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Market Insights

Stay On Point with Current Global Economic Conditions

Information to help you navigate market conditions, the economy, and the world of personal wealth management.

2022 Economic and Market Outlook

BOK Financial’s investment management team provides perspective on the year ahead and discusses their outlook on key issues affecting the economy and financial markets.

Insights and Resources

Market Reactions to Omicron Variant

Analysis of Federal Reserve’s Latest Moves

SEC Approves First Bitcoin Futures-Backed ETF

Insights on Supply Chain and Labor Woes

Potential Tax Implications of Infrastructure Plan

Employment and Price Stability

Wyett Addresses Growing Inflation Concerns

Is Inflation Just Around the Corner?

Consumers Coming Back

Your Questions Answered

Mark Buntz

Mark Buntz
Senior Vice President
Director, Alternative Investments, BOK Financial

What do you think about committing new money to the Private Equity market? Are you concerned about valuations? What should investors be thinking about?


Valuations always matter, but I see three ways to address investors’ concerns.

First, when valuations are high, focus on earlier stage companies where valuations tend to be lower. You’re making a tradeoff from a valuation risk to a technology or execution risk, but you can mitigate that with a PE manager who has a good track record of managing that risk.

Second, make sure what you’re invested in is very high quality. Many companies have great success with highly disruptive technology and strong business models. They can survive a valuation hiccup that might occur as a result of changes in the macro environment. Over time, disruptive tech will win out and overcome a valuation hiccup.

Third, keep in mind that PE funds invest over a cycle. What may be a high valuation today will have a chance to average down. Money is put to work over a cycle, not all on one day.

More Questions Answered

Expert: Matt Stephani l President l Cavanal Hill Investment Management

Energy has definitely been a great performer this year, up over 50% YTD as a sector. But think back 20 years. In the 2000s we had a situation where the tech bubble burst. As a result, tech underperformed for 8 out of 9 years from 2000 to 2008, and energy out performed during that time. From 2000 to 2008 energy as a sector increased from 4% to 13% of the S&P 500. Then in 2011 we had the shale oil boom, where shale oil started meeting more than 100% of world demand growth at times. Public and private companies produced too much oil, which created the price collapses in 2014/2015, and 2020. As a result, by early 2021, the energy sector had fallen to less than 3% of the S&P 500.

Investors are still hesitant, as they’ve seen these oversupply situations in the past, and there are concerns about ESG and alternatives such as wind, solar and hydrogen. But I think that’s shortsighted. We could be in for a time of more outperformance from energy stocks. I’d add energy to the category of cyclical stocks right now, and here’s why:

Energy stocks are trading from 5-7X EBITDA, or cash flow, historically below where they have been. Meanwhile, the S&P 500 is 13X cash flow…well above where the S&P 500 has historically been. I think there are still opportunities in this area. Energy is at 2.7% of the S&P 500, yet was at one time 13%. Is it going back to 13%? I doubt it, but I still think there are opportunities in that area. OPEC is showing great discipline in terms of not ramping up production, and US public companies know if they started increasing production, they would see investors flock away from those stocks. I also think we’ll see demand recover to a new high by the second quarter of next year.

Expert: Matt Stephani l President l Cavanal Hill Investment Management

We tend to see higher leverage levels in the industries that are more slow growth. The Fed in the long term wants to get the interest rate up to 2.5% after 2024, but the bond market isn’t buying that, as higher rates would bite smaller cap companies. Even if you assume that higher interest rates are eventually on the horizon, it just points to the need for active management in the small cap space, in particular. However, I think the terminal Fed funds rate is likely much smaller than the Fed dot plot suggests. I would just be cautious in the small cap space. It’s probably not a great space to index because you’re picking up a lot of companies that have higher debt levels.

Expert: Mark Buntz l Senior Vice President l Director l Alternative Investments, BOK Financial

As interest rates rise, downward pressure will increase on information technology companies. Outside of the Apples and FANG type names that are marginally profitable and growing very rapidly, a rise in interest rates would depress their current value. Tech won’t remain in the defensive sector as long term rates rise, but rates would have to go dramatically higher from here to have a great deal of impact. We believe the Fed’s expectation in terms of long term interest rates is probably too aggressive, but even if it does occur, most of the companies we’re dealing with on the PE side are unlevered. While higher interest rates could have some impact on valuation, it’s not huge. It depends on each company’s growth rate going forward.

