Our First Podcast Anniversary: Lessons From the Past Year
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I'm Cathy Jones and up was and .

Sanders and this is unexpected, an original podcast from Charles. Each week, we analyze what's happening in the markets and discuss how might affect your investment.

Hi, Kathy said this week, we are marking a bit of a special occasion for us in his way, hopefully for our listeners. It's been one year since we started this podcast, so we thought this week we d take the opportunity to step back from the weekly turn of data and indicators and news and reflect back on the past twelve months and see what's change. So can they looking back on IT, how would you summarize the past twelve months in terms of your world fixed income investments, rates, volatility and everything else?

I think the word that comes to mind as roller coasters, lisa, you know, I look back over the past year, what we see is that the fed funds rate two months ago had reached that peak level of you know five and a half percent for the upper bound and was stuck there. And although they were hinted IT was going to come down, we didn't know when and how much and how fast.

And obviously, subsequently, IT took a long time for the fed to get around, to start cutting me. The expectation was at that time that would start sooner rather later. But we were stuck there for a while.

And you know, the interesting thing was, two years yellow a year ago were at four ninety. They had all the way down to three point six, actually fell, came back, fell again, and now back up to four and a quarter or so for thirty. So we've kind of done this almost around trip twice, same as ten year yields.

Me know. They started out of four ninety, got down to three eighty, went to four and three quarters, got to three sixty. Now a back at four thirty, it's just been this turning and pretty volatile time period.

But what's interesting is apart from that break even rates, so the embedded implied inflation expectations that we thought would derive from the treasury inflation protected security market, the tips market, those haven't changed that much. They had very mild sort of up and down, but it's still right around the quarter, two point three percent. That's kind of where it's been stuck the whole year because that just very little volatility.

So despite the moves and rates, despite all of the excitement that we've had in the markets in the volatility, embedded inflation expectations really haven't change that much, which is interesting. The other thing I think is, you know, inflation has done what we had hoped that we do has come down mildly, and that's also a bit reassuring. Maybe that's why the inflation expectations have been kind of anchored around two, two and half percent.

And all this happened while the fed baLance sheet came down by over trillion and we added about two point four million jobs over the past year. So lots of activity. But when we look at where yields are right now kind of aging back up to the upper end of that trading range, three billion, not not all the way up.

But um we we haven't gone that far. I guess the end of the day, we've traveled far, but we haven't gone in that far. How about you, lisa, looking back on the equitas market, I mean, you've also had a bit of excitement over there in that part of the world. How would you recap the past year?

yeah. So it's really been sort of a tale of two markets in a different way in the first half of the year, relatives to so far anyway in the second half of the year. So the first half of the year, really through the initial surge to all time highs, which occurred in mid july, was one of incredible concentration and dominance on the part of the mega cap tech, tech related names often bunched together in that magnificent seven moniker.

But even there, I think the story has changed IT. Because in twenty twenty three, those stocks were the seven largest stocks, and they were also all very strong performers. And twenty, twenty three, you only had to go down, I think, to rank number sixty two out of the five hundred two names in the S P.

Five hundred to capture all seven of the magnian seven. That was not the case in the first half of uh, twenty twenty four where you had some big loggers notta ly a tesla in that group of stocks. That said, if you think more broadly about just mega cap tech and tech related the growth trio of technology and communication services and consumer directionally, that's where pretty much all the performance was.

And I don't member the exact point. I think I was sometime in june, you had some record breaking numbers in terms of the share of performance accounted for by a very small subset of names. At the same time, a record low percentage of the index, in this case, S M P five hundred that was outperforming the index itself over the prior one year period of time.

And that was one of the things that we were pointing out to investors, is that having A A market that is dominated by captain indexes like the S M P five hundred or the nasdaq, having performance biased up the capitalization spectrum or in a relatively small handful names is not abNormal. That's happened many times, particularly in in bow markets, certainly happened in the later part of the one hundred and ninety IT becomes a bigger problem when the rest of the market is sorely underperforming. And that was the extreme that we saw in the first half of the year.

