While geopolitical volatility remains a systemic risk,
historical market cycles and post
midterm trends suggest that growth remains intact.
Welcome to Nasdaq trade talks,
where we meet with the top thought leaders and
strategists in emerging technologies,
digital assets and regulatory
landscape and capital markets.
I'm your host, Jill Malandrino,
and joining me on the desk at the Nasdaq market site.
We have Phil McIntosh, chief economist at Nasdaq.
Chris Dearborn, managing director on
the Nasdaq Market Intelligence desk.
Steve Sosnick, chief strategist at Interactive Brokers.
And joining us from Tulsa, Oklahoma,
we have Steve Wyatt,
chief market strategist at Bok Financial.
We're here to discuss the fundamental and
historical assessments of the economy
and the market at
a very appropriate conversation for
the two Steves with us today.
As you are walking encyclopedias and history books,
Steve, W let's kick it off with you.
Give us a little bit of background here.
It seems like geopolitical events and midterms could
actually not be too bad for the market.
Yeah. Good day. Jill. So yeah, so look, I mean, look,
we all know the history of the markets when we've seen
these types of geopolitical events in the past,
the right decision was to buy the dip.
If we think about midterm elections,
which do have greater volatility,
uh, than, uh, than other years of presidential cycles,
but the long term is that you buy
the dip because if we get past the midterms,
we've never had a post midterm,
12 month period negative for the S&P 500 since 1938.
So I think that what's going to be we're going
to have to watch closely
as we think about what's happening in Iran.
It's going to be the breadth of
the conflict and the duration of the conflict.
It is possible that this works
out differently than what we've seen in the past,
and some things we would be looking for there.
Um, man, if we would see Saudi Arabia or
UAE as they kind of mentioned,
uh, potentially, Uh, moving on Iran as well.
Or if we would see, uh,
continued shutdowns in the Straits of Hormuz,
which the president has come out to with some, uh,
plans to help that that would take oil up to 100 bucks.
Jill. Then I think we got to we got to
reconsider because at that point,
that would probably be enough to knock us off of
this idea that we're going to
have positive economic growth this year,
that we're going to see inflation
overall declining a little bit.
Still trouble spots there.
We know PPI was hot.
We know the core PCE is at 3%.
Uh but something that would knock us off of this idea of
economic growth and improving earnings
not just at the S&P level but broad more broadly,
mid and small caps,
which have done very well this year.
It would have to knock us off of that for
us to change this idea that
we're going to view
declines in the market more opportunistically,
as opposed to risks of a longer term pull down.
Yeah, Steve, it's interesting, as
he's saying that since 1938,
My first thought was the prediction markets
are going to light up and
see if we if we just jinx that history.
But back to how corporates are approaching this.
I think the other thing to consider is how
corporate management teams are executing on
all these investments that they made in the tech space,
because you have to pay the piper at some point.
This is this is one of the themes that
I've been thinking about for some time.
And we could see that the mentality
has changed, you know,
and for better or worse,
the history of the internet sort of is relevant here.
History doesn't repeat. It rhymes.
But in this case, we're rhyming
because you know we're moving.
Let's stipulate that AI is
everything that it's that it's hoped to be.
That was that was really the case with the internet.
It was everything we'd hoped it to be. And then some.
On the other hand, you know,
at some point you have to move past the enthusiasm of,
what can I do for what can I
do for you to how am I going to pay for this?
And what can it disrupt?
You can't have a disruptive technology
without somebody being disrupted.
That was the sell off in in software stocks.
And but so what we're seeing here is we're
moving when any normal business has to consider.
And any normal investor needs to
consider this on behalf of the, you know,
what management is doing,
what a return on equity or what a return on assets.
And so how is AI going to
bring efficiency to the bottom line?
And with all the money that's being spent,
as a lot of companies that have been
celebrated for being asset light businesses
are now asset heavy businesses
with that are putting on a lot of
fixed costs in terms of
interest rates and other and other expenditures.
How, how are we
how are we going to bring this to the bottom line?
And I don't mind that the market
is looking at this more critically.
I think that's I think that's sensible.
But it's going to bring it's going
to bring potholes along the way.
Yeah, it certainly is. And we're
seeing that play out in the market right now
trying to discern the hype versus you know,
the demand and broadening exposure lends to that.
You've seen that over the last couple of months,
which is kind of interesting.
To Steve's point, everyone's point here
about software selling off recently,
especially as the AI ramp up from
the different agents kind of pull into that concerns.
There are really more of
those companies being a little too.
