Speaker 1: Hello, and welcome to What Goes Up, a weekly markets podcast.
Speaker 1: My name is Mike Reagan. I'm a senior editor at Bloomberg.
Speaker 2: And I'm Aldona Hirik, Across Asset reportered with Bloomberg.
Speaker 1: And this week on the show, Well, this year's red
Speaker 1: hot stock market finally cooled off a bit in August.
Speaker 1: I followed a blistering rally that saw the S and
Speaker 1: P five hundred gain almost twenty percent and the Nasdaq
Speaker 1: one hundred climbed forty four percent through July. So what
Speaker 1: are we to make of the market running out of
Speaker 1: steam late in the summer. Is it just that typical
Speaker 1: seasonal weakness when investors were all at the beach or
Speaker 1: is there something more going on. We'll get into it
Speaker 1: with a veteran market strategist. First of about a summer's
Speaker 1: almost over, do you have a good summer?
Speaker 2: Well, we know that. You think I was gallivanting around Europe,
Speaker 2: which I did for a little while. Yeah, that was fun.
Speaker 2: Otherwise it just went by really fast.
Speaker 1: I'm ready for fall. I'm ready for the cooler weather.
Speaker 2: I heard you're a big fan of pumpkin spice lattes.
Speaker 2: Not at all, Yeah, you love them. I heard Mike
Speaker 2: Reagan loves pumpkin flavored stuff PSL Pumpkin spice lattes.
Speaker 1: Not at all, Not at all.
Speaker 2: I wonder if our guest likes pumpkin spice lattes. He might.
Speaker 2: He's one of my favorite people to talk to. It's
Speaker 2: Art Hogan, chief market strategist at bet Riley Wealth Art.
Speaker 2: Thank you so much for coming back on the show.
Speaker 3: Thanks so much for having me. I'm very excited to
Speaker 3: do this.
Speaker 2: Do you like pumpkin spice lattes?
Speaker 3: Not really a fan. I like a lot of pumpkin things,
Speaker 3: but not the coffee flavored pumpkin stuff.
Speaker 2: I'm I'm going to spread the rumor that both of
Speaker 2: you like pumpkin flavored stuff. I'm going to tweet it.
Speaker 1: He can't spreading spreading rumors, Vildonna. You're a you're a
Speaker 1: professional journalist. You've got to deal with the facts.
Speaker 2: We need some controversy in our lives, so this, this
Speaker 2: can be it. But Art to start, Mike mentioned at
Speaker 2: the top of the show that we had had this
Speaker 2: blistering rally in the market. So I'm just wondering what
Speaker 2: you're expecting over the next couple of weeks. Do you
Speaker 2: think that we can continue to expect the market to
Speaker 2: digest the gains that we had seen coming into the fall.
Speaker 3: Yeah. I think Mike made a really good point. And
Speaker 3: I think if you look back in history and say,
Speaker 3: what does the SP five hunder do when it gets
Speaker 3: off to a really solid start, And if you looked
Speaker 3: at the last twenty times that the spfif hunder was
Speaker 3: up ten percent or more going into the mid year,
Speaker 3: August and September I have been rough months. That's why
Speaker 3: we call it season lead. Sometimes it takes a little
Speaker 3: bit of a catalyst to remind us, but this year
Speaker 3: it didn't. We just flipped the calendar and August was
Speaker 3: just a bumpy road for all asset classes but certain
Speaker 3: life treasuries, and I think that was part of the problem.
Speaker 3: Yields backed up, but we saw some pretty quick draw downs.
Speaker 3: It was more noticeable and the seven largest AI darlings,
Speaker 3: the Magnicent seven, right, which were off a lot more
Speaker 3: than the index was. But I think that what happens
Speaker 3: is you do sort of look at this and say, Okay,
Speaker 3: these gains sustainable to me. The more important thing that
Speaker 3: happened sort of post Memorial Day and into this August
Speaker 3: the September time frame is the market's really broadening out
Speaker 3: and it's quietly getting some sponsorship for some of the
Speaker 3: underperforming sectors in the first six or seven months this year,
Speaker 3: and by that, I mean, you know, it was all
Speaker 3: about technology, communications services, and consumer discretionary in the first
Speaker 3: half of this year, and all of a sudden, posts
Speaker 3: memorl Day into August, we started to see energy pick up,
Speaker 3: which is great, right, So one of the biggest laggards
Speaker 3: in the SP five hundred is up seven hundred basis
Speaker 3: points over technology in the last month, right, And I
Speaker 3: think that's helpful. Industrials are up three hundred basis points
Speaker 3: or two hundred and seventy basis points above technology, So
Speaker 3: that catch up trade is really important. And I set
Speaker 3: it up that way because I think that's what the
Speaker 3: back end of this year looks like. We can continue
Speaker 3: to have markets grind higher. I really think the trade
Speaker 3: is going to be about, Hey, what didn't work in
Speaker 3: the first of this year. What should I be focusing on?
Speaker 3: And I think investors are looking for that now. The
Speaker 3: other piece of the puzzle that really worked well post
Speaker 3: Memorial Day and continues to out perform is the Russell
Speaker 3: two thousand small caps, big under performer in the front
Speaker 3: half of the year, and I suspect they're going to
Speaker 3: perform in the back half, you know.
Speaker 1: Towards the end of the month. Obviously, we got Jerome
Speaker 1: Powell's speech at Jackson Hole, and the market really seemed
Speaker 1: to take that as a positive. You know, I'm not
Speaker 1: exactly sure what it was. He didn't seem to really
Speaker 1: break too much new ground. But is this sort of
Speaker 1: nascent rebound we've seen from the August folatility is that
Speaker 1: all due to pal Do you think just taking sort
Speaker 1: of the worst case scenario off the table when it
Speaker 1: comes to rates or what? Is it just a coincidence?