And the midi came and IT was A A confluence of the things that, that unfolded. Some concern about earnings in the A I space, not so much the reports for second quarter, but commentary round investments and A I and maybe a bit of a timing gap between the expenses associated with investments in a AI and the revenue generation of productivity benefits of crawling from that. That might have been the most fundamental reason why you started to see a bit of rotation.

You also had the unwinding of the the and Carry trade, a number of forces that kicked in a bit of a corrective phase between me, july and early August, cultivating in that very funky day in early August, August faith. I think that was where in that one trading day, you had a record breaking inter surge in the volatility index and on that same exact day, you had a record breaking day decline in the same volatility index. So that was sort of the current do point in time, at which point you you had gone into correction territory for the nasdaq.

He weren't quite there for the S M. P, but the rotation really started. And you initially saw a move away from in a mega cap tech and tech related into interest sensitive areas. That was also around the time when we started to get the telegraphing by the fed of a moved easier monetary policy that provided a lift to the interest sensitive segments of the markets. He saw leadership shift to real state investment trust and financials utilities.

In addition, although utilities has been a strong performer al year, in part because it's seen as A A bit of an A I play, but then you've seen rotation since then in two other areas of the market. You've seen rotations at time, shorter term rotations into the more traditionally defensive areas like health care and consumer staples. You've seen rotations into more globally cyclical areas like materials and especially when we got some of the stimulus news out of china.

So one of the themes that we have had is that we expect these rotations in this broadening out to have legs, but it's not binary. We didn't just go from a mag seven LED market to some other segment of the market. You've seen these now more above the surface rotations happening at times, Frankly, back into the magnificent seven, back into the mega cap tech tech related names at time.

So just this sort of more above the surface turn is something that we expect to continue for a while. Where is in the first half of the year was more below the surface turn. But the highlight just how much turn there has been.

As I mentioned, we did get a correction in the nas act to the tune of thirty percent in that magliari August period. But the average member within the attack has had a forty five percent maximum draught down this year. It's nowhere near is extreme for the S.

M P. But even in the S. M P, the average maximum drawed down this year is almost twenty percent. So IT really has been A A tale of two markets depending on what segment of the market you're looking at.

I think that helps maybe to explain to investors are so confounded by all of these uncertainties of the macro variety, geopolitical inflation, economic fed. And boy, how can the market have been so resilient, just sort of continued to move to all time highs in the face of all of this. But the reality is, I think of a fuller story gets told.

If you look beyond just the surface of these capitated indexes, and there you see a little bit more of a connection to some of that uncertainty. So so that's been the way I thought about this market. Definitely a different look to this market in the second half of the year relative to the first time of the year. And not a bad thing because I think a market where you have brought her participation, even if it's of the rotational variety, is a healthy ier market than one that just stays highly, highly concentrated without a lot of participation from other areas.

You know, one of the things we saw on the credit market as credit spreads have stayed very tight, both investment grade in high yields. I think that only does that reflect that the finances has been available, the the liquidity is there and their eager lenders out there, but also the corporate profits have done well. You know, when I went to school, supposedly the dark market was evaluation was based on earnings and earnings expectation. And IT does look like when we look back at the data, those earnings have come through. So I think that, that too seems to be supportive of your your comment that there has been a lot of turn, a lot of rotation, but underlying IT looks like those earnings have been pretty solid.

They happen solid. And what you can also do is look at the performance breakdown, a particularly during earning season of companies that are reporting Better than the earnings, both on the top line, in the bottom line that have been able to maintain or protect profit margins.

The rewards spread is pretty significant, whether the hit to stocks that are on the other end of the spectrum, they either missed earnings or have those double misses where they miss on both top line growth and bottomline growth can protect those profit margins. And that becomes a bigger problem as you go down the capture camera. Forty three percent of the rustle two thousand right now are negative earnings.

That's a pretty high percentage given a pretty strong overall earnings profile. But clearly, the benefit is occurred more toward those larger companies. And that helps keep the overall learning structure, especially given that we measure IT typically via the S M P.

Five hundred, which is a large cap. index. But there's another part of the story here, which is a smaller companies that uh have struggled a bit more.

