Finding the Market Bottom

I say that because we had the culmination of the Fed's latest policy meeting, which was really no surprise. But what ensued after that? Well, if you paid attention to the market, and I bet you did, you were probably surprised by the violent move that we had over the ensuing days. But let's unpack all of this and ask the question, what does it all mean? Bob, Lindsey, great to be back with you guys. Lindsey, you did such a great job last week on the podcast, I was questioning whether I needed to return.

 

Lindsey Bell  01:01

Well, I mean, Bob and I were wondering if we needed you back. So happy to have you back. We're God. We hope you feel rested and rejuvenated, returning to this uber volatile market fun times, right?

 

Chris Versace  01:14

Well I may not be as quick to move Lindsey, you know, Italy, pasta, pastry. You know, if you were to say I ate my way through southern Italy, you would be correct.

 

Lindsey Bell  01:23

You got some really good wine too.

 

Chris Versace  01:26

Yeah, let's just say more than some and leave it at that. How about that, Lindsay?

 

Lindsey Bell  01:31

Fair enough.

 

Bob Lang  01:32

Well, Chris, I'm glad you took responsibility for the markets going down, because now you're back, and I think if you're back in the in the mix here, I think people can look forward to markets going going higher, and start making money instead of losing money.

 

Chris Versace  01:49

What are you saying, Bob, I leave things fall apart. I come back. As we're looking at the market today, it looks like it's rebounding a little bit. Are you saying I'm God's gift to the market?

 

Bob Lang  01:58

I would say so. Yes. I'm like, you know that's I. I've been told in the past that when I when I get on a plane, especially during the when the markets are open, that Look out below, you better protect yourself, because when Bob's in the air, good things don't happen.

 

Lindsey Bell  02:18

So Chris, how much did you pay Bob to say that is what I want to know.

 

Chris Versace  02:23

You know, probably Bob's weight and Twinkies is what I did. So whatever that might be, Lindsay, you can, you can figure that out.

 

Bob Lang  02:30

I have a couple of euros. I got a couple of euros from Chris.

 

Chris Versace  02:34

So yeah, that probably means I've paid too much anyway. Alright, so let me just frame this for everybody. So markets were, like I said, kind of pulling back, you know, in extreme measures, not not a little bit, but, you know, we had a couple days that were multiple percentage points. We were popping through some key support levels. And when we looked at it, we had, late last week, a July manufacturing PMI that disappointed, the July employment report disappointed, and that kind of rekindled concerns about a hard landing, soft landing debate. And then we got the the dissolution, I guess you would call it of the carry trade, which Bob I think we're going to pick your brain on. And then Lindsay, am I missing anything else other than hurricane Debbie or some other stuff that kind of might have popped out. No.

 

Lindsey Bell  03:26

I mean, I think really it was just like this, this period of changing monetary policy is what it came down to, for me, like people were grappling when, when volatility increases this significantly, so quickly it's, it's kind of people start grappling for what is, what is the problem? Why are we moving like this? So every day, it's, we're over analyzing and looking at different things. But I think what monetary for me, it was really, it came down to the change of monetary policy, not only in the US, but overseas Japan, making the surprise move higher. But I really, I think it's just, it's, it's this question of confidence in the Fed, Are they behind the ball, or are they on target? And I think that is, is still uncertain. We don't know. And right now, markets are deciding maybe they're behind the ball.

 

Chris Versace  04:17

Well, let's continue that in a minute. Lindsay, I also going to toss in. We're going to talk about earnings expectations for the second half of the year, because, as I'm sure you noticed Lindsay Bob, I'm not sure if you did, but the second half of the year, the growth expectation versus the first half moving lower. But we'll talk all about that, folks, and explain what it all means right after this.

 

Bob Lang  04:47

All right, folks, we are back getting ready to assemble the puzzle pieces of what happened last week and what we're looking forward to in the coming days, relating it all to the stock market and your investing journey. Journey. So Bob, let's start off with the carry trade. It's a little, I hate to say it a little technical, a little wonky for some folks, but let's turn to you, what is the carry trade that's unfolding? How does Japan relate to this and the recent move by the Bank of Japan? So really, what the carry trade is all about is investors or traders. What they'll do is they'll borrow money in a very low interest rate currency. In this particular case, they're borrowing in to buy risk assets. And this is a trade that is normally pretty stable, especially when the currency is not moving very much. And you know, for a long while the yen wasn't moving too much, interest rates were basically steady, very, very low, and then the Japanese central bank started raising interest rates a few months back, and what ends up happening is that that trade becomes a lot costlier, especially when the end starts to improve. So if you're, if you're what these traders or investors are doing, Chris and Lindsay is there, there's they're selling, so they're, they're using the yen to start buying risk assets, right? And so they can do that multiple times over. We call that leverage. Remember that, use it. Use leverage to buy risk assets, and then so when something happens, much like we've had with balmageddon, when volatility started to implode about six, seven years ago, what ends up happening is the people who are on leverage start getting burned, and they end up having to cover those positions. And that's what we saw happen in the of the past couple of days. You did see the Nikkei index on Sunday night, Monday morning, down 12.8% Well, last night we recovered. It was up 10% this these are some volatile numbers that that we haven't seen in quite some time. In fact, I heard somebody say that the net, the Nikkei, or the Japanese index, had its worst day, Chris, since 1987 anybody remember what happened in 1987 I do. I was in college back then, but dating myself, but for the record, but what's interesting about the the whole carry trade thing is it doesn't take long for that whole trade to unwind. And from what I from what I've been what I gather from what I've been reading and hearing, is that that unwind is completely done now. So now is it? Does it mean we get back to normal? Well, for a little while, some of these hedge funds who who had this trade on are licking their wounds from the gains that they had for a long time that also turned into losses over about two or three days, they'll get back into the game again, much like, you know, just like a dog gets led to water when they're thirsty. So I think that by and large, this trade was 100% responsible for the volatility we've had two or three days. Speaking of volatility, Chris and Oh, hang

