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- [00:00]
A
We are sitting in one of the craziest market cycles history has ever seen. And that's why I'm sitting down with Steve Sosnick. He's the chief strategist at Interactive Brokers. He's the perfect guy to explain what's happening with earnings, the Iran conflict, the sectors that are winning and losing, what's happening with the next leg of the bull market, why he thinks the stock market could fall before the end of the year and much more. I learned a ton from Steve in this conversation. I think you will too. Steve, I want to start with this ridiculous rally we've seen. We've come all the way back from a pretty low low I would say. What do you make of all this? We've got all the indexes right near record highs.
- [00:41]
B
Well, there's a few things to unpack. First of all, I think it's not a coincidence that it happened almost a year to the day after the tariff tantrum from last year. And I think that weighed very heavily in investors minds. When I think about the market reaction to the closure of the Strait of Hormuz, this was always among risk managers and investors blackest of black swans that a closure of the Straits would lead to call it $150 oil and a 10% correction pretty much instantaneously in the market and then some time to unravel. That's not what transpired. Yeah, we got dated Brent up to I think 144. So maybe you could check that box. S and P 500 got down I think like 9%, never even 10%. We saw steady dip buying the entire way and at the slightest whiff, not even of a resolution to the conflict, but call it a stalemate to the conflict, people are pretty much assuming it's done. And you know, we went from having a very strong inverse correlation between stocks and oil prices to essentially no correlation between stocks and oil prices over the course of the call it March to April. And so I think people have decided that this like the tariff situation was resolved relatively quickly despite the fact that there's no obvious evidence as we're taping this that it's been resolved quickly. As a matter of fact there's an escalation of hostilities. Stocks originally shrugged it off today. I mean as we're sitting down now, they've sold off a bit. But this is, you know, there's the general perception that the worst is behind us as far as the Persian Gulf and it's not clear that it is.
- [02:26]
A
I wonder if all of this could be Chalked up to, hey, buying the dip's been a great strategy for years. You have. Both the Fed and President Trump have effectively outlawed prolonged declines in the market. Is it that simple? What's going on here?
- [02:43]
B
You've captured a lot of it. I mean, when I talk to people, the questions I get are almost generational. So older investors, which I consider myself one who remember the Internet bubble, who remember the global financial crisis, who remember other hiccups that didn't necessarily go away in a week or two, basically their basic question is, what's going on? It usually involves what the. Something like that, But I'll keep it G rated. But it's usually some question of that nature. They're just sort of, why didn't we sell off? And what is going on here? I think generationally, we've created a new class of investors who don't remember a prolonged cycle. And I'm not saying that as a negative. I'm just saying that as it's basically within their memory. There's the COVID There's the COVID bear market, which was ended relatively quickly because of massive monetary and fiscal stimulus. There was indeed something of a bear market in 2022, but that passed relatively quickly. It was Basically, call it 10 months in length. And so if you've come to the market since 2009, you've not experienced some. You really haven't experienced a crisis or a prolonged bear market. And again, I keep coming back to last year, but that lesson was really reinforced when the President took a unilateral action and the markets kind of freaked out. And then that turned out to be an overreaction. In this case, the President took a unilateral action. May not be quite. You can't unwind this with a stroke of a pen. It's a bit different. But the lesson that was learned is reinforced. Every dip is a buying opportunity. Every rally should be chased. I'm not advocating this necessarily, but this is the mindset. And also, remember fomo. It's easy to say FOMO is silly, but it's not if you're an institutional investor.
- [04:49]
A
Wait, explain that a bit more. What do you mean?