Speaker 3: I think he had such an easy comp compared to
Speaker 3: last year. Right So, last year it was Jackson Hole
Speaker 3: j Powell who just crushed the market, came out with
Speaker 3: a comically short speech and talked about how much more
Speaker 3: work they had to do, right so, and looking back
Speaker 3: and say, well, how much has changed year over year,
Speaker 3: I think Jay Powell was a lot more comfortable. You know,
Speaker 3: we just don't know, and we're going to have to
Speaker 3: be careful about it because they're getting to that last
Speaker 3: mile getting headline inflation from three percent out of two percent,
Speaker 3: et cetera. And that's the tricky part because they don't
Speaker 3: want to overdo it and break something, which the Fed
Speaker 3: usually does. They don't want to underdo it and end
Speaker 3: up in a seventy situation where inflation comes rory back.
Speaker 3: So I think he delivered the right message. I don't
Speaker 3: think he made any news unnecessarily. I think navigating by
Speaker 3: the stars and the cloudy sky was kind of the
Speaker 3: highlight for me. But I think if you combine that
Speaker 3: with the path of economic data that we've seen of
Speaker 3: late and yields, finally these sort of calming down a bit, right,
Speaker 3: So if the Treasury curve calms down a bit and
Speaker 3: stills a bit more of a risk on attitude, I
Speaker 3: think that has been helpful for the last couple of days.
Speaker 3: But it's only been you know, two or three days
Speaker 3: in August where we've actually seen much of a rally,
Speaker 3: where most of the month we couldn't put two days
Speaker 3: together in a row. So I think it's you know,
Speaker 3: we continue to have a bit of a bumpy road
Speaker 3: in front of us, but I think the good news
Speaker 3: is we're going to put August in the rear view
Speaker 3: mirror in September is going to come around, and we'll
Speaker 3: get through that as well.
Speaker 2: That's such a good point about having the two days
Speaker 2: in a row, which is a stat one of our
Speaker 2: Bloomberg colleague, Aliena Popina, actually ended up writing about the
Speaker 2: other day, and it was just so surprising to me
Speaker 2: just reflecting on that. So you mentioned the seasonality factor.
Speaker 2: I'm just wondering how much weight we really should be
Speaker 2: putting behind something like seasonality, where people just looking back
Speaker 2: at history say, okay, September tends to be choppy, October
Speaker 2: tends to be choppy. How much weight do we put
Speaker 2: behind those?
Speaker 3: The way I think about it is, I think the
Speaker 3: seasonality piece of the puzzle is a good it's a
Speaker 3: good rule of thumb, but I don't think it's anything
Speaker 3: you change an investment decision for. I think it's important
Speaker 3: to know that historically there are months that are that
Speaker 3: are softer than others, and there's certainly cycles like the
Speaker 3: presidential election cycle that are important. I think in general,
Speaker 3: it's just it's more of a it's more of a
Speaker 3: guide post for you to say, Okay, this may be
Speaker 3: the reason why we're seeing softest, but it's all, it's
Speaker 3: never going to be the reason that you want to
Speaker 3: change your long term investment ws.
Speaker 1: You know art you mentioned earlier Magnificent seven, you know,
Speaker 1: the big megacap text shares at the top of the
Speaker 1: S and P five hundred US waiting top of the
Speaker 1: Nazek one hundreds waiting to The whole frenzy towards AI
Speaker 1: has been kind of fascinating to me because, you know,
Speaker 1: we're used to seeing something like that built entirely on hype,
Speaker 1: but in this case, you know, the fundamentals seem to
Speaker 1: be coming in early, hand in hand with the hype.
Speaker 1: You know, every time in Video puts out a forecast
Speaker 1: or its earnings release, it's like wow, you know, it's
Speaker 1: like this is real here and now fundamental improvement based
Speaker 1: on this AI theme, at least for n Video, but
Speaker 1: I'm sure for others, you know, the cloud service providers
Speaker 1: and all that. So how are you thinking about that
Speaker 1: sort of separating the hype from the actual fundamentals in
Speaker 1: the AI plays and where do you see it going?
Speaker 1: Like to me, it almost feels like with stocks that big,
Speaker 1: market caps that big, and sort of this speculative frenzy
Speaker 1: around AI. It seems like kind of a dangerous combination
Speaker 1: for volatility potentially until we out the winners and losers
Speaker 1: of AI more completely and comprehensively. But I'm curious how
Speaker 1: you're thinking about sort of that that hype combined with
Speaker 1: actual fundamental improvement so quickly in the cycle of something
Speaker 1: that's being hyped.
Speaker 3: Like this, right, such a great point, and I think
Speaker 3: you set it up perfectly. I think when you think
Speaker 3: about anything new, the best analog for me is going
Speaker 3: back to ninety five to two thousand when we think
Speaker 3: about the Internet, right, So, the Internet and dot com revolution,
Speaker 3: and that was going to change the world. And what's
Speaker 3: interesting to me is that going back to that timeframe
Speaker 3: and say, yes, ninety five companies started company public and
Speaker 3: then it really got a head of esteem into ninety seven,
Speaker 3: eight hundred and fifty three companies came public and most
Speaker 3: of them didn't even have business models, but they put
Speaker 3: dot com at the end of their name, and we
Speaker 3: can remember all of those and that virtually all of
Speaker 3: them are gone now, right, and virtually the winners in
Speaker 3: the Internet cycle, and you and I using it in
Speaker 3: our daily basis really didn't happen. Is so two thousand
Speaker 3: and five right, So that total adres market and that
Speaker 3: opportunity took the better part of a decade. So what's
Speaker 3: different now is, first and foremost, we haven't had just
Speaker 3: a flood of new, newly minted companies that are AI
Speaker 3: specific or have AI adjacency, or have AI attributes. And
Speaker 3: that's good. So there's not that sort of speculative bubble
Speaker 3: and newly minted companies. I think that's very powerful and
Speaker 3: a big difference, and I think that's healthy. I also
Speaker 3: think the time is going to be compressed between when
Speaker 3: companies adopt an AI strategy as part of their business
Speaker 3: model and may monetize it, So I don't think we
Speaker 3: wait a decade to see this happen. We've certainly seen
Speaker 3: Nvidia growing their revenues because they're making the only chip
Speaker 3: in town that really drives enough GPUs for companies to
Speaker 3: actually have that AI strategy. So I would say as
Speaker 3: an investor, the two things I would say early on
Speaker 3: here is to say, yes, this is new and exciting.
