January 16, 2025 • 17 mins
The stock market is at a crossroads. After the strongest back-to-back years for the S&P 500 since the late 1990s, investors are wondering what to expect in 2025. Will higher productivity, stronger earnings, and D.C. deregulation win out and propel equities higher? Or will higher-for-longer interest rates, geopolitical tensions, and “sticky” inflation hamstring markets? To cut through the fog and get some answers, I spoke with Eric Wallerstein, Chief Markets Strategist at Yardeni Research, for this week’s MoneyShow MoneyMasters Podcast.
Eric starts by sharing his background, which included stints at the New York Fed’s repo desk and the Wall Street Journal prior to his joining Yardeni Research. We then pivot to a macro-focused discussion, one covering the latest inflation figures, the Federal Reserve’s recent (and potential future) policy moves, and the likely impact of Trump Administration policy on hiring, investment, and capex spending. Next, Eric lays out what could go RIGHT for markets...and what could go WRONG for them...in the new year. But he emphasizes the positives, including what to expect with corporate earnings and GDP growth – and the one “great thing” that the economy has going for it.
We then move on to the bond market’s recent convulsions, a contrarian call he recently made, and the reasons why the U.S. looks poised to outperform other regions. Then we talk about the five market sectors he likes, and his one favorite group – one that has “a lot of runway” for potential gains. Finally, we discuss what he’ll cover at the MoneyShow Masters Symposium Dallas, scheduled for April 4-6 at the Hilton DFW Lakes. Click here to register: https://www.mmsdallas.com/?scode=061246
Eric starts by sharing his background, which included stints at the New York Fed’s repo desk and the Wall Street Journal prior to his joining Yardeni Research. We then pivot to a macro-focused discussion, one covering the latest inflation figures, the Federal Reserve’s recent (and potential future) policy moves, and the likely impact of Trump Administration policy on hiring, investment, and capex spending. Next, Eric lays out what could go RIGHT for markets...and what could go WRONG for them...in the new year. But he emphasizes the positives, including what to expect with corporate earnings and GDP growth – and the one “great thing” that the economy has going for it.
We then move on to the bond market’s recent convulsions, a contrarian call he recently made, and the reasons why the U.S. looks poised to outperform other regions. Then we talk about the five market sectors he likes, and his one favorite group – one that has “a lot of runway” for potential gains. Finally, we discuss what he’ll cover at the MoneyShow Masters Symposium Dallas, scheduled for April 4-6 at the Hilton DFW Lakes. Click here to register: https://www.mmsdallas.com/?scode=061246
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
After the strongest back to back market years since the
late nineteen nineties, markets are at a critical crossroads. The
range of potential outcomes is extraordinarily large.
Speaker 2 (00:14):
Productivity boom, a great inflation, a melt up, a melt down.
Speaker 1 (00:19):
I've heard investors, analysts, and a strategists make the case
for all of those, just about everything in between the
cup to the thought. I've invited a brand new money
Show Money Master's Podcast guest to join us. He's Eric Wallerstein,
chief market strategist at your Denny Research, and you're not
going to want to miss what he has to say.
Speaker 2 (00:35):
Eric, Welcome to the show.
Speaker 3 (00:36):
Thanks Mike.
Speaker 2 (00:38):
Look, I love getting new guests with new perspectives on
the show.
Speaker 1 (00:41):
But since you are new, why don't you start a
little bit by sharing your background and what it is
you do at your any research with our viewers here.
Speaker 2 (00:47):
Sure.
Speaker 4 (00:48):
So I started out at the New York Fed on
the repo desk. I was there in twenty nineteen when
we had that money market rate freak out, and then
as COVID started as well, so it was a very
interesting time.
Speaker 3 (00:59):
I was trading in the repo and reverse repo operation.
Speaker 4 (01:01):
So a lot to learn and then I joined Yard
Denny early last year from the Wall Street Journal, where
I was covering asset allocation, FX, treasuries, the banking system
when SVB kind of blew up, So a range of things.
But yeah, I'm kind of a jack of all trades here,
just as ED is covering the waterfront of Macro both
(01:24):
here and abroad. And it's an exciting time in markets,
as it always is, but a lot to go over.
Speaker 1 (01:30):
Yeah, absolutely, Why don't we start with sort of the
big picture economic view here? I mean, where are your thoughts,
where are we with inflation and kind of what the
Fed has done in the last several months, and maybe
what your outlook is for what they're gonna do over
the first few quarters of twenty five.
Speaker 3 (01:44):
Sure.
