WEBVTT - What If There Was a Recession and No One Noticed? 0:00:13.880 --> 0:00:17.320 Hello, and welcome to What Goes Up, a weekly markets podcast. 0:00:17.600 --> 0:00:19.840 My name is Mike Reagan, I'm a senior editor at. 0:00:19.720 --> 0:00:23.680 Bloomberg, and I'm all Donna Hirich, across asset reporter with Bloomberg. 0:00:24.480 --> 0:00:27.640 And this week on the show, well, don't pinch yourself, 0:00:27.680 --> 0:00:30.319 you're not dreaming, and don't bother to call the IT 0:00:30.680 --> 0:00:32.680 department to adjust your computer monitor. 0:00:32.720 --> 0:00:33.560 It's working fine. 0:00:33.960 --> 0:00:36.199 The stock market really did just put in one of 0:00:36.200 --> 0:00:39.400 the strongest first halfs of a year in well forever, 0:00:39.600 --> 0:00:42.440 at least for the Nasdaq one hundred, which as of 0:00:42.479 --> 0:00:45.600 this recording is up about thirty seven percent so far 0:00:45.840 --> 0:00:49.839 in twenty twenty three. So how exactly did that happen 0:00:50.000 --> 0:00:52.559 when everyone and their dog was calling for a recession 0:00:52.600 --> 0:00:55.720 this year? And what can we expect next? We'll get 0:00:55.720 --> 0:00:58.920 into it with a very special guest. But first of Feldona, 0:00:59.520 --> 0:01:03.440 I think many listeners are probably familiar with the famous 0:01:03.440 --> 0:01:09.000 Bloomberg pantry. We're very lucky to have snacks and coffee 0:01:09.520 --> 0:01:10.720 on soft drinks. 0:01:11.000 --> 0:01:13.280 What's your favorite part of the Bloomberg pantry? 0:01:13.319 --> 0:01:16.600 Bloomberg pantry, Okay, we have these really cool machines that 0:01:16.760 --> 0:01:20.800 I heard are straight from Italy. That make lattes. Do 0:01:20.880 --> 0:01:23.959 you use those? They're like dotted all over the place. 0:01:24.720 --> 0:01:27.560 One of them is a brand new and makes like 0:01:27.600 --> 0:01:30.759 the silkiest latte, So I love those. 0:01:31.360 --> 0:01:34.600 I was going to be corny and say the people. 0:01:35.000 --> 0:01:38.959 Oh my god, please don't make me roll my eyes. 0:01:39.680 --> 0:01:42.160 All right. I was walking through the pantry the other. 0:01:42.080 --> 0:01:45.880 Day, and there is something to being back in the 0:01:45.920 --> 0:01:47.960 office and not working at home all the time, because 0:01:47.960 --> 0:01:51.120 you run in the people. I had my eggs, my 0:01:51.560 --> 0:01:55.320 hard boiled egg, my coffee, a pocket full of red liquorice, 0:01:55.800 --> 0:01:58.000 and I ran into our guests this week and made 0:01:58.000 --> 0:01:59.920 me think, you know what, it's about time we had 0:02:00.160 --> 0:02:01.680 on the show. We have a lot of strategists on 0:02:01.720 --> 0:02:04.680 the show from outside of the firm, but we're lucky 0:02:04.720 --> 0:02:07.440 to have one of the best in the business right here. 0:02:08.040 --> 0:02:10.280 When I see her in the hallways, I never say 0:02:10.320 --> 0:02:13.360 hi because I'm like, oh, no, I'm leaving her alone 0:02:13.360 --> 0:02:17.480 because she needs her time. She's so busy, really really, yes, 0:02:19.120 --> 0:02:21.360 hello to me. Oh I never say hello to you 0:02:21.400 --> 0:02:21.960 on purpose. 0:02:22.240 --> 0:02:25.120 Yeah, turn the other way, completely different reason. 0:02:25.120 --> 0:02:27.600 I guess, turned the other way. Yes, Okay, it's Gina 0:02:27.639 --> 0:02:31.119 Martin Adams, Chief Equity strategist at Bloomberg Intelligence. Since she's 0:02:31.160 --> 0:02:32.680 been on the show before, and we're so lucky to 0:02:32.680 --> 0:02:33.920 have you back. Thank you for joining me. 0:02:33.960 --> 0:02:36.280 Wow, thank you for having me. That was quite an introduction. 0:02:36.400 --> 0:02:38.079 Well we should just stop it right there on that 0:02:38.200 --> 0:02:39.520 high and call it a quit. 0:02:39.720 --> 0:02:42.040 Thanks everybody for listening this week. 0:02:42.520 --> 0:02:44.440 But it's a good week, Gina, to have you on. 0:02:44.560 --> 0:02:47.919 You guys just came out with your mid year outlook 0:02:48.160 --> 0:02:51.280 for equities. Talk to us about sort of your main 0:02:51.440 --> 0:02:56.560 takeaways about this crazy strong rally we've seen this year 0:02:56.600 --> 0:02:59.320 and what we should take away most from the mid 0:02:59.400 --> 0:02:59.960 year outlook. 