 

Chris Versace  08:02

on, hang on, hang on, hang on. Let me just back you up there. So you're saying it was 100% responsible for the volatility, but was it responsible for all the volatility that we saw? Right? So the carry trade was definitely responsible. You're saying 100% of the carry trade, but it couldn't have been the only driver for that pop and volatility could it?

 

Bob Lang  08:22

No, it was a lot of other things that were involved as well, too. And then I think one of the things that Lindsay mentioned last week, she first introduced it two weeks ago on our first podcast, is something called the SOM rule. And I know she wants to talk a little bit about that, but I never heard about it. I chair Powell talked about it last week in his press conference. So if you caught some of that, but it was interesting that I think a lot of people glommed onto that, especially when the unemployment rate came out on Friday. I'm sure I know Lindsay will talk a little bit more about what this means, but I think that that was also a driver in people worrying about saying, uh oh. Fed rate cuts are, are, only one or two with this number, I think it's going to go up to three, four or five. And that was some of the expectations that were that were hit in there. And also, you saw fixed income starting to get get a catch a bid rates starting to come down. But a lot of that mixed together create a lot of volatility.

 

Chris Versace  09:20

Alright, so Lindsey, before we move on and talk about some of that other stuff that Bob was alluding to. Any, any other thoughts on the carry trade, Japan? Any, anything you want to weigh in on?

 

Lindsey Bell  09:29

No, I mean, I think Bob did, like such a good job of explaining it. It's this wonky thing that, because it create, because the moves were so big and they fed on each other, I think they bled across and created contagion across asset classes. So it wasn't just equities that were selling off. You saw everything selling off too, which, which can be scary. I think Bob has it right, that the we could talk about later, the SOM role created anxiety going into the jobs report, and then the. Employment rate kind of created a reality there that investors didn't really like. So I mean, I wouldn't, I wouldn't add too much on to what Bob had said. What I would say, though, is that volatile. We haven't had very much volatility in the markets this year up until this, this point in time, and we've talked about this before. We are, especially now that we're officially in August and we're moving going to go into September. These are two of the most, worst performing months of the year, not necessarily the most volatile. But in September, you do have less liquidity in the marketplace. People are on vacation. There's there's it makes any move. It can make any move a little more pronounced. But so what I will say is, prior to now, we had one 5% move in the market. And historically, you you have three to four, four moves like that a year. So we're, I think, a little behind the ball in that sense. The other thing I will say is, you know, I'm still pals with my old boss, Sam Stovall, over at CFRA research. We were at S and P Global together, and his work shows that, you know, the first quarter of this year was a really good price performing year. And so when you have years like that, and you have limited volatility, the second pullback that you get in a year can be greater than 10% it actually will average something like 12.6% according to the work that he's done. So I think that given the seasonality of the period that we're in, I think the uncertainty in the market related to the election to earnings, to cracks potentially in the consumer, the slowdown in the economy, I think volatility is here to stay, but that doesn't mean it's necessarily unhealthy. And I think we'll talk about this, but I don't think anything significantly, fundamentally changed in the market over the last several days.

 

