1 00:00:02,440 --> 00:00:16,240 Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. 2 00:00:18,040 --> 00:00:21,240 Speaker 2: Hello and welcome to another episode of the All Lots podcast. 3 00:00:21,360 --> 00:00:22,759 Speaker 2: I'm Tracy Alloway. 4 00:00:22,440 --> 00:00:23,600 Speaker 3: And I'm Joe Wisenthal. 5 00:00:24,160 --> 00:00:27,880 Speaker 2: Joe. For all intents and purposes, we're pretty much at 6 00:00:28,000 --> 00:00:30,520 Speaker 2: a record in terms of US stocks totally. 7 00:00:31,040 --> 00:00:33,440 Speaker 3: We're recording this April second, so we're actually down a 8 00:00:33,479 --> 00:00:36,960 Speaker 3: little bit today, about a percent. But the story in 9 00:00:37,000 --> 00:00:39,720 Speaker 3: my mind of the market for twenty twenty four is 10 00:00:39,760 --> 00:00:41,479 Speaker 3: that we went into this year with all sorts of 11 00:00:41,520 --> 00:00:43,760 Speaker 3: soft landing optimism. The FED is going to cut rates 12 00:00:43,760 --> 00:00:46,320 Speaker 3: a bunch of times, and then all these sort of 13 00:00:46,360 --> 00:00:48,800 Speaker 3: rate cut hopes are sort of slowly evaporating, but it's 14 00:00:48,840 --> 00:00:51,720 Speaker 3: hardly affected the stock market, and so we're basically at 15 00:00:51,800 --> 00:00:54,720 Speaker 3: record highs despite the fact that that first cut keeps 16 00:00:54,720 --> 00:00:56,040 Speaker 3: getting pushed out into the future. 17 00:00:56,200 --> 00:00:58,840 Speaker 2: Yeah, And the question is, are stock's going to start 18 00:00:58,840 --> 00:01:01,760 Speaker 2: to turn lower again? They are lower today, They've been 19 00:01:01,880 --> 00:01:05,160 Speaker 2: kind of vacillating for the past couple of days. Is 20 00:01:05,200 --> 00:01:08,560 Speaker 2: the start of a durable drop or are markets basically 21 00:01:08,600 --> 00:01:11,600 Speaker 2: catching their breath after a torrid rally and are they 22 00:01:11,640 --> 00:01:14,360 Speaker 2: going to continue upward? Is all that excitement over things 23 00:01:14,400 --> 00:01:17,520 Speaker 2: like AI and tech just going to keep going. And 24 00:01:17,560 --> 00:01:21,000 Speaker 2: speaking of excitement over AI and tech, you do see 25 00:01:21,040 --> 00:01:25,200 Speaker 2: some commentary at the moment about bubble territory, so the 26 00:01:25,319 --> 00:01:28,280 Speaker 2: idea that, well, maybe we're getting a little bit too optimistic, 27 00:01:28,440 --> 00:01:31,520 Speaker 2: or isn't it weird that it was expectations of rate 28 00:01:31,600 --> 00:01:34,360 Speaker 2: cuts that drove the move upward, but as the rate 29 00:01:34,400 --> 00:01:37,520 Speaker 2: cuts get priced further out, we're not really seeing that 30 00:01:37,600 --> 00:01:39,400 Speaker 2: big impact on stocks totally. 31 00:01:39,600 --> 00:01:41,920 Speaker 3: So for a while as the market was doing this 32 00:01:42,000 --> 00:01:44,200 Speaker 3: sort of straight line up really since the end of 33 00:01:44,200 --> 00:01:48,160 Speaker 3: October when rates peaked, part of this sort of I 34 00:01:48,160 --> 00:01:51,120 Speaker 3: don't know, bear crowd or skepticism or people trying to 35 00:01:51,160 --> 00:01:53,400 Speaker 3: poke holes in the rally is like, oh, it's all tech, 36 00:01:53,480 --> 00:01:56,680 Speaker 3: it's all the mag seven, these gigantic tech stocks, etc. 37 00:01:57,120 --> 00:02:00,400 Speaker 3: What's interesting about lately is that actually a lot of 38 00:02:00,400 --> 00:02:03,120 Speaker 3: these high flyers, like in video, they've like sort of 39 00:02:03,160 --> 00:02:06,120 Speaker 3: been flat for the last month or so, and even 40 00:02:06,160 --> 00:02:09,120 Speaker 3: that doesn't seem to be holding water. There actually are 41 00:02:09,480 --> 00:02:12,200 Speaker 3: big rallies in many parts of the market. So the 42 00:02:12,320 --> 00:02:14,800 Speaker 3: question is like why, I mean, you could say, oh, 43 00:02:14,840 --> 00:02:17,320 Speaker 3: like the story maybe made sense, it's like, oh, there's 44 00:02:17,320 --> 00:02:20,840 Speaker 3: these handful of mega giants. They're capturing all of the gains, 45 00:02:20,919 --> 00:02:23,320 Speaker 3: and so what these new all time highs don't really 46 00:02:23,400 --> 00:02:26,160 Speaker 3: reflect what the broader market is doing. The broader market's 47 00:02:26,200 --> 00:02:26,880 Speaker 3: doing fine. 48 00:02:27,080 --> 00:02:30,920 Speaker 2: Yeah, and again against expectation. Yes, it's actually broadening out yeow, 49 00:02:31,160 --> 00:02:33,280 Speaker 2: rather than becoming more narrow, which is the kind of 50 00:02:33,280 --> 00:02:35,400 Speaker 2: thing that you would be worried about if you are 51 00:02:35,560 --> 00:02:37,840 Speaker 2: in a bubble or about to test a bubble. But 52 00:02:37,919 --> 00:02:40,040 Speaker 2: all right, I am very pleased to say that we do, 53 00:02:40,120 --> 00:02:44,000 Speaker 2: in fact have the perfect guests to discuss markets and 54 00:02:44,120 --> 00:02:47,000 Speaker 2: whether or not we are closing in on bubble territory. 55 00:02:47,040 --> 00:02:50,160 Speaker 2: We're going to be speaking with Cevita Supermanian, head of 56 00:02:50,280 --> 00:02:53,959 Speaker 2: US equity strategy at Bank of America, and she recently 57 00:02:54,080 --> 00:02:56,240 Speaker 2: raised her target for the S and P five hundred 58 00:02:56,520 --> 00:03:00,200 Speaker 2: from five thousand to five four hundred. I think this 59 00:03:00,440 --> 00:03:04,240 Speaker 2: was done about a month ago, and we're already at 60 00:03:04,280 --> 00:03:08,359 Speaker 2: like five thousand, two hundred. Yeah, So yeah, good call, Savita. 61 00:03:08,480 --> 00:03:09,360 Speaker 2: Welcome to the show. 62 00:03:09,480 --> 00:03:11,800 Speaker 4: Hi, it's great to be here. Thanks for having me. 63 00:03:12,160 --> 00:03:14,160 Speaker 2: It's I feel kind of bad. I feel like we 64 00:03:14,160 --> 00:03:17,480 Speaker 2: should have had you on way way earlier, because you know, 65 00:03:17,600 --> 00:03:20,640 Speaker 2: you are sort of a stalwart of the cell side 66 00:03:20,639 --> 00:03:23,440 Speaker 2: research on the stocks, and yet we haven't made it happen. 67 00:03:23,520 --> 00:03:26,960 Speaker 2: Kind of weird, that is weird, but we're correcting for 68 00:03:27,240 --> 00:03:32,880 Speaker 2: past mistakes. Yes, this is good, a good type of correction. 69 00:03:33,040 --> 00:03:37,440 Speaker 2: All right, SMP five hundred pretty much at record highs. 70 00:03:37,520 --> 00:03:38,160 Speaker 2: What's driving it? 71 00:03:38,920 --> 00:03:42,200 Speaker 4: Yeah, So it's interesting when we launched our twenty twenty 72 00:03:42,200 --> 00:03:46,160 Speaker 4: four outlook in November with our year ahead report, and 73 00:03:46,840 --> 00:03:50,480 Speaker 4: we launched our SMP market call with a five thousand 74 00:03:51,000 --> 00:03:55,200 Speaker 4: year end target, and I remember having to repeat that 75 00:03:55,320 --> 00:03:59,760 Speaker 4: number like people would literally say, did you just say 76 00:03:59,800 --> 00:04:03,680 Speaker 4: five thousand? Like it was way too high? And now 77 00:04:03,720 --> 00:04:08,880 Speaker 4: here we are at fifty two whatever, and a couple 78 00:04:08,880 --> 00:04:12,160 Speaker 4: of months ago, the market basically breezed right through that 79 00:04:12,240 --> 00:04:16,559 Speaker 4: five thousand target. And you know, there's no perfect way 80 00:04:16,640 --> 00:04:19,160 Speaker 4: to forecast a point in time target impact. I think 81 00:04:19,160 --> 00:04:21,520 Speaker 4: it's kind of a silly number. But the question that 82 00:04:21,560 --> 00:04:23,919 Speaker 4: we asked ourselves was, Okay, now, what does the market 83 00:04:23,960 --> 00:04:26,600 Speaker 4: go higher or lower? Because we're kind of where we 84 00:04:26,960 --> 00:04:29,880 Speaker 4: thought we would be by your end in January, and 85 00:04:30,360 --> 00:04:33,719 Speaker 4: everything we looked at said higher, So you know, I 86 00:04:33,720 --> 00:04:35,920 Speaker 4: can delve into it, but I think where we are 87 00:04:35,960 --> 00:04:38,440 Speaker 4: now is still we're sort of climbing that wall of worry. 88 00:04:38,720 --> 00:04:41,280 Speaker 4: We're still in an environment where I don't know, it's 89 00:04:41,320 --> 00:04:44,599 Speaker 4: interesting if you look at the average target for the 90 00:04:44,800 --> 00:04:47,159 Speaker 4: S and P, I think it's lower than where the 91 00:04:47,200 --> 00:04:50,640 Speaker 4: market is today, which is unusual because I think the 92 00:04:50,680 --> 00:04:54,279 Speaker 4: SU side is usually skewed to being more optimistic. When 93 00:04:54,279 --> 00:04:58,680 Speaker 4: you look at even analysts earnings expectations, there are still 94 00:04:58,720 --> 00:05:02,320 Speaker 4: relatively low outside of this so called you know, Magnificent 95 00:05:02,400 --> 00:05:04,960 Speaker 4: seven or the you know, the megacap tech companies that 96 00:05:04,960 --> 00:05:07,720 Speaker 4: have been driving the market. So I still think we're 97 00:05:07,720 --> 00:05:11,520 Speaker 4: in an environment where allocation to stocks is just starting 98 00:05:11,520 --> 00:05:15,280 Speaker 4: to increase, Bolishness is just starting to percolate, and as 99 00:05:15,279 --> 00:05:17,680 Speaker 4: you rightly point out, the market is just starting to 100 00:05:18,240 --> 00:05:19,200 Speaker 4: broaden out a bit. 101 00:05:20,360 --> 00:05:23,000 Speaker 3: Let's go back to the initial call that you made 102 00:05:23,000 --> 00:05:25,760 Speaker 3: for S and P five thousand. What was the reasoning 103 00:05:26,000 --> 00:05:29,120 Speaker 3: then in terms of like, let's just start with that question. 