And I think that, that has been another fundamental support for the larger cap bias within the equity market is just how much stronger the earnings s profiles is. Are it's so Kathy, let's reminds a little bit as we celebrate one year of doing this together on almost day on every week basis. So we've certainly covered a lot of topics.

The fed has found its way and woven into pretty much every one of our conversations. I think this year, we've talked a lot about how unique this cycle has been in this pandemic post pandemic world, in the rolling recessions and recoveries, the somewhat suppressed volatility in the equity market, a bit more volatility in your world, in the fixed income market. We've we've talked a lot about markets, but also the economy and the consumer and inflation.

And we've even had to talk a little bit about politics. We tend to keep those segments a short on often will pitch our colleague my tense since washington ton White podcast for people who want to dive into that. But we've had some really memorable topics that we've tackled with guests as as well.

We've had some really special guests. One of my favorites and and probably yours were bias a little bit but was shocked up our founder and and fearless chairman. Those conversations are always interesting.

I I got to sit down with scot elway for pretty far reaching conversation, and he talked a bit about his bookies. Obviously a very popular podcast. I'm self and always has intriguing ideas.

My friend mellody hopson about participating on in corporate boards and her involvement at Ariel you had the great quality assam twice. We've had that you are danny. There are so many. Ah so what what's most memorable to you, Cathy, about the last year of our casting? Well.

i'll have to admit when we started, I was pretty nervous about IT and wasn't really sure I had the talent or the where with all to do this just because I was new to me. And so i'm glad that people have liked the podcast generally speaking, and that we've been able to get some just fabulous people. You've named a bunch of them and there were more.

Um we had julio, a corner to terrific economist on I hope to have her on back on again. Many of our colleagues have been on who we get a chance to kind of shine a light on how talented on the srub folks are. We've had people from shop and and know asset managment.

We've had my colleagues, Cooper, Howard and collin Martin. I know you've had Kevin gordon, you know your your body here. So IT has been fun to find how popular ratio and how much people really are interested in the content.

And I guess the other you real memorable thing for me is the reaction we've had from shop client and very other people who kind of reached out and said, thank you. This is just what I needed or you know hey, how about this idea um which is usually a really good idea because these things people are asking about, our people are interested in that we can comment on. So IT has been a lot in terms of getting prepped every week for this and keeping up to date with A A lot of interesting people, but it's been a real opportunity.

And i've gotten over most of my fear, not one hundred percent, you know that a little bit nerves before we go on the air with this and and started the topic. But I think I think all and all just a lot of greek as a lot of great information, lot a great chance to just chat about what's going on in the markets in a way that's not to structure. It's not too time limited. It's just talk about IT and keep on top of that and having the positive reaction from a lot of things just been fantastic.

Yeah, i'd say one of the overarching comments that we get from people who are kind enough to oppose a review or send us a note is I like the conversational aspect of IT. And one I guess, one of the disadvantages to doing this audio only although as we're doing this right now, you and I can see each other, we can see our production team, but our listeners cancer isn't. There are podcast which are done on camera, and i'm not suggesting we switched to on camera because then IT puts Cathy in a position to have to do here and make up on days where we others SE don't have to do IT make up on a wait.

No way is that not doing that every time.

There are times we're in her makeup anyway for other things that we have to do. But if you could see us, you'd see that we're not reading off of long scripts. IT truly is a conversation between us.

You're you're actually right. There's often a lot of prep that has to be done in advance when we're sitting down with an external guest. I remember back to back episodes we had one on residential real estate with the great darlene and then commercial real state with my friend I rebel.

And certainly on the commercial real estate side, to some degree, on the residential real side, I wouldn't call myself a deep dive expert in those. And so those types of of interviews you definitely want to prep for and it's not appropriate or I think beneficent little listener to just wing IT. But you and I when we have these conversations, we're just talking about what we both live IT and breathe every day.

And and it's nice to your point, Cathy, to have that sort of open time frame. We try not to make these so short that there have no value or so long that we start to hear the stores in the background, but we are not constrained in their times where we spend a bit more time diving into topics and the times where IT doesn't seem like a lot of times where there's not much to talk about, but it's been a blast. We both talk for a living to a large degree, but it's nice to have a different kind of form for doing that.