What would be the right word acting well,
as over previously times and
finally coming back down to normal a little bit.
You know, the hyperscalers are
still investing on free cash flow,
so that money is going to continue to go into whatever
needs to maybe whether it's workout builds,
cross, um, investments or others.
But what's really interesting is you're
seeing the broadening of the market come out.
You're seeing small and mid-cap names
starting to perform very well.
You're seeing defensive names starting
to act very, very well.
Staples, utilities all as
a safe haven for this uncertainty.
Granted you're going to see stock
picking more than sector involvement.
Companies that are doing well with who are operating
well free cash flow predictability, profitability,
companies that are uncertain or in their earnings calls
don't forecast that are
going to be hit and they're going to be hit hard.
So you're seeing that broadening
the S&P 400 mid cap is one of
the best performing indexes year to date.
And overall the markets really haven't
reacted for the last two weeks.
You know for the month of March there's
only a couple of days we're flat.
Yeah. I mean Phil,
even from the macro perspective,
AI productivity and spend is becoming more of
a critical component of what
we're seeing with GDP as an example.
I mean, it's kind of hard to
see AI productivity in the data.
It's hard to see AI affecting jobs in the data.
It's a little bit like a year ago looking for tariffs,
having an impact on the economy as well.
I think at the moment we're still pretty early stages.
It's like the internet in the 90s,
it didn't really deliver productivity gains
until the noughties.
And so we have to actually build
the AI to the point where people know how to
deploy it and how to make it make us more
productive before it's actually
going to make companies more money.
So, you know, I think there's
multiple legs to this trade.
And right now there's,
if anything, the people that would have lost their jobs.
And now looking at AI and how to use it
in the same companies and put it into products,
but they haven't lost their jobs completely.
Yeah. And I wonder if it, um,
makes it harder to forecast
in terms of what kind of jobs.
Oh, totally.
Because the whole thing is we get the efficiencies,
we get the use cases and so forth.
What is the ROI? How do we benchmark that?
How do we value the data?
It's pretty arbitrary at this point.
And we can as humans, we can only keep up so
fast with acclimating to this kind of technology.
Which jobs are actually AI exposed?
I mean, I've seen so many different charts
where the category at the top is
different and really different than
a category at the top of the next
chart or the chart after that.
And so really, we just don't know
how many jobs and people talk about augmenting jobs.
So you could have AI make our job a lot less boring,
a lot more interesting, and make us more productive.
Or you could replace us with
virtual people sitting at a desk like we don't know yet.
Or maybe we're lucky and we're actually
not exposed to AI doing this,
so no one knows.
And it's going to be interesting to see
how it really does play out,
what consumers want to buy
and what they're willing to let AI do for them.
Yeah, I mean, Steve White, I think the market and
investors have to exercise some patience here.
Well, and I'm going to go back to
something that Steve said early on.
This is the way we've been describing AI.
This this to this point is
how long will investors be, uh,
willing to invest in the,
in the enthusiasm for AI
versus the need for actual returns?
But I think the other part of this,
we've all read the recent report that came out that
indicated to Phil's point what could be at risk.
And, uh, you know,
I've vacillated between being
really excited about AI as a tool and,
and being absolutely terrified of it replacing me.
Uh, but I think as we, as we move forward.
Jill. Uh, in the end,
companies are in the business to make
money and it's just going to be,
uh, I think every company needs to be
thinking about how they're utilizing AI.
I thought it was very interesting.
Uh, when Jack Dorsey came out and said they were going
to cut 40% of their employees at block.
Now that hasn't been a great performing stock.
There probably was some short covering,
but that stock was up 25%.
I think on the day that they made that announcement.
I openly wondered with some of my internal people,
does that green light companies now
to make those kinds of decisions?
As Steve pointed out earlier,
companies were being were being rewarded for
making these huge AI investments.
That's kind of slowed down a little bit.
Are we moving to a new era
where it's going to be companies that are
that this is how they're
signaling that they're forward thinking?
Jill. This is how they're
signaling that they're on the front edge of trying to
make AI a better
part of their business plan and improve their margins,
improve their profitability, whether
that's actually going to be able to occur.
I think Phil is exactly right.
It's hard to see that at the moment, but, um,
signaling can be an important part of what
happens to your stock price in the short run.
It's a double edged sword though.
If you cut employee headcount
and your stock goes up when you cut employee headcount.
There's less spending going into the economy.
Well, that's that's the micro versus the macro, right?
I mean, you know that at
the micro level it might make sense.
