Nasdaq and yields in focus: The Investment Committee’s strategy

IS HOW LONG STOCKS AND BONDS CAN COEXIST AT THEIR RESPECTIVE LEVELS, AT THEIR RESPECTIVE LEVELS. RIGHT? YIELDS KEEP BACKING UP. STOCKS ARE HANGING IN. WE'RE NEW HIGH ON THE NASDAQ. YOU'RE BARELY OFF THE HIGH FOR THE S&P. >> SO WITH THE INFORMATION THAT WE HAVE IN FRONT OF US I THINK THERE'S TWO THINGS THAT PROVIDE EVIDENCE THAT THIS CAN CONTINUE. FIRST OF ALL THERE WAS A CONCERN SURROUNDING RISING YIELDS. AND WHAT WOULD BE THE EFFECT ON THE CAPEX CYCLE FOR AI. IN FACT, WOULD IT BE AN IMPEDIMENT FOR COMPANIES THAT WERE GOING OUT AND OFFERING DEBT? THAT WAS CHALLENGE NUMBER ONE. I THINK WE HAD A CLEARING EVENT LAST WEEK WITH THE THE MEETING WITH THE PRESIDENT AT THE WHITE HOUSE AND THE TECH CEOS. I THINK THE MARKET GREW VERY COMFORTABLE AND COMFORTED AFTER THAT MEETING. SECONDARILY, I THINK MICRON'S EARNINGS LAST WEEK VALIDATED THAT THE THE DEMAND, THE INSATIABLE DEMAND IS STILL IN PLACE. SO I THINK THIS CONTINUES. AND WHAT IS HAPPENING IN FRONT OF US RIGHT NOW, THIS RESILIENCY THAT YOU'RE SEEING IN WHICH TEN OUT OF 11 S&P SECTORS ARE HIGHER, THE MARKET IS LOOKING FORWARD, ANTICIPATING PRICING IN AND POSITIONING FOR WHAT WILL BE ANOTHER STRONG EARNINGS QUARTER. >> NOW YOU'VE GOT EVERY SECTOR TODAY IS IN THE GREEN. STEPH. I DO THINK THE BACKUP IN YIELDS AND THE WHOLE MOVE TO A MORE CONCENTRATED MARKET IS IS PRETTY INTERESTING. AND IF YOU LOOK AT IT THIS WAY SO OVER THE LAST MONTH LET'S LET'S TAKE THAT AS THE TIME FRAME OF REFERENCE. OKAY. SINCE SEPTEMBER 5TH. ALL RIGHT. ON SEPTEMBER 5TH, THE TEN YEAR WAS 478. ALL RIGHT. SO WE BACKED UP LIKE 50 BASIS POINTS BETWEEN THEN AND NOW. AND OVER THAT PERIOD OF TIME, CONCENTRATION HAS ONLY GOTTEN MORE PRONOUNCED, RIGHT? ONE HAS FOLLOWED. THE OTHER IS YIELDS HAVE BACKED UP. WE'VE GOTTEN SMALLER IN THE MARKET. THE EQUAL WEIGHTS DOWN 4.5% SINCE THEN. NASDAQ'S UP ALMOST 5% SINCE THEN. THAT TELLS A PRETTY GOOD STORY. DOES THAT CONTINUE? >> I MEAN, I CAN'T BELIEVE BONDS IN SEPTEMBER ARE DOWN 8%. I MEAN, BONDS ARE SUPPOSED TO BE YOUR SAFETY MECHANISM. IT'S SUPPOSED TO BE RIGHT DOWN THE CENTER OF THE FAIRWAY. AND IT'S BEEN NOTHING. BUT NOT SO TO ME. I THINK 5% PLUS ON A TEN YEAR FOR A LONG PERIOD OF TIME MAKES BONDS PRETTY INTERESTING. THAT BEING SAID, I THINK THE LONG TERM TOTAL RETURN FOR THE S&P 500 IS MUCH MORE COMPELLING. WE'VE GROWN 8% ON AVERAGE