Speaker 4 (01:45):
Yeah, I think the big issue or sticking point is
sticky inflation, especially on the core services side. So we
had PPI this morning and we'll have CPI tomorrow for December.
But I think a lot of people mistook over the
summer we had this slow down and hiring.
Speaker 3 (02:01):
We kind of had a.
Speaker 4 (02:02):
Weak jobs report, payrolls or visions we had to slow
down in inflation. I think people mistook what was kind
of a blip for this broad slow down from long
and variable lags of monetary policy. In reality, what exactly
are long and variable lags? There's they're kind of just
this mirage that people used to explain crises that happened
after the Fed Titans. You know, in our opinion, the
(02:25):
crisis was SVB and the regional banking panic. But the
Fed and the Treasury stepped in the ease conditions, So
that blip kind of set the Fed on this easing path,
and one hundred basis points of easing over just a
few months isn't really nothing to scoff at. But then
the economy rebounded, both in terms of it's just a
(02:45):
strong economy with a pretty strong labor market, but also
the Fed was easing conditions and they basically told markets
and you know, business owners that conditions will be easier.
So we have inflation kind of ramping back up or
sticking too high above two percent, And now we have
businesses saying we're going to hire more, we're going to
raise wages. We have potential tariffs which which could easily
(03:07):
raise prices. So there's all these things that are happening,
and we're stuck with one hundred bases points lower on
the Fed funds rate. So I think, you know, heading in,
you know, into this year, you might see a lot
of reactions to the Trump administration and that that could
be both good in that I think we're going to
see more hiring, more investment, more cap x, both from
small and large businesses. They're more certain, they're expecting a
(03:29):
lower corporate tax rate, they're expecting the regulation. But I
also think there could be some you know, inventory investment
that's not necessarily productive, trying to front run tariffs. I
think there could be a little little more hesitancy, you know,
if you're an exporter. But we'll see, you know, we'll
see how these first hundred days go. And it's just, yeah,
another uncertain year, uncertain year after uncertainy year.
Speaker 2 (03:52):
I suppose, yeah, I hear you.
Speaker 1 (03:53):
You know, it's interesting one of the pieces you had recently,
you kicked off the year with kind of this analysis
of what could go right in twenty twenty and what
could go wrong. I know there's a lot of material
in there, but maybe it's a few of those points
on either side. What do you think is probably one
of the best things that could go right, one or
two things, and what are on the flip side, things
that could potentially go wrong.
Speaker 4 (04:12):
Yeah. I think one of the things that people are
kind of missing, especially since we're talking about bonds in
the Fed pretty much all day and there's a lot
of Trump noise around what potential policies might be, is
that earnings growth is really the engine that drives equity
markets higher.
Speaker 3 (04:25):
It's what.
Speaker 4 (04:31):
Drives forward earnings and then therefore more high ultimately the
entire economy. So earnings growth looks good. I mean, even
just in Q one, analysts expects eight point two percent
year of the year earnings growth. We're looking at more
like ten percent real GDP looks good, you know, two
to three, three and a half percent through the remain
of the year. We think it's quite possible. And productivity growth,
(04:58):
I think is another big that a lot of people
are missing. So we had two percent that's historically average,
you know, it's kind of will expect and you can
think of productivity growth as all real GDP. It's like
the best form of economic growth. It helps expand corporate
profit margins, it leads to higher real wages for workers.
(05:19):
It's amazing, and it keeps inflation down most importantly, So
you can actually get a better real wage without putting
upward pressure on overall inflation. So it's a great thing,
and we think it could go higher. We're expecting three
three and a half four percent productivity growth over the
next few years and by the end of the decade.
It sounds very large, especially compared to some of the
(05:41):
posts Great Financial Crisis malaise. We bottomed at like half
a percent of productivity growth for the five year rolling
period from twenty ten to twenty fifteen, So like, you're
getting no economic growth right, No one's being productive. Some
of that might have to do with ZERP and zero
interest rate, Paul, I see, there's a lot of zombie companies,
(06:02):
but there was a lot of moving parts there. We
think at bottom there, and it's been on a steady
uptrend since. So two percent right now, sure, but especially
if you get more deregulation, corporate tax cuts, also AI, automation, robotics, whatever,
I think you're gonna get a lot of real GDP
growth from productivity, even as labor force growth slows. So
(06:23):
I think there's a lot of positives for the economy
as well as for corporate earnings that it kind of
gets lost when you get stuck talking about monetary policy
and bonds all day.
