‘No Landing’ Scenario, Supercycles, Small Caps, And The S&P Market View

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By Mike Larson, Editor-in-Chief, MoneyShow

Mish Schneider, Chief Strategist at MarketGauge.com and Kenny Polcari, Chief Market Strategist at SlateStone Wealth share their take on stocks, sectors, commodities, and more.

Transcript

Mish Schneider's Market View

Larson – Hi there. I'm Mike Larson, Editor-in-Chief with MoneyShow. And I'm coming to you from the Las Vegas Money Show/TradersEXPO. Today, I'm pleased to be speaking with Mish Schneider, Chief Strategist at MarketGauge.com. Welcome to the event.

Schneider – So great to see you, Mike. I've loved coming here for years now.

Larson – It's really fantastic. It's great to see the big crowds again post-COVID and so on. So let me just start with the big picture. It seems like sometimes you hear on TV or you talk to people, they've got this laundry list of complaints and things to worry about. But I think you have a little bit of a different take about where we stand and where this environment is, right?

Schneider – Well, yes, because I did a lot of research coming here in terms of what I was going to tell people as far as what's the ultimate macro right now. And what really struck me was that if we looked at life as a still photograph and we stopped it right now, everything's pretty good. The Fed has paused.

We just saw Nvidia (NVDA) beat and that went up. Growth stocks have been leading the way, even with a little correction. People have more money in their pocket. Disposable income is high, even though we hear about credit card debt a lot. The government. Yeah. Okay. We have a crazy debt and high interest rate payments, but that can seems to be getting kicked down the road. We have war all around us, but it hasn't really had that much of a major impact at this point.

There's talk of BRICs, but yet still, the dollar is very strong. And we can go on and on and on with reasons why we can worry. But yet at this point, the rate of inflation, the interest rates, the lack of recession, and the fact that people are still going out and spending – and we're seeing it here in Vegas for sure, means that everything's good. Like I said, if we stopped right now, we'd be golden.

Larson – I'd be a little worried if they weren't charging us $6 for a water or something. That means things are wrong with the economy. Let me try to unpack that, you know, one by one on some of those points. The Fed, you know, I think Wall Street, obviously six, seven, eight weeks ago was looking for up to, what, five or six cuts? Now it's maybe three or four, depending on what day you check the rate market.

What are your thoughts on that? I guess if you'd said a few months ago, that'd be a problem for the market or you'd expect that to be a problem for market, and it really hasn't been. So, what's your take on that?

Schneider – Well, I have a couple of thoughts on that. Number one is when you're talking about 5% to 5.5%, that's actually normal. If you look back historically, the fact that we got so addicted to ZIRP was not helpful. So, if we could stay right here, again, going back to that still photograph and inflation stays where we are, the Fed really doesn't need to do anything else.

And that's the rub, right? In terms of the cuts, five or six cuts, I'm not quite sure why people were perceiving that to be so wonderful. I looked at that as two possible, horrible signs. One, recession, and two, hyperinflation. And that's exactly what happened in the late '70s. The Fed accommodated. Just when things look really bad recessionary wise.

And of course, we saw what happened in the late '70s with inflation. So, I think the Fed is good to stay where they are. However, as we know, when things are going really well, you wait for a shoe to drop and that's going to be what happens with the Fed next. Which shoe is going to drop? Is it going to be the recessionary shoe, which seems less likely, or the inflationary shoe, which seems more likely, and that put together really is more of a stagflation environment. Not great for the Fed.

Larson – Let's talk about the economy for a little bit. You mentioned consumer spending being pretty strong. I think, you roll the clock back 12, 18 months, there were things like the Bloomberg story saying "100% chance of recession." Obviously, that hasn't happened. Are you in the sort of soft landing, hard landing, or no landing camp?

