Lead-Lag Live

Mark Newton on US Energy Policies, Fed Rate Cuts, and Market Diversification Strategies

• Michael A. Gayed, CFA

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Curious about how the US energy market is evolving and what it means for your investments? Tune in to our latest episode where we break down the impact of US energy policies and inflation control efforts. Featuring insights from Mark Newton, Chief Technical Strategist at Fundstrat, we explore a bearish outlook on crude oil due to expected supply increases and highlight favorable conditions for gold and silver amid potential Federal Reserve rate cuts. We also discuss the enduring relevance of technical analysis and the notable market shifts since July, including tech, small caps, value stocks, and international markets.

Discover the recent performance and trends within various market sectors and why diversification is more crucial than ever. We delve into the pullback in technology stocks and the subsequent shift into value sectors like financials and industrials. Despite challenges faced by semiconductors, regional banks and insurance stocks have shown strong performance driven by lower long-term interest rates. We also discuss the potential effects of an un-inversion of the yield curve on banks and the implications of future interest rate movements, combining technical analysis and market cycles to assess the outlook.

Explore the dynamics in financial markets, focusing on interest rates, Federal Reserve policies, and global factors like China's economic stimulus. We analyze the decoupling of treasuries and equities and discuss the implications for commodities, particularly copper and energy. Precious metals like gold and silver are highlighted for their potential benefits in the context of an easing Federal Reserve. Additionally, we touch on the movements in the grains market, the AI revolution in economic forecasting, and the fascinating divergences in real estate fundamentals across the US. Don't miss insights into the healthcare sector, REITs, and the performance of homebuilders amid falling interest rates.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

Obviously, supply having been built up for not only the current administration trying to get inflation lower and keeping US production higher, but also under a new administration, we would also see radical efforts to try to cut the prices of energy in half and build up our own infrastructure. So that would be certainly bullish for US energy, but for energy stocks and the amount of supply that's out there versus the demand should cause crude to go steadily lower in the next year. So I'm a lot more bearish on crude oil than I am on other commodities like gold and silver and I know you've mentioned some of those in the past and obviously hitting new all-time highs. Gold still is in a very good spot right now, at the onset of a huge amount of Fed cutting, which normally can benefit precious metals.

Speaker 2:

Appreciate those that spread the word around Lead Lag Live, which is effectively what this is under as a podcast name. This will be an edited conversation under Lead Lag Live on all of your favorite platforms Apple, YouTube, Spotify. Now I've got, I think, 1.3 million downloads over the last two years. I've had the pleasure of getting to talk to Mark through Spaces before First time. I think he and I do this face to face, which is always a nice dynamic. So, with all that said, my name is Michael Guyette, publisher of the Lead Lag Report. Joining me for the rough hour is Mr Mark Newton. Mark, a lot of people are familiar with your work and your technical analysis, but introduce yourself for those who don't know who you are. What have you?

Speaker 1:

done throughout your career? What are your specialties? What are you doing currently? Yeah, thanks, Mike. I appreciate the chance of joining you and your audience today.

Speaker 1:

I am the Chief Technical Strategist of Fundstrat. I joined Tom Lee about three years ago. I got my start in the business probably in the early 90s, I guess I would say. I used to trade equity options as a floor trader at the CBOE. I joined Morgan Stanley and I moved from Chicago to New York in 2004 and I have really been in this area for the last 20 years. So I ran technical analysis for Morgan Stanley. I worked briefly with a hedge fund called Diamondback Capital that was formed by a few people that used to work for Steve Cohen. That was about three and a half years. I ran my own business for some time. I joined a firm down at the New York Stock Exchange and sent technical analysis to a lot of their clients, and so you know I've done a little bit of everything. I've worked really both on the buy and the sell side of the business, largely for the last 25, 30 years.

Speaker 2:

Has technical analysis changed since those early 90s days? I mean, I got to assume that a lot of the stuff that used to work maybe doesn't anymore, because so many people are aware of so many indicators and so many patterns. You know it's?

Speaker 1:

that's a great question. I think, honestly, the answer to that is no. Technical analysis will almost always continue to work and that's because, really, people either make mistakes when trying to enter positions based on technical. You could look at things really in both ways. Based on technical, you could look at things really in both ways. You could say that technicals should always work, because people aren't looking at certain things and we know that obviously there are breakouts that fail. There are breakdowns that end up not working, but also it still works a remarkable amount of the time.