OVER THE LAST TEN YEARS, 7% IN THE LAST 50 YEARS. AND WHY I THINK WE'RE GOING TO CONTINUE TO SEE A RALLY IN EQUITIES IS BECAUSE THE ECONOMY CONTINUES TO DO REALLY WELL. SO LAST WEEK WE HAD A REALLY GOOD WEEK IN TERMS OF ECONOMIC DATA. WE HAD THE S&P SERVICES PMI AT THE BEST LEVEL SINCE JULY OF 2021. AND WE HAD THE OFFICIAL ISM THIS MORNING, WHICH HAS BEEN THE BEST NUMBER SINCE IN FOUR AND A HALF YEARS. SO WE'VE HAD SUCH A CONSISTENCY ON THE SERVICES SIDE. MANUFACTURING IS STARTING TO PICK UP TO COMFORTABLY ABOVE 50. IT'S A DIFFUSION INDEX, SO THAT'S WHAT YOU ROOT FOR ABOVE 50. WE HAD EMPLOYMENT NUMBERS LAST WEEK THAT WERE PRETTY GOOD. WEEKLY CLAIMS AREN'T THE BEST LEVEL SINCE 1969. AND WE HAD A REVISION ON GDP. YOU ADD IT ALL UP, SCOTT. AND I CAN'T IMAGINE THAT EARNINGS ARE NOT GOING TO BE REALLY GOOD. AND YES, THEY'RE GOING TO BE VERY GOOD AT MAG-7. ONE OF THE REASONS WHY I'VE BEEN ADDING TO MAG-7 RIGHT. >> META, FOR EXAMPLE, IS YOUR NEWEST RIGHT. >> META LAST WEEK. RIGHT. BUT NVIDIA AS WELL ABOUT TWO MONTHS AGO. SO MY POINT BEING IS WE'RE GOING TO SEE GREAT EARNINGS IN TECH AND COM SERVICES. THEY'VE HAD A NICE RUN. I HOPE THAT WE'RE GOING TO SEE THESE OTHER SECTORS DO WELL AS WELL. I THINK THE SETUP IS REALLY GOOD BECAUSE ALL OF THE OTHER SECTORS ARE DOWN IN THE LAST MONTH. AND THE EXPECTATIONS ARE FOR FOR REALLY LOW. THEY'RE LOW AT THIS POINT IN TIME. WE'VE GOT TO GET THROUGH THIS WEEK. WE HAVE NO DATA FOR THE REST OF THIS WEEK REALLY. SO NEXT WEEK IS WHEN WE'RE REALLY GOING TO START TO SEE THE EVIDENCE. >> THE ONLY SECTOR. >> OVER THE LAST MONTH THAT'S UP IS TECH. NOW EVERYTHING ELSE HAS GONE NEGATIVE INCLUDING COMP SERVICES. NOW THAT'S BASICALLY FLAT. BUT IF YOU LOOK DOWN THE STACK THAT'S WHAT THE STORY IS, IS TELLING. AND YOU DO HAVE SOME PRETTY BIG DIVERGENCES, WHICH EVERCORE POINTS OUT, JIM, TODAY HAVE REACHED EXTREMES. ENERGY PLUS 40% YEAR TO DATE OUTPERFORMING OBVIOUSLY, ALONG WITH TECH, WHICH IS PLUS 30% YEAR TO DATE DIVERGENCES TO THE EXTREMES TO SUCH A DEGREE HAS BEEN RARE. EVEN RARER IS THE FACT THAT THE FINANCIALS HAVE BEEN UNDERPERFORMING RELATIVE TO THOSE BY SUCH A DRAMATIC AMOUNT. FINANCIALS DOWN 2% YEAR TO DATE, ONLY EIGHT TIMES SINCE 1990. HAVE THOSE DIVERGENCES HAPPENED TO SUCH A DEGREE. NOW, THAT OBVIOUSLY SPEAKS TO THE FACT THAT WE'VE GOTTEN SMALLER. WE'VE GOTTEN MUCH MORE CONCENTRATED AND MORE TOP HEAVY. AGAIN, THE QUESTION