0:03:00.600 --> 0:03:03.440 Yeah, I think there's a lot to unpack with the 0:03:03.480 --> 0:03:05.800 market so far this year. I think the biggest takeaway 0:03:05.840 --> 0:03:10.960 for me really is we cannot drop the ball on 0:03:11.280 --> 0:03:15.200 following earnings trends and earnings did give us a lot 0:03:15.200 --> 0:03:17.360 of indication that twenty twenty two was going to be weak. 0:03:17.440 --> 0:03:19.960 They also have given us a lot of support in 0:03:20.000 --> 0:03:23.440 twenty twenty three, and I think that many people dismissed 0:03:23.440 --> 0:03:25.920 the gains in the equity market. It has been a 0:03:25.919 --> 0:03:28.519 powerful rally, but remember it comes off of a really 0:03:28.639 --> 0:03:31.360 rough go in twenty twenty two. For that, Nasdaq and 0:03:31.440 --> 0:03:34.400 for some of those tech stocks, so earnings trends very 0:03:34.520 --> 0:03:38.960 very important. Inflation likewise important not only for its impact 0:03:38.960 --> 0:03:41.640 on earnings trends, but because inflation in the seventies and 0:03:41.680 --> 0:03:44.480 eighties was a really great timing mechanism for stock tops 0:03:44.480 --> 0:03:49.000 and bottoms. Once again, inflation peaks, stocks bottom, and we're 0:03:49.000 --> 0:03:52.040 off to the races as inflation is decelerating. So that's 0:03:52.080 --> 0:03:55.720 a big takeaway from US. I think thirdly, sentiment is 0:03:55.760 --> 0:03:59.680 still pretty mixed. A sentiment gave us an indication in 0:03:59.680 --> 0:04:01.840 Octo Tilboro of last year that we should start getting 0:04:01.840 --> 0:04:04.920 more constructive to stocks because everybody else had left the building. 0:04:04.960 --> 0:04:07.440 There was just nobody left that wanted to touch equity markets. 0:04:08.040 --> 0:04:12.240 And sentiment is still somewhat mixed. I do think that 0:04:12.280 --> 0:04:17.039 people are still really nervous about this potential economic recession 0:04:17.160 --> 0:04:20.720 and how deep or long it may be. People are 0:04:20.720 --> 0:04:23.760 still really nervous about the FED. As long as I 0:04:23.800 --> 0:04:26.600 keep getting pushed back from people that we shouldn't be constructive, 0:04:26.600 --> 0:04:28.240 and then we probably should be constructive. 0:04:29.680 --> 0:04:32.400 I really like the very first line of the midyear 0:04:32.520 --> 0:04:35.280 of your mid year outlook, so I want to read it. 0:04:35.320 --> 0:04:37.960 Stocks should breathe a sigh of relief as the inflation 0:04:38.080 --> 0:04:40.640 pig appears to have passed through the S and P 0:04:40.760 --> 0:04:44.360 five hundred earnings Python. That's so good and so visual. 0:04:44.520 --> 0:04:44.880 Thank you. 0:04:45.080 --> 0:04:48.440 And then you also mentioned margin pressures from twenty twenty two. 0:04:48.640 --> 0:04:51.520 They're fading and should offset any revenue weakness. Can you 0:04:51.520 --> 0:04:53.680 talk a little bit about that, And then also about 0:04:53.720 --> 0:04:56.720 the idea I want to bring AI into this as well, 0:04:56.760 --> 0:04:59.440 like if we are expecting all these companies to be 0:05:00.000 --> 0:05:02.640 spending on AI, does that hurt margins? 0:05:02.800 --> 0:05:07.560 Yeah? Really great questions. So I'm I am very well 0:05:07.600 --> 0:05:09.800 known as being obsessed with margins. As a matter of fact, 0:05:09.839 --> 0:05:12.480 one of my associates one time accidentally wrote my name 0:05:12.560 --> 0:05:15.159 Gina Margin Adams on a piece of work instead of 0:05:15.160 --> 0:05:17.560 Gena Martin Adams. She says it was an accident, but 0:05:19.160 --> 0:05:23.520 it's it's just something that I follow very very carefully. 0:05:23.720 --> 0:05:28.400 And margins had been just crashing when inflation was accelerating. 