The End of Irrational Exuberance?
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On the Tape.

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Welcome to the Monday on the tape podcast guides on me today. I'm joined by Elizabeth Young Thomas, somewhat grieving Elizabeth Young Thomas as her Packers of Green Bay were beaten yesterday by the Eagles of Philadelphia in what was not a fun game to watch. If you are a Packer faithful.

No, and you know what? I started grieving after the first quarter. I turned it off for the entire second quarter out of protest. And to be honest, by the end of the third quarter, I was surprised the score wasn't worse, but it was just an ugly game. It was sloppy. It was hard to watch. There was very little fun in any of that. Well, noted, but there has been some fun in the market. Nice segue, Guy. And obviously Friday...

We saw a bit of a market sell-off. And this is something I know you've been talking about and I obviously have been somewhat focused on. I think finally, Elizabeth, the market is starting to take its cues now.

From the move in interest rates, and I'll say this, and you probably know it a lot better than I do, but I think the spread between twos and tens, the widening is probably almost the steepest we've seen in quite some time. And again, I hearken back to a couple of years ago when you correctly said that the inversion was the warning sign, the re-steepening was sort of the signal. And to a certain extent, it appears as though the market might be picking up on what you talked about a while back.

Yeah. So if my chart is correct, this is the steepest spread we've seen since 2022. And even then, that was a little a little whisker of a time. So, yes, we are we are positive in that spread by about 38 basis points. And the 10 year Treasury, as of me saying this out loud, is at 477. If we round, it's 478.

market is open, market is down. And when you look across the broad indices, again, we've got the NASDAQ down the most. So growth stocks being hit the hardest, to your point, yields up and growth stocks down. Now there was a day, I believe it was last week,

And it might have been last Monday when I said this relationship is not going to last. It was one where the yields were up and growth stocks were up. And the very next day it did flip. So here's the good news. Let's focus on the good news. The good news is this is rational behavior.

It's irrational to have everything up at the same time, including yields. So the good news is this is rational behavior. Yields are up. Growth stocks are down. We're giving back in multiple expansion what we've gained so far that didn't necessarily make a ton of sense. And it was very fragile. So here we are giving back some of the fragility. There were concerns towards the end of the year and maybe early this year that we had

entered this exuberance phase in investing, and now it looks like exuberance is not the case. I would also argue that that's a good thing. We know that quote by John Templeton about exuberance. But what is it? Bull markets die on exuberance. So exuberance is not usually the place that we want to be. Now, the question really that remains is,

Is this the beginning of something that's going to keep moving downward? And I think the focus should be on that. And with higher interest rates, the optimists will say that rates are going higher because things are not as bad as people predicted in terms of the economy. And quite frankly, that jobs number that we saw on Friday was probably the trigger to send rates higher. And

Again, people will look at that and say, hey, don't be such a doomsdayer. Things are actually good and rates are going up for the right reasons, which is, you know what, that may in fact be true. But I'll take you to something that you're extraordinarily familiar with, and that's the small caps. And again, that's a monolith, I understand. But the IWM is obviously one of the things that I look at. In November of 2021, it made an all-time high of about 240, and then it spent the next sort of

two and a half years or so trading sideways to lower. We obviously recently took out that prior high, oddly enough, in November of last year. So you sort of round trip the whole thing. But here we are having traded up to about 243 and a half.

The IWM is trading about 215 or so. So I guess by definition, it's in a bit of a correction period. I only bring that up because one would think if rates are going up for the right reasons, small caps might not be going higher, but they wouldn't be trading off as precipitously as they have. So thoughts on that? Yeah, so I'm looking at the RTY, which is the Russell 2000. That's what the IWM tracks. And that date in November, I believe, where it hit its recent high was November 25th.

And it's come down since then. We are technically in correction territory, knowing that correction is anything beyond 10 percent and then bear market is anything beyond 20 percent. So we've got small caps in a technical correction. We'll see what happens today. I'm going to guess that given where growth stocks are trading, small caps are going to also be down perhaps further than the S&P and the Dow. So.