104 00:05:29,440 --> 00:05:31,880 Speaker 4: So the reasoning then and it was basically putting the 105 00:05:31,960 --> 00:05:33,479 Speaker 4: smp at around it. I think it was like a 106 00:05:33,520 --> 00:05:36,679 Speaker 4: ten percent year or thereabouts. Was the idea was, Okay, 107 00:05:37,200 --> 00:05:39,559 Speaker 4: where are we now versus where we were a couple 108 00:05:39,560 --> 00:05:41,479 Speaker 4: of years ago, And I think there's a lot of 109 00:05:41,520 --> 00:05:44,119 Speaker 4: good news that we should be happy about. We should 110 00:05:44,160 --> 00:05:47,279 Speaker 4: be happy that the FED has actually moved interest rates 111 00:05:47,279 --> 00:05:51,360 Speaker 4: from zero to five because now we have a lot 112 00:05:51,400 --> 00:05:53,640 Speaker 4: of latitude with which to ease our way out of 113 00:05:53,680 --> 00:05:57,120 Speaker 4: the next crisis. We should also be happy that the 114 00:05:57,200 --> 00:06:00,400 Speaker 4: SMP itself is pretty different today than what it was 115 00:06:00,440 --> 00:06:02,440 Speaker 4: a couple of years ago. And I think you know 116 00:06:02,480 --> 00:06:05,200 Speaker 4: what I find interesting is that the SMP five hundred 117 00:06:05,279 --> 00:06:07,919 Speaker 4: has basically managed out a lot of its own risk 118 00:06:08,480 --> 00:06:12,480 Speaker 4: over the last couple of years by attrition. So if 119 00:06:12,520 --> 00:06:14,479 Speaker 4: you look at a lot of the companies that were 120 00:06:14,480 --> 00:06:17,200 Speaker 4: in the S and P five hundred in twenty twenty two, 121 00:06:17,839 --> 00:06:19,720 Speaker 4: you know when the big surprise was the FED was 122 00:06:19,760 --> 00:06:22,960 Speaker 4: about to hike interest rates by the largest amount ever 123 00:06:23,480 --> 00:06:26,560 Speaker 4: in the fastest period of time. You know, the constituents 124 00:06:26,560 --> 00:06:29,479 Speaker 4: that were bigger weights in the market are now smaller 125 00:06:29,520 --> 00:06:32,520 Speaker 4: weights and maybe have even drifted out. And in particular, 126 00:06:33,120 --> 00:06:35,840 Speaker 4: the ones that have drifted out are those with refinancing 127 00:06:35,920 --> 00:06:38,000 Speaker 4: risk or companies that might not be able to hack 128 00:06:38,040 --> 00:06:41,359 Speaker 4: it in a five percent rate world. So I almost 129 00:06:41,400 --> 00:06:44,719 Speaker 4: feel like the beginning of this year was a good 130 00:06:44,800 --> 00:06:47,279 Speaker 4: start in terms of the health of the index. We 131 00:06:47,440 --> 00:06:53,280 Speaker 4: also saw that despite this megacap tech dominance. These companies 132 00:06:53,760 --> 00:06:56,880 Speaker 4: they got expensive, but they didn't get as expensive as 133 00:06:56,880 --> 00:07:00,400 Speaker 4: we saw, you know, nonprofitable tech during the tech bubble 134 00:07:00,440 --> 00:07:04,800 Speaker 4: of ninety nine two thousand. Moreover, I think what's really 135 00:07:04,920 --> 00:07:09,320 Speaker 4: exciting from a corporate finance perspective is that when you 136 00:07:09,360 --> 00:07:11,920 Speaker 4: look at the risks around the S and P five 137 00:07:12,000 --> 00:07:15,840 Speaker 4: hundred based on higher interest rates. One of the things 138 00:07:15,840 --> 00:07:17,640 Speaker 4: that worried us a couple of years ago was that 139 00:07:17,720 --> 00:07:21,800 Speaker 4: the SMP itself was a very long duration instrument, i e. 140 00:07:22,040 --> 00:07:25,680 Speaker 4: You were buying today for like great growth, but it 141 00:07:25,720 --> 00:07:27,560 Speaker 4: was way out in the future and you were getting 142 00:07:27,560 --> 00:07:30,720 Speaker 4: no cash return. Today, I think a lot of that 143 00:07:30,800 --> 00:07:34,520 Speaker 4: has resolved itself because many of the less profitable growth 144 00:07:34,560 --> 00:07:39,240 Speaker 4: companies have either drifted lower in market cap or have 145 00:07:39,400 --> 00:07:43,240 Speaker 4: become profitable and are now returning that cash to shareholders. So, 146 00:07:43,760 --> 00:07:45,720 Speaker 4: you know, when we looked at companies in the big 147 00:07:45,800 --> 00:07:49,480 Speaker 4: tech sector in early twenty twenty three, we started to 148 00:07:49,480 --> 00:07:53,480 Speaker 4: see really encouraging signs. These big companies, these megacap tech 149 00:07:53,560 --> 00:07:58,440 Speaker 4: companies basically acknowledged that they were too big to grow 150 00:07:58,560 --> 00:08:02,560 Speaker 4: as quickly as they had in a zero percent interest 151 00:08:02,640 --> 00:08:04,880 Speaker 4: rate world. And they were also just going to grow 152 00:08:04,880 --> 00:08:08,560 Speaker 4: a little bit more slowly, and you saw these growth 153 00:08:08,600 --> 00:08:15,360 Speaker 4: stocks actually cut capacity, cut costs. Meta did the biggest 154 00:08:15,400 --> 00:08:18,120 Speaker 4: share buyback that we've ever seen in the history of 155 00:08:18,200 --> 00:08:21,800 Speaker 4: share buybacks. And you know, these companies were able to 156 00:08:22,160 --> 00:08:27,400 Speaker 4: lower their duration by pulling earnings earlier, in returning cash 157 00:08:27,480 --> 00:08:30,680 Speaker 4: to shareholders, et cetera. I mean, the unthinkable happened earlier 158 00:08:30,720 --> 00:08:33,800 Speaker 4: this year with Meta paying a dividend or initiating a dividend. 159 00:08:33,920 --> 00:08:36,960 Speaker 4: So I think, you know, the idea here is we're 160 00:08:36,960 --> 00:08:39,440 Speaker 4: at a point where the market actually looks a lot 161 00:08:39,440 --> 00:08:44,240 Speaker 4: healthier and much better able to navigate a higher rate 162 00:08:44,480 --> 00:08:46,960 Speaker 4: environment than it did a couple of years ago. 163 00:08:47,320 --> 00:08:49,959 Speaker 2: So this is really interesting because you hear a lot 164 00:08:49,960 --> 00:08:53,600 Speaker 2: of people say, well, stocks look expensive at the moment, 165 00:08:53,679 --> 00:08:56,079 Speaker 2: and I think Bank of America has a bunch of 166 00:08:56,120 --> 00:08:58,280 Speaker 2: different metrics that you look at, and I think in 167 00:08:58,360 --> 00:09:00,199 Speaker 2: one of your notes you said that the SMP five 168 00:09:00,280 --> 00:09:04,679 Speaker 2: hundred is statistically expensive on nineteen of twenty metrics. Yes, 169 00:09:04,679 --> 00:09:08,920 Speaker 2: but the argument is that we've gone through this period 170 00:09:09,080 --> 00:09:12,720 Speaker 2: of adjustment of higher rates and the mix of the index, 171 00:09:12,880 --> 00:09:18,719 Speaker 2: its composition has shifted such that well, maybe those valuations 172 00:09:18,760 --> 00:09:20,120 Speaker 2: are well deserved. 173 00:09:20,800 --> 00:09:23,520 Speaker 4: Well, to some extent, it's the question should we ever 174 00:09:23,600 --> 00:09:28,480 Speaker 4: be comparing the market multiple to a prior market multiple, right, 175 00:09:28,520 --> 00:09:32,320 Speaker 4: because it's a different animal. And I think today, as 176 00:09:32,320 --> 00:09:34,679 Speaker 4: you said, you know, we're looking at an S and 177 00:09:34,760 --> 00:09:39,160 Speaker 4: P five hundred index that barely resembles the market in 178 00:09:39,240 --> 00:09:43,240 Speaker 4: nineteen eighty or even nineteen ninety. We've gone from a 179 00:09:43,320 --> 00:09:47,800 Speaker 4: market that was you know, seventy percent manufacturing back in 180 00:09:47,840 --> 00:09:54,120 Speaker 4: the eighties to an index that's fifty percent asset light growth, healthcare, 181 00:09:54,240 --> 00:09:58,360 Speaker 4: tech innovation. We've gone from a benchmark that had much 182 00:09:58,520 --> 00:10:02,720 Speaker 4: higher debt to x equity ratios ten years ago to 183 00:10:03,120 --> 00:10:05,640 Speaker 4: a benchmark that's paid down a lot of it's debt 184 00:10:05,720 --> 00:10:09,439 Speaker 4: and now has fixed strate you know, kind of long term, 185 00:10:10,480 --> 00:10:13,400 Speaker 4: less leverage risk and less free financing risk than it 186 00:10:13,440 --> 00:10:16,720 Speaker 4: has had in prior cycles. I mean, seventy percent of 187 00:10:16,800 --> 00:10:21,120 Speaker 4: debt sitting on SMP balance sheets is long term fixed 188 00:10:21,200 --> 00:10:24,000 Speaker 4: rate debt versus back in two thousand and seven it 189 00:10:24,080 --> 00:10:27,400 Speaker 4: was you know, something like forty percent. So it's almost 190 00:10:27,400 --> 00:10:30,880 Speaker 4: like comparing apples to oranges by saying the market today 191 00:10:30,960 --> 00:10:34,280 Speaker 4: looks expensive versus the market of two thousand, or you know, 192 00:10:34,400 --> 00:10:37,160 Speaker 4: nineteen eighty or thereabouts, So I think that's part of 193 00:10:37,200 --> 00:10:39,280 Speaker 4: the problem. And then the other part of the problem 194 00:10:39,360 --> 00:10:41,840 Speaker 4: is when you look at the S and P five hundred, 195 00:10:41,920 --> 00:10:44,080 Speaker 4: it's made up of a whole bunch of different stocks. 