0:05:28.480 --> 0:05:32.160 Margins x energy, which is an important clarification on the 0:05:32.240 --> 0:05:35.039 S and P five hundred, crashed from late twenty twenty 0:05:35.080 --> 0:05:37.400 one right through to the first quarter of this year, 0:05:38.240 --> 0:05:41.760 but started we're starting to see margin improvement occur on 0:05:41.800 --> 0:05:44.280 the index, and that is a direct reflection of the 0:05:44.279 --> 0:05:49.440 inflation landscape. Consumer prices are decelerating, Producer prices growth is 0:05:49.480 --> 0:05:52.640 also decelerating, but consumer price growth is decelerating at a 0:05:52.640 --> 0:05:55.880 slower pace than producer price growth, and that margin is 0:05:56.120 --> 0:05:58.640 directly impacting the S and P five hundred. On top 0:05:58.680 --> 0:06:02.440 of that, we did go through some pretty significant layoffs 0:06:02.480 --> 0:06:05.400 in twenty twenty two, and that's enabling margin recovery for 0:06:05.480 --> 0:06:08.400 some of the index. So what we're starting to see 0:06:08.520 --> 0:06:10.479 is actually green shoots in the earning stream. And we 0:06:10.520 --> 0:06:12.880 started writing about this in the first quarter earning season. 0:06:12.960 --> 0:06:15.120 People were like, you got to be crazy. The economy 0:06:15.200 --> 0:06:17.559 is going to fall apart. You can't have green shoots 0:06:17.600 --> 0:06:19.560 in the earning stream when economy is going to be 0:06:19.600 --> 0:06:22.480 falling apart. But that's what we see, and as long 0:06:22.520 --> 0:06:26.640 as that continues, that fundamental shift in margins should lead 0:06:26.640 --> 0:06:29.920 to much better earning stability for the index going forward, 0:06:29.960 --> 0:06:32.800 in particular for X energy sectors. Now, tech is a 0:06:32.839 --> 0:06:37.520 really interesting phenomenon right now because what's happening in tech 0:06:38.440 --> 0:06:41.120 is in some cases very different from what's happening in 0:06:41.160 --> 0:06:43.520 the rest of the index, and in some cases the same, 0:06:43.600 --> 0:06:47.840 and where it's very different is there is optimism in tech. 0:06:48.040 --> 0:06:50.599 There's optimism nowhere else in the S and P five hundred. 0:06:50.600 --> 0:06:52.920 The equal weighted S and P still trading below its 0:06:52.960 --> 0:06:56.520 pre pandemic average levels, but there's a ton of optimism 0:06:56.560 --> 0:07:01.279 in tech. Tech valuations are at pandemic peace in the 0:07:01.440 --> 0:07:05.920 S and P specifically, and that's a function of both 0:07:06.320 --> 0:07:10.040 margins starting to improve. This really started the tech rally. 0:07:10.120 --> 0:07:12.160 Nobody wants to admit it because everybody thinks it's all 0:07:12.200 --> 0:07:16.320 about AI, but the reality is Tech cut costs. Tech 0:07:16.360 --> 0:07:18.880 cut those costs that created a margin bottom for tech 0:07:19.400 --> 0:07:22.960 and created an uptrend in an updraft in earnings estimate 0:07:22.960 --> 0:07:25.800 revision for that space going into latter the later part 0:07:25.800 --> 0:07:28.640 of this year. So that created the initial rounds of optimism. 0:07:29.160 --> 0:07:33.240 And then what's different is AI and AI certainly is 0:07:33.360 --> 0:07:37.280 driving an anticipated recovery and spending at large, and capital 0:07:37.320 --> 0:07:41.440 spending in particular, that impacts different segments of tech and 0:07:41.480 --> 0:07:44.680 communications and some of the consumer discretionary sectors in very 0:07:44.720 --> 0:07:47.760 different ways. So some of the companies that are big 0:07:47.800 --> 0:07:52.440 beneficiaries of that capital spending obviously can see really significant 0:07:52.480 --> 0:07:55.760 revenue growth to offset any any spend that they have 0:07:55.840 --> 0:07:58.760 to develop product Companies that are simply going to have 0:07:58.800 --> 0:08:02.760 to spend in or to onboard have face a different scenario. 