Welcome to Know More, Risk Better, a Credit Sites podcast. Across the global strategy team, we aim to make sense of the macro and the micro, highlighting opportunities and the risks facing the fixed income markets. As the macro makes headlines, we leverage our network of experts across fixed solutions to better understand economic trends, rates, gyrations, geopolitical events, and how these factors impact corporates. At Credit Sites, we understand that credit investing comes down to picking winners to generate alpha and avoiding losers.
Our team of over 100 analysts across the U.S., Europe, and Asia provide unmatched expertise and fundamental knowledge. In our weekly podcast, the strategy team offers a look at the conversations we have with our colleagues, including analysts, fellow strategists, economists, and leveraged finance market experts. If you want to know more so that you can risk better, you'll want to give this podcast a listen. Hello, and thank you for tuning in to another episode of Know More, Risk Better, a Credit Sites podcast.
I'm your host, Zach Griffiths, Head of Investment Grade and Macro Strategy. And today, we're going to be talking all things markets. And I'm excited to say we have a very special guest. I will be chatting with Jeff DeGraff.
He's the chairman and co-founder of Renaissance Macro Research, an independent research firm based out of New York. Prior to starting RenMac, he spent time at Merrill Lynch and Lehman Brothers before joining ISI Group in February 2007, where he served on the Management Committee and Head of the Firm's Investment Policy Committee. Jeff is Wall Street's preeminent technical analyst and a member of the Institutional Investors Hall of Fame. Jeff, thank you so much for coming on the podcast.
Thanks for having us. One correction, we are now in Connecticut, not New York. Ah, okay. So it's a minor and a more recent move, but just to lay the facts there.
All right, the facts are out there. And Jeff, I mean, it's another statement to say it's been a wild start to 2025. We have an intensifying global trade war, shifting geopolitical dynamics, large swings in monetary policy expectations and interest rates, and considerable economic growth, labor market, inflation, cross-currents to consider. We at Credit Sites came into the year with an underweight recommendation on USIG and high-yield corporate credit that had been a bit of a tough call up until just recently as threads have finally started to widen out a little bit consistent with our call to move up in quality and shorter in duration in corporate credit.
US equities have also come under pressure as concerns about economic growth and uncertainty from the broadening. Trade war are front and center for markets. So, Jeff, at Credit Sites, I think one of the things we are best known for is the quality of our analyst team's fundamental research and the coverage of a preponderance of corporate issuers across the globe. On the strategy team, we analyze the markets from a variety of perspectives, but heavily weight the fundamental view from our sector analysts.
As a technical analyst, can you take us through your process and maybe highlight your perspectives on the key differences between being a fundamental and technical analyst? Yeah, sure, Zach. I mean, look, I came to the markets, I think, in a very traditional way, which is sort of the fundamental door, right? And my reason, finance or finance, depending on your vernacular.
I'm a CFE charterholder, so I have great appreciation for the fundamental side of the ledger. And I take that word from a friend of mine and client now, Treasury Secretary Scott Besson, who talks about, you know, the importance of imagination in this business because we are so, I don't want to say two-dimensional, but we certainly, you know, stick very close to the mean outcome. And, you know, the history of the world is that the mean outcome, while it feels good, is not necessarily always the base case, right? And I think we have to be a little bit more expansive on how we think about things.
And technical analysis kind of allows you to do that, gave you more of an artistic license to think more broadly than maybe the fundamentals would otherwise suggest. What it really came down to for me, and I'm glad you asked the question because I think it's a really important one, is that there's no way, you know, in good conscience or in a thorough manner that you can go around the globe and be an expert in everything and know what's happening in credit in Vietnam and in Germany and in the U.S. and then in gold and with copper and with cotton and all these various things. But, you know, a quick way, and I do this weekly, a quick way to kind of get at least an understanding, I've got three piles every weekend.
It's bullish, it's bearish, and I've got to figure out what's going on here. And so you can go through the charts really quickly and create a pretty good mosaic of what's happening. And, you know, interestingly enough, in today's environment, which is kind of a great case study here, is U.S. equities are under pressure, U.S.
yields have come down, and at the same time, if we look at Europe, the European markets are red hot, and their yields look like they're breaking out, right? So there is this disconnect, and I know it's easy to kind of point the finger at the political uncertainty of what's happening here, but it really opens your eyes and says, hey, what's going on? Maybe a more contemporaneous example is China and Hong Kong. We got bullish on China and Hong Kong in 2024, early 2024, and then really pressed into that in mid-2024.