196 00:10:44,120 --> 00:10:46,200 Speaker 4: We all know this, but right now there is a 197 00:10:46,280 --> 00:10:50,199 Speaker 4: skew where, you know, the growth companies that really benefited 198 00:10:50,280 --> 00:10:54,400 Speaker 4: from this sort of free capital environment are bigger proportions 199 00:10:54,400 --> 00:10:58,160 Speaker 4: of the benchmark and are potentially more expensive than the 200 00:10:58,200 --> 00:11:00,640 Speaker 4: rest of the SMP. So it's kind of like if 201 00:11:00,640 --> 00:11:03,040 Speaker 4: you peel back the onion and you take out, you know, 202 00:11:03,360 --> 00:11:07,200 Speaker 4: five of the megacap companies, the market multiple drops from 203 00:11:07,600 --> 00:11:11,720 Speaker 4: twenty to fifteen or something pretty pretty extreme. So I 204 00:11:11,720 --> 00:11:14,480 Speaker 4: think there are a lot of problems with just looking 205 00:11:14,520 --> 00:11:17,960 Speaker 4: at a snapshot multiple and saying, Yep, the SMP's at 206 00:11:17,960 --> 00:11:21,079 Speaker 4: twenty five times and it's historically been at fifteen times, 207 00:11:21,280 --> 00:11:23,720 Speaker 4: you want to sell it. That's not the call we're making. 208 00:11:23,960 --> 00:11:27,400 Speaker 3: So I'll just give my full disclosure here, which is 209 00:11:27,440 --> 00:11:29,400 Speaker 3: that I am an investor in an S and P 210 00:11:29,600 --> 00:11:32,400 Speaker 3: five hundred index fund. So I want to thank the 211 00:11:33,080 --> 00:11:37,960 Speaker 3: active managers at SMP who have successfully gotten rid of 212 00:11:38,000 --> 00:11:40,560 Speaker 3: some of the more rate sensitive stocks out of the industry. 213 00:11:40,559 --> 00:11:41,880 Speaker 2: If de risk your portfolio. 214 00:11:41,960 --> 00:11:44,960 Speaker 3: Yes, thank you for the excellent active manager of my 215 00:11:45,200 --> 00:11:49,200 Speaker 3: passive vehicle. You've already raised a number of really interesting points. 216 00:11:49,240 --> 00:11:50,120 Speaker 4: But I want to go back. 217 00:11:49,960 --> 00:11:52,920 Speaker 3: To something you said in the first answer about sentiment, 218 00:11:53,000 --> 00:11:56,600 Speaker 3: because capturing whatever the sentiment is at the moment is 219 00:11:56,679 --> 00:12:00,320 Speaker 3: an inherently difficult task. You can look at market measures, 220 00:12:00,360 --> 00:12:03,240 Speaker 3: what's happening with call options, you can do surveys. Bank 221 00:12:03,240 --> 00:12:05,800 Speaker 3: of America does a survey of fund managers and they 222 00:12:05,840 --> 00:12:08,880 Speaker 3: talk about their allocation. When you say that, like we're 223 00:12:08,920 --> 00:12:12,120 Speaker 3: just getting into bullishness, it sounds weird when stocks are 224 00:12:12,160 --> 00:12:14,320 Speaker 3: at all time hies. What are you looking at when 225 00:12:14,320 --> 00:12:16,800 Speaker 3: you say something like that, And when you say, okay, 226 00:12:16,840 --> 00:12:20,360 Speaker 3: we're just getting people are just getting more into stocks. Now, 227 00:12:20,400 --> 00:12:21,319 Speaker 3: what is the data that. 228 00:12:21,320 --> 00:12:21,920 Speaker 1: Backs that up? 229 00:12:22,440 --> 00:12:25,559 Speaker 4: Yeah, there's a lot of data, And you can basically 230 00:12:25,600 --> 00:12:28,200 Speaker 4: get data to say whatever you wanted to if you 231 00:12:28,360 --> 00:12:32,920 Speaker 4: isolate your frame of reference to certain subsets. So I 232 00:12:32,920 --> 00:12:35,880 Speaker 4: guess it's a complicated question, and nobody really ever has 233 00:12:35,920 --> 00:12:38,320 Speaker 4: a full kind of up to date look at what 234 00:12:38,400 --> 00:12:41,680 Speaker 4: everybody in the world is holding. And also, I mean, 235 00:12:41,720 --> 00:12:44,960 Speaker 4: for whoever is buying equities, somebody is selling equities, So 236 00:12:44,960 --> 00:12:47,880 Speaker 4: it's kind of like, why does positioning even matter? So 237 00:12:47,960 --> 00:12:49,680 Speaker 4: one of the things we look at is is sort 238 00:12:49,679 --> 00:12:54,480 Speaker 4: of who are the arbiters of inflows over the next 239 00:12:54,960 --> 00:12:58,800 Speaker 4: like let's call it three to six months, right, Individual 240 00:12:58,840 --> 00:13:01,680 Speaker 4: investors are obviously part of the pie, But then there's 241 00:13:01,720 --> 00:13:05,600 Speaker 4: the asset owners themselves, the pension funds, the sovereign wealth funds, 242 00:13:05,679 --> 00:13:09,040 Speaker 4: like the biggies that kind of engage in asset allocation decisions. 243 00:13:09,559 --> 00:13:12,080 Speaker 4: And I think what's interesting there is that you would 244 00:13:12,080 --> 00:13:16,040 Speaker 4: think that asset allocators would be maxed out on equity 245 00:13:16,080 --> 00:13:20,000 Speaker 4: exposure today, given how well the asset class has done, 246 00:13:20,120 --> 00:13:23,040 Speaker 4: how well stocks have done relative to other asset classes. 247 00:13:23,080 --> 00:13:26,080 Speaker 4: But if you look at the average US pension fund, 248 00:13:26,679 --> 00:13:31,320 Speaker 4: their exposure to public equity to stocks is actually the 249 00:13:31,360 --> 00:13:36,040 Speaker 4: lowest we've seen since the nineteen late nineteen nineties. And 250 00:13:36,360 --> 00:13:38,880 Speaker 4: the reason is that a lot of these pension funds 251 00:13:38,880 --> 00:13:45,240 Speaker 4: have supplanted their exposure to equities with exposure to private 252 00:13:45,280 --> 00:13:49,000 Speaker 4: equity or alternative asset classes or you know, kind of 253 00:13:49,120 --> 00:13:53,040 Speaker 4: less liquid ways to buy growth. And I think that's 254 00:13:53,160 --> 00:13:57,360 Speaker 4: important because where we are today is an environment where 255 00:13:58,040 --> 00:14:02,839 Speaker 4: pension funds have basically supplanted to their exposure to active 256 00:14:03,760 --> 00:14:09,120 Speaker 4: equity like mutual funds and hedge funds with an index fund. 257 00:14:09,800 --> 00:14:13,000 Speaker 4: But they've actually replaced a lot of that equity exposure 258 00:14:13,160 --> 00:14:16,440 Speaker 4: with other asset classes in this search for growth, and 259 00:14:16,480 --> 00:14:21,880 Speaker 4: I think that's potentially more problematic for ill liquid asset 260 00:14:21,880 --> 00:14:25,080 Speaker 4: classes like private credit and private equity, and asset classes 261 00:14:25,080 --> 00:14:28,840 Speaker 4: that haven't necessarily been marked to this current environment of 262 00:14:28,880 --> 00:14:31,840 Speaker 4: a little bit higher rates and inflation than it is 263 00:14:31,960 --> 00:14:35,840 Speaker 4: for public equities. So that's one measure of positioning. The 264 00:14:35,880 --> 00:14:39,520 Speaker 4: other measure of positioning that I've followed my entire career 265 00:14:39,720 --> 00:14:41,680 Speaker 4: at Bank of America, and I inherited this from my 266 00:14:41,760 --> 00:14:45,400 Speaker 4: former boss, Rich Bernstein, who was our strategist at Merrill 267 00:14:45,440 --> 00:14:47,400 Speaker 4: Lynch for many many years, and I think he may 268 00:14:47,440 --> 00:14:51,440 Speaker 4: have inherited it from somebody before him. Is it's called 269 00:14:51,440 --> 00:14:54,600 Speaker 4: the Cell side Indicator, and it's the reason I always 270 00:14:54,600 --> 00:14:57,000 Speaker 4: go back to this model is that it has been 271 00:14:57,520 --> 00:15:02,120 Speaker 4: the most predictive market timing model for the S and 272 00:15:02,120 --> 00:15:05,960 Speaker 4: P five hundred over a twelve month time horizon, more 273 00:15:05,960 --> 00:15:09,320 Speaker 4: predictive than anything else I've been able to find. And 274 00:15:09,640 --> 00:15:12,200 Speaker 4: what we do in this cell side indicator is we 275 00:15:12,240 --> 00:15:15,480 Speaker 4: look at our peers and ourselves, and we say how 276 00:15:15,480 --> 00:15:18,920 Speaker 4: bullish or bearish are we by virtue of one number, 277 00:15:19,360 --> 00:15:23,960 Speaker 4: which is our recommended allocation to equities in a balanced portfolio. 278 00:15:24,080 --> 00:15:26,440 Speaker 4: So when you talk to your broker and he or 279 00:15:26,520 --> 00:15:29,160 Speaker 4: she tells you we think you should put sixty percent 280 00:15:29,200 --> 00:15:31,720 Speaker 4: into stocks and you know, thirty percent into bonds and 281 00:15:31,720 --> 00:15:34,760 Speaker 4: ten percent into cash. We take that stock allocation, we 282 00:15:34,800 --> 00:15:38,840 Speaker 4: average it together across the entire Wall Street bulge bracket firms, 283 00:15:39,280 --> 00:15:41,400 Speaker 4: and we look at what that average allocation is, and 284 00:15:41,480 --> 00:15:45,240 Speaker 4: it has waxed and waned between something like forty percent 285 00:15:45,480 --> 00:15:48,200 Speaker 4: and seventy percent. It's been all over the place over 286 00:15:48,240 --> 00:15:51,040 Speaker 4: the last thirty or forty years. But what we found 287 00:15:51,080 --> 00:15:53,680 Speaker 4: is that when it's at very bearish or bullish extremes, 288 00:15:53,880 --> 00:15:56,320 Speaker 4: you should do the opposite of what we're all telling 289 00:15:56,360 --> 00:15:59,600 Speaker 4: you to do. And I think what's interesting is that 290 00:15:59,680 --> 00:16:02,720 Speaker 4: we're not at a bullish extreme. We're at a point 291 00:16:02,800 --> 00:16:06,280 Speaker 4: where your average market strategist is recommending that you put 292 00:16:06,280 --> 00:16:11,200 Speaker 4: about fifty five percent of your assets into equities, which 293 00:16:11,240 --> 00:16:15,320 Speaker 4: is kind of surprising given that we've seen dramatic outperformance 294 00:16:15,360 --> 00:16:18,040 Speaker 4: of equities relative to other asset classes over the last 295 00:16:18,080 --> 00:16:22,320 Speaker 4: couple of years surprise gains in the SMP versus other indices, 296 00:16:23,160 --> 00:16:25,000 Speaker 4: it's a little bit surprising to see that there is 297 00:16:25,040 --> 00:16:28,680 Speaker 4: still this very tepid allocation to stocks. I mean, the 298 00:16:28,720 --> 00:16:31,760 Speaker 4: benchmark for years has been sixty percent stocks, and we're 299 00:16:31,800 --> 00:16:34,600 Speaker 4: still shy of that. So it's not to say that 300 00:16:34,680 --> 00:16:38,040 Speaker 4: folks out there are bearish and under the table and 301 00:16:38,160 --> 00:16:41,200 Speaker 4: hiding and putting all their money in cash and gold 302 00:16:41,360 --> 00:16:44,720 Speaker 4: and under the mattress. But I think we're at a 303 00:16:44,760 --> 00:16:49,120 Speaker 4: point where we're far from that euphoric level on equities 304 00:16:49,120 --> 00:16:52,440 Speaker 4: that typically heralds the end of a bull market. 