Leo Grohowski knows investing. He's been at it for decades, most of that time at the industry's top levels. As chief investment officer for BNY Mellon Wealth Management, he now helps oversee $261 billion in client assets.
To tap into his firm's expertise takes a minimum of $5 million. But he was happy to dispense all kinds of insights and advice when he sat down with me in Tampa on Wednesday.
He is watching the trade disputes carefully. He's cautious on bonds, thanks to rising interest rates. And he remains bullish on our stock markets.
"We are still looking at a good year in 2019," said Grohowski, who works out of New York City, "but with a bumpier ride."
Here's more of what he said during the interview, edited for length and clarity.
Let's start with stock markets. How is 2019 looking?
The S&P 500 closed on March 9, 2009 at 676. We closed Tuesday at about 2,700. That’s a gain of over 300 percent without dividends. It's been a good run, and we believe that we are still in an equity friendly investing environment. There is a lot of chatter about whether this bull market is over. I don’t think so.
What is your forecast for the S&P 500?
Our end of 2019 target is 3,000.
Is there a caveat?
Let me put it this way: Last year we were nicely overweighted in equities. This year, over three slices, we have been reducing how much we hold, taking our position in equities from overweighted to neutral. The market is not expensively valued, but it’s not cheap.
After this nice run up we have had in the markets over the last nine years, we are instructing our wealth managers to work with their clients and have a realistic assumption about what the capital markets can provide in the years ahead. Everyone sees the disclaimers on the bottom of their statements about how past performance isn’t an indication of future gains, but nobody pays attention to them. I really think we have to pay attention.
It’s been a really good period. I just don’t think past returns are going to be repeatable.
Are there any upsides to the recent market volatility?
A lot of investors had become a little bit lazy. When you can get an asset class like large cap equities or the S&P 500 inexpensively and keep it on autopilot and get a 7 percent return, it’s easy for them to ask, "Why do I need to bother with this other stuff like diversifying and looking at other investment options?"
I think October proved to be a good wake up call. I hate to use the word healthy, because when you lose 7 percent of your capital in one month it never feels healthy. But it feels to me like it was a wake up call for a lot of investors who were getting too complacent.
Interest rates are rising, though Federal Reserve Bank Chairman Jerome Powell recently indicated that there might be fewer increases than originally assumed for the coming year. How will rising rates impact your decision making?
The good news is you are finally getting a return on cash. We went through eight or nine years where your money in cash was eroding your real net worth even though inflation was only running at 1 to 1 1/2 percent. Now the rates on cash aren’t great, but you are at least keeping pace with inflation.
I think the market is most concerned by how many times the fed will raise the federal funds rates. I think the market was rightly concerned because the federal reserve seemed to indicate four more hikes, one in December and three more in 2019.
So I think last week’s speech by chairman Powell was very important to pare back a little bit, not make any promises, but to say the fed was going to be data dependent. Bridging that gap between four interest rate hikes and the markets thinking maybe two is justified is really important.
Rising interest rates can hurt bond investors. How do you think the bond market will fare in the coming years?
I don’t think we are entering a huge bear market for bonds. But I do think investors have to be prepared for gently rising yields (which can erode the value of bonds). I say that because a lot of investors have not been through anything but a bond bull market for 35 years.
How much does our current political landscape play into your investing decisions?
Going into the midterm elections we expected, and experienced, volatility. The markets breathed a sigh of relief with the outcome. No. 1 because it was over. And No. 2 because history has shown that the markets can do quite well with a divided Congress.
My concerns about interest rates and inflation did not go away. But they were tempered a bit because the likelihood of another dose of healthy fiscal stimulus — tax cuts 2.0 — is looking pretty remote right now, politically speaking. The bond market takes comfort in that. Given the condition of our debt and deficit many investors feel that we don’t need more tax cuts, an additional dose of fiscal stimulus. They are saying let’s try to get our fiscal house in order in respect to reigning in spending.
The history of markets also shows that 12 months after midterm elections since World War II we have never had a down market. And the combination that we will have in place — a Republican president and a divided Congress — has historically produced an annual return of about 10 percent, depending what year you go back to.
What about tariffs? How concerned are you with the ongoing trade disputes?
Tariffs are a big deal because longer lasting constraints on trade like tariffs can lead to stagflation. I can think of few words that are as painful for equity market investors than stagflation — slowing growth and higher inflation. In the last couple of months, I’ve been hearing that word, and using that word myself, more often.
More (chief financial officers) and (chief executive officers) that we talk to say that it is starting to affect their spending decisions and their hiring decisions. That said, we still have not changed by one-tenth of a percentage point our (gross domestic product) forecast for next year due to trade. More importantly, we haven’t lowered our earnings forecast for S&P 500 companies for 2019. Not by even a nickel.
We haven’t felt obliged to react to the actual impact of what’s happened so far, but the pencil is in the hand. If we impose more tariffs on more goods, it’s going to be more impactful and it will be time to take down our earnings estimates.
I'd also add that these trade disputes come at a bad time. Things are slowing in housing and autos already. I think they come at a more challenging time than our government probably appreciates.
What investing mistakes do you often see?
I’m on a six-person committee that oversees BNY Mellon’s $6 billion 401(k) plan for our employees. I’m amazed at how many employees don’t take advantage of company matching plans and younger employees who don’t take advantage of more aggressive portfolios, in other words, stocks.
I’m also amazed with how many high net-wealth investors don’t take advantage of tax managed equity vehicles. This is not for the young saver. But for folks in the maximum tax bracket, there are funds that can be managed so that they distribute capital losses that can be used to offset gains.
In this new environment, I think after-tax performance is going to be particularly important to focus on for wealthier investors.
Contact Graham Brink at [email protected] Follow @GrahamBrink.