WEBVTT - Why Savita Subramanian Thinks Stocks Can Keep Going Higher 0:00:02.440 --> 0:00:16.240 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.040 --> 0:00:21.240 Hello and welcome to another episode of the All Lots podcast. 0:00:21.360 --> 0:00:22.759 I'm Tracy Alloway. 0:00:22.440 --> 0:00:23.600 And I'm Joe Wisenthal. 0:00:24.160 --> 0:00:27.880 Joe. For all intents and purposes, we're pretty much at 0:00:28.000 --> 0:00:30.520 a record in terms of US stocks totally. 0:00:31.040 --> 0:00:33.440 We're recording this April second, so we're actually down a 0:00:33.479 --> 0:00:36.960 little bit today, about a percent. But the story in 0:00:37.000 --> 0:00:39.720 my mind of the market for twenty twenty four is 0:00:39.760 --> 0:00:41.479 that we went into this year with all sorts of 0:00:41.520 --> 0:00:43.760 soft landing optimism. The FED is going to cut rates 0:00:43.760 --> 0:00:46.320 a bunch of times, and then all these sort of 0:00:46.360 --> 0:00:48.800 rate cut hopes are sort of slowly evaporating, but it's 0:00:48.840 --> 0:00:51.720 hardly affected the stock market, and so we're basically at 0:00:51.800 --> 0:00:54.720 record highs despite the fact that that first cut keeps 0:00:54.720 --> 0:00:56.040 getting pushed out into the future. 0:00:56.200 --> 0:00:58.840 Yeah, And the question is, are stock's going to start 0:00:58.840 --> 0:01:01.760 to turn lower again? They are lower today, They've been 0:01:01.880 --> 0:01:05.160 kind of vacillating for the past couple of days. Is 0:01:05.200 --> 0:01:08.560 the start of a durable drop or are markets basically 0:01:08.600 --> 0:01:11.600 catching their breath after a torrid rally and are they 0:01:11.640 --> 0:01:14.360 going to continue upward? Is all that excitement over things 0:01:14.400 --> 0:01:17.520 like AI and tech just going to keep going. And 0:01:17.560 --> 0:01:21.000 speaking of excitement over AI and tech, you do see 0:01:21.040 --> 0:01:25.200 some commentary at the moment about bubble territory, so the 0:01:25.319 --> 0:01:28.280 idea that, well, maybe we're getting a little bit too optimistic, 0:01:28.440 --> 0:01:31.520 or isn't it weird that it was expectations of rate 0:01:31.600 --> 0:01:34.360 cuts that drove the move upward, but as the rate 0:01:34.400 --> 0:01:37.520 cuts get priced further out, we're not really seeing that 0:01:37.600 --> 0:01:39.400 big impact on stocks totally. 0:01:39.600 --> 0:01:41.920 So for a while as the market was doing this 0:01:42.000 --> 0:01:44.200 sort of straight line up really since the end of 0:01:44.200 --> 0:01:48.160 October when rates peaked, part of this sort of I 0:01:48.160 --> 0:01:51.120 don't know, bear crowd or skepticism or people trying to 0:01:51.160 --> 0:01:53.400 poke holes in the rally is like, oh, it's all tech, 0:01:53.480 --> 0:01:56.680 it's all the mag seven, these gigantic tech stocks, etc. 0:01:57.120 --> 0:02:00.400 What's interesting about lately is that actually a lot of 0:02:00.400 --> 0:02:03.120 these high flyers, like in video, they've like sort of 0:02:03.160 --> 0:02:06.120 been flat for the last month or so, and even 0:02:06.160 --> 0:02:09.120 that doesn't seem to be holding water. There actually are 0:02:09.480 --> 0:02:12.200 big rallies in many parts of the market. So the 0:02:12.320 --> 0:02:14.800 question is like why, I mean, you could say, oh, 0:02:14.840 --> 0:02:17.320 like the story maybe made sense, it's like, oh, there's 0:02:17.320 --> 0:02:20.840 these handful of mega giants. They're capturing all of the gains, 0:02:20.919 --> 0:02:23.320 and so what these new all time highs don't really 0:02:23.400 --> 0:02:26.160 reflect what the broader market is doing. The broader market's 0:02:26.200 --> 0:02:26.880 doing fine. 0:02:27.080 --> 0:02:30.920 Yeah, and again against expectation. Yes, it's actually broadening out yeow, 0:02:31.160 --> 0:02:33.280 rather than becoming more narrow, which is the kind of 0:02:33.280 --> 0:02:35.400 thing that you would be worried about if you are 0:02:35.560 --> 0:02:37.840 in a bubble or about to test a bubble. But 0:02:37.919 --> 0:02:40.040 all right, I am very pleased to say that we do, 0:02:40.120 --> 0:02:44.000 in fact have the perfect guests to discuss markets and 0:02:44.120 --> 0:02:47.000 whether or not we are closing in on bubble territory. 