WEBVTT - Freaking Out Over Rates 0:00:13.680 --> 0:00:17.440 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.640 --> 0:00:20.400 I'm Mike Reagan, a senior editor at Bloomberg, and I'm 0:00:20.440 --> 0:00:24.360 Baldana Hick, Across Acid, reporter at Bloomberg. This week on 0:00:24.400 --> 0:00:26.759 the show, well, when I was a kid, we didn't 0:00:26.760 --> 0:00:29.720 have the internet, we didn't have video games. There are 0:00:29.720 --> 0:00:32.880 only three channels on the TV, but we did have 0:00:32.960 --> 0:00:36.080 aluminum cans. So most nights in the warmer weather, all 0:00:36.080 --> 0:00:38.800 the neighborhood kids would gather in someone's yard and play 0:00:38.800 --> 0:00:41.920 a game called kick the can. And guess what. That's 0:00:41.960 --> 0:00:44.760 exactly what Congress did this week. They kicked the can 0:00:44.880 --> 0:00:47.520 down the road on the topic of raising the US 0:00:47.600 --> 0:00:50.280 debt ceiling, and that has obviously been one of the 0:00:50.280 --> 0:00:53.199 issues that was causing investor sentiment to deteriorate in the 0:00:53.280 --> 0:00:58.080 last month. The markets have reacted euphorically. What was that really? 0:00:58.120 --> 0:01:01.360 It was that all that was keeping benchmark indexes from 0:01:01.360 --> 0:01:04.240 returning to record highs. We'll get into it with the 0:01:04.319 --> 0:01:08.280 chief US echoity strategist at a big bank, and as always, 0:01:08.360 --> 0:01:10.520 we'll close out the episode with the craziest thing we 0:01:10.560 --> 0:01:13.040 saw in markets this week. So if you saw anything, 0:01:13.440 --> 0:01:16.360 call us on the Craziest Things hotline at six or 0:01:16.440 --> 0:01:20.360 six three two four three four nine zero. Leave us 0:01:20.400 --> 0:01:22.320 a voicemail and maybe we'll play it on the show 0:01:23.440 --> 0:01:25.319 Phil Dona. Did you play Kick the Can when you're 0:01:25.360 --> 0:01:28.520 a kid? I didn't, And I cannot even believe that 0:01:28.560 --> 0:01:31.320 this was a real game. Why it's it's totally a 0:01:31.360 --> 0:01:34.680 real game because you could use the ball like a 0:01:34.760 --> 0:01:37.639 soccer ball. The can was I don't know why, maybe, 0:01:37.680 --> 0:01:39.480 but the can was much better for some reason. It 0:01:39.560 --> 0:01:41.240 made the noise you got. You would fill it with 0:01:41.360 --> 0:01:44.160 rocks and then you'd get that noise anyway, How would 0:01:44.160 --> 0:01:45.880 you close the can if you fill it with rocks? 0:01:47.280 --> 0:01:50.160 You just strapped the little pebbles inside and then make 0:01:50.240 --> 0:01:54.760 them anyway. Okay, well it just sounds so fun. That 0:01:54.840 --> 0:01:58.800 have sounded really genuine. Anyway, maybe there's like a video 0:01:58.920 --> 0:02:00.840 version of Kick the Can can play. But this is 0:02:00.960 --> 0:02:03.880 this is what they refer to, uh problem, this sort 0:02:03.880 --> 0:02:07.440 of problem solving like we saw in the European debt crisis, 0:02:07.480 --> 0:02:10.000 when every week they'd kick the can further down the 0:02:10.080 --> 0:02:12.280 road and the markets would go nuts, and then the 0:02:12.320 --> 0:02:14.680 problem would return in a week and they'd kick it again. 0:02:14.760 --> 0:02:17.639 But let's get into it with our guests. Shall we 0:02:17.680 --> 0:02:19.680 Evil do La? Do you know our guest also has 0:02:19.680 --> 0:02:22.760 a podcast, and not only that, her podcast has slides 0:02:22.840 --> 0:02:25.920 attached to it. I think we need slides with podcasts. Yeah, 0:02:25.919 --> 0:02:28.600 she's a she's an inspiration and I listened to her podcast. 0:02:28.760 --> 0:02:32.040 She comes out with reports beforehand, then the podcast to 0:02:32.120 --> 0:02:34.400 tell you what the report was all about in a 0:02:34.440 --> 0:02:37.720 sort of quick snippet, which I think is great, a 0:02:37.760 --> 0:02:41.400 better way, more organized than our podcast, which I'm amazed 0:02:41.400 --> 0:02:44.839 it even happened some weeks with me too technical difficulties. 