305 00:17:08,119 --> 00:17:12,399 Speaker 2: How much of the rise in stocks is an interest 306 00:17:12,480 --> 00:17:15,920 Speaker 2: rates story? Going back to the beginning of this discussion, 307 00:17:16,000 --> 00:17:19,280 Speaker 2: because part of the idea here is that, all right, well, 308 00:17:19,880 --> 00:17:22,639 Speaker 2: the FED might cut interest rates, but the reason it 309 00:17:22,680 --> 00:17:27,479 Speaker 2: would be cutting interest rates is because economic growth is deteriorating, like, 310 00:17:27,560 --> 00:17:30,480 Speaker 2: maybe not substantially, but it's weakening a little bit, and 311 00:17:30,600 --> 00:17:34,359 Speaker 2: so it's trying to get ahead of a potential recession 312 00:17:34,480 --> 00:17:38,000 Speaker 2: or something like that. Is that perhaps why there's some 313 00:17:38,160 --> 00:17:43,000 Speaker 2: reticence on the cell side to jump into stocks wholeheartedly 314 00:17:43,040 --> 00:17:43,600 Speaker 2: at this point. 315 00:17:43,800 --> 00:17:46,480 Speaker 4: You mean, because of the fact that we're likely moving 316 00:17:46,520 --> 00:17:48,080 Speaker 4: into a lower growth environment. 317 00:17:48,200 --> 00:17:48,880 Speaker 2: Yes, exactly. 318 00:17:49,080 --> 00:17:53,040 Speaker 4: Yeah, I think that is really the underpinnings of this caution. 319 00:17:53,200 --> 00:17:55,560 Speaker 4: And I mean, if you think about it, since the 320 00:17:55,640 --> 00:18:03,040 Speaker 4: beginning of twenty twenty two, we had economists bracing us 321 00:18:03,040 --> 00:18:06,800 Speaker 4: for this recession that was going to happen and it 322 00:18:06,880 --> 00:18:09,000 Speaker 4: was going to be in two quarters, and it kept 323 00:18:09,000 --> 00:18:11,679 Speaker 4: getting kind of pushed out. So we've been in this 324 00:18:11,840 --> 00:18:15,680 Speaker 4: environment where we've been sort of waiting for this recession 325 00:18:16,080 --> 00:18:19,679 Speaker 4: that hasn't happened, and it's hard to really pound the 326 00:18:19,720 --> 00:18:24,160 Speaker 4: table on equities if you're expecting an economic recession, right, 327 00:18:24,240 --> 00:18:26,640 Speaker 4: this is the wall of worry, basically the wall of warry. Yeah. 328 00:18:26,920 --> 00:18:30,000 Speaker 4: And then I think on top of that, we've had healthy, 329 00:18:30,200 --> 00:18:34,119 Speaker 4: attractive returns in the risk free rate. So you know, 330 00:18:34,320 --> 00:18:37,440 Speaker 4: this is the Tina argument is now sort of debunked 331 00:18:37,480 --> 00:18:40,720 Speaker 4: because you can get great returns and you know, in 332 00:18:41,240 --> 00:18:44,440 Speaker 4: money market accounts and you don't have to take any risk. 333 00:18:44,760 --> 00:18:48,040 Speaker 4: So I think that that's the other problem with allocating 334 00:18:48,040 --> 00:18:51,600 Speaker 4: too aggressively to stocks. But you know, what's what's interesting 335 00:18:51,680 --> 00:18:53,399 Speaker 4: is that if you go back over time and you 336 00:18:53,440 --> 00:18:59,159 Speaker 4: look at allocations during periods when cash yields were this high, 337 00:19:00,000 --> 00:19:04,000 Speaker 4: allocation to stocks, we're actually higher than where they are today. 338 00:19:04,119 --> 00:19:06,160 Speaker 4: I think we're just in an environment where we're all 339 00:19:06,200 --> 00:19:10,200 Speaker 4: so surprised that you can actually make any money off 340 00:19:10,240 --> 00:19:15,280 Speaker 4: of bonds and cash after getting nothing for a decade, 341 00:19:16,000 --> 00:19:20,520 Speaker 4: that it's almost made those asset classes that much more attractive, 342 00:19:20,600 --> 00:19:23,800 Speaker 4: or surprisingly attractive. And I think there's very little acknowledgment 343 00:19:23,840 --> 00:19:26,480 Speaker 4: that rates can actually continue to move higher rather than 344 00:19:26,520 --> 00:19:29,800 Speaker 4: come down. So if you're bearish on stocks because you 345 00:19:29,840 --> 00:19:32,800 Speaker 4: can get better yield in cash, I get it. But 346 00:19:33,000 --> 00:19:35,560 Speaker 4: if the FED is about to start cutting interest rates 347 00:19:36,080 --> 00:19:38,840 Speaker 4: and most of the assets sitting on balance sheets of 348 00:19:38,880 --> 00:19:43,200 Speaker 4: individual investors are in money market funds and retirey accounts, 349 00:19:43,200 --> 00:19:45,520 Speaker 4: where they're looking for investments they can live off of, 350 00:19:46,160 --> 00:19:48,000 Speaker 4: my sense is that as we start to see short 351 00:19:48,080 --> 00:19:51,199 Speaker 4: rates come down, if that happens this year, they'll be 352 00:19:51,280 --> 00:19:54,840 Speaker 4: forced to look for other areas of higher yield, which 353 00:19:55,280 --> 00:19:58,240 Speaker 4: basically pushes them a little bit higher up the risk spectrum, 354 00:19:58,280 --> 00:20:02,360 Speaker 4: back into good old bast equity income or utilities and 355 00:20:02,880 --> 00:20:06,080 Speaker 4: financials and even real estate companies. So I think those 356 00:20:06,080 --> 00:20:08,760 Speaker 4: are some of the considerations that we're thinking about in 357 00:20:08,880 --> 00:20:12,880 Speaker 4: terms of what is keeping investors on the sidelines when 358 00:20:12,880 --> 00:20:15,120 Speaker 4: it comes to equities, but what could push them back 359 00:20:15,160 --> 00:20:16,000 Speaker 4: into equities? 360 00:20:16,440 --> 00:20:18,879 Speaker 3: So I want to press a little bit further on 361 00:20:19,320 --> 00:20:22,359 Speaker 3: this idea of maybe it's not a contradiction, but that 362 00:20:22,600 --> 00:20:25,119 Speaker 3: stocks have been fined even with the rate move up 363 00:20:25,160 --> 00:20:28,239 Speaker 3: and even with the higher for longer becoming consensus. So 364 00:20:28,280 --> 00:20:31,359 Speaker 3: I take your point that over long periods of time 365 00:20:31,960 --> 00:20:34,160 Speaker 3: or medium periods of time, the S and P five 366 00:20:34,240 --> 00:20:37,160 Speaker 3: hundred is just not as rate sensitive as it might 367 00:20:37,240 --> 00:20:40,080 Speaker 3: have been times in the past when companies had more 368 00:20:40,119 --> 00:20:43,920 Speaker 3: dead had more assets, had more rollover risk. What about though, 369 00:20:44,080 --> 00:20:48,120 Speaker 3: just the last two months, which is like if someone 370 00:20:48,160 --> 00:20:50,400 Speaker 3: asks you, why haven't stocks gone down over the last 371 00:20:50,400 --> 00:20:53,120 Speaker 3: two months, after we keep getting these warmer than expected 372 00:20:53,160 --> 00:20:57,040 Speaker 3: inflation prints, after we keep that rate expectation keeps getting 373 00:20:57,119 --> 00:20:59,359 Speaker 3: pushed out. This week we saw the odds of a 374 00:20:59,440 --> 00:21:02,560 Speaker 3: June cut has now fallen below fifty percent. Talk about 375 00:21:02,600 --> 00:21:03,920 Speaker 3: that ongoing resilience. 376 00:21:04,480 --> 00:21:07,600 Speaker 4: I mean, I think it's really thinking about why the 377 00:21:07,640 --> 00:21:11,520 Speaker 4: Fed's not cutting, And it's the idea that the Fed's 378 00:21:11,520 --> 00:21:16,320 Speaker 4: not cutting because the economy is still running too hot, right, 379 00:21:16,920 --> 00:21:22,480 Speaker 4: And again I think that's not a bad environment for stocks, right, 380 00:21:22,520 --> 00:21:25,359 Speaker 4: I mean, so far we've sort of seen this proof 381 00:21:25,400 --> 00:21:28,399 Speaker 4: of concept, if you will. So when you think about 382 00:21:28,440 --> 00:21:32,439 Speaker 4: the last couple of years, I, along with many was 383 00:21:32,520 --> 00:21:36,600 Speaker 4: expecting to see margins getting hit harder by the fact 384 00:21:36,640 --> 00:21:40,840 Speaker 4: that we went from you know, negative inflation to nine 385 00:21:40,960 --> 00:21:43,520 Speaker 4: percent and then to five and you know, now we're 386 00:21:43,560 --> 00:21:46,840 Speaker 4: a little bit lower. But it's kind of remarkable that 387 00:21:46,960 --> 00:21:51,960 Speaker 4: margins remained relatively intact and healthy during that entire period 388 00:21:52,040 --> 00:21:59,360 Speaker 4: of massive volatility around costs of everything, labor inputs, you know, lumber, 389 00:21:59,440 --> 00:22:03,760 Speaker 4: every thing. Saw a lot more volatility around costs than 390 00:22:03,800 --> 00:22:06,480 Speaker 4: what we were expecting and the what we thought margins 391 00:22:06,520 --> 00:22:09,920 Speaker 4: could actually withstand. So I think that proof of concept 392 00:22:09,920 --> 00:22:13,919 Speaker 4: that you can have the corporate sector navigate that environment, 393 00:22:14,359 --> 00:22:16,800 Speaker 4: you know, still be able to price in many areas 394 00:22:16,800 --> 00:22:21,479 Speaker 4: of the economy. The consumer hasn't slowed down meaningfully. I mean, 395 00:22:21,480 --> 00:22:24,880 Speaker 4: there's been pockets of a slowdown, but in fact, the 396 00:22:24,920 --> 00:22:28,600 Speaker 4: average US consumer is potentially benefiting a bit from higher 397 00:22:28,600 --> 00:22:32,359 Speaker 4: short rates by that spread between their assets and liabilities. 