Speaker 1 (06:31):
Right, I'm glad you brought that up, because, I mean, obviously,
especially in the last couple of weeks, seems like everybody
and their sister is worried about rising rates. You actually
tweeted not too long ago about buying bonds, and I'm
kind of curious, why aren't you scared about this big
bed five percent number that everybody seems to be worried
about when it comes to the tenure.
Speaker 4 (06:47):
Yeah, those are definitely PA trades and non financial advice.
But yeah, I think bonds have largely tracked the strength
of the economy, and that's why yields were rising. I
think a positive upwards sloping yield curve makes sense, you know,
like thirty forty fifty BIPs. That's also what we saw
around nineteen ninety five and in the late nineties, which
is probably the most comparable period to today, like a
(07:10):
soft blending. We had a few rate cuts and then
they kind of stuck with higher for longer. That said,
there's maybe an overreaction. I don't think there's a ton
of news on the fiscal front. I don't think Trump
two point zero is a huge departure from what Biden
was doing in terms of the fiscal deficit. I think
we could either stay here, we could shrink the deficit
it marginally. I don't think a lower corporate tax rate
(07:33):
is like the end of the world per se. And
I think the incoming administration is actually attentive to the deficit,
whereas the prior one or the current one I suppose
is a little less. So they kind of just let
it run and weren't too worried about it. I think
they did a lot in terms of debt management to
possibly even stimulate the economy further, focusing on short term
(07:54):
bills rather than actually issuing duration treasuries to the market.
Speaker 3 (07:58):
So there's component.
Speaker 4 (08:00):
I also think, like I mean, China is the second
biggest economy in the world, and it's quite literally in
a recession. It's been a huge downward influence on inflation globally.
Like goods inflation in the US has been put for
a year and a half. It's been deflating. So even
as consumer demand possibly you know, producer demand comes back
(08:21):
for goods durables and non durables, I think we have
this huge external pressure coming from China and it's really
crushing Europe, like Germany's export sector is crushed. They can't
you know, industrial production there is falling precipitously to record lows,
and so you have, you know, a US economy that's
doing quite well, but the rest of the world is
(08:42):
doing pretty bad, pretty poorly. So you see five percent
yields in the US. I think inflows are going to
be pretty strong. I think the strong dollar reflects that.
And sure there's buying of mortgage backed securities, people are
buying corporate debt, people are buying US equities. But buying
large to the US is such an attractive esment case right
now relative to history, relative to the rest of the
(09:03):
world that I think. You know, yields have plenty of
reason to fall, and I don't think they'll fall that far.
You know, four point twenty five percent might be a bottom.
Four and three quarters percent might be a top for
the ten year. They might they might bounce around in
that range, but you know, five percent in the thirty year,
four and three quarters in the ten year, I'm not
sure that really lines up with where economic fundamentals are.
Speaker 2 (09:25):
Yeah, got it.
Speaker 1 (09:26):
You know, you and ED do fantastic work in the
Yardanny quick takes newsletters.
Speaker 2 (09:30):
Sofybody's watching this.
Speaker 1 (09:31):
You're doing yourself a favor if you subscribe, and one
of the things in there, you had a great update,
he said. Stock market valuation and beauty have a lot
in common. They're both in the eyes of the beholder.
Can you expand a little bit on that point and
kind of what your message was there.
Speaker 4 (09:44):
Yeah, So a lot of people are concerned with valuations.
They're lofty relative to history. Also with higher yields, it's
kind of coming more into focus. I think the difference
between today and previous periods when you're comparing where you're
comparing their valuation or market concentration to is the type
of companies that are highly valued.
Speaker 3 (10:05):
The S and P.
Speaker 4 (10:06):
When you cut out the mag seven, so the S
and P four ninety three trading like eighteen times forward earnings.
You know, it's it's not low, but it's not certainly
not anything.
Speaker 3 (10:15):
It's uberant.
Speaker 4 (10:16):
And you know Apple, Meta and Video, Microsoft, these are
the companies that are trading twenty eight, twenty nine, thirty
times forward earnings. But they're growing companies, right, they have
the earnings growth to back that up.
Speaker 3 (10:28):
And if you think about it. The index used to.
Speaker 4 (10:30):
Be, you know, comprised of companies that were more mature,
that had slimmer margins, and you know, as you grow
out of beat at a lower valuation. Today, the highest
quality stocks, the biggest stocks, are also growing rapidly, and
so far there's nothing to say that that growth is
(10:52):
going to slow. I mean, in vidious profit margins are
over fifty percent. That's crazy for you know, like a
trillion dollar plus company in terms of market caps.
Speaker 3 (11:01):
So sure, you know, valuations are tricky.