Schneider – I'm kind of in the no landing camp right now. But let's talk about the consumer, because it's so interesting. People want to talk about AI all the time. And so, I've been thinking about what is the implication for people and the consumer? Because we hear, again, all the bad stuff that people will lose jobs. People will have more dependency on staying home and they don't really have to do anything.

But the truth of the matter is, is that what I'm seeing already in a shift in the consumer is the "all about we" last year where people were spending it on traveling and going out to eat to a shift to "all about me." Right. So now people are starting to take care of themselves more. And I think the diet drugs, whether you love them or hate them, whether they're controversial or not, you can certainly have the debate of obesity over side effects of a drug that prevents you from being obese.

The point is, is that we're creating potentially with these drugs that are so wonderful in terms of keeping weight off a whole slew of people that have been hiding behind the door because of their weight problems or what have you. And as AI goes up, and we don't really know what's even real, what's deep fake, the only way you're going to connect as a human being is face to face.

So, if you take that trend with AI and people having to go out and the trend of people maybe possibly starting to feel better about themselves, what does that mean for the consumer? It means they start to spend more money on feeling good about themselves. From there, it's nicer clothes, better skincare, makeup, going to a gym, fashion, etc. So, that to me is a trend that I think we really need to keep an eye on.

Larson – Okay. So, if we sort of take that market overview and translate into what it means for stocks and sectors, that's got to be consumer discretionary, right? And what else sort of would fall under your promising basket for the next 12, 24 months?

Schneider – Well, I think biotechnology, which has been certainly a very undervalued area, is something to look at, of course. A lot of that has to do with what we're talking about here with the diet drugs. You know, Eli Lilly (LLY) has been an incredible performer. Yeah, I'm certainly looking in those areas, as I mentioned, that really have to do with vanity and personal care.

But I would not lose sight of commodities because especially precious metals, because if that shoe drops, which let's face it, we can come up with several tinder boxes that can prove out to be more inflationary, then the commodities that have been particularly beat up, whether it's gold, which of course at $2,000 you can't say is beat up, but still has been sitting and laying in wait.

Silver, which definitely has been beat up, gold miners even more so beat up, copper, which is kind of just sitting there. I think you'll have a lot of opportunities to kind of get this next sort of Supercycle potential. And it may not necessarily affect the consumer as badly as we think, but it could affect a lot of the other sectors in the market.

Larson – Okay. Any thoughts on some of the other things that people are looking at? You know, the dollar, what's happening there, even Bitcoin (BTC-USD) and crypto for that matter?

Schneider – Well, yeah, let's talk about that. So obviously, the spot ETF and the move ahead of that was tremendous for Bitcoin and the sell-off was predicted. You know, buy the rumor, sell the news. Now we have a new one coming out potentially with Ethereum (ETH-USD), and that's definitely helping the Ethereum market. And we have the halving event that happens in April, which means the supply of Bitcoin, which is already low, will get halved.

So, I think that that is another one of those, sort of, technological advances that we cannot ignore. That is here to stay. And that's very appealing, particularly to the younger generations, and is a great representation of decentralization, even if it is somewhat regulated now. So yeah, I'm very bullish in the long term.

Larson – Got it. Okay. I guess if you had to say of the risks that are out there, what's the thing that scares you the most or that could derail your generally bullish outlook on this market?

Schneider – I'd say right now, geopolitics, really. We all know what's going on in the Middle East and everybody has their eyes on oil, which is flirting with that $80 a barrel. Obviously, like as I mentioned, gold is sitting there laying in wait as if it knows something. But I also think that we have to keep an eye on what happens with Russia and China and Putin in particular right now and the dollar and BRICS. Those to me are the biggest risk factors. But again, when? That's always the key, the timing of everything.

Larson – And I guess one last question I'd ask because you brought up Nvidia and obviously we all know the story of the Magnificent Seven. What's the next Magnificent Seven or do you think we're going to be in this environment where those kinds of stocks continue to lead and they're still not that broadening out of the averages?