0:02:47.040 --> 0:02:50.160 We're going to be speaking with Cevita Supermanian, head of 0:02:50.280 --> 0:02:53.959 US equity strategy at Bank of America, and she recently 0:02:54.080 --> 0:02:56.240 raised her target for the S and P five hundred 0:02:56.520 --> 0:03:00.200 from five thousand to five four hundred. I think this 0:03:00.440 --> 0:03:04.240 was done about a month ago, and we're already at 0:03:04.280 --> 0:03:08.359 like five thousand, two hundred. Yeah, So yeah, good call, Savita. 0:03:08.480 --> 0:03:09.360 Welcome to the show. 0:03:09.480 --> 0:03:11.800 Hi, it's great to be here. Thanks for having me. 0:03:12.160 --> 0:03:14.160 It's I feel kind of bad. I feel like we 0:03:14.160 --> 0:03:17.480 should have had you on way way earlier, because you know, 0:03:17.600 --> 0:03:20.640 you are sort of a stalwart of the cell side 0:03:20.639 --> 0:03:23.440 research on the stocks, and yet we haven't made it happen. 0:03:23.520 --> 0:03:26.960 Kind of weird, that is weird, but we're correcting for 0:03:27.240 --> 0:03:32.880 past mistakes. Yes, this is good, a good type of correction. 0:03:33.040 --> 0:03:37.440 All right, SMP five hundred pretty much at record highs. 0:03:37.520 --> 0:03:38.160 What's driving it? 0:03:38.920 --> 0:03:42.200 Yeah, So it's interesting when we launched our twenty twenty 0:03:42.200 --> 0:03:46.160 four outlook in November with our year ahead report, and 0:03:46.840 --> 0:03:50.480 we launched our SMP market call with a five thousand 0:03:51.000 --> 0:03:55.200 year end target, and I remember having to repeat that 0:03:55.320 --> 0:03:59.760 number like people would literally say, did you just say 0:03:59.800 --> 0:04:03.680 five thousand? Like it was way too high? And now 0:04:03.720 --> 0:04:08.880 here we are at fifty two whatever, and a couple 0:04:08.880 --> 0:04:12.160 of months ago, the market basically breezed right through that 0:04:12.240 --> 0:04:16.559 five thousand target. And you know, there's no perfect way 0:04:16.640 --> 0:04:19.160 to forecast a point in time target impact. I think 0:04:19.160 --> 0:04:21.520 it's kind of a silly number. But the question that 0:04:21.560 --> 0:04:23.919 we asked ourselves was, Okay, now, what does the market 0:04:23.960 --> 0:04:26.600 go higher or lower? Because we're kind of where we 0:04:26.960 --> 0:04:29.880 thought we would be by your end in January, and 0:04:30.360 --> 0:04:33.719 everything we looked at said higher, So you know, I 0:04:33.720 --> 0:04:35.920 can delve into it, but I think where we are 0:04:35.960 --> 0:04:38.440 now is still we're sort of climbing that wall of worry. 0:04:38.720 --> 0:04:41.280 We're still in an environment where I don't know, it's 0:04:41.320 --> 0:04:44.599 interesting if you look at the average target for the 0:04:44.800 --> 0:04:47.159 S and P, I think it's lower than where the 0:04:47.200 --> 0:04:50.640 market is today, which is unusual because I think the 0:04:50.680 --> 0:04:54.279 SU side is usually skewed to being more optimistic. When 0:04:54.279 --> 0:04:58.680 you look at even analysts earnings expectations, there are still 0:04:58.720 --> 0:05:02.320 relatively low outside of this so called you know, Magnificent 0:05:02.400 --> 0:05:04.960 seven or the you know, the megacap tech companies that 0:05:04.960 --> 0:05:07.720 have been driving the market. So I still think we're 0:05:07.720 --> 0:05:11.520 in an environment where allocation to stocks is just starting 0:05:11.520 --> 0:05:15.280 to increase, Bolishness is just starting to percolate, and as 0:05:15.279 --> 0:05:17.680 you rightly point out, the market is just starting to 0:05:18.240 --> 0:05:19.200 broaden out a bit. 0:05:20.360 --> 0:05:23.000 Let's go back to the initial call that you made 0:05:23.000 --> 0:05:25.760 for S and P five thousand. What was the reasoning 0:05:26.000 --> 0:05:29.120 then in terms of like, let's just start with that question. 