0:08:02.880 --> 0:08:05.160 They'll need to see revenue growth in other spaces. But 0:08:05.640 --> 0:08:08.200 it does appear to be creating this sort of snowball 0:08:08.240 --> 0:08:11.560 effect throughout the entire in the entirety of the tech sector, 0:08:12.200 --> 0:08:15.280 where there is this optimism embedded in prices. That could 0:08:15.280 --> 0:08:18.000 be a risk later this year if tech companies aren't 0:08:18.000 --> 0:08:20.520 starting to post the earnings growth that it's anticipated in 0:08:20.520 --> 0:08:24.240 that valuation, then we could face some downdraft in tech, 0:08:24.320 --> 0:08:26.520 But for now, it looks like it's only creating an 0:08:26.600 --> 0:08:28.440 upwave in expectations. 0:08:29.000 --> 0:08:31.600 You know, one of the most interesting things to me 0:08:32.000 --> 0:08:36.040 in the mid year outlook is you guys have at 0:08:36.080 --> 0:08:40.400 BI Equity Strategy have your own economic regime model. That 0:08:40.440 --> 0:08:45.040 model actually suggests that the recession is come and gone, 0:08:46.400 --> 0:08:49.800 happened in what the second half of twenty twenty two, 0:08:50.000 --> 0:08:53.400 which sort of makes this market make a lot more 0:08:53.480 --> 0:08:56.040 sense than everyone bracing for a recession. But could you 0:08:56.040 --> 0:08:58.240 walk us through sort of the inputs of that model 0:08:58.280 --> 0:09:02.360 and what exactly it's showing and what makes you make 0:09:02.400 --> 0:09:05.720 that analysis that it really looked like a recession last year. 0:09:06.120 --> 0:09:09.440 Yeah, so the economic regime model. We designed this. I 0:09:09.480 --> 0:09:11.560 designed this many many years ago when I was with 0:09:11.600 --> 0:09:16.240 another firm that shall remain nameless. But nonetheless, it is 0:09:16.360 --> 0:09:18.760 designed to give us a read on the current read 0:09:18.800 --> 0:09:22.880 on the economy by indicators that are historically very meaningful 0:09:23.040 --> 0:09:26.960 for predicting stock prices. So we really isolate that read 0:09:27.000 --> 0:09:31.400 on the economy into four factors. We use consumer confidence, 0:09:31.440 --> 0:09:35.120 we use ism, we use capacity utilization, and we use 0:09:35.120 --> 0:09:39.720 continuing claims. And those four factors together have given us 0:09:39.840 --> 0:09:42.160 We put them into a logistic regression. I don't want 0:09:42.200 --> 0:09:45.120 to get too nerdy, but nonetheless, most of the time 0:09:45.160 --> 0:09:48.000 those factors give us an output of a range of 0:09:48.040 --> 0:09:50.440 from zero to one, and most of the time they 0:09:50.480 --> 0:09:52.760 give us an output of near one, which would suggest 0:09:52.760 --> 0:09:55.680 the economies just fine. The input from the economy for 0:09:55.720 --> 0:09:58.600 the equity market is very positive. You should expect positive 0:09:58.600 --> 0:10:00.959 returns over time when they the output is at one. 0:10:01.880 --> 0:10:04.840 When it drops below one, it creates risk to the 0:10:04.840 --> 0:10:07.560 equity market, right, And so this indicator gave us an 0:10:08.160 --> 0:10:11.480 started suggesting there were economic risks emerging for the equity 0:10:11.480 --> 0:10:14.520 market as early as June of last year, and then 0:10:14.520 --> 0:10:17.320 it hit just an outright low level, like a low 0:10:17.360 --> 0:10:20.240 that you never see outside of recession, near zero in 0:10:20.280 --> 0:10:24.160 December of last year. So we effectively had this big 0:10:24.240 --> 0:10:27.040 loss of momentum in the economy that impacted the equity 0:10:27.040 --> 0:10:30.200 market extremely negative between June and December of last year. 0:10:30.840 --> 0:10:33.199 Since December, it's certainly not out of the woods. It's 0:10:33.200 --> 0:10:35.760 still terrible. The reading is awful. It suggests we may 0:10:35.760 --> 0:10:37.880 and we may actually still be in some form of 0:10:37.920 --> 0:10:42.160 an economic correction or recession, but it's off of the low. 0:10:42.440 --> 0:10:45.280 So this is what's really meaningful for price direction is 0:10:45.320 --> 0:10:49.520 as we know, equity prices are driven by shifts in momentum. Right, 0:10:49.640 --> 0:10:52.320 So even if the economy is still in recession, the 0:10:52.320 --> 0:10:56.400 recession reached its big momentum trough according to this indicator 0:10:56.559 --> 0:10:59.080 as of December. Now, this is really contradictory to any 0:10:59.080 --> 0:11:01.280 economic thought out there, and you know every economist will 0:11:01.280 --> 0:11:03.360 tell you no way we're in recession. The job market 0:11:03.400 --> 0:11:04.160 was very stable. 