Schneider – Well, I'd like to think that if things really did normalize, we might start to see much more opportunity within the small caps. I mean, we're certainly seeing in the transportation sector, of course, a lot of it having to do with Lyft (LYFT) and Uber (UBER). That actually got very close to new all-time highs, but hasn't quite made it yet. So, I think growth stocks, you know, when something is in momentum, it stays in momentum, basic physics. So, I would not discount the fact that if things stay rosy and technology will continue to outperform.

Larson – Got it.

Schneider – But I do think that there is an opportunity, if we can get through all of the politicking in this election and start to actually put some money into the United States in terms of our own industry, that will help the tech companies, but also may help a lot of those small cap companies as well.

Larson – Excellent. Well, Mish, thank you so much for sharing some of your insights here. I hope the rest of the conference goes great for you and we'll talk to you again.

Schneider – Thank you so much for talking to me.

Kenny Polcari's Market View

Larson – Kenny, welcome. I'm glad you could do this podcast here. Let's talk a little bit about the markets. And I'm going to jump in for anybody who may not have seen this. You're one of the earlier observers who was saying the Fed was not going to cut as fast as Wall Street thought and that, that might be an issue for the markets. Why don't you talk about that call for a bit?

Polcari – Well, and I'm still in the camp. I actually don't think they should cut at all because I don't think the data requires that they cut. And they've been very clear about the data, the data, the data. And I think, you know what, the end of the year last year after the November meeting and the dot plot, and they suggested that, you know, the thinking is starting to be that maybe there'll be some rate cuts.

That went from maybe some rate cuts, with five or six or seven rate cuts in 2024, which made zero sense to me on a number of levels. Number one, because the data wasn't suggesting that the economy was going down a drain and that we needed to cut rates was number one. Number two, think about this historically, 5, 5.25, 5.5 is not out of the norm.

Listen, it's out of the norm if you look at what happened between 2007 and 2023 when rates were held at zero for 15 years, that was out of the norm. But you know what? There's a whole generation of investors and portfolio managers who only know that 0% interest rate. And so to them, 5% is like, oh my God, rates are so high. And I want to laugh because they weren't around in 1979 when rates were 21%, you know, S I laugh about that and I say, you know, at 5%, that's really normal.

So, to me, I never understood. It was very illogical that they were pounding their feet to cut rates. And so therefore, I was in the camp that they weren't going to do it. And the data continues to confirm, I think that they're not going to do it, or at least not do it to the extent that the market was expecting.

I don't even think, listen, if we get one rate cut this year, I think that's okay. I'll go with that. I don't think you get more than that. I just don't see how. First of all, they're not going to cut in March. They're probably not going to cut in May. And then, you know, you get into June and within that six-month window of a presidential election, which is a whole other conversation about the Fed not moving on rates up or down six months prior to an election, for fear of being seen as political, right?

And so once you get into that six-month window, then it becomes, in my mind, even more difficult for the Fed to then convince the markets and people why they have to do this. If the data continues to be strong, unemployment continues to remain at historic lows, down to 3.7% and the PMI numbers and all the other data points are not circling the drain, why do we need to stimulate the economy and risk igniting inflation all over again?

Larson – You seem to be, I guess, forgetting the soft landing or hard landing. You're kind of in the no landing camp right?

Polcari – Right? Yeah. I don't think, listen, if you'd asked me a year ago, I would have said we were coming in for this, really, crash landing. But I don't think we're in this soft landing, either. I think we're kind of in this purgatory at the moment.

Larson – And yet here we are. We just, you know, had S&P 5000. We've had a little bit of chop in the last few days as we're recording this. But generally speaking, markets seem to be okay with that. Why?

Polcari – So, the markets are okay with 5% rates because that's honestly, historically, that's fairly normal, right? And so I think that's one reason that the market says, okay, these are really normal. So, we can function with that. But listen, let's be honest. The economic data has not been horrendous, right? The economy is strong.

