Did the Market Misjudge Inflation?

Are you a consumer of Tik Tok?

Lindsey Bell: I'm not because I guess I am an old millennial and apparently I can't figure out how to use it. But I do have an account. Occasionally I open it up to check it out, but I'm, I get lost. Are you?

Chris Versace: you're a creeper. You're a creeper is what you're saying. Okay, that's fine.

Lindsey Bell: because I just get frustrated after like three minutes. What about you?

Chris Versace: I do not, I barely use social media as it is on the more traditional platforms, x, maybe a little Instagram, [00:01:00] LinkedIn, and you're way more savvy on LinkedIn, which is why we always say folks should check you out and LinkedIn with all the great stuff you post there. But no, I was just kind of curious about this a little back and forth, if it does get, sold, it'll be interesting to see what that means for, the digital advertising space and, potential implications for companies like Meta, Google, maybe even a trade desk or two, but I was just kind of curious from a use perspective. What you were, using it for or not.

Lindsey Bell: regardless of what happens, there's definitely been a bifurcation. There's multiple different types of social sites now available to, to. Really fit any one of your social needs. So if you're an advertiser makes a lot more difficult, right? Maybe even for consumers, too.

Chris Versace: I totally agree because sometimes you got to sit there and like, I got a few minutes, am I going on Instagram? Am I going on LinkedIn? Am I going on blue sky? Am I going on threads? Am I going back to X and seeing all the nonsense that's there anyway, anyway. All right. Well, [00:02:00] thanks for that insight, Lindsey Let's move along to our three big topics of the day. First topic, when we come back from the break, is going to be, Did the market get too excessive with its inflation expectations? Second topic, we are going to discuss a current tragedy that's unfolding on the western side of the United States, the California fires, and what some of the implications might be for the economy. And other things that folks should contemplate as investors. And then when we'll round it out, talking about bank earnings big banks are set to start reporting this week. What should we be listening for all that and much more when we come back?

All right, folks, this is Chris Versace joined by Lindsey Bell in the What Does It Mean podcast. Lindsey, I think the market has gotten a little ahead of itself with inflation expectations. And I have to admit, I was probably guilty of that too. [00:03:00] Why? That December services PMI report, the prices component. Holy cow, it was the highest reading in December than it was in over a year, and I think that really spooked a lot of folks. What do you think?

Lindsey Bell: I think it did spook a lot of folks but I also don't think one month just because ppi In this in december was better. Or the latest report

Chris Versace: Well, not better than expected, right? I mean, it wasn't as strong, but when you look at the data, it's still pretty, as you like to say, sticky.

Lindsey Bell: Exactly. So I was going to say it's sticky. I think we got to wait till we get CPI. We're taping this Tuesday. We'll get CPI on Wednesday. And PPI prices don't always initially translate into CPI prices. I think one of the positives out of the PPI report was the cost of food. Those prices did come down, which is going to be a relief for the consumer eventually, hopefully. So I think that there's still work to be done on the inflation conversation because I don't think we're out of the woods yet. You've got the potential [00:04:00] that tariffs cause restocking. You've got deregulations, which typically leads to higher prices. And even a price increases are slowing, they're still increasing and the consumer is feeling it. And we saw in the Michigan survey last week that the expectation for inflation from the consumer's perspective is starting to tick up. So we've got to be careful with that.

Chris Versace: Totally agree. And there's other data out there that kind of supports the notion that prices are going to remain elevated, right? So like the cast freight index, even though volumes are low, pricing is ticking up for the first time in two years. You talked about food, I'm a fan of the FAO food price index. Those ticked higher in December compared to November. So I think, at least in the near term, we may get a lot of conflicting signals, but it's not until we see inflation really start to step down, not only in a pronounced manner, but really on a consistent one as well, that I think we can [00:05:00] say maybe the market kind of overshot expectations when it comes to inflation.

Fair statement?

Lindsey Bell: I think that's a fair statement, but then the question is, what does that mean from the fed's perspective, right? What do we do with interest rate?

Chris Versace: I think it means they do nothing until they see that data. But, I want to ask you a separate question, Lindsey, because I'm a dyed in the wool equity geek, right? We talk bonds and yields. And other than dividend yields, I go to sleep. I just, I can't, I don't know what it is. I'm like a bond narcolept.

So when we take a look at what's happening, right, you probably follow the bond market like other folks do. Sometimes it's the two year, the 10 year, what have you. I'm going to pose a question to you, which is, do you think the bond market is telling us the Fed made a policy mistake with that last rate cut?