0:11:04.640 --> 0:11:06.320 I was going to ask what was the main driver 0:11:06.480 --> 0:11:08.520 of that? Was it in poor consumer confidence? 0:11:08.559 --> 0:11:08.920 Mainly? 0:11:09.440 --> 0:11:12.360 Oh, it was everything. I mean, you know, remember ism 0:11:12.520 --> 0:11:14.520 peaked all the way back in twenty eleven. We use 0:11:14.559 --> 0:11:17.200 our twenty twenty one. We use ISM as another indicator 0:11:17.240 --> 0:11:19.200 as a component of our market health checklist, and it 0:11:19.240 --> 0:11:21.200 gave us a really early read that things were going 0:11:21.280 --> 0:11:23.680 south as of the end of twenty twenty one. So 0:11:23.840 --> 0:11:26.880 ism was plummeting for much of last year. May have 0:11:27.000 --> 0:11:31.200 crested it's low as well, and that certainly helps. Continuing 0:11:31.240 --> 0:11:35.280 claims were stable to hire, so they weren't particularly great. 0:11:35.400 --> 0:11:37.000 Consumer confidence was awful. 0:11:37.200 --> 0:11:40.320 We had those two back to back negative GDP readings 0:11:40.360 --> 0:11:40.760 as well. 0:11:40.960 --> 0:11:43.360 We did there were definite weaknesses, and we saw that 0:11:43.520 --> 0:11:45.599 really clearly in earnings. And I think that this is 0:11:45.640 --> 0:11:48.000 the important point. I'm not trying to make a forecast 0:11:48.040 --> 0:11:50.199 for the economy. It doesn't matter to me whether we 0:11:50.280 --> 0:11:53.600 fall into a technical recession or not. I need to 0:11:53.640 --> 0:11:56.680 forecast earnings, and I need to forecast what's going to 0:11:56.679 --> 0:11:58.760 happen with or figure out what's going to happen we're 0:11:58.880 --> 0:12:01.280 likely to happen with stock price returns, and these four 0:12:01.320 --> 0:12:04.080 indicators as a group, I've done a very good job 0:12:04.160 --> 0:12:07.280 of suggesting to me where I should be with respect 0:12:07.320 --> 0:12:09.640 to the equity market and how constructive you want to be. 0:12:09.800 --> 0:12:12.719 And basically what it said is go as far away 0:12:12.760 --> 0:12:17.000 from equities as you can in June and in December 0:12:17.440 --> 0:12:20.080 get back in. And that's what the model said to us. 0:12:20.240 --> 0:12:22.600 And it may or may not eventually prove. It could 0:12:22.600 --> 0:12:24.400 be the case that we did or did not fall 0:12:24.440 --> 0:12:28.199 in recession in twenty twenty two, But the economic indicators 0:12:28.200 --> 0:12:30.760 that matter to me as an equity strategist suggest that 0:12:30.800 --> 0:12:33.400 the distress has reached some sort of low point. We're 0:12:33.440 --> 0:12:36.240 still somewhat distressed, but not as distressed as we were 0:12:36.320 --> 0:12:36.760 last year. 0:12:42.840 --> 0:12:45.520 This is really interesting to me because I feel like 0:12:45.640 --> 0:12:47.920 in recent days more and more people have been bringing 0:12:48.000 --> 0:12:50.720 up the fact like we've been waiting for this recession. 0:12:51.360 --> 0:12:56.040 There still aren't crazy great signs that something is happening 0:12:56.120 --> 0:12:59.800 right now. But somebody I spoke with earlier this week said, 0:13:00.280 --> 0:13:02.319 if you're looking at the market, if you look at 0:13:02.320 --> 0:13:05.040 small caps for instance, or you mentioned the eco weight 0:13:05.840 --> 0:13:09.440 SMP index, that actually you could almost make the argument 0:13:09.480 --> 0:13:12.760 that those stocks are pricing in a recession because they're like, 0:13:12.880 --> 0:13:13.600 what do you think of that? 0:13:13.800 --> 0:13:15.400 Yeah, And as a matter of fact, I think large 0:13:15.400 --> 0:13:17.680 caps priced in recession as well. Last year. We were 