Expert: Matthew Stephani, CFA l President l Director, Cavanal Hill Investment Management

On the capital gains tax rate, proposals have ranged anywhere from raising it to 28% to as high as the highest marginal tax rate, which could approach 40%. Those proposals seem a bit draconian, and the range of potential outcomes is quite wide. It’s also important to remember that different administrations lead to different tax policies, so any policy change this year may be temporary or reversed in future years. We’ll just have to keep an eye on this as it is clear that at least the initial proposal that was put out there is going to have a difficult time getting passed as proposed. So, the chances that the worst of the tax outcomes becomes a reality is somewhat low at the present time.

But, as far as selling pressure on stocks, I’m not sure that would exist. Let’s say you sell your stock because you want to take advantage of the lower capital gains rate this year relative to next year. Once you sell, what do you do with the proceeds?

Investors would have several options to consider once they sell stocks to take advantage of the lower capital gains. First, you could consider the low-risk savings account with virtually no yield as one possibility. Then, you’ve got your medium-risk bonds with rates that offer minimal returns – the 10-year Treasury only yields 1.3%. Finally, you have your higher-risk equities where returns have been historically most attractive. In this scenario, I still think equities would look relatively attractive, given the alternative opportunities in deposits and bonds. So I don’t know that raising capital gains tax rates would have a dramatic effect on equity markets as that market would still appear attractive when compared to these alternatives.

Expert: Steve Wyett, CFA | Chief Investment Strategist, BOK Financial

From my lens, I don’t think the Fed is going to tighten lending. In fact, the most recent action by the Fed was to loosen some of the requirements on the systematically important financial institutions (SIFI), which freed up money for them to pay out more in the form of dividends and stock buybacks. One of the key differences as we come through this pandemic as compared to past economic downturns is our financial system is well capitalized and flush with liquidity.

Financial institutions in general are going to be looking for ways to increase lending activity as we move over the next couple of years. A key part of our outlook for sustained economic growth is the ability for new companies to go into business and gain access to capital. Last year, as the pandemic related shutdown occurred, banks were required to place billions of dollars in loan loss reserves as a cushion against expected losses. As the economy recovered it became clear loan losses were going to be materially less than earlier expectations. Hence many banks are now releasing those reserves back to income and their overall capital position remains above regulatory minimums.

In summation, we do not think the Fed is going to be in a position to restrict lending as we go forward.

Expert: David (Dave) Maher | Manager S.V.P. International Sales & Trading, BOK Financial

The crackdown in China is political in nature. Specifically, the crackdown is on Chinese companies listed in the U.S. This is likely in response to criticism here in the U.S. about some Chinese large tech firms amid worries about security issues. I think that this could impact investment, certainly in Chinese tech companies. These actions remind investors that China is a communist regime and doesn’t need to go through the same processes that we do here. China can crack down and make wholesale change spur of the moment.

Expert: Steve Wyett, CFA Chief Investment Strategist, BOK Financial

This question highlights an interesting dilemma for the Fed – of their own making – as they have become very prescriptive in their communication around monetary policy. From our lens, the thought of seeing a taper tantrum increases if the Fed would do something that the market was not anticipating. We saw a little bit of that at the most recent FOMC meeting, when we saw their “dot plot” – a measure of the individual FOMC participant’s views on interest rates – change fairly significantly from one meeting to the next. Some FOMC members moved forward their anticipated date for expected interest rate increases leading 10-year Treasury notes to move up to 1.7% rather quickly. It has since reversed a lot of this upward move as Fed Chair Powell, and others, tried to clarify the “dot plot” is not a forecast. But I think this highlights the risk of taper tantrum is there if the Fed does not effectively communicate what they are doing. As long as the path towards tapering occurs within our expected timeframe, and as long as we don’t get any huge surprises from an economic standpoint, I think the chances of a taper tantrum like we saw some years ago are low.

