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'If we get giddy about liquidity, I think that's a mistake for investors': Comerica Asset Management CIO

John Lynch, Comerica Asset Management Chief Investment Officer, joined The Final Round to discuss this unprecedented market and what he expects for stocks and the market in the second half of the year.

Video Transcript

AKIKO FUJITA: And John, you know, we keep talking about this optimism that appears to be in the market, despite the economic data sort of pointing to a mixed picture. You know, what do you make of what's driving the market higher right now?

JOHN LYNCH: Well, good afternoon. Yeah, it's an amazing time, if you think about interest rates near zero, the money supply growing at a 25% annual rate. Where else are investors going to go, right? They're going to stocks and to gold. I just think that, you know, we've seen a little shift, as you were talking about earlier on the show, about how we're starting transition to value, starting to see some strength in transports. I'm not necessarily looking at transports on an absolute level, but I do like to look at transports relative to utilities. And we're seeing that, on a relative basis, trend higher as well. So I think those are some positives we need to keep focusing on.

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ANDY SERWER: Can I ask you to expound a little bit on the money supply issue?

JOHN LYNCH: Sure.

ANDY SERWER: Because it's sort of under-recognized and under-discussed to my mind, John, and I'm curious as to what's going on there, how that's moving the market higher and all that.

JOHN LYNCH: Right. Well, I guess in its simplest terms, the Fed took its balance sheet to, what? From $4 trillion to $7 trillion in a matter of weeks. For a decade now, we have seen companies buying back shares. So again, in the simplest terms, we have more dollars chasing fewer shares. And at a, you know, very expensive bond market with the benchmark 10-year yielding, what? 50 basis points or so, 55 basis points or so, investors are looking for opportunities elsewhere.

But what the curious thing is, if you look at-- equity prices are showing one indication, but fund flows are showing the complete opposite. Since March, fund flows into bond funds and bond ETFs have beaten equities by a factor of at least four. So that would argue that there are more tailwinds for equities going forward, which kind of scares me.

I like a rising market as much as anybody, but I think the market has to be supported with the foundation of profits. And to the degree that Wall Street consensus is projecting record profitability return to 2018, 2019 type levels, I think with 10 million fewer, 12 million fewer workers, that would require amazing growth in productivity that I'm not sure we're capable of delivering.

RICK NEWMAN: Hey John, Rick Newman here. Do you see some kind of reckoning coming, or can stock values just remain unmoored from the real economy for the indefinite future?

JOHN LYNCH: Yeah, the unmoored comment to scary, right? There's always going to be a comeuppance. And we're in a seasonally weak period. We could see a vice president candidate named for Vice President Biden-- former Vice President Biden, candidate Biden, if you will. And you know, if there's renewed emphasis, say, on a corporate tax cut, and if that starts grabbing headlines and starts grabbing attentions of investors, that could weigh temporarily on the market as well.

So I do-- the unmoored thing really scares me. If we have too much liquidity, if we get giddy about liquidity, I think that's a mistake for investors. It's always about earnings and interest rates, as far as I'm concerned. Earnings are a tail-- I mean, interest rates are a tailwind. But we're not convinced yet that we can get to earnings at a record level next year.

MYLES UDLAND: Well, and John, I want to follow up on that. Unmoored has probably been our favorite word here on the show over the last couple--

JOHN LYNCH: Unprecedented.

MYLES UDLAND: Well, I think we just say it like, yeah, it's definitely true. Is it definitely true that the stock market is completely ignoring the real economy? I think too many people assume that that's true. But clearly, if everyone thinks that-- like, you know, the logic here of everyone can't be wrong, right?

JOHN LYNCH: Well, you make the point because investors need to appreciate the fact that the economy might be in real time, or even a lagging time, but the equity market is forward looking. So there's going to be a lag. There's going to be a disconnect. I just want to make sure the disconnect isn't so wide that you can't full that-- you can't fill that chasm.

AKIKO FUJITA: And John, I want to get back to what you were talking earlier about the money supply. You know, we've talked so much about how the Fed is supporting the market right now, and yet I am curious if there is an increasing case here for looking for opportunities outside of the US because of the policy support we're seeing in places like Europe. There are certainly, you could argue, not just the same amount of policy support, but also a more steady policy on the virus front, in terms of the reopening. Sure, some cases have popped back up but not to the extent that we've seen in the US. Are you seeing funds starting to flow outside of the US increasingly?

JOHN LYNCH: Well, absolutely. And as part of the Fed policy and the growing money supply, what we're seeing is obviously not only an increase in liquidity, but we've seen dollar weakness. So when you have that sort of dollar weakness, that's a bid not only for industrials and value domestically, but you're also seeing risk-on trades with the euro relative to the yen and also the Aussie dollar relative to the yen. So those are global risk-on trades that I think bode well. And then to the degree that investors are confident in the steps that Europe has taken relative to the US and the progress that Europe has made relative to the virus compared to the US, I think you're also starting to see that bid.

Now, to the degree that the dollar continues to weaken-- you know, we're still the world's reserve currency. So I'm not convinced how low it can go. You know, we all know it can go lower. But nonetheless, when I always look at emerging markets, for 30 years, I have focused on a premium-to-growth economically or premium-to-earnings growth or a discount from a price-to-earnings ratio. But it always seems to come down to dollar weakness and liquidity flow that seems to drives emerging markets, and you're starting to see that now. So to the degree you're getting a global risk-on trade, that can be a benefit, certainly for diversified investors.

AKIKO FUJITA: OK, John, we want to ask you to call on the dollar, at least not today. John Lynch is the CIO at Comerica Asset Management, appreciate you joining us today.

JOHN LYNCH: Thank you. My pleasure.