Speaker 4 (11:05):
But I think you know, there's a number of people saying,
you know, three four percent annualized returns on the S
and P five hundred. We're expecting double digit earnings growth,
not even talking about total return and dividends. We should,
you know, we should achieve at least historically normal returns
for the large cap index. So I think things look good.
(11:29):
It makes sense that these companies are trading at high
lofty relative to what their companies can actually do.
Speaker 1 (11:35):
You know, you mentioned in video that's obvious name that
I looked at actually earlier today. I looked at the
top performing companies and stocks and the SMP five hundred.
Last year a video was there, Palanteer, a couple other
tech names, and ironckily enough United Airlines up there as well.
When you look forward to either individual stocks or sectors,
what are some of the again groups and if you're
comfortable talking about a couple of names, things that you
(11:56):
and the team there are particularly optimistic about for the
new year.
Speaker 4 (12:00):
Yeah, so we stay away from single stocks, but we
do have sector preferences. For a little while, we've been
basically long the names you'd be in an economic expansion,
so financials, industrials, consumer discretionary, infotech especially which includes for
US comm services. But I think financials are a really
good and interesting play back. In August, we suggested that
(12:23):
you know, there was a small bank catchup trade at
least as if FED was cutting, and a lot of
people got really excited about the regional bank ETFs and
some of those kind of downbeaten names, which especially took
a hit after SVB and that regional banking crisis. But
I think there's a lot of runway for big banks.
I think consumer credit quality is perfectly fine. I think
(12:44):
it looks very good. Debt levels are low, consumer incomes
are rising. I think savings are fine, and there are
a little bit upticks in delinquencies. If you listen to
bank earnings calls and car card earnings calls, it seems
to be concentrated in just like people who who over
indebted themselves during the pandemic. It doesn't seem to be
a broader issue. So I think consumer balance sheets look healthy.
(13:07):
Banks are starting to lend again. If you look at
the Senior Financial Opinion Survey Senior Financial Officers Opinion Survey,
this boose banks are actually starting to loosen credit conditions
and lend again and CNI loans, commercial real estate, etc.
So I think there's this huge opportunity for banks to
continue earning. We also have the M and A front.
(13:29):
The FTC in the Biden administration was incredibly strict on
M and A and we had the rapid rise in rates, right,
so M and A should come back. Trading revenues have
been pretty good, and then there's this huge deregulatory regime.
Speaker 3 (13:44):
Michael Barr, the.
Speaker 4 (13:45):
FED Vice Chair for Supervision, is leaving his post early.
President Trump will likely replace him with either Michelle Bowman
or Governor Waller, and both those are better for a
three end game. It's not going to be very strict.
I think, if anything, the Wall Street and the bank
lobbying groups will have much more power to basically reverse
this trend of increasing regulation increasingly a constricting you know,
(14:08):
DC policy rain over banking, and I think it just
opens a lot of pathways through big banks. So I
really like financials and then the rest of those groups
I think have been doing well and should continue to
do well.
Speaker 1 (14:22):
So financials, industrials, and tech probably the best places to
be in your opinion, Yeah, definitely great. Now, you know,
one of the reasons we're talking is because we're privileged
to have you joining us for the Money Show Master
Symposium in Dallas and coming up in April.
Speaker 2 (14:35):
You know, you have a very.
Speaker 1 (14:36):
Interesting topic and I kind of alluded to it in
the intro. It's what's next for the economy and markets?
Productivity boom, great, inflation or melt up? Can you just
briefly summarize kind of you know, what types of things
you might be talking about and what attendees are going
to get out of that.
Speaker 2 (14:49):
Yeah.
Speaker 4 (14:49):
So I think these three possible scenarios are a great
framework for looking at twenty twenty five and even beyond on,
especially with this new administration. We've been really banging the
drums on the roaring twenty twenties. We I think productivity
growth is really going to fuel also pretty good chances
of a market it melts up, which one hundred basis
(15:15):
points of FED cuts, stickier inflation, higher bond yields. These
are all things where stocks rise in the short term,
but to the intermediate to long term, there are a
lot of issues in terms of the deficit, in terms
of FED credibility, kind of longer term, okay, like what
what are we betting on here when we're buying US
assets for domestic and foreign investors alike. And then there's
(15:35):
this other bucket of just everything that could go wrong.
I think, especially on the geopolitical front, there's some uncertainty
and there's some more certainty right if we could if
the war is in the Middle East between Russia and Ukraine,
and that's a huge plus for global markets and global economies,
especially for Europe, which is struggling with energy costs.
