Lessons to take from previous market bubbles

Kristen Bitterly, regional head of investments for North America at Citi Private Bank, joins Yahoo Finance to discuss inflation and crypto concerns, the rise in yields, and consumer confidence.

Video Transcript

MYLES UDLAND: Let's stay on the economy and talk a bit more about everything happening in the markets. We're joined now by Kristen Bitterly. She is the regional head of investments for North America at Citi Private Bank. Kristen, thanks for joining the program this morning. I'd love to start with rates and what you guys are thinking about the signal we can reliably say is coming from the long end of the bond market and how you're trying to decompose some of those pressures that maybe have investors worried or maybe folks are just looking through.

KRISTEN BITTERLY: Yeah, so the price action that we've seen obviously in broader markets and particularly within rates, this has been driving everything over the past couple of days. And this question about, OK, should we be worried about inflation, the curve steepening, what does that mean for growth stocks? And so in terms of how we've been positioned going into this, we've actually been pulling back from some of what we call the COVID defensive stocks that have really seen a run over the past 12 months and then rotating into what we call COVID cyclicals. So we've been doing that rotation. And we've also been positioning our portfolios in anticipation of some of this inflationary concern as well as rising rates.

Because as the data gets better-- So some of the things you were just talking about. So the consumer savings rate, the average savings rate in the US is twice the amount it was last year. As we think about this pent-up demand and when that actually, when the 15% of the global economy that's currently shut down, when that actually comes back online, what does that mean? So looking at our portfolios, basically, if you're looking at this curve steepening, what things are punitive? It's cash and duration.

So where we're positioned right now is we're trying to find ways of augmenting income without taking on duration. And we're actually trying to convince people that cash is punitive. Because when you look at it on an inflation-adjusted basis, you're almost guaranteed to lose value.

- Well, seeing that people have seemingly been pouring money into lots of stuff that has a higher return, maybe they're getting that message that cash is punitive right now. I want to pick up on the discussion we were just having about consumer confidence. I don't know where in the world you are. But this sort of perception that maybe we're a little skewed here in the Northeast in terms of how open the economy is. Both anecdotally and the actual data, how optimistic are you in terms of economic growth right now?

KRISTEN BITTERLY: So I'm in the Northeast as well. So in terms of-- I'm here in Brooklyn. So in terms of my own perception of it, I can say that I definitely feel that that 15% of the global economy is still definitely shut down where it may be more open depending upon climate. I think that consumer confidence, we still see-- so, yes, there's certain parts of the market where people are pouring money into the market. And we've seen that. But we also do see that hesitancy in terms of getting invested. And so I can understand that consumer confidence kind of being right in the middle, that there is improving data, right? So you have this element of vaccines, the distribution of vaccines.

You also have more-- more vaccines coming to market, right, and more efficacious treatment. So this idea that you could see a summer that would be a little bit more normal I think is something that, that consumers are getting comfortable with. And they are starting to think about planning things like vacations and how basically they're going to be coming back to normal in a post-pandemic world. But we've seen spending-- so you guys were mentioning kind of the spending in terms of home improvements and the first time someone bought a drill.

We've seen that type of spending. But, obviously, there still is this pent-up demand. And there still is a pent up demand for all of those really heavy-hit COVID cyclical industries, which is something that will drive the consumer behavior, and I think ultimately something that will be a reinforcement of whether we actually see strong consumer confidence.

- Kristen, is too much being made out of the rise in 10-year yields? It's not as if the 10-year is at 4%. It's at 1.4%, remains very low historically. Are you at that point where 1.4% is triggering you to make changes in your portfolios?

KRISTEN BITTERLY: You know what I think the market is wrestling with right now? So when we look at the 10-year where it's at, we almost have to go back and say, look, the 10-year in December of 2019 was at 1.9%. So the economy was functioning very, very well. Technology and growth stocks were actually continuing to dominate the market and grow. And so I think what the market is wrestling with right now is whether this rotation that we're seeing, is it a rotation or is it catch-up of COVID cyclicals? So the price action that we see today, obviously, you're seeing some of that rotation. You're seeing financials perform very well. You're seeing tech hurt a little bit. But I think one of the questions that we're all struggling with is really kind of pivoting more to real earnings as opposed to expectations.

And so what I mean by that is yes, you can see why financials would perform well with the curve steepening. You can see parts of, once the economy reopens, those sectors actually doing particularly well. But I think one question on everyone's mind is so when you look at some of these companies that have been dominating the market-- so let's talk about the big five, right, so like Apple, Amazon, Microsoft, Google, Facebook-- when you look at them, they're right now around 18% of market cap. But they're 25% of earnings. And so in terms of representation from a contribution of earnings standpoint, you can almost make the argument that they're underrepresented. And so I think the focus and what everyone's going to be watching very closely is can these companies actually continue these really stellar earnings and continue to deliver even as we move to a post COVID-world?

MYLES UDLAND: Now Kristen, something you flagged to us is that all your clients or many of your clients are asking about if we're in a bubble. How that fits in here, I think everyone likes talking about it because the big fun word to say. And related to that also is the crypto conversation. All this speculation that happens, not just in financial markets, but tangential to financial markets, how are you guys talking through some of those concerns or maybe the FOMO, perhaps, that the [? senior ?] client base is having if they are not really allocated to those kinds of areas?

KRISTEN BITTERLY: Yeah, so are we-- the question about are we in a bubble and where to put capital to work, I think you always have to put it into perspective. My colleague Robert Buckland did a really great piece, an op-ed piece in the "Financial Times" that walked through just putting it into perspective compared to 2000, for example. And if we look at the price action not just over the past-- I think everyone's looking at this price action since March and since the depths of the pandemic. But if we take a step back and we actually look at over the past three years, what price action are we seeing in equity markets? Well, the past three years, you can say the NASDAQ is up 90%. So 30% per annum, that's actually very, very strong. We all would agree with that.

But going into the tech bubble, it was completely different. It was around 300%. US equities up around 36%, so 12% per annum. Once we got outside the US though, it's a very different story. So emerging markets up 12% over that time period, the DAX flat, UK equity is are actually negative over that same time period. So I think the one thing is when you're looking at, are we in a bubble? There are parts of the market that, yes, feel that way, look that way, seem overheated. And that's why I go back to, are they-- are these parts of the market, are they delivering on earnings or not?

And the other thing is to focus on, where haven't you seen some of the snapback? Where are you looking from a relative valuation standpoint that's attractive? And an example of that, global health care. So global health care, you would think in a pandemic, right, in a pandemic, health care would absolutely be rallying. But what we've seen is on a relative PE basis, it's at the lowest levels relative to global equities in about a decade.

So we like health care for a variety of reasons, not just because of the pandemic, but more of a demographic argument. But it's a strong sector, high free cash flow generating. So there's areas of the market where it makes a lot of sense to invest-- not only short term, but long term.

MYLES UDLAND: All right Kristen Bitterly is the Regional Head of Investments for North America at Citi Private Bank. Kristen great to get your thoughts this morning. Thanks so much for joining the program. We'll talk soon.