0:05:29.440 --> 0:05:31.880 So the reasoning then and it was basically putting the 0:05:31.960 --> 0:05:33.479 smp at around it. I think it was like a 0:05:33.520 --> 0:05:36.679 ten percent year or thereabouts. Was the idea was, Okay, 0:05:37.200 --> 0:05:39.559 where are we now versus where we were a couple 0:05:39.560 --> 0:05:41.479 of years ago, And I think there's a lot of 0:05:41.520 --> 0:05:44.119 good news that we should be happy about. We should 0:05:44.160 --> 0:05:47.279 be happy that the FED has actually moved interest rates 0:05:47.279 --> 0:05:51.360 from zero to five because now we have a lot 0:05:51.400 --> 0:05:53.640 of latitude with which to ease our way out of 0:05:53.680 --> 0:05:57.120 the next crisis. We should also be happy that the 0:05:57.200 --> 0:06:00.400 SMP itself is pretty different today than what it was 0:06:00.440 --> 0:06:02.440 a couple of years ago. And I think you know 0:06:02.480 --> 0:06:05.200 what I find interesting is that the SMP five hundred 0:06:05.279 --> 0:06:07.919 has basically managed out a lot of its own risk 0:06:08.480 --> 0:06:12.480 over the last couple of years by attrition. So if 0:06:12.520 --> 0:06:14.479 you look at a lot of the companies that were 0:06:14.480 --> 0:06:17.200 in the S and P five hundred in twenty twenty two, 0:06:17.839 --> 0:06:19.720 you know when the big surprise was the FED was 0:06:19.760 --> 0:06:22.960 about to hike interest rates by the largest amount ever 0:06:23.480 --> 0:06:26.560 in the fastest period of time. You know, the constituents 0:06:26.560 --> 0:06:29.479 that were bigger weights in the market are now smaller 0:06:29.520 --> 0:06:32.520 weights and maybe have even drifted out. And in particular, 0:06:33.120 --> 0:06:35.840 the ones that have drifted out are those with refinancing 0:06:35.920 --> 0:06:38.000 risk or companies that might not be able to hack 0:06:38.040 --> 0:06:41.359 it in a five percent rate world. So I almost 0:06:41.400 --> 0:06:44.719 feel like the beginning of this year was a good 0:06:44.800 --> 0:06:47.279 start in terms of the health of the index. We 0:06:47.440 --> 0:06:53.280 also saw that despite this megacap tech dominance. These companies 0:06:53.760 --> 0:06:56.880 they got expensive, but they didn't get as expensive as 0:06:56.880 --> 0:07:00.400 we saw, you know, nonprofitable tech during the tech bubble 0:07:00.440 --> 0:07:04.800 of ninety nine two thousand. Moreover, I think what's really 0:07:04.920 --> 0:07:09.320 exciting from a corporate finance perspective is that when you 0:07:09.360 --> 0:07:11.920 look at the risks around the S and P five 0:07:12.000 --> 0:07:15.840 hundred based on higher interest rates. One of the things 0:07:15.840 --> 0:07:17.640 that worried us a couple of years ago was that 0:07:17.720 --> 0:07:21.800 the SMP itself was a very long duration instrument, i e. 0:07:22.040 --> 0:07:25.680 You were buying today for like great growth, but it 0:07:25.720 --> 0:07:27.560 was way out in the future and you were getting 0:07:27.560 --> 0:07:30.720 no cash return. Today, I think a lot of that 0:07:30.800 --> 0:07:34.520 has resolved itself because many of the less profitable growth 0:07:34.560 --> 0:07:39.240 companies have either drifted lower in market cap or have 0:07:39.400 --> 0:07:43.240 become profitable and are now returning that cash to shareholders. So, 0:07:43.760 --> 0:07:45.720 you know, when we looked at companies in the big 0:07:45.800 --> 0:07:49.480 tech sector in early twenty twenty three, we started to 0:07:49.480 --> 0:07:53.480 see really encouraging signs. These big companies, these megacap tech 0:07:53.560 --> 0:07:58.440 companies basically acknowledged that they were too big to grow 0:07:58.560 --> 0:08:02.560 as quickly as they had in a zero percent interest 0:08:02.640 --> 0:08:04.880 rate world. And they were also just going to grow 0:08:04.880 --> 0:08:08.560 a little bit more slowly, and you saw these growth 0:08:08.600 --> 0:08:15.360 stocks actually cut capacity, cut costs. Meta did the biggest 0:08:15.400 --> 0:08:18.120 share buyback that we've ever seen in the history of 0:08:18.200 --> 0:08:21.800 share buybacks. And you know, these companies were able to 0:08:22.160 --> 0:08:27.400 lower their duration by pulling earnings earlier, in returning cash 0:08:27.480 --> 0:08:30.680 to shareholders, et cetera. I mean, the unthinkable happened earlier 0:08:30.720 --> 0:08:33.800 this year with Meta paying a dividend or initiating a dividend. 