Speaker 3 (15:55):
But you know, trade.
Speaker 4 (15:56):
Wars, there are question marks. Even if they do ultimate
work and shore up domestic manufacturing, there could be a
lot of volatility in the immediate term. So that's difficult
for investors and owners to navigate and we'll see what
happens with the deficit. You know, I think this incoming
administration has a plan to tackle it, but it's not
(16:18):
going anywhere good, you know what I mean. So I
think there's plenty to talk about. There's a lot of
cross currents, both positive and negative, and it's an exciting time.
Speaker 2 (16:26):
Really, what wasn't Eric?
Speaker 1 (16:28):
I really do appreciate you taking some time out to
chat here on viewers. If you're watching this and you
want to learn more from Eric, he is going to
be speaking at that Master Symposium in Dallas, which is
in early April.
Speaker 2 (16:38):
You can find more details on the event.
Speaker 1 (16:39):
And actually register to attend if you like, in the
description below. And again, if you like this video and
these things we do for the podcast, don't forget to
like and subscribe.
Speaker 2 (16:47):
Eric. Thank you so much, and I'll be seeing you
in Dallas in a couple of months.
Speaker 3 (16:51):
Thanks Mike, looking forward to it.
Speaker 2 (16:52):
Take care,
After the strongest back to back market years since the
late nineteen nineties, markets are at a critical crossroads. The
range of potential outcomes is extraordinarily large.
Speaker 2 (00:14):
Productivity boom, a great inflation, a melt up, a melt down.
Speaker 1 (00:19):
I've heard investors, analysts, and a strategists make the case
for all of those, just about everything in between the
cup to the thought. I've invited a brand new money
Show Money Master's Podcast guest to join us. He's Eric Wallerstein,
chief market strategist at your Denny Research, and you're not
going to want to miss what he has to say.
Speaker 2 (00:35):
Eric, Welcome to the show.
Speaker 3 (00:36):
Thanks Mike.
Speaker 2 (00:38):
Look, I love getting new guests with new perspectives on
the show.
Speaker 1 (00:41):
But since you are new, why don't you start a
little bit by sharing your background and what it is
you do at your any research with our viewers here.
Speaker 2 (00:47):
Sure.
Speaker 4 (00:48):
So I started out at the New York Fed on
the repo desk. I was there in twenty nineteen when
we had that money market rate freak out, and then
as COVID started as well, so it was a very
interesting time.
Speaker 3 (00:59):
I was trading in the repo and reverse repo operation.
Speaker 4 (01:01):
So a lot to learn and then I joined Yard
Denny early last year from the Wall Street Journal, where
I was covering asset allocation, FX, treasuries, the banking system
when SVB kind of blew up, So a range of things.
But yeah, I'm kind of a jack of all trades here,
just as ED is covering the waterfront of Macro both
(01:24):
here and abroad. And it's an exciting time in markets,
as it always is, but a lot to go over.
Speaker 1 (01:30):
Yeah, absolutely, Why don't we start with sort of the
big picture economic view here? I mean, where are your thoughts,
where are we with inflation and kind of what the
Fed has done in the last several months, and maybe
what your outlook is for what they're gonna do over
the first few quarters of twenty five.
Speaker 3 (01:44):
Sure.
Speaker 4 (01:45):
Yeah, I think the big issue or sticking point is
sticky inflation, especially on the core services side. So we
had PPI this morning and we'll have CPI tomorrow for December.
But I think a lot of people mistook over the
summer we had this slow down and hiring.
Speaker 3 (02:01):
We kind of had a.
Speaker 4 (02:02):
Weak jobs report, payrolls or visions we had to slow
down in inflation. I think people mistook what was kind
of a blip for this broad slow down from long
and variable lags of monetary policy. In reality, what exactly
are long and variable lags? There's they're kind of just
this mirage that people used to explain crises that happened
after the Fed Titans. You know, in our opinion, the
(02:25):
crisis was SVB and the regional banking panic. But the
Fed and the Treasury stepped in the ease conditions, So
that blip kind of set the Fed on this easing path,
and one hundred basis points of easing over just a
few months isn't really nothing to scoff at. But then
the economy rebounded, both in terms of it's just a
(02:45):
strong economy with a pretty strong labor market, but also
the Fed was easing conditions and they basically told markets
and you know, business owners that conditions will be easier.
