Is the Inauguration the Start of Extended Market Volatility?

And I'm sad to say, I think there's another storm coming. So Chris is starting off getting a lot of exercise, putting his new Oura ring to practice.

Lindsey Bell: And is that making Chris grumpy this year?

Chris Versace: You know, This time of year when you kind of go dry January and you cut out the sugar trying to be a good little person, could I be a little grumpier? Yeah, it's entirely possible.

Lindsey Bell: Well, we've got a lot more in store this year for our listeners including more guests, right? We're going to bring more guests onto the show. We're doing shorter, [00:01:00] snappier episodes. And, you know, we're going to jam pack them with tons of factoids that we hope you find valuable and interesting and including today, we're going to talk about the January bounce back.

We're going to talk about the kickoff to earning season, which is next week. We're going to dive into what the inauguration, which is coming up on January 20th, means for investors. And then we're in the midst of CES 2025 in Las Vegas. We're going to talk about some of our big takeaways there. So we're going to take a short break right now.

We'll be right back with this on the other side. Welcome back, everybody. Chris, let's talk about this. No Santa Claus rally, but a

Chris Versace: bah,

Lindsey Bell: January. What's going

Chris Versace: bah, little bah humbug, wasn't it? At the end of the year, people were a little concerned about the Santa Claus rally that didn't show. You have to remember that's the last five days of the trading [00:02:00] year, first two days. And I think we were kind of head faked on that first day of trading, Lindsey.

People, kind of said, ah, folks are back from vacation, stocks is sold off. Yeah. There could be some good value here. And I think that's ultimately what we're going to see, but unfortunately just not captured in that Santa Claus rally timeframe. However. We are in the midst of yet another seasonal indicator.

You know, these things, I remember when we spoke with Jeff Hirsch, he was like, rattling all these things off. And at the time when we taped our podcast with him, I was like, man, oh man, it's like swinging a dead cat. You can't avoid it. And sure enough the first five days indicator, were in the midst of that.

And I would say it looks like we started off positive. But as we're taping this, we did get some not so good economic data, Lindsey, that I think is throwing some cold water on the market. I'm of course referring to the red hot prices reading that we saw in the December [00:03:00] services PMI came in at 64. 4 according to ISM.

That's up from 58. 8 in November, the highest level, Lindsey, in over a year. And I think that is going to throw some cold water on timing for the first rate cut of 2025, assuming there is a rate cut in 2025.

Lindsey Bell: That is a very good point, and yes, I think consumers are a little bit tired and a little bit weary of prices continuing to go higher. But I think it's also a reflection of where the demand is, as well, as there is demand for services more so than goods. If you look at inflation split between those two categories, you definitely see that services has been much hotter and goods have been cooling. But that being said, it's all going to play into earning season. And I think it's going to be really important, the prices component, because we're looking for, I look, you know, me, I look at cap IQ earnings, growth rates. And the current estimate for the fourth quarter is 8. 7%. [00:04:00] Which I say, that's pretty reasonable when you think about the expectation for fourth quarter GDP of two and a half percent. But the problem that I have with that is that when we go into earning season, what we want to see Chris, is we want to see a low bar. So you want to see, you want to see earnings estimates come down so that companies can easily exceed them. You also want to see the market come down, which, okay, we saw that in December, but this rebound is kind of muting the decline that we saw in December. And when I look at the performance of the market since the beginning of October, which is the beginning of the fourth quarter. We're still up like three and a half percent. So I think the bar is a little bit elevated going into this reporting period, but getting back to your prices, the growth for earnings is expected to come from margin expansion, continued margin expansion,

Chris Versace: Yikes,

Lindsey Bell: But so we're going to need to really see sales growth come in better than expected.

Chris Versace: I [00:05:00] think you're right on that. When we look at, these rising prices, whether their wages, or you and I over the break kind of talked about the FAO food price index that just continues to move higher. And I, it really causes some concern margins for restaurant companies, food companies.

But it also tells us that this inflation, the sticky inflation that consumers are seeing, particularly around food prices is likely to remain. So I just use those two as an indicator that says, if there's one thing I want to be laser focused in on this earning season, it's going to be margins. Because the extent margins are eroding that means that even if we get that sales growth, it's not going to translate to the bottom line.