Speaker 3: We don't know how big this gets, but who are
Speaker 3: the obvious players? And Video is obviously the leader here
Speaker 3: and every time they report they raise their quarterly guidance
Speaker 3: in billions of and while there's still the only game
Speaker 3: in town, and they are right now and they've got
Speaker 3: the early, early lead. They will eventually get some competition,
Speaker 3: but for now, I think that's that's a safe place
Speaker 3: to be if you want to have some force near
Speaker 3: your portfolio there. And then the two incumbents are obvious,
Speaker 3: right that the you know, the hyperscalers that can actually
Speaker 3: use this right away and afford to develop an AI strategy.
Speaker 3: See that's obviously Google and in Microsoft right and every
Speaker 3: week there to come out with a different announcement and
Speaker 3: talk about about how much you're going to charge for it.
Speaker 3: But the difference that makes in the near term for
Speaker 3: those two companies is much smaller than the difference that
Speaker 3: it has made for in video. So you know, to me,
Speaker 3: there's three obvious players, but I would overweight the guys
Speaker 3: that are selling the picks and shovels to the gold rush.
Speaker 3: And that's in video right now, and clearly it's It's
Speaker 3: what's amazing to me is it's a lot cheaper than
Speaker 3: it was when they reported their earnings a week or
Speaker 3: so ago, and and you know, you might have some
Speaker 3: better opportunities here. So they sharpen your pencil, but don't
Speaker 3: jump in and never put on a full position at
Speaker 3: one time, and any of these things. But the biggest
Speaker 3: thing I'd be concerned about is if we start to
Speaker 3: see the capital markets open, we start to have a
Speaker 3: flood of newly minted companies that are AI specific or adjacent.
Speaker 3: I would avoid that at all costs because they likely
Speaker 3: don't have models. There's gonna be a lot of hype
Speaker 3: around them. They're going to get priced at twenty and
Speaker 3: litle bit at sixty, and that doesn't end well for anybody.
Speaker 2: It's like when a couple of years ago a bunch
Speaker 2: of companies were adding just blockchain to their name. Right,
Speaker 2: I do have another question about the big tech companies
Speaker 2: for you. There was this really interesting report from Bloomberg
Speaker 2: Intelligence this week that said, looking over the past five, ten,
Speaker 2: fifteen years, there's only one equity mutual fund that has
Speaker 2: outperformed QQQ, which is the giant NAZAQ one hundred ETF.
Speaker 2: Just one has outperformed QQQ over that timeframe, and it's
Speaker 2: because they had a heavyweighting towards Tesla. Wondering what you
Speaker 2: make of something like that and just how difficult it's
Speaker 2: been to beat these giant, giant companies that have just
Speaker 2: been doing so well.
Speaker 3: Yeah, anytime, friend that you look at it, you're always
Speaker 3: going to see a high percentage of active managers, whether
Speaker 3: they're running mutual funds or to tap asset management firms
Speaker 3: or have their own funds, beating the market, and especially
Speaker 3: a market that is driven at least over the course
Speaker 3: of the last call it two or three years, by
Speaker 3: the five or ten largest names in the SPF voter. Now,
Speaker 3: that's nothing new to us, right If you go back
Speaker 3: to the last fifty years or at least thirty years,
Speaker 3: you could pick every decade and say, what were the
Speaker 3: top five names of the SPFF voter. It's just the
Speaker 3: names change, but the size because of the way the
Speaker 3: SPF hutter is made up. But it's a market cap
Speaker 3: weighted index, they always have an outsize impact on the
Speaker 3: overall index. And it used to be companies like Exxon
Speaker 3: Mobile and General Electric and AT and T, and over
Speaker 3: the years, that's kind of obviously shifted over to companies
Speaker 3: like Apple and Alphabet and Facebook. And I think that
Speaker 3: that's going to change again, you know, ten years from now.
Speaker 3: But I think in general that the sort of active
Speaker 3: management versus passive management or active versus ETFs is a
Speaker 3: very difficult game to play, and it's a very few
Speaker 3: you know folks have had a long term record of
Speaker 3: beating right and and I'll ask you a question. Name
Speaker 3: for me a hero of viewers that is a long
Speaker 3: only fund manager, because what I was your age. I'm
Speaker 3: going to have five names for you.
Speaker 2: This is a trick question because there aren't.
Speaker 3: If you can't name any, then there's none in your life.
Speaker 3: Right So, you know, when I started the business, Peter
Speaker 3: Lynch was a rockstar type portfolio manager and had you know,
Speaker 3: outperformed for years, but nobody was invested in the market.
Speaker 3: Nobody could buy the Triple Cues or the Spiders. You know,
Speaker 3: we just didn't have as much passive back then. So
Speaker 3: it's made that role that much more difficult. Warren Buffett
Speaker 3: I Sposh falls into that category, but different investment style.
Speaker 3: But you know, four years and years you would you
Speaker 3: would have your favorite long only portfolio manager at the
Speaker 3: tip of your tongue. And right now I can't find
Speaker 3: anybody that just has that answer for me right away.
Speaker 1: Mike well Art, I'm glad you brought up Lynch. I
Speaker 1: actually have a Peter Lynch related question for you, because
Speaker 1: I was reading one of your notes and I found
Speaker 1: this interesting. He wrote, we foresee a path to S
Speaker 1: and P five hundred earnings of two hundred and thirty
Speaker 1: dollars for twenty twenty three and two point fifty in
Speaker 1: twenty twenty four. Now, this is what I found interesting.
