Taking Stock
Interview by Bruce A. Percelay
Photography by Kit Noble
NANTUCKET SUMMER RESIDENT AND FORMER PUTNAM INVESTMENTS CEO BOB REYNOLDS
Bob Reynolds is widely regarded as a leader in the securities world, having served as chief operating officer of Fidelity Investments and president and CEO of Putnam Investments. Reynolds, a Nantucket summer resident, sat down with N Magazine to discuss the state of the market, the lingering effects of oil prices, and our local economy.
The disconnect between Wall Street and Main Street has never been greater. The market is at an all-time high, while credit card defaults are increasing and high inflation continues to impact the middle and working classes. How do you reconcile these two realities?
I don’t think there’s a huge difference between Wall Street and Main Street. Wall Street does have institutional investors, but there are a lot of individual investors in the market, especially with 401(k) retirement planning, which brought investing to MainStreet America. I do think the strength of the market surprised some people. But when you look at employment levels, the unemployment rate is relatively low, which is a great sign. Consumer spending remains a huge driver of growth, even though I do think people are being a lot more selective right now. The biggest thing to me, which has always driven the market, has been for-profit businesses. Those are very healthy. Of course, it’s led by tech, healthcare and AI-related companies, but across the board they have been relatively strong. It was a great first quarter, and if you look at household wealth, it remains elevated, especially compared to pre-pandemic levels. This is supported by home values and the financial assets.
A number of highly respected Wall Street veterans are projecting a major market reversal, and that the current melt up will not have a happy ending. What are your thoughts?
I don’t agree with it. You have to be optimistic about the market, but there are some challenges out there. There’s no question about it.
Last month, we spoke with Andrew Ross Sorkin, who drew parallels between the current market and the crash in 1929. Given the exponential growth of our national debt and the weakening of the dollar, could you envision a 1929 kind of event with the stock market?
No, because there are too many levers to pull, and the government didn’t have back then what they have now. I don’t see that as a remote possibility. I think there are too many good things going on in the economy, even though we’re being challenged by a geopolitical situation. Back in the dot-com era when the market was booming, you had companies getting paid with eyeballs, but I think in today’s economy it’s different. The super valuations are in AI companies, which is not [paid with] eyeballs, it’s actually delivering something that can have a significant impact on the world for years to come.
There are many doom-and-gloomers about the impact of artificial intelligence, however there are others who feel the increase in productivity could create dramatic growth, much like the industrial revolution. What camp are you in?
I’m optimistic. If you go back intime in America’s history, any time there was new development—whether it be steam engines, trains or electricity—America has a way of adapting to these changes. I don't think the AI revolution is going to go as fast as people think, but I do think that certainly in the very near future, it is going to create a lot more jobs. Like everything else, we should find ways to take advantage of it. One area where I know it will have a dramatic impact is medicine, which is huge for the Boston area.
The S&P 500 has risen significantly, though mostly as a result of a limited number of stocks—most notably the Magnificent 7. What is the purpose of investment diversification if buying outside of technology has a much higher risk of reducing your return?
You can look at the S&P in two ways. One is cap-weighted, and that’s when a fewer number of stocks can dominate the market, and the other way is equal-weighted, where every stock is 0.2% of the market. The S&P cap-weighted was up 10.7% and the S&P equal-weighted was up 8.7%. So large stocks have had an impact, but not to the level that people would want you to believe.
Meanwhile, high oil prices impact virtually every aspect of the economy. How are we to avoid further inflation without significantly lowering oil prices?
It makes it more difficult. Inflation has cooled but it remains above the Federal Reserve’s long-term target, so it makes it much more difficult. Usually when you have a rise in oil prices, you have inflation because the cost of goods goes up. I think it’s a geopolitical challenge, and I think time will have to bear it out, whether it’s as impactful in the long term as some people suggest.
If oil prices were to drop tomorrow, how long would it take to lower costs on the consumer given how sticky prices are on the downside?
I think it depends upon the industry. At the pump, I think you would see [costs lower] in a relatively short period. Longer term, due to contracts and prices paid for petroleum and the products that are made with it, it may take a little bit longer. Every time there’s a thought that there could be some type of deal in Iran, you see dramatic drops in the price of oil, and it does take a while to enter the economy, but it would have immediate impact.
The expectation before the war in Iran was that rates would come down, but now there looks to be a likelihood of them going up. What is your prediction?
Right now they certainly will not be cut. It all depends on inflation, which has cooled a little bit. I don’t think there’s an immediate need to raise interest rates. I think the big [employment] number was helpful in that unemployment has not changed at all, but I think inflation has to be the biggest concern on the horizon for the American investor.
Nantucket and places like it seem to be the beneficiaries of the market upswing in general and with AI in particular. Do you see the demand for luxury housing on Nantucket and the real estate market continuing to appreciate?
To me, Nantucket is a different part of the economic lesson in supply and demand. That’s one of the huge challenges not only on Nantucket, but across the United States. They’re just not building homes, and [high] interest rates have puta challenge on people buying homes. I think on the high end, you’re not going to see that big of a change right now.
The Massachusetts economy was once the envy of the nation, but now appears to be among the worst performers in the country. What is your view on where the Massachusetts economy is heading?
In Massachusetts, we’re last in the country in private-sector job growth since the pandemic, and we’re [near the bottom of] states in domestic outflow. Most of the people leaving the state are young workers and people with wealth. I think that creates a very, very ominous future for the state, and that definitely concerns me. We’re creating a situation where the further you get behind, the harder it is to catch up.
The millionaire’s tax in Massachusetts is doing what politicians have wanted, but when does it start to cost the state?
It’s costing the state now. That’s what you don’t hear. If you had no millionaire tax, you would have zero revenue [from the tax], and if you have a millionaire tax, you have some number, so that’s the number they all show. But what it doesn’t tell you is the people that have left the state.
If there was a sector of the market outside of AI that you felt was the next area of investment opportunity, what would it be?
I think you would have to go into the pharma industry. With how AI can cut down the time of testing and get to the right answer very, very quickly—I do think that will have a dramatic impact on the pharma industry in a positive way.
Are you bullish on the market as a whole over thecoming year?
In the shorter term, when you look at the market, the harder it is to predict. The next three or six months are a little bit easier, but it’s still difficult. The longer term you go out, the more certain you are on the market. If someone’s time horizon is five years, the equity market is the best place for your money.
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