So we have inflation kind of ramping back up or
sticking too high above two percent, And now we have
businesses saying we're going to hire more, we're going to
raise wages. We have potential tariffs which which could easily
(03:07):
raise prices. So there's all these things that are happening,
and we're stuck with one hundred bases points lower on
the Fed funds rate. So I think, you know, heading in,
you know, into this year, you might see a lot
of reactions to the Trump administration and that that could
be both good in that I think we're going to
see more hiring, more investment, more cap x, both from
small and large businesses. They're more certain, they're expecting a
(03:29):
lower corporate tax rate, they're expecting the regulation. But I
also think there could be some you know, inventory investment
that's not necessarily productive, trying to front run tariffs. I
think there could be a little little more hesitancy, you know,
if you're an exporter. But we'll see, you know, we'll
see how these first hundred days go. And it's just, yeah,
another uncertain year, uncertain year after uncertainy year.
Speaker 2 (03:52):
I suppose, yeah, I hear you.
Speaker 1 (03:53):
You know, it's interesting one of the pieces you had recently,
you kicked off the year with kind of this analysis
of what could go right in twenty twenty and what
could go wrong. I know there's a lot of material
in there, but maybe it's a few of those points
on either side. What do you think is probably one
of the best things that could go right, one or
two things, and what are on the flip side, things
that could potentially go wrong.
Speaker 4 (04:12):
Yeah. I think one of the things that people are
kind of missing, especially since we're talking about bonds in
the Fed pretty much all day and there's a lot
of Trump noise around what potential policies might be, is
that earnings growth is really the engine that drives equity
markets higher.
Speaker 3 (04:25):
It's what.
Speaker 4 (04:31):
Drives forward earnings and then therefore more high ultimately the
entire economy. So earnings growth looks good. I mean, even
just in Q one, analysts expects eight point two percent
year of the year earnings growth. We're looking at more
like ten percent real GDP looks good, you know, two
to three, three and a half percent through the remain
of the year. We think it's quite possible. And productivity growth,
(04:58):
I think is another big that a lot of people
are missing. So we had two percent that's historically average,
you know, it's kind of will expect and you can
think of productivity growth as all real GDP. It's like
the best form of economic growth. It helps expand corporate
profit margins, it leads to higher real wages for workers.
(05:19):
It's amazing, and it keeps inflation down most importantly, So
you can actually get a better real wage without putting
upward pressure on overall inflation. So it's a great thing,
and we think it could go higher. We're expecting three
three and a half four percent productivity growth over the
next few years and by the end of the decade.
It sounds very large, especially compared to some of the
(05:41):
posts Great Financial Crisis malaise. We bottomed at like half
a percent of productivity growth for the five year rolling
period from twenty ten to twenty fifteen, So like, you're
getting no economic growth right, No one's being productive. Some
of that might have to do with ZERP and zero
interest rate, Paul, I see, there's a lot of zombie companies,
(06:02):
but there was a lot of moving parts there. We
think at bottom there, and it's been on a steady
uptrend since. So two percent right now, sure, but especially
if you get more deregulation, corporate tax cuts, also AI, automation, robotics, whatever,
I think you're gonna get a lot of real GDP
growth from productivity, even as labor force growth slows. So
(06:23):
I think there's a lot of positives for the economy
as well as for corporate earnings that it kind of
gets lost when you get stuck talking about monetary policy
and bonds all day.
Speaker 1 (06:31):
Right, I'm glad you brought that up, because, I mean, obviously,
especially in the last couple of weeks, seems like everybody
and their sister is worried about rising rates. You actually
tweeted not too long ago about buying bonds, and I'm
kind of curious, why aren't you scared about this big
bed five percent number that everybody seems to be worried
about when it comes to the tenure.
Speaker 4 (06:47):
Yeah, those are definitely PA trades and non financial advice.
But yeah, I think bonds have largely tracked the strength
of the economy, and that's why yields were rising. I
think a positive upwards sloping yield curve makes sense, you know,
like thirty forty fifty BIPs. That's also what we saw
around nineteen ninety five and in the late nineties, which
is probably the most comparable period to today, like a
(07:10):
soft blending. We had a few rate cuts and then
they kind of stuck with higher for longer. That said,
there's maybe an overreaction. I don't think there's a ton
of news on the fiscal front. I don't think Trump
two point zero is a huge departure from what Biden
was doing in terms of the fiscal deficit. I think
we could either stay here, we could shrink the deficit
it marginally. I don't think a lower corporate tax rate
(07:33):
is like the end of the world per se. And
I think the incoming administration is actually attentive to the deficit,
whereas the prior one or the current one I suppose
is a little less. So they kind of just let
it run and weren't too worried about it. I think
they did a lot in terms of debt management to
possibly even stimulate the economy further, focusing on short term
(07:54):
bills rather than actually issuing duration treasuries to the market.