Speaker 1: Using a twenty multiple on the blended earnings of two
Speaker 1: forty gets us to forty eight hundred for the SP
Speaker 1: five hundred. I'm curious how you got to that twenty
Speaker 1: multiple because I always think back to Peter Lynch and
Speaker 1: his rule of twenty. You know that the multiple plus
Speaker 1: the rate of inflation in a fair market should equal twenty. Now,
Speaker 1: there's plenty of examples of it being below and above that,
Speaker 1: but it does kind of average out to that interestingly.
Speaker 3: So, unfortunately, for the last ten years, if you applied
Speaker 3: the rule of twenty, which is a discipline that I've
Speaker 3: always tried to use, you would have been out of
Speaker 3: You would have been out of the market for most
Speaker 3: of the time. Part of that was the fact that
Speaker 3: we have very low inflation, and then we shifted the
Speaker 3: very high inflation or a very short period of time.
Speaker 3: I think that what I tried to do is taken
Speaker 3: it and that twenty multiple is obviously a trailing multiple,
Speaker 3: not a not a forward multiple, so it's a you know,
Speaker 3: I think that makes it a little bit easier to
Speaker 3: sort of justify. And I said, what what does that
Speaker 3: multiple look like on the end of the year for
Speaker 3: the last five years, And that's ad her about where
Speaker 3: it is and my role as a strategy. You have
Speaker 3: to come up with a number, and I was at
Speaker 3: forty four hundred, and everyone thought I was crazy in January,
Speaker 3: you know, having to have something in print and not
Speaker 3: having people saying, oh, so you think the market's going down.
Speaker 3: I just kind of rolled out to what we think
Speaker 3: twenty four looks like. And we're confident in that estimates
Speaker 3: we have both this year and next year because after
Speaker 3: the second quarter earage reporting season, the estimates went up,
Speaker 3: not down, which is you know doesn't always happen. And
Speaker 3: we saw no degradation of the of the twenty four estimates,
Speaker 3: which is a positive. A lot of that can change.
Speaker 3: It is a moving target, but you're right. It's like
Speaker 3: it was difficult to type that number when I put
Speaker 3: it down, but I felt a little more confident was
Speaker 3: kind of looking out a bit further and using what
Speaker 3: the average was for the last five years.
Speaker 1: Yeah, well that's the thing though, it does seem it
Speaker 1: does seem like a reasonable multiple in the state and age.
Speaker 1: You know, I guess I've been kind of surprised that
Speaker 1: this acceleration in inflation and interest rates hasn't knocked the
Speaker 1: multiple down further. You know, is there you know, is
Speaker 1: the multiple just you know, signaling that the market believes
Speaker 1: inflation and rates are going to normalize back to pre
Speaker 1: COVID levels, do you think?
Speaker 3: I don't know if they believe that they're going to
Speaker 3: normalize back to pre COVID levels, but they certainly believe
Speaker 3: they're heading in that direction. Right, So you know, we
Speaker 3: headline CPI going from nine percent to three percent, obviously
Speaker 3: we're heading in the right direction. So no one's going
Speaker 3: to use, you know, what inflation was six months ago
Speaker 3: or three months ago. They're going to use what they
Speaker 3: think it's going to be in six months. And I
Speaker 3: believe it's going to have a two handle, especially if
Speaker 3: we start to get shelter costs in line with reality,
Speaker 3: right that the government uses something owner's equivalent rent, which
Speaker 3: has got a lag of six to twelve months because
Speaker 3: it's kind of survey, right, But if you look at
Speaker 3: you know, any of the other real time data, you know,
Speaker 3: like Zilo or redfin or any of the folks that
Speaker 3: give us that real time data, we know that that's
Speaker 3: off by a bit. So I think that the inflation
Speaker 3: numbers just naturally have more to come down, and I
Speaker 3: think that helps sort of justify a bit of a
Speaker 3: higher multiple than we normally would have if in fact
Speaker 3: you and I were sally using the rule of twenty
Speaker 3: and subtracting the current inflation rate. So I think it's
Speaker 3: I think that's where the difference lies. The other thing
Speaker 3: I think about two is, you know, we talked about
Speaker 3: the S and P five hundred and that multiple, but
Speaker 3: adding one of those five years, if you were to
Speaker 3: back out the top ten stocks, the multiple has been
Speaker 3: add or about fifteen between fifteen and fifteen and a
Speaker 3: half and it continues to be the case. So again
Speaker 3: that's the tricky part about having five hundred stocks where
Speaker 3: the ten of them have the most influence and are
Speaker 3: attributed much higher multiples because they have much higher growth
Speaker 3: rates in general.
Speaker 2: So speaking of different ways, to look at valuations for
Speaker 2: the market. I actually had called you about this a
Speaker 2: couple of days ago because I was trying to find
Speaker 2: a different way of measuring the rally that we had
Speaker 2: seen in the s and P five hundred so far
Speaker 2: this year. So if we take the SMP five hundred
Speaker 2: market cap and we divide it by nominal GDP, or
Speaker 2: if we take it and divided by CPI, the gains
Speaker 2: just aren't as great as you know, whatever we had
Speaker 2: we had risen as much as twenty percent this year,
Speaker 2: nearing those all time highs that we had seen at
Speaker 2: the start of twenty twenty two. It's just not there's
Speaker 2: just much further to go to reclaim those highs.