Speaker 1:

On a longer term basis. People think that there should be this self-fulfilling prophecy, but we also know that's not true. So momentum investing continues to be extraordinarily successful. It's almost always better to buy a stock or commodity or really anything that's approaching or at new all-time highs versus trying to buy dips of something which is the new 52-week lows. But much depends on one's own timeframe and the risk management techniques. But certainly it's easier and, I would argue, less risky potentially to buy something that's within 5% of 52-week highs versus trying to buy the bottom of a big something that's at multi-year lows.

Speaker 2:

Yes, I mean no, it's saying that you still see a lot of people trying to in quotes pick the top, and I think that's sort of a commonality across a lot of people in general, especially maybe in election years when people tend to fall for certain narratives. I always try to frame things in terms of conditions as opposed to predictions, not from the standpoint of picking a top, but rather rotating to something else that might be doing better, and to that end, it seems like not only are people trying to pick the top, but they're also trying, in particular, to maybe bet against tech. I want to get your thoughts on where we are since July, because it seems to me, from the intermarket perspective, entering July, a lot of big shifts started taking place. You started seeing tech weakening. You started seeing small caps outperforming large caps. You started seeing value outperforming growth, maybe international a bit outperforming the US. Let's go through that a bit.

Speaker 1:

Well technology has been largely unchanged since the last three months. If you look at it on an equal weighted basis, we did see a little bit of a shift into value versus growth as technology pulled back pretty sharply into early August and that was a period of just, you know, largely a few weeks time. But you could argue that you know the last couple of months have sort of been shaky for parts of technology. It's been important to be diversified. Semiconductors were very hard hit, but that largely did not affect the broader market nearly as much, and we saw sectors like industrials and financials that still have managed to thrive in this environment financials and industrials hitting new all-time highs at the end of August, along with other groups such as healthcare utilities and also technology.

Speaker 1:

So people were still pretty concerned about the stock market in August heading into, understandably, a very bearish seasonal time. But yet we had five sectors that hit new all-time high territory at the end of last month, and so the breadth was honestly quite robust at a time when people were really on the sidelines and maybe had been a little too overexposed to technology. They'd gotten burned on the pullback into August, and so I would argue the market is still in very good shape. We haven't seen sufficient evidence of technology breaking down. You look at the larger companies within tech that still represent a substantial part of many indices and ETFs, like Apple or Nvidia, microsoft or Alphabet. They're still in excellent technical shape despite their minor consolidation that has happened in recent months.

Speaker 2:

Does it look to you like financials are maybe the new leader? So I'm going to share with my screen based on a post you put out. It looks like last week, but I've noticed this as well. I mean financials, which is to me the quintessential value sector from a lot of perspectives, and the dividend sector.

Speaker 1:

Yeah, it's been a little bit of a mixed bag honestly.

Speaker 1:

I mean, financials did move through all-time highs in August.

Speaker 1:

The move started arguably in late spring and once interest rates really started to drop, on the long end of the curve, we really saw some pretty good outperformance from regional banks that really helped the financial sector to break out.

Speaker 1:

So if you look at the insurance stocks, if you look at the credit card companies, you and I know if you go to any music event or a sports event, you can't use cash anymore. So these companies like Visa and MasterCard, they've been thriving at a time when many people are trying to understand what companies within the financial space is working and exchanges also are still quite attractive and doing very well. But you look at stocks like Bank of America or Citigroup and they really have been, you know, not nearly as strong as really some of the other parts of the sector, and so it is important to diversify around the space and really understand what's working, what's not. It's not your traditional money center banks per se that are almost always leading. I mean they have sort of struggled a bit compared to recently what's happened in regional banks, but really it's been the insurance stocks and some of the other areas that have really been top performers.

Speaker 2:

How much do you think the un-inversion is helping with that momentum, the idea that if you get some steepening, that's going to be a good thing for the banks?

Speaker 1:

I don't know that I would necessarily say that I think that it's good, if you're a bank, to be able to lend, borrow short, lend long. When that changes, then things could change for the banks. But the banks continue to be in terrific shape. Banks continue to be in terrific shape and, honestly, most of them went through the ringer back in 2008, 2009, and throughout all the stress tests and ways that they've made efforts to really strengthen their own balance sheets. I think that's been quite helpful.