And I do think at some level,
um, you know, and I'll let Phil speak more to this,
but my gut is telling me in
a couple of conversations I've had with,
with other economists have been
that a lot of
the weakness in labor that we're seeing now.
Yes, AI is part of it,
but it's also to some extent,
the aftermath of the labor hoarding that
went on during during the Covid era.
And at this point, maybe, you know,
is in the case of square,
and I don't want to pick on that company because I don't
know enough about their business particularly.
But I've heard people allege that, you know,
they were hoarding labor, they've been underperforming.
So now they're going to jettison
everybody and not everybody,
but they're going to jettison a large
amount of them and say,
you know, say it's because of AI efficiency.
So we don't really know.
And in many cases, this is, you know,
going back to the the ROI, the ROI,
the ROI, You know where
the micro is different than
the macro you were talking about from the macro level?
Phil. At the micro level,
you know, where he was saying that,
that these are very fluid technologies.
Again, I want I want to use the analogy of in 1998,
if we were all investing the way,
the way that the trends were going and the internet,
we would be, we'd be, you know,
dialing up on AOL right now to, to log,
you know, you know, and
checking and checking, searching with yahoo.
And, you know, you also had
all this spending going on with,
you know, the global crossings of
the world and all the people.
And again, the data center build out to
me is very analogous to, um,
the, you know, the hardwire build up the,
the bandwidth buildup that went on then.
And those were illustrious companies
like Global Crossing, Northern Telecom,
Lucent, um, Worldcom, Enron,
you know, should I go on?
Um, so yeah, so,
so the point being we don't know,
does it fill you?
Sorry, you put this on the tee for me?
I'm just. I'm just hitting it here.
So from a on a on a macro level,
if we don't know on a micro level,
we have to be concerned as well.
That doesn't, that doesn't mean all the bets
that the market's making are wrong.
But you know, remember in 1998,
Mark Zuckerberg was probably still in high school,
if not if not starting college.
And, and the guys at Google were just,
you know, putting their putting their ideas together.
Neither of these companies really
existed yet they're the ones who dominated.
We don't know who's going to dominate AI.
I saw a great chart that looks at all of
the different industries and
employment in the industries,
and even in the industries that were affected
by technology and innovation,
they still had more employees.
And then there was a bunch of new industries
that layered on top.
So I mean, historically, even with innovation,
humans find new places to do
work and we create jobs as well.
I mean, business cycles and failures do happen.
It feels as if over the past decade and a half,
we haven't been allowed to fail to a certain extent.
But you know, to both of your points,
these are how businesses get
borne out of learning from those mistakes,
what worked, what didn't work, and where investors are
willing to put capital towards.
And what are the new products that we can
make with AI that we can't make right now?
That's going to be really interesting.
I mean, your point about Google and we
talked about Netflix last time I was here,
like it didn't exist in the tech bubble.
It's only because of
the internet that you can have Netflix.
Well, it's because we have the show.
So thank you for the internet, Chris.
It's interesting though. Where else
would you go though to put your money to work?
Right? So again, the main point where
people are putting investment
into is the broadening of the market.
They're putting it into small and
mid-cap names right now,
pulling back a little bit from the crowded trades
that we've seen with the mag seven,
though they are acting better as of recently.
What you're seeing is again, the defensive names,
but companies that are clear about
their cash flow have a clear path to profitability,
are seeing investments into the stock,
their more conservative names.
You know, you're talking about
staples that pay a nice dividend.
Others right now they're parking some of
that money because they're
unsure of where it's going to go,
Really, where we're going to go is still an uncertainty.
The IPO market is strong right now,
even though we've got a bit of a pause
on right now for the obvious reasons.
We've had a fairly amount of good names
p e starting to let some of those companies come out.
So there is a risk on appetite somewhat,
but it depends on the company.
If the company has a clear path to profitability,
like with an investment with a stock that's been
out or a company that's been public for a long time,
they're going to find investment.
If it's uncertainty, they're going to sit and wait.
I mean, you're still getting close to 4% on the ten year.
That's not so bad either, right.
So people have options.
But the uncertainty about what's going on
globally headline and economically,
especially with inflation picking up a little bit more.
And then with the fed changeover coming up in May,
you know it's still a little bit up in the air.
But the markets are still acting well.
They're holding their own well.
I mean interest rate risk.
Could be a big part of the equation as well.
I think earnings though
companies across all the sectors of
the S&P 500 across
all the market cap ranges even around the world,
companies are doing really well
compared to 2 or 3 years ago.