0:02:45.120 --> 0:02:47.320 Let's bring our guests in. Her name is Lori Calvacina. 0:02:47.440 --> 0:02:51.240 She's the head of US equity strategy at RBC Capital Markets. Laurie, 0:02:51.280 --> 0:02:54.480 welcome back to the show. Thanks so much for having me. 0:02:54.600 --> 0:02:56.560 I mean, I'll say, you know, you guys know I've 0:02:56.560 --> 0:02:58.720 been a fan of this podcast in the past, and 0:02:58.800 --> 0:03:01.160 when you guys started putting out, I think I did mind. 0:03:01.200 --> 0:03:02.880 You know, maybe like a year or so later, but 0:03:03.560 --> 0:03:05.960 you guys definitely help get my creative juice is flowing. 0:03:06.040 --> 0:03:07.560 So it's an honor to be here, you know, in 0:03:07.840 --> 0:03:10.200 many ways as a listener and um, you know, as 0:03:10.200 --> 0:03:13.080 someone who's taken some inspiration for you guys. Oh that's 0:03:13.600 --> 0:03:15.120 nice to you to say you're showing us up with 0:03:15.160 --> 0:03:16.679 the slides, though, Laurie, I want to I want to 0:03:16.680 --> 0:03:18.560 see how we can get some slides to attach it 0:03:18.720 --> 0:03:21.520 to ours. I have enough problems with the basic podcast 0:03:21.840 --> 0:03:25.560 cast technology. I'm not sure I want to add Laurie's. 0:03:25.639 --> 0:03:27.160 It's been a while since you've been on the show. 0:03:27.280 --> 0:03:30.080 I know you had a new baby. Congratulations. I'm jealous. 0:03:30.200 --> 0:03:33.519 I love babies. Thank you. He's he's not a baby anymore. 0:03:33.600 --> 0:03:38.080 My pandemic baby is thirteen months old. Now. Yeah, he's awesome. 0:03:38.120 --> 0:03:41.360 Hopefully he will you know he will. He will continue 0:03:41.400 --> 0:03:43.120 to do his cute little things for a while. But yeah, 0:03:43.160 --> 0:03:45.720 he's not a baby anymore. I had that realization that's 0:03:46.000 --> 0:03:48.880 not too fast. That's an adorable age. And enjoy them 0:03:48.880 --> 0:03:51.920 before they get old enough where they're roasting you on TikTok, 0:03:52.040 --> 0:03:56.160 like my kids are very, very unfortunate. But lord, let's 0:03:56.160 --> 0:03:57.880 get into this whole idea. I know you spent a 0:03:57.920 --> 0:04:02.720 lot of time looking at and measuring investors sentiment and 0:04:02.760 --> 0:04:05.760 it had really, you know, turned south there in September. 0:04:05.800 --> 0:04:10.400 It it really gotten pretty poor, um, you know, and 0:04:10.400 --> 0:04:13.280 it's always hard to tell exactly to sort of quantify 0:04:13.320 --> 0:04:16.840 and dissect what's causing it. But we have seen this, 0:04:17.160 --> 0:04:19.760 you know, strong reaction to the market by the fact 0:04:19.800 --> 0:04:22.880 that Congress was able to at least postpone the day 0:04:22.920 --> 0:04:27.159 of reckoning for the debt ceiling issue. Um, did that 0:04:27.200 --> 0:04:29.880 surprise you that that was that much of sort of 0:04:29.880 --> 0:04:32.240 a weight around the market's neck? I mean, is this 0:04:32.600 --> 0:04:34.080 clearing this out of the way, Is that enough to 0:04:34.120 --> 0:04:37.480 sort of say, blue guys ahead or what? Well, Mike, 0:04:37.520 --> 0:04:39.159 I think you know, you you've kind of stolen my 0:04:39.200 --> 0:04:41.400 craziest thing, which was you know, the reaction to the 0:04:41.839 --> 0:04:44.040 de ceiling deal was you know, sort of the crazy 0:04:44.080 --> 0:04:46.440 thing to me because I had the same thought you did. 0:04:46.480 --> 0:04:48.560 That we knew that this was something that was weighing 0:04:48.600 --> 0:04:51.040 on investor sentiment one of many things, right, but you know, 0:04:51.080 --> 0:04:53.560 there's a pretty long list right now. But you know, 0:04:53.680 --> 0:04:56.600 I think that the conventional wisdom, right is they always, 0:04:56.760 --> 0:04:58.839 you know, this this issue comes up every few years. 