That's what I'm concerned about.

Lindsey Bell: Yeah, and I think a lot of the margin expansion is going to be carried on the back of technology, communication services in the tech sector which I know we're going to talk about CES a little bit later. That to me is, and I think it sounds like we're in agreement, that's part of the risk for at least the next several weeks as we're thinking [00:06:00] about where the market goes from here. What else is on your mind from a risk perspective, at least in the near term.

Chris Versace: It's got to be the market multiple. I mean, You take a look at where we are, we're 25 times, what we would argue are trailing earnings, right, for 2024. The market's really focused on 2025. But even there, last night's close 21. 7 times call it just under 22. You sit there and you go, okay, all right, 22, but here's the context, everyone. The market peaked at 21, 822 and 23. 1. Peaked, right, at those levels in 2023, 2022. And yes, 2021. The question you have to ask yourself is how much more can we see in the market multiple? And if you go one step further, trace it all the way back over the last 25 years. And we have to make some adjustments, right?

2001 was the recession. 2020 we all know as the pandemic. So multiples, we kind of have to [00:07:00] toss out for those two years. But if we look at the rest of it, the market peaked, absolute peak, 24 times in 2001. So you got to say to yourself. Maybe we have a little bit of more to go in terms of multiple expansion, but not much, which brings us right back to what you were saying, Lindsey, it's going to be all about earnings

Lindsey Bell: Well, and you know, and I'll just, I'll finish it off with one little point too, is that 22 times multiple from 2022 when inflation was at its peak and operating margins were also at its peak because I think companies were able to benefit from higher prices, the ability to pass on higher prices and gather some margin.

We're right there today. And so the question really becomes is how much more margin expansion can we get in in the year ahead too. So it's going to be all about what the outlook is from these companies too. So we'll be keeping an eye on that and we'll be talking about it over the next several weeks.

Right Chris?

Chris Versace: 100 [00:08:00] percent and you just used some key buzzwords, Lindsey, you said outlook, and I think when we trace some of the recent data back, there seems to be some improvement in sentiment in the business community, and I think that ties back to, early November with the recent presidential election and the idea that President Trump will be a little more upbeat, call it business friendly.

And that outlook translates to January 20th, which happens to be Inauguration Day. And I think that's going to be the start where we're going to start to see some official policy out of the White House. And I think that's going to be another catalyst that we'll have to watch for the markets, whether it's going to be the use of tariffs, tax cuts, what have you.

I want to take the other side of this coin, Lindsey, because while a lot of people are upbeat for it, I'm a little nervous about it. I say that just, if you go back to Trump's first term, there was a [00:09:00] lot of uncertainty in the market. You and I, as investors, we kind of like to know, okay, the date is coming, the data leading up to the data that we're going to get seems to be positive or negative.

We can kind of get prepared. This guy, I understand art of the deal and all that other stuff, but man, oh man, he loves keeping people off balance and that's just not good for the market.

Lindsey Bell: Yeah. I mean, I think part of what's been driving the upside in the last several days for the market is this news that potentially tariffs might not be as expansive or as elevated as expected. The Washington Post had a report out, but then Trump denies that on truth social so you don't know what to believe and we all know like you always talk about he's this master negotiator so I think that Inauguration day doesn't necessarily mean that we're going to all of a sudden have this clarity on if campaign promises align with reality. But I don't know. Maybe it's a step closer to less [00:10:00] uncertainty, but I I hear you I

Chris Versace: I, I don't know. I just, I think it's going to be like a ping pong match all day, all long, every day. What did he say? What didn't he say? Is he taking it back? Is he expanding it? Da. Some folks thrive on that level of uncertainty and that's fine.

It's just not what the market likes. And I think that's the hard part. So you know, anybody who's expecting to have a high degree of clarity and predictability, sorry folks, I just don't think you're in for that. Buckle up, be prepared for some potentially volatile times ahead,

Lindsey Bell: Well, and that being said I would just say I think that there maybe there is potential opportunity because we did have this big run up in the Trump trade into the election and even following the election maybe through through November for some categories. But If you look at just at the month of December and even into January, the weakest trades have been the Trump trades.