Chris Versace  11:50

I agree with you 100% on that. Lindsay, I do think that the month of August, maybe into September, is going to be, let me use the technical term, bumpy for the market. But I think the key here in carrying out the discussion on the carrier, on the carry trade, what does it mean? I think the takeaway for folks is that while it is a bit technical, it's kind of a one off event. And I think the collective consensus here is that it's largely done. We might see some final reverberations kind of out of it, but large, largely behind us. So let's, let's move on and talk about the data. And Lindsay, let's tackle the question that you talked about, when in our opening comments, about the Fed, and are they behind? And I think as we kind of kick that off, I think the question is, are we? Are we really seeing the economy fall apart the way some folks are kind of fearing that it is and then it's more of a hard landing that's coming than a soft landing. My thinking is just kind of parsing the three key pieces of data that we got, July manufacturing, PMI, the July employment report, the July services PMI, I don't really think that we're seeing the economy fall off a cliff here, if anything, yes, manufacturing is weakened a little bit. Services strengthened a little bit. I almost think that they're kind of that they're likely to cancel each other out. But I also think, though, that the manufacturing economy may not be as weak as some folks are thinking. And I say that because earlier today, I shared a piece of data with Bob and Lindsay. I'm sorry I didn't share it with you, but I will now it's that the this is kind of a wonky piece of data, but the July logistic managers index in the US actually increased, hitting their highest level in four months as a combination of transportation pricing and volume has picked up again, month over month over month. And we're not going to see that pick up in transportation logistics volume. If the economy is, you know, really in decline. So I to me, it's almost like looking at, you know, truck tonnage, looking at weekly rail, rail car loadings, that, that kind of stuff, as a secondary indicator of the economy, right? I think it helps support the notion that, yeah, the economy might be slowing a little bit on the manufacturing side, but it's not kind of fault, like I said falling off a cliff.

 

Lindsey Bell  14:25

Yeah, no, I think you're right. I that dovetails with I saw a chart recently on shipping prices are elevated again. So I think that takes that into into consideration. I think we're getting mixed data. And I really, I really think if we go back to last year, July of 2023, May. You can even go back June. May, June, July, August of 2023, we're at this point in the monetary policy cycle where we're like, what's the Fed going to do next? Are we pausing? Are we cutting? Are we hiking? And the market gets anxiety. Around. And you can look back at history too. The market gets anxiety around these periods of time where monetary policy is shifting or changing direction, because there's always uncertainty about it, because there is the option to just pause and stay still, right?

 

Chris Versace  15:15

Yeah, yeah. So, so Bob. Why is it that the market has, I mean, we're three relatively I like to think we are relatively intelligent people, right? We follow our respective lines of expertise in terms of the data. Why does the market have such a tough time reading the tea leaves, and it tends to get ahead of itself on rate cut expectations?

 

Bob Lang  15:41

Well, I think the market has a little difficult time with fed credibility here. I think, you know, over over years, there's been a lack of a lack of credibility, or perceived lack of credibility, by the Fed and what is their main driver? I mean, we know what their mandate is, stable prices and to support a full employment those are the two mandates from Congress. That's really what their job is. But do they have all these other responsibilities or allegiances, like to the stock market? You know, for years and years and years, we heard there was a Fed put right. What kind of a phantom thing that you know, if the market's dropped a certain level, the Fed would come in and start you start adding liquidity. And we saw that happen in covid. We saw that happen in a financial crisis. But I think it's the credibility question Chris and Lindsay that that the market just doesn't trust what they're saying or what they're doing. More recently, we had chair Powell talking about inflation being transitory, and he was 100% wrong, right? And we were paying for his mistakes, his interpretation of what inflation was like a few years ago. We're paying for it because we have higher prices now, and they've had to keep rates higher for longer. They had to lift interest rates to five and a quarter, five and a half percent. We've been there for a whole year. And if, if there's, if there's a lack of credibility right now, it's on the side of the Fed, and I think the market's not trusting it. Now, the flip side of that Chris is, is that if the markets get it wrong, the market's going to end up paying for it, because the Fed is, is the Fed. There's only one fed to have one policy, and they're going to move it, move interest rates when they're ready, not when the market wants them. So as we learned earlier this year, when the markets were leaning towards six, seven, rate cuts January, February, and the markets took off. And all the markets got religion. And when the Fed said, slow down, we're not going that at that pace, all of a sudden, those rate cut expectations were reduced, and we ended up seeing the markets also get reduced as well too. Back in April, we had a good four or 5% retreat. So I'm worried now. I'm worried that the market's getting ahead. I think I heard something Well, I think Lindsay might verify this. That couple of day or two ago, Goldman, Sachs Citigroup are saying five quarter point rate cuts before the end of the year. I and I think the Fed Funds Futures are seeing that as well, too.

 

Lindsey Bell  18:24

Chris, so I mean, the CME tools at 100 basis points. So four cuts right now, but I think it was at five.

 

Chris Versace  18:30

Yeah, I think I wrote something, I read something this morning that I you know, there are varying groups inside of Goldman, but I think one of them came out, came out and said, 325, basis point rate cuts, but they could do more right kind of talking out of both sides of their proverbial mouth, I guess. I mean, we will see, we will see what happens. I think it's going to be interesting on the data. You know, to me the next update for the Atlanta Fed GDP now model is going to be the one to watch, but it's so preliminary. I mean, it's only just the start of the July, you know, data. And obviously we'll have July, August and September data, you know, before we find out what the September quarter GDP really looks like. But we but even before the before that, we're going to get a lot more data before the Fed September meeting. So, Lindsay, do you think the Fed has missed the window, they're too late, or do you think they're kind of baby bearing it, and they might be able to still time, time it correctly?