0:04:58.839 --> 0:05:01.640 They always figure out way to avoid financial arm again 0:05:01.640 --> 0:05:03.560 and get it done. And a lot of people I 0:05:03.600 --> 0:05:05.920 was even out talking to clients this week about this issue, 0:05:06.440 --> 0:05:10.200 UM in person actually, and you know, the responses while 0:05:10.200 --> 0:05:12.080 they always get it done. You know, I've learned to 0:05:12.080 --> 0:05:14.279 sort of ignore this issue. There's a lot of noise 0:05:14.360 --> 0:05:16.479 and then lo and behold. You know, we see this 0:05:16.600 --> 0:05:20.000 enormous reaction in markets today. So look, I think it 0:05:20.080 --> 0:05:23.240 probably was a little bit different this time just because 0:05:23.480 --> 0:05:26.480 it did seem it just wasn't clear how they were 0:05:26.520 --> 0:05:29.039 going to get to resolution. It did seem like, um, 0:05:29.120 --> 0:05:31.600 there was a little bit more than theater this time around, 0:05:31.640 --> 0:05:33.440 So maybe that worry was a little bit deeper than 0:05:33.480 --> 0:05:36.919 a lot of us were letting on and lur the 0:05:37.040 --> 0:05:39.200 dead ceiling was one of the things that was sort 0:05:39.200 --> 0:05:42.599 of weighing on markets up until now. And I'm hoping 0:05:42.640 --> 0:05:45.200 you can sort of talk about what else is behind 0:05:45.200 --> 0:05:47.920 the two way volatility that we've seen from markets where 0:05:47.960 --> 0:05:50.760 we're seeing these you know, one percent updates followed by 0:05:50.760 --> 0:05:53.760 one percent down days followed by one percent updates, and 0:05:54.240 --> 0:05:57.680 what does it all mean for investors? So look, you know, 0:05:57.720 --> 0:05:59.800 I think if we're just thinking about the past, maybe 0:05:59.800 --> 0:06:02.200 like two weeks, because I think that question might have 0:06:02.279 --> 0:06:03.960 a different answer if we went back to you know, 0:06:04.000 --> 0:06:05.599 to kind of a month ago. But I think over 0:06:05.640 --> 0:06:07.800 the past couple of weeks. I think the sort of 0:06:07.960 --> 0:06:10.560 jarring move that we had in the treasury yield, the 0:06:10.600 --> 0:06:14.400 tenure yield, was something we certainly heard about from a 0:06:14.400 --> 0:06:17.279 lot of investors. UM. And you know, when it's always, 0:06:17.279 --> 0:06:19.000 you know, when you kind of get into these discussions 0:06:19.000 --> 0:06:21.719 with people, it's never the direction or the magnitude of 0:06:21.720 --> 0:06:23.679 the move, it's the speed of the move that tends 0:06:23.720 --> 0:06:25.680 to to sort of freak people out. I think we 0:06:25.720 --> 0:06:28.480 did have a very quick move here, UM. And you know, 0:06:28.560 --> 0:06:30.839 we we did an investor survey at the end of 0:06:30.880 --> 0:06:33.520 September and we actually give people a write in question 0:06:33.600 --> 0:06:35.120 and we say, you know, what keeps you up at night, 0:06:35.160 --> 0:06:38.160 what's on your mind? And we had one person right 0:06:38.200 --> 0:06:41.680 into that survey as their free response, UM, sort of 0:06:41.680 --> 0:06:45.360 the rapid rotation from growth back to value, which we're 0:06:45.360 --> 0:06:48.760 not positioned for. And so I think it's also it's 0:06:48.800 --> 0:06:51.440 not just what's happening on the macro variable. It's the 0:06:51.440 --> 0:06:53.760 fact that it happened quickly and people weren't set up 0:06:53.760 --> 0:06:55.680 for it. And you saw a fierce rotation out of 0:06:55.680 --> 0:06:57.920 technology stocks, which have been the you know, the long 0:06:58.040 --> 0:07:00.960 term favorites of a lot of investors. And I think 0:07:00.960 --> 0:07:02.640 people sort of new in the back of their heads. 0:07:02.680 --> 0:07:04.200 You know, we think rates might go up, We think 0:07:04.240 --> 0:07:06.120 financials are going to catch a bit. But the fact 0:07:06.160 --> 0:07:08.760 that it happens so quickly that everybody's favorites talks in 0:07:08.760 --> 0:07:11.480 the stocks in the tech sector flips so quickly, I 0:07:11.480 --> 0:07:13.480 think it was just a combination of all of that 0:07:13.880 --> 0:07:16.200 on that really jarred markets over the last week or so. 0:07:17.240 --> 0:07:19.960 We'll talk to us about that notion of growth and value. 