You've got, energy down nine and a half percent, industrial [00:11:00] down 8%, small cap down 8%. This is in the month of December, industrial down 8%. The dollar has bucked the trend. It's remained strong, but

Chris Versace: Which is something he doesn't want, right.

He bemoans high interest rates, bemoans the high dollar because it's, they're less competitive. And he's not wrong. That dollar is also something that, if we were to go back a couple moments ago and talk about what you want to watch for the upcoming December quarter earning season, the dollar's got to be in there and its impact on multinationals because it's going to be a drag.

And I think we heard some of that recently from Nike and others. But the other side of this uncertainty, Lindsey is, I don't know if we call him Trump too low or little Trump or baby Trump, this guy, Elon Musk, holy cow, who is this guy? And I say this because he's overseeing how many companies and he's worming his way in, to the Trump administration and he's not even elected. So who asked for this guy?

[00:12:00] Doge,

Lindsey Bell: Trump did dodge man. Dodge.

Chris Versace: Doge, just like the coin.

Lindsey Bell: Just

Chris Versace: come on.

Lindsey Bell: haven't checked the coin out in a while. How's it

Chris Versace: So the only thing I'll say about this is if we have Trump on his own embracing unpredictability I think, you know, you factor in or layer on top Musk, it's going to be even more unpredictable. And I think, again, I, we just need to brace ourselves for that kind of sticking to the data and other indicators to try and navigate the tumultuous times.

But you are right, Lindsey. Not only did some of those sectors sell off some of them, they're oversold in certain stocks. And the other group that I'll throw in there will be the defense contractors, because there's a lot of concern over what Doge may do on that front, even though I think it's overdone.

My understanding is Doge is only is going to go after areas that're not overseen by Congress. Again, we'll have to wait and see how it develops.

Lindsey Bell: I think that this could go either way. There could [00:13:00] be, to the extent that policy is positive for some of these sectors that have been beaten down you could see a pop. To the extent that there's more uncertainty and confusion, it could continue to put pressure. So I think that it's going to be a developing story throughout at least the 1st quarter.

So we'll keep an eye on it. But speaking of your boy Musk and Tesla, we can't ignore CES happening as we currently speak. And that it's the Vegas conference, consumer electronics conference, and it is highly watched in the tech space, right? Because there's a lot of announcements that are made this time of year, but it is a, you know, I think as wall streeters, as investors, you're looking for the big business announcements. But it really is the focus of it is is the consumer products aspect of it being said we can't ignore like the who's stealing the show so far Nvidia,

Chris Versace: Yeah yes, yeah, Jensen Wang gave a [00:14:00] keynote speech on Monday night, the first keynote speech, there will be others coming but what did he do? Man, he laid out a world vision for AI. Effectively AI going to be everywhere all the time. It's a lot like that movie that won a lot of awards.

I'm gonna butcher the title everywhere, every place all the time. That's it. That's the vision for AI. Look, it says that we're still in the early innings. And if it was just Jensen Wang at this point, I think people wouldn't pay as much attention. But when we look about, Dell kind of rebranding their PCs to take advantage of this.

We look at Samsung introducing robots, introducing augmented TV with AI. You can watch TV, Lindsey, and you can click a button, and if you're watching a food program, it'll instantly bring up the ingredient list so you can go buy it. It's really kind of, kind of interesting I think. How much utility I would get outta that, I don't really know. But I think it says still in [00:15:00] the early innings. And I think when we step back and we look at the surveys that talk about enterprise spending on ai, we talk about more devices getting ai this is gonna be. To me, like the internet 2. 0 in the sense that it's going to be in a lot of places, we're going to become reliant upon it.

And in that environment, as an investor, I want to own the picks and shovels.

Lindsey Bell: Yeah. No, totally. I agree with you. But do you own it by by owning individual securities like an nvidia? That's Trading it 50 times or do you buy, you know, do you buy an ETF? know, the soc did that 34 times on a PE basis. So it sounds a little cheaper, but, and you're diversifying your exposure. How do, what's the best way, I think to get, to get exposure to the ai in your

Chris Versace: Wow. Trick, tricky question, tricky questions. So I'll answer that a couple of ways. The first and foremost, I would say is if you're an [00:16:00] individual investor and you don't have a lot of time, but you want exposure, I would say that an ETF is probably the go to move. To do that, you do get your broad based exposure.