Speaker 1:

So many have pointed out that the financials have been a very good value for a long period of time, but it's important to catch the trends, and the trend of the last year has been excellent, for financials have been a very good value for a long period of time, but it's important to catch the trends, and the trend over the last year has been excellent for financials. I haven't seen evidence of that falling yet. I don't suspect that if rates are going to continue to creep up, that that will be a good environment, or I mean, coming down would be a good environment for the banks, but we shall see.

Speaker 2:

Let's talk about rates. I mean, the 50 basis point cut has been talked about ad nauseum, but from a technical perspective, where do you think rates are likely going? Is there a sense of a so-called measured move when it comes to a technical look at different rates?

Speaker 1:

You know my process includes a combination of a lot of things. I look at not only trend and momentum, but also cycles. I use some counter trend tools based on the works of Tom DeMark and others, and so a lot of my work. I wrote to clients earlier this year that rates were in the process of turning down. I expected a sharp move down to get down under 4%, which many thought was impossible, and so that has happened. My ultimate target is going to be down near three and a quarter for the 10 year, which is still a ways to go, but it's not going to be a direct move.

Speaker 1:

We're already starting to see evidence of now treasuries and equities decoupling a little bit as inflation has pulled back, and so bad news used to be good news. Any evidence of bad news that would cause the Fed's rate cuts to be pulled forward was actually very good for the stock market, and so, as rates dropped on poor economic data, or at least poor versus expectations, I would say that was good for the stock market, and I don't think that's going to be the case going forward. I sense that at this point we know that the Fed is in a cycle where they're going to start to drop rates pretty dramatically over the next nine months or so. We have about 200 basis points of cuts now built into the curve. Powell pushed back on that a little bit, but others like Waller have come forward and actually suggested that that very well could happen.

Speaker 1:

So rates have actually turned higher after the Fed's 50 basis point cut, which is unusual. I think the last time that happened was 2008. And let's not forget I mean look, the stock market rallied 26% ahead of a 50 basis point cut. So that is unusual, that the stock market and you know, given the levels of unemployment, the economy largely is still okay, although starting to weaken on the fringes. So the Fed cutting 50, and I would argue that's a good sign, it's good, it's necessary for the Fed to cut. But you know, it's just interesting. It's almost always important to see what the swaps market has baked into the curve, because the Fed doesn't usually like to disappoint, because that's what causes a volatility when they do something different than what the market expects.

Speaker 2:

I wonder if there's a bit of a complicating factor that might be thrown into the mix here around China and rates. So you know this and I just saw the news this morning, but a lot of stimulus coming out of China. China's markets were up fairly sizably, but it posts out a little bit earlier on this. You and I both know China has been a horrendous performer and everyone's talking about it being a inflationary depression and I keep going back to yeah, the equities are actually throwing up here. Let's talk about China and let's relate that to the potential for China perhaps coming back and what that might imply for commodities and, in turn, rates. I think there's a link here in terms of maybe China throwing the Fed's path off.

Speaker 1:

Yeah, I actually wrote about China last night and talked about it yesterday after the PBOC made pretty serious movement changes to their reverse repos and also set dollar yuan up materially higher ahead of this China's national holiday week, which starts on October the 1st. So I think a lot of that was forward dated to really help cause at least some type of a bounce. And, of course, the actions to really cut mortgage rates for borrowers or reduce the amount that banks must hold in reserves. Those are huge positives that I think even people that don't follow China are going to have to pay serious attention to. So it's, you know, it's my belief that authorities are doing all they can to try to put a floor under China and their equity markets following, you know, a huge amount of just underperformance and lagging in their market compared to most of Asia. So I think it's a big positive, honestly, for confidence, for the short-term technicals, intermediate-term technicals, for the FXI and K-Web, which are the two main liquid ETFs that a lot of people follow when they think of China. But the move is going to take time. I mean, they have serious issues with regards to their economy and commercial real estate and we don't need to go into that necessarily, but it's something that you know. That's going to take a long time but as we know you know, typically a stock market sometimes will lead what's going to happen in the economy. You know, if the stock market starts to rally substantially, then that might be somewhat helpful and sort of helping to mitigate some of what's gone wrong in recent years as they try to exit from sort of a deflationary type system. We saw a pretty decent breakout in copper and I think that's going to continue to benefit as we see evidence of the Chinese stock market recovering. So I do like copper to push back to new highs for the year, but I don't sense that it's going to be a long-term bull market in copper. I think it's going to be a bounce and once that's complete that we're likely going to show further weakness like the starting next year in copper. So there's only so much that we can do.

