0:05 spk_0
Well, good afternoon. I’m Kenny Polcari, and this is Trader Talk at Yahoo Finance. And today, I’ve got two very special guests. We’ve got Gina Martin Adams, who’s the chief market strategist at HB Wealth here in New York City, and Adam Shapiro, who is the managing editor of A Invest, a very interesting concept. We’re gonna talk about that. I’ll let Adam tell you a little bit about that so that you get it, but it’s gonna be a very interesting conversation today. Well, thank you very much for joining me. I do appreciate it. I’m very excited to learn, uh, a little bit more aboutThe invest so and as the listeners are as well. So why don’t you tell us a little bit, Adam, just about A Invest and then we’ll take it from there.
0:41 spk_1
Uh, invest. Think of it as two things, and it’s very much like Yahoo Finance. I manage the content side where we write articles. I have human beings who are writing articles for retail investors, for day traders. Uh, in fact, our demo, I can, I can share this. Our demo is, is, is mostly men, 25 to 54. We do have women, but it’s mostly men. And so we use.The content that we write, both human, video, podcast, and written articles, uh, as well as large language model written articles as top of funnel to attract people to the platform, and then you can choose to try some of our AA, uh, AI tools. Amy is our agent. Our AI agent is Amy, and Amy can, uh, you could use magic signal. You put in 10 stocks you choose, and then you set the parameters you want to watch, and you tell Amy, this is what I want you to watch for.by all of these different things and you will get notifications from Magic Signal from Amy and then you then have to execute and through the platform, you can link your to your brokerage, uh, and you can then execute trades should you choose. Gina,
1:47 spk_0
let’s talk HB Wealth and your role there.
1:49 spk_2
Yeah, sure. HB Wealth is a fiduciary fee only RIA headquartered in Atlanta actually, but with clients all over the country, predominantly in the southeastern and mid-Atlantic United States.Uh, I’m the chief market strategist. Work inside the investments team. Also sit on the investments committee, so we provide our research and analysis of financial markets to help enable investment decision making, help tool the advisors with conversation talking points and intelligence to share with our clients. Perfect.
2:19 spk_0
I love that because you and I do the same thing. I do it at an independent RRA as well, smaller than yours, but we.Design and do the same thing. I sit on the investment committee. I do all that stuff. I, I, you know, and I’m out in the media as you are, uh, kind of talking about markets. So now that we’re talking about markets, let’s talk about it. We just had, earnings season is about over. We’ve got, you know, 4 or 5 companies that are going to report this week, which really will wrap it up. It’s Marvel, it’s, uh, uh, Hewlett-Packard, Costco, uh, Dell, and, uh, and Salesforce.I think, and they’re, I think they’re very significant because those 5, those 5 names kind of represent the whole theme that we’re talking about. It’s AI, it’s infrastructure, AI infrastructure data. So talk to us a little bit about where you both stand on how the earnings season’s played out, where you think we’re over, where you think we’re overdone, and where you think the opportunity is.
3:06 spk_2
OK, sure. So earnings season was phenomenal. I mean, it was, for a lack of a better word, a 29% year over year versus expectations.of 12%, just phenomenal. 83, I think% of companies beat expectations. So the backward look from earnings season was extraordinary. I think the trouble we face now is how do we compare to that going forward. And typically years in which earnings growth peaks tend to ultimately be actually relatively low price return years because earnings growth is peaking. You can’t get much better than that. That this is the challenge for companies.going forward. That said, there still are pockets of sort of extreme earnings growth that are inside the equity market. And now it’s just a matter of how much are we paying for that earnings growth and can companies continue to beat expectations at such an extraordinary pace. So, we’re in this kind of, uh, waffly middle ground with respect to the markets where, yeah, things look fantastic. Will they continue to get better orWe see momentum slow a little bit in the second half of the year as we start to see the impact of higher oil prices, higher interest rates filter through to some company fundamentals. So it probably becomes a little bit more of a mixed story into the second half of this year, whereas first quarter was unabashedly fantastic growth throughout the index.