Speaker 3: I think that's such a great exercise because what it
Speaker 3: tells you is two things. In my mind. I forget,
Speaker 3: it tells you that the Fed that has, you know,
Speaker 3: a thousand economists looking at markets probably feel a whole
Speaker 3: lot more comfortable with how far we've come during What
Speaker 3: they've been trying to do is kind of tighten financial
Speaker 3: conditions because they can live in a nominal world. Right
Speaker 3: they say, Okay, the market's up, but not not when
Speaker 3: you factor in GDP, or if you factor in inflation. Now,
Speaker 3: you and I and the rest of the investing world
Speaker 3: likely get our wealth effect from the notional gains that
Speaker 3: we have. Right, So you know, if I bought Apple
Speaker 3: at fifty dollars in the cell where it closed, I
Speaker 3: don't factor in inflation there, right, factor in my gains
Speaker 3: and say, okay, I feel this much more wealthy. So
Speaker 3: the wealth effect can actually be in place for the
Speaker 3: games that the market have had notionally, while the FED
Speaker 3: can rest a little easier as they look at the
Speaker 3: games nominally. And I think that's that's the difference. When
Speaker 3: you look at that exercise, I thought, I thought it
Speaker 3: was a great question, and and and believe me, when
Speaker 3: I think about this more and more, I think it
Speaker 3: helps the FED feel more comfortable. The financial conditions aren't
Speaker 3: quite as tight as or as loose as they feel
Speaker 3: like they are. You know, everyone has this feeling. It's
Speaker 3: this is all make an analogy for you. So everyone
Speaker 3: thinks the FED thinks about the stock market more than
Speaker 3: they actually do. Right, we all believe it's like, oh,
Speaker 3: the Fed, if the Fed sees the market go up
Speaker 3: as much as it has, they're going to keep tightening.
Speaker 3: I don't think they give it as much thought. And
Speaker 3: then then I always try to equate that with I'm
Speaker 3: a Red Sox fan, and I assume no, I assume
Speaker 3: everyone in the York hates the Red Sox as much
Speaker 3: as we hate the Yankees, Right, But I think that
Speaker 3: the same way the FED looks at this, Right, So,
Speaker 3: I think that the Feds like, yeah, whatever, that's the
Speaker 3: market over. I think the Yankees fans are like, yeah,
Speaker 3: it's just the Red Sox.
Speaker 2: We don't think about you guys.
Speaker 3: Right exactly. You're not that passionate about about how you
Speaker 3: feel about us. And I think the I think the
Speaker 3: FED thinks the same way as Yankee fans do about
Speaker 3: the Red Sox about the market, and especially if they
Speaker 3: can use that, Hey, if I compare this to inflation
Speaker 3: or GDP, I feel like the market's actually gone up less.
Speaker 1: You know, Art, you've written that you favor a quote
Speaker 1: unquote Barbell approach to investing with one end focused on
Speaker 1: things we need versus things we want. To talk to
Speaker 1: us a little bit about what you mean by that.
Speaker 1: That's an interesting concept.
Speaker 3: Yeah, so things appreciate for it, the things we need healthcare, right,
Speaker 3: things we need energy, things we need staples, right, those
Speaker 3: types of things, and I think about that in that bucket,
Speaker 3: and if you were to balance that off with things
Speaker 3: that you want, typically you're going to find that in
Speaker 3: a lot of the growthier names for a lot of reason.
Speaker 3: And when you set this up at the beginning of
Speaker 3: the year, it's not a set out and forget it.
Speaker 3: So you've got an equal waiting on either side of
Speaker 3: that barbell. And every quarter when you rebalance, you're literally
Speaker 3: selling some of your winners and buying some of your losers.
Speaker 3: And if you were to take that, and we did,
Speaker 3: we ran the numbers last year and in the six
Speaker 3: months of this year, you kind of look at us.
Speaker 3: It's kind of a discipline way of staying diversified and balanced.
Speaker 3: And you actually put money into energy at a great time,
Speaker 3: and you took some profits and technology at a very
Speaker 3: good time. So it's very much of those You know,
Speaker 3: I want the Apple fifteen. I don't need it because
Speaker 3: I've got an eleven right here, but I want it.
Speaker 3: Those are the things that I want. Things that I need.
Speaker 3: I certainly need healthcare, and I certainly need energy, and
Speaker 3: to a certain extent, which has it worked yet, but
Speaker 3: I believe it's going to as I look at one
Speaker 3: of the other laggards, I think financials fall into that category.
Speaker 3: But there's so much noise around you know, what new
Speaker 3: regulation is going to look like, and when netager's income
Speaker 3: improves and all of that. But I think that's probably
Speaker 3: one of the cheapest spaces in the S and P five.
Speaker 3: That's one of our three in that basket. It's energy, healthcare.
Speaker 3: Financials used to be stables, but they got too expensive.
Speaker 3: They're getting better now. But on the other side, it's
Speaker 3: pretty obvious, you know where we be on the on
Speaker 3: the growth of your side.
Speaker 2: Well, how does the FED play into what we can
Speaker 2: expect from the market going forward? Like what how high
Speaker 2: is the bar for a September hike and what else
Speaker 2: do you expect from the Fed.
Speaker 3: The good news is this time of year, the Fed's
Speaker 3: had a couple of long breaks in between meetings, right,
Speaker 3: So you got July meeting, September meeting, no October meeting,
Speaker 3: and a November meeting, right, So you've got that sort
Speaker 3: of you know, on again, off again Fed. So it's
Speaker 3: less of a concern. So we put less attention on
Speaker 3: every single data point, which I think is always a mistake,
Speaker 3: So nobody is going to use any one single data
Speaker 3: point and say, oh, this means the FED has to
Speaker 3: do this, right. I think the consensus has it about
Speaker 3: right that there's about a twenty percent chance that they
Speaker 3: might raise by twenty five basis points in September. I
Speaker 3: don't think they're going to, but then they've got this
Speaker 3: whole plethora of data that they get to see before
Speaker 3: they meet again in November, and I think that's a
Speaker 3: real positive. I think that there's a you know, a
Speaker 3: chance that the path of inflation continues apace, that they
Speaker 3: will feel that they've made significant progress towards their symmetric
Speaker 3: two percent target, and we may have seen the last
Speaker 3: of the rate hikes. Now another rate hike if they
Speaker 3: do go and November, is not going to sort of
Speaker 3: break the market. But I certainly think they've already gone
Speaker 3: far enough. I think there's there's really long lags of
Speaker 3: monetary policy. Typically. I think that the lags are much
Speaker 3: longer right now in the here and now. The reason
Speaker 3: I say that is the majority of consumer debt is
Speaker 3: tied up in mortgages, and the majority of that's below
Speaker 3: four percent, So nobody has felt the bite of higher
Speaker 3: mortgage rates unless you're one of the new home buyers, right,
Speaker 3: so you know you haven't really felt this. Of the
Speaker 3: SP five hundred's debt doesn't have to be repaid until
Speaker 3: twenty thirty, So Corporate America is not feeling the bite either.