So I think that's helping support the market because
the actual fundamentals coming
out of the companies is pretty strong.
Let me ask a question to the group,
if you don't mind me taking over for a second.
When was the last time anybody talked about rate cuts?
That was just what I was alluding to. There's so.
Much.
You're drinking from a fire hose when
you're thinking about all the,
uh, you know, the worries that this market is.
But rate cut probabilities have have fallen.
One.
Now. Well, no, it's one and change.
But the first rate cut we'd gotten as we'd
gotten as far as pricing went in for June, that was that.
That was only about like a three day period or so.
But we're now beyond
July for the first rate cut, and we're about one.
And as we're taping this sort of about 60%,
70% for a second rate cut,
whereas we were, you know,
definitely, you know, definitely,
if not June definitely won by July,
definitely to by December,
if not a 30 or 40% chance of a second cut.
Market hasn't really reacted to that and yet,
you know, but so the narrative,
I will say investors are incredibly creative.
To your point, Chris, not only about rotation,
but changing the narrative to whatever fits.
It's now to Phil's point about earnings in the economy.
Rates have come down.
I think that's you know, a year ago we were
talking about rates needed to come down.
They have all come down. It's a question
of where is neutral.
And you look at Canada and you look at Europe.
And they're basically at the point now where they
probably don't want to have to put
rates down because that's recession.
They might be going up for the next,
uh, you know, sort of rate change.
We probably do need a little bit more of a cut to get to
our neutral rate, but not much.
So I think that's why, you know,
even if we do get 1 or 2 more cuts,
that's going to be it.
And so we're pretty close to back to normal.
So Steve, why is the market distracted from other things.
I think feels exactly right.
Look, we're just not that far away from
neutral and I don't know how much,
you know, what's another 25 or
50 basis points going to do?
What what would upset the market
is if we would have to start
thinking about the potential
for the fed to raise interest rates?
I don't think we're close to that now,
but I don't think anybody's really looking for the fed to
be the stimulus that's going to
drive the growth going forward.
Uh, companies are doing are doing well.
And there are, uh, you know,
earnings expectations are there. They've broadened.
I think the biggest thing that,
that I'm taking away from the market and
just looking at how it is behaving,
even in the short run as
all of this stuff is happening, uh,
there's rotation in the market,
but nobody's pulling money out of the market.
It's still there. They want to be there.
There's this idea that, uh,
they can make shifts within the market,
but they're not going to, they don't want to be out of
the market for any period of time.
And in the end, uh,
for all the concern,
if there is that, uh,
of what the fed may do,
there is still a lot of liquidity out there.
There's plenty of liquidity.
You know, we haven't talked about potential tremors in
the private credit world and
where that what that might do.
But if we just shift that
over to the public credit markets,
they haven't shown the type of stress
there that would lead me to believe that
that there's enough at
this point that there's enough there
for us to be concerned about that
from a broad economic standpoint.
Yeah.
I mean, that's what happens when you allow the market in
the business cycle to recalibrate naturally.
Absolutely. That's you know,
that's one of the things I do say, even,
even after my point about rate cuts is you should
always be rooting for a stronger economy
because that does bring earnings.
That does it brings
all the good things happen from a strong economy.
You have people working, you have money being spent.
You have investments being made.
I do get a little concerned about
private credit because it is opaque and I do.
And over history,
every new asset class gets a real world test.
And it's not clear to me that
private credit has finished.
It's finished the exam period yet.
But you know, but I'm
not I'm not knowledgeable enough about
the asset class to just sort of have it
as other than sort of a background risk at this point.
Because because, you know,
you got a lot of smart people
allocating a lot of money, but it is.
It is opaque and therefore difficult to reckon with.
If there is a bit of a hiccup.
Especially when you have so many products that have been
designed around it as well.
Right. I mean, if there's demand fill,
the products will come.
Yeah. The problem with
private credit and private equity is you're
by definition investing in long duration assets.
And so you can't afford to have
short duration liabilities like deposits.
It's one of the arguments why
private credit makes sense to do in a hedge fund,
because the investors are in it for a longer term
rather than us with deposit money and
our wages and checks going in and out,
where the banks have a much higher risk of
their deposits floating quickly.
But the private credit people
are asking for some money back.
And it's it's problematic because you can't
really sell some of these assets that quickly.
All right. I appreciate everyone's insight.
Thanks for joining us on trade talks.
I'm Joe Malandrino, global markets reporter at Nasdaq.