4:25 spk_0
The, the oil story may in fact change, right? If we, if we get this deal thatWe’re hoping is real, uh, this geopolitical deal, we may see oil come back down. It may not come back down to 60% initially because I think there’s been a lot of disruption as a result, right? All those tankers sitting in the Gulf and all that stuff, but, uh, it may take some of the pressure off that. So that’s gonna be an interesting part of the argument in the second half ofthe year.
4:49 spk_2
It’ll be really interesting, especially because.Because there’s a little bit of a misunderstanding about how oil impacts earnings. Oil and earnings are positively correlated. So usually you don’t see the downside impact of an escalation in oil prices until oil prices start to ease. So you could have the sentiment headwind of high oil prices removed from the market at the same time that you have the earnings headwind.To emerge on oil that creates a more volatile outlook in the very short term, just depending upon when we do ultimately see oil prices resolved. Frankly, stable oil prices are the best environment for equity, but not at 100, not at $100. And so if we can get back to $80 even lower than $80 and we can stabilize, then that’s a fantastic environment.But for now it is still a risk and it’s a somewhat underappreciated risk because it’s been overwhelmed by extraordinary earnings in the short run.
5:39 spk_0
So Adam, tell us what Amy says.
5:41 spk_1
Um, well, I haven’t asked Amy about this. I will tell you what the guests we’ve had on our platform, and I’m not going to argue with an economist and someone who actually has skin in the game as, as a portfolio manager, not portfolio manager, but as a strategist, um.One thing that people don’t talk about is the fact we’re in a midterm election year and that the 2nd quarter of a midterm election is always the most volatile and you can expect things to, you know, I don’t, right, and then we shoot up after the election.So, so, and I’ve had different guests on who, who on our platform who’ve said that very thing. The, the one thing when you talk about earnings and where we’re going is, the question I like to ask the team when we’re having discussions is, how are we going to make money now? And you have juggernauts like Nvidia, OK, they’re gonna make money, but then Salesforce, when they report earnings after the bell, you know, are they able to monetize what they’ve been doing.Can they make money off of this? And that’s the question. We have anthropic is going to become profitable this quarter, right? Uh, so we’ll get an IPO, great. But open AI, what’s going to happen there? And the question is that our investors are asking is, where do I make money? Because the herd is following the mag 7, and the mag 7 might have some difficulty. Google doesn’t even tell you exactly what they’re up to. So you have to look where the herd is not looking.
7:05 spk_0
Agreed.And so where’s the herd not looking? Does Amy have an idea? Oh
7:09 spk_1
yeah, well, Amy has an idea, absolutely. You could go on there and you could ask Amy, phrase the question very simply. Everybody is chasing the mag 7 with artificial intelligence. Where should I look if I don’t want to follow the herd and see how Amy responds. I would bet you that Amy says, look at, uh, infrastructure buildout, at, uh, utilities, uh, at.That, uh, Dr. Copper has got to be, uh, in, in demand. I have not asked Amy about copper right now, but with the infrastructure buildout with AI and with data centers, the only thing that could throw a wrench into this is the NIMBY factor because there’s this pushback now to
7:47 spk_0
building big pushback. As a matter of fact, they had a piece on it, uh, I think Fox Business had on yesterday about, about big pushback. There’s a, there’s a development going on out inI think it’s out in Oregon, and the, the town is pushing back on it because they don’t want it at all. Uh, so that’s gonna be interesting, but I’m curious where you think the opportunity is away from because all that kind of circles around tech, right? It’s the utilities, it’s the infrastructure building, the data centers, all around tech and AI. Let’s step back for a minute and look at what other sectors though are presenting opportunities. I think there’s opportunity in healthcare. I think there’s opportunity in financials. I think there’s opportunity in basic materials, right? I think healthcare is way underperform.And so I think if you’re looking to add new money as a long-term investor, not a day trader, right? Because, because, because I think your markets are different, right? We’re both long-term investors and you’re talking to a market of day traders. So you naturally want to be in that space. But, you know, you and I, as you’re building portfolios are talking to long-term investors that are building generational wealth. They’re gonna want.To look at some of the sectors that are underperforming at the moment, not chase the names that are exciting for you, but may be too richly valued forus,
8:56 spk_2
right? And I think when we think about the landscape, we think in terms of geographies, sectors, and factors, and really where we’re seeing opportunities right now are in geographies and factors, even more so than in sectors, and I’ll walk you through why.If you look at how the market’s progressed over the course of the sort of ceasefire era, right, that major low that we had at the end of March, difficult to characterize, but we hit a major low at the end of March. We bounced back extraordinarily over that subsequent two month-ish period.Almost that entire bounce back was growth stocks. It was very specifically growth companies. Most profoundly semiconductors were the biggest driver of optimism, right? So you had a 50% rally in semiconductors, which drove 40% of the S&P 500 rally over that time. Growth stocks got extremely overbought. That leavesAll other components of the market, somewhat undervalued and underappreciated, in particular quality stocks. If we look at quality very seriously, quality and value both as components of a portfolio. Quality stocks historically have just hammered growth over the long term. They perform a lot better on downside, as downside risks emerge and
10:11 spk_0
don’t participate inthe.