Speaker 3 (07:58):
So there's component.
Speaker 4 (08:00):
I also think, like I mean, China is the second
biggest economy in the world, and it's quite literally in
a recession. It's been a huge downward influence on inflation globally.
Like goods inflation in the US has been put for
a year and a half. It's been deflating. So even
as consumer demand possibly you know, producer demand comes back
(08:21):
for goods durables and non durables, I think we have
this huge external pressure coming from China and it's really
crushing Europe, like Germany's export sector is crushed. They can't
you know, industrial production there is falling precipitously to record lows,
and so you have, you know, a US economy that's
doing quite well, but the rest of the world is
(08:42):
doing pretty bad, pretty poorly. So you see five percent
yields in the US. I think inflows are going to
be pretty strong. I think the strong dollar reflects that.
And sure there's buying of mortgage backed securities, people are
buying corporate debt, people are buying US equities. But buying
large to the US is such an attractive esment case right
now relative to history, relative to the rest of the
(09:03):
world that I think. You know, yields have plenty of
reason to fall, and I don't think they'll fall that far.
You know, four point twenty five percent might be a bottom.
Four and three quarters percent might be a top for
the ten year. They might they might bounce around in
that range, but you know, five percent in the thirty year,
four and three quarters in the ten year, I'm not
sure that really lines up with where economic fundamentals are.
Speaker 2 (09:25):
Yeah, got it.
Speaker 1 (09:26):
You know, you and ED do fantastic work in the
Yardanny quick takes newsletters.
Speaker 2 (09:30):
Sofybody's watching this.
Speaker 1 (09:31):
You're doing yourself a favor if you subscribe, and one
of the things in there, you had a great update,
he said. Stock market valuation and beauty have a lot
in common. They're both in the eyes of the beholder.
Can you expand a little bit on that point and
kind of what your message was there.
Speaker 4 (09:44):
Yeah, So a lot of people are concerned with valuations.
They're lofty relative to history. Also with higher yields, it's
kind of coming more into focus. I think the difference
between today and previous periods when you're comparing where you're
comparing their valuation or market concentration to is the type
of companies that are highly valued.
Speaker 3 (10:05):
The S and P.
Speaker 4 (10:06):
When you cut out the mag seven, so the S
and P four ninety three trading like eighteen times forward earnings.
You know, it's it's not low, but it's not certainly
not anything.
Speaker 3 (10:15):
It's uberant.
Speaker 4 (10:16):
And you know Apple, Meta and Video, Microsoft, these are
the companies that are trading twenty eight, twenty nine, thirty
times forward earnings. But they're growing companies, right, they have
the earnings growth to back that up.
Speaker 3 (10:28):
And if you think about it. The index used to.
Speaker 4 (10:30):
Be, you know, comprised of companies that were more mature,
that had slimmer margins, and you know, as you grow
out of beat at a lower valuation. Today, the highest
quality stocks, the biggest stocks, are also growing rapidly, and
so far there's nothing to say that that growth is
(10:52):
going to slow. I mean, in vidious profit margins are
over fifty percent. That's crazy for you know, like a
trillion dollar plus company in terms of market caps.
Speaker 3 (11:01):
So sure, you know, valuations are tricky.
Speaker 4 (11:05):
But I think you know, there's a number of people saying,
you know, three four percent annualized returns on the S
and P five hundred. We're expecting double digit earnings growth,
not even talking about total return and dividends. We should,
you know, we should achieve at least historically normal returns
for the large cap index. So I think things look good.
(11:29):
It makes sense that these companies are trading at high
lofty relative to what their companies can actually do.
Speaker 1 (11:35):
You know, you mentioned in video that's obvious name that
I looked at actually earlier today. I looked at the
top performing companies and stocks and the SMP five hundred.
Last year a video was there, Palanteer, a couple other
tech names, and ironckily enough United Airlines up there as well.
When you look forward to either individual stocks or sectors,
what are some of the again groups and if you're
comfortable talking about a couple of names, things that you
(11:56):
and the team there are particularly optimistic about for the
new year.
Speaker 4 (12:00):
Yeah, so we stay away from single stocks, but we
do have sector preferences. For a little while, we've been
basically long the names you'd be in an economic expansion,
so financials, industrials, consumer discretionary, infotech especially which includes for
US comm services. But I think financials are a really
good and interesting play back. In August, we suggested that
(12:23):
you know, there was a small bank catchup trade at
least as if FED was cutting, and a lot of
people got really excited about the regional bank ETFs and
some of those kind of downbeaten names, which especially took
a hit after SVB and that regional banking crisis. But
I think there's a lot of runway for big banks.