Speaker 3: I think everyone sort of looked at this, like you
Speaker 3: refinancing lower. Corporate America looked at this and said, Okay,
Speaker 3: I'm pushing my duration out at these low rates. So
Speaker 3: both the consumer and Corporate America haven't really felt the
Speaker 3: bite of all of the monetary policy that we put
Speaker 3: in place now all around the edges. Obviously everyone has
Speaker 3: and than a new home buyer, I said, pay seven
Speaker 3: point four percent for a thirty year fixed. That's taking
Speaker 3: a bite, but it's not taking a bite on the majority, right,
Speaker 3: the majority of consumers that have debt that they're probably
Speaker 3: not going to roll over. So I think that causes
Speaker 3: an even longer lag in this monetary policy process. I
Speaker 3: think we've seen the last of the hikes, and I
Speaker 3: think the market celebrates that we can get to pause
Speaker 3: in the September. That's consensus, that's not a surprise. If
Speaker 3: we don't get a radio in November. I feel like
Speaker 3: that's going to signal that they're getting closer where they
Speaker 3: need to be. The real question won't be how high
Speaker 3: anymore to be how long And consensus now has it
Speaker 3: way out to the second half of next year. I
Speaker 3: think there's a small number of people think June there
Speaker 3: might be a cut, And I think that the talk
Speaker 3: about when they cut really has to do more with
Speaker 3: are they overrestrictive now?
Speaker 1: Right?
Speaker 3: So, if we start to see the path of inflation
Speaker 3: come down at the pace that it's been coming down,
Speaker 3: and they're sitting at five and a half in the
Speaker 3: FED funds rate and there's a two hundred basis point
Speaker 3: delta between the current inflation rate, that's going to be
Speaker 3: overlad that's going to be overly restricted. And the reason
Speaker 3: that they'd want to cut is to get that somewhere
Speaker 3: between a D and fifty underd and seventy five basis points.
Speaker 3: Doesn't have to mean the wheels are coming off the
Speaker 3: cart because they're cutting it. It just means that, hey,
Speaker 3: we're restricted enough. And the j Paltton was the last presser,
Speaker 3: not Jacksonville, but at the last meeting even said we
Speaker 3: wait till we get to two percent. We've waited too long.
Speaker 3: We have to start adjusting policy and become less restrictive
Speaker 3: to normalized rates. So I think that happens in the
Speaker 3: back half of next year. The market is kind of
Speaker 3: sniffed that out, and I think that, you know, we're
Speaker 3: setting up in my mind, this August in September period
Speaker 3: is really setting up nicely for a year round rally.
Speaker 3: And why do I say that? If you look at
Speaker 3: all the survey data, So whether it's the AAII, the
Speaker 3: first time it's been Parish in twelve weeks was this week.
Speaker 3: People are waking up and saying, Okay, you know something's
Speaker 3: going on here. Is the individual Investor survey outrageously low,
Speaker 3: the lowest we've seen it for the year. So sentiment
Speaker 3: is starting to wind that. We're starting to wind down
Speaker 3: a lot of the positioning, the bull is positioning that
Speaker 3: we sort of exited July with, and the sentiment is
Speaker 3: rolling over nicely as well. So it's it's funny how
Speaker 3: a sloty August can kind of change that mindset and
Speaker 3: and kind of get us reset back to, you know,
Speaker 3: something more realistic. So the more the more these surveys
Speaker 3: start to read Parish, the more confident I feel that
Speaker 3: we're setting up nicely for a run into the end
Speaker 3: of the year.
Speaker 1: Well, or does you know? Life is full surprises? Who
Speaker 1: would have thought we'd ever be looking at the Red
Speaker 1: Sox and Yankees battling for last place in the allis
Speaker 1: I hate to throw that out. You do have bragging
Speaker 1: rights over the Yikees this year at least, though, I
Speaker 1: think you still got about ten games up with the Yankees.
Speaker 1: If I were to summarize your outlook, I would say
Speaker 1: you're pretty bullish, kind of in the soft landing camp.
Speaker 1: The market set up for a nice year end rally.
Speaker 1: But what what worries you? You know, what's your main
Speaker 1: risk that you would be either surprised or not by.
Speaker 1: But we know what's sort of the surprise that would
Speaker 1: sort of turn your sentiment around.
Speaker 3: China becomes Japan and goes through a last decade, right, So,
Speaker 3: China went through a different sort of pandemic experience. Most
Speaker 3: of the developed world went through this sort of longer
Speaker 3: than we expected, but locked down, reopening process, a lot
Speaker 3: of stimulus, and we're able to sort of go through
Speaker 3: a very very much of a v shape recovery. And
Speaker 3: China just hasn't experienced that, so you know, after three
Speaker 3: years of onig and off again, they're trying to reopen,
Speaker 3: never stimulated the consumer, and they're really you know, turning
Speaker 3: into a consumer driven economy. So it's not as though
Speaker 3: there's a big savings rate by the Chinese consumer. That's important.
Speaker 3: Their demographics are getting older. That's difficult. And what we
Speaker 3: haven't seen yet is the typical China state government stepping
Speaker 3: in is stimulating. We do with some things around the
Speaker 3: edges that that aren't really effective. But without them fixing
Speaker 3: some stimulus and driving their economy to get anywhere close
Speaker 3: to their five percent GDP goals, the global economy's not
Speaker 3: going to have the kind of recovery that we're anticipating.
