Podcast Summary
Market performance, BMW features: The BMW 7 Series reflects cultural significance of number seven with innovative features, while the market's unexpected strong performance, defying initial expectations, causes anxiety for some investors, but historical trends suggest continued growth for the S&P 500.
The BMW 7 Series embodies the cultural significance of the number seven, offering innovative features from automatic doors to a 31-inch theater screen in the back seat. Meanwhile, in the financial world, the market's performance over the past few years has defied initial expectations, with the S&P 500 reaching new record highs despite rising interest rates. This unexpected trend has caused some anxiety among investors, particularly those who manage active funds and are concerned about the market's durability beyond the performance of a few large tech stocks. Tom Lee, co-founder and head of research at Funstrat Global Advisors and FS Insight, is one of the few who predicted this market trend and continues to expect strong performance. Despite some nervousness in the market, the historical trend of a positive June following a drawdown in April suggests continued growth for the S&P 500.
Market Themes, Debt Service Ratio: Marko Kolanovic, JP Morgan's Chief Equity Strategist, uses historical trends, cross-market signals, monetary policy, and thematic drivers like millennials, labor shortages, energy security, and cybersecurity to inform his analysis. Consumers have low debt service ratios, indicating a healthy economy with good earnings growth and a balanced labor market.
Marko Kolanovic, JP Morgan's Chief Equity Strategist, uses an evidence-based, research-driven approach to making educated guesses about the stock market. He relies on historical trends, cross-market signals, monetary policy, and thematic drivers to inform his analysis. Thematic drivers, such as millennials, global labor shortages, energy security, and cybersecurity, have been key factors in his work and have led to the outperformance of JP Morgan's thematic core stock portfolio since 2019. While these themes are promising, Kolanovic believes that they are playing out within a healthy economy, with good earnings growth and a balanced labor market. Consumers, he argues, are not heavily leveraged, and the debt service ratio is a key indicator of this. Kolanovic has had a long career in finance, starting at Kidder Peabody in the early 90s and covering various sectors, including wireless and bankrupt stocks, before becoming JP Morgan's Chief Equity Strategist in 2007.
Tech Boom Comparison with Late 90s/Early 2000s: Despite some similarities, the ongoing AI boom and the late 90s/early 2000s tech boom have significant differences, including concentration of production in a few key companies, US technology export role, and interest rate impact on stock valuation. Tech sector's share of global stock market is expected to grow to 40-50%.
The ongoing AI boom and the internet boom of the late 1990s and early 2000s share some similarities, particularly in terms of rapid growth and underestimation by Wall Street. However, there are also significant differences, such as the concentration of technology production in a few key companies and the role of the US as a primary technology exporter. Additionally, despite a higher interest rate environment, tech stocks may still see growth due to the replacement of labor costs with capital investments. The relationship between interest rates and stock valuation is not linear, and historically, between 4% and 7%, there has been a positive correlation. This means that higher interest rates can actually lead to rising PE ratios for unlevered companies. Overall, the tech sector is expected to make up a larger share of the global stock market in the future, potentially reaching 40-50%, up from the current 18%.
Monetary policy and investor sentiment: Monetary policy easing or increased conviction could lead to significant breadth expansion later in 2022, but the durability of consumer strength and historically low inflation rates is debated. Understanding fundamentals and building a base case for future growth is crucial.
The market performance in 2022 has been uneven, with many sectors underperforming, and the overall market is experiencing a lack of investment due to high cash reserves and decreased margin debt. Tom Lee, an equity strategist, believes that if monetary policy eases or investors become more convinced of it, there could be significant breadth expansion later in the year. Despite the strong consumer and historically low inflation rates, there is debate over the durability of these trends. The median inflation rate is actually below the long-term average when considering all components except for housing and auto insurance. Lee's target for the S&P 500 in 2024 is 5,800, but the question remains whether there will be a pullback before reaching that level. While price targets are important to clients, Lee emphasizes the importance of understanding the underlying fundamentals and building a base case for future growth. He believes that in a normalized world, the S&P 500 could reach 15,000 by the end of the decade.