- [04:51]
B
Here's the problem. If you're upset that you missed the rally and your friend is telling you how much money he made, it kind of sucks, but it doesn't really affect your life. If I'm. If I'm managing a large portfolio and I sold and I sold at the bottom and have not bought back in, I am vastly underperforming my benchmark and my peers. And that is professionally very difficult. Right. You know, how do your bonus, your bonus and potentially even your job is at risk if you systematically underperform. A lot of institutional managers got caught on the wrong side of the April 25 move because they'd sold out. And I think to a certain extent, many were more reluctant to sell out this time. And when things turned around, they were a bit more eager to chase. I mean, we're talking about stuff that hasn't happened in. I've been writing a bunch of things and so many times I've had to use the word unprecedented or barely precedented. So last week we completed our third straight week of 3% plus gains in the S&P 500. Since 1980. That's happened twice. One was 1982, which was when Paul Volcker, after basically goosing interest rates, gunning interest rates for the period of three to four years to fight the oil shock, recession, inflation, among other things, he basically there was basically the Fed signaled and it wasn't as clear as it is now. They don't. The Fed is more. Amor was more amorphous in its messaging, but the market understood that they were done. And so that was a big change. They didn't necessarily go from complete tightness to complete easing, but they basically said this cycle that we've been through is over. And it was also Reaganomics. So there was some fiscal stimulus at the time as well from the taxes. The other example was May June 2020, which was not the absolute low of the COVID bear market, but we were still in it to some extent. And this is when quantitative easing and stimulus checks were. I forget if they were getting talked about or exactly priced in. So both of those times were huge turnarounds. This was from what, maybe a 9% decline, not even a correction. And we've had several of the. There have been more instances in the NASDAQ. Almost all of the ones in NDX occurred between 1998 and 2000, a lot of them in late 1999, which was the peak of the bubble largely because of Y2K stimulus. And then the last one for a while was March of 2000, which was literally the end. So I'm not saying that this means this means the end. I do say that there is a finite but low probability that what we're seeing now is a blow off like we saw then. But more likely this is just sort of buy and chase. But you're talking about stuff that hasn't been seen. Sox, as I looked at it today, I think we're still up, but this would be 17 straight days that SOX is up.
- [08:08]
A
Semiconductor index.
- [08:09]
B
Semiconductor index. I couldn't find an example of that. The longest example I could find was nine days and we're up 42% at least when I looked around noon today. Granted, Texas Instruments earnings were really good, but can you say that this is sustainable? It's really difficult to do that, especially because we're not coming off that. We're not coming off a big base. We're not seeing monetary stimulus, we're not seeing fiscal stimulus. Yes, some of the tax. Some of the tax stuff is kicking in, but there hasn't been a big change to monetary or fiscal policy that would. That would indicate that this is the start of something completely new, rather than sort of a frenzied continuation of what we had.
- [08:56]
A
Well, I think that point right there is why this is so unusual and maybe arguably bullish, I would say, and I think you would disagree. But if you're getting this much momentum and this much exuberance in the market and. And we have no fiscal or monetary stimulus, just imagine when those things start to kick in, if we start to see it within the next year or so. Is that something that you're anticipating or are you expecting a pullback before that? What's going on?
- [09:25]
B
Monetary stimulus. The markets priced it out okay, by the way. This has occurred with two. Two rate cuts being priced out of the market, not into it. So monetary. The perception of monetary policy is moving in the opposite direction. Fiscal policy. We're starting to hear some numbers come out. Texas Instruments, I keep harping on them, but they were up 20% when I last looked, give or take. They credited some of the tax savings to being their result. But we're not getting any more that stimulus is in. We're not getting more stuff, especially with a Congress, Congress that can't agree basically on whether the sky is blue or not, let alone major stuff, especially with the likelihood of the House changing parties, if not the Senate changing parties in the midterms. So fiscal stimulus, I don't see it. Now, I'll argue that fiscal stimulus has gone in reverse because if energy prices remain this high, we've just all gotten a tax increase. So that's why I think the momentum. It's very difficult, if not impossible, to fight a momentum search like this, and I wouldn't recommend doing it. But I do have to wonder if whether that's worth adding new money to at this point. I think the risk reward is very tricky.
