Talking Turkey, Equities, and the Market

Marc Zabicki (00:00):

Hello folks, and welcome to this edition of the Market Signals podcast. My name is Marc Zabicki, Chief Investment Officer of LPL Financial. Joining me today is Quincy Krosby, Chief Global strategist. Quincy, how are you?

Quincy Krosby (00:15):

Fine, thank you, Marc. This is my favorite week. Thanksgiving is one of my all-time favorite holidays.

Marc Zabicki (00:21):

Yes. And it's my job today to tee up a few things that we want to talk about. And we are reporting this on Monday, November 20, so the Monday ahead of Thanksgiving. Before we get started into some of the thoughts that I know you wanted to share with the audience, let's talk a little bit about what we've seen in the short past from equity markets and fixed income. Obviously, equity markets have endured a lot of positive momentum, really across the board. So, what, would you say about that, you know, momentum Quincy and its likelihood that could continue?

Quincy Krosby (01:04):

Well, first of all, one of the major catalysts for the market coming off the lows, and that it began on November 1st, was the announcement from the Treasury Department suggesting that the supply that would have to go into auction actually was going to be slightly lower, which was music to the market's ears. Because one of the problems for the market has been that with the oversupply going into the auction, that the yields coming out from the auction, where it was settled, were just too high. Remember, that was what got the market equity market so nervous is that yields were just jumping higher to 5%. That helped, that announcement helped the market, it set the tone for the market. And then Marc, and then in addition to that was the idea, because there was a Fed meeting the same day later on, but that was probably the most important basis for the market to climb higher.

Quincy Krosby (02:03):

The notion that the Fed, that the Treasury Department was actually going to make it easier in terms of the auctions absorbing the supply, the funding that the Treasury and the country needs. Then at the Fed meeting, it helped to compliment that in the sense that the basic message to the market, at least the market interpreted that way, is guess what the Fed's finished. The Fed has done a quote unquote dovish pivot. That was the interpretation from the market. You couldn't ask for a better catalyst to get a negative market because the market was deep, deep into basically nothing could go right. Everything is terrible, to suddenly change its tune and enjoy the hospitality of the best season for the market. And one of the best months of the market, which is November. However, and I can't stress this enough, part of this message that the market has been absorbing, at least what the market wants to believe is that, hey, you know what, not only is the Fed not going to be raising rates anymore, but in fact the Fed is going to cut rates as soon as this summer.

Quincy Krosby (03:23):

That is music to the market's ears, despite the fact, by the way, that what would require the Fed to cut rates in the summer? Needless to say, it would be a major slowdown, a dislocation or something that would require the Fed to offer medicine for the market. And yet, right now, this is important for the market. The market, despite some of the comments, Marc, from the Federal Reserve speakers, including those on the dovish side of the equation and at the Federal Reserve committee, is, wait a minute, we don't know, yet, we're not sure. You know, we want to have rates higher for longer. The market's response is uh-oh, that's not going to happen. You are not going to have rates higher for longer. They are going to come down. This is a tug of war between the market and the Fed. And the question right now is, Marc, do we hear anything more from the Fed that would telegraph that, hey, market, you're wrong. The Fed has done this in the past. We remember Jackson Hole, Wyoming, where Chairman Powell came out and said, not only are you wrong market, read my lips, we're going to be raising rates and raising rates and raising rates. So again, this is why the data between now and December 13, which is the next Fed meeting, is so crucial, crucial for the Fed, crucial for the market.

Marc Zabicki (04:57):

Yeah. And you can almost set your watch by it. Given the swings in the pendulum of expectations around the Federal Reserve. It's almost comical how people think the Fed is going to be, you know, tighter for longer. And then that switches, I mean, so that switch in sentiment also has impacted, no doubt the fixed income markets, which have reacted very nicely over the past month and certainly last week as well. No doubt part of that expectation around, you know, Fed action, perhaps more in line with what we've been thinking anyway. Quincy, I mean, what would you say about the, you know, the fixed income returns here. I know we're a big fan of fixed income. What do you think about that market?

Quincy Krosby (05:49):

Well, you know, it's been good, but I have to say that the 30-year auction was not helpful. We didn't have as much participation from foreign banks as we had expected or hoped for, nor from domestic buyers. So that yield was higher, higher than the market wanted. Today there's a 20-year auction, and the market's very interested on where that has settled. So that's going to be important. However, for the Fed, for the market rather, what you're probably going to see are more of the short duration notes coming to market. And that's actually been very attractive for buyers. But nonetheless, the slower the economy, the more the yields are going to come down. But when you factor in, Marc, the idea that well, they're going to cut rates, there's even a 30% chance, according to the futures market, that the market believes, 30% of the market believes, there'll be a rate cut in March. March, that's around the corner from now.