 

Lindsey Bell  19:32

I think they still have time on their side. I don't think these calls for emergency rate cuts, I think are kind of ridiculous, to be honest. I think the the economy is slowing, that is what monetary policy is supposed to do. It's supposed to slow things down. It doesn't necessarily mean we're gonna have a hard landing, but it doesn't guarantee a soft landing either. So I think that's this is the whole problem in the big debate that we're in right now is, is, where do we go from here? We don't know. And that creates anxiety and uncertainty in the marketplace. And so I think you're seeing the reaction in stocks that that you are. So I think the Fed has times time. I think there's obviously going to be the market's pricing in 100% chance of a rate cut in September. And I think that's appropriate. Is it 50? Is it 25 I don't know. We have to see. What if inflation fell off a cliff, you know, what if? What if jobs actually pop up, like, you just don't know, like, there was, there was weather impact there, you know, there's a lot of moving parts right now. I think you're seeing a softening, a weakening in in the economy. And I think that's not necessarily a bad thing. And I think it's too early to say that you're falling off we're falling off a cliff or not. The worry is, obviously, when, when unemployment starts ticking up, it can shoot to the moon very quickly. I do think, as you guys know, I write about a lot, I think that there's pressure on the middle income consumer. We talked about it last week. I'm not going to rehash what Bob and I went through, we talked about a ton of the different consumer companies, especially the ones catering to the middle to aspirational consumer, the higher end companies that have aspirational consumers, their wage growth has been stagnant pretty much over the last, you know, four, four years or more, and so I think that they're, you know, stimulus is it is out of the system. Wages aren't growing up, going up as significantly as they were. You've got the job prospects. If you look at the US, US, excuse me, the Michigan consumer sentiment prospects for job opportunities are at like three year lows. People are worried about their opportunities, and you do see the hiring rate fell to one of the lowest levels. Let me just look. I wrote down the stat. It was the largest drop in 16 months, and it was the lowest level since April of 2020, at 3.4% so I think employees are aware of the job market kind of closing up. And the other thing I talk about too is that the quality of jobs that have been added this year have been on the lower end. Yeah, it's all it's all hospitality and service workers and government and healthcare. Healthcare is good, but you're seeing declines or stagnation and information technology, finance and then professional business services, which is like a catch all for accounting, consulting, lawyers, etc, etc. Those are the good middle class income paying jobs, and so they are being stretched, and I'm losing my where am I at in this course?

 

Chris Versace  22:43

So no, so let me, let me see if I can bring it back. So you were saying earlier that, you know, the point of this monetary policy, higher for longer is to cool the economy. So I would say, then, based on what you said, Lindsay, that this is probably what the Fed wants to see, right? They want to see a slower rate of job growth. So that wage pressure, you know, the bidding up for people falls. Wage pressure, you know, starts to diminish. These, these are good things. And you know, it's funny too, because while I was away, I did see the headline of jobs, the number of jobs created in the month of July. And I was like, you know, I remember when that was actually a pretty good number, you know what I mean? And it's all just relative to the expectation, right? So in and of itself, you know, we can pick through the employment report. There's always issues with the data, but the but the figures are the figures. That's the way I look at it. And over 100,000 jobs does not say the economy is going into the toilet, folks. I hate to say it, but it doesn't Bob looks like

 

Bob Lang  23:54

I agree with that. And and I think the when people's hair is on fire, when they see 100,000 jobs being created when just the prior month it was, it was not much, not much higher than that. You know, just, it's just a point in time when people are choosing to panic when the prior month they didn't. I think the markets went, went up, skyrocketing in early July, right after that, that last jobs report. But, you know, be it as it may. I think that when what Lindsay was talking about is very important about the quality of jobs that are being created, I think that's extremely important consideration here, even as the numbers are still pretty, pretty strong and fairly robust, I think that you have to really worry about people coming in and and taking these jobs. One thing that Chris, that we, that we discussed last week was a little bit about productivity and how productivity has been holding up pretty well. We just saw strong productivity and lower wage growth unit labor costs when they came out to last week and that. Was a that was a huge positive, I think on came out on last Wednesday that we saw, when we see good, strong productivity means that the GDP is growing organically, strong, without the influence of inflation. So I think that that, in and of itself, is good. But the flip side of that, if jobs are being lost. People are being replaced. And if we start a vicious cycle of that going on, we're going to see the productivity levels running up even higher. Why is that? Because you're going to get, you know, one person doing the job of three people. They're going to be extremely productive when it comes to workers and so forth like that. May not be strong for the economy, but it'll be high for productivity, but we're not there yet.

 

Chris Versace  25:47

So Bob, let me, let me throw you a curveball here, if we're talking AI, and at some point robots, or as I like to say, robots, we're gonna see productivity explode in the coming years.