I will say the fourth quarter was uncomfortable, it didn't really follow through, but we were staying with it because of trends. But that was happening as people were talking about Hong Kong is uninvestable, that Asia and the communist regime, et cetera, is forever going to be a suppressant on growth and free markets and the like. But the markets were telling us something different, right? And so I think what the markets have done for me is really fact-check and say, hey, is this narrative being confirmed by what the market's message is?
And really, as I think about it and try to distill it down to its essence, it's a matter of listening more than I'm talking, right? I felt like as a fundamental analysis, I was talking to the market. Hey, you should be doing this because of value. Hey, you should be doing this because of the discount rate change or whatever the case may be.
Within the technical analysis community, I feel like I am listening to the market, right? And certainly there are points where I think that we can talk to the market, but as we all know, the golden rule, right? The good Lord gave us two ears and one mouth, and so I do think that in this business, it's also helpful to be a listener as much as it is, at least, as a talker. Jeff, those are all great points.
I think the lack of imagination is a big problem. I feel like even I've suffered with over time, just that reliance on returning to the mean and trying to break out of the trap of staying in the box of historical norms. And I think the other great point you make is separating the narrative in the market from what the market is actually telling you, looking at the charts and what you're seeing. So I think that's a perfect way to transition to your outlook coming into this year, starting with some of your key calls.
And I know you came out with your outlook in January. I think you were looking for positive returns on S&P 500, but potentially looking for a more attractive entry point. Maybe take us through your core outlook views, we are unapologetic trend followers. And as long as the trends are positive, we will stay bullish.
You know, it's a lot of different ways you can measure that. We've done a lot of work around that. We've got systems that help us. I will give you something that I think is very simple and yet it's amazingly effective.
And that's just simply, where's the 50-day moving average versus the 200-day moving average on the S&P 500? And if the 50-day is above the 200-day, well, you're in an uptrend. If it's below, you're in a downtrend. And it's really remarkable the amount of alpha, the daily alpha that's generated in an uptrend versus in a downtrend, just using that very simple, almost too simplistic to be, you would think, useful tool as a differentiator between bull market and bear market.
So we're clearly, even with this correction, this 10% correction, we're clearly still in this bull market. So that to us is kind of the career longevity game, which is identify trends and stay with us as long as you can and certainly try not to fight those unless some very specific circumstances develop. And we can talk a little bit more about that if you want to. But we came into the year saying, look, we're in a trend market.
We're not in a momentum market. And that's an important distinguishment for us because momentum market says that everything's going up and there's sort of an urgency to be a buyer and you should buy. The biggest mistake you can have is not having enough exposure. That was fourth quarter of 2023.
We saw momentum measures that we use to identify these types of environments. And it just said to us in December 23, actually November 23, look, you got to get exposure. Don't worry about, you know, do I buy NVIDIA or do I buy Broadcom? It's just, you got to get exposure, right?
So we would do that through an index and then from the index, we'd start to reallocate into leadership and names that look good. Coming into this year, the difference had been, look, the percentage of issues of other 20-day moving average, the number of 20-day highs on any given day. All these indicators, which were still positive, were not robust. They were just kind of lukewarm.
And so it just said to us, for every step forward you take, you're going to take a half a step back and that's the way that that generally plays. Where I think it got more interesting, particularly around the election, we had the quote-unquote Trump bump, right? And when we looked at our data, our factor to work, what we found was that the beta component, high beta versus low beta over the last 65 days, which is roughly a quarter, was showing that high beta had been outperforming low beta in the 99th percentile historically. We percentile that because it gives us a reference through time.
If I said, well, high beta outperform low beta by 15%, you know, is that good or bad? There's no way to really know that, right? So we percentile it so you can understand it. And what we understand from being anything above 90 is that, hey, I'm in a dangerous zone for some type of reversion, right?
Particularly if it's exclusive and in this case for beta, it was. And so in December, we said, look, I think we're probably good for the remainder of the year, but the first quarter is likely to have this beta reversion. We were wrong in that and that December actually wasn't a great month for beta, so it almost pinpointed it, which hardly ever happens, but that's okay. And then obviously we've had this continuation of that slide in beta.
Where we stand today, remember, it's 99th percentile as of about three months ago. It's actually the first percentile today. So you went from being as extreme of returns in high beta versus low beta as you'd expect to now as worse of an extreme in returns of high beta versus low beta as we've seen historically. So we actually think that this oversold condition that's developed, again, around political uncertainty, which I'm happy to talk about as well, has created this exhaustion in beta.