0:13:17.760 --> 0:13:19.880 on a different model. We call it our fair value model, 0:13:19.960 --> 0:13:23.840 and this is a model that utilizes consensus expectations to 0:13:23.960 --> 0:13:26.880 suggest where the fair value for various equity markets are 0:13:26.920 --> 0:13:31.320 around the world macroeconomic expectations, and that model at the 0:13:31.400 --> 0:13:36.160 lows of last year, was anticipating of fifteen percent decline 0:13:36.160 --> 0:13:38.080 in earnings coming over the next twelve months, So that 0:13:38.120 --> 0:13:41.160 would say that, Okay, if the market is right here 0:13:41.880 --> 0:13:45.559 as of October first, twenty twenty two, we are officially 0:13:45.559 --> 0:13:48.760 headed into a major earnings recession in twenty twenty three, 0:13:49.520 --> 0:13:53.280 a major decline in earnings of fifteen percent more. Because 0:13:53.280 --> 0:13:56.120 remember earnings were already declining by that point in time, 0:13:56.240 --> 0:13:58.360 so that would be equivalent to roughly a twenty percent 0:13:58.440 --> 0:14:02.520 drop in earnings, which is very consistent with historical recession experience. 0:14:03.040 --> 0:14:05.920 We already priced it in the equity market, and unless 0:14:05.920 --> 0:14:08.240 we get a greater than twenty percent drop in earnings, 0:14:08.240 --> 0:14:12.520 those lows are probably pretty firm. Yep, the October lows 0:14:12.520 --> 0:14:14.080 are probably pretty firm. At least that would be what 0:14:14.280 --> 0:14:18.080 was implied in that model at that time. Small caps 0:14:18.280 --> 0:14:21.360 very similarly, small caps are much more economically sensitive or 0:14:21.400 --> 0:14:24.600 sensitive to the movements in the US economy than our 0:14:24.680 --> 0:14:27.280 large caps, so the divergence between large caps and small 0:14:27.320 --> 0:14:31.000 caps could be easily explained by the ongoing weakness and 0:14:31.040 --> 0:14:34.880 the domestic economy, the divergence between what's happening in tech 0:14:34.920 --> 0:14:36.400 and some of the bigger cap names and some of 0:14:36.440 --> 0:14:40.080 the multinationals that are more sensitive to foreign exchange in 0:14:40.200 --> 0:14:43.040 large caps versus small caps, which don't get those benefits 0:14:43.040 --> 0:14:46.200 of the dollar move. Small caps are not as beneficent, 0:14:46.520 --> 0:14:49.120 not as benefited by a re emerging Asia out of 0:14:49.200 --> 0:14:52.440 COVID restrictions, where large caps get a little bit of 0:14:52.440 --> 0:14:55.400 boost there. So there's I think a lot of what's 0:14:55.440 --> 0:14:57.440 happened in the equity market, As much as people think 0:14:57.480 --> 0:15:01.600 it's very mysterious and things are not a explained by fundamentals, 0:15:01.640 --> 0:15:04.760 I actually think the equity advance is largely explained by 0:15:04.760 --> 0:15:05.880 some fundamental shifts. 0:15:06.360 --> 0:15:09.360 Well, you also discuss the notion of a FED pause 0:15:09.760 --> 0:15:13.760 in your outlook and what historically has happened after a pause. 0:15:13.800 --> 0:15:17.440 I guess we don't really know if this is the 0:15:17.520 --> 0:15:20.000 highest that the Fed funds rate will be. Jerome Powell 0:15:20.080 --> 0:15:23.800 keeps saying maybe probably two more quarter point increases this year. 0:15:24.040 --> 0:15:26.880 I feel like the market could digest another half point 0:15:27.240 --> 0:15:29.760 on the Fed funds rate after this, And you know, 0:15:30.120 --> 0:15:32.680 whether this is a pause or it's a pause after 0:15:32.760 --> 0:15:35.240 another fifty basis points. I don't think it's that big 0:15:35.240 --> 0:15:37.800 of a difference, but I do wonder, you know, if 0:15:37.800 --> 0:15:41.240 we do plateau there for a while and the bond 0:15:41.360 --> 0:15:44.280 market falls in line with that, and we have an 0:15:44.360 --> 0:15:47.720 elevated risk free rate compared to what we saw a 0:15:47.720 --> 0:15:51.480 pre pandemic, how does that influence your thinking on what 0:15:51.520 --> 0:15:55.200 the market will do and valuations