En avant : Thèmes influant sur les marchés mondiaux en mai 2025 - 20 mai 2025

[00:00:22] Jordan Chevalier: Hello, and welcome to The Upside. I'm Jordan Chevalier. Joining us today is Denise Chisholm, Fidelity's Director of Quantitative Market Strategy, to explore the current state of the markets and highlight key sectors for investors to watch. Denise, it's great to see you, it's good to have you here in Toronto in the studio.

[00:00:40] Denise Chisholm: Great to be here.

[00:00:40] Jordan Chevalier: Amazing. Let's start off for those who maybe aren't familiar, a little bit about your role at Fidelity, what you do, how that maybe differs from some of the other people that we have here at Fidelity.

[00:00:54] Denise Chisholm: My title is Director of Quantitative Market Strategy but really I'm in equity research. Much like all of the other equity researchers who usually recommend individual stocks to our diversified portfolio managers I am also focused on getting the right names into the funds. I just do it in a very different way. I don't talk about individual companies. I usually talk about sectors, about industries, about the market backdrop overall. Mostly it's a data-driven approach. What I'm really looking for is historical data that has a specific pattern to it, finding those patterns and using those patterns to help us figure out what the alpha odds are in the market, what diversified portfolio managers can buy, and almost most importantly, how to not make mistakes in a macro environment.

[00:01:46] Jordan Chevalier: I guess within that day-to-day and within your role is there something that really energizes you now? You've been in the role a little while, what's that one thing that when you get up you're excited really to kind of go through?

[00:01:56] Denise Chisholm: I think it's the ever-changing nature of the equity market. As much as I'm a quant, meaning that my background's in statistics and econometrics, there are things that I've done in the past before I got into investment management that the data is static. Once you do the research project nothing changes. With the equity mark everything is always changing. There, honestly, hasn't been a time in the last 25 years I've been doing this job where I haven't woken up in the morning and saying, I want to look at this, I want a look at that. Despite the fact that I've looked at all of these situations over 25 years new ones keep coming up. I do think that studying history is one of the best ways to avoid making any pitfalls or any mistakes in the market. I's not what you know that gets you in trouble, it's what you think you know that you don't for certain that does.

[00:02:49] Jordan Chevalier: Those sort of market presumptions.

[00:02:51] Denise Chisholm: Exactly, the market [crosstalk].

[00:02:52] Jordan Chevalier: You mentioned everything changing. I think this year has certainly been not short on twists and turns. Is there something that surprised you about where we are so far in 2025?

[00:03:02] Denise Chisholm:  I think what surprised me and most other investors is the magnitude of the tariffs, not necessarily that there were going to be tariffs. I think that's the part of the strategy that wasn't potentially appropriately discounted when we entered the year. So 30% tariffs, forget the weighted average in terms of what it means from a historical context, and you have to go back to the 1890s, the way I think of what tariffs might mean is that they're a tax to the consumer and a potential shock to the economy. That's the trickiest part about thinking about recessions is that they usually happen from a shock. The shocks that we've seen in history are usually oil prices or usually interest rates, not tariffs. But we can put those tariffs into the same bucket and make some assumptions about how much hits the U.S. consumer. Some of it will be taken from the foreign producer, some of it might get absorbed by currency but something is gonna end up in higher prices that cause a contraction in real income. That 30% tariffs was enough of a shock, to the extent that it comes to fruition, to be a 2% headwind to the U.S. consumer. That's a sizable headwind that puts us right in the danger spot for recessionary risk.

[00:04:23] Jordan Chevalier: Zooming in a little bit, I know you do work with sort of sectors and key themes, things that you're watching, are there things throughout the year that if you kind of put an investor lens on investors could be looking at?

[00:04:34] Denise Chisholm: I think valuation is one of the best concepts to look at historically. It's best when using a data-driven approach. It's hard for everybody to get all the data that we have at Fidelity going back to the '60s. But I think if you go back to 18 months ago there was a unique data point in the financial sector which is you got down to valuation levels, and by valuation levels I mean relative forward P/E or relative price-to-book. They were in the bottom quartile of all the history that we have going back to the '60s. Once you get there you have a positive risk-reward even if earnings contract. That's a really strong environment from a valuation perspective. Those are the kinds of opportunities and sectors that I'm looking for. On the plus side when you have a contraction in the equity market, like we've recently seen that's bear market adjacent, almost down more than 20%, you end up seeing dislocations. Like most equity investors I kind of run to the dislocations and see if there's any interesting alpha odds. One of the sectors that has not really been at median valuation levels in five years has now hit those valuation levels and it's technology stocks. I think that's a really unique setup that we haven't seen in quite some time. Much like we talked about 18 months ago for financials the risk-reward in technology starts to look positive even if operating margins come down, or the companies are a little less profitable, or earnings numbers have to come down. That risk-reward, in terms of the starting point on valuation, has buffered in some of that. The volatility that we've recently seen sort of makes me dive in and look for opportunities that have a better starting point, that could provide a risk-reward for investors, and I think technology is coming up a couple clicks in terms of those risk-reward levels.

[00:06:30] Jordan Chevalier: That's fascinating. When you do dive in and you look at it is it sort of a 50/50 split, historical and fundamental? How would you round out or how would you look at your personal approach balancing the history and also what's happened currently?