Speaker 3: Right The reopening of China is going to drive demand
Speaker 3: for goods and services globally, and it just hasn't happened yet,
Speaker 3: So that would be the biggest thing. I don't think
Speaker 3: they have a lost decade, and I do think they
Speaker 3: get back to the normal patterns, but they've got a
Speaker 3: lot of things they have to deal with. Pilot debt,
Speaker 3: really bad real estate puldings all across the board, on
Speaker 3: again off again relationships with the United States, so we'll
Speaker 3: have to wait and see. That's probably you know, the
Speaker 3: closest to a black swan that kind of is out there,
Speaker 3: I think. Yeah, And then anything else that sort of
Speaker 3: significantly disrupts the supply of energy because the blind demand
Speaker 3: dynamics are really pretty tight right now. Right so Russia's
Speaker 3: pumping as much as they can and they're not sort
Speaker 3: of operating with Opek. But Opek wants to keep prices
Speaker 3: at are about, you know, one hundred bucks and here
Speaker 3: we are at eighty bucks. So if Opek really gets
Speaker 3: religion and decides to really crank it down, and we
Speaker 3: don't see an increase in the US supply, which we are,
Speaker 3: I mean, we're gradually pumping more every every week. We'll
Speaker 3: probably be at a record in the first quarter this year.
Speaker 3: But if something we're to disrupt that, you know, that'd
Speaker 3: be the second thing that would be out there, because that,
Speaker 3: you know, that hurts everybody.
Speaker 1: I'm glad you brought up China. Is it surprising at
Speaker 1: all to you to watch all these credit issues in China?
Speaker 1: Country Garden, Evergrand All the developers are basically underwater on
Speaker 1: all these construction projects, very aggressive development projects. They were
Speaker 1: engaged in Is it surprising to you that that's not
Speaker 1: a bigger theme in the US and global markets right now?
Speaker 1: I mean, you know, not too long ago, any hint
Speaker 1: of weakness in China would really trigger some risk off
Speaker 1: mood in the US market. Is it surprising to you
Speaker 1: where have we sort of decoupled enough do all the
Speaker 1: deglobalization that's going on, that China is not as big
Speaker 1: of a catalyst as it once was.
Speaker 3: Yeah, I would say, yes, I am surprised. I think
Speaker 3: that We've got a strong enough muscle memory for China
Speaker 3: to always step in and do something that helps drive
Speaker 3: their economy, and I think that's what we're counting on now.
Speaker 3: So I think they got sort of a mulligan for
Speaker 3: the pandemic for three years. It's like, okay, being hyper vigilant,
Speaker 3: not reopening that's really hurting everybody. At the same time,
Speaker 3: we realized how fragile our supply chains were, as did
Speaker 3: everyone else, and started finding other places to get supplies from.
Speaker 3: So they're losing that, but they're still in the middle
Speaker 3: of this sort of generational change from bringing folks from
Speaker 3: farms into cities, and they overdid what they built, right,
Speaker 3: So that's where their real estate problems got into Imagine
Speaker 3: moving over an eight year period, six hundred million people
Speaker 3: into a city the size of Boston that you just
Speaker 3: built a month ago, and I'm finding them all jobs
Speaker 3: and then shutting the economy down but not sending them checks. Right,
Speaker 3: So that's kind of the difference when we think about
Speaker 3: what they're going through. I think the world is waiting
Speaker 3: for that announcement. They're waiting for China to say, oh,
Speaker 3: and we're going to do this, and we're going to
Speaker 3: do this because that's just what we're used to. If
Speaker 3: this is a different type of China and they're willing
Speaker 3: to say, you know, we don't have a five percent
Speaker 3: GDP growth goal and we're not going to stimulate anymore.
Speaker 3: We are, and we try to do a workout of
Speaker 3: all this commercial real estate. That's a disaster. Yeah, I
Speaker 3: think that's a big dent. You can't imagine that the
Speaker 3: second largest economy in the world doesn't have an impact
Speaker 3: if they're going to go into a recession or have
Speaker 3: very slow growth over the next few years.
Speaker 1: Art Hogan, chief market strategists at b Riley Wealth, aret,
Speaker 1: such an honor and a privilege to hear your thoughts.
Speaker 1: Can't let you go just yet. Art. We do have
Speaker 1: a tradition here on what goes up where we've got
Speaker 1: to get your craziest thing of the week. Hold on,
Speaker 1: let's start with you though.
Speaker 2: Okay, mine is a Bloomberg. Sorry, that was I think
Speaker 2: very well read. The headline is Citadelvet's sixty nine thousand
Speaker 2: intern applicants to find the next math geniuses. So they
Speaker 2: have sixty nine thousand applications and guess how many people
Speaker 2: they actually accept per intern class two hundred it's so
Speaker 2: tiny twenty fourteen.
Speaker 3: We easier to get into Harvard than it is to
Speaker 3: get into Citadel.
Speaker 2: That was the craziest thing I saw. I mean, like
Speaker 2: you just stand no chance.
Speaker 1: Yeah, there's got to be some AI involved there and
Speaker 1: stipping through all those opp.
Speaker 3: Probably Apparently there was a story out earlier in the
Speaker 3: week that said that they make one hundred and twenty
Speaker 3: thousand dollars fly business class and stay and forced our
Speaker 3: hotels not bed right out of college.
Speaker 2: Yeah, it does sound really nice.
Speaker 1: That's pretty good. I right, Well, that's a good one
Speaker 1: built on a right How about you you seed anything
Speaker 1: crazy in the last week or so?
Speaker 3: Craziest chart that continue to float around the street this
Speaker 3: past week and continues to bother me. A touch was
Speaker 3: that the total credit card debt was at a record
Speaker 3: high and no one ever put a denominator on it.
Speaker 3: Everyone's like, okay, alarm bells, it's a trillion dollars. And
Speaker 3: you know, we never say what the US debt is
Speaker 3: without saying to GDP, but it's okay to say consumers
Speaker 3: have this much step and not put a denominator on
Speaker 3: as compared to what their total savings are. And if
Speaker 3: you just use that, no one would ever read the
Speaker 3: story because it sounds so much better to say there's
Speaker 3: a trillion dollars in credit card debt. But oh, by
Speaker 3: the way, the alinguanc's art not even back to where
Speaker 3: they were in twenty nineteen, and as a percentage of
Speaker 3: total savings, they are completely average. So it's just it's
Speaker 3: the frustrating chart that comes out here. We call that
Speaker 3: a chart crime, and it was one of the chart
Speaker 3: crimes of the week.