0:08:33.920 --> 0:08:36.960 So I think, you know, the idea here is we're 0:08:36.960 --> 0:08:39.440 at a point where the market actually looks a lot 0:08:39.440 --> 0:08:44.240 healthier and much better able to navigate a higher rate 0:08:44.480 --> 0:08:46.960 environment than it did a couple of years ago. 0:08:47.320 --> 0:08:49.959 So this is really interesting because you hear a lot 0:08:49.960 --> 0:08:53.600 of people say, well, stocks look expensive at the moment, 0:08:53.679 --> 0:08:56.079 and I think Bank of America has a bunch of 0:08:56.120 --> 0:08:58.280 different metrics that you look at, and I think in 0:08:58.360 --> 0:09:00.199 one of your notes you said that the SMP five 0:09:00.280 --> 0:09:04.679 hundred is statistically expensive on nineteen of twenty metrics. Yes, 0:09:04.679 --> 0:09:08.920 but the argument is that we've gone through this period 0:09:09.080 --> 0:09:12.720 of adjustment of higher rates and the mix of the index, 0:09:12.880 --> 0:09:18.719 its composition has shifted such that well, maybe those valuations 0:09:18.760 --> 0:09:20.120 are well deserved. 0:09:20.800 --> 0:09:23.520 Well, to some extent, it's the question should we ever 0:09:23.600 --> 0:09:28.480 be comparing the market multiple to a prior market multiple, right, 0:09:28.520 --> 0:09:32.320 because it's a different animal. And I think today, as 0:09:32.320 --> 0:09:34.679 you said, you know, we're looking at an S and 0:09:34.760 --> 0:09:39.160 P five hundred index that barely resembles the market in 0:09:39.240 --> 0:09:43.240 nineteen eighty or even nineteen ninety. We've gone from a 0:09:43.320 --> 0:09:47.800 market that was you know, seventy percent manufacturing back in 0:09:47.840 --> 0:09:54.120 the eighties to an index that's fifty percent asset light growth, healthcare, 0:09:54.240 --> 0:09:58.360 tech innovation. We've gone from a benchmark that had much 0:09:58.520 --> 0:10:02.720 higher debt to x equity ratios ten years ago to 0:10:03.120 --> 0:10:05.640 a benchmark that's paid down a lot of it's debt 0:10:05.720 --> 0:10:09.439 and now has fixed strate you know, kind of long term, 0:10:10.480 --> 0:10:13.400 less leverage risk and less free financing risk than it 0:10:13.440 --> 0:10:16.720 has had in prior cycles. I mean, seventy percent of 0:10:16.800 --> 0:10:21.120 debt sitting on SMP balance sheets is long term fixed 0:10:21.200 --> 0:10:24.000 rate debt versus back in two thousand and seven it 0:10:24.080 --> 0:10:27.400 was you know, something like forty percent. So it's almost 0:10:27.400 --> 0:10:30.880 like comparing apples to oranges by saying the market today 0:10:30.960 --> 0:10:34.280 looks expensive versus the market of two thousand, or you know, 0:10:34.400 --> 0:10:37.160 nineteen eighty or thereabouts, So I think that's part of 0:10:37.200 --> 0:10:39.280 the problem. And then the other part of the problem 0:10:39.360 --> 0:10:41.840 is when you look at the S and P five hundred, 0:10:41.920 --> 0:10:44.080 it's made up of a whole bunch of different stocks. 0:10:44.120 --> 0:10:46.200 We all know this, but right now there is a 0:10:46.280 --> 0:10:50.199 skew where, you know, the growth companies that really benefited 0:10:50.280 --> 0:10:54.400 from this sort of free capital environment are bigger proportions 0:10:54.400 --> 0:10:58.160 of the benchmark and are potentially more expensive than the 0:10:58.200 --> 0:11:00.640 rest of the SMP. So it's kind of like if 0:11:00.640 --> 0:11:03.040 you peel back the onion and you take out, you know, 0:11:03.360 --> 0:11:07.200 five of the megacap companies, the market multiple drops from 0:11:07.600 --> 0:11:11.720 twenty to fifteen or something pretty pretty extreme. So I 0:11:11.720 --> 0:11:14.480 think there are a lot of problems with just looking 0:11:14.520 --> 0:11:17.960 at a snapshot multiple and saying, Yep, the SMP's at 0:11:17.960 --> 0:11:21.079 twenty five times and it's historically been at fifteen times, 0:11:21.280 --> 0:11:23.720 you want to sell it. That's not the call we're making. 