 

Bob Lang  26:00

Um, yes, I think it will. I think the people who are actually doing jobs will, who are who still have jobs and not being replaced by robots, will still be doing more work as then they then they were supposed to be doing in the first place. So no, I think the productivity numbers are going to are going to rise, are going to increase. And, you know, I still think that I'm not, I'm not, I'm not. Let's just say I'm not completely convinced that the robots can, can replace human beings in a lot of jobs out there. But, you know, I'm sure that that is going to be tested down the road. I think

 

Chris Versace  26:38

you're right. You know, I'm still waiting to see Chipotle automatic burrito folding robot come to market, but we will see. So Lindsay, let's, let's put a bow on this part of the podcast and help me. Help me, kind of put it all together. When it comes to the fed the data. What does it all mean that we're seeing is the market overreacting? And you know, we need to give it more time to see what the Fed's going to do or what what do you think?

 

Lindsey Bell  27:05

I think what it all means is that the economy is slowing, which isn't necessarily a bad thing. It means that rate cuts are coming, and I think that the Fed has the opportunity to do it in an orderly manner. And I don't think that a soft landing is necessarily off the table, but, but it does mean that we're in wait and see mode, which is can be a very uncomfortable mode to be in, right?

 

Chris Versace  27:30

I I agree. I agree. And I almost think that, you know, we've kind of vacillated over the last few months between soft landing, hard landing, no landing. And I think what we need to understand is, if the Fed is doing its job, the economy, as you said, Lindsay, is going to slow. More likely than not, a soft landing will be here. But the positive means that we will start to see those rate cuts. And I think it's important that it's not one rate cut. It's the start of a rate cutting cycle. And I think that will help investors who have been patiently waiting for turns and more interest rate sensitive environments and sectors kind of start to see those plays begin to pay off. Bob, yeah,

 

Bob Lang  28:15

so that whole rate cutting cycle is an important point you just made there, Chris, because I think this is something that chair Powell is concerned about too, because I think he knows, he understands that it's a process. He talked about this. He said it three times in the press conference last week, rate cutting cycle, rate hiking cycle, it's a process. It's not a one off deal. This is why he made the comment said, oh, one cut doesn't really mean anything. He understands that. He knows that it's part of a process that but once he gets that process started, you can't stop. You have to have a lot of confidence to know that inflation is is is going to remain low. Uh, we're having a little bit of difficulty in the in the employment area, and if that continues, then rate cuts are certainly going to help on that front, but he has to feel confident. The whole committee has to feel confident that this rate cutting cycle can commence without them having to stop or turn around and take back those rate cuts, because that is just going to cause a lot of chaos in the markets. I

 

Chris Versace  29:15

agree, and I think it you know, for folks who are looking for a resolution, we're cutting rates. Sorry, folks, not the way it's going to work, because it's going to be a constant monitoring of the data, just like we've been doing to figure out, you know, ultimately, is the Fed going to cut four times, six times, eight times. That's That's where we go from the start of rate cuts to where will the Fed end, and their, excuse me, and their rate cutting efforts. So you know, it's gonna be a lot of Groundhog Day. Kind of, watch the data, rinse, repeat, call it what you will. But let's, let's move on. In the opening segment, I said that earnings expectations for the second half of. The half of the year for the big basket known as the S p5 100 are starting to come down. So let me, let me share those figures. In July, the consensus expectation was that second half EPS for the S and p5 100 would grow around 11.2% compared to the first half of the year now with about 75% of the SMP 500 basket having reported their June quarter results, that second half growth rate is now down to about 8.8% here's the thing, we have 25% of the S p5 100 to go and Lindsay, I want to tackle something that you said a few minutes ago, right last week, you guys were talking about middle income consumers and the pressure that they were feeling. We know that they've been increasing selective trading down. Here's the deal among that 25% of the S, p5, 100 left to report, there's a slew of consumer facing names, especially retailers. I think that the odds are that 8.8% growth rate that we've just arrived at goes lower. What do you think?

 

Lindsey Bell  31:11

I think that's a safe bet. How much are we wagering? No, to put it into perspective, let me just if you look at the consumer discretionary sector, which I know it has Tesla in it. So take it with a grain of salt. But still, even with Tesla in it, the consumer discretionary sector earnings growth for the third quarter is expected to be essentially flat, and that That's down from the second quarter of almost 12% first quarter of 20% growth, fourth quarter of 2023 26% so they're starting to come up on much tougher comparisons. The consumer is slowing down, no doubt about it. But when I look at the S, p5, 100 overall, when you see earnings estimates for the second half being reduced as we're in the middle of the third quarter. That is atypical. You don't usually see numbers come down in the third quarter, usually by the third quarter. You've let me just finish this point, usually by the third quarter, numbers have like settled into where they should be. So analysts are cutting estimates now the fourth quarter. Usually you do see that come down in the fourth quarter, only because we always forget about the fourth quarter. Numbers are always too high in the fourth quarter. We're overly optimistic at the beginning of the year. We just kind of let it hang out there. I could say this is a an equities analyst previously, so you usually see that, but we're seeing both, both quarters come down, especially third quarter estimates. So it's a little bit concerning, but earnings worth is still going to be positive. Chris,

 