IS, DOES THAT CONTINUE AS LONG AS YOU HAVE BOND YIELDS WHERE THEY ARE? THE IDEA, AGAIN, AS I ASKED AT THE TOP, THE COEXISTENCE OF STOCKS AT THESE LEVELS AND BOND YIELDS AT THESE LEVELS, AND HOW LONG THAT CAN LAST AND THE RAMIFICATIONS OF IT WITHIN THE MARKET. >> YEAH. I MEAN, THEY CAN CLEARLY COEXIST AT THIS LEVEL. I WILL TELL YOU, I'M UNCOMFORTABLE AT THIS LEVEL. AND IF BOND YIELDS GO HIGHER, I'M GOING TO GET EVEN MORE UNCOMFORTABLE. AND SOME OF THE SECTORS THAT YOU SPOKE ABOUT, SCOTT, ARE DIRECTLY AFFECTED BY HIGHER INTEREST RATES. SO IF WE THINK ABOUT JUST, FOR INSTANCE, ENERGY OR EXCUSE ME, MANY SECTORS THAT HAVE A LOT OF DEBT IN THEM, THEY ARE NOW GOING TO FACE OVER TIME HIGHER INTEREST COSTS. THAT IS A WEIGHT ON THEM. NOT TO THE EXTENT, BY THE WAY, OR TO A LESSER EXTENT IS THE MAG-7, WHICH OKAY, THE TEN YEAR UP 50 BASIS POINTS ISN'T GOING TO DERAIL ANY PLANS THAT THEY HAVE FOR DATA CENTERS. THERE MAY BE POLITICAL ISSUES, BUT INTEREST RATES ARE NOT GOING TO, AT THIS LEVEL DERAIL THEM ALL THIS A WAY OF SAYING THAT WE'VE HAD A YEAR WHERE THE ROTATIONS HAVE BEEN FAST AND FURIOUS. IT'S HARD TO BELIEVE. BUT SIX WEEKS AGO, THE EQUAL WEIGHT S&P 500 HAD A YEAR TO DATE GAIN ABOVE THAT OF THE S&P 500. NOW IT'S WELL BEHIND. WE COULD HAVE THAT ROTATION FLIPPED BACK, BUT IN MY OPINION YOU DO NEED TO SEE THE BOIL COME OFF IN TERMS OF INTEREST RATES AND GIVE SOME RELIEF. YOU ALSO MENTIONED FINANCIALS, WHICH WE'VE BEEN WORRIED, SCOTT, THAT MAYBE HIS INTEREST RATES HAVE GONE HIGHER. MAYBE SOMETHING WOULD BREAK IN THE FINANCIAL SECTOR. I DON'T THINK THAT'S WHAT'S HELD FINANCIALS BACK. I THINK REALLY WHAT'S HELD FINANCIALS BACK IS THE LESSENING OF THE IPO CALENDAR. WE HAD A VERY ROBUST EXPECTATION FOR THE FOURTH QUARTER. THERE'S STILL EXPECTATIONS THAT ANTHROPIC WILL COME. BUT WITH ALL THIS VOLATILITY IN INTEREST RATES IN THE EQUITY MARKETS, THAT IPO CALENDAR IS LOOKING A LITTLE LESS EXCITING AS WE GO THROUGH THE END OF THE YEAR. >> JOSH, IF WE JUST STAY SORT OF WHERE WE ARE INTERNALLY, I GUESS, AND WHERE YIELDS ARE, IS THERE ANY REASON TO BELIEVE THAT THE INTERNAL MARKET PICTURE IS GOING TO CHANGE ANYTIME SOON? >> I DON'T THINK SO. AND I THINK WE'RE WE'RE ALMOST LIKE SAYING, WILL SOMETHING HAPPEN AFTER IT'S ALREADY HAPPENED? THE S&P 500 YEAR TO DATE PRICE RETURN IS LYING TO YOU. THE WHOLE WORLD CHANGED IN MARCH WITH THE ATTACK ON IRAN. NOTHING HAS BEEN THE