When we look at small caps, I believe I mentioned this last week, I look at small caps as confirmation, right? They're not necessarily the thing that's going to lead or drive the entire market, but they should be able to either confirm a rally or confirm a drawdown. And right now what we're seeing is unfortunately that small caps are confirming the drawdown. Now, what affects small caps more?

rates, economy, small caps are much more sensitive to those things. So when we think about cyclicality, when we think about rising rates, you're going to see small caps get hit harder, which is exactly what's happening right now. So I don't say that to say, oh, this is OK.

But this, again, is rational behavior in the market. So small caps are getting pinched by this quite a bit. And then obviously we have very little clarity on what's actually going to happen with tariffs. Now, small caps get a little confusing in that zone because when you think about large multinationals and exposure to a strong dollar and getting hit by exports, most of small cap revenue is actually domestic. So they don't get hit by that export demand.

issue that would be caused by a stronger dollar. But they do get hit by raw materials going up. They get hit by all of the input costs that could drive their margins much smaller. And then the last thing I will say is we talked about this broadening out for so much of 2024. If that's going to happen again and look, it could. We have we're in this weird period. We're waiting for inauguration. We're waiting for confirmation of cabinet. We're waiting for clarity on policies. We're waiting for earnings season to start.

If that's going to happen again, we need small caps to confirm it. We need industrials to confirm it. We need some of the other cyclical sectors like financials to confirm it as well. And financials are something that have a pretty big presence in that mid cap index. So that's also something to watch. Yeah, absolutely. You know, those small and medium sized banks are a large component of that without question. And

Again, very economically sensitive. So that's one of the reasons I'm focused on it. It's just interesting to watch how these things play out and what the market is trying to discern from what this rate move is. And you mentioned tariffs. I want to shelve that for a second. I'm going to come back to it. But we talk about higher rates. We have to talk about this surging US dollar. And Morgan Stanley's Mike Wilson, who's been on the On The Tape podcast a number of times, and we will have him back.

talked about how obviously a strong U.S. dollar might help the domestically oriented companies, might be a bit of a headwind for those companies with more international exposure. But there's no question whatsoever that historically, Elizabeth, a strong dollar has been a huge headwind for earnings. And, you know, we're in the midst of that now. Now, it will be interesting to see if the strength in the dollar continues and if it's just predicated on rates going higher.

But that is clearly something to watch as well. And I know it's something that you watch. Yeah, absolutely. And that has been the expectation. However, during this cycle, the times that we've expected that to happen where a stronger dollar was going to be a really big problem from large multinationals, and we've split that up in the S&P and looked at what's the international revenue exposure, what's the performance of these companies in a stronger dollar environment. It hasn't actually happened as we expected, right? It hasn't been as big of a headwind as we thought.

But it could be this time, and it could be if we're trying to rely on exports of our companies to other nations.

especially knowing that China's in a world of hurt right now. Europe isn't doing so great. So the demand even isn't there. Let's even take a strong dollar out of the picture. The demand picture is weak around the globe. So then add to that a strong dollar and you've got a real headwind for margins. And margins has been the story forever.

that's held earnings up. It's been the thing that a lot of investors have hung their hat on to say, this is okay for valuations because we've got strong margins, we've got growing margins, our margins are at least at trend. They're not in an unhealthy position. We've got a buffer.

If those margins start to get pressured, we're going to have a lot of people questioning valuations and questioning the earnings expectations. So here's something that's been interesting. In the face of a stronger dollar, we have crude oil that very quietly has gotten itself off the mat. Just looking at WTI, which I want to say probably bottomed in September of last year, right around 65 or thereabouts-ish.