The Fed feels the price increases that we are seeing right now – which are really driven by this peak stimulus and reopening of the economy – are more transitory in nature, meaning that they aren’t going to last very long. Transitory itself is not a definitively defined term. We don’t know what that means; is it three months, is it six months, is it a year? That’s the debate. We need to see that economic growth continue as there is going to need to be a handoff from this stimulus-led recovery that we saw coming out of the pandemic to a private sector-led expansion that then can last for multiple months.

The Fed has started to talk about how they are going to begin to reduce the amount of monetary accommodation they are providing. Importantly, this does not mean the Fed is tightening in any way, they are just going to be somewhat less accommodative. While there are some FOMC members that seem to think we need to start raising rates as early as 2022, we find that to be highly unlikely as we would not expect them to start raising interest rates until they complete the tapering process. Our thought is that it is going to be 2023 before we see any interest rate increases and depending on how this handoff from the stimulus-led recovery to the private sector-led expansion goes, it might even be a little bit longer than that.

The Fed will be stepping back – we want that – as we want the economy to be able to operate without needing this extraordinary amount of monetary accommodation.

Expert: Matthew Stephani, CFA | President, Cavanal Hill Investment Management

Regarding equities, if you look at a chart of equity returns, there is really no place you could have been in equity markets in the last quarter, three years or five years that would have had a negative return. As interest rates drop, there is currently a discount rate on future earnings. Think about a company that has a lot of earnings projected for 2030 but not a lot now. Those 2030 earnings are being discounted at a much lower interest rate. That propels growth stocks in the short run. This doesn’t necessarily mean that growth is over-valued relative to value, it just means that the interest rate environment is low. We think that there are better opportunities in cyclical stocks rather than defensives, but rather than playing that out domestically, we think the opportunity sits in Europe. Why?

When you look at the European market relative to the U.S. market by sector, 44% of EAFE stocks are in the industrials, energy, financials and materials sector. Only 26% of the S&P 500 are in those four sectors. So, we like the international market not only because it has a little cyclical bend to it, but more importantly, think about what is going on with the vaccine. As I mentioned previously, Europe looks to be behind the U.S. in its recovery and the emerging markets are behind Europe. If these markets grow their GDP as the U.S. did in the first quarter, there’s a lot of opportunity for investments in some of these cyclical sectors that have more of an influence and more of their customer base in Europe.

Expert: Matthew Stephani, CFA | President, Cavanal Hill Investment Management

If 60/40 is your right investment objective, and it fits your risk tolerance profile in a five to 10-year timeframe, I wouldn’t make any changes. There’s nothing in the market that would lead us to think that we need to materially alter the makeup of the portfolio at this point in time. That being said, we do like international equities right now, not only because those markets have more cyclical exposure, but more importantly, because of where they are in terms of the vaccine. We got to the point in the U.S. where vaccines were readily available throughout the country in the April/May time period. Europe looks to be about two to three months behind us, and then the emerging markets look to be three to five months behind Europe.

So, while the U.S. hit 6% GDP growth in the first quarter, most of the rest of the world – with the exception of China – printed negative GDP growth in the first quarter. What is likely to happen as the second and third quarters move along, and as Europe and then the emerging economies continue to vaccinate their citizens, is that the recovery in GDP broadens to include these international markets. As a result, investments in international equities may benefit. We are not negative on U.S. stocks, but rather equal weight U.S. stocks with a tilt towards international as the recovery that has already started in the U.S. moves into Europe and the rest of the world. Of course, this is all contingent on vaccines and what is going on with the Delta variant of the virus, so we are watching those things very closely. So if a 60/40 allocation fits your risk tolerance profile for that time period, I wouldn’t be nervous about leaving it as is. Just stay in touch with the advisor who is monitoring the market and your portfolio.

Expert: Brian Henderson, CFA | Executive Vice President, Chief Investment Officer, BOK Financial

Yes, this chart shows that Europe has seen unprecedented growth when it comes to their savings rate, just as we have seen here in the U.S. Europe’s recovery was pushed back a bit due to a COVID case surge in the first quarter of 2021. That led to negative GDP growth and elongated their recovery, putting them back about a quarter or so behind the U.S. So, there’s a lot of pent-up demand in Europe. While they didn’t have the open checkbook like we did here with lots of stimulus checks, they have core savings and their savings rates are very high, just like they are here in the U.S.

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