So this but that going to reminds me of our first episode where we discussed a little bit about our own philosophy, about analyzing the markets and one of the things we discussed, how much we both read and where we get our information. And just follow up on that. Has anything changed in the past year for you in terms of how you work or sources that you are following? Is that pretty much of the same as IT has been?

You know, a lot of the same. But but even in in some of the the source ism information, the type of data and research that is of greater interest to me has adjusted over time. I will say a lot of the focus for me in the first half of the year was diving into the history of concentrated markets and hardening back to the period, like the late one thousand and nineties, to Green what the similarities and differences were the last time we had that kind of concentration.

So a lot of those research providers that we use that have enviable database of historical information, we had pull hickey on from the spoke, their database extraordinary and going back elementary or the same thing in terms of not just sentiment based data historically, but just reams of data on market behaviour. And they they're second to none in terms of what they have, especially in a period like the late one thousand and nineties as a comparison. You diving a bit more into fed commentary, as I know you do, whether it's minutes or regional fed updates because of of the sunne cycle and having gone from the most aggressive tightening campaign than a fairly lengthy pause period during which the equity market had the best performance in the history of the pause period, to now this uncertainty with regard to rate cuts.

So a bit more inflation fed related researches is resonating in this kind of backdrop. And then a bit more information that we get both externally and kudos to our colleagues at trobe quality ratings because as unio, Cathy, we've been very factor focused in how we talk to our investors on the equity side of the equation. Factors is just another really word for characteristic tics. And instead of thinking in moneths terms around large capture, small cap c world, first is value or individual sectors, we've we've had an emphasis on investing based on factors or characteristics, a high quality factors focusing on companies with profitability profiles and strong baLance sheet and strong free cash flow. So a lot of work in the last couple of years and a lot of research from both our internal sources as well as external sources that is factor oriented has been very additive into our mix.

How about you know, I think in the in the past year, I mean that my philosopher hasn't really changed. I try really hard and our team tries really hard to be open minded about what's going to happen in the markets, not come in with a bias. It's hard not to, but we tried very hard and we check each other on that to make sure that we are being honest about we were coming from, but also fact based.

And one of the things that I have experienced in, in this past year and in this cycle in particular is kind of bursting the bubble on a lot of the the things that a lot of people held to be absolutely true to explain market movements. And when you do the math that you try to run a correlation or show some relationship between these two things that people are absolutely trying to convince you are related. And although intuitively, IT might be a good story, when you look at the data, IT doesn't turn out to be the case.

And that's one of the things that I think this past cycle and this past year has really been occupying a lot of my time. A lot of my time has been capable sending me charts, forwarding things and saying, okay well, this is really interesting um let's take a look at that. Let's dive into that and with color and Cooper, we dive in and a good amount of time we are saying that IT doesn't really pan out the way it's conveyed.

And so I think if there's any value add to what we've been doing is we have had to really rethink a lot of things. IT made us revisit a lot of what we have to be true to make sure that is actually stands up. And it's been a good exercise, but it's been good um it's been good.

It's made us think more deeply. It's made us research more deeply. And there are some terrific people doing great work out there. I SAT through two days online meeting of the clever and fed on the topic of inflation, and a lot of great papers were presented, a lot of terrific speakers, many points of view on IT.

And what's interesting, as I don't think I would have done that five years ago, because IT wasn't as hot a topic and IT wasn't as much up in the areas to what causes inflation or what what inflation was doing. So people are really thinking very deeply about lot of topics or not. Everybody just thrown the chart together.

You got a lot of really smart people doing a lot of really hard work. And that's been for me, that's been very satisfying this year to see people tackle problems and rethink everything. I think that that's been a good thing on baLance.

You know what I just realized, I don't think i've ask in the past year, is, are you an abbot podcast listener? And aside from a little podcast call on investing that I am sure you love in this at the topic list, do you listen to podcast and do you have favorites?

Um no, I listen to a handful. I can't say that i'm a big podcast person because I don't drive much, so it's not like an opportunity in the car. I don't have a dog, so i'm not walking the dog and listening to a podcast.