Chris Versace  32:50

I don't disagree with you with that, Lindsay, but I will disagree just slightly with you on one on one point and Bob, Bob knows, because he and I have known each other for a long time that I watch the consensus expectations for the S, p5, 100 throughout the year like a hawk. I've got massive spreadsheets i i track with fact set publishes each and every week, not only for the annual numbers, but the quarterly breakdown, blah, blah, blah, blah, blah, and I always get a little nervous when I see expectations for the second half of the year rather lofty, right? Compared to history. And that is what we saw this year. You know, we started off at a very high level, and they are dialing back, which I think is, you know, we're hitting more realistic numbers, right? It does mean that we're going to have to have to adjust expectations for the market multiple as a result, because earning growth will be a little slower. But you are right. Lindsay, you know, overall they're still growing. The the concern that I'm starting to turn to now with the market is for expectations for 2025 because typically we see the forward year consensus. You know some somehow, I can't explain how Wall Street does this, but somehow we always start off with the forward year up about 10% right? But you know, no rhyme, no reason. You know why? Because, because, why? Don't ask me that question. Nobody's got an answer, but, but this year, the number is looking more like 14% growth going into 2025 now that that is a very big number, and some of it will hinge on something we just talked about, the prospect for the rate cutting cycle to begin and expand, whereas a lot of sectors that have been kind of, you know, housing, for example, in the multiplier affected, as on the economy might, might come back, you know, but we'll see. We'll see. So that's I'm a little more concerned about that Bob. Any any thoughts on the earnings front? Yeah, so

 

Bob Lang  34:56

I would say that, you know, the. If you're in the rate cutting crowd rooting for the rate cuts, be careful what you wish for. Because I think when we start talking about rate cuts coming into the economy, there's a reason for it. It's because the Fed is trying to re stimulate the economy, or else, you know, avoid a recession. Now we've, they've been, there's been talk about this whole soft landing scenario. If you look back over history, there's never been a soft landing. They've tried to do it, tried to land the plane softly, but has always generally been either a hard landing or no landing. And and I think that that's a little troublesome here, hearing that 14% in 2025 if you're if you're banking on rate cuts to help get you to that number, I think if the rate cuts are going to be aggressive in 2025 but we're looking at three or four rate cuts to get down to some neutral rate. I think Lindsay and I talked about it last week, three, three and a half percent, maybe a neutral rate. You're only talking about, you know, 12 rate cuts all together, 1112, rate cuts all together to get to that neutral rate. I think if you're banking on rate cuts to get you to a 14% earnings growth rate, I think you're looking at it all wrong. And I think of anybody who's banking on that happening, I think the reason for the rate cuts is because the Fed is looking at earnings probably slowing down even worse than that. So there is certainly a disconnect there, Chris, that I can't seem to reconcile myself. But I guess we have to wait till we get to 2025 right?

 

Chris Versace  36:35

Not really. Those expectations will move ahead of that. Go Go, go ahead. Lindsay, no, they

 

Lindsey Bell  36:42

will. What I found is like looking over history, seven for any annual year, January through December, 70% of the reduction in earnings growth expectations on January, where we went through December, happens in the first quarter. So people kind of refocus their expectations in the first quarter, after we get through the full year. But I agree with you, Chris, I think those numbers are are too high as they currently stand, and they might, you know, you know, I don't know what, what kind of rate cut expectations are in those numbers, but I you know, there's always that's where the opportunity lies right, where earnings growth is moving who's moving up, who's moving down. One thing I will just quickly add is that I was looking at the tech sector before, before our call, I was looking at the mag seven, because everyone's like, you know is this, this is a tech wreck, the sell off that we've had, right? The NASDAQ and correction territory already, right? Well, the mag seven earnings expectations for the third quarter have actually moved up 2% in total. Now, if you, if you do the next 12 months, they're down. They're down a little bit, though, not not significantly. They're down about, you know, 3% two and a half percent. So it's not, hasn't been that much of a move. Still, these are, these are the companies that are giving us the greatest growth, their multiples have come down, if you like, these stocks, at 33 times at the beginning of the year, which was cheaper than the five year average of 36 times. Now they're trading at 27 times. I'm not saying they're done selling off. I'm just saying that.

 

Chris Versace  38:15

So let me

 

Lindsey Bell  38:17

haven't changed.

 

Chris Versace  38:18

Let me, let me connect the the dots there for you Lindsay, and ask you a question, if, if someone you knew, say me, for example, was a portfolio manager for, you know, a product, and he saw that and stepped in and maybe picked up some Amazon, some Microsoft, and at the advice of The counselor, picked up some meta yesterday. Would you say that's a smart move, or at least a good move? I

 

Lindsey Bell  38:46

think it's a good mood move. When you get a dis, when you get these things on sale, it's like you go to the store, you want to get your jeans on sale, right? Everybody wants a discount. I don't think the fundamentals have changed, like when you look at earnings, what did people what drove the stocks down even before the whole market sell off. We had we had Microsoft, we had alphabet report, right? And they sold off on AI spending being greater than anticipated. Look at the three big ones. It was only up by 5% more than what I mean, we're talking billions of dollars granted, but it was up 5% more than what Analysts had expected going into the reports. And now we have religion on this spending, which we all believe is the future of productivity that we talked about, and all these things, so I don't know.