Now we have levels that we haven't seen since that subsequent bounce we saw into the fall. You're almost around $77 or so in WTI. I mentioned that because obviously, typically for commodities, the stronger dollar is, again, to use the term, a headwind. But whether it's a headwind or not, there's no denying the strength in WTI and to a certain extent what we're seeing in other products, natural gas and heating oil and those types of things. Again, I mentioned that because...

I don't think people are paying enough attention to what potentially this higher energy prices could mean. And I don't think, and this is just my opinion, I don't think they're going up for the right reasons. Obviously, there's a lot of geopolitical stuff going on. So has it reached your radar screen? Because as we're sitting here now, you have an XLE, which...

itself has gotten itself a bit off the mat. And I think you may agree with this energy, which was a disappointment most of last year. It's gotten off to a decent start this year. Yeah, it has. And so the number that you were looking for, yes, 65, 75 WTI bottomed back in September. And now we're trading about 77, 80 or so. So there's been a decent move. Now, obviously, that's nowhere near some of the spikes that we've seen over history. But I

I would agree that it's not happening for good reason. So then how do we answer that?

What are the good reasons? What would the good reasons be? The good reasons would be if there was cyclical demand around the globe, right, for energy. If there was demand-driven price strength rather than supply-driven price strength. And I think what's happening right now is more so on the supply side. We've got geopolitical risks affecting the price of oil because we know that the demand picture is not actually strong. So

A rise in the price of oil because of supply issues, supply constraints, is not typically something that the economy can handle for too long of a time, especially during a period in the U.S. where we are now having renewed focus on inflation. Now, obviously, the Fed removes energy from its inflation conversation. We talk about core inflation pretty often, which takes energy out. But the reality for consumers is that

You can't take energy out of the equation. So I do think that this is something to watch again, far from big spikes that we've seen in times of turmoil. But the rise, the gradual and steady rise that we've seen has been something that is, yes, definitely hit the radar.

Yeah, and listen, I look at the XLE if you want to play the ETF game. That's something that I believe made its all-time high in the summer of 2014, probably either side of $100 or so. Obviously, like many things, you had a significant sell-off

at the height of COVID. Now it's gotten back on its horse recently, trading right around $90 or so. I mean, I think we all know the three major components, Exxon, Chevron, ConocoPhillips, some other names as well. But I think this is one that can continue to surprise on the upside. So I am looking for that again.

XA market just cascading lower, benign to lower market, I still think energy can perform. So that's something obviously I'm keeping a keen eye on. Over the weekend, Jamie Dimon was on CBS Morning News yesterday talking about tariffs and how they could help resolve security issues and maybe take some of the competition problems that we've had historically, sort of level the playing field and then

Stephen Marin is the new chief counsel of economic advisors. He's the chair or will be the chair, I think, under this new Trump administration, you know, talking about tariffs of around 20 percent, potentially as high as 50 percent. And that'll level the playing field as well. I know tariffs has been top of mind for a lot of people.

But I bring it up today because something we saw, and this was reported in the New York Times, China's trade surplus is now a record $1 trillion. And that's for a myriad of different reasons. I mean, the largest reasons, because their goods are cheap and people are clamoring for them. And this is not a political statement, but I'm curious as to your thoughts.

You know, former President Trump and now incoming President Trump will look at a headline like that. And when he sees a trade surplus from a country like China, he will view that almost by definition as a loss for us. I don't think it's that simplistic. I don't think trade surpluses and deficits mean or equal wins or losses.

But my sense is that's how it will be interpreted, which to me means that the likelihood of tariffs only just went up on the back of that. I know it threw a lot at you, but thoughts on that? Yeah. So first of all, trade surplus means that they're exporting more than they're importing. OK, and that's a situation that China's been in.

forever and eternity. Now, they don't just export certain products. There are a number of different things that they export. We obviously and perhaps the incoming Trump administration has their eyes more so on certain goods and services that China would be exporting to us because it will crimp our own production or crimp our own ability to export goods and not be so dependent on other countries.