10:13 spk_2
We’re talking high ROE, high ROIC companies specifically. Value, I would say are really based on the valuation metrics. So low price to sales, low price to book, low price to earnings companies are also relatively cheap and did not participate in the rally. Value has does not have nearly the historical track record that quality does, so we want to pick our spots relatively carefully there.But quality, frankly, it has growth-like characteristics, but also performs much better over the longer term and did not really participate in that rally. That leaves some opportunities on the table. Um, also, from a geographic perspective, emerging markets have doubled the performance of US markets this year. They also command a valuation ratio of only 12 times forward earnings, whereas US stocks are trading at 21 times forward earnings on a market.cap weighted basis. So there’s a tremendous opportunity still there to diversify portfolios, uh, geographically and still participate in the upside, uh, presuming that we’re still in this longer term bull market with some give and take in the, which I think
11:17 spk_0
we are. I mean, does tell me where you think we are in this bull market. Do you think it’s got legs to run? I
11:22 spk_1
think the
11:22 spk_0
economy
11:22 spk_1
is verystrong. I mean, so I’ve, I’ll tell you who I follow, uh, just because I, I consider myself.Torsten Slack over at Apollo. I listened to Torsten and not because they own Yahoo. Um, I’ve known him for years. And he just put out a note the other day, uh, Daily Spark, you can get it for free, um, that the economy is much stronger than people suspect. So when I hear the concerns about the inflationary pressures from, for instance, oil, I get it, but we haven’t for some reason, we haven’t broken that.For, for an extended period, the $100 a barrel. Today we’re trading around $92 a barrel. But the other thing, the other person I follow is not very well known, but this guy Mike Dixon over at Horizon, and he’s been talking about the S&P 600. He’s talking about small caps and how we talk about S&P 500 is up. I think it’s, um, I sent some notes over to you, but, uh, 52 weeks, it’s up maybe 27%, whereas the small caps are at 29%. My question.And, and you would know better than I would. Have we missed that rally, because I think a lot of people were asleep when this was happening. Yeah,
12:25 spk_0
well, I think people have been talking about the smiths, small midcaps for a while coming into this year. That was a sector that a lot of people were starting to focus on based on what they thought the economy was gonna do, what they thought rates were gonna do. That’s a whole other conversation because that, because the rate conversation changed from, you know,2 and 3 cuts at the beginning of the year to potentially a rate hike. Not even, not even holding steady, but a rate hike, which I’m not so sure is really on the table anymore, but I think they had to put it out there to kind of take the rate cut story off the table for a little bit because I think people are getting too excited about more rate cuts coming. And I don’t think Kevin Warsh can really justify at the moment.A cutting rates. No,
13:06 spk_2
I think it’s gonna be really difficult, in particular with the two-year Treasury real yield now above the Fed funds rate. It’s very rare, at least in the last 25 years, for the Fed to cut rates when the two-year Treasury yield is already above the Fed funds rate. They tend to follow the bond market, so we’ll see where he goes with that. But I would say that is the predominant risk to small caps. Small caps are extremely interest rate sensitive
13:27 spk_0
now. So just to clarify, the two-year trading, I think, at 4.05 today.I think that’s your guess is as good as yeah, no, I, well,this morning when I was writing, I think
13:35 spk_2
it was 4.05, right,
13:37 spk_0
but the Fed funds rate is 3.5, 375%, so that’s what you mean. That’s what she means by.To 2 you’re being, I just want to make that clear to the audience that the 2 years ahead of the Fed funds rate, right, which is a signal saying that rates aren’t goinglower
13:50 spk_2