 

Chris Versace  39:32

So I think it was, I think it was two things, right? I think it was, Oh, my God, they're spending even more than I thought. And I think there was a lot of questions over are we starting to see the benefits of all this AI stuff yet, right? And here's the thing, I can understand that people are asking this question, but when you look at the results from ServiceNow, right? You look at what Microsoft said about the uptake of its co pilot offerings on its earnings call. You look at what Palin. Tier just announced. And then you take a look at lumen, which booked a massive dollar amount sales order, I think 5 billion, and they said they're working on a total number of up to another 7 billion for infrastructure capacity because of AI. I think we're going to start to see some of these numbers roll through that say, Hey, yes, we are seeing that uptake on AI and that these, these big tech companies, they're spending, you know, they've got to build out the capacity for what's coming, you know. And we'll have to double check it. I think we talked about on one of our original podcasts about the risk of double booking in the orders and things like that. So we'll have to continue to watch that. But I agree with you Lindsay that, you know, and I wasn't joking, we actually stepped into with the Street Pro portfolio and did what I just said we did. We actually bought one other we added to another position as well as Bob knows. But let's, let's wrap this up this part, because I do want to get on to our final part of this section of the podcast. So So for earnings, Bob, help me out here. Earnings expectations. You know, they're, they're likely to come in a little bit for the second half of the year as we go through the balance of earnings. And we, and we are collectively concerned about the expectations for 2025 up more than 14% for the S, p5, 100. But is the message, Bob. It just means you got to be a good stock picker and pick your spots.

 

Bob Lang  41:27

Yes, we're still in a stock pickers market here. And you know, you're either in a market of stocks or a stock market, right? Stock Market is one where the market can go down, and stuff that you're in will go down, regardless of whatever is happening, the macro takes over and starts driving the action. Or if you're in a market of stocks, where you can be a selective stock picker, which has been where the best trades and the best investments have been done over the past you know, several years. Look, you know, if you pick, if you picked Nvidia, pick meta, over the past couple years, just to name two, you've well outperformed the rest of the market for the past year and a half, two years. So I think we're in that stock pickers market, Chris, I think you can, if you can be picky and choosy. I know the street portfolio does. We do a great job in trying to select names that will outperform the rest of the market, and I think we've done a pretty good job of that. But, yeah, I think certainly, you know, even with those high expectations, with earnings, if you can pick stocks, you can do well, alright. So

 

Chris Versace  42:36

so far, we've talked about the carry trade, recent economic data and the Fed earnings expectations. So let's wrap it all up, given everything that we saw coming into this week. And I'm just going to throw this question out to both of you guys, how can we find the market bottom? Like, what do we look for?

 

Lindsey Bell  42:57

What do we look for the market bottom? I think, I think, well,

 

Chris Versace  43:01

how do you, how do you identify it, right? Because there can be false starts, right? What? What does it take for you, Lindsay, to get comfortable and saying, like, Okay, I think the bottom is in,

 

Lindsey Bell  43:12

oh, this. I mean, it's not an easy question, right? That's

 

Chris Versace  43:15

why, that's why we started with you first. You're the big brain. Here we got the counselor in the brain.

 

Lindsey Bell  43:20

Well, I think for me, what I want to do is I want to get through retail earnings. So I think it's going to be hard for the market to find the bottom until we get through that, because it's going to give investors more reason to worry about the consumer, like we talked about, the cracks in the consumer are going to be evident as these retailers report earnings, and maybe that's partially priced into some of those stocks. But I think we need to get through that. I think we need to see what inflation is going to be like, and I think we need to see what jobs look like, you know, I think it's a long road ahead, in other words, and stocks, typically, it takes a while for them to bottom and then recover. So, so

 

Chris Versace  44:00

earlier on the podcast, I said, I think the next couple of weeks are going to be bumpy. It sounds like you're in that camp as well.

 

Lindsey Bell  44:07

Yes, I think it's going to be hard for us to see green shoots in the near term.

 

Chris Versace  44:12

All right, let me wheel to Bob on this. So Bob, we saw the market kind of break through its RSI levels yesterday below 30. That means they're classically oversold. We saw the VIX explode higher, right? And it's, it's traded off, you know, late yesterday, being Monday, and again, today, Tuesday. Does that give you any comfort that we might be closer to finding a bottom in the market?