Speaker 1:

The commodities in general had suffered a bit. We did see, of course, energy making up a substantial amount of commodities and that's a different story. We can speak to that. But that's more of a demand picture that was thought to be largely from China, coinciding with just US, obviously, supply having been built up for not only the current administration trying to get inflation lower and keeping US production higher, but also under a new administration we would also see radical efforts to try to cut the prices of energy in half and build up our own infrastructure. So that would be certainly bullish for US energy, but for energy stocks and the amount of supply that's out there versus the demand should cause crude to go steadily lower in the next year.

Speaker 1:

So I'm a lot more bearish on crude oil than I am on other commodities like gold and silver and I know you've mentioned some of those in the past and obviously hitting new all-time highs. Gold still is in a very good spot right now, at the onset of a huge amount of Fed cutting which normally can benefit precious metals and some of the base metals. That'll take time. But we've seen some interesting action also out of the grains, and some of that could also be tied to China and their demand for soybeans, and so we're seeing soybeans and corn and wheat all start to turn higher in the last few weeks, and so that's also an area for people to take a look at.

Speaker 2:

Yeah, I would say I think the grains are actually kind of a sleeper part of the investable landscape. I had Jake Hanley of Tucre. I mean they've got a number of these ag-based ETFs out there and you know, a lot of these things have gone around trip post-invasion Russia, ukraine, but they're showing some signs of life. And if that's the case I don't know if that's, if you've ever on this, but is there anything to suggest that ag tends to move first before another reflationary wave?

Speaker 1:

Yeah, that's a great question. I mean, I don't look at links and I mean they run in their own certain cycles, but it's tough to, you know, make a big statement regarding, you know, for the time being it's just a short term balance. One really cannot say that. You know we're going to see a next, a big boom in the price of agriculture, but I do sense that we're going to continue this recent rally that we started, you know, back in August and I thought that was, you know, sort of important. So I sense we probably can see soybeans get back up to, you know, over $11 a bushel. I mean, I don't, I don't put a lot of focus in the fundamentals of grains, but I do track some of the cycles for many of these, some of the grains, and some of them certainly have made short-term bottoms. The question is whether that's sustainable.

Speaker 2:

You always have a lot of clients with fun strata. Do you find that one's bullish or bearish views are somewhat a function of their political views? I mean, I think there's always an element, personally, of if you are very anti the current administration, it'll be bearish, independent of what charts tell you, I think, that that certainly comes to the forefront.

Speaker 1:

you know, just given news all around us that we really can't avoid these days, and you know we all have news at our fingertips now versus 20 years ago, and so you know that's a completely different subject with regards to politics, and you know just the efforts of media companies to generate news items that make investors click and really drive us further to the fringe, and that's potentially a problem because nobody knows what they can believe or what to trust these days. You know, sometimes people, you know, tend to be permables, perma bears, and that doesn't necessarily have anything to do with politics, but there are a lot of people, for a lot of good reasons, that are upset about the recent direction in the country in recent years, and so that's politics. And, as we've studied this, this shouldn't really make a big deal about the stock market per se. We've seen what's a bigger deal, I think. Market per se, we've seen, you know, what's a bigger deal, I think is whether you have a balance of power or whether it's all on one side, and that can lead policies to go to extremes, which sometimes can cause these big imbalances. But you know, look, the US is facing a massive problem with spending on either side and I think until that's addressed, you know it's going to eventually be addressed for us if we don't want to address it, but it's a very sensitive subject that nobody wants to tackle. So you know.

Speaker 1:

To get back to your original question, you know, I think, that in election years that sort of rises to the forefront as being you know something. But most people are already pretty wired. Anybody that's been an investor, you know, for a long period of time, you know. We know the stock market goes up 75% of the time. But I think that you know there's certainly an element to disturbing news and division and the polarity that can cause people to become, you know, discouraged.

Speaker 1:

And if you're a trader, you know, sometimes you have a little bit more of a bearish mentality than if you're an investor. I've seen that time and time again. The people that are adept at picking, you know, short term tops and bottoms tend to get bearish a little more quickly, but they also have a very short timeframe and so it's a very different. You know. You always have to. You have to. The key is when you see people that are long-term bears or bulls switch and go the other way and that's your real value of information. It's less about whether somebody's bearish and they might be looking at something over a period of two days and somebody else is bullish until next spring or summer. The two of those can certainly coexist, but you really need to understand people's timeframe when really addressing bulls versus bears.