Quincy Krosby (06:54):

What would have to happen, it would have to be a deep, deep slowdown. Typically, historically, the Fed does not cut rates until they see a recession or until something breaks. So this is the market saying, you know what Fed, we don't want to hear about your mantra of higher for longer. We don't believe that. And then the Fed coming out and saying, even the doves coming out and saying, well, wait a minute, we're not so sure. We're not so sure what we're, you know, we still, we may need more rate hikes. Right now for the market, and I have to point this out, it is about when the rate cuts come in, even if we had a 25 basis point or another rate hike, for the market it is focused on when do those cuts come in. So this has been attractive, obviously for fixed income.

Quincy Krosby (07:46):

Clearly there'll be a slowdown of some sort you know, and even perhaps a recession, however, you know, the conference board, because remember we pay attention to what these surveys tell us, but the conference board came out with, yeah, we may have a shallow recession. Notice they said shallow, in the first quarter. There's a difference between shallow and say, a hard landing, right? So you have all of these strategies out there, and yet, I can't say this enough as we speak right now, the market is pricing in about 2% right now. Right now, it'll change as the data come in, 2% GDP for the fourth quarter. It's not stellar. It's not as strong as the 4.99% that first read of GDP for the third quarter. But it's still not recessionary.

Marc Zabicki (08:40):

Yeah, I mean, it is our base case. We'll see a material fade in GDP. It's our base case. We'll see a recession in 2024. And I don't know that, along with what you said, Quincy, that we're believers in higher for longer you know, either. So again, the pendulum swing is probably not that much of a surprise. So, just moving on to this week's economic calendar. Obviously it's a light week, but some important numbers ahead. You know, the Fed meeting minutes for one thing tomorrow, Quincy, how, how does the week set up in terms of economic data and what has got your eye?

Quincy Krosby (09:21):

Well, you know, we'll have existing home sales. The expectations are that that will be a little bit better. And remember last week we had a better, a better print on new home sales and also pending home sales turning up a little bit. Obviously, for the year it's down, but it's trending up. The other thing that we're going to have this week, which I think is very important, is we will have durable goods. And why is that important? Because embedded within the durable goods report is a picture of capital expenditures. And we've seen that companies have been a bit more careful. It has been actually fairly weak. We'll see if that has changed at all. The other thing this week, which is not in the numbers, but it is certainly, I would have to say, more important than the numbers, by the way, given the importance of the U.S. consumer, 68% of GDP is consumer spending. Is how are consumers facing Thanksgiving week for spending. Black Friday, which is the day historically that the retailers in our country actually go from negative to positive.

Quincy Krosby (10:39):

Not to mention the importance of Cyber Monday in which billions of dollars as consumers look to seek and get bargains, promotions, you name it. This is crucial. And why is it crucial? Obviously because of our role in the larger economy, but also from comments out of Walmart last week. And, you know, Marc, I thought that this was going to get the market to sell off and ask questions later. It did not. Maybe because it was perceived as actual good news. If you're on the camp that we're headed towards a recession, maybe the commentary from Walmart was perceived as, ah, aha, this is exactly what we think. And ultimately this will lead to the downturn that forces the Fed to cut rates. And that comment from the CFO from Walmart last week was, you know, we've seen a slowdown in consumer spending from the beginning of October, not just last week or the week before, but from October.

Quincy Krosby (11:40):

And then coming from the CEO of Walmart. It was this comment that he saw the potential for a spate of deflation coming up. So those two comments, you know, normally would have the market very, very nervous, but, you know, the market heard it, didn't like it, but then moved on and actually, you know, wound up in the green. Again, I believe, because it was bad news becoming good news. So this week we're watching the consumer, those pictures of the consumer spending. I don't know. And maybe you know, Marc is there a must have? Every year there's a must have where folks get in line, it doesn't matter, rain, snow, sleet, they had to have it, may be a toy for their children and they will pay full price. But Americans have been taught you let you, I love this, but you let the you let the retailers blink first.