at the moment. No, it doesn’t seem likely. That said, you’re absolutely right. We did have, at least in the first quarter and into April, a tremendous recovery in the manufacturing sector inside the economy, and that played out as an improvement for small.Small cap stocks, which small caps are also very sensitive to cycle activity inside the US. And when the manufacturing sector suddenly recovered after frankly, 3 years of sitting in dormancy, it was, um, a massive boon for small caps. If we can continue to see that momentum and potentially fade a rate cut, then small caps can do well.But that is a bit more
14:25 spk_0
mixed. But to your point, that was exactly the story coming into this year. Tech had gotten stretched. Everyone was worried about tech coming into January. Remember, it was having a tough time. It was kind of repricing itself, but small caps and smids, right, small midcap as we call them, um, were starting to benefit. They’ve had actually so far a very good year, right? Uh, now if we don’t see.Or if we, if we talk, start talking more about rate hikes, you may see the small midcaps back off a little bit as a result. I know again, I’d say, what does Amy think? Well,
14:55 spk_1
I would ask Amy, uh, and I play, I play with a lot of, we should have Amy
14:59 spk_0
here the next time we do this. Hey, Amy, what do you think? We,
15:02 spk_1
we could ask Amy, and she would give it. Amy would give you an answer. But the question I would ask Amy is, can Warsh and the Fed manipulate the, the Treasury’s, uh, the, the yields without, uh, a rate manipulation, but through the.Balance sheet reduction and how will that play out and then what would that mean? Well,
15:20 spk_2
that also is very meaningful because the balance sheet has been expanding and that has been part of the hidden sort of resources behind the small cap rally. So even a balance sheet contraction, if rates stay steady would not be great likely for small caps unless you’ve got an even greater manufacturing recovery emerging. Now, all of this assumes something really interesting, I think that we haven’t talked about yet, and that is the mix inside the economy is very different today than it was.It was, say, 1015, 20 years ago, very different, frankly, than it has been at any point in US history since the late 1990s. And that is, it’s all business investment and manufacturing. It is not a strong economy in the way that we and our mothers and grandparents thought a strong economy would look in that it’s not driven by consumption. It’s driven by sort of a flatline consumption with a major hockey stick acceleration in industrial production and manufacturing specific to tech industries.And that’s playing out in the markets really profoundly. If that changes, if you see the consumer start to recover a little bit, if you see manufacturing industries outside of technology start to actually participate to a greater degree, that can also create a big tailwind for small caps and non-sort of narrow AI focused tech industries and an adjacent industries that are supporting that build right now, right?
16:38 spk_0
Butlet’s think about just to your point, ifIf Kevin Warsh shrinks the balance sheet, then he, and he himself has said it. If he shrinks the balance sheet, then he can cut rates because one really offsets the other, right? Well, OK, and that’s, that’s the argument. That’s right. He thinks so. Listen, Trump for sure is gonna put pressure because he’s already said it that he rates are coming down quick.I just don’t see it. I don’t see how Kevin Warsh is gonna convince anybody. Look, there’s already dissent on the committee. There’s 4 people that are already said, well, Stevie, Stevie Myron wants lower rates anyway, but the other 3.I have already said back off, not so quick, and I think that’s gonna be the difficult part forhim,
17:19 spk_2
right? Yeah, it’ll be really interesting to see how this plays out because it, and it is somewhat dependent upon near-term inflation conditions. I think the mistake that the consensus right now is making is saying near-term inflation conditions are all related to the war in Iraq.That’s actually not the case. You don’t have a re-acceleration in manufacturing production. Copper prices reaching new highs, silver prices reaching new highs. X energy commodities are all hitting record high levels. That’s some inflation pressure in the pipeline that’s demand generated. That’s gonna be very difficult for the Fed to totally ignore, granted.Like we said earlier, the consumer is not in the most fantastic of shape. The housing market is obviously
17:58 spk_0
saying
17:59 spk_2
that,
17:59 spk_0
yet the consumer,
18:00 spk_2
but it’s a mixedpicture.