Speaker 2:

Yeah, that always drives me crazy. It's like you can be bullish and bearish at the same time, depending on time frame, and so much of the discourse and frustration and debates are purely around the when Right, not not the direction. I know you guys have been. You know, obviously spot on as far as the bull run in large cap averages. Obviously, it's spot on as far as the bull run in large cap averages. Has it been surprising, though, that we've seen gold as strong as it has been in the context of that move? We've seen the utility sector, the defensive sector Okay, yeah, we can talk about AI as part of that. But yeah, if, at the start of the year, I were to say to somebody gold is going to be having this huge run and utilities would be the best performing sector.

Speaker 1:

I don't know if many people would equate that to a bull market for the S&P 500. Yeah, to your point. I mean a lot of that is just demand for that's more power centers and AI that's driving some of the utilities move. You look at the utilities that are making the large gains, you know. If you strip out the constellation energies and the NRGs and some of the others, you know there are utilities that are making the move.

Speaker 1:

The reason for the outperformance is because interest rates have started a massive bear market from a level right close to 5% and are now down under 4%. So that's a big, big deal and that obviously causes these interest rate sensitive investors. As rates are going to drop, they're going to look for yield sensitive type sectors like REITs, like utilities, to try to position. I would argue that we're not in a defensive time and if you look at the performance of consumer staples, I mean you look at relative charts of staples versus the S&P and we're at decade lows. So that really speaks against that trend of hey, the market's real defensive and everybody's in defensive type names. I mean I think that the staples certainly has underperformed pretty massively Gold and silver.

Speaker 1:

That's also due to real rates starting to drop less about. Many people say, well, gold is an inflation hedge and this and that, but a lot of it. If you look at the performance of gold in recent years, as the 10-year treasury has made intermediate turn peaks and troughs a lot of times, gold has inversely made the same turning points, right along with interest rates. So watch the dollar, watch rates and you'll get your move in gold, and usually it's the opposite.

Speaker 2:

Let's talk about REITs. That's something I often talk about. Although I write about it, I think REITs are probably increasingly more interesting. They lag for so long and REITs are unique in that, at least from my own studies, they don't really fit cleanly within a risk-on, risk-off framework. Sometimes they act defensive, sometimes they act offensive. Do you think we're at a cycle turn for REITs, independent of these ongoing concerns around property, housing, commercial?

Speaker 1:

real estate. I sense that there's a very strong short-term bounce happening. I can't say that I'm long-term bullish on REITs, but I think that I myself turn bullish, and Tom Lee did as well earlier in the year on the REIT sector. He did for fundamental reasons and macro reasons. I did for more technical reasons, but REITs were one of the most under-owned sectors in terms of you look at standard deviation of just people that are favoring certain sectors and flows, and they were at about two-decade lows in terms of the amount of interest in the sector. And so from a sentiment perspective, you could certainly make the argument of why it was right to get in the REITs. And then I use my own methods and there was a lot that suggested REITs had the potential to bottom during the spring summer, at a time when rates were really going to start to turn down.

Speaker 1:

So I don't. I don't sense that this interest rate move is done. Obviously, the Fed is just starting to cut rates and so rates have started to bounce a bit in recent weeks, but I still sense that the intermediate term trend is still quite negative and bearish for interest rates on the long end and we're seeing this bull steepening, as you mentioned, re-inversion and breaking back up above the zero line. But in general rates in general are coming down pretty sharply on an intermediate term basis. So I still sense that the REITs can probably work into next year.

Speaker 2:

How important is that rate dynamic when it comes to equal weighting versus market cap weighting? Because it's clear there's a strong link between REITs and small caps and equal weighting tilts more mid and small.

Speaker 1:

Yeah, I think that the fact that we're yet again in another time when you have a few amount of stocks that are dominating these indices, it really serves to confuse the average investor that doesn't take the time to look under the hood and we have days where technology is down, but yet the majority of the market's up and breadth is two to one positive and people say, oh, the market got killed and it was like well, no, your tech stocks got killed.