Does it snap back? It's hardly ever, you know, zig, zag, zig, zag. It's, you know, more of a zig and a zag and then, you know, a little less market kind of forward and moves on and does something else. But I do think that there's probably an underrepresentation or a sentiment fear that's developed in beta that probably needs to be recognized and understood.
Part of that too, and I know this can be controversial, is that when you get price to react that extremely, people start creating narratives to identify that extreme, right? And so right now, we're seeing some of these narratives, these bull bear narratives. In fact, just last night, the investor's intelligence bull bear ratio inverted for the first time, I think in 18 months, maybe two years, where there are now more bears than bulls, right? So this reversal in the beta trade, which we know price really does drive sentiment and it's not the other way around.
This reversal in the beta trade has taken the sentiment to an extreme and now searching for narratives as to why that's happened. Now, believe me, I'm sure part of this is a slowdown in the economy. I'm sure part of this is the political uncertainty. But I also think the extremities to which we've seen this develop is also a byproduct of those extremes that we saw in beta that have unwound and now making people more anxious that there's something more to it than just a, hey, trees from the corner of the sky and we have to have some type of reversion, right?
So I think that's interesting. The other thing I would just say about political uncertainty and again, this can be controversial is there's an interesting, out of Stanford, an interesting index called the political uncertainty index that goes back to the 1980s so this isn't just a Trump era legacy but it's called the Baker Bloom and Davis political uncertainty index and they measure new flow of political uncertainty and at one point in time I knew exactly what it was, I don't remember now but it was interesting and I thought it was useful so we threw it into our work and tested it and wrote a white paper about it and what's interesting is political uncertainty when it's low or mediocre or average but going higher is a bad time to be an investor. Like there's no doubt if there's kind of mediocre political uncertainty but it's going to a high political uncertainty environment that's not good. Once you're in the political uncertainty environment though there are actually statistically significant positive returns going forward because the political uncertainty tends to be very well discounted pretty quickly and politicians are going to hear this but generally they don't really have that big of an impact on day-to-day business and the markets in a more holistic sense over an intermediate period of time and we would characterize that as something like 13 to 26 weeks so 3 to 6 months something like that.
So when we see high levels of political uncertainty and oversold condition now kind of generating itself into this bull bear spread which is just general investors sentiment we think that's actually a pretty interesting opportunity and I think part of what the way that we think about this or try to program ourselves and believe me I've been doing this for 35 years it's not like when I was 22 I had all these answers it was more a matter of I've seen this movie so many times that when I'm thinking about this the same way that normal people are thinking about it I just have a little trigger that says hey that's probably not the right thing to be doing here and so it's just a matter of learning and teaching yourself this but when we see these things it just says to us okay if people are overly bearish and the distribution of outcomes is 50-50 bullish or bearish but it's tilted 70% bearish shouldn't we maybe just take the other side even if it's just a flip of a coin shouldn't we maybe just take the other side because that's where the odds say we should be playing so we think about it that way and I think there's some opportunity here I mean one thing about imagination what if instead of raising tariffs you kind of come to this negotiation where we start high and we reduce tariffs and nobody's really talking about that and we know that that is in fact in the playbook so maybe we start at this high oh my god it's high and going higher well maybe it's high and potentially going lower as we come to the table and kind of figure out what exactly it is that's going to be best for everybody as we move forward so again part of that imagination I think is important particularly when people get so one-sided in terms of sentiment and in returns there's a lot there to consider Jeff and I mean I think it's kind of wild to consider high beta moving from 99th percentile to the first percentile in what seems like a very short period of time and you mentioned this political uncertainty index almost being an inverse indicator if you will when it reaches a peak that's a good time to get in where are we on the policy uncertainty index right now just to kind of frame it up I have to imagine it's been moving up a ton it's in the 92nd percentile so that's a big number now I mean what's funny in a historical context is almost the entirety of the 45th president we were in the policy uncertainty red zone if you will so this is not anything new to this administration or I know there's different people but this president would say but yeah a lot of the angst might be different for the investment community than it is kind of our personal beliefs or how that right so quite literally not uncharted territory for the president correct in fact probably just the beginning yes yes it seems that way and so I think you've had a great call that there'd probably be a more attractive entry point into this market probably in the first quarter of the first half of this year I think in your outlook you had pegged something like 5400 on the S&P and just for our listeners we're recording this on March 12th this morning we had somewhat softer than expected CPI day of the Bank of Canada has caught 25 basis points and we have more news on the Russia-Ukraine war perhaps Vladimir Putin willing to sign a truce with his own terms so there's a ton going on in the markets today when you kind of look at where we are we're getting a little bit