0:07:20.000 --> 0:07:23.400 I mean, it's it's obviously been the lemma all year. 0:07:23.680 --> 0:07:26.320 You know, how long we'll we'll value out perform, and 0:07:26.360 --> 0:07:29.080 then it stopped out performing. And now you know, it 0:07:29.080 --> 0:07:32.480 looks like the conditions are in place for for that, 0:07:32.760 --> 0:07:34.640 you know, to that trade to come back. I mean, 0:07:34.800 --> 0:07:38.520 are we poised for some more value out performance going forward? 0:07:38.560 --> 0:07:41.480 Do you think? I think so? And we've we've tried 0:07:41.520 --> 0:07:43.840 to not be too cute in our recommendations, you know, 0:07:43.880 --> 0:07:46.960 we're sort of stopping the conversation in terms of you know, 0:07:47.080 --> 0:07:49.560 we like value, we like growth. We're trying to say, 0:07:49.600 --> 0:07:51.560 just have exposure to both. We think it's going to 0:07:51.600 --> 0:07:54.320 be a very choppery leadership environment oversay the next year 0:07:54.400 --> 0:07:56.520 year and a half. So that's how we've positioned everything. 0:07:56.880 --> 0:07:59.040 But I think the really interesting conversation is, you know, 0:07:59.080 --> 0:08:02.040 sort of why and different time frames we see. So 0:08:02.280 --> 0:08:04.480 really since I think kind of early August, we changed 0:08:04.520 --> 0:08:06.920 all those positioning calls, and the framework we tried to 0:08:07.000 --> 0:08:09.000 lay out was at the time at least we said, look, 0:08:09.000 --> 0:08:11.840 there have been some very clear pressures on the value 0:08:11.880 --> 0:08:14.280 trade that have caused people to shift back into growth. 0:08:14.280 --> 0:08:16.560 And at the time it was the delta variant UM, 0:08:16.600 --> 0:08:18.640 it was some of the supply chain pressures which we're 0:08:18.680 --> 0:08:22.160 having an impact on value earnings revisions UM, and a 0:08:22.160 --> 0:08:24.080 lot of it was COVID to be honest, UM, that 0:08:24.200 --> 0:08:25.920 was there was still a lot of uncertainty there and 0:08:25.960 --> 0:08:28.800 no influencing things like the Michigan sentiment data UM. But 0:08:28.880 --> 0:08:30.320 we said, look, you know, we're going to come out 0:08:30.320 --> 0:08:33.000 of this. We think Wall Street has not really you know, 0:08:33.080 --> 0:08:35.320 sort of properly baked in a lot of the things 0:08:35.360 --> 0:08:36.720 we went through at the end of the summer, but 0:08:36.720 --> 0:08:38.080 we're going to come out of that. And when we 0:08:38.120 --> 0:08:40.600 come out of that, we think you'll see another big 0:08:40.720 --> 0:08:44.000 kind of intermediate term pop in the value trade UM. 0:08:44.080 --> 0:08:45.959 And we said, you know, it's we think it in 0:08:46.240 --> 0:08:48.400 some time in a sort of mid till late next year, 0:08:48.480 --> 0:08:51.320 so there's an expiration date on that trade um and 0:08:51.360 --> 0:08:54.040 we think growth leadership will eventually take over again late 0:08:54.080 --> 0:08:56.480 next year. But that was really the framework we tried 0:08:56.520 --> 0:08:59.120 to put out there was, Yes, we're gonna get another 0:08:59.160 --> 0:09:01.960 big move in the value you trade, don't get too comfortable, 0:09:01.960 --> 0:09:03.880 and it don't expect it's going to be the beginning 0:09:03.880 --> 0:09:06.000 of kind of a five year type cycle because growth 0:09:06.040 --> 0:09:07.520 is going to take back over, but we're going to 0:09:07.600 --> 0:09:09.640 have this sort of nice, you know, kind of move 0:09:09.679 --> 0:09:12.319 in financials and energy and things like that for a while. 