As this quant sees it, the best that you can do is look back at period of growth and periodic carnage, examine what has happened overall to the economy and to the regulatory environment, and then come up with two options: an optimistic one and a pessimistic one. To that end, he says: “The market is fairly priced right now, and you could make an equally good argument that it could go up, and that it could go down.”
Indeed. Blitzer, who spent his first 15 years at S&P as chief economist and the last 16 overseeing the creation and maintenance of S&P’s various indexes, is scheduled to give one of the keynotes at Bank Insurance & Securities Association’s annual conference on March 9 to March 12 titled “The Old Regime, The New Regime and the Next Regime."
Bank Investment Consultant caught up with Blitzer to hear his thoughts on the big picture economic issues.
“The period from 1980 to 1999 was a kind of golden age,” he says. “Then, on March 24, 2000, we had the tech stock collapse, followed by the 2007/8 financial crisis and the recession. Now we’re having a very modest recovery.” Over that same period, he notes, there was also a long process of deregulation, beginning in 1975, when the NY Stock Exchange was forced to end fixed commissions, and ending in 1999 with the elimination of Glass-Steagall.
In the new post fiscal-crisis, post-deregulation environment, he says there are a few certainties. One is that there will be another economic downturn and another market plunge. Another is that the next downturn, whenever it comes, likely won’t be as bad as the last one. Yet another is that interest rates, currently at near zero for short-term Treasuries, will rise.
Noting that there are always downturns in the economy and in the stock market, Blitzer says that for now, there are signs of economic recovery, such as an improvement in the housing market, which he says is “for real, and substantial, after it bottomed out a year ago.” As for the equity markets, he says, “The P/E ratio is about 15.5 X earnings, so we’re a little below the average of 18.5 for the 1988-2012 period.
That leaves him with his two alternatives. “The optimistic forecast,” he says, “would be that the economy accelerates this year and next, the Federal Reserve manages down its quantitative easing without causing undue damage, and as interest rates rise, as they inevitably will, the market anticipates this and investors gradually sell their bond holdings, so there’s no bloodletting.”
As for the pessimistic alternative, he says, “You could see inflation rise, and the Fed responding. It gets bloody, and the economy goes back down.” At least in that event, he says, there is unlikely to be a repeat of the last few years. “Before the fiscal crisis, we spent 30 years building up debt, but now there has been a lot of de-leveraging, and so in the next downturn, we won’t have anywhere near as much debt.” He adds, “Besides, the US economy has an ability to muddle through, despite the nonsense in Washington.”
While he’s not offering any forecast, Blitzer does say that he tends to have an “inherent bias” towards optimism. “Usually when I’ve been wrong, it’s been for being too over-optimistic.”
So what’s an advisor to do given all this?
Perhaps not surprisingly, this S&P index maven says he favors index funds. “I’m definitely on the index side,” he says emphatically. “An index fund will outperform two-thirds of managed funds on a one-year, 3-year, 5-year or whatever other basis you want to pick. Sure you can find funds any year that outperform the index, but it’s not the same fund each time, so you still have the problem of picking the right managed fund....For most people, an index fund is a much better choice.”