of a bounce in equities are you suggesting to clients now is a great time to get back in in a big way how are you thinking about where things are after this pullback and how the big drivers of this pullback we have neighborhood indicators and then we have street address indicators we can put it right on the sidewalk in front of the house and I'd say certainly our zip code indicators like the bull bear ratio we're firing some of the external oversold conditions that we look for the beta call in the first percentile all those would be kind of neighborhood indicators we're in a pretty good zone what we said to clients this morning was we think we're 85% there some of the things that are the precision bombs if you will for us the strikes didn't trigger and so you always want to be a little careful it's hey we think at the margin this is the right call but we're not pounding the table it has to be right here right now and those would be things like 20 day lows and 20 day highs and some of the call data the intraday sentiment work that we looked at didn't quite get there for us so I think you know for anybody who's listening with that 13 to 26 week forward outlook I think this is a pretty good time to be looking at a lot of these names that we frankly we put in the piece today banks is a good example are oversold in an uptrend a lot of these look like just corrections they don't look like cops banks globally look strong so I don't want to name names but you know just generally in terms of that sector it looks good there are some in tech and I would be careful that when we talk about tech we're really not talking about semis semis don't look that good once they haven't for about nine months now, so there's a lot of froth there, and we identified that in the early summer, and we started to see these breaks, and from a trend perspective and relative perspective, those things actually rolled over for us in August, and so that's been a very good call from a sentiment standpoint for us, and it just doesn't look like it's ready to turn. Again, I think a lot of stuff bounces because of this oversold condition, but we're looking for the sustainability. Where's the leadership? Where can we be comfortable owning names between now and the end of the year?
And so I think there is an opportunity there with communication service names, as an example, looking good. From a valuation standpoint, it's interesting because we do pay attention to value, and in fact, if anything, the semiconductors, and I'll give you an example, we measure the market cap contribution of the semiconductors to the overall market cap, right? I can't remember what that number is off the top of my head, but we compare that ratio then to the revenue component that semiconductors collect as a percentage of overall GDP, and when we look at that, just kind of a price to sales, if you will, of a sector to the overall economy, semiconductors are trading at similar levels to where they were in 2000, and essentially, it was 5, 6, 6x their contribution in revenues. Now, it doesn't take into account growth, so clearly, if these things are growing at substantially better multiples than the rest of the economy, you can justify that to some extent, but even then, again, that lack of imagination that we talked of, maybe to the downside that new technologies develop, maybe it's the Google chip, maybe it's something else, that starts to displace some of these leaders, and all of a sudden, you can't justify those multiples in terms of revenue, right?
So, Jeff, that's 5 to 6 times market cap relative to revenue contribution. Correct, correct. Big. It's okay for an industry, or I'm sorry, for a stock, you'll get 10x, you'll get 20x, I mean, those are still crazy numbers, but to get it for an industry group, that's a much trickier and, I think, more clarion call for us that, hey, it's going to take a while to probably grow into these things, and between here and that eventuality of growing into them, you think you might hit a speed bump?
I'm going to guess probably, right? So, we look at those types of things and get some perspective on it. So, on the other side of that, the one that really just kind of jumps out to us as being relatively cheap, no, this is not back technically yet, so for us, we sit on our hands, we'll play it just as a valuation or a contrarian call, but we won't get big, but we'll start to add to those positions as the charts start to confirm that's energy, right? So, if you look at the contribution, same metric, energy is trading well below, its market cap relevance is well below that of its revenue relevance to the overall economy.
So, we like energy from the setup, we don't like energy from the charts, I think they're still underperformers, but as we start to see the markets recognize this and move in our favor, clearly that's something that we'll be more attuned to and be willing to be a buyer. But we found, you know, we've done a lot of work, we found that valuation without trend or momentum doesn't do any good, valuation with trend or momentum doesn't do a lot of good, and so, you know, that combination, using one without the other, just is not a great recipe. Very tasty if you put them together, though. That makes a lot of sense, and I think it's interesting to frame all that up.
I want to shift gears a little bit, and you mentioned these views of where things look relatively cheap from a valuation perspective, but you don't really move in a big way until the charts and the technical support it. I'd like to get your perspective on the bond market from what the charts are telling you. I know you can focus on various parts of the curve, certainly your friend and client, now Treasury Secretary Scott Besson, he's been focusing on the 10-year yield, there's been a lot of moves there. You can look at the two-year yield as kind of a proxy for where the market is expecting the monetary policy rate to go.
I think it's been interesting to see how inflation expectations in the two-year part of the curve have come up, while real yields have come down, and that's a little bit different than what you see further out. What are the charts telling you? You can focus on either 10 or whichever one you think maybe is most relevant for the market we're in today. What are you seeing in the charts there?