0:09:12.800 --> 0:09:15.040 The interesting, you know, sort of set up for me 0:09:15.960 --> 0:09:17.240 was if you if you kind of look at the 0:09:17.320 --> 0:09:20.760 valuation data, there's a lot of room for value to 0:09:20.880 --> 0:09:23.240 beat growth. There's a lot of room for cyclicals to 0:09:23.320 --> 0:09:25.840 do well versus secular growth. I look at small cash right, 0:09:25.880 --> 0:09:28.120 small cats are still very cheap versus large caps. So 0:09:28.120 --> 0:09:29.959 we said, you know, the room is there from the 0:09:30.040 --> 0:09:33.960 valuation perspective. We knew that COVID trends had been driving 0:09:33.960 --> 0:09:36.480 a lot of those trades, and our biotech analysts was 0:09:36.480 --> 0:09:39.000 making a call that COVID cases would peak shortly after 0:09:39.080 --> 0:09:41.400 labor after Labor Day, so we said that would give 0:09:41.400 --> 0:09:44.920 you a catalyst to let that value trade move higher UM. 0:09:44.960 --> 0:09:46.760 And then the last thing we really talked about was 0:09:46.840 --> 0:09:49.200 just what do you expect from the economy next year. 0:09:49.240 --> 0:09:51.199 And when you're in a hot economy, which is one 0:09:51.240 --> 0:09:53.760 that tends to run above average the average is about 0:09:53.760 --> 0:09:56.280 two and a half percent UM, you tend to see 0:09:56.360 --> 0:10:00.000 value outperform, small cap outperform, cyclicals outperform. And and even 0:10:00.040 --> 0:10:03.040 though some of the economic numbers have been knocked down, 0:10:03.640 --> 0:10:06.320 consensus for next year still sitting comfortably above four percent, 0:10:06.480 --> 0:10:09.520 so you know, kind of a valuation room, a catalyst 0:10:09.520 --> 0:10:12.800 from COVID trends improving, and hot economy that will allow 0:10:12.800 --> 0:10:14.920 those ciglical you know, parts of the market to to 0:10:15.000 --> 0:10:17.200 really have some good fundamental support for next year. That 0:10:17.280 --> 0:10:19.320 was really kind of three ingredients we saw for that 0:10:19.360 --> 0:10:31.120 intermediate term value. Pope. Let's let's unpack that a little 0:10:31.120 --> 0:10:33.600 bit on small caps. I know you you started out 0:10:33.640 --> 0:10:36.880 as a small cap analysts in a previous life, right, 0:10:36.880 --> 0:10:39.800 so I know it's probably dear to your heart, uh, 0:10:39.880 --> 0:10:42.400 the smaller companies you know. To me, I don't always 0:10:42.440 --> 0:10:45.400 think of small caps in the same breath as as 0:10:45.520 --> 0:10:47.400 value stocks. But I guess you know, if you look 0:10:47.400 --> 0:10:49.200 at the waiting of the Russell two thousand, I mean, 0:10:49.240 --> 0:10:52.719 have you on on financials, have you on energy? So 0:10:53.000 --> 0:10:56.880 from a sector's perspective, you know, they certainly seemed to 0:10:57.800 --> 0:11:00.920 potentially benefit from the same type of tell wines that 0:11:00.920 --> 0:11:04.520 that would boost the value stocks in the large cap induexes. 0:11:04.960 --> 0:11:07.040 How are you thinking about small caps going forward? I 0:11:07.080 --> 0:11:13.199 mean it also feels like, um, the revitalization, the rebound 0:11:13.200 --> 0:11:16.240 and earnings for small caps has been sort of deferred 0:11:16.240 --> 0:11:18.959 a little bit into the future compared to large caps. 0:11:19.000 --> 0:11:21.200 I mean, is it kind of, uh the time for 0:11:21.240 --> 0:11:23.880 the for small caps to shine? But given all these factors, 0:11:24.200 --> 0:11:26.800 and to make a twelve part question, I know, the 0:11:27.840 --> 0:11:31.200 you know, earning earnings estimates for small caps can be 0:11:31.240 --> 0:11:35.679 a little bit more violatile than, uh than large caps, 0:11:35.760 --> 0:11:37.439 and so I don't know if that plays into your 0:11:37.480 --> 0:11:39.880 thinking at all. But you know, how are you sort 0:11:39.880 --> 0:11:42.600 of thinking about small caps going forward, given given all 0:11:42.640 --> 0:11:46.600 these sort of catalysts that potentially could help them out. Yeah, 0:11:46.600 --> 0:11:49.040 it's it's a great question. And you know, I sort 0:11:49.080 --> 0:11:52.480 of described small cap as my first professional child. Um, 0:11:52.600 --> 0:11:54.600 you know, I spent seven years as a small cap 0:11:54.679 --> 0:11:56.679 strategist at a couple of different shops. I mean, now 0:11:56.720 --> 0:11:58.520 I kind