398 00:22:32,600 --> 00:22:34,400 Speaker 4: I mean, I think all of this, we've had two 399 00:22:34,480 --> 00:22:38,119 Speaker 4: years of seeing the fallout of a massive move in 400 00:22:38,640 --> 00:22:42,439 Speaker 4: short rates, and it hasn't necessarily derailed a lot of 401 00:22:42,480 --> 00:22:45,520 Speaker 4: the equity market. It's certainly derailed parts of the spectrum. 402 00:22:45,520 --> 00:22:49,280 Speaker 4: It's derailed you know, commercial real estate. It's derailed parts 403 00:22:49,320 --> 00:22:52,159 Speaker 4: of the private markets and the less liquid areas. But 404 00:22:52,440 --> 00:22:55,639 Speaker 4: we haven't necessarily seen it play through to you know, 405 00:22:55,680 --> 00:22:59,040 Speaker 4: your average cash rich company sitting on the S and P. 406 00:22:59,119 --> 00:23:02,120 Speaker 4: Five hundred caps haven't done particularly well, but I think 407 00:23:02,119 --> 00:23:05,640 Speaker 4: they're perhaps a bit more refinancing or credit sensitive than 408 00:23:05,720 --> 00:23:07,920 Speaker 4: large caps. But I do think that you know, we've 409 00:23:07,920 --> 00:23:12,560 Speaker 4: had enough time to see that corporates can actually handle 410 00:23:13,320 --> 00:23:17,560 Speaker 4: five percent cash shields. Some companies are benefiting, some consumers 411 00:23:17,600 --> 00:23:21,560 Speaker 4: are benefiting. Consumers aren't necessarily slowing down. We're still all 412 00:23:21,640 --> 00:23:25,040 Speaker 4: gainfully employed for the most part. We haven't seen massive layoffs. 413 00:23:25,520 --> 00:23:27,640 Speaker 4: We're still in a very tight labor market in fact, 414 00:23:27,920 --> 00:23:30,520 Speaker 4: in many areas of the economy. So I think those 415 00:23:30,560 --> 00:23:33,080 Speaker 4: are some of the reasons that the market is remaining 416 00:23:33,080 --> 00:23:35,320 Speaker 4: where it is. Then I think the other kind of 417 00:23:35,800 --> 00:23:39,160 Speaker 4: I guess harder to prove or harder to bear out, 418 00:23:39,160 --> 00:23:42,720 Speaker 4: And the data reason is that we are seeing some 419 00:23:42,840 --> 00:23:47,479 Speaker 4: seeds sown for potentially a very strong productivity cycle, and 420 00:23:47,520 --> 00:23:51,280 Speaker 4: I think that is the bulkhase from here, and we 421 00:23:51,320 --> 00:23:54,439 Speaker 4: need to really all be paying attention to how that's materializing. 422 00:23:55,000 --> 00:23:56,760 Speaker 4: But you know, I said earlier, we should be happy 423 00:23:56,800 --> 00:23:58,800 Speaker 4: that the FED has gotten us off of ground zero 424 00:23:58,920 --> 00:24:01,240 Speaker 4: on interest rates. And the truth is, we're now at 425 00:24:01,280 --> 00:24:04,560 Speaker 4: a point where there's a lot more certainty around earnings 426 00:24:04,960 --> 00:24:07,000 Speaker 4: than there was a couple of years ago. A couple 427 00:24:07,000 --> 00:24:09,560 Speaker 4: of years ago, a lot of companies were generating earnings 428 00:24:09,560 --> 00:24:12,760 Speaker 4: growth per share, earnings growth by borrowing money to buy 429 00:24:12,760 --> 00:24:15,800 Speaker 4: back stocks. That's not a great, high quality source of 430 00:24:15,800 --> 00:24:19,119 Speaker 4: earnings growth. And then even before that, we had globalization 431 00:24:19,320 --> 00:24:22,040 Speaker 4: driving a lot of the earnings for the SMP, and 432 00:24:22,080 --> 00:24:27,000 Speaker 4: you had cost arbitrage, tax arbitrage, basically global arbitrage. You know, 433 00:24:27,240 --> 00:24:29,520 Speaker 4: if something was expensive in the US, you could move 434 00:24:29,560 --> 00:24:33,360 Speaker 4: somewhere else. And that was just this frictionless, great story 435 00:24:33,359 --> 00:24:37,280 Speaker 4: for earnings for you know, for twenty years. But that 436 00:24:37,480 --> 00:24:40,000 Speaker 4: is also risky, and we're now starting to see that 437 00:24:40,240 --> 00:24:43,240 Speaker 4: because you know, we're no longer friends with everybody, and 438 00:24:43,680 --> 00:24:46,280 Speaker 4: you know, this whole globalization story seems like it's at 439 00:24:46,320 --> 00:24:50,640 Speaker 4: least hit pause, if not reverse. So I think today 440 00:24:50,720 --> 00:24:53,760 Speaker 4: we're also at a point where we can be a 441 00:24:53,840 --> 00:25:00,080 Speaker 4: little bit more what's the word confident about company's ability 442 00:25:00,320 --> 00:25:06,560 Speaker 4: to continue to generate earnings given that all of these easy, 443 00:25:06,840 --> 00:25:11,560 Speaker 4: kind of lower quality maneuvers are behind us. They've reversed, 444 00:25:11,720 --> 00:25:14,960 Speaker 4: and we've still seen companies able to adapt. So I 445 00:25:14,960 --> 00:25:17,960 Speaker 4: think that's another part of this story that's you know, 446 00:25:18,119 --> 00:25:22,040 Speaker 4: companies are now focusing on productivity. They're spending money on AI. 447 00:25:22,240 --> 00:25:24,560 Speaker 4: We'll see if it works or not, but you know, 448 00:25:24,600 --> 00:25:26,400 Speaker 4: there is this promise that a lot of the more 449 00:25:26,520 --> 00:25:29,240 Speaker 4: labor intensive companies in the S and P five hundred 450 00:25:29,560 --> 00:25:33,000 Speaker 4: can become labor light very quickly, and we've seen this happen. 451 00:25:33,400 --> 00:25:36,280 Speaker 4: I mean, I think what's remarkable is like when you 452 00:25:36,320 --> 00:25:41,040 Speaker 4: look at certain business models, they have vaporized overnight, Like 453 00:25:41,119 --> 00:25:44,480 Speaker 4: that idea of a call center has basically gone away 454 00:25:44,800 --> 00:25:48,960 Speaker 4: after generative AI was put out there. We've seen, you know, 455 00:25:49,000 --> 00:25:52,840 Speaker 4: the need for Python programming completely evaporate because you can 456 00:25:52,920 --> 00:25:55,239 Speaker 4: get you know, you can get AI to write your 457 00:25:55,240 --> 00:25:58,520 Speaker 4: code for you. So it's kind of an interesting, very 458 00:25:58,680 --> 00:26:03,640 Speaker 4: fast moving theme that's already disrupted some industries and has 459 00:26:03,720 --> 00:26:09,000 Speaker 4: the potential to really make a lot of these service sectors, 460 00:26:09,040 --> 00:26:13,720 Speaker 4: like it services, financial services, legal services that much more efficient. 461 00:26:14,359 --> 00:26:17,320 Speaker 2: One thing I always wondered, if you are a stock 462 00:26:17,400 --> 00:26:20,679 Speaker 2: strategist looking at something like that SMP five hundred, and 463 00:26:20,760 --> 00:26:22,959 Speaker 2: you think we are on the verge or in the 464 00:26:23,040 --> 00:26:27,360 Speaker 2: early stages of a big secular trend. So for instance, 465 00:26:27,440 --> 00:26:30,840 Speaker 2: the Internet in the late nineteen nineties, early two thousands, 466 00:26:31,000 --> 00:26:34,600 Speaker 2: or the AI revolution right now, how do you start 467 00:26:34,640 --> 00:26:38,080 Speaker 2: incorporating something like that into your forecast. Yeah, it feels 468 00:26:38,119 --> 00:26:43,000 Speaker 2: like it could be so transformative. And there's no historical parallels, 469 00:26:43,320 --> 00:26:44,520 Speaker 2: not a perfect one. 470 00:26:44,880 --> 00:26:47,880 Speaker 4: Yes, it's hard. I mean we've been trying to think 471 00:26:47,880 --> 00:26:51,240 Speaker 4: about you know, well, there's a few angles. One is 472 00:26:51,280 --> 00:26:54,880 Speaker 4: the revenue angle, which is already in play, and that's 473 00:26:54,920 --> 00:26:57,840 Speaker 4: the idea of the capex takers. So if you have 474 00:26:58,080 --> 00:27:03,600 Speaker 4: some theme, be it the PC revolution or industrial automation, 475 00:27:04,280 --> 00:27:07,480 Speaker 4: there's a company that benefits. And if you look at 476 00:27:07,640 --> 00:27:12,320 Speaker 4: robotics companies or you know, nvideo or chip makers, those 477 00:27:12,359 --> 00:27:14,960 Speaker 4: are the capex takers and we've seen those stocks do 478 00:27:15,119 --> 00:27:20,320 Speaker 4: tremendously well. If you think about the next leg, which 479 00:27:20,520 --> 00:27:25,000 Speaker 4: is probably a longer leg, it's the first movers in 480 00:27:25,200 --> 00:27:29,760 Speaker 4: industries that buy the stuff and get it right. So 481 00:27:30,000 --> 00:27:33,920 Speaker 4: you know, it's it's basically the first company that buys 482 00:27:34,440 --> 00:27:38,240 Speaker 4: the right chips and implements them successfully to replace a 483 00:27:38,280 --> 00:27:42,280 Speaker 4: big chunk of their expensive workforce, and that company could 484 00:27:42,320 --> 00:27:48,560 Speaker 4: see margin expansion and bump up in there. Multiple I 485 00:27:48,600 --> 00:27:52,359 Speaker 4: would argue that margin expansion might be short lived if 486 00:27:52,840 --> 00:27:56,520 Speaker 4: the process can be replicated across the industry. So I 487 00:27:56,520 --> 00:28:00,520 Speaker 4: think we move from the capex takers to the first movers, 488 00:28:00,960 --> 00:28:04,520 Speaker 4: to the process being commoditized and priced in across the industry. 