18:01 spk_0
Yeah, I mean, consumer sentiment was at its low on Friday when University of Michigan reported it. Consumer confidence came out this morning. I didn’t see it. I don’t know where it was a
18:09 spk_2
little bit better. It was a little bit, a little bit better,
18:10 spk_0
um, but that’s gonna be an interesting play. We’ll see how that, we’ll see how the second half.
18:16 spk_2
Let me tell you a little bit about that because this is important. The sentiment survey, the Michigan University of Michi.Michigan Sentiment survey is much more inflation-centric. The consumer confidence survey that comes from the conference board is more about financial conditions and, and growth prospects, employment prospects. So the story being told, even in those surveys is really interesting. Sentiment is reaching all-time lows as inflation pressures are perceived to be budding and presenting a problem to consumers, whereas confidence is relatively resilient. It’s not great, but it’s not at an all-time low.Because consumers perceive their financial conditions in the job market as generally OK. Those are two very different stories, and that inflation versus growth story will play out in markets over the course of the
18:59 spk_1
second half. It’s gonna, the sentiment’s going to take a big hit this summer, uh, and, and another sector to look at ag, because there’s going to be a heat dome over the central part of the United States. There’s going to be all kinds of problems with it’s gonna be a a heat dome. We’re going to have, we already have drought.If you look at, so you can go to the US Drought Monitor and you can follow this kind of stuff. If you’re looking for where the herd is not looking, and if you want to play soybeans, or if you want to take a look at what’s going on with ag products, we’re about to get hit with higher beef prices. We’re about to get hit with higher prices for food because we’re going to have, we’re going to have a heat wave, which is going to hurt farmers.
19:36 spk_0
It’s gonna hurt farmers.It’s gonna hurt the crops.
19:38 spk_1
So, so there, there’s that issue. The other thing with affordability is housing, and even though it’s gotten better, I was just reading.This this morning, 2023, there was a metric which shows affordability for housing, and it’s actually gotten a little bit better since 2023, but it’s still unaffordable because most people are spending 40%, even with 10% down on, on, uh, to buy a house, they’re still spending 40% of their pay and rates are on it and rates are 6.35% now.
20:03 spk_0
I think it’s closer. Wasn’t it closer to 6.5%? It might be, yeah, I thought it was closer to 6.5%, which, by the
20:09 spk_1
way, when I was a kid.would have been thrilled. 6%.
20:13 spk_0
Don’t even get me started. My first mortgage was 15.5%. Yeah,
20:17 spk_2
well, 20 years ago rates were at 6%, but how much lower were house prices? So the affordability, the affordability was a very different story when the last time rates were that high,
20:27 spk_0
correct. And, but I will say, and let’s be honest, the reason we have a lot of this problem is because the Fed kept, kept rates at zero for way too long, in my opinion, after the crisis in 2008, 20209, and 201,010, right.It was fine. You keep, you kept them low through maybe the mid-teens, but they kept them way too low for way too long, and it caused this mismatch in asset prices, clearly housing. Certainly the stock market benefited as a result.