- [10:46]
A
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- [12:24]
B
The Fed put is not about stocks. Understand that Investors, I think, get this completely wrong. The Fed put is a systemic put. Yes, the Fed put was invented in the crash of 87. It wasn't because stocks fell, it was the second order effects of stocks falling. Various specialist firms were underwater and there couldn't meet their clearing obligations, which put the clearinghouse and the clearing banks at risk. Therefore, the Greenspan Fed realized they needed to do something. I actually was part of the Fed put ending, literally. So I was new on the desk at Salomon Brothers. The crash itself was bad. The next morning was worse. People don't remember this, people don't know it. People don't think about this. The Tuesday, it happened on Monday, the Tuesday was worse. And we got in in the morning and basically the morning meeting was the specialist system is broke. They can't help you out. They have no money left. And the selling continued the next morning and there were literally no bids. Nasdaq in those days was a call around market when you see was ever at the top of the screen. My job was basically making sure we were not at the top of the screen going through our list and taking us down. I was trading both New York and NASDAQ stocks which was very peculiar. Long story about that. But that's, that's a, that's a podcast for another time why people didn't do one. White people never did one and the other at the same time if you were on a desk. But anyway and so the system froze the. There was. It was essentially limit down because nothing was trading. What happened then was some, you know, some a lot of smoke filled room. You could smoke in those days. So smoke filled room just off the trading floor. And you'd hear back and forth like Stanley, Stanley shopcorn around the desk. Stanley pick up Mnuchin. Mnuchin was the treasury tax Secretary's father who ran the desk at Goldman. And there was a couple of other names thrown around. I think it was Anson Beard at Morgan Stanley. And you'd hear this and they'd have to come out of the office and take the phone call and call in the office and from what I. And basically at one point they all come out puffing smoke. And I want all you. And I'll leave the next set of words aside, I want all you to call down to the floor and find out what it would take to open any stocks that are not trading because they were all offered only so there wasn't a price. Find out what it would take to open them. I don't care what you have to do. The same message went out I know through Goldman Sachs and Morgan Stanley. It might have gone through others. And basically they were being backstopped by the. From what I learned much later was they're being backstopped by the Fed because they needed to stop the bleeding. But it was not because the market was going down. It was because the market going down was creating a banking crisis. And when you think back to all the other times that the Fed put has been exercised, yes, stocks are going down, but it's not because stocks are going down. It's because there are systemic problems elsewhere that the Fed has to address involving I would call it the third leg of its dual mandate, which is the safety and soundness of the banking system and the credit markets. So Covid, yeah, the stock market got throttled in March by the way. The stock market spent all of February not noticing that there was a global pandemic because it was in another one of these rally modes. But they cut rates to zero because they knew that economic activity was essentially falling off a cliff. They had to do something. Think back to the Silicon Valley bank crisis and things like that. What's the keyword there? Bank crisis? It was affecting the safety and soundness of the banking system. So every time you have one of these Fed puts, you're not getting a Fed put if the stock market goes down 8%. The last bear market we had was 2022, which not coincidentally was a midterm election year. The Fed was raising rates. They weren't coming in to bail out the stock market because it was down 20%. Yeah, it rallied when the Fed stopped raising rates, but that wasn't the Fed coming to the rescue. The administration, that's a different story. I think their messaging is thoroughly designed. I think they learned a very painful lesson early April, right in the aftermath of Liberation Day, when they basically seemed to dismiss the market concerns, which is what freaked markets out because they were expecting something better from the administration. They didn't get it. And so I think this time the messaging, I mean, at this point, do we get a daily. Some of the timing of the messages and sort of the daily reminder that peace talks are just around the corner. Despite no peace talks around the corner, I think is specifically designed to prop up the market. And without results, that ultimately does not work. But you're right. But in the short term, you're right. It's almost impossible to fight when you have a concerted effort from the White House.
- [17:29]
A
Steve, this is why we bring you on the show. You got a lot of inside baseball here. I want to press you a bit. You have a 6,500 year end price target for the S&P 500. And as we're sitting here, that's about 8 or 9% lower than where we're trading today. Make your case why you think stocks are going down.