Yeah, I think they're both important, and we've been more optimistic about bonds, believing that yields really above 475 in the 10-year were choking off growth and was detrimental to not only equity evaluations, but detrimental to some portions of the economy, right? I think you saw it in homebuilders, you saw it in, as I classified it, anything that you'd have to ask your spouse about to buy was under pressure. Probably not Nike shoes, apparently Nike shoes is probably okay, that flew under the radar, but you have to talk about Lenar, Total Brothers, or Tesla, and come home with either one of those and make a longer conversation, right? So those were under pressure.
Autos, big ticket spends were under pressure. At the same time, it's really been interesting because it's been a very good market for hedge funds and for stock pickers, because in every single sector, I can show you, we just talked about it with tech, right? I can show you weak absolute charts in semis and still yet strong and robust charts in software, right? Within discretionary.
Weak charts in building products and homebuilders and strong charts in, say, travel, cruise lines, hotels, et cetera, right? So, you know, kind of these experiential names seem to be fine, restaurants as well, while the big ticket items were under pressure. So, you know, within discretionary, there's, you know, definitely trench warfare taking place into what's working and what's not. So, and we'll skip back to the bond market.
So, we were in the camp that 475 was not only bad for equities, but probably unsustainable from a bond market perspective. We thought 415 on the 10-year, I don't know if we got there, we've been pretty close here in the last couple of days or weeks. And frankly, 415 now doesn't really look like it's going to hold for much longer. I think 440 is the upside on the 10-year yield with, you know, probably something that has a three-handle to it as we go lower.
I'd say 385, something in that zone. Under 350, it becomes really uncomfortable for us from a, you know, what is this saying about the economy, right? Right now, we think the economic outlook is okay. Certainly, it's slowing.
We think it was slowing prior to Trump taking office. Certainly not helped by the political uncertainty, right? People pulling their arms, if you will, around that stuff. But it looks as well that the two-year yield is probably on its way to 350, right?
So, you know, we're actually pretty bullish on bonds, and we think that that'll be supported by the inflation outlook as we go forward. You know, that it does all that good work in our shop on inflation, and as he looks at kind of leads to inflation, there's certainly one-offs with used car prices and some other things, but it's like, you know, most of the trajectory around the things that have, you know, a long tail to them, like rent equivalent yields and the like, are getting better, not worse, and those are going to be big components as we go forward. So, I think the inflation scare, and it would be a bit similar in the charts when we look at metals and crude, for that matter, right, and some of these other things, and it doesn't look in the charts like we've got this big, big inflationary problem staring us in the face, and so I think that will act as a buffer to some of these concerns as we go forward. I know that's not turf related, but that's, you know, as we look through the lens of kind of traditional, what's the trajectory of this stuff, certainly looks more support than less.
And when you think about the 10-year, you kind of mentioned if we get back down to 350, that's probably pretty uncomfortable from an economic growth, what that's saying about the outlook, maybe if we're there, just given where policy is and what the Fed's saying, the curve has reinverted. Is there a level that if we get through it in the near term on the 10-year treasury yield that you think we could be going to 350, or is there an initial signal level that you think that that's back on the table? Is it the 415 you mentioned, if we kind of break through that sustainably? So, I think we kind of touched it, maybe intraday, and we bounce off it.
Is there a level that you're watching to indicate that clear downside on the 10-year, separating it from all of the various macro factors to consider? Yeah, it would be closer to that 385 level. So, we think we get through 415, not much trouble with that. And something that's in the realm of softer, but still positive growth, and maybe a more long-term sustainable environment.
You start getting below that, and then we're starting to hit bone there, in terms of what that suggests. Now, the good news is, in your world, and we watch this carefully as well, is while credit has ticked up on the corporate side, it certainly hasn't been nearly as stressed as what we're seeing in the equity markets, right? In fact, that's an indicator that we use is this offset between what's happening in credit, what's happening in equities, both from a volatility standpoint and a return standpoint. And then we actually got buy signals earlier this week, which is the stress we were seeing in the S&P or the equity markets, was not matched by similar stress in credit, right?