Lindsey Bell: Well, I mean, you hear people talk about the bond vigilantes, and I'm going to try to be quick because I don't want you to fall asleep. But, you have seen the tenure up 100 basis points since the Fed's [00:06:00] first rate cut. That's a big move in just a handful of months because the first cut was in September. And so I think that the bond vigilantes are trying to kind of pressure the Fed into realizing that potentially they're making a policy mistake by leaving rates higher for longer. But, the fact of the matter is, is higher rates also can be a reflection of higher economic growth, not just inflation expectations too.

So I think what the fed is trying to do is trying to figure out what is it. And I don't necessarily know that, you know, I know a lot of people say the bond folks are the smart folks and us equity folks were just too optimistic.

Chris Versace: Hey, Hey, Hey, Hey. The uh, I don't uh, I'm not going to say I resemble that remark but

Lindsey Bell: Hey, an equity gal too. You know that.

Chris Versace: I know. I suspect that in the weeks and possibly even the months to come, Lindsey you and I are going to be revisiting the topic of GDP versus inflation, more than a few times, especially as we approach each of the upcoming fed meetings.

[00:07:00] So let's. Let's put a pin in that and say TBD on whether the market got ahead of itself with inflation expectations. We will see. Let's shift gears, talk about our second topic, which is, I mean, I'm sorry that we have to talk about this, but we really do. Obviously our thoughts, prayers, hearts go out to the folks in California that are just, struggling doesn't even begin to say it. But they're contending with those wildfires, which last I saw, the winds are picking back up and could continue to spread the damage. I think about it from folks that are losing their homes, things that are being destroyed, and eventually, that needs to be kind of replaced.

But, before we get to the rebuilding that could benefit non residential construction, maybe some home builders, there's likely to be some near term pain, right, in other economic data, right, Lindsey?

Lindsey Bell: Yeah exactly. I mean, I think everybody's trying to assess what the damage is going to be to the insurance industry. And estimates last week were like the [00:08:00] high was 20 billion. This week it's looking closer to 30 billion, potentially 40 billion when you account for uninsured losses. And it's possible that goes higher. Hurricane Ian just back in 2022 for reference, the impact on the insurance company was 60 billion and we haven't even fully assessed what the impact has been from hurricanes Milton and Helene that came through here just a couple months ago in the southeastern part of the country.

So, I think unfortunately this will also have an impact by the way, to answer your question, will have an impact on the jobs report for January. And Goldman, I think right now is estimating a 15, 000 to 25, 000 impact to jobs. A hit to jobs that are added in January. But I think, unfortunately, I'm curious to what you think on this topic, is I think this is gonna be for market participants.

Kind of, uh, just look past the event and see what happens over the next couple of months, [00:09:00] similar to what happened in the fall with the hurricanes, like I said, that came through the south Eastern part of the country. So, I think there's gonna be a negative impact, but there'll be a positive impact on the other side of it.

So I don't think investors are gonna get too concerned about it in the near term.

Chris Versace: I think you raise a good point, but I'll counter with, there always tends to be some like knee jerk reaction when we actually finally see the data, right? Not everybody is connecting the dots like you just did Lindsey Right? You're a smart cookie. We know this.

And there are folks who are kind of asleep at the switch and they just see, oh my goodness, look at the big miss in the employment number and they don't go, oh, wait a minute. Geez. What happened? 3-4 weeks ago. Oh, right, right. So it's one of those things that I think it's important that we pointed out. But I do agree with you.

We're likely to get a pass on this. This is a well publicized event. There will be areas of disruption. The big question I have though candidly [00:10:00] is just, how long will it take for the rebuilding effort to emerge. Because I did notice that late last week, as this tragedy intensified, we heard more reports about damaged homes. Homebuilder stocks went higher, even though mortgage rates are hanging around 7%.

So I, I just wonder if maybe folks are jumping the gun a little too soon on something like this.

Lindsey Bell: Well, I think you might be right, too, because if you look at some of the insurer stocks, like Allstate and Mercury fell 20 percent last week. This week, it's hanging in there. And so I do think you get this knee jerk reaction from different parts of the economy, different sectors that are impacted in different ways. And, I think we're just really going to have to wait to see what the assessment is and what the impact actually is going to be. So it's going to be again really a wait and see. I think when you think about the insurers, this actually could be a benefit to them. You hate to talk about it in a positive way, right?