of do I do everything the broad market, 0:11:58.520 --> 0:12:00.480 and I still do small caps, but there's a certain 0:12:00.520 --> 0:12:02.360 fondness for me there, and I often feel like it's 0:12:02.360 --> 0:12:05.160 the lens through which I can really understand what's going 0:12:05.200 --> 0:12:06.880 on the market. I do think that a lot of 0:12:06.880 --> 0:12:10.920 things are clearer there than they are an SMPD. UM. 0:12:10.960 --> 0:12:13.680 And look, I think with small cap and people hate 0:12:13.679 --> 0:12:16.080 it when I say this, UM, but I really don't 0:12:16.080 --> 0:12:19.200 think earnings matter that much. Um. You know. I think 0:12:19.200 --> 0:12:22.200 the reality is that small caps have so many companies 0:12:22.200 --> 0:12:24.480 with losses and now it's obviously more now than in 0:12:24.520 --> 0:12:27.200 the past. UM. But the reality is there's really no 0:12:27.240 --> 0:12:29.480 good way to calculate the EPs growth of the Russell 0:12:29.520 --> 0:12:31.600 two thousand. I come up with ways to do it 0:12:31.640 --> 0:12:34.720 to satisfy client requests. Frankly, UM, and to try to 0:12:34.760 --> 0:12:37.280 help my clients, you know, put some numbers around something 0:12:37.320 --> 0:12:40.040 that's very difficult to put numbers around. But I've just 0:12:40.520 --> 0:12:43.360 realized over time that's just not what the stocks trade on. 0:12:43.440 --> 0:12:47.280 The stocks tend to trade on higher level macro variables, 0:12:47.600 --> 0:12:49.480 and the only way the earnings I feel like really 0:12:49.520 --> 0:12:51.600 sort of seeps in is when you sort of look 0:12:51.640 --> 0:12:54.120 at it from a quality perspective, and people want higher 0:12:54.160 --> 0:12:57.240 quality so than the sheer number of companies with losses 0:12:57.280 --> 0:13:00.600 will push people out of that space into bigger caps um. 0:13:00.679 --> 0:13:02.880 But and I think that's certainly something that hurts small 0:13:02.880 --> 0:13:05.800 cap over the summer. The nervousness around the COVID outlook, 0:13:05.840 --> 0:13:08.320 the FED a lot of other things pushed investors back 0:13:08.360 --> 0:13:10.520 towards higher quality stories, and that pulled some of the 0:13:10.559 --> 0:13:13.160 multi asset investors out of small cap. But that's really 0:13:13.160 --> 0:13:14.520 the only time I think you really want to pay 0:13:14.559 --> 0:13:16.720 too much attentions to earnings. I think earnings is more 0:13:16.720 --> 0:13:19.400 of a stock selection issue within small cap for active 0:13:19.400 --> 0:13:21.079 managers as opposed to a reason to get in or 0:13:21.120 --> 0:13:23.760 out of the asset class um. But you know, to 0:13:23.840 --> 0:13:25.839 kind of go back to your original question, I think 0:13:26.600 --> 0:13:29.000 small caps and value are not always the same trade. 0:13:29.200 --> 0:13:31.720 I think they are the trade the same trade right now. 0:13:31.760 --> 0:13:35.480 If you look at how large has performed versus small, 0:13:35.640 --> 0:13:39.040 and growth has performed versus large within the Russell one thousand, 0:13:39.080 --> 0:13:42.160 so the large cap lands both of those trades have 0:13:42.280 --> 0:13:44.520 been moving in tandem with the rate of change in 0:13:44.600 --> 0:13:47.640 COVID cases in the US. That's been true for small 0:13:47.679 --> 0:13:50.360 cap since last November. It's been true for value growth 0:13:50.400 --> 0:13:53.079 since March UM but the last like six nine months 0:13:53.160 --> 0:13:55.280 or so. They are both trading on one of the 0:13:55.360 --> 0:13:59.000 same economic variables. They are also both very sensitive to 0:13:59.160 --> 0:14:01.440 interest rate direct ship. And this is something we've seen 0:14:01.480 --> 0:14:03.400 over time that when the tenure yield is going up, 0:14:03.400 --> 0:14:05.839 it doesn't really matter why it's going up. Small caps 0:14:05.840 --> 0:14:09.120 tend to outperform and value tends to outperform. And if 0:14:09.160 --> 0:14:12.640 you sort of think about why those