489 00:28:05,119 --> 00:28:07,200 Speaker 4: But at the end of the day, when you look 490 00:28:07,320 --> 00:28:11,600 Speaker 4: at the companies that have used these tools to transform themselves, 491 00:28:11,960 --> 00:28:16,480 Speaker 4: the entire sector should trade at a lower risk premium 492 00:28:16,920 --> 00:28:21,360 Speaker 4: because those earnings are potentially stickier and easier to predict 493 00:28:21,760 --> 00:28:24,160 Speaker 4: than they would be if you had to worry about 494 00:28:24,440 --> 00:28:28,359 Speaker 4: this very cost intensive and risky labor force. Like people 495 00:28:28,400 --> 00:28:31,160 Speaker 4: are risky, processes are less risky. So I think that's 496 00:28:31,160 --> 00:28:33,399 Speaker 4: the sort of the evolution of this the way I 497 00:28:33,440 --> 00:28:35,720 Speaker 4: see it. And then what we did was we looked 498 00:28:35,720 --> 00:28:38,440 Speaker 4: at at prior cycles, like we looked at the nineteen 499 00:28:38,480 --> 00:28:42,480 Speaker 4: eighties and nineties to see, you know, how automation benefited companies. 500 00:28:42,480 --> 00:28:44,440 Speaker 4: And what was interesting to see is that over that 501 00:28:44,640 --> 00:28:49,480 Speaker 4: entire time period, within sectors, the peers that became labor 502 00:28:49,560 --> 00:28:54,000 Speaker 4: light versus the peers that didn't become more efficient. The 503 00:28:54,120 --> 00:28:59,280 Speaker 4: labor light companies outperformed their labor intensive peers. So our 504 00:28:59,360 --> 00:29:02,200 Speaker 4: view is, okay, okay, we've got this opportunity for big 505 00:29:02,320 --> 00:29:04,640 Speaker 4: chunks of the S and P five hundred to become 506 00:29:05,240 --> 00:29:09,760 Speaker 4: less labor intensive, and based on our performance data, labor 507 00:29:09,840 --> 00:29:15,280 Speaker 4: intensity and improvements in that metric have actually translated into alpha. 508 00:29:16,240 --> 00:29:19,400 Speaker 4: So long kind of convoluted argument for how you track this, 509 00:29:19,520 --> 00:29:22,240 Speaker 4: But I think right now all anybody's focused on are 510 00:29:22,600 --> 00:29:25,480 Speaker 4: the capex takers and the chip makers and the tech companies. 511 00:29:25,520 --> 00:29:28,280 Speaker 4: Maybe now we've moved on to power and grid, but 512 00:29:28,360 --> 00:29:30,960 Speaker 4: I think at some point we're going to start acknowledging 513 00:29:31,000 --> 00:29:35,640 Speaker 4: that there are these industries that are likely to be transformed. 514 00:29:35,680 --> 00:29:37,440 Speaker 4: There are some industries that are going to go away, 515 00:29:37,560 --> 00:29:39,920 Speaker 4: other industries that are going to pop up. You know, 516 00:29:40,040 --> 00:29:43,000 Speaker 4: like any tech revolution, this is going to take away 517 00:29:43,000 --> 00:29:45,880 Speaker 4: some jobs, but is also going to create jobs, and 518 00:29:46,160 --> 00:29:48,760 Speaker 4: we're seeing that real time with Python. I mean, you know, 519 00:29:48,800 --> 00:29:51,360 Speaker 4: it's interesting if you talk to a graduate and an 520 00:29:51,400 --> 00:29:53,960 Speaker 4: engineering program, well, I don't know, maybe it's different now, 521 00:29:53,960 --> 00:29:56,200 Speaker 4: but you know, maybe six months ago I was talking 522 00:29:56,240 --> 00:29:59,520 Speaker 4: to some recent grads in a program that I'm affiliated 523 00:29:59,560 --> 00:30:02,840 Speaker 4: with and they were saying that, you know, the software 524 00:30:02,960 --> 00:30:06,120 Speaker 4: and the coders were not getting jobs, but the hardware 525 00:30:06,160 --> 00:30:08,160 Speaker 4: folks were getting jobs. So that was just a big, 526 00:30:08,200 --> 00:30:11,840 Speaker 4: big transformation right away that was disrupting jobs but creating 527 00:30:11,920 --> 00:30:14,880 Speaker 4: like tightness and jobs and other sectors. And I think 528 00:30:14,920 --> 00:30:17,000 Speaker 4: that's just what we have to kind of think about 529 00:30:17,040 --> 00:30:19,960 Speaker 4: and try to anticipate in a smart way. So we're 530 00:30:20,000 --> 00:30:23,880 Speaker 4: listening to our fundamental analysts on every sector. And what's 531 00:30:24,000 --> 00:30:28,080 Speaker 4: fascinating to me is when we have calls on AI 532 00:30:28,320 --> 00:30:32,120 Speaker 4: and it's use cases, it's not just tech analysts that 533 00:30:32,240 --> 00:30:36,960 Speaker 4: participate in these calls, it's healthcare analysts, insurance analysts, you know, 534 00:30:37,040 --> 00:30:42,720 Speaker 4: really old economy businesses where there are potential transformative measures 535 00:30:42,760 --> 00:30:43,240 Speaker 4: in place. 536 00:30:59,000 --> 00:31:01,960 Speaker 3: I mentioned before investing in an S and P five 537 00:31:02,040 --> 00:31:06,440 Speaker 3: hundred index fund. And in the investment industry there's always 538 00:31:06,440 --> 00:31:09,080 Speaker 3: this preaching of diversification, and you mentioned that, you know, 539 00:31:09,160 --> 00:31:11,400 Speaker 3: right now maybe people are at fifty five percent, or 540 00:31:11,480 --> 00:31:14,320 Speaker 3: people are in various alternatives, or from time to time 541 00:31:14,320 --> 00:31:17,440 Speaker 3: they're like go international by international stocks, or rotates to 542 00:31:17,480 --> 00:31:20,520 Speaker 3: small caps or whatever. But for the last fifteen years, 543 00:31:20,560 --> 00:31:22,600 Speaker 3: more or less, we really all should have just had 544 00:31:22,640 --> 00:31:25,840 Speaker 3: all of our money in QQQ and outside of no 545 00:31:26,040 --> 00:31:28,000 Speaker 3: for real, right, Like, that's like we we've almost been 546 00:31:28,040 --> 00:31:30,840 Speaker 3: punished for being the good diversifiers that we're supposed to 547 00:31:30,920 --> 00:31:33,959 Speaker 3: be and we really shouldn't have. What changes that, What 548 00:31:34,080 --> 00:31:36,960 Speaker 3: kind of regime shift would you want to see such 549 00:31:37,080 --> 00:31:41,080 Speaker 3: that it's not always just like this sort of inexorable 550 00:31:41,520 --> 00:31:45,240 Speaker 3: sucking of value towards a handful of leading edge. 551 00:31:45,560 --> 00:31:48,840 Speaker 4: Yeah, it's such a good point. I mean, I suppose 552 00:31:49,360 --> 00:31:54,280 Speaker 4: I would argue we're seeing that now, and maybe by now, 553 00:31:54,360 --> 00:31:58,200 Speaker 4: I mean, you know, March, but not any time earlier 554 00:31:58,200 --> 00:32:00,480 Speaker 4: than that. But it's it's really the idea that we 555 00:32:00,560 --> 00:32:06,360 Speaker 4: are starting to see earnings broaden out beyond just these 556 00:32:06,840 --> 00:32:11,600 Speaker 4: thematic stories. So you know, it felt like last year 557 00:32:11,640 --> 00:32:14,200 Speaker 4: we were just jumping from theme to themes. So it was, 558 00:32:14,280 --> 00:32:17,200 Speaker 4: you know, AI was doing well, in financials were doing poorly. 559 00:32:17,320 --> 00:32:19,560 Speaker 4: Then it was GLP one and you know, kind of 560 00:32:19,600 --> 00:32:23,480 Speaker 4: anti obesity, and you know, it's different theme, different months. 561 00:32:23,600 --> 00:32:25,959 Speaker 4: You know, this month there's a lot of interest in 562 00:32:26,480 --> 00:32:30,560 Speaker 4: power and utilities has actually outperformed on some of those themes. 563 00:32:30,640 --> 00:32:35,160 Speaker 4: So I think that where we're starting to see that 564 00:32:35,520 --> 00:32:39,400 Speaker 4: idea that diversification is important is when you look at 565 00:32:39,760 --> 00:32:41,520 Speaker 4: just within the S and P five hundred, which is 566 00:32:41,520 --> 00:32:44,920 Speaker 4: what I know best, we have seen this sort of 567 00:32:45,000 --> 00:32:48,600 Speaker 4: broadening of the market occur. So in March, I think 568 00:32:49,280 --> 00:32:52,520 Speaker 4: something like sixty percent of S and P companies outperformed 569 00:32:52,520 --> 00:32:56,760 Speaker 4: the index, versus less than fifty percent in prior months, 570 00:32:56,800 --> 00:32:59,520 Speaker 4: you know, going back to December. So we're at a 571 00:32:59,560 --> 00:33:02,720 Speaker 4: point where we are starting to see the average stock 572 00:33:02,840 --> 00:33:07,040 Speaker 4: outperform the index, rather than the index outperform the average stock. 573 00:33:07,080 --> 00:33:10,480 Speaker 4: And I think that's a change, and that is actually 574 00:33:10,520 --> 00:33:15,600 Speaker 4: more normal than unusual. So historically we've seen the breadth 575 00:33:15,640 --> 00:33:18,400 Speaker 4: of the S and P five hundred remain a little 576 00:33:18,400 --> 00:33:22,280 Speaker 4: bit higher than fifty percent rather than below fifty percent, 577 00:33:22,320 --> 00:33:24,200 Speaker 4: And I think that's something we can point to as 578 00:33:24,200 --> 00:33:27,000 Speaker 4: a sign that diversification is starting to pay off again. 