Quincy Krosby (12:40):

They're willing to hold out until the retailers blink and cut those prices. And those discounts are out there. I'm watching them as I go into the various stores. But still the consumer, except for the lower income consumer, under tremendous pressure. That's where the delinquencies are. The late payments are. The subprime loans for the automobiles, the vehicles. That's where the problems are. What we need to see is, are we going to see more spending. Now that the UAW strike is over, that lasted longer than the market thought and longer than they thought. And now they could take a deep sigh of relief and maybe we see more spending. And that's interesting because we saw initial unemployment claims pick up. We saw continuing claims pick up, and some of that has been attributed to how the UAW strikes skewed some of these numbers.

Quincy Krosby (13:39):

So this week is terribly important. The Fed minutes are coming out. Now, I have to say years ago, this was one of the most important market moving events of the month. However, given how every single meeting is live, how Fedspeak is part of the fabric of our markets. We know what they're thinking. But still with the Fed minutes, everyone is looking for a kernel of information that perhaps the market did not assimilate. And that's really why we pay attention to it. It's coming out tomorrow afternoon. And then one last thing that I'm paying attention to is the consumer sentiment. Because embedded in consumer sentiment is a look at inflationary expectations for the future, right? Expectations one year and then three to five years, this is up, Marc, this is up. But when we dig deeper, we notice that it is young workers and also the lower income wage earners worried about higher inflation down the road.

Quincy Krosby (14:52):

Now, gasoline prices are down, food prices are down somewhat, turkey prices are down. I know that for a fact. But the point here is that you have to have those expectations come in. They need to be reined in. And the reason is that the more we see inflation higher, longer term, the more a psychology takes hold. And that psychology is, you know what? We better buy it today because it's just going to be more expensive tomorrow. That's inflationary, the opposite of deflation, which is, hold on, don't buy it today because tomorrow it's going to be cheaper. The Fed has to make sure that consumer expectations are anchored. This is important for any central bank. They can't let this fester. So we're hoping that that number comes in, in this report this week.

Marc Zabicki (15:51):

Yeah, and your comments on Walmart are certainly interesting and we were discussing similar comments actually from Target a couple weeks ago on, you know, cautionary comments around the consumer as well. So it's not just Walmart out there. And we've long, not long, but over the last several months really been highlighting the delinquencies in credit cards and auto loans, which you mentioned as well. We just think the consumer is set to slow down in 2024, relative to 2023. And certainly, some of the retailers are seeing early signs of that. Let me ask you a couple questions, Quincy, we have a little bit of, we have a little turkey theme here today, given the week. And I'm going to going to cover a couple things that I know that's on your mind and I want you to share your expertise with the audience. Actually two questions, really back to back. What's underpinning the latest equity rally? And is the market overbought and due for a consolidation?

Quincy Krosby (16:59):

Yeah, we discussed that just a few minutes ago, but just to make it clear, underpinning this market rally is a deep belief that the Fed is finished. We call that the dovish pivot. And that it will be complimented by rate cuts, rate cuts early on, despite the Fed claiming over and over and over and over again. No, you're wrong. The market says you are wrong Fed because this is what's going to happen. That belief is underpinning the market. And is the market overbought? Yeah, the market is short-term overbought by the metrics that are used. Typically, an overbought market will, there'll be something to come along and have that market pull back. But one thing that can happen is the market goes sideways. The market meanders a little bit up a little bit down and, but sideways, we saw that a bit last week.

Quincy Krosby (18:02):

That helps to just burn off some of that, that excess froth is healthy for the market. But overall, this market is a market that came back to life from the doom and gloom of no, no, there'll be no recovery at the end of the year. There'll be no Santa Claus rally. There'll be, there'll be nothing. This is terrible. You know, Marc, the market reminds me of Mother Nature. You know, when Mother Nature sees everybody agreeing on something, Mother Nature wallops you. Oh, it never ceases to amaze me. Same thing with the market. The market got fed up with everyone saying on TV and the news. Well, every year we get a rally in the last part of the year. Every year we do, these are the statistics. That was the overwhelming consensus estimates. You know, what the market, the market said, hey, hey, we'll make the decision, not you and the market put us into negative thoughts. That is usually when you get a nice turn. And we talked about this November 1, we got that turn from the Treasury Department and then again from the Fed. And there are many catalysts for the economy, for the market ending higher this year.