relationships are there, UM, 0:14:12.679 --> 0:14:16.360 I think right now, financials is a huge influence on 0:14:16.400 --> 0:14:18.800 both the small cap space as an asset class and 0:14:19.120 --> 0:14:22.480 the value trade. And so interest rates go up, financials 0:14:22.520 --> 0:14:24.760 tend out perform. It's pulling both of those parts of 0:14:24.840 --> 0:14:27.560 the market up right now. UM. And I just sort of, 0:14:27.600 --> 0:14:29.240 you know, put in a slightly different way when we 0:14:29.360 --> 0:14:32.480 talk about small cap looking cheap versus large cap UM. 0:14:32.520 --> 0:14:35.160 It's a really really compelling chart that we put together 0:14:35.240 --> 0:14:38.160 on that you're really at historic valuation opportunities and small 0:14:38.240 --> 0:14:40.640 versus large when you go and look at it sector 0:14:40.680 --> 0:14:44.040 by sector to figure out what's driving that valuation differential. 0:14:44.400 --> 0:14:48.120 It's not things like healthcare, UM. It's it's the financial sector, 0:14:48.240 --> 0:14:51.160 it's the energy sector. UM. It's these kind of you know, 0:14:51.360 --> 0:14:53.880 value oriented parts of the market that are have a 0:14:53.960 --> 0:14:56.160 very heavy presence in small cap now that are really 0:14:56.240 --> 0:14:59.360 driving that valuation differential. So there's a lot of overlap 0:14:59.400 --> 0:15:01.080 in those trade right now that we might not no, 0:15:01.520 --> 0:15:05.680 not not ordinarily. See. I'm glad you brought up financials 0:15:05.720 --> 0:15:08.640 because I had noticed in one of your notes recently 0:15:08.680 --> 0:15:11.680 where you said ahead of FED hikes, you tend to 0:15:11.720 --> 0:15:14.920 see some value in some small caps out performing. So 0:15:15.080 --> 0:15:17.520 I'm hoping you can walk us through what can work 0:15:17.640 --> 0:15:21.080 well in in the environment now where people are anticipating 0:15:21.120 --> 0:15:24.680 a FED taper and then eventually FED hikes. So I 0:15:25.000 --> 0:15:27.880 do think the taper was largely priced in in the 0:15:27.920 --> 0:15:30.080 second quarter of the year. UM. And if you kind 0:15:30.080 --> 0:15:33.520 of go back and you think about the sort of 0:15:33.520 --> 0:15:38.320 conversation that was happening among economic economists and rage strategists, 0:15:38.360 --> 0:15:40.080 and there was you know, sort of this this kind 0:15:40.080 --> 0:15:42.040 of pounding the table up. The FED is behind the 0:15:42.040 --> 0:15:44.040 curve and they need to taper because inflation is getting 0:15:44.040 --> 0:15:45.960 out of control and they're going to eventually wake up 0:15:45.960 --> 0:15:48.640 to this risk and pull their time table forward. But 0:15:48.680 --> 0:15:50.840 that was a big conversation happening in kind of March 0:15:50.880 --> 0:15:53.880 and April, and that's actually when we saw the value trade, 0:15:53.960 --> 0:15:57.520 you know, kind of start to underperform. And we after 0:15:57.560 --> 0:16:00.120 having had a big run and also small caps mysteriously 0:16:00.160 --> 0:16:03.200 at the time, seemingly peaked versus large cap and we 0:16:03.280 --> 0:16:05.520 sort of put some of those trades that had been 0:16:05.520 --> 0:16:08.440 doing very well and that normally do well going into 0:16:08.440 --> 0:16:12.440 a hiking environment, they suddenly, you know, just stopped working um. 0:16:12.480 --> 0:16:13.880 And I think as we go back and look at 0:16:13.880 --> 0:16:15.880 the data, we think sort of the deterioration you were 0:16:15.880 --> 0:16:18.240 starting to seeing some of the COVID stats contributed to that. 0:16:18.280 --> 0:16:20.680 But I also think it was just Wall Street figuring 0:16:20.680 --> 0:16:23.000 out that the taper was coming sooner rather than later, 0:16:23.080 --> 0:16:25.640 despite what the Fed was saying. And you know, if 0:16:25.680 --> 0:16:27.400 you go do back and look at the taper, we 0:16:27.480 --> 0:16:31.480 had you know, time frame and that announcement, and then 0:16:31.560 --> 0:16:34.240 when we actually did the taper, um we saw those 0:16:34.240 --> 0:16:37.720 traditional you know, kind of rate hike trades flip um. 0:16:37.800 --> 0:16:40.720 So normally you get into a rate hiking cycle, small 0:16:40.720 --> 0:16:43.200 peaks versus large value does very well going into the 0:16:43.240 --> 0:16:46.200 hiking cycle and then growth leadership takes over once hikes begin. 