Investors 'are best served playing a little bit of the fence’ during this election period: Thornburg Investment Management

Jeff Klingelhofer, Thornburg Investment Management’s Co-head of Investments, joins The Final Round panel to discuss his thoughts on what’s driving the markets politically and socially, and where investors should be investing.

Video Transcript

JEN ROGERS: We've been riding those stimulus headlines. We do know that Secretary Mnuchin and Speaker Pelosi were scheduled to be talking around 3:00 PM. We don't have any details out of that right now. But this market has traded a lot on stimulus headlines before. So we are certainly on the lookout for that. And of course, it's earnings season coming up after the bell.

Right now, I want to bring in Jeff Klingelhofer, Thornburg Investment Management co-head of investments. And Jeff, just as you look at the market right now and sort of the action that we've been seeing the last 15 minutes here, we're two weeks away from the election. OK?

So you've got a finite number of trading days. No one knows exactly what's going to happen on the other side of November 3. But what is the volatility expectation in here for the next two weeks? And do you buy? Do you sit on your hands? Do you just walk away? What are you telling people?

JEFF KLINGELHOFER: Well, there's always opportunity. The question, of course, is in what, right? I think the opportunity here really is playing defense. You're right. We have a very finite cliff type risk coming up.

And I think this is-- you know, if last election was a referendum perhaps on politics, this is a referendum on society as a whole. There's a potential huge step change here, one where the current president really views his success as the level of the S&P 500, right? If stocks are doing well, he's doing well. And that could change dramatically under a Biden presidency.

And so I think investors here are best served playing a little bit of defense, just given the reality that yields on fixed income are low and valuations on equities broadly are pretty high. Take a step back. Let's wait and see what the other side looks like, and adjust there. So play defense for today, and position to be nimble and opportunistic on the other side.

JEN ROGERS: When you talk about wait and see, one of the issues with this election is there are concerns about how long it's going to take before we know anything. And then this lame duck, if it were a lame duck, could be unlike any other lame duck that we've ever seen, because everything is unprecedented when it comes to President Trump.

So I guess, like, how long a window are you thinking for defense here? Because there are a lot of people that got nervous in the spring and have gotten left out of the rally. We have cash on the sidelines, and everybody's looking for that moment to get in.

JEFF KLINGELHOFER: Well, that'll be driven by valuation. So, you know, ultimately, nobody ever has the answer of what happens tomorrow, right? We never know. But we do know what happens today. We do know how markets are going to react.

And so the challenge, of course, with waiting on the sideline with COVID was, valuations had shifted a lot. And so it doesn't mean you necessarily have to go all in, hand over fist. But there was value to be had there, certainly incremental value.

And so I think ultimately, no one has the answer of how long you need to play defense. I'm of the camp and of the belief that ultimately, we know the outcome of the election probably pretty soon after the election, if not the night of.

Will that cause immediate volatility? I think it will, actually. And I think there will be volatility between here and now. So there may even be opportunity to position more opportunistically going into the election cycle. But just wait for better valuations because I do think that there will be some opportunities.

SEANA SMITH: [INAUDIBLE] Seana Smith. So two questions off that. One, if you want investors to wait on the sideline, how big of a pullback do you think we could see then ahead of the election?

And then once we get past the election, it's interesting just because we're still going to have a lot of uncertainty in the market. When you still take a look at the fact that the economic recovery is slowing, the coronavirus case counts continuing to trend in the wrong direction, when you speak about volatility, is this something that you can see carrying over into 2021?

JEFF KLINGELHOFER: I think that's not even a question to me. I think absolutely it will carry over into 2021, right? The other side of election only determines who the president of the United States is. There's all sorts of other uncertainties, the least of which, of course, is COVID. But how that president reacts between US and China relationships, what China may do, the upcoming election cycle in Europe, there's all sorts of events.

So to your point, how big of a pullback do I expect? You know, I think 5% to 7% is something very reasonable. And really, the clarity that we will likely gain, of course, is the social agenda moving forward. What is the view on healthcare? What is the view on green technology, et cetera? That has the potential to shift.

And so having that clarity is very important and allows investors, ultimately, to pick and choose their battles a little bit more wisely, to really construct their portfolios. You know, we have healthy debate every single day on the investment team. There are no answers to this. But again, it's focusing on valuations. It's focusing on risk and return.

If I could sum it up into the most simple, it's that many of the right tail risks are already priced in, the risk of stimulus, the risk of finding a vaccine. Those are great things, great outcomes. With the left tail risks, I think the market aren't paying enough attention to. And that's really where investors need to be focused today.

JEN ROGERS: All right, good to hear you guys are all still debating it, because it seems like we are as well. Jeff Klingelhofer, Thornburg Investment Management, great to get a chance to talk with you.

JEFF KLINGELHOFER: Thank you.