And the way that we think about the world is equity is simply a cushion to the capital structure that is embedded in credit, right? And so, at some point, I think what was interesting, we published this on our Twitter account at Remark LLC earlier this week, is when Tesla was in kind of this depth of decline and concern, you pull up the CDS market for Tesla, and they have plenty of cash on the balance sheet, so this is not about the balance sheet of Tesla, but at the margin, if people are believing that Tesla is really going to have a big problem, you're going to see some type of, just as a hedge, some type of increase in the probability of default out of Tesla, and they were actually at, I think, three-year lows, right? So, you know, clearly something was happening in equities that was not taking place in the credit markets, and we saw that, not to that extent, but we certainly saw that, I would say, more holistically. Now, I don't think corporate credit is a terribly attractive value right here, don't get me wrong, but in terms of its messaging for how serious is this for equities, it says, you know, this is a flesh wound, as I say, versus this is something that's, you know, more potentially mortal.
So, I like what we're seeing out of that disconnect between the fixed income market, particularly on your side, the corporate side, and what the equity markets are telling us. So, that tends to be sentiment-related, and again, it gets us back to the policy, it gets us back to the bull bear spread, and that differential or that contraction that we saw in high beta versus low beta. Yeah, I'm glad you brought that up. Just looking at what we're seeing in spreads, it does seem to have sort of lagged the move in equities, which maybe makes sense to your point of equity being a cushion to the capital structure embedded with credit.
You know, so right now, we're looking at BBB spreads around 116. I think the 2024 peak in August was 137, and when we look at our outlook for 110 basis points on the IG index for year-end 2025, returning to that 137 peak in August of 2024 feels realistic when you just break down the market in terms of how big the BBB component is, really, more or less a 50-50 BBB and single-A index. When you think about your outlook and maybe overlay our call, let's say we're right, and we move back to that 135 to 140 area on BBB spreads, of course, it'll matter what exactly is driving it. I expect it to get when we got the results of the election back in November, but if you take all of this, and let's say that we kind of continue to drift higher to what are ultimately not wide spread levels historically, does that make you more nervous at those levels about the equity markets in terms of performance for the balance of 2025?
It would have, you know, it would have in December, it doesn't hear down 10%, right? I think that's more likely to have been priced in to some extent. You know, what we would look at would be, how does that, how is that reflected in equity factor measures, right? Is, does profitability start to become a more dominant factor?
Does balance sheet quality become a more dominant factor? You can see it in sectors, you know, utilities are kind of the outlier here, because if you just look at utilities, you'd say, okay, this is, obviously there's something with the yields that are correlated there, but the performance, I mean, I think utilities are now, they're not the top of the second best technically ranked sector in our work, right? Which is pretty unusual given that you're still in the bull market, right? So we certainly keep our eye on that.
In isolation, I'd say that would make us more nervous, but we're not seeing it really jive with other things, right? So we're always looking at the, trying to look at the complete picture and say, hey, that's happening, so what else should be happening if this is a problem, right? And those things aren't happening, but we keep our eye on it. So I think that that's important, but you would expect an increase in things like healthcare, right?
Healthcare should be better. You'd expect a more permanent turn in staples. You'd expect materials to continue to be under pressure, which they are. I think the real crux of this is, we talked about it before, this trench warfare taking place in discretionary, do we see all discretionary start to roll over, right?
Do we start to see it in restaurants? Do we start to see it in the, hey, honey, let's not go to the restaurant this week that, you know, we were going out three times a week, now we're going to go out once a week. Do we start to see that start to shift? Because if that's happening, then if you lose discretionary, then I think we've got a bigger problem for equities.
But right now, it's actually almost perfectly neutral. And we do equal weight, so you have to do equal weight, because otherwise you're going to just be telling me what Amazon's doing, right, and Tesla for that matter. So if you do equal weight, you get Starbucks, and you get McDonald's, you get Marriott, and you get everybody else that's in there as well, Ruffler and et cetera. So I think discretionary as we go forward, if there's something I can tell your listeners, watch that rally performance of discretionary from here as we get into the summer.
If that peels off and utilities continue to do well, or maybe even more importantly, discretionary peels off at the expense of staples, and staples start to outperform, then I think we have something that's going to be a little bit less comfortable as we get into the summer and probably support your elevated views on corporate credit. That's really consistent with what we're hearing from our analyst team looking at the consumer broadly and how discretionary has held up perhaps a bit better than we anticipated or perhaps for a bit longer than we had anticipated. And so I think that'll certainly be interesting to watch, and it's probably also a good indicator of where the economy as a whole is going. So Jeff, we've covered a lot here.
I want to get some of your final thoughts on, you kind of mentioned you have the zip code indicator, the neighborhood indicator, and the street address. Are there, what are you most focused on now in terms of determining once we hit that oversold level that you're really starting to pound the table? I think that would be an interesting perspective in terms of, it's been a huge move recently, but in the context of the big run-up in pretty much everything following the election, maybe it's not as concerning. So kind of take us through maybe one, two, three of what you're looking at to determine that we are at that oversold level that you will start pounding the table for clients.