So I'm not going to speculate on how there might be a reaction to that headline. I do think, though, that it will probably embolden the protectionism just even around the globe. I don't even think it's just here. I think protectionism has happened across the lands and something like that may embolden a lot of different countries to protect themselves.

and make sure that they're not so dependent on China or so dependent on any one region or on any one country, especially for commodities, because we've seen commodities really wreak havoc on a lot of European nations. We've seen what happened with Russia and Ukraine. And we realize that you don't want a country to be too sensitive to commodity imports from one specific place.

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iConnections is the world's largest capital introduction platform in the alternative investment industry. The iConnections membership-only platform brings together the asset management community, providing allocators and managers with the opportunity to connect both physically and virtually. With an impressive network of over 4,000 allocators and 900 managers, their community oversees an astounding,

77 trillion and 33 trillion in assets, respectively. iConnections is also the driving force behind the alternative investment industry's most renowned in-person events. We invite you to join iConnections at their upcoming flagship events, Global Alts Miami, January 27th through the 30th, and Global Alts New York, June 9th and 10th. These events are packed with one-on-one meetings, thought leadership sessions, and

and unparalleled networking opportunities. To explore more about iConnections events and gain access to their members-only platform, visit iConnections.io.

SoFi, the all-in-one super app for banking, borrowing, and investing. Earn industry-leading APY, get great loan rates, and trade stocks. SoFi, get your money right. Banking products and loans offered by SoFi Bank N.A., NMLS 696891. Brokerage and active investing products offered through SoFi Securities, LLC, member FINRA, SIPC.

We have a lot going on this week. I'll start sort of on the earnings front, not asking you to opine on individual names, more so sort of the importance of a week where we kick off earnings season historically with banks. We have JP Morgan, Goldman Sachs, Wells Fargo, and Citi all

on Wednesday, all pre-market, by the way, and then Morgan Stanley and Bank of America on Thursday. You throw UnitedHealth in, obviously not a bank, on Thursday, and that's how we're kicking things off. So I guess my question to you is not necessarily looking to play stock market here, but the importance of...

Maybe the quarter, but I think more importantly, the landscape that a lot of these CEOs and CFOs will opine about in their earnings calls. Yeah, so I'm looking at S&P 500 sector earnings growth growth.

We're talking about financials here. Financials really only expected to produce about 7% to 8% earnings growth for all of 2025. That's compared to about 14% for 2024. Now, obviously, this reporting season is going to be the fourth quarter of 2024. But financials are expected to pull back a little bit in the earnings growth compared to what they did in 2024.

Now, first and foremost, Wednesday is going to be a big day because we've got CPI that day to pre-market. So everybody get a good night's sleep on Tuesday. There's going to be a lot to sort through before the market even opens on Wednesday. So I think that this is going to be a really critical week to set the tone for earnings growth for the rest of this reporting season.

And coming into it now today, you know, obviously looking like a down day still for the S&P. The Dow is actually up at this point. If we're coming into it from a little bit of a trepidatious place in the market, that could exacerbate some moves. So.

especially because of how well financials did post-election. You usually see the give back happen faster than what the take did on the upside. So I do think that this is going to be really important. And the commentary from CFOs and CEOs on banks is also going to be important, as it always is. But the outlook for 2025, I think, is going to be what we need to cue off of. There has been a really strong expectation that M&A activity would pick up in 2025, and that would benefit financials.

financials, that capital markets activity elsewhere would pick up, things like the IPO market, deal making, and that that would benefit some of those big banks as well. So it'll be interesting to hear what they say. It'll also be interesting to hear if there are any themes across financials, because that's always what you want to listen for. And then the last thing I'll say is we've got some of these really big diversified financials that we'll hear from, but there are also other banks in there that are more exposed to the consumer. So we want to hear what