Because they're real lives and real people impacted homes lost, [00:11:00] like sentimental things gone forever that they'll never be able to get back. But insurance companies, when these types of events happen, it helps them to raise their premiums, which by the way, then flows through to inflation. FYI.

Chris Versace: Yeah. You're singing Warren Buffett's favorite song, right? He loves insurers and he loves to buy them when they're down and out, like after events like this, because to your point, pricing rolls in. Margins go higher. Earnings go higher. It's who would have thought that sweet Uncle Warren was such a cynic, huh? Not me.

Let's close this out by saying that from my perspective, if you're looking to play the rebuilding angle on this, I would suggest that you consider some of the more non residential construction stocks like United Rentals, Vulcan Materials, and the like. Because they're continuing to benefit from infrastructure spending and other nonresidential spending growth.

Wink, wink, Lindsey Data centers. Say it with me. [00:12:00] Data centers.

Lindsey Bell: Data centers.

Chris Versace: There you go. There you go. Thanks for that. All right. Let's move on to our third and final topic. We are at the mouth of the December quarter earnings season, and typically most earnings seasons begin with a flood of banks.

Whether they're big banks or other financial companies, we are getting them this week, JP Morgan, Goldman Sachs, Citigroup, Morgan Stanley, Bank of America, PNC, Wells Fargo, and I think BlackRock too. So Lindsey I'm curious because as you reminded me, you are an equity investor. When you look into these bank earnings and if you have a favorite one, great.

If you don't, that's fine. But generally speaking, what are the line items that you go to right away?

Lindsey Bell: Well, I mean, maybe this is old school. I always go to net interest margin. You want to learn how the companies are performing on their loans, if they're actually making money on them or not. And if they're [00:13:00] able to expand that. So I always look at that. But, when I look at these companies too, I like to look at top line growth too and what's driving that.

And for a lot of the big money center banks, the bigger banks, that's going to be deal activity, deal making. So whether it's M& A or IPOs, there's a prediction that that's going to pick up in 2025. And I think that we've got some anecdotal evidence, or hard evidence actually, from Jeffries, who reported earnings last week, and they talked about how their investment banking revenue came in better than expected, reaching a new quarterly record for the company.

So Jeffries is doing well. They're in the middle market. FYI, by the way, that was my first jobs out of college working in the investment banking unit at Jeffries.

Chris Versace: Oh, how many nights did you sleep under your desk, Lindsey?

Lindsey Bell: Too many to count, too

Chris Versace: So,

Lindsey Bell: But yeah, a lot of long nights, long hours there, but deal makings on the up and up for 2025. But also we just talked about interest rates. This is something that benefits the banks, right? Net interest rate margin. You [00:14:00] compare what their loan, the rate they're loaning at versus the way they have to pay off the depositors. And we've seen the yield curve turn into positive territory. That is a positive for banks, right? It means they're able to make money on their loans. So that's a favorable yield curve. There's a narrow spread between bonds and corporate loans as well, too. So that means that the health of those corporate loans that they're lending is positive. And so I think when you look at all this, you think about the deregulatory, the friendlier regulatory environment that we're entering in. The FTC commissioner and Lena Collins on her way out. We've seen changes at the Fed with Michael Barr stepping down in preparation for president Trump to take over and and potentially get some of his folks in there. So I think that this is a positive for the banks. I think numbers have been cut going into earning season. And I think valuation, when you look at the financial services sector, which has struggled since the beginning of December, look a lot less stretched than other sectors. So I think [00:15:00] there's opportunity here, Chris.

I don't know how you're playing it. I think that I'm sticking with the larger, higher quality names. I don't know how you're looking at financials.

Chris Versace: Well, I can tell you. In the Street Pro Portfolio that I run, we've been long Bank of America and Morgan Stanley, and they have been working for us. I think that. Picking up on your, the points that you mentioned, why Morgan Stanley, right? In particular, because when you look at their blend of business, they're not really like a commercial bank, right?

They're really centered on two key areas. Investment banking in 2024 was a better environment for deal making. And I agree with you that 2025 looks to be even better. But the other side of their business is asset management where they've been not only taking share, but benefiting from what we've seen in the market. You know, 2023 2024, two years back to back better than twenty percent. And we'll see what the, remember our conversation with Mr. Hirsch, right? So no Santa Claus rally. We had the [00:16:00] five day. The first five days was positive. Need to see what January does. And if that's the case, we could be in for another solid year, or at least It's according to the sentiment indicators, but I know you, Lindsey and I will continue to stick to the data and figure it out as we go.