- [17:47]
B
Well, I mentioned the midterm election year. You're almost always bound to get something. We've had two bear markets in the last 10 years. 2022, 2018. Coincidence? I think not. So that's part one. I do think, interestingly, the Trump put, as it were, the strike price was 6,500. So I do have to wonder whether that part is. That's the part that kind of spooks me a little bit. But you know what? I made the call the beginning of the year. It's not. I've never actually had made A price target I was never allowed. So I just figured, you know what, I'm going to stick with it. It's a talking point. I'm not as I certainly, I've resisted the urge to spike the ball at the end of the first quarter when that was in play. But I do think that again, I think we. The exuberance now is on the good side. It's based on earnings. But one of the problems you get when earnings expectations get too good is they become too difficult to. The bar is set too high. You're asking a high jumper to get over a bar that it might not be able to clear. Even if they're able to clear a very high bar, they might not be able to clear the bar that's just been set for them. And I do think that the longer this situation in the Gulf goes on, the worse the global economy gets. And if it does, it puts the Fed in a bind because I know Powell dismissed stagflation and said we're nowhere near 70 stagflation. He's right. I'm not gonna dispute him on that. But if you have a situation where the economy is growing at single low, what was 0.5% in the last revision and not expected to grow very quickly, and you have price press, that's a tough road for a market to hoe. And the longer this goes on, the harder it is to unwind. It was one thing when you said, okay, when the market basically told the president, we thought those tariffs were silly and he wasn't going to back down from tariffs overall, but they reformed them and made them more sensible. You know, this situation, you're dealing with a dug in theocracy on the other side. It's not necessarily so quick to end. And so I still, I remain on the cautious side. So I'm not going to take that down. I just, I've always disliked it when people move their targets too much. So I said at the end of December, I'll see if it works out by the end of next December.
- [20:28]
A
Man of integrity, I like it. I, I also, I see so many strategists, they change their targets before we even get to the mid mid term or midway point of the year. On the earnings point, a lot of companies are already beating earnings and we're at this point where if a company doesn't beat and raise expectations or their outlook, that stock will come down. Is there any realistic scenario where something in the earnings season breaks the current momentum we're in?
- [21:02]
B
Oh, it's quite possible because I Mean, just, just on the way here I got two alerts on my phone. One that Microsoft is giving early retirement to 7,000 people. Another that Meta is laying off 10,000 people. So what's happened is you've fundamentally changed the business nature of the most important companies in the economy. They went from having, I'm going to call it almost a magical balance sheet where they had phenomenal margins, low fixed costs, not a ton of. They were asset light and now they've committed to spend billions, gazillion dollars. Gazillion, yeah. Double digit billions in some cases. Now the beneficiary is somebody like Texas Instruments. The beneficiary has been Sandisk Micron. It turns out the bigger beneficiaries, at least in this part of the cycle, have not even been the highest end chips like Nvidia. It's the worker bees, so to speak. The analog chips, the memory chips, that's okay, but that spending, does it go on indefinitely? I don't know. But I think what, again, I think you get to the situation, you hit upon something very important. First of all, when a company reports, they tell you two things. They tell you what they did last quarter and they tell you what they expect next quarter. Beating EPS is a necessary condition for a rally, but not a sufficient condition for a rally. Okay, so in any given quarter, 75, 80%, it varies, but it's around 75 +% of companies beat their EPS estimates. Is that coincidence? No, not if it, if it happens once in a while, that, that, that's interesting. If it happens every quarter, that's a fact pattern. And what it. So I will assert that CFOs are as, as good at managing their analysts as they are at managing their bottom lines. So let me stipulate that. So if you don't, if you can't do that, which 75%, if you're in that outlier 20, call it 25%, you got a problem right there. So, so that, that's a reason then. But the real key is guidance. So if everybody's beating their numbers by some amount, you know, if you blow it out, that's one thing. If you beat it by a penny or two, well, that's what you're supposed to do anyway. And so you have to show me some. So show me what's happening next. Markets are a discounting mechanism. And so if you can't demonstrate that guidance is, if you can't demonstrate forward guidance that's improving or at least stable, you're going to get whacked. And you're going to get whacked hard. Because, you know, this is what the, this is what the market has come to expect.
- [23:39]
A
Wow. That's. I remain optimistic, but that is definitely a more cautious and I think, very rational way to think about it.
- [23:48]
B
That was not meant bullish or bearish. That was just this.
- [23:50]
A
This is sober, though.
- [23:52]
B
This is what the market is telling you. If, and if you, and if you, if you beat on both, you rally and you deserve the rally. I'm not, I'm not this crabby guy who says nothing works.
- [24:03]
A
Totally.