And when I met the gym, I can or i'm out uh, exercising outdoors, which I prefer, I try not to have anything in my ears that I can enjoy the outdoors. But I do of course listen to washington wise with my towns and because is fantastic, I listen to the financial decoder, mark greeb's, because it's really, really interesting and then a handful of others. But i'm not I have to admit, one reason I was cared to do this is i'm not a huge podcast person. So I took me a while to learn the value. How about you?

Well, I guess if it's a weaken and i'm looking for something more fun and light, I think it's everyone podcast out there. But smartness, I think is just fun and funny. But of the business, righty, yeah.

I'll also plug our colleagues mike and mark with their podcast, which are fantastic. I really like grant William who write a well red newsletter called things that make you go. And he has a series of podcasts and they're really interesting.

They're pretty long form. They can run over an hour, you know, pick your topics or some that are not as relevant or interesting, but mro and geopolitics and fed and markets. And so that I would say his series of pod casters are go to if I am not purposely gear toward one particular one or an episode to just sort of score through, okay, who've been interesting gas sets. One of the places that I will, I will go.

You know this has been found a refinance, but now we've got a look forward. We've got a luck going on. There is a busy week coming up.

So what are you watching? We have lot of data with elections, with a fed meeting. I assume you're watching all of that, but what do you think stands out?

Yeah, we're tapping this earlier in the week. So just this week before the episode errors, we've got the P, C, E version of inflation, personal consumption expenditures, res Price index, and that's the feds preferred measure. We've got the big monthly job report at the end of next week, actually next week, to your point, we've got election.

We've got the fed meeting. We we get other data that is important, particularly I S M manufacturing and services. Uh, those are purchasing managers index and they can sometimes provide pretty significant tidbits on the breakdown between what's going on in the services. In the manufacturing side of the economy, we've get some consumer sentiment data, which includes inflation expectations. But I think jobs, the election and the fed meeting are probably top of mind, I assume so for you as well, Kathy.

Yeah I think more than anything, um there's a lot of question barks around all of those so that the jobs data sewed by the hurricane and the boeing strike so would be hard to get clean read on that. The fed I think there's a chance for a pause. I'm going to give you the same odds as the presidential election.

Fifty, fifty seemed like a toss up. We had seven members of the fed at the last meeting who want to go twenty five. They eventually went fifty and agreed to that. But you could see from the that plot that they were not totally enthusiastic about that.

So we can make the case that maybe they pause, particularly without clean data and just wait and see what happens till the december meeting or they go another twenty five when they wait in december, depending on how the data turn out. I think it's it's a asset I really don't have a have a field for. Maybe we will get some hints from fed speeches, but um as we've now into the quiet period, we haven't had any hts either way.

So obviously, that a big issue. And then you know with the election, I don't think you ll know anything deviates that quickly next week, but that's gonna an influence on seven men and what people think it's gonna happen going forward. And that can affect the markets, whether or not that actually does affect the markets is another question, but that something we have to keep an I and am expecting a lot of volatility. I default that just expect a lot of volatility over the next week to ten days or so.

That's IT for us this week. This was a fun and and deut everyone who has listened to the show so far. We continue to receive lot of really great feedback for which were so grateful and IT really does help as well.

Well, when you leave a rating or review on apple podcast, we're so grateful for this past year. In addition to what I hope is a continued interest in the podcast, you can also keep up with us in real time on social media, on at lazer Sanders, on accent linked in my Normal PSA. I'm not on facebook, i'm not on instagram or WhatsApp.

If you see someone claiming to be me, it's an imposter. Also, if you want to find any of our articles, written reports, videos, please check them out on top, top, come forward, slash, learn. And those are all publicly accessible. You don't need to be a client. You don't have to walking to view them.

And i'm at Cathy Jones is Cathy with the k and accent linton I mentioned if you've enjoy the show, we really do appreciate those reviews on apple podcast, are reading on spot fire feedback wherever you listen. You can also follow us for free and your favorite podcasting APP will be back with another episode week or stay to.

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