0:11:23.960 --> 0:11:27.400 So I'll just give my full disclosure here, which is 0:11:27.440 --> 0:11:29.400 that I am an investor in an S and P 0:11:29.600 --> 0:11:32.400 five hundred index fund. So I want to thank the 0:11:33.080 --> 0:11:37.960 active managers at SMP who have successfully gotten rid of 0:11:38.000 --> 0:11:40.560 some of the more rate sensitive stocks out of the industry. 0:11:40.559 --> 0:11:41.880 If de risk your portfolio. 0:11:41.960 --> 0:11:44.960 Yes, thank you for the excellent active manager of my 0:11:45.200 --> 0:11:49.200 passive vehicle. You've already raised a number of really interesting points. 0:11:49.240 --> 0:11:50.120 But I want to go back. 0:11:49.960 --> 0:11:52.920 To something you said in the first answer about sentiment, 0:11:53.000 --> 0:11:56.600 because capturing whatever the sentiment is at the moment is 0:11:56.679 --> 0:12:00.320 an inherently difficult task. You can look at market measures, 0:12:00.360 --> 0:12:03.240 what's happening with call options, you can do surveys. Bank 0:12:03.240 --> 0:12:05.800 of America does a survey of fund managers and they 0:12:05.840 --> 0:12:08.880 talk about their allocation. When you say that, like we're 0:12:08.920 --> 0:12:12.120 just getting into bullishness, it sounds weird when stocks are 0:12:12.160 --> 0:12:14.320 at all time hies. What are you looking at when 0:12:14.320 --> 0:12:16.800 you say something like that, And when you say, okay, 0:12:16.840 --> 0:12:20.360 we're just getting people are just getting more into stocks. Now, 0:12:20.400 --> 0:12:21.319 what is the data that. 0:12:21.320 --> 0:12:21.920 Backs that up? 0:12:22.440 --> 0:12:25.559 Yeah, there's a lot of data, And you can basically 0:12:25.600 --> 0:12:28.200 get data to say whatever you wanted to if you 0:12:28.360 --> 0:12:32.920 isolate your frame of reference to certain subsets. So I 0:12:32.920 --> 0:12:35.880 guess it's a complicated question, and nobody really ever has 0:12:35.920 --> 0:12:38.320 a full kind of up to date look at what 0:12:38.400 --> 0:12:41.680 everybody in the world is holding. And also, I mean, 0:12:41.720 --> 0:12:44.960 for whoever is buying equities, somebody is selling equities, So 0:12:44.960 --> 0:12:47.880 it's kind of like, why does positioning even matter? So 0:12:47.960 --> 0:12:49.680 one of the things we look at is is sort 0:12:49.679 --> 0:12:54.480 of who are the arbiters of inflows over the next 0:12:54.960 --> 0:12:58.800 like let's call it three to six months, right, Individual 0:12:58.840 --> 0:13:01.680 investors are obviously part of the pie, But then there's 0:13:01.720 --> 0:13:05.600 the asset owners themselves, the pension funds, the sovereign wealth funds, 0:13:05.679 --> 0:13:09.040 like the biggies that kind of engage in asset allocation decisions. 0:13:09.559 --> 0:13:12.080 And I think what's interesting there is that you would 0:13:12.080 --> 0:13:16.040 think that asset allocators would be maxed out on equity 0:13:16.080 --> 0:13:20.000 exposure today, given how well the asset class has done, 0:13:20.120 --> 0:13:23.040 how well stocks have done relative to other asset classes. 