20:51 spk_1
They used to have a policy at the Fed. I covered the Fed a billion years ago, and do they still do this? They, there was a paper, I think it was 2008 when I read this, where they prefer to let, uh, an asset bubble deflate on itself. They don’t want to let the pressure out. Theywant it to be a natural event. Are we in that kind of situation now, because that’s bad news. If, if it means they want, well,
21:14 spk_2
it’s very interesting because Kevin Marsh would argue that the Fed’s sort of injection of quantitative easing into the economy via the balance sheet has what’s created the financial asset bubble, and I agree with that rate policy targets sort of the American economy more directly, and so he wants to lean out of that.To a degree, which maybe pushes back a little bit against that paper that says that they want to let bubbles deflate on their own. I asked the bubbles deflate on their own. If he’s going to actually implement a more restrictive balance sheet policy or get the Fed out of, uh, balance sheet as a tool for monetary policymaking, then that may help deflate the financial asset level. Why do
21:55 spk_0
you think that what they really want is they want to inflate their way out of this problem. They don’t really want inflation to go away.Do you think yes or no not
22:03 spk_1
Kevin Warsh.
22:04 spk_2
I don’t think Warsh does. I don’t think so. I think we do have a problem with, uh, elevated debt for the level of GDP. We do have a fiscal spending issue that he wants to get out of the game.of supporting, will he be able to do that or not? I’m not sure. That’s going to be a really tricky, tricky
22:24 spk_1
conversation. They all have said it every, every time they go before Congress, they say the spending has got to come under control and then nothing happens, and it’s not going to happen. No, it’s not going to happen. So.It’s gonna be, uh, uh, uh, as they, as he does, uh, institute the balance sheet reduction. What happens to the US dollar and to the, the fact that our government continues to spend? Are we at $40 trillion yet? We’re about to hit $40 trillion in the total debt for the United States. We’re over 100% of GDP and it’s what happens to the consumer who wants to go get a mortgage? What happens if the consumer wants to buy.A car when you’re now competing against that.
23:02 spk_0
Have you, bythe way, have you tried, have you seen car prices? Have you tried to buy a car recently? They’re nuts. They start at 75,000, and that’s just sort of make and model. It’s crazy. Anyway, let’s get some final thoughts just on the second half of the year. You brought it up with midterm elections, so let’s start with you in terms of what investors couldexpect.
23:18 spk_1
OK, so I am an optimist. I’ve always been an optimist. I think that we’re going to see, uh, uh.A decline in the S&P 500, and then after the election, I think you’re going to see a shoot up. I think that the Iran war will get resolved. It may not get resolved well. Iran may control the Strait of Hormuz and start charging, but the flow of oil, the flow of fertilizers will resume at some point. So I think the fact that our economy is still in many ways the envy of the world will propel us higher toward the end of the year.
23:49 spk_2
I would agree bull market’s still intact, probably a little ahead of our skis, in particular with some of these gross stocks in the short run, in the short run, but there are still, the equal-weighted index is not overvalued. It’s still sitting at valuation levels that we had pre-crisis. So there are opportunities in the equity market. You just have to pick your spots a little bit more carefully after the rip roaring rally that we had in a select segment of the market.Unfortunately, that segment is also a representative of risk tolerance historically, the semiconductors, so any pullback in that could be somewhat painful in the short run, but I would suspect it’s still within the scope of the longer term bull trend. Yeah,
24:24 spk_0
I agree. I do think the second half of the year is gonna be fine. I think we’re gonna run into some summertime anxiousness around the midterm elections. I think the, the war, the res, the conflict is going to be resolved. Uh, it’s curious. I don’t think they’re going to maintain control of the street.I think that’s gonna be in international waters and they’re not gonna be able to charge.
24:41 spk_1
The problem if, if that doesn’t happen, the problem is everyone else can now say, well, we’re gonna control this water.
24:47 spk_0
That’s why I don’t think, I don’t think the world will let it happen. In any event, Listen, we’ve run out of time. I’ve loved this conversation. I’d like you to come back maybe 4 or 5 months and let’s go back over this conversation and see where we are, what we thought, how we did, uh, in any event, I’m Kenny Pulcari, and this is Trader Talk, and we’ll see you next week.
25:09 spk_3
The following content is not intended to be financial advice and should not be used as a substitute for professional financial services.