 

Bob Lang  44:41

Well, let's start off with the with the VIX here, which, by the way, tag 65 yesterday, which was, historically, it was the third highest level Chris and Lindsay that we'd seen in the VIX the previous 220 20 March. Trip 2020 when actually we hit the highest level ever. And then prior to that 2000 8009, financial crisis, so yesterday was history making day with the with the such a high vix level. But as, as you just noted, the VIX has come down quite sharply, and we're down into the back into the 20s. Now we're 2026. Right now is the VIX is down about 35% today. It fell off of those highs on On Monday, the fifth quite, quite sharply. And a lot of fear built up, but then it's come back down, and that will give me a lot more confidence to know that the market has bottomed here. Do I need some see some follow through? Yeah, I got to see some follow through. We're seeing a little bit of it today here on august 6, but a little bit more and a little bit more digestion. Come back and test these lows from yesterday. I know it's going to sound painful for some of you, but I think we got to come back down test those lows and make sure that those are good, and then we can shoot right back up again. I mean, maybe we're talking September, October, before we we start seeing a move, move higher, but a little basing period is good, and then again, making sure that low yesterday is is solid.

 

Chris Versace  46:15

Okay, all right. And with that, we'll be back to wrap it all up. Do?

 

Chris Versace  46:27

All right, folks, we're back, and we're gonna, as I like to say, wrap up the podcast, sharing some things that we learned and things that we are looking forward to, to keep our eyes on the market. But I will say, you know, I really do enjoy talking with you guys, because we cover so much ground here, and I think that we really do such a great job of helping inform listeners as to what's going on and telling them what things really mean and what they need to focus on, what they need to know. So with that, Bob, what did you learn during our conversation today, and what, what? One, two things are you looking forward to over the next couple days?

 

Bob Lang  47:08

Well, the one thing I learned here Chris Lindsay. Lindsay is about, you know, how disconnected the markets get between where Fed policy is and where the expectations are at. And oftentimes they're, they're in alignment, but most, most recently, they've been out of alignment, and they continue to be, and that is causing a lot of uncertainty in the markets. Markets hate uncertainty, and as a result, we have a rise of volatility, which we've had the past. You know, several days will that come into alignment again? I don't know. I do think that there's continues to be a disconnect with market expectations of earnings and actual earnings that are that are falling into into place here. And I think those lofty expectations into the end of the year and into 2025 are going to be troublesome if, if they're too if they're too high, and these companies can't deliver on that promise, but I think that then and there, this whole disconnect situation has been a little bit concerned.

 

Chris Versace  48:13

All right, Lindsey, what about you?

 

Lindsey Bell  48:15

Yeah, I mean, I guess for me, I think what it the takeaway for me is that the fundamentals haven't changed significantly. The economy is slowing. Companies are starting to issue more cautious guidance as we look out into the end of the year. But things aren't falling off a cliff. They're doing what the Fed intended them to do. And so I think in that environment while we need to watch everything. And you know, you can't just sit back and kick your feet up, and you need to be actively participating and watching the market and understanding what's going on. I think it's, it's it's not as bad as maybe the last couple days have feared.

 

Chris Versace  48:57

I agree. I agree. And with that said, Lindsay, what? What are the one or two things you got your eye on over the next couple days, or even into next week?

 

Lindsey Bell  49:06

Well, I'm going to keep my eye on jobless claims, because I think that's another one of those things that people are making it out to be a bigger issue than what it is. I think there's some volatility with some different weather, things and different things going on. It's really not that out of out of whack those numbers yet, so going to keep an eye on that. And then obviously inflation, inflation next week is going to be super important. So that's what I'm looking forward to. What about you?

 

Chris Versace  49:35

You're stealing my takeaway, and

 

Lindsey Bell  49:37

what were you looking forward to?

 

Chris Versace  49:38

Well, let me start in reverse order, because you were starting to steal my thunder there. Lindsay, you know, next week we do have the next iteration of CPI PPI figures, but because of our conversation about the consumer and those retail facing companies, it will be July retail sales numbers that are out next week that I'll be really focused in on. Yeah, because, and here's the reason why a lot of retailers have a January fiscal year end that means their next quarter ends on July. So when I look through the July retail sales report in the nice column all the way to the right, they will give us a nice benchmark for the quarter that ends in July for the various reporting items. So that's what I'll be looking forward to, you know, in terms of what I'm when I'm walking away with is just the context and perspective that you guys help, you know, bring out. I think it's extremely valuable, because it's easy to get, as I say, lost in the sauce, right? And I think what folks who are listening here need to understand is that sometimes you've got to take a step back, put the emotion to the side, let the data talk to you, as I like to say, and really understand what's happening. And when you do that, as you pointed out, Lindsay, there are times when opportunity presents itself, and you have to be open to that as an investor. You can't be kind of cowering in fear. You've got to remain God, I'm going to how many tropes Can I break out here? You got to be cold, you got to be cold blooded, and you got to be able to react when the moment presents itself. And I think that's one of the keys. It's not easy. It's easy to throw your hands up, but that's why we're here, and we're helping, trying to help listeners recognize what's happening and telling them what does it all mean. So with that, folks, that's today's episode. Thank you so much for joining us. We will be back next week when we break into the inflation data, the retail sales data, more earnings and probably talking about what some fed heads are saying, but between now and then, thanks for listening