[00:06:46] Denise Chisholm: It's different because it is always different this time but those patterns are very persistent. The data-driven approach sticks. I always say you're not going to hear me talk about my opinions, you're going to hear me talking about the data, the probabilities associated with the data and then how you can use those to inform yourself as an investor or turn them into alpha on your own. Despite the fact that, yes, it is a risky time in terms of whether or not we see a recession, what overall tariffs are going to be, I think finding those data supports in terms of valuation where the market has potentially already priced in bad news, that's what you want to gravitate to as an investor. We know as equity market investors that if you wait for the news to be good we've already seen a move. Or conversely, if you sell on bad news what are you going to buy on because markets bottom on bad news. It's always tricky in terms of finding the discounting mechanism of the market. Instead of focusing on the news flow and what that will be and struggling with what tariffs might end up a) being and then 2) meaning to the overall market I think as investors we need to start struggling with the market is already discounting being down 20%.

[00:08:04] Jordan Chevalier: I think looking more into that medium and long term is there something that investors maybe you feel aren't paying enough attention to or something that they should be paying attention to through that sort of mid long term throughout the year?

[00:08:17] Denise Chisholm: This gets a little quanty so just hang tight with me. It's credit spreads. That's just the difference between high yields, average high yields, versus the risk-free rate or the 10-year Treasury. The wider that gap is the more investors are wanting to be paid for default risk or bankruptcy risk. The wider credit spreads are the more people are concerned that maybe companies will end up bankrupt or insolvent or we're gonna have an earnings recession. When you see the credit market being more fearful in the spread indicator than the equity market that's usually a bad sign. That's what we saw going into the financial crisis and it's what we saw going in to the dot-com recession. We are seeing the opposite. Again, to get quantity, but you can look at it with the VIX, the VIX represents fear in the equity markets. I don't want to say we've never seen VIX higher but in the past above 60 is the top 1% of all historic incidents. Contrast that with the credit market that's in the bottom half of the distribution. When the credit is saying, hmm, I don't think it's going to be as bad as the equity market thinks that's usually a good setup, historically speaking, for the market to be able to climb the wall of worry. When people ask me what does the future hold I'll always tell them what I'm watching to send a signal is the signals in the credit market. Ao far, so good but that's something to be watched.

[00:09:50] Jordan Chevalier: Denise, I think we have to talk about tariffs. The big question is, are they inflationary inherently?

[00:09:56] Denise Chisholm: They obviously increase prices. I think the gut knee-jerk reaction is that they're inflationary. When you look at history I think that there's a big red flag waving in your face. Of the five situations we've had historically where we've had tariffs every single one of them has seen the CPI decelerate over the course of the next year. We haven't seen tariffs of this magnitude in quite a while but I think it puts you on notice for this potentially only being very, to use the appropriate word, transitory. Tariffs, as much as they're a price increase on some items end up acting like a tax to the U.S. consumer. Unless somebody gives you more money, and if the price of washing machines goes up, well, you're gonna end up destroying demand in other areas which means that there's pricing power being destroyed in other area. Said differently, there's a whole bunch of offsets to the price shock that make the price shock more temporary than I think investors expect. When we're thinking about how persistent this stagflation narrative might be it might not be nearly as persistent as investors expect.

[00:11:08] Jordan Chevalier: I think another question we get a lot is around defensive sectors like utilities, consumer staples. What are your thoughts there?

[00:11:15] Denise Chisholm: We've seen a recessionary rotation, and by recessionary rotation I mean that despite the fact that the market, obviously, has gone down in all recessions it's very varied. In 1980 it was only down, I think, 15%. It wasn't even a bear market. Of course, in the financial crisis it was down almost 60%. The consistency has actually been in what I call a defensive rotation. That's those classically defensive sectors like consumer staples, utilities, health care, the old telecommunication services. You see a situation where investors sell anything they think is cyclical, like technology and consumer discretionary, and they buy all of these safe sectors. That has been fairly consistent. We're 70% of the way through a typical recessionary rotation without having seen a recession yet. We have discounted 70% of what is a recession. At these levels even if you see recessionary data points if you take a one-year time horizon most of the time after a rotation of this magnitude those sectors underperform over the course of the next year. When you think about the risk-reward I think it's fairly negative. Again, not in any one or two or three month period. If you're willing to extend your time horizon I'm not sure chasing defensive sectors right now is really the right answer given the massive rotation we've already seen.

[00:12:43] Jordan Chevalier: To round it out, we hear a lot about market uncertainty. I think a lot of people are feeling that. As investors should that make us more cautious or is there another move? Is there another play?

[00:12:53] Denise Chisholm: It's interesting. Mathematically you can actually measure uncertainty. There's an economic policy uncertainty index. I think it goes back to 1985 for anyone who wants to see the charts on my charts of the week on LinkedIn. You can measure this and you'll see that it's more uncertain right now than COVID. That is an interesting data point in and of itself because as much as you might think it would be negative for forward returns as an investor it is actually positive. There is a clear linear monotonic, which means step function, correlation between the higher your starting point on uncertainty the higher your risk-adjusted returns over the next year. While a lot of investors are saying, hey, uncertainty means maybe I should stay on the sidelines, from a quantitative perspective I look at those high uncertainty levels and see opportunity. Why? Because usually the next move is the second derivative lower, which is not to say it's certain but it is less uncertainty. It's that moving second derivative that usually drives the market. It's what we have to be conscious of is that if you wait for clarity most of the time by that point the market has already moved.

[00:14:03] Jordan Chevalier: You've already missed it. Thanks again. I know I speak for everyone at home, and we appreciate your insights and for coming in today.

[00:14:09] Denise Chisholm: Great to be here.

[00:14:10] Jordan Chevalier: Thank you all for watching and see you next time on The Upside.