February 12, 2021
An interview with Erik Ristuben, Global Chief Investment Strategist at Russell Investments.
Erik joins us to discuss where global stock markets are now and what the indicators are telling us for the future, everything from planning, asset allocation and diversification to Game Stop.
For the full interview please listen to the most recent CM Group- Free Lunch Podcast, Episode 38 “Stock Market Outlook with Erik Ristuben”.
Colin and Greg: Tell us a little bit about the global stock market is obviously big. It's bigger than people might know. But how does the Canadian stock market compare to the U.S. stock market in size just for our listeners? And then an offshoot to that is how big is the opportunity set in the global stock market?
Erik: You have to forgive me. I don't offhand know exactly where we're sitting in terms of the Canadian marketplace as a percentage of the global capitalization. Let's just simply say the US is bigger, probably on the order of 11 to 12 times bigger, there’s a lot of familiarity with not only the US and, all of our foibles as a country, but also our stock market. Our economies are clearly linked. Our markets are clearly going. There's a lot of connectivity between our two nations. And I think when you think about the US, it's really dominated the global stock market in terms of performance over the last well, basically 12 years. That is changing recently. And we think that likely that change will continue going forward. But right now, the US is I think fifty eight percent of the world's market capitalization, which is interesting because we're one fifth of the world's economy. So that's a little bit we may be a little too big for our britches at this point.
Colin and Greg: It's interesting, when you think about where that market cap comes from, I think about didn't the US start as like an industrialized nation, like it was a growth nation, and isn't it now more of a consumer driven nation? Is that a fair statement?
Erik: Yeah, well, I mean, first of all, our consumption in the United States represents roughly 70 percent of our economy. So just Americans living their lives is about 70 percent of the economy. That's actually on the very high end of what we see in terms of kind of first world industrialized countries. Obviously, Canada very clearly in that category, but it's not as high above what everybody else thinks. Most nations that are industrialized and have mature economies. Consumption represent 60 plus percent of their economy. So we're on the high end. And yet the composition of our economy is different, actually, to correct you. If you go back all the way back, the United States started an agrarian based. You're an agriculture based economy, and that's pretty standard. There's a standard evolution to kind of economic evolution or steps that you start as agrarian, subsistence farming, then agrarian and exporting, and then you become industrialized. And then what begins to happen is you build wealth. You're no longer competitive in the kind of industrial realm. And so you move more into knowledge, based more into services. And that's as we kind of go through. That's what the United States is doing and frankly, most economists think are going to go through that that arc.
Colin and Greg: Erik, you brought up the economy, so why don't we start there? Give us your kind of lay of the land as far as the global economy and stock markets, of course, which many of our listeners are interested in, where you see things going in the short term as well as the long term?
Erik: Let's start with the relationship between the economy and the stock market, because there is one it's not as tight as people would think. The best description I've ever heard of the relationship between the stock market and the economy came from, I believe, a professor farmer at UCLA. And you describe the relationship as two drunks tied together by a long piece of string, which is just evocative, to say the least. What do you think about it? And I always use Seattle as an example. These two drunk start the evening drinking in downtown Seattle. And if people are familiar with downtown Seattle, it's at the bottom of a hill. I live at the top of the Hill, Capitol Hill. So if you go straight up Hill from downtown, you go to my house. And so think of it as the relationship is, when those two drunks decide to quit drinking downtown and drink in my neighborhood, they start walking up the hill. And what will happen is the more sober of the two, the economy, moves at a fairly steady pace and usually pretty consistently either uphill or downhill, but in this case, up the hill and, the economy's all over the place, just meandering all around it.
And sometimes it's way below the economy in terms of its ascent up the hill. But because that string gets stretched eventually, if the economy keeps going up the hill, it's going to drag the drunk up the hill. So that's, I think, the way to think about it. And a lot of it's a lot of volatility in the markets, usually less volatility in the economy. For instance, we spend 90 percent of our time economically in expansion. We spend about 10 percent in recession, and that's a little less than 10 percent of the time with the market in recession or the economy in recession. And so when you think about it, is you have to be thinking about from the markets, where is the economy headed? And right now, we have come off the fastest one of the deepest recessions we've ever experienced in the world. So the downturn that we saw from about middle of March to the maybe the beginning of May for about a two and a half, I guess, was probably middle of February. If you start the clock to the middle of May, you have about a two and a half month recession and then an enormously intense recession.
For more questions and answers with Erik Ristuben please refer to our Podcast.
Stay safe, stay happy, stay well!
-The CM Group