Technology is certainly driving the action because we are now in this new technology revolution. Let's just say it for what it is. AI is not going away, and it is driving — it's like, you know, it's like every revolution, the industrial revolution, right? And so, this is going to change the world. I think that's also part of the reason that there's all this excitement now.

Is it too excited? Have they taken valuations to levels that I think are stretched? Sure. But we even saw that over the last couple of weeks in this earnings season when we saw, you know, all the big names report and they all reported great numbers. And what did they do right away? They sold them all, right? No matter what, Apple earned $119 billion in three months.

Larson – Three months. Unbelievable.

Polcari – Three months. And yet they sold that stock off because they were disappointed that they only earned 20 billion in cheddar, not 25. Like, really? Like, it doesn't make sense. So, I think that the market would be okay, and I think it is okay if we stay right here. I don't think the market really wants. The traders are the ones who really want the lower rates. I think the market's okay.

Larson – Okay. All right. Let's talk, you brought up tech, obviously. And like you said, there's the sort of, you know, two-way thing where you've got great earnings, companies changing the world and so on. And yet, the short-term market reaction is throwing a hissy fit and pulling back. How do you think that situation resolves? Does money rotate out of tech to other sectors? Does it come right back in a week or two? What do you see?

Polcari – Well, so here's what I think. I think money has to start to rotate out. And we're starting to see a little bit of that, partly because the tech sector has now become in portfolios, it becomes overweight in the portfolio and so the portfolio managers have an obligation to manage their risk. And so, I put this in my note this morning. You know, people always think, Vanguard is selling Amazon (AMZN) or Vanguard is selling Apple (AAPL). You know, there must be something wrong. No. Vanguard owns 225 million shares. It's now overweight and amongst these powerful, they need to manage that risk. And so you have to be careful how you make assumptions on why people are selling and why people are buying, right?

Everyone buys and sells for different reasons. And so, I think it's all about managing risk. But I do think that we're going to see just because it's so outperformed, is that money has to be reallocated into other sectors, right? Wherever they are, whether it's small caps, mid caps, whether it's healthcare. I think healthcare is going to do very well this year. In fact, it's up 7% so far year to date. It was one of the underperformers in 2023.

Larson – Yeah, you know, that's a great point. And I think you had a wonderful piece the other day. I read your stuff and I watch your videos. It was on the industrials. Now, you know, what are you going to freak out, you know, one day and then two days later, it's above where you freak out?

Polcari – Okay. And that's exactly the point because that happened with the CPI, right? The CPI came in a 10th of a percent hotter than expected. Okay. So it is moving up. It didn't go down. So, the fact that it went up was a little bit unnerving, right? And then the PPI on last Friday was also even hotter than the CPI, which just leads us into another conversation.

We'll talk about that in a minute. But what happened when the CPI came out, the market threw a hissy fit. The Dow was down 800 points and the S&P was down 100, all this stuff. And it was like the end of the world. And I'm like laughing because the XLI was a perfect example, right? People hit the sell button. They just sell everything, right?

And then two days later, the CPI didn't make a difference anymore and everything had rallied right back. So, I think to myself, okay, if you're a long-term investor, you sold your XLI because you're panicking and you're selling everything. Now you get this cash and the market went right back and now you want to jump back in? What did you really accomplish? Nothing, right? You spent a lot of in and out, in and out, and that's what you did. Sure. You just churned your account. And for what?

Larson – Yeah. No, I hear you. If we put our intermediate term, or I guess you could call it, your long-term hat on, what do you see happening over the course of the year? I mean, do you think we're going to be challenged for a little bit as markets digest what happened in tech? Where are we going?

Polcari – Yeah, So I think the rest of this quarter, which takes us to the end of March, I think the market is going to churn and backfill a little bit. I think it has to because if you just kind of look at the action, it got ahead of itself and it never really – it hasn't had a chance to catch up yet.