579 00:33:27,320 --> 00:33:28,680 Speaker 4: But you know, I think one of the reasons that 580 00:33:28,720 --> 00:33:31,480 Speaker 4: diversification didn't pay off over the last twenty years or 581 00:33:31,560 --> 00:33:34,560 Speaker 4: fifteen years was that you had one single buyer of 582 00:33:34,680 --> 00:33:36,840 Speaker 4: US treasury bonds, and that was the FED, and the 583 00:33:36,880 --> 00:33:39,960 Speaker 4: FED was pouring trillions and trillions and trillions of dollars 584 00:33:40,000 --> 00:33:45,280 Speaker 4: into US treasuries. That's not a diversified investor. That's one theme, 585 00:33:45,680 --> 00:33:50,120 Speaker 4: one asset class, and one big, huge, monstrous buyer. And 586 00:33:50,200 --> 00:33:53,680 Speaker 4: I think if that environment is behind us, we go 587 00:33:53,800 --> 00:33:56,160 Speaker 4: back to a more diverse set of buyers buying different 588 00:33:56,160 --> 00:33:56,959 Speaker 4: types of things. 589 00:33:58,120 --> 00:34:01,160 Speaker 2: Similar question, I suppose, but what would give you pause 590 00:34:01,560 --> 00:34:03,320 Speaker 2: at this point? What would make you nervous? 591 00:34:04,480 --> 00:34:07,360 Speaker 4: Well, I guess I'm what makes me nervous is you know, 592 00:34:07,560 --> 00:34:11,839 Speaker 4: every earning season we're listening for layoffs because I think 593 00:34:11,880 --> 00:34:19,640 Speaker 4: the lynch pin of consumption is not necessarily rates or 594 00:34:19,760 --> 00:34:23,839 Speaker 4: the cost to borrow. It's really just having a job, right. 595 00:34:23,880 --> 00:34:27,799 Speaker 4: I mean, if you have income and you have the 596 00:34:27,840 --> 00:34:30,239 Speaker 4: ability to pay off your mortgage, you're not going to 597 00:34:30,280 --> 00:34:32,760 Speaker 4: walk away from your house. When you lose your job 598 00:34:32,920 --> 00:34:36,000 Speaker 4: and you have no option to pay off your mortgage, 599 00:34:36,040 --> 00:34:39,399 Speaker 4: that's when you start to see things really deteriorate. So 600 00:34:39,440 --> 00:34:43,800 Speaker 4: I think one kind of bow case for the US 601 00:34:43,880 --> 00:34:47,120 Speaker 4: consumer that we've been highlighting is, you know, we're still 602 00:34:47,120 --> 00:34:49,000 Speaker 4: in a pretty tight labor market. I mean, we had 603 00:34:49,000 --> 00:34:53,160 Speaker 4: this massive resignation during COVID, we had an aging population, 604 00:34:53,480 --> 00:34:57,279 Speaker 4: We have fewer workers in manufacturing. Meanwhile, there's this huge 605 00:34:57,320 --> 00:35:01,800 Speaker 4: restoring initiative brewing where you know, companies are moving plant 606 00:35:01,920 --> 00:35:05,200 Speaker 4: property and equipment back to the US from other parts 607 00:35:05,239 --> 00:35:08,239 Speaker 4: of the world. So I think that tightness in the 608 00:35:08,280 --> 00:35:12,000 Speaker 4: manufacturing complex and the feed through to small businesses in 609 00:35:12,040 --> 00:35:16,279 Speaker 4: those regions has been positive. But if that starts to 610 00:35:16,280 --> 00:35:19,840 Speaker 4: slow down, that would be a negative and broadspread job losses, 611 00:35:19,880 --> 00:35:22,759 Speaker 4: I think would be what we'd worry about to sort 612 00:35:22,800 --> 00:35:25,640 Speaker 4: of end the consumption story. You know, I also worry 613 00:35:25,680 --> 00:35:29,360 Speaker 4: about the debt burden carried by the US government, but 614 00:35:29,440 --> 00:35:33,440 Speaker 4: I think that's a harder problem to model into your 615 00:35:33,520 --> 00:35:36,799 Speaker 4: equity market forecast, right, I mean this is like, this 616 00:35:36,920 --> 00:35:39,120 Speaker 4: is like your question earlier on AI and how do 617 00:35:39,160 --> 00:35:42,319 Speaker 4: you model these things into your outlook? I think it's 618 00:35:42,360 --> 00:35:47,000 Speaker 4: hard to know how the debt to GDP burden of 619 00:35:47,040 --> 00:35:49,719 Speaker 4: the US government resolves itself. Does this mean that the 620 00:35:49,880 --> 00:35:54,839 Speaker 4: US sovereign you know, tenure treasuries are more risky? Does 621 00:35:54,880 --> 00:35:57,120 Speaker 4: this mean that the dollar is at risk of losing 622 00:35:57,160 --> 00:36:01,839 Speaker 4: its reserve currency status? Definitely today, because there's no alternative. 623 00:36:01,920 --> 00:36:04,839 Speaker 4: But I think those are the more kind of problematic, 624 00:36:05,000 --> 00:36:10,560 Speaker 4: longer term risks that make me less polytize about the 625 00:36:10,560 --> 00:36:13,680 Speaker 4: world that I might be. Again, though, when I think 626 00:36:13,680 --> 00:36:16,960 Speaker 4: about those risks, I don't know if they manifest themselves 627 00:36:17,040 --> 00:36:19,480 Speaker 4: in the S and P five hundred and in the 628 00:36:19,520 --> 00:36:23,960 Speaker 4: public equity markets. I think they're more impactful to private equity, 629 00:36:24,160 --> 00:36:29,120 Speaker 4: liquid assets, real estate, you know, just basically bonds, and 630 00:36:29,160 --> 00:36:31,399 Speaker 4: then just sort of the idea of the US as 631 00:36:31,440 --> 00:36:35,200 Speaker 4: a high quality sovereign I think is the other kind 632 00:36:35,239 --> 00:36:38,280 Speaker 4: of part of this that is harder to really fathom 633 00:36:38,600 --> 00:36:39,240 Speaker 4: at this point. 634 00:36:39,480 --> 00:36:43,239 Speaker 3: You know, you mentioned the companies cutting cost layoffs and 635 00:36:43,480 --> 00:36:47,080 Speaker 3: changing their cash management. I sort of came away from 636 00:36:47,120 --> 00:36:51,439 Speaker 3: that whole period of like, US company operators are really good. 637 00:36:51,840 --> 00:36:55,799 Speaker 3: Layoffs aren't good, especially mass layoffs. But the speed with 638 00:36:55,840 --> 00:36:59,600 Speaker 3: which companies kind of pivoted it was like many companies 639 00:37:00,080 --> 00:37:03,840 Speaker 3: demonstrated a pretty serious sort of like management competence just 640 00:37:03,840 --> 00:37:06,040 Speaker 3: sort of like in a few minutes left, Like it 641 00:37:06,200 --> 00:37:08,279 Speaker 3: sort of goes in hand in hand with if people 642 00:37:08,320 --> 00:37:10,359 Speaker 3: have jobs, they're probably going to spend it. That'll keep 643 00:37:10,360 --> 00:37:13,200 Speaker 3: support up. What are you you seeing in terms of 644 00:37:13,320 --> 00:37:16,360 Speaker 3: just sort of how EPs, earnings per share or corporate 645 00:37:16,360 --> 00:37:19,279 Speaker 3: earnings are tracking versus where you would have thought at 646 00:37:19,280 --> 00:37:21,520 Speaker 3: the beginning of the year or six months ago or 647 00:37:21,560 --> 00:37:23,680 Speaker 3: at the end of October when this rally really took off. 648 00:37:24,040 --> 00:37:27,440 Speaker 4: Yeah, yeah, it's a great point. So we've seen margins 649 00:37:27,440 --> 00:37:31,320 Speaker 4: hang in there, they've actually expanded a little. The big surprise, 650 00:37:31,560 --> 00:37:33,960 Speaker 4: like I always feel like kind of surprised when I 651 00:37:34,000 --> 00:37:35,840 Speaker 4: look at the data, even though I know it, is 652 00:37:35,840 --> 00:37:38,600 Speaker 4: that we had an earnings recession last year, right we 653 00:37:38,719 --> 00:37:41,040 Speaker 4: had companies and the overall S and P five hundred, 654 00:37:41,080 --> 00:37:44,080 Speaker 4: it had a couple of quarters of negative earnings growth. 655 00:37:44,239 --> 00:37:48,040 Speaker 4: And that recession is now behind us, and we're seeing 656 00:37:48,040 --> 00:37:52,000 Speaker 4: companies recover. I suppose when I look at earnings trends, 657 00:37:52,040 --> 00:37:54,080 Speaker 4: I mean, one reason that I think the market could 658 00:37:54,120 --> 00:37:57,400 Speaker 4: start to broaden out even more than just a month 659 00:37:57,640 --> 00:38:00,319 Speaker 4: or two is that when you look at just the 660 00:38:00,840 --> 00:38:05,040 Speaker 4: differential between high growth tech companies and the rest of 661 00:38:05,080 --> 00:38:08,760 Speaker 4: the S and P five hundred, that differential starts to narrow. 662 00:38:09,080 --> 00:38:11,400 Speaker 4: Last year, the only companies that were making money were 663 00:38:11,400 --> 00:38:13,600 Speaker 4: the Magnificent seven, so it kind of made sense that 664 00:38:13,680 --> 00:38:16,560 Speaker 4: they just crushed it. This year, we're starting to see 665 00:38:16,560 --> 00:38:20,560 Speaker 4: that differential between growth trends and narrow. We're forecasting about 666 00:38:20,600 --> 00:38:23,560 Speaker 4: ten percent earnings growth this year, which is roughly in 667 00:38:23,560 --> 00:38:26,680 Speaker 4: line with where I think bottom up consensus is. Maybe 668 00:38:26,719 --> 00:38:30,080 Speaker 4: bottom up consensus is a little bit higher we're basically 669 00:38:30,160 --> 00:38:35,000 Speaker 4: forecasting a broad based recovery across sectors that we've already seen. 670 00:38:35,800 --> 00:38:38,480 Speaker 4: So it's the idea that we've already seen cost cutting 671 00:38:38,520 --> 00:38:41,720 Speaker 4: and now maybe we see that operating leverage from demand 672 00:38:41,800 --> 00:38:44,879 Speaker 4: coming back from parts of the economy starting to pick 673 00:38:44,960 --> 00:38:48,000 Speaker 4: up again. We're seeing a shift from service spending to 674 00:38:48,080 --> 00:38:50,279 Speaker 4: good spending, so that's positive for the S and P 675 00:38:50,400 --> 00:38:52,920 Speaker 4: five hundred and consumer stocks. Those are some of the 676 00:38:52,960 --> 00:38:55,719 Speaker 4: areas that we're looking at from an earnings perspective. 