Technology hype cycles: During tech hype cycles, be cautious of investor demands for high price targets, analyst adjustments to eliminate risk, excessive investment banking activity, and high price-to-earnings ratios as potential bear signals. Hedge funds targeting specific themes might signal a trend but not a late-cycle signal.
During periods of technological hype and rapid growth, such as the late 1990s tech boom or the current AI trend, it's essential to be cautious and look for warning signs. These may include investors demanding higher price targets, analysts adjusting discount rates to eliminate risk, and excessive investment banking activity. The emergence of hedge funds targeting specific themes, like AI, might signal the beginning of a trend but should not be considered late-cycle signals. Outside of technology stocks, high price-to-earnings ratios and bearish sentiment among investors can serve as potential bear signals. While it's impossible to predict market movements with certainty, staying informed and vigilant can help investors navigate volatile markets.
Bitcoin sentiment: AAII sentiment indicator is valuable despite low response rates, Bitcoin's price is driven by network activity and adoption, and the speaker predicts a bullish price of $15,000 by 2030
While sentiment indicators can be unreliable due to low response rates, they can still be useful in extreme cases. For instance, the AAII sentiment indicator is considered valuable. Companies like the one being discussed prioritize direct communication with clients to gauge sentiment in real-time. As for Bitcoin, its price is primarily driven by the number of active wallets and activity per wallet. Its adoption and network activity are key factors influencing its future price levels, which could potentially reach into the millions in the long term. The opening of new wallets is driven by various factors, including price and innovation around the cryptocurrency. The history of currencies could provide insights into Bitcoin's potential growth, as more widespread adoption leads to further innovation and increased use cases. The speaker is confident in Bitcoin's future growth and has made a bullish call for a price of $15,000 by 2030, which would require significant annual price appreciation and earnings growth. The speaker also believes that businesses, particularly large corporations, have proven to be more resilient than expected and deserve higher valuations.
Financial Crisis Impact: Financial crisis of 2008 continues to shape markets, recency bias in investing is a concern, historical context matters, and valuations and interest rates are interconnected.
The financial crisis of 2008 may feel like ancient history for some, but its impact on markets continues to shape the present day. Tom Lee, a seasoned financial analyst, highlighted this recency bias in investing and the lack of institutional knowledge about past crises among younger fund managers. Lee also emphasized the importance of considering historical context when evaluating stocks and markets, rather than being swayed by recent events or biases. Additionally, Lee discussed his approach to setting price targets, which differentiates him from other equity strategists. Another key point was the connection between valuations and interest rates, with companies that have strong cash positions potentially benefiting from higher rates. Despite the hype around AI and tech companies, the boom in initial public offerings (IPOs) in this sector has yet to materialize in the same way as previous market booms. Overall, the conversation underscored the importance of historical context and objective analysis in making informed investment decisions.
Bloomberg Surveillance: Bloomberg Surveillance is a financial news podcast with influential guests discussing market trends and investment strategies, available for free for Bloomberg subscribers on Apple Podcasts and YouTube, with live chat engagement option during broadcast.
Bloomberg's Surveillance is your go-to destination for the latest news and insights on global financial markets. The show, which airs weekday mornings from 7 to 10 a.m. Eastern on Apple Podcasts and YouTube, features influential voices discussing the most current market trends and investment strategies. Notable guests like Tom Lee have provided price target discussions. If you're a Bloomberg subscriber, you can listen to all episodes for free by connecting your account with Apple Podcasts. Don't forget to leave a positive review if you enjoy the show. Join the live chat during the broadcast to engage with other listeners and make Bloomberg Surveillance a central part of your morning routine. To tune in, visit the Bloomberg Podcast page on YouTube and click on the live feed.