They're saying about consumer trends and spending trends for maybe the holiday season or at least the fourth quarter of 2024. Yeah, we have the typical Fed speak this week, but we also have the Fed Beige Book, which I think will be interesting just to sort of, I don't know, finger through and see what they said about

in terms of some of the commentary that went out. It always, to me, is interesting. It's not necessarily market moving, although every once in a while it is. And this is just something that I noticed, and I don't want to make a big deal out of this. I mean, I've always thought that for whatever reason, PPI came out the day after CPI, but this year, well, this year, this week, it's coming out before. So I only mentioned that because I look at CPI sort of as a inflation gauge option

obviously, without question. I look at PPI more, and maybe I'm wrong, Elizabeth, but more sort of the state or the health of

of the economy. And I think they can tell very different stories. So, you know, a strong PPI is not necessarily a bad thing for the market. A weak PPI, though, and a hot CPI could be a bit of a problem. And that's something that we have seen a few different times over the last year or so. You're right. Usually PPI does come out after CPI. This is a little weird. CPI is actually a little late,

This month, usually we see CPI about the 10th of the month. We're not getting it till the 15th this time. So PPI is going to come out first. PPI is where we can gauge things like inventories, what companies are doing, what they're having to pay to build up those inventories. And you're also right that if you have a weak PPI and a strong CPI or a hot CPI,

eventually those two will work in opposition to each other, right? So a weak PPI would suggest that there's actually not strong incoming demand in the economy. A hot CPI would suggest that consumers are getting pinched for other reasons. So we don't want that to happen. So it will be interesting to see the interaction of those two. We get PPI tomorrow, CPI on Wednesday. And again,

The market had been really focused on jobs for 2024. Now we're back and focusing on inflation. So remembering, I know I sound like a broken record with this one, but remembering that the early part of the year, the first quarter of each year usually has a seasonally hot period for inflation just because of the way that the base effects work.

and because of the way that the data is going to get reported. It happened last year. It caused a correction in spring. So that's something to just be aware of and perhaps not overreact to, but also keep your eye on about what the drivers are of those hotter prints, if that should be the case.

A couple of things on my end. This is always interesting. You always get some news out of it, but the JP Morgan Healthcare Conference starts this week. So keep your eye on that. Earlier this morning, Daniel O'Day of Gilead was interviewed out in San Francisco. I mentioned that because Gilead stock has had a great run and Daniel O'Day happens to be

a classmate, Georgetown class of 1986. So I always like to plug my buddies that have done well, me not being one of them. So there are a few things to watch there. The other thing is, you know, there are some retail names, Elizabeth, and I'm looking at Lululemon this morning that have actually had sort of this stealth rally. I mean, Lululemon, which by the way, was catastrophic for the majority of 2024, fitted down about 225 or so. All of a sudden we wake up today and

And you have a stock north of 400. So, you know, maybe some of these retail names were unduly beat up and maybe they're just gaining ground. But, you know, I think if there's follow through in some of these retail names, that's something that I'm watching as well. So that's sort of it on my end. I do think this is an interesting week. Remember, next month.

Monday, it's a holiday. So, you know, things sort of get these holiday shortened weeks, which we will see next week. Sometimes you get some strange things happening. So a lot to watch this week. I will continue to watch the VIX now north of 21. I've thought for a while the volatility is going to be a story that's sort of playing out right now. You know, Elizabeth mentioned the IWM and the RTY. I think that is obviously something to watch as well. And keep your eye on yields. I think

think everything is sort of predicated on the back of what's going on with interest rates and this continuing steepening of the yield curve. So I want to thank Elizabeth Young-Thomas. She of SoFi, the football season is over for her and her Packers of Green Bay, but that doesn't mean she won't root for some other team out there. Is that true, Elizabeth? That's true. The Rams play tonight, I believe, and they usually play at SoFi Stadium. The game was moved because of the tragic fire events that are going on. But

I'm going to cheer for the Rams, I guess, for the rest of the season. Of course you are. I want to thank everybody. We will be on the market call later today. Elizabeth will be joining us again later in the week. I want to thank you for joining us and we'll talk to you all folks later.