cryptocurrency, I’m certainly not going to stop you, but you should really think of it just as a speculation, because that’s really what it is. I’ve never been a big fan of holding gold in my portfolio.”

On the possibility of inflation:“In the next year, deflation is going to be the issue. ... But it would not be surprising if, a couple of years from now, we’re looking at inflation in the vicinity of 2.5 or 3 percent, or a bit more, as a result of all the stimulus. That’s also a result of some other fundamental changes. Restaurants will probably have to have less seating than they have in the past. Same for the airlines. And that might mean their costs will go up quite a bit, and some of that will be passed on to you and me. Another fallout from this crisis is deglobalization. ... Maybe the production of some things will be brought back to the U.S., and almost by definition if you don’t go with a low-cost provider around the world, you’re going to have somewhat higher costs. It may be beneficial to bring production home, but one likely effect is higher prices.”

On how this trauma will affect the psychology of investors, particularly young people who may be going through their second crisis in quick succession: “There’s some pretty good research on this — that the economic conditions you experience in your 20s and 30s stay with you for the rest of your life. My father, for example, grew up in the Great Depression and never trusted the stock market. ... So I would not be surprised to see that folks who live through this have a reluctance to invest in stocks as a result, and that may last for quite a long time.”

On what advice he would give to UML students, especially those about to graduate:“Count your blessings because you’re getting a good education. Try to get the best job you can, work as hard as you can, and make sure it’s clear to your employers that you’re doing what you can do to make things successful.”

Watch video of Ed Keon’s complete Virus and the Markets webinar.