And so I think you're going to have this back and forth. I think between 5,000 and 5,050, it feels like to me, okay, we've tried it a couple of times. We've backed off every time we've traded low. And now with these, you know, with the tech earnings season and now with some of these latest tech numbers, which have not been bad, but yet it's caused the trader types and some of the asset managers just to take some money off the table. Let's say that.

Everything was priced to perfection. So, the path of least resistance had to be down because even if they came out and said everything's perfect, someone's going to say it wasn't perfect enough. Or they didn't use the right word in this sentence. It's ridiculous, right? But that being said, I do think that we're going to see some churn this quarter.

But then I do think by the end of the year, that the market is going to be higher. I'm calling for the S&P to have a 10% move, which would take us to about 5,150 right at the end of the year. Now, we traded only up to 5,050, so that didn't seem really dramatic. But when you think about it, that was already up 8% from where we started the year.

If you're only expecting a 10% move, then you're there already, right? I also think, let's just talk about the big elephant in the room, the presidential election. It's certainly going to create some chaos, not only in the nation. But I think it could create some economic chaos. And I think it could certainly create some market chaos. But you and I both know politics can do that, create short-term chaos. But in the long run, politics do not price stocks.

Larson – Yeah, it's economics. It's earnings.

Polcari – But it does create an opportunity. Because when people get nervous, and the chaos it creates, people make these rash decisions. It's when the opportunities are created.

Larson – For sure, in the time we have left, anything you want to offer and if the answer is no, it's no problem, on other asset classes like bonds, Bitcoin, gold, etc.

Polcari – Here's the deal and I like gold, but as long as rates remain higher, the dollar is going to remain strong and gold will be under pressure. So, I think gold is going to be stuck in the $2,000, $2,050 range, which is where it's been churning now for the last couple of weeks. You looked at it trades at $2,020, $2,030, trades back up to $2,050.

Now, the other day when the CPI came out, there was all this panic that actually the rumor went from rate cuts to possible rate hikes and they killed gold. They took it right down to $2,000, where it found some support. But I think it's going to stay there. I think the dollar as a result is going to remain relatively strong because I don't think they're going to cut rates. And so therefore, the dollar will stay where it is.

Bitcoin, I own a little bit of it, not a ton. But for me, it's more like I'm just wetting my feet. Do I think it's exciting, all that stuff? Yeah. And I'm excited to see where it goes. You know, some have called for $100,000 bitcoin by the end of the year and yes, I only hope so. But if it doesn't go there, I'm not going to lose any sleep over it.

Larson – Sure. I guess one last thing I wanted to ask you. You are talking about four key themes in 2024 here. You already touched on politics. That's one of them, right? What are the other major drivers that you think are going to be the biggest issues?

Polcari – For me, the themes were the presidential election, the politics, right? So that's the first theme. The Fed was the second theme. Economics, right? And are we in for a soft landing or are we in for a hard landing? And then really, the geopolitical issues.

Larson – That's the one we haven't talked about.

Polcari – Right. And again, the geopolitical issues create chaos. They create uncertainty and create nervousness and angst. But really, in the long run, in the end, like national politics, it doesn't price stocks. In the long run, it creates opportunity because it creates chaos. But I do think that the geopolitics in the Middle East are going to continue to remain elevated. And the fear is that we as a nation get drawn now into a third conflict that we don't really need be.

But the fear is that we're going to get drawn into that. And I think that could potentially then cause some angst amongst the nation and amongst investors. And that would be another reason that maybe the people go for more safety and try to go into Treasuries and take the risk off the table.

Larson – Got it. Well, Kenny, the sort of cautiously optimistic outlook, I guess, is how I'd summarize it, right?

Polcari – Well, I'm bullish. Listen, I am bullish, but I do think the next month, the next month and a half, you know, to the end the quarter is going to be people should expect some churn and move lower. But that's actually okay to shake the branch a little bit to see who falls out, right?

Larson – For sure. Okay. Thank you so much for taking some time out here at the Money Show.

Originally published on MoneyShow.com