0:13:23.080 --> 0:13:26.080 But if you look at the average US pension fund, 0:13:26.679 --> 0:13:31.320 their exposure to public equity to stocks is actually the 0:13:31.360 --> 0:13:36.040 lowest we've seen since the nineteen late nineteen nineties. And 0:13:36.360 --> 0:13:38.880 the reason is that a lot of these pension funds 0:13:38.880 --> 0:13:45.240 have supplanted their exposure to equities with exposure to private 0:13:45.280 --> 0:13:49.000 equity or alternative asset classes or you know, kind of 0:13:49.120 --> 0:13:53.040 less liquid ways to buy growth. And I think that's 0:13:53.160 --> 0:13:57.360 important because where we are today is an environment where 0:13:58.040 --> 0:14:02.839 pension funds have basically supplanted to their exposure to active 0:14:03.760 --> 0:14:09.120 equity like mutual funds and hedge funds with an index fund. 0:14:09.800 --> 0:14:13.000 But they've actually replaced a lot of that equity exposure 0:14:13.160 --> 0:14:16.440 with other asset classes in this search for growth, and 0:14:16.480 --> 0:14:21.880 I think that's potentially more problematic for ill liquid asset 0:14:21.880 --> 0:14:25.080 classes like private credit and private equity, and asset classes 0:14:25.080 --> 0:14:28.840 that haven't necessarily been marked to this current environment of 0:14:28.880 --> 0:14:31.840 a little bit higher rates and inflation than it is 0:14:31.960 --> 0:14:35.840 for public equities. So that's one measure of positioning. The 0:14:35.880 --> 0:14:39.520 other measure of positioning that I've followed my entire career 0:14:39.720 --> 0:14:41.680 at Bank of America, and I inherited this from my 0:14:41.760 --> 0:14:45.400 former boss, Rich Bernstein, who was our strategist at Merrill 0:14:45.440 --> 0:14:47.400 Lynch for many many years, and I think he may 0:14:47.440 --> 0:14:51.440 have inherited it from somebody before him. Is it's called 0:14:51.440 --> 0:14:54.600 the Cell side Indicator, and it's the reason I always 0:14:54.600 --> 0:14:57.000 go back to this model is that it has been 0:14:57.520 --> 0:15:02.120 the most predictive market timing model for the S and 0:15:02.120 --> 0:15:05.960 P five hundred over a twelve month time horizon, more 0:15:05.960 --> 0:15:09.320 predictive than anything else I've been able to find. And 0:15:09.640 --> 0:15:12.200 what we do in this cell side indicator is we 0:15:12.240 --> 0:15:15.480 look at our peers and ourselves, and we say how 0:15:15.480 --> 0:15:18.920 bullish or bearish are we by virtue of one number, 0:15:19.360 --> 0:15:23.960 which is our recommended allocation to equities in a balanced portfolio. 0:15:24.080 --> 0:15:26.440 So when you talk to your broker and he or 0:15:26.520 --> 0:15:29.160 she tells you we think you should put sixty percent 0:15:29.200 --> 0:15:31.720 into stocks and you know, thirty percent into bonds and 0:15:31.720 --> 0:15:34.760 ten percent into cash. We take that stock allocation, we 0:15:34.800 --> 0:15:38.840 average it together across the entire Wall Street bulge bracket firms, 0:15:39.280 --> 0:15:41.400 and we look at what that average allocation is, and 0:15:41.480 --> 0:15:45.240 it has waxed and waned between something like forty percent 0:15:45.480 --> 0:15:48.200 and seventy percent. It's been all over the place over 0:15:48.240 --> 0:15:51.040 the last thirty or forty years. But what we found 0:15:51.080 --> 0:15:53.680 is that when it's at very bearish or bullish extremes, 0:15:53.880 --> 0:15:56.320 you should do the opposite of what we're all telling 0:15:56.360 --> 0:15:59.600 you to do. And I think what's interesting is that 0:15:59.680 --> 0:16:02.720 we're not at a bullish extreme. We're at a point 0:16:02.800 --> 0:16:06.280 where your average market strategist is recommending that you put 0:16:06.280 --> 0:16:11.200 about fifty five percent of your assets into equities, which 0:16:11.240 --> 0:16:15.320 is kind of surprising given that we've seen dramatic outperformance 0:16:15.360 --> 0:16:18.040 of equities relative to other asset classes over the last 0:16:18.080 --> 0:16:22.320 couple of years surprise gains in the SMP versus other indices, 0:16:23.160 --> 0:16:25.000 it's a little bit surprising to see that there is 0:16:25.040 --> 0:16:28.680 still this very tepid allocation to stocks. I mean, the 0:16:28.720 --> 0:16:31.760 benchmark for years has been sixty percent stocks, and we're 0:16:31.800 --> 0:16:34.600 still shy of that. So it's not to say that 0:16:34.680 --> 0:16:38.040 folks out there are bearish and under the table and 0:16:38.160 --> 0:16:41.200 hiding and putting all their money in cash and gold 0:16:41.360 --> 0:16:44.720 and under the mattress. But I think we're at a 0:16:44.760 --> 0:16:49.120 point where we're far from that euphoric level on equities 0:16:49.120 --> 0:16:52.440 that typically heralds the end of a bull market. 