We're looking at the fluctuations away from projected trends, and when that gets below negative three, that says, okay, you're in the spitting zone of probably trying to probe some type of bottom, presumably you're in an uptrend, which we are, and we got there. In fact, just yesterday, we did it on an equal weighted basis, which we think is important because one of the preconditions of a good low is that there really isn't anywhere that you can run at high, that no matter where you are, maybe you're not going down as much as the rest of the market, but you still pull up your Fidelity account or your Schwab account and say, damn it, I lost money last month. So that's an important kind of precursor, and we just got that yesterday. So I think that's the first thing that we look at.
The next is then, okay, well, what's happening internally? How do we find how pervasive this has been? And one of the things that we look at there is the percentage of issues they're trading by the 20-day moving average. Yesterday, it was at 26%.
We see that number down something that's a teenager, so something below 20%. So it's close, but again, close isn't necessarily – if I said close, between here and, say, 15%, it's probably another 3% of the S&P, and the question is, do you sell it at 15% and then make that mistake, or can you ride it through? Some people can ride it through. If you can ride it through, it's fine.
It just kind of is everybody's own risk tolerance, if you will. And then we look for sentiment, right? Is sentiment telling us that people are more fearful of more downside, or are they trying to exploit the upside? And we can do that through options.
We can do that through some sentiment surveys and like, as I mentioned, the bull bear survey from the investor's intelligence inverted, and that's historically a pretty good sign between an uptrend. And so I think we're 80% there on the sentiment side. We haven't seen the option activity. So if we go to spike in the option activity, if we saw the percentage of issues above the 20-day moving average, that's where we have the all-clear to say, okay, let's go buy bad charts, right?
Now, there's oversold conditions that I mentioned in banks. There's a lot of that that have developed in good enough trends that we think, hey, this is the part where you say, okay, at the margin, I'm going to own some of this stuff because it's oversold here. I think we've stretched it to the downside, and the next 2% or 3% is not that big a deal. And so I think on an individual basis, there's some of those.
But from a market perspective, that would be it. And then on the way out, like, how do we respond off of these original conditions, right? Is it a lot of breadth? Are we talking about, you know, days in which 90% of the index is up on the day?
Is money coming in wholesale? That's what we really look for. And so I don't care if NVIDIA's up and GM's down. That's not really of that much interest to me.
What I care about is NVIDIA's up and GM's up and Starbucks's up and Amazon's up. Like, that's where it gets really interesting, right? And utilities are up, right? So you can do it from a sector perspective, seeing all the sectors in the green is a good sign.
But if we can get that kind of 90% days in terms of breadth, that's a really good indication that money's coming back to find a home in equities. And usually that's not fleeting money. That's money that kind of gets reallocated and put into place. But I think, you know, one of the things that keeps us more comfortable about the bull market is what we talked about at the very beginning, which is globally, the markets have gotten better, not worse, right?
The U.S. is kind of the standalone bull market, if you will, for 23 and then into much of 24. And then Europe started to really kick it in. Asia started to kick it in.
So you would expect that birds of a feather tend to flock together. It doesn't always have to be the case, but it's easier to have a bull market in any country when the world is in a bull market, right? So I think that's good news. And it'll be credit dependent.
It always is. So that's why we watch credit so carefully. But at this point, we think the differential between what the equity markets are saying and what the credit markets are saying certainly support a more bullish tone on equities because it doesn't look to be something that's systemic. And again, I would point to the banks and the performance banks as just another check on that to say, hey, if we really were expecting asset quality deterioration and defaults and the like, you would see it in the banks.
Now, one thing to keep in mind, and we're watching this, is where has private credit been embedded over this last cycle? Certainly, that's in PE firms, right? I won't name names. We all know who those are.
So let's see how they respond to this, right? Because if they rally and fail, in other words, don't make new highs and start to roll over, then that's something I think we need to discuss. I don't think that's a problem until late spring, if it is in fact a problem at all. But that's certainly something that I'd watch.
Where at the margin would we expect some of these problems to develop? And so we've got to watch those for the signs of infection, basically. How would you track that, Jeff? And just kind of thinking about these big PE firms that do trade publicly, kind of looking at the rebound in them, and as you said, rebound and fail, so kind of lower highs and maybe lower lows.
Is that kind of the easiest way? Because we talk about private credit all the time. We have some good data. Our colleagues at Covenant Review and our colleagues at Lefant Insights cover it really well.