Speaker 1:

But if you're diversified amongst the sectors, then actually the broader market is doing quite well. For me, it's an important tool in the arsenal to make use of these relative charts and, looking at equal weighted indices versus equal weighted S&P, strip out the large cap tech stocks that have such dominance and try to really get a feel for really what's moving. And that's helped me, you know, over the years to be able to select, you know sectors that are set to really underperform or outperform and why that happens. And when you use just the S&P, for example, you have to realize that Apple and NVIDIA and Microsoft are big percentages of that, so it oftentimes can camouflage the action of some of these other groups and other stocks.

Speaker 2:

Does equal weighting tend to sortly work better for some sectors versus others? I mean, when I think about tech I think in general it's winner take all. So I myself find it hard to believe that Eagle weight tech would end up outperforming large cap tech, just given the nature of the sector. Maybe I'm wrong, but any observations of that, Because I think that has become an interesting thing in terms of where to tilt.

Speaker 1:

Well, certainly, over time, you find that the large cap tech stocks that dominate should be the ones that you know potentially outperform. These are the ones that have made all our lives better in recent years through all the amazing technology you know. I think if you look at a three month return, I mean XLK was, you know, one of the worst of the major sector ETFs, of the of the major 11, the sector spiders. It was down close to 3%. But if you actually look at you know what, what eco weighted technology did you know? You're up 1.28%. So there's certainly periods of time when it's best to not own the MAG-7, own the FANG. Many of these are in triangle consolidation patterns. Other parts of tech are thriving and hitting new highs parts of software and some of the disk drive companies and this and that. So it's not always that large cap has to outperform and it's not always that the MAG-7 has to outperform, outperform and it's not always that the MAG-7 has to outperform. To your original question, certain of these ETFs have huge weightings in just a few companies, and look at the XLY, for example. That's not really a great gauge for consumer discretionary. I mean it has a chock full of Netflix and Amazon that account for what? 40% of that ETF? So that's not really a good gauge for how you want to look at discretionary.

Speaker 1:

The consumer discretionary has not been doing all that well this year. It's been a big laggard, but obviously for those that own Amazon or that have the major companies, it looks like it's doing just fine. But the consumer stocks have been a big disappointment. That's probably one of the biggest things that many people have not taken the time to study. That potentially could be a warning for years to come in terms of what's happening to the consumer. Is the consumer getting stretched? Why aren't these stocks acting well? We've seen a little bit of a comeback of late with the Nikes and the Starbucks of the world, but in general, the consumer stocks just have not really thrived, as should have happened, honestly, this past summer. So that's something I'm watching.

Speaker 2:

How about homebuilders Talking about hitting new highs. I mean, it's been remarkable how homebuilders just don't want to stop.

Speaker 1:

Yeah, I mean. A lot of that is an interest rate play as well. Rates coming down sharply has benefited this sector. But you know you've seen some evidence that the fundamentals and the technicals might be diverging a little bit, because across the country you've seen evidence of inventories starting to rise around the US outside of the Northeast. The Northeast has not been nearly as affected by any of this. They still have record low inventories. But if you look at Florida and Texas they have a third of all the inventories in the entire country. So people have left New York, the high tax states in the Northeast, to go to the South and now they've seen just a record amount of.

Speaker 1:

All of a sudden we're starting to see price cuts and inventories rising and so I sense that a lot of the South very well could be in a big bubble in real estate in ways that you haven't really seen in the Northeast and might not see.

Speaker 1:

But I still sense that in the years to come. Some of the cycles I look at suggest that real estate should start to decline over the next few years. So I sense the prices have just gotten way too high and prices are just not affordable right now and rates, even though they've pulled back in the last year, they're still well up from where they were a few years ago. Many people refinanced at 3% back in 2017 are now getting notices from their banks that rates are going to be reset to 5%, 6%, 7%, and that's just not affordable. So mortgage originations are down. I sense that there could be some eventual trouble brewing for real estate, but look, the stocks themselves are still acting quite well and most of the gauges for these, whether you look at ETFs like ITB, fom, construction or XHB for just the whole builder's ETF, I mean they're still acting very well.

Speaker 2:

You had alluded to this a little bit earlier sort of the changing interaction between bonds and particular treasuries and equities. I myself have made a point that if I've been right about anything separate from my bullishness on gold and utilities, it's that the reverse carry trade which showed itself for just two trading days, which everyone freaked out over, would maybe bring back that flight to safety behavior. And it seemed like ever since then, when the stock market's down fairly heavy, long duration yields are falling right. As that's happening, spreads are widening for a moment in time. Again, it hasn't really been that persistent, but at least that behavior is showing some size of life. Do you think that we're back to sort of that more normal interaction?