Speaker 1: Yeah, I mean that excess savings from the pandemic has
Speaker 1: really been the story for the last few years. It
Speaker 1: is sort of normalizing though, right, I mean, how big
Speaker 1: of a headwind is that do you think.
Speaker 3: Well, I'll tell you this. So just to put some
Speaker 3: context around, if you went back for the last twenty
Speaker 3: five years and said, what's the per capita GDP per
Speaker 3: capita at personal savings rate, it's always similar about five percent,
Speaker 3: between five and five and a percent twenty five year
Speaker 3: average always has got to eighteen percent during the pandemic,
Speaker 3: So not only are you getting money, but there was
Speaker 3: nothing to gets fedded on. Right. There was virtually nothing
Speaker 3: you could do, so obviously that had to work down.
Speaker 3: And guess where it is now. It's five percent. So
Speaker 3: the fact that we're back to normal now. If we
Speaker 3: went from eighteen to three percent and credit card as
Speaker 3: a as a relationship to personal savings was some percentage
Speaker 3: that we haven't seen forever, then I'd be more concerned.
Speaker 3: But I think we're normalizing some post pandemic abnormalities and
Speaker 3: I think the personal savings rate is one of those.
Speaker 3: So as a headwind is think I would focus more
Speaker 3: on the fact that wages for the last two months
Speaker 3: have increased more than inflation, and it took until two
Speaker 3: months ago for that to happen, So that likely is
Speaker 3: the silver lighting and what could otherwise be a cloud there.
Speaker 1: It all sort of reverts back to just that job
Speaker 1: market staying strong. It seems to me it's always the
Speaker 1: most important variable, right, you know, as long as we're
Speaker 1: seeing this unemployment claims, low rate of unemployment, solid growth
Speaker 1: every month. I mean, that seems to be the whole
Speaker 1: story these days when it comes to the economy.
Speaker 3: Yeah, we as an Americans since World War Two, spend
Speaker 3: our income statement, not our balance sheet, right, so if
Speaker 3: we have a job, that's what we spend.
Speaker 1: Right.
Speaker 3: We don't think about necessarily value of our house, or
Speaker 3: we don't necessarily think about those are things we put
Speaker 3: into confidence, but we really do. I have a job,
Speaker 3: where could I get one if I needed one? And
Speaker 3: that still feels like a relatively high number. And you know,
Speaker 3: when I started the business, any think low five percent
Speaker 3: on employment was full employment. So we've ratchet that down
Speaker 3: to four percent, I guess now, and you know, to
Speaker 3: look at that, it's hard to predict some terrible things
Speaker 3: happening at three and a eight percent right now?
Speaker 1: All right, good stuff, I'll give you my crazy thing.
Speaker 1: This is courtesy of the Independent Newspaper, the British newspaper.
Speaker 1: In the commodities market. If you will Vildana. I think
Speaker 1: this counts. The world record for the most expensive cheese
Speaker 1: has been broken. Wow, the most expensive cheese is Cabrales
Speaker 1: blue cheese from northern Spain. Well, let me tell you
Speaker 1: a little bit about this cheese. It's aged in a cave, wow,
Speaker 1: fourteen hundred meters for like eight months. It could be
Speaker 1: cow's milk or a mixture of cows, sheep and goat's milk.
Speaker 1: And they put it up in a cave at fourteen
Speaker 1: hundred meters pretty high up there, at a temperature of
Speaker 1: seven degrees celsius, and it needs to spend a minimum
Speaker 1: of eight months there, and then they bring it down
Speaker 1: and they auction it off. So you're now a game
Speaker 1: show contestant on our little game show here. The price
Speaker 1: is precise two point two kilogram wheel of Umbrellas blue
Speaker 1: cheese from northern Spain. Most expensive cheese ever sold. Guy
Speaker 1: who owns a restaurant, body, what do you suppose the
Speaker 1: price was for two point two.
Speaker 3: Kilograms fifteen thousand dollars.
Speaker 1: Fifteen thousand dollars, so that would be what about twelve
Speaker 1: Of course, this is the independence, so they give it
Speaker 1: in British pounds, so that's like twelve thousand, stuff like that.
Speaker 2: Twelve thousand and one.
Speaker 1: Ah, you're going one, you're one dollar over.
Speaker 2: Yeah, because I was gonna say twenty thousand originally.
Speaker 1: But yeah, thirty thousand pounds for this wheel of cheese.
Speaker 2: It's worth it. I'm sure it's worth this cheese sounds wonderful.
Speaker 3: I did not have this on my bingo card. Mic
Speaker 3: that was.
Speaker 1: It's the same restaurant owner had bought the previous record
Speaker 1: holder for most expensive cheese. Sometimes I wonder if there's
Speaker 1: a little publicity stunt going on with some of these. Know,
Speaker 1: I've come to my restaurant, I've got the world's most expensive.
Speaker 3: That's a pr stunt. It's a pretty cheesy one, Mike,
Speaker 3: I think, all.
Speaker 1: Right, all right, gets the joke of the show. I
Speaker 1: guess we'll see that one comment down Fifth Avenue boat
Speaker 1: but still got me. Art Hogan from b Riley Wealth.
Speaker 1: Such a great time as always, Art, we appreciate it
Speaker 1: and hope we can talk to you again soon.
Speaker 3: Sounds great, Thanks guys, Thank you.
Speaker 2: Art.
Speaker 1: What Goes Up will be back next week. Until then,
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Speaker 1: And you can find us on Twitter, follow me at
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Speaker 1: produced by Stacey Wong. Thanks for listening, See you next time.