specifically, does that suggest 0:15:55.280 --> 0:15:59.480 to you a sort of lower ceiling for valuations or 0:16:00.240 --> 0:16:04.360 does this tech euphoria overshadow that and outweigh where the 0:16:04.440 --> 0:16:05.720 risk free rate is going to be. 0:16:06.280 --> 0:16:09.440 Yeah, it's a really good question. I think the equity 0:16:09.440 --> 0:16:12.080 market will really dismiss anything that happens with the FED 0:16:12.080 --> 0:16:13.600 in the short run. I think that we're kind of 0:16:13.640 --> 0:16:17.360 over it, right. It's just, yeah, okay, we're pausing. It 0:16:17.440 --> 0:16:20.440 might hike one or two more times, but it's largely 0:16:20.480 --> 0:16:22.600 been the near term price section is the near term 0:16:22.600 --> 0:16:25.280 action from the FED has been priced. I do think 0:16:25.320 --> 0:16:28.120 there's a risk, though, that the bond market is very 0:16:28.160 --> 0:16:30.160 convinced that this is not a pause. It's just a 0:16:30.200 --> 0:16:32.960 short term pause that leads to a series of cuts 0:16:33.720 --> 0:16:38.200 and we do see that sort of infiltrating equity market 0:16:38.280 --> 0:16:43.080 psychology through valuations for long duration versus loaduration stocks. So 0:16:43.560 --> 0:16:46.440 high duration equities are much more sensitive interest rates. Higdration 0:16:46.480 --> 0:16:50.160 equities are still trading and increasingly trading at a premium 0:16:50.200 --> 0:16:55.520 to low duration equities, which would substantiate that bond market forecast. 0:16:55.600 --> 0:16:57.800 So I think later this year you do have some 0:16:57.920 --> 0:17:01.119 risk if the economy does not comply, we don't ultimately 0:17:01.160 --> 0:17:04.880 fall into that growth malaise or recession. If we don't 0:17:04.920 --> 0:17:09.800 see inflation really viciously come down to more normalized levels, 0:17:09.920 --> 0:17:11.920 then the bond market has to adjust, and that will 0:17:11.920 --> 0:17:15.040 have impacts on the equity market. It won't be as 0:17:15.160 --> 0:17:20.240 negative as the last year's impacts because you have the offset. Right. 0:17:20.280 --> 0:17:22.399 If the bond market is having to adjust to an 0:17:22.440 --> 0:17:24.720 outlook where the Fed Funds rate doesn't have to come 0:17:24.760 --> 0:17:29.400 down and instead stays stable for longer, that only impacts 0:17:29.440 --> 0:17:33.400 valuations because that only happens in an environment where economic 0:17:33.400 --> 0:17:36.480 growth is actually still stronger than anybody had hoped, right, 0:17:36.520 --> 0:17:39.280 and inflation is coming down, And so that offset that 0:17:39.520 --> 0:17:42.639 stronger economic growth than anybody had hoped with a decelerating 0:17:42.640 --> 0:17:45.760 inflation is very good for the earning stream, and it 0:17:45.800 --> 0:17:49.000 really substantiates twenty twenty four forecasts for earnings, which should 0:17:49.080 --> 0:17:52.480 help the equity market sustain that movement, but it will 0:17:52.520 --> 0:17:56.320 create volatility and equities, probably for longer duration equities more 0:17:56.320 --> 0:17:59.040 than short duration equities. That's what I'm worried about with 0:17:59.080 --> 0:18:00.800 respect to the FED. That longer term. 0:18:01.400 --> 0:18:04.000 I remember it was just a couple of weeks ago, 0:18:04.080 --> 0:18:07.360 I think when people some people were suggesting the FED 0:18:07.440 --> 0:18:08.560 was going to start cutting in July. 0:18:09.040 --> 0:18:11.920 Yeah, yeah, now, yeah, But. 0:18:11.880 --> 0:18:13.479 I want to ask you just to go back to 0:18:13.520 --> 0:18:17.280 the AI theme, just broadly speaking, what you make of 0:18:17.320 --> 0:18:19.080 it in terms of it being such a big driver 0:18:19.400 --> 0:18:24.200 for the rally for companies spending on AI, and what 0:18:24.240 --> 0:18:28.399 the possibilities are of it driving not just spending with 0:18:28.520 --> 0:18:33.000 the big megacaps, but also with I don't know, smaller 0:18:33.040 --> 0:18:36.320 companies that might start utilizing AI in different ways, and 