Speaker 1:

I do think things are normalizing there, because I think inflation has already receded quite a bit from from the highs that we saw post-COVID. And you know I peaked out I guess the middle part of you know 2022 and started down very sharply, the middle part of 2022 and started down very sharply. So I think that, in general, bad news on the economy used to be good news for the stock market. I don't see that being the case. If you look at prior years, we've had normally a time when yields going down was not necessarily good for the stock market. It was bad for the stock market, and so we had a huge period of very positive correlation this year for treasuries and equities, and so we had a huge period of very positive correlation this year for treasuries and equities, and now in the last week, that's really been unwound, that's starting to become unwound, where rates have gone straight up but stocks have also gone up. So I think that is interesting. We've moved exactly the opposite in the last week, as we've moved nearly all year with regards to the relationship between stocks and bonds. So look, the Fed is focusing much more on the labor market now that it is on inflation. I think they feel the inflation battle is one that's arguable. Potentially but at least that is you know for the time being you know if they start to cut rates very dramatically in the next year and inflation is still somewhat elevated, then it could reignite another spark of inflation.

Speaker 1:

But I think that the labor market deserves some focus. I agree the Fed should have cut rates and I think they should continue. The Fed funds above five you have inflation largely. It's eventually will reach goal. I mean the goal should be zero, right, not even two and a half 3%. But I sense that seeing hiring stop dead in its tracks and even though that hasn't led to massive unemployment, it certainly led to a very, I think, meaningful sign of just a real slowdown in hiring and layoffs have started to some extent, but not huge.

Speaker 1:

So this is all COVID. You know supply, demand and balance. And it's affected the labor market, of course, with the work from home crowd and now we're seeing more and more people are demanding that people come into work. You know I think that's going to take time to shake out. But also you know US consumers were never really affected by the Fed's rate hikes. All those that are homeowners that were able to lock in a 3%, they've not been really adversely affected. Like other countries around the world. For example, like in the UK, you can't get a 30-year mortgage. I mean, you're basically a few years out. You have to effectively refinance again or you're set to a new rate. So eventually this is all going to filter through.

Speaker 1:

But it's still a very strange time. Even the economists don't really have a great handle. They're all looking at backwards data. I mean, if anything that's an area ripe for regime change by AI is just replacing the Fed with some sort of a machine that can make decisions based on current data and make intelligent decisions and not based on past data from a year or two ago and having to dance around every little word in hopes that the stock market doesn't decline. This is 2024. We should have a better way to look at the world and be a little bit more accurate than many of these economists have been.

Speaker 1:

In recent years. The Fed has never correctly been able to back off of a series of huge rate heights and start a campaign of dropping rates really without the economy being affected. It's been rare, I mean. I think they've had like 14. Rate cutting cycles and after a huge amount of rate hikes and almost all of them led to recessions. Eventually and some of those times it didn't we actually had much better GDP, much higher savings, much lower debt. So this stuff all matters. But look, this is 2024. It's a time for taking risk. It's still a good time in the cycle. We're not a time yet when the economy is really starting to falter. So, you know, I still think it's right to be bullish, and when that changes, then I will certainly address that.

Speaker 2:

At what point is it going to be right to be ultra bullish on small caps? That's been the frustrating part of the marketplace, as we know. I keep going back to the best majority of small cap stocks, still pretty below their 2021 respective eyes. I know you guys and I was as well. Uh, we're pretty optimistic on small caps. Year is not over, right, so you never know how things can play out. But what's it gonna take, for small caps are getting all the momentum?

Speaker 1:

you know, as people might or might not be aware, you know our own founder and owner of, uh a fun strat, tom lee, did make a very bullish call and counted the table on small caps. And you know, for reasons based on valuation and also based on the Fed's plans on cutting rates substantially, which should benefit companies of small capitalization, companies that have a need to refinance. The flip side of that, of course, is that you have, if the economy does go into a recession, then the small caps would be adversely affected. They'd be hurt potentially down the road. Technically, I joined Tom and thought that small caps could work, but it's been a lot of false starts, unfortunately. We've had big run-ups that have failed and pullback. Now recently we started to turn higher again. I am optimistic.