SAME EVER SINCE. WE HAD AN ENJOYABLE SUMMER RALLY IN THE QUOTE UNQUOTE REST OF MARKET, BUT THAT HAS NOW GIVEN WAY TO CONTINUED DEFENSIVENESS. THE THING IS, PEOPLE HAVEN'T REALLY GOTTEN UP TO SPEED HERE. WHAT IS DEFENSIVENESS LOOK LIKE IN 2026 VERSUS WHAT IT LOOKED LIKE WHEN PROFESSIONAL ASSET MANAGERS STARTED THEIR CAREERS IN THE 80S AND THE 90S AND THE 2000. DEFENSIVENESS NOW IS YOU PULL THE LEVER AND YOU GO LONG. THE GIANT TECHNOLOGY COMPANIES THAT HAVE DOMINATED THE MARKETS FOR THE LAST 15 YEARS, AND NOBODY EVER YELLS AT YOU FOR BEING EQUAL OR OVERWEIGHT. AND THAT'S EXACTLY WHAT PEOPLE ARE DOING. SO I WANT YOU TO THINK ABOUT THIS. ONLY 41% OF THE S&P 500 COMPONENTS ARE ABOVE THE TO THEIR OWN INDIVIDUAL 200 DAY MOVING AVERAGES. THAT'S A NUMBER THAT WE'RE SEEING ACTUALLY FALL AND IT COULD GET WAY LOWER. WE JUST DO NOT HAVE THE MAJORITY OF STOCKS IN A BULL MARKET RIGHT NOW. BUT AGAIN, THE INDEX IS LYING TO US AND WE KNOW HOW IT WORKS. IT'S CONCENTRATION. AND IT'S NOT ONLY CONCENTRATION OF MARKET CAP, BUT WHERE THE EARNINGS GROWTH IS COMING FROM. AND TO STEPHANIE'S POINT, THE MAG-7 IS NOW THE EASY BUTTON. IT IS OUTPERFORMING THE S&P PLUS 14.1% VERSUS PLUS 13.8% FOR THE S&P FOR 93. AND YOU'RE NOT REALLY YOU DON'T REALLY HAVE TO PAY UP MEANINGFULLY TO PUT THAT TRADE ON. YOU'RE AT A FORWARD MULTIPLE FOR THE OVERALL MARKET AT 19.1 TIMES, AND TECH IS 21.6. SO NOT ONLY ARE PEOPLE RACING BACK TO THIS OLD MAG-7 TRADE OLD FAITHFUL FOR FOR DEFENSIVE REASONS, THEY'RE ACTUALLY NOT BEING FORCED INTO A WEIRD POSITION WHERE THEY HAVE TO MATERIALLY RAISE THE VALUATION OF THEIR OVERALL PORTFOLIO. LAST THING, THE NASDAQ ITSELF HAS AN RSI OF 65, WHICH IS REALLY HEALTHY. BUT THEN I TELL YOU, ONLY 2.85% OF THOSE STOCKS WITHIN THE NASDAQ ARE TRADING AT AN RSI OVER 70. THERE'S A REASON WHY THE NASDAQ HAS BECOME THE SAFETY TRADE FORWARD. EARNINGS ESTIMATES HAVE ABSOLUTELY RIPPED UP 32.5% YEAR TO DATE. SO YOU HAVE THESE NASDAQ GIANTS, I THINK MASKING A LOT OF THE PAIN THAT PEOPLE ARE FEELING IN NAMES THAT ARE AWAY FROM THIS AI TRADE. IT'S BEEN GOING ON FOR A WHILE NOW AND IT'S GETTING EXACERBATED. AND I THINK THAT IS THE BIG CHANGE THAT WE'VE EXPERIENCED SINCE MARCH WITH HIGHER YIELDS, HIGHER OIL, RISING INFLATION. THINK ABOUT WHAT WE WERE TALKING ABOUT BEFORE IRAN, SCOTT. WE WERE TALKING ABOUT CUTS, INSURANCE CUTS. WE WERE SAYING, NOW THE QUESTION IS HOW MANY MORE HIKES AND