0:17:08.119 --> 0:17:12.399 How much of the rise in stocks is an interest 0:17:12.480 --> 0:17:15.920 rates story? Going back to the beginning of this discussion, 0:17:16.000 --> 0:17:19.280 because part of the idea here is that, all right, well, 0:17:19.880 --> 0:17:22.639 the FED might cut interest rates, but the reason it 0:17:22.680 --> 0:17:27.479 would be cutting interest rates is because economic growth is deteriorating, like, 0:17:27.560 --> 0:17:30.480 maybe not substantially, but it's weakening a little bit, and 0:17:30.600 --> 0:17:34.359 so it's trying to get ahead of a potential recession 0:17:34.480 --> 0:17:38.000 or something like that. Is that perhaps why there's some 0:17:38.160 --> 0:17:43.000 reticence on the cell side to jump into stocks wholeheartedly 0:17:43.040 --> 0:17:43.600 at this point. 0:17:43.800 --> 0:17:46.480 You mean, because of the fact that we're likely moving 0:17:46.520 --> 0:17:48.080 into a lower growth environment. 0:17:48.200 --> 0:17:48.880 Yes, exactly. 0:17:49.080 --> 0:17:53.040 Yeah, I think that is really the underpinnings of this caution. 0:17:53.200 --> 0:17:55.560 And I mean, if you think about it, since the 0:17:55.640 --> 0:18:03.040 beginning of twenty twenty two, we had economists bracing us 0:18:03.040 --> 0:18:06.800 for this recession that was going to happen and it 0:18:06.880 --> 0:18:09.000 was going to be in two quarters, and it kept 0:18:09.000 --> 0:18:11.679 getting kind of pushed out. So we've been in this 0:18:11.840 --> 0:18:15.680 environment where we've been sort of waiting for this recession 0:18:16.080 --> 0:18:19.679 that hasn't happened, and it's hard to really pound the 0:18:19.720 --> 0:18:24.160 table on equities if you're expecting an economic recession, right, 0:18:24.240 --> 0:18:26.640 this is the wall of worry, basically the wall of warry. Yeah. 0:18:26.920 --> 0:18:30.000 And then I think on top of that, we've had healthy, 0:18:30.200 --> 0:18:34.119 attractive returns in the risk free rate. So you know, 0:18:34.320 --> 0:18:37.440 this is the Tina argument is now sort of debunked 0:18:37.480 --> 0:18:40.720 because you can get great returns and you know, in 0:18:41.240 --> 0:18:44.440 money market accounts and you don't have to take any risk. 0:18:44.760 --> 0:18:48.040 So I think that that's the other problem with allocating 0:18:48.040 --> 0:18:51.600 too aggressively to stocks. But you know, what's what's interesting 0:18:51.680 --> 0:18:53.399 is that if you go back over time and you 0:18:53.440 --> 0:18:59.159 look at allocations during periods when cash yields were this high, 0:19:00.000 --> 0:19:04.000 allocation to stocks, we're actually higher than where they are today. 0:19:04.119 --> 0:19:06.160 I think we're just in an environment where we're all 0:19:06.200 --> 0:19:10.200 so surprised that you can actually make any money off 0:19:10.240 --> 0:19:15.280 of bonds and cash after getting nothing for a decade, 0:19:16.000 --> 0:19:20.520 that it's almost made those asset classes that much more attractive, 0:19:20.600 --> 0:19:23.800 or surprisingly attractive. And I think there's very little acknowledgment 0:19:23.840 --> 0:19:26.480 that rates can actually continue to move higher rather than 0:19:26.520 --> 0:19:29.800 come down. So if you're bearish on stocks because you 0:19:29.840 --> 0:19:32.800 can get better yield in cash, I get it. But 0:19:33.000 --> 0:19:35.560 if the FED is about to start cutting interest rates 0:19:36.080 --> 0:19:38.840 and most of the assets sitting on balance sheets of 0:19:38.880 --> 0:19:43.200 individual investors are in money market funds and retirey accounts, 0:19:43.200 --> 0:19:45.520 where they're looking for investments they can live off of, 0:19:46.160 --> 0:19:48.000 my sense is that as we start to see short 0:19:48.080 --> 0:19:51.199 rates come down, if