Marc Zabicki (19:19):

Yeah. And so, we've touched on really kind of like the sentiment side of it, which is the Federal Reserve and expectations for, like you said, a little bit of a directional change in monetary policy, which again, is our base case. And it's been that way for a little while now. Let's talk fundamentals here for a minute about corporate earnings. You know, as the question reads, how have corporate earnings been overall? And then secondarily, what should we expect from corporate earnings going forward?

Quincy Krosby (19:50):

Well, you know, that's the basis should be the basis for the market. But corporate earnings have been solid. Some have been actually stellar, but overall solid. And one other aspect to the earnings season is that the margins, everyone had been looking for margin compression. Margin compression. Because if you start seeing pressure on operating margins, the next thing you think about is, well, they're going to have layoffs in order to make that bottom line. Ironically, margins have been expanding rather than compressing, which is very good news because that helps obviously the bottom line. And the other thing is we've had a nice round of earnings surprises. That's always what the market wants to see. And basically, this earnings season has been a success. In fact, to a large degree we are entering the 2024 first quarter with the earnings recession just about over.

Marc Zabicki (20:56):

And then just kind of taking a look at this week, and you've touched on some of this, but you know, if there's one or two things that you would point out this week as we look ahead for the next, you know, three days in the market and then Friday, a short day as well. But what is the market focused on during this holiday week?

Quincy Krosby (21:19):

Well, this week is very important just in terms of earnings. I just want to point that out. We had lows. We had going to have Deere, which is important because all of these tell a story, a larger story, Deere, for example, in terms of infrastructure spending, right? And Lowe's telling us about the consumer and, you know, fixing up houses and fixing up condos and a lawn and so on and so forth. Just like Home Depot. But we're going to have a very important earnings, and that is NVIDIA. And why is NVIDIA so important? Because you may know NVIDIA as the top gaming company, which is how we all knew NVIDIA, if you like gaming, you knew NVIDIA. NVIDIA has become and evolved into probably the most important semiconductor name and related to artificial intelligence. It's fast, it's quick, it's the kind of thing that the AI movement needs.

Quincy Krosby (22:21):

It's the essential. They have had two quarters of unbelievable unparalleled reports. They were what we would call in the industry, triple plays, top line, bottom line and guidance. There's a fear that they can't do it again. You know, that fear, oh my goodness, they can't do it again. And yet the analysts are suggesting, hang on, they just may. Now, one of the concerns for NVIDIA is this, that because of their relationship with China, they had come up with a special chip just for China that they believe would pass compliance from the U.S. government. The fact is, it wasn't the government, U.S. government said, nope, this is not what we want to see going over into China. There is a sensitivity regarding our semiconductor innovation, our chips, our software getting into the Chinese military.

Quincy Krosby (23:27):

So, but one of the things that we heard about a week ago is that a host of Chinese, of chips were bought from China before the clamp down came, the question for NVIDIA will be, and they may answer it, they may not have to wait until a reporter asks or an analyst asks the question. And that is, how are you going to make up that gap? What are you going to do to make up that gap? And based on the news that I've been reading, they have a very powerful story to tell. But NVIDIA joins the big six. It's become an integral part of the seven, the magnificent seven. Together they represent close to 29% in terms of the weighting for the S&P 500. Now, it is interesting that NVIDIA has its report late, late in the season, well after the other six have reported.

Quincy Krosby (24:25):

This is the reason, is that NVIDIA was never part of that group until AI became so entrenched and NVIDIA fit right in there in terms of their fast, fast processing chips for generative AI. It's going to be an incredibly important report. It is actually market moving. And again, the expectations are that they will beat their previous reports. That would be amazing. That will be absolutely amazing, and it will be a positive for the market. This is a shortened week, Marc, as you know, we all know, and volume tends to be down. So anything in the market can be skewed in one direction or another. If this is a strong report, as the analysts believe, and the guidance is incredibly strong it could provide a halo effect for the entire market, even despite maybe what consumers are doing because that is also absolutely key.

Marc Zabicki (25:29):

Yeah, and thank you Quincy for that. I mean, honestly, just from a personal perspective, I mean the way, you know, S&P 500 companies are able to manage around various different, you know, variables, whether it's inflation, whether it's COVID, whether it's whatever it may be. They are seemingly excellent at doing that. So consequently, we're getting probably a little bit better earnings than most people had expected. Let me pause and thank you for joining us on this short Thanksgiving week. Jeff Buchbinder will be back in this chair on Monday for the new Market Signals podcast. Thank you Quincy Krosby for your time. Audience, thank you for joining us and have a great week.