‘The Federal Reserve is going to be slower than most investors think’: Expert

Katie Nixon, CIO at Northern Trust Wealth Management, joins Yahoo Finance Live to discuss the tech sector, cryptocurrency, and outlook on the Fed.

Video Transcript

- So I'm going to continue this market conversation now and bring in Katie Nixon, CIO at Northern Trust Wealth Management. Katie, good to see you here on this Monday. So we're seeing this rebound in tech stocks today. Do you think that this rally has legs? Is it a signal that investors are recommitting to growth stocks, do you think?

KATIE NIXON: Well, Alexis, thanks for having me. Great to be here. And I think we're going to continue to see this kind of tug of war between the tech stocks and the growth stocks in general and those reopening trades. The further along we get into the reopening, I think the more investors are thinking beyond this COVID reopening related bounce and tremendous lift to the economy and to earnings, and really looking maybe towards 2022 and beyond where the resumption of maybe a lower growth trajectory really favors the secular growth stories.

So we're going to continue to see these kinds of days when growth outperforms value, and then we'll have some good economic news, and we'll have a value trade, and we're going to see these sort of stutter steps, I think, between now and probably past the end of the year into 2022.

- So Katie, then, given that tug of war that we are seeing between growth and some of those value names, how should investors really be looking at their portfolios to deal with the fact that sometimes tech is going to do well, and then as you mentioned, we'll get another headline, another data point, and then, of course, we'll start to see those growth stocks. A lot of folks essentially rotating back into those sectors.

KATIE NIXON: I mean, I think this is a time to be well diversified. Honestly, you don't have to choose growth or value. We think portfolios will benefit from having both. Clearly, there is a lot of momentum behind the value trade right now, but it's true. There's great earnings momentum. Value is going to outgrow growth this year and next year, so there's a great fundamental story for value right now.

But at the same time, we have these just incredible companies with these structural advantages that are going to carry them through really any economic environment. And we certainly saw this during COVID where you had some of these great growth names continue to post really spectacular results in the face of a lot of economic pressure. So again, it's not either or. It's probably both and for most investors.

- When you talk about diversifying your portfolio is part of that conversation, now, Katie, does it include cryptocurrency? I mean, we saw Goldman Sachs recently come out and call Bitcoin a bona fide asset class. Is this something that investors should be maybe taking a closer look at and including, even a small portion of their portfolio, should they be including some crypto in it?

KATIE NIXON: Right, so that's the big question of the day. And you know, we look at things sort of from a 30,000 foot level as you know, the world having two super asset classes. Risky assets-- these are things that act and behave like equities and have equity-like drivers of return and correlation to equities. And then we have risk control assets. And these are very short duration, super high quality fixed income. And the combination of those two is really your basic source of diversification. So think about crypto. Is it a risk asset?

Well, it doesn't have a stream of income attached to it or a cash flow attached to it, so it's pretty hard to value. It also has extraordinarily high volatility, and as you've been reporting last week, and even today, is a cautionary tale for anyone. It's not certainly for the faint of heart. So lots of volatility. No real source of value. So it doesn't really feel like an equity like asset.

And so is it risk control? Well, absolutely not. We see this extraordinary volatility whipsawing investors around, so it doesn't really fit in a strategic optimized portfolio. It's more like a speculative commodity. But to your point, a lot of people want to speculate, and that's fine, so long as you do so in a way that still protects your ability to fund your goals. So figure out how much you can afford frankly to lose as we see these massive swings in value of crypto. And so keep your speculation well contained over there, and keep your conventional strategic asset allocation aligned against your financial goals. And so I think that's a way for investors who want to speculate to be able to do so, and then still sleep at night.

- So I do want to ask you, because we did hear from the Fed's Lael Brainard, who talked about a digital currency backed by the Fed moving forward. And we've heard about a lot of institutions really getting involved in this space, which I think, of course, has a lot of questions about regulation, but also then about the stability of cryptocurrencies moving forward. Now, there's thousands of cryptocurrency, so I think we really are talking more about Bitcoin. Ethereum, for example, when we talk about some of these moves. But as we start hearing that kind of institutional support for cryptocurrency, does the calculus change for you on investors perhaps maybe adding some of those cryptocurrencies to their portfolios? Does it become more attractive to you as you see those headlines and you hear those interviews as an asset that investors could potentially be adding?

KATIE NIXON: Well I think we have to be open minded obviously, and we're learning, and with experience comes learning. So we are seeing the evolution of crypto as a asset class as we speak. And I do think that the central banks, the Fed, obviously PBOC getting involved with creating digital currencies does sort of legitimize a digital currency. But I think there's a push-pull because while that legitimisation is very attractive and could shine a positive light on crypto, I think it does come with a lot more regulation, and that's going to be a headwind for the crypto industry.

- And, Katie, ahead of what many believe is going to be a move by the Fed sooner rather than later, to start tapering those monthly bond purchases, are you making any strategic moves now on clients' portfolios to ready for that moment? You'd like to think the market has been sort of pricing that in now over the past few months, but what moves are you making right now?

KATIE NIXON: So it's interesting. I think we might have already had the taper tantrum back in the first quarter with a terrible, terrible bond market. You know, we don't expect to taper until early 2022 at the earliest. And if anything, the Federal Reserve is going to be slower than the most investors think. So we haven't been positioning any differently because our perspective has always been that the Fed would be very delayed and even starting to normalize monetary policy.

Our point of view on interest rates is that they're here to stay low for the foreseeable future. And outside of the taper tantrum, if you look back to what happened and post global financial crisis, rates went down. So we are anticipating that rates are going to stay low and probably range bound for the foreseeable future. So for us, that means, again, leaning into risk if you can, figuring out with low bond yields and low bond returns, how much risk you can comfortably take, because rates are going to stay pretty constrained and pretty unappealing in conventional fixed income. So we're positive and constructive on taking risk. We are leaning into global equities, emerging markets, and European equities in particular from a tactical perspective, given that those are the areas in the equity market that benefit the most directly and the most acutely from this global reopening and global growth trade.

- Well, real quick, you mentioned Europe. Is there any particular country that you're interested in right now in terms of investing?

KATIE NIXON: We take a really broad brush there, but we are very aware of the levers that are in the European equity market, the exposure they have to non-European sources of growth, the exposure that they have to some of the deeper value and more cyclical areas of the market, which again have high leverage and high beta to the reopening to the global reopening trade. So we really take a broad approach and really are leaning into the cyclical trade there.

- All right, Katie Nixon, thanks so much for joining us. We appreciate your time.