that happens this year, they'll be 0:19:51.280 --> 0:19:54.840 forced to look for other areas of higher yield, which 0:19:55.280 --> 0:19:58.240 basically pushes them a little bit higher up the risk spectrum, 0:19:58.280 --> 0:20:02.360 back into good old bast equity income or utilities and 0:20:02.880 --> 0:20:06.080 financials and even real estate companies. So I think those 0:20:06.080 --> 0:20:08.760 are some of the considerations that we're thinking about in 0:20:08.880 --> 0:20:12.880 terms of what is keeping investors on the sidelines when 0:20:12.880 --> 0:20:15.120 it comes to equities, but what could push them back 0:20:15.160 --> 0:20:16.000 into equities? 0:20:16.440 --> 0:20:18.879 So I want to press a little bit further on 0:20:19.320 --> 0:20:22.359 this idea of maybe it's not a contradiction, but that 0:20:22.600 --> 0:20:25.119 stocks have been fined even with the rate move up 0:20:25.160 --> 0:20:28.239 and even with the higher for longer becoming consensus. So 0:20:28.280 --> 0:20:31.359 I take your point that over long periods of time 0:20:31.960 --> 0:20:34.160 or medium periods of time, the S and P five 0:20:34.240 --> 0:20:37.160 hundred is just not as rate sensitive as it might 0:20:37.240 --> 0:20:40.080 have been times in the past when companies had more 0:20:40.119 --> 0:20:43.920 dead had more assets, had more rollover risk. What about though, 0:20:44.080 --> 0:20:48.120 just the last two months, which is like if someone 0:20:48.160 --> 0:20:50.400 asks you, why haven't stocks gone down over the last 0:20:50.400 --> 0:20:53.120 two months, after we keep getting these warmer than expected 0:20:53.160 --> 0:20:57.040 inflation prints, after we keep that rate expectation keeps getting 0:20:57.119 --> 0:20:59.359 pushed out. This week we saw the odds of a 0:20:59.440 --> 0:21:02.560 June cut has now fallen below fifty percent. Talk about 0:21:02.600 --> 0:21:03.920 that ongoing resilience. 0:21:04.480 --> 0:21:07.600 I mean, I think it's really thinking about why the 0:21:07.640 --> 0:21:11.520 Fed's not cutting, And it's the idea that the Fed's 0:21:11.520 --> 0:21:16.320 not cutting because the economy is still running too hot, right, 0:21:16.920 --> 0:21:22.480 And again I think that's not a bad environment for stocks, right, 0:21:22.520 --> 0:21:25.359 I mean, so far we've sort of seen this proof 0:21:25.400 --> 0:21:28.399 of concept, if you will. So when you think about 0:21:28.440 --> 0:21:32.439 the last couple of years, I, along with many was 0:21:32.520 --> 0:21:36.600 expecting to see margins getting hit harder by the fact 0:21:36.640 --> 0:21:40.840 that we went from you know, negative inflation to nine 0:21:40.960 --> 0:21:43.520 percent and then to five and you know, now we're 0:21:43.560 --> 0:21:46.840 a little bit lower. But it's kind of remarkable that 0:21:46.960 --> 0:21:51.960 margins remained relatively intact and healthy during that entire period 0:21:52.040 --> 0:21:59.360 of massive volatility around costs of everything, labor inputs, you know, lumber, 0:21:59.440 --> 0:22:03.760 every thing. Saw a lot more volatility around costs than 0:22:03.800 --> 0:22:06.480 what we were expecting and the what we thought margins 0:22:06.520 --> 0:22:09.920 could actually withstand. So I think that proof of concept 0:22:09.920 --> 0:22:13.919 that you can have the corporate sector navigate that environment, 0:22:14.359 --> 0:22:16.800 you know, still be able to price in many areas 0:22:16.800 --> 0:22:21.479 of the economy. The consumer hasn't slowed down meaningfully. I mean, 0:22:21.480 --> 0:22:24.880 there's been pockets of a slowdown, but in fact, the 0:22:24.920 --> 0:22:28.600 average US consumer is potentially benefiting a bit from higher 0:22:28.600 --> 0:22:32.359 short rates by that spread between their assets and liabilities. 0:22:32.600 --> 0:22:34.400 I mean, I think all of this, we've had two 0:22:34.480 --> 0:22:38.119 years of seeing the fallout of a massive move in 0:22:38.640 --> 0:22:42.439 short rates, and it hasn't necessarily derailed a lot of 0:22:42.480 --> 0:22:45.520