That's what we do, but I continue to like Morgan Stanley for that with Bank of America to your point, I will be listening for what they say about net interest income in the coming year. But also stepping back, even though we don't participate in JP Morgan, I, like others, of course, will be very interested in what Jamie Diamond has to say about the economy, what he sees about loan activity going forward, what, his comments on interest rates both for their business, but also for the economy as well.

And I suspect, he'll sprinkle in some other insights that we'll probably put to work in the portfolio. So I am looking forward to that in particular. Now, Lindsey is there [00:17:00] any as we look forward, we're both kind of bullish on these big banks. Any risks out there, do you think?

Lindsey Bell: Actually, like, I kind of think the risk is to the upside,

Chris Versace: Ha!

Lindsey Bell: If I have to go negative, when I think about this, I think it's a far off risk, but the risk that the consumer slows down substantially and that delinquencies pick up substantially or foreclosures in the housing market pickup. So that would be one area of that. We got to closely watch as the consumer, but you know me, I think we're both positive on the consumer. I think they've been resilient for quite a while now. And I think they can continue that, especially with jobs data picking up in December. And I've been calling it a post election hiring pop that's been happening.

And so I think if that continues and real wages continue to grow, that the consumer can be okay and could continue to be resilient. But so that's where I look. The other thing is, I mean, you just got to consider geopolitics and, things that are out of our control too, but overall, or a [00:18:00] Fed policy mistake, but I don't know.

Chris Versace: Is

Lindsey Bell: I'm

Chris Versace: that all?

Lindsey Bell: I'm grasping for the negative. What do you think?

Chris Versace: You know, the one area of weakness I think would be for banks with greater exposure to the housing market, because to the extent that rates are higher for longer and mortgage rates are hovering, let's say closer to 7%, right? And as soon as we saw that in December the, Mortgage Bankers Association, new mortgage originations index rolled over big time on that.

And that just tells you that folks are not anxious to trade up in their mortgage rate to around 7%. So that could be a headwind, but I think you and I are going to learn a lot more about that as we get more inflation data. But you know, at the same time too, there, there is this component of household formation, right?

People do get on with their lives. And sometimes you got to move out, move into a new home. You got to move for a job, what have you. And I will share [00:19:00] this. I may not want to trade up to 7 percent in a mortgage, right? Personally, but my very first mortgage? Eight percent.

Lindsey Bell: Yeah.

Chris Versace: Not exactly a huge deal breaker when you think about it.

Lindsey Bell: Yeah, somehow the economy got along at rates like that back in the 80s, 90s, right? 80s,

Chris Versace: Nineties, Lindsey nineties, I'm not that old. Don't let the, don't let the temporary beard fool you. I'm not that old. All right. All right. Let's let's leave that there. And when we come back, folks we'll wrap up today's podcast and we'll share what we learned. In our conversation today.

All right, Lindsey that's a wrap for this week's episode of the What Does it Mean podcast. Ladies first. It also takes the pressure off me to come up with an answer. But what did what stood out in our conversation to you? What did you learn this week?

Lindsey Bell: What stood out to me is two things when we were talking about wildfires, you made the good point that oftentimes investors [00:20:00] overreact to big natural disasters or catastrophes like what we're seeing in California. So you see big movements in individual securities which can create opportunity or be a head fake.

So I think it's important to watch those stocks as we go forward here. How about you? What did you learn? What was the most insightful thing that we talked about?

Chris Versace: Well You know because I kind of fall asleep when we talk bonds and that dynamic the fact that you pointed out that the treasury yield has righted itself and that's an opportunity a potential tailwind for banks, that really steps out for me, and it says that I really got to pay a little more attention to that and, adjust my thinking accordingly.

That's what I would say. Let's see. What do you think of that? You probably thought I was going to say, I was surprised that you're not on Tik TOK, even though you are.

Lindsey Bell: I'm not surprised that you're not on TikTok, let's put it that way.

Chris Versace: Yeah. Well, Middle aged white guy. Can't help it. Sorry. Anyway. All right, folks, we will leave it [00:21:00] there. That is today's episode. Please be sure to check out the show notes for some other links and resources. Uh, you can find Lindsey on LinkedIn. I suggest you go there. She is posting some great stuff and you might even see some other interviews that she's doing.

As for me, you can always find me over at the Street Pro Portfolio and we'll be back with you next week with another episode of the What Does It Mean podcast.