You're not overly reliant, but you also don't have to be focused on any one particular company, knowing the inner workings, the nuts, the bolts, that sort of thing. But one of the issues with ETFs out there is that they don't always have what we'll call high purity. You really need to understand all the constituents in the basket that the ETF is investing in.

A lot of times there's, filler either for trading volume purposes or just because folks want to cram certain stocks in there, certain favorites. If you go back in time and you tell me how John Deere got into a space ETF. I would be all interested in understanding the quote logic behind that decision, which is ridiculous since it's an ag and construction equipment company.

But I digress. The 2 other ways to do it. One, I would argue that's better than [00:17:00] an ETF is using a model portfolio where you can have six to eight, six to 10 names that you have very high purity relative to the strategy. And anybody wants to know about that, you can just message me offline and I'll tell you a hell of a lot more about that.

But as an individual who manages a portfolio at the street pro portfolio I do the legwork, Lindsey, as you know, and invest in individual stocks. Okay. Thanks. Do we own NVIDIA in the pro portfolio? We do. Do we own Marvell in the pro portfolio? We do. And we own several others, both on the software side and other chip areas as well.

So that's the way I think about it. Long winded, but hopefully complete.

Lindsey Bell: Yeah, no, very complete. Like, I tend to agree, too. If you, if you don't got a lot of time and you're doing your own thing, ETFs are a great way to invest. But I think some of these big juggernauts are worth looking at. They're the, they're the names when you look at the index where earnings are increasing.

They're the ones where margin expectations are rising. They have, you [00:18:00] know, in this day and age, they're much more healthy balance sheets. They've got cash flow. Some of them even pay dividends. So um, it's worth, it's worth taking a look at the individual securities. If that's something that you're interested in and fit your risk profile and all those, all those disclaimers, right, Chris?

Chris Versace: Yep. Yep. What do you say, Lindsey? Let's take a break and wrap it all up.

Lindsey Bell: Sounds good.

All right.

Chris Versace: We are about to wrap up the show. This is where we share with you the things that kind of stood out to us or things that we learned during the course of our conversation.

Lindsey, I'll let you go first.

Lindsey Bell: Yeah. I mean, we talked about so many awesome things that are happening at the start of this year, but I think what I've taken away there, there is a handful of uncertainty that does reside in the marketplace. The good news though, is, is that earnings growth is likely to be positive. We have, you know, a new [00:19:00] president getting started here just relatively soon, and he is pro business.

He is pro market. And so I think that there, there are some good things going on here. And then we talked about the AI revolution essentially. That's going to be a big underpinning to determine the direction of the market this year. And so I think while there's uncertainty, I think there's a lot of positivity to chew on as the next few weeks and months unfold.

Chris Versace: Yeah, I think if I had to zero in on one thing, it's going to be yes, we talked about uncertainty and we talked about the market multiple, you've heard me say this before, Lindsey, most investors don't buy the market. Even like we were talking about if you want AI or digital infrastructure or some of these areas, you're looking for specific strategies, not necessarily buying the market as some folks tend to think that they do. So be mindful of the market valuation, but also zero in on areas of faster revenue growth, faster earnings growth, because that's where you'll tend to [00:20:00] see the valuations continue to expand. And that's the area you really want to be.

And to the extent that we get some uncertainty in the marketplace, whether it's from Trump, Musk, or some questions over the Fed and rate cut timing, be prepared to use that to your long term advantage. That's what I got, Lindsey.

Lindsey Bell: Couldn't have said it better myself. Well done, Chris.

Chris Versace: Thank you, Lindsey.

That's it for this week. Folks, thanks for listening. Be sure to check the show notes and resources below. For Lindsey Bell, you can check her out on LinkedIn, find all her great writings over there. As for me, Chris Versace, you can find me over at the Street Pro Portfolio.

See you soon.