0:16:46.480 --> 0:16:49.200 And that's exactly what happened back in the taper during 0:16:50.160 --> 0:16:52.800 and we really essentially saw those trades take root again 0:16:52.880 --> 0:16:55.720 in second quarter of this year. UM. But you know 0:16:55.800 --> 0:16:58.080 what we had before, right, was the sort of interesting 0:16:58.120 --> 0:17:01.480 intervening period between the AP and the hikes, um, where 0:17:01.520 --> 0:17:04.320 a lot of these risk trades started to work again. UM. 0:17:04.359 --> 0:17:06.679 And now you know, essentially I think we're sort of 0:17:06.720 --> 0:17:09.240 in this holding period, right. I think the market is 0:17:09.280 --> 0:17:13.240 going to enjoy the cyclical spirits that make the FED 0:17:13.320 --> 0:17:16.480 confident enough to hike rates. UM. So we've got above 0:17:16.520 --> 0:17:19.959 average GDP in place. That's something you normally see before 0:17:20.119 --> 0:17:22.600 and early on in a FED hiking cycle. Um, we've 0:17:22.640 --> 0:17:24.800 got very lofty levels of I s M. That's something 0:17:24.800 --> 0:17:27.280 you also tend to see before the hikes actually, you know, 0:17:27.320 --> 0:17:31.439 start to happen. Um. And you know what, unfortunately, we 0:17:31.440 --> 0:17:33.320 tend to see is when the hikes themselves start. I 0:17:33.520 --> 0:17:35.919 s M usually ends up peaking during the hikes are 0:17:35.960 --> 0:17:38.680 shortly thereafter in GDP grows from being above average to 0:17:38.720 --> 0:17:41.359 below average shortly after the hiking cycle. So the markets 0:17:41.400 --> 0:17:44.000 start to say, you know, the FED always cools off 0:17:44.000 --> 0:17:46.280 the economy and pull some of that that froth out, 0:17:46.920 --> 0:17:49.600 and markets start to anticipate it, and so these parts 0:17:49.600 --> 0:17:52.320 of the market that benefit from that really hot economy, 0:17:52.440 --> 0:17:55.200 they start to discount in advance even though it's happening. So, 0:17:55.680 --> 0:17:58.200 you know, I think that the Fed, unfortunately, I think 0:17:58.280 --> 0:18:01.040 is what puts the expiration daid on the siblical tradits, 0:18:02.400 --> 0:18:05.800 you know, Laurie, I, I think the one interesting sort 0:18:05.840 --> 0:18:09.080 of difference in this latest episode over the last year 0:18:09.200 --> 0:18:13.560 two has been the the enormous fiscal response. Uh. You know, 0:18:13.800 --> 0:18:18.040 in addition to such a huge uh monetary response from 0:18:18.080 --> 0:18:21.560 the Fed, we for once we saw a really huge 0:18:21.560 --> 0:18:26.280 fiscal response from from the Congress and the President's UM. 0:18:26.359 --> 0:18:30.960 That's how one's obviously wearing off. UM. I wonder how 0:18:31.040 --> 0:18:35.560 much optimism was priced into the market about whether it 0:18:35.560 --> 0:18:39.800 be an infrastructure deal the Biden three and a half 0:18:39.800 --> 0:18:43.560 trillion spending package. You know, at this point, it doesn't 0:18:43.560 --> 0:18:46.000 look like we will necessarily get either one. I mean, 0:18:46.320 --> 0:18:48.320 at least I wouldn't bet on it. Possibly will get 0:18:48.359 --> 0:18:52.040 some kind of of narrowed down UH package that would 0:18:52.080 --> 0:18:55.240 be sort of above trend government spending. But you know 0:18:55.960 --> 0:18:58.800 what's priced into the market as the market, in your opinion, 0:18:58.840 --> 0:19:02.119 just written off the sort of an above average fiscal 0:19:02.200 --> 0:19:05.360 spend going forward at this point, I think it's such 0:19:05.400 --> 0:19:07.400 a great question, Mike. And when we sort of think 0:19:07.440 --> 0:19:09.920