But in terms of the publicly available data, the charts that you can watch, is it really looking at the equity prices of those big PE firms? So first, look at the rally performance versus financials, right? So you'll see that first. And so that's lagging.
They can even be at new highs, but that starts to lag. That's a yellow flag, right? I mean, that's that fully hoisted yellow flag. It's just like, hey, let's pay attention to this.
And then from the absolute charts, we start seeing their failures to make new highs roll over. They're failing at the 200-day or failing at the 50-day. The 50-day crosses the 200-day. All those things, we start to say, hey, something's building here that we need to be really, really particularly careful of.
And usually, you can see it. Again, you have to listen to the market, right? But you can see it develop in these spots. And that's going back to what we talked about before.
I mean, I was full on in my career at 40 years old during the great financial crisis. And I had just switched firms from Lehman Brothers, which was recently in 2007 to ISI. And we built our models and started doing everything again in the spring of 2007. We just started to see the deterioration of credit.
And then from an equity standpoint, who was most at risk? And it was like talking to a brick wall for a lot of these things because people just didn't want to hear it, right? And we're saying, look, there were problems here. And so that's usually how it develops.
And I would say the one thing I found in my career is usually the big problems take so long to develop. I mean, you'll see them. But they take so long to develop that you start questioning yourself, right? It's so easy to go back and look at a chart of the peak in 1974 and 75 and say, oh, that was easy.
But you have to walk home every day, right? You have to walk to the train every single day. You have to get up every single day. And that's like moving in slow motion when you're really living it out.
It's easy to go back and look at the top in the S&P in 2007, 2008, say, oh, look at that. But when you're doing it every single day, it takes a long time for that to really play itself out. You're almost asking yourself, why the hell is this not cracking, right? It's just, why is this not worse?
And eventually it is. So I would say if it's a problem, it's probably a long building problem. And by long, I don't mean years. It could be.
But it's probably something that we can have a conversation again several times a week and wonder why that's not happening. So keep that in the back of your head. I think that's a great perspective. And really, we had been pointing to clients that maybe private credit was a little bit of a buffer in terms of providing liquidity to firms that might not have otherwise been able to tap the public markets.
The big question now is when does that shift? And I think that's a great perspective on keeping an eye on the data and also identifying these trends or the big shift in trends early can be tough. And to see it not necessarily become pervasive that quickly can cause you to question it. But I guess hindsight is 2020.
Everything's easy to call when you know what's going to happen. All right. I don't want to leave it on a somber note. But Jeff, I think that was a great ending point.
Maybe just to not have any linkage to the financial crisis at the end of the podcast. Can you give us a rough estimate of your expected returns for the S&P from today's level? I know it's moved around quite a bit, but what's kind of your base case? Give us a range.
Yeah. So we started the year, our market stock was putting us in the 13-ish percent return for the year. And that had us somewhere around 6,800. And we thought the year would be decent, but it would be better on a pullback or weakness.
So obviously where we are today looks better. We don't have any reason to adjust that. Again, this is a pretty typical, as we see it, correction in an uptrend. And by the way, just to kind of think about this.
And people say, well, we've never seen tariffs like this before. Okay. But you've never seen a terrorist attack like 9-11 before either. It's always going to be different.
It's never going to be, oh, this is exactly what happened back in 1978. And therefore, this is what's going to happen. That's never going to be the case. If that's what you're looking for, forget it.
Read Dickens or something. That's the wrong profession, right? Exactly. So the narrative will always be different.
The circumstances will always be different. But there are only three things you can do with any circumstance. You can buy, you can sell, you can hold. That's it, right?
That's it. There's no other option. And so when you look at the vastness and the infinite outcomes or combinations that can develop as to why things are happening, don't get too wrapped up in that. Look at the same consistencies in behavior, the same consistencies in markets that are really very process-oriented and use those as your guide.
Don't use, well, this time it's different because. It might be, but we're in the habit of playing blackjack and we have a 19. We don't tend to take a card because we think there's a deuce in the deck. It just isn't the way that we think about the world.
So that's the way I would think about this, that the oversold condition, yes, there might be a trouble effect. There might be a political uncertainty effect. There might be a lot of other things happening that we haven't quite seen before. But the reality is, is when we look at this in a combination of how behaviors work, how markets tend to work, there's actually more reason to be optimistic than pessimistic.
All right. There it is. That's our optimistic finish point. Remember, all you can do is buy, sell, or hold.
And it's probably better to use your imagination than to try to think inside the box. Jeff, this was a great discussion. I really enjoyed it. And we really appreciate you coming on the podcast.
Thanks, Zach. A lot of fun. Appreciate you having me. All right.
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