677 00:38:56,440 --> 00:38:59,160 Speaker 2: All right, Savina, I'm so glad we finally had you 678 00:38:59,280 --> 00:39:00,160 Speaker 2: on all Laws. 679 00:39:01,760 --> 00:39:01,960 Speaker 4: Having. 680 00:39:02,160 --> 00:39:16,279 Speaker 5: It's great to be here, Joe. 681 00:39:16,280 --> 00:39:18,680 Speaker 2: I'm so glad we could do that episode finally because 682 00:39:18,800 --> 00:39:22,160 Speaker 2: Cevita has nailed the upwards trend in the S and 683 00:39:22,160 --> 00:39:23,799 Speaker 2: P five hundred at a time when a lot of 684 00:39:23,800 --> 00:39:27,680 Speaker 2: people were still very nervous about the outlook for stocks. 685 00:39:28,120 --> 00:39:30,799 Speaker 2: The one thing that had me thinking, and I think 686 00:39:30,800 --> 00:39:35,200 Speaker 2: we spoke about this before, but like the one recession 687 00:39:35,600 --> 00:39:38,960 Speaker 2: path that I kind of worry about is the idea 688 00:39:39,000 --> 00:39:43,040 Speaker 2: of like I guess, lofty EPs expectations kind of coming 689 00:39:43,080 --> 00:39:46,440 Speaker 2: back to haunt the market in the sense that companies 690 00:39:46,680 --> 00:39:50,160 Speaker 2: had pricing power in recent years, they raised their prices. 691 00:39:50,200 --> 00:39:54,520 Speaker 2: That helped pad margins. But if inflation is starting to 692 00:39:54,560 --> 00:39:57,040 Speaker 2: go down, or if consumers are starting to push back, 693 00:39:57,200 --> 00:40:00,240 Speaker 2: or if there is pressure on household balance sheets or whatever, 694 00:40:00,520 --> 00:40:03,160 Speaker 2: then maybe one of the levers they pull is on 695 00:40:03,280 --> 00:40:05,879 Speaker 2: the job front, and then we get layoffs, and then 696 00:40:05,920 --> 00:40:08,839 Speaker 2: we see consumer powers start to go down, and then 697 00:40:08,960 --> 00:40:11,719 Speaker 2: we see profit margins start to go down, and that 698 00:40:11,719 --> 00:40:13,719 Speaker 2: would be bad. I'm not saying we're there yet, but 699 00:40:14,120 --> 00:40:17,000 Speaker 2: that's the one kind of path that I worry about totally. 700 00:40:17,200 --> 00:40:19,080 Speaker 3: That makes a ton of sense to me. And also 701 00:40:19,280 --> 00:40:21,799 Speaker 3: just this idea that like, you know, there's this on 702 00:40:21,880 --> 00:40:24,759 Speaker 3: the service puzzle, why haven't stocked affected by higher rates? 703 00:40:24,840 --> 00:40:25,160 Speaker 4: Yeah? 704 00:40:25,200 --> 00:40:27,759 Speaker 3: Well, rates are high because demand is strong and the 705 00:40:27,800 --> 00:40:30,640 Speaker 3: economy continues to grow at a robust clip. And if 706 00:40:30,640 --> 00:40:33,000 Speaker 3: people continue have jobs, they'll continue to spend. And if 707 00:40:33,000 --> 00:40:35,319 Speaker 3: they continue to spend and earnings hold up, and then 708 00:40:35,400 --> 00:40:39,120 Speaker 3: you don't necessarily need those higher rates. So it's interesting 709 00:40:39,719 --> 00:40:43,840 Speaker 3: that already this year, you know, rather than the scenario 710 00:40:43,880 --> 00:40:46,239 Speaker 3: that you describe, which seems very plausible to me so far, 711 00:40:46,239 --> 00:40:48,840 Speaker 3: at least, we're seeing the opposite, that broadening out of. 712 00:40:48,960 --> 00:40:51,520 Speaker 2: Virtuous Yeah, it's a virtuous cycle. At the moment, it 713 00:40:51,520 --> 00:40:53,440 Speaker 2: could go in the other direction, but for now it 714 00:40:53,480 --> 00:40:56,360 Speaker 2: seems to be feeding on itself in a positive manner. 715 00:40:56,640 --> 00:40:58,600 Speaker 2: The one other thing I thought was really good to 716 00:40:58,680 --> 00:41:02,640 Speaker 2: emphasize is that index composition yes, yes, and the idea 717 00:41:02,760 --> 00:41:05,200 Speaker 2: that like, okay, you could look at historical pees and 718 00:41:05,280 --> 00:41:08,279 Speaker 2: comparing contrast with the nineteen eighties or the early two 719 00:41:08,280 --> 00:41:11,080 Speaker 2: thousands steering the tech bubble or whatever, but there are 720 00:41:11,280 --> 00:41:13,799 Speaker 2: actual changes in the S and P five hundred that 721 00:41:14,000 --> 00:41:18,400 Speaker 2: might make that comparison less useful. And especially that point 722 00:41:18,560 --> 00:41:22,760 Speaker 2: about companies terming out their balance sheets and the duration 723 00:41:22,920 --> 00:41:25,440 Speaker 2: changes that we've seen. I think if you had a 724 00:41:25,480 --> 00:41:28,640 Speaker 2: good handle on the degree to which companies had actually 725 00:41:28,640 --> 00:41:31,800 Speaker 2: refinanced their balance sheets over the past couple of years, 726 00:41:32,000 --> 00:41:34,440 Speaker 2: you probably would have nailed a lot of the resilience 727 00:41:34,480 --> 00:41:35,520 Speaker 2: that we've seen in markets. 728 00:41:35,560 --> 00:41:37,480 Speaker 3: Totally. I think it's really important this idea of like 729 00:41:37,560 --> 00:41:41,360 Speaker 3: sort of earnings durability quality, and so you can imagine 730 00:41:41,400 --> 00:41:44,440 Speaker 3: that a company that has to hold a lot of inventory, 731 00:41:44,600 --> 00:41:46,960 Speaker 3: or a company that has to from time to time 732 00:41:47,000 --> 00:41:51,600 Speaker 3: engage in huge capital expenditure cycles, like, yeah, you probably 733 00:41:51,640 --> 00:41:55,000 Speaker 3: don't want to pay as much for those earnings as 734 00:41:55,080 --> 00:41:58,520 Speaker 3: you do a company that doesn't have to manage those 735 00:41:58,680 --> 00:42:00,520 Speaker 3: risks the same way, and so I think, like I'm 736 00:42:00,520 --> 00:42:03,600 Speaker 3: always a little bit scared of like, oh, here's why 737 00:42:03,600 --> 00:42:06,200 Speaker 3: the index is not doesn't matter, and that these like yeah, 738 00:42:06,239 --> 00:42:08,960 Speaker 3: you know, percentiles in ninety fifth is not as scary. 739 00:42:09,000 --> 00:42:11,400 Speaker 3: But it does make sense that there are certain types 740 00:42:11,440 --> 00:42:14,879 Speaker 3: of earning streams that the nature of the business models sucks, 741 00:42:14,920 --> 00:42:18,000 Speaker 3: where you can be confident that they'll be more durable 742 00:42:18,120 --> 00:42:19,520 Speaker 3: than another type of company. 743 00:42:19,680 --> 00:42:22,480 Speaker 2: This has gone back to being a value bashing show. 744 00:42:22,920 --> 00:42:24,759 Speaker 3: Yes, can I say the one other thing I really 745 00:42:24,840 --> 00:42:27,800 Speaker 3: like is that, you know, it is really hard to measure, 746 00:42:27,960 --> 00:42:31,680 Speaker 3: as Savida said, like how much allocation different types of 747 00:42:31,680 --> 00:42:35,080 Speaker 3: investors have to stocks any given moment. That's why there's 748 00:42:35,080 --> 00:42:38,239 Speaker 3: all these surveys. I love that the one measure that 749 00:42:38,320 --> 00:42:42,200 Speaker 3: seems to have some historical validity is to just measure 750 00:42:42,200 --> 00:42:45,200 Speaker 3: the analysts themselves. And when the analysts are really bullish 751 00:42:45,320 --> 00:42:48,400 Speaker 3: or super bullish, that's maybe time to sell. Like that, 752 00:42:48,520 --> 00:42:50,640 Speaker 3: you just do the survey, look what people are recommending, 753 00:42:50,680 --> 00:42:52,200 Speaker 3: and see if how out of whack they are. 754 00:42:52,400 --> 00:42:55,440 Speaker 2: I'm looking at the cell side indicator that Savita mentioned 755 00:42:55,600 --> 00:42:58,080 Speaker 2: right now and It is kind of crazy how much 756 00:42:58,160 --> 00:43:02,279 Speaker 2: bollishness there was in Sale two thousand and one. Yeah, 757 00:43:02,360 --> 00:43:04,799 Speaker 2: it seems to work anyway. Shall we leave it there? 758 00:43:04,880 --> 00:43:06,000 Speaker 4: Let's leave it there, all right? 759 00:43:06,080 --> 00:43:09,120 Speaker 2: This has been another episode of the Oudlots podcast. I'm 760 00:43:09,160 --> 00:43:12,520 Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway. 761 00:43:12,160 --> 00:43:14,840 Speaker 3: And I'm Joe Wisenthal. You can follow me at the Stalwart. 762 00:43:15,200 --> 00:43:18,640 Speaker 3: Follow our producers Carmen Rodriguez at Carman Arman dash Ol 763 00:43:18,640 --> 00:43:22,279 Speaker 3: Bennett at Dashbot and Kelbrooks at Kelbrooks. Thank you to 764 00:43:22,320 --> 00:43:25,400 Speaker 3: our producer Moses onm. For more Oddlogs content, go to 765 00:43:25,400 --> 00:43:28,160 Speaker 3: Bloomberg dot com slash odd Lots, where we have transcripts, 766 00:43:28,200 --> 00:43:30,719 Speaker 3: a blog, and a newsletter, and you can chat with 767 00:43:30,760 --> 00:43:33,760 Speaker 3: fellow listeners twenty four to seven in the discord discord 768 00:43:33,800 --> 00:43:36,399 Speaker 3: dot gg slash odd Lots. We have a markets room 769 00:43:36,640 --> 00:43:39,240 Speaker 3: where people talk about stocks all day. Go check it out. 770 00:43:39,320 --> 00:43:41,400 Speaker 2: And if you enjoy ad lots, if you like it 771 00:43:41,440 --> 00:43:43,720 Speaker 2: when we take a look at what's going on with stocks, 772 00:43:43,760 --> 00:43:46,560 Speaker 2: then please leave us a positive review on your favorite 773 00:43:46,560 --> 00:43:50,640 Speaker 2: podcast platform. And remember, if you are a Bloomberg subscriber, 774 00:43:50,680 --> 00:43:54,000 Speaker 2: you can listen to all of our episodes absolutely ad free. 775 00:43:54,080 --> 00:43:56,720 Speaker 2: All you need to do is connect your Bloomberg account 776 00:43:56,880 --> 00:44:04,719 Speaker 2: with Apple Podcasts. Thanks for listening in