0:18:36.600 --> 0:18:39.720 how that might be beneficial or even underpin the ball case. 0:18:40.000 --> 0:18:42.159 Yeah, I think it's really early to say what the 0:18:42.200 --> 0:18:45.040 potential of this is long term, and certainly we'll go 0:18:45.080 --> 0:18:46.919 through the process of trying to price that over the 0:18:46.920 --> 0:18:50.040 next six to twelve months. That said, every cycle starts 0:18:50.080 --> 0:18:54.840 with some new innovation, some new catalyst for growth. And 0:18:54.920 --> 0:18:58.240 what you do tend to find is that if you 0:18:58.320 --> 0:19:01.920 get this catalyst for growth, it emanates throughout and tends 0:19:01.960 --> 0:19:06.160 to broaden in terms of its impact on industries, companies 0:19:06.200 --> 0:19:08.800 and sectors at large. And think about this. If we're 0:19:08.840 --> 0:19:11.920 able to accelerate the utilization of AI and tech, there's 0:19:11.920 --> 0:19:15.439 no reason why that ultimately would not also benefit the 0:19:15.440 --> 0:19:18.679 margins of even consumer staples companies long term. Right, So 0:19:19.760 --> 0:19:23.720 this is right now really being implemented as a driver 0:19:23.880 --> 0:19:26.840 of revenue growth, right and I think that's the psychology 0:19:26.920 --> 0:19:29.240 right now, is that this will help drive revenue growth 0:19:29.280 --> 0:19:32.359 long term for tech. What we haven't thought through and 0:19:32.440 --> 0:19:35.880 probably the second derivative impact of this is Okay, it'll 0:19:35.880 --> 0:19:38.520 help drive revenue growth for tech, and companies will spend 0:19:38.560 --> 0:19:41.520 a little bit more on this. They'll probably shift spending 0:19:41.600 --> 0:19:45.360 so it's not a net net margin drag in that capacity. 0:19:45.400 --> 0:19:48.480 Instead of spending on other capital investments, they'll spend on AI. 0:19:49.280 --> 0:19:53.040 Presumably in that sense, if they're spending the same amount, 0:19:53.160 --> 0:19:56.560 they're elevating the value of revenue or they're elevating revenue 0:19:56.560 --> 0:19:59.280 growth potential for the tech space, which are the producers 0:19:59.320 --> 0:20:03.240 of AI, but then they also are implementing these technologies 0:20:03.280 --> 0:20:06.920 which should reduce their margin pressures or reduce margins longer 0:20:07.000 --> 0:20:10.520 term make their companies much more efficient. And that efficiency 0:20:10.560 --> 0:20:13.879 improvement is the long term, big, big benefit that I 0:20:13.880 --> 0:20:15.919 think we have yet to really price because we just 0:20:15.960 --> 0:20:19.040 don't know how fast can it be implemented, how quickly 0:20:19.080 --> 0:20:22.919 can it actually improve efficiency and drive productivity gains. We 0:20:22.960 --> 0:20:26.600 all have read all the articles about how horribly unproductive 0:20:26.640 --> 0:20:30.159 the US economy is. This is a potential big game changer. 0:20:30.400 --> 0:20:32.600 I don't think that it's at all in the consensus 0:20:32.640 --> 0:20:35.280 forecast right now. I think most people are saying, look, 0:20:35.800 --> 0:20:38.000 you know that we're still going to struggle with this, 0:20:38.280 --> 0:20:42.440 these labor dynamics and very low productivity rates and whatnot. 0:20:42.480 --> 0:20:45.120 So it's a potentially very big game changer longer term, 0:20:45.119 --> 0:20:46.520 but it's going to take us a while to work 0:20:46.560 --> 0:20:49.480 that out. For now, it is very much a driver 0:20:49.600 --> 0:20:51.199 of revenue optimism in tech. 0:20:51.640 --> 0:20:52.200 Yeah. 0:20:52.240 --> 0:20:57.040 Well, I hear efficiency gains and I interpret that as 0:20:57.680 --> 0:21:02.200 job layoffs, which obviously feeds back into your economic models. 0:21:02.440 --> 0:21:03.960 How big of a risk is that, do you think? 0:21:05.040 --> 0:21:07.480 I think it's limited in the short run, mostly because 0:21:07.520 --> 0:21:11.440 we have record levels of available jobs open in the economy. 0:21:11.520 --> 0:21:13.720 As it is, the way that I see the job market, 0:21:13.760 --> 0:21:15.679