I think consumer credit quality is perfectly fine. I think
(12:44):
it looks very good. Debt levels are low, consumer incomes
are rising. I think savings are fine, and there are
a little bit upticks in delinquencies. If you listen to
bank earnings calls and car card earnings calls, it seems
to be concentrated in just like people who who over
indebted themselves during the pandemic. It doesn't seem to be
a broader issue. So I think consumer balance sheets look healthy.
(13:07):
Banks are starting to lend again. If you look at
the Senior Financial Opinion Survey Senior Financial Officers Opinion Survey,
this boose banks are actually starting to loosen credit conditions
and lend again and CNI loans, commercial real estate, etc.
So I think there's this huge opportunity for banks to
continue earning. We also have the M and A front.
(13:29):
The FTC in the Biden administration was incredibly strict on
M and A and we had the rapid rise in rates, right,
so M and A should come back. Trading revenues have
been pretty good, and then there's this huge deregulatory regime.
Speaker 3 (13:44):
Michael Barr, the.
Speaker 4 (13:45):
FED Vice Chair for Supervision, is leaving his post early.
President Trump will likely replace him with either Michelle Bowman
or Governor Waller, and both those are better for a
three end game. It's not going to be very strict.
I think, if anything, the Wall Street and the bank
lobbying groups will have much more power to basically reverse
this trend of increasing regulation increasingly a constricting you know,
(14:08):
DC policy rain over banking, and I think it just
opens a lot of pathways through big banks. So I
really like financials and then the rest of those groups
I think have been doing well and should continue to
do well.
Speaker 1 (14:22):
So financials, industrials, and tech probably the best places to
be in your opinion, Yeah, definitely great. Now, you know,
one of the reasons we're talking is because we're privileged
to have you joining us for the Money Show Master
Symposium in Dallas and coming up in April.
Speaker 2 (14:35):
You know, you have a very.
Speaker 1 (14:36):
Interesting topic and I kind of alluded to it in
the intro. It's what's next for the economy and markets?
Productivity boom, great, inflation or melt up? Can you just
briefly summarize kind of you know, what types of things
you might be talking about and what attendees are going
to get out of that.
Speaker 2 (14:49):
Yeah.
Speaker 4 (14:49):
So I think these three possible scenarios are a great
framework for looking at twenty twenty five and even beyond on,
especially with this new administration. We've been really banging the
drums on the roaring twenty twenties. We I think productivity
growth is really going to fuel also pretty good chances
of a market it melts up, which one hundred basis
(15:15):
points of FED cuts, stickier inflation, higher bond yields. These
are all things where stocks rise in the short term,
but to the intermediate to long term, there are a
lot of issues in terms of the deficit, in terms
of FED credibility, kind of longer term, okay, like what
what are we betting on here when we're buying US
assets for domestic and foreign investors alike. And then there's
(15:35):
this other bucket of just everything that could go wrong.
I think, especially on the geopolitical front, there's some uncertainty
and there's some more certainty right if we could if
the war is in the Middle East between Russia and Ukraine,
and that's a huge plus for global markets and global economies,
especially for Europe, which is struggling with energy costs.
Speaker 3 (15:55):
But you know, trade.
Speaker 4 (15:56):
Wars, there are question marks. Even if they do ultimate
work and shore up domestic manufacturing, there could be a
lot of volatility in the immediate term. So that's difficult
for investors and owners to navigate and we'll see what
happens with the deficit. You know, I think this incoming
administration has a plan to tackle it, but it's not
(16:18):
going anywhere good, you know what I mean. So I
think there's plenty to talk about. There's a lot of
cross currents, both positive and negative, and it's an exciting time.
Speaker 2 (16:26):
Really, what wasn't Eric?
Speaker 1 (16:28):
I really do appreciate you taking some time out to
chat here on viewers. If you're watching this and you
want to learn more from Eric, he is going to
be speaking at that Master Symposium in Dallas, which is
in early April.
Speaker 2 (16:38):
You can find more details on the event.
Speaker 1 (16:39):
And actually register to attend if you like, in the
description below. And again, if you like this video and
these things we do for the podcast, don't forget to
like and subscribe.
Speaker 2 (16:47):
Eric. Thank you so much, and I'll be seeing you
in Dallas in a couple of months.
Speaker 3 (16:51):
Thanks Mike, looking forward to it.
Speaker 2 (16:52):
Take care,
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