Speaker 1:

Technically, I would argue it's never proper to try to dig your heels in at the lows and try to find something that's compelling. I mean technically, I want to see that a trend's been established. Small traps have been going down for a decade and so that is the unfortunate, know, the unfortunate truth. But some of that is just due to the fact that we have all these large technology companies that are all helping us in many ways and that's wonderful. But to truly see small cap outperformance, you know I'm not sure what that's going to take. It Normally these little bull, you know, runs last for a period of about six to eight months, like they did in 2020, and then they roll over again. So I think we're in that period where small caps can work between now and probably next spring, but technically I'm unable to say that.

Speaker 1:

We're in a time of years and years of small cap outperformance. It's just very, very difficult. These companies don't make any money. Some of them I mean you look at the the in general it's been difficult to find make the case that you know the small capitalization companies are the ones that are that are making the most earnings. They're just not, and so that is a little bit of a concern to me, but but not to. You know, tom has made a very, a great argument and it's been working of late and I'm very optimistic that it can work. Technically, though we're still a little choppy. I'd love to see IWM get up over 228. That'd be encouraging. 244 was the all-time high, I believe, from back in 2021. And to really have faith that you can see a lengthy, long-term move, we almost need to get over that first before the move can start, and so I'm skeptical that that happens, honestly. But I do sense that the IWM probably does get to 244 by next spring.

Speaker 2:

Is there anything that you're observing that could be sort of the next big thing, technically speaking, out of some new sector or industry or asset class that nobody's really paying attention to, but it's showing some signs of life.

Speaker 1:

Healthcare is interesting that nobody's really paying attention to, but it's showing some signs of life. Healthcare is interesting. There's a real question mark as to whether that little bounce that we've seen will have longevity, but that's been a sector that's been lagging for some time. You know June July are normally some of the best months of the year for healthcare. We did see that pretty good bounce and now, you know I wrote about the biotechs in a recent report last week. I think the sector has tremendous promise. Medical device companies also tend to outperform when you see a series of interest rate cuts, understandably speaking.

Speaker 1:

So you know, the real question is as I guess the politics and the administration and what you know, what could happen. You know, certainly we've seen a lot of the efforts on M&A have been squashed by Lena Kahn. You know, under the FTC and that's been problematic for the health care sector. And you know there was evidence that at least when Trump won the debate that we saw a lot of Medicare Advantage. You know the insurers really started to thrive in that sector.

Speaker 1:

So you know all this is a big question mark and it's not to say that one's going to be better or worse, but it is important to watch the sector movement, you know, as they happen, healthcare is still an area that I think can probably show some promise between now and end of year. But that's something people are just. My view is that people really pay attention to very little outside of technology and so you know, people don't realize that industrials is at you know, multi-decade highs in relative terms versus the S&P and broke out, made a big breakout last year, or that, you know financials is at record highs because they say, well, citigroup is trading here to have a little bit more understanding of what's driving these markets and just not look at their semiconductor stocks as being the be-all, end-all thing, and really have an appreciation for what's driving the market in this day and age.

Speaker 2:

Mark, for those who want to track more of your thoughts, more of your work, where would you point them to?

Speaker 1:

Well, you go to Fundstratcom. Well, you go to Fundstratcom, but you can go to our services under fsinsightcom. Fsinsight is a division of Fundstrat that's geared more towards retail clients, and so anybody you know I publish a piece once every weekday. I do a five to seven minute video every day that talks about the market. What I like usually has three or four charts involved in most of the reports I put out. I do a monthly piece.

Speaker 1:

I have a favorite stock list called Uptix, based on the work of the late, great Isaac Newton, who had a piece called Optix. So mine's a little twist on that being that I am a Newton, of course, but look, tom publishes also daily. We have a crypto team, digital assets, we have a guy that does policy with us, and so we really have a lot to offer for those that really care on direction and really want a deep dive as to how to look at markets. I am on Twitter, although I don't post a lot that's actionable on Twitter, so I know many are on Twitter looking for the next big thing. I can't promise you'll find that under my posts, but there are. I do tend to leave some nuggets every now and then that might be helpful. So I'm at Mark Newton CMT on X, so I would encourage people to look at that as well. I would quickly add that if any would like a trial subscription, that watched here today, you know.

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Michael A. Gayed, CFA

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