- [24:03]
B
This is, this is. But I'm saying that this is. So if you beat those metrics, if your business is growing and you can demonstrate growth going forward, by all means, you should be rewarded. If you can't do that, though, the market is going to punish you. And right now, the market is, because we're not cheap right now. The punishment is not mild, necessarily.
- [24:28]
A
It's a great way to think about it. And it's so funny. Every single earnings season, you hear everyone go on tv, all the analysts start talking. Earnings always look good pretty much every quarter, no matter what the cycle is. And that's because of what you're saying. Expectations are set by these CFOs to the point where if you don't beat, you've done something dramatically wrong. So it's an amazing reminder for everyone. It's like earnings are supposed to look good, and frankly, your outlook is supposed to look good as well. I want to ask you about. We have all this momentum in the market right now, but all the investor sentiment surveys continue to be more bearish, and this is slightly different, but similar. The consumer sentiment surveys also are very negative, and yet we're at record highs. What's the disconnect there?
- [25:16]
B
Well, let me take the second part first. I think part of the reason for the terrible consumer sentiment, and I published about this after the last Michigan number, and you could see what's really bothering people is the level of prices. See, the problem is when you hear about this is a very natural reaction is, wait, inflation's going down. But I'm not. My grocery bill isn't going down. It doesn't cost any less for me to do anything that I do. What are you telling me inflation is down for? And that's because in the public mindset, they mistake the fact, I think all too often that inflation refers to the price level, not the change in prices. So even if we're Talking about high 2% inflation right now, which is above the Fed's target But not historically awful. But if you keep piling on 2.5% to 3% price inflation every month, I'm sorry, every year, prices are not going down. So they're sort of incrementally ratcheting higher. And that's giving people a lot of agenda from an investor. But yet stocks have rallied. The numbers for the last couple years have been nowhere even close to where they were in Covid. They're that bad. But stocks have rallied nonetheless. So you could basically say, all right, the consumer's miserable, but the investors aren't. And to a large extent, there's two possible explanations for it. I have not been able to affirmatively do this. I'd need a sociologist to really tell me. But it's either some combination of this is the bright spot in people's lives. My rent may be going up, my mortgage is not getting more affordable, but my stocks are going up, my 401k is doing well, or because you have this K shaped economy. And I will assert that the shape of the K is almost an upside down small kid. The bottom leg of the K is going up, but investors, for better or worse, are the ones at the top
- [27:18]
A
of the K. Yeah, and that's.
- [27:20]
B
So that's the dichotomy.
- [27:22]
A
It's very hard to shake. And I can't project forward any real good ideas on how that changes. As far as that pattern, what do you see, Steve, as the worst case scenario for the rest of the year? As far as what would it take for us to really enter into something like a bear market?
- [27:42]
B
I think you would need some sort of political chaos, which is, and I don't mean like true chaos, I think just sort of upheaval to a certain extent. I think a clear sign that the Senate changes parties might spook a lot of people. I think right now the base case is the House definitely changes. The Senate toss up. And I think it's not necessarily the idea of having a Democratic Congress that would freak people out. It's how the President would react to having a Democratic Congress because it will just be fights and recrimination rather than any basic attempt to govern. And then you're going to. And then it also depends how. If you have a Democratic Congress, are there impeachments? Not necessarily of the President, but of his Cabinet. I mean, chaos. So that's part one. Part two is if the situation in the Gulf does not resolve each day it goes on, it takes probably an extra week to resolve. And so you've destroyed refining capacity in the Gulf, you've basically shut down the passage of 10 to 20% of the world's crude oil. You're in situations where inventories are being run down and it takes four to six weeks for oil tankers to get to some of these places. So you can get some big global economic slowdowns as a result of this. Pardon me. At the same time you have price pressures. That's again stagflation, let's call it stagflation light. But stagflation is really the enemy because you could say stocks to some extent. Stocks can and do act as an inflation hedge to some extent. Let me stipulate that and I think that may be one of the reasons why they acted reasonably well through this crisis was people some acknowledgement of that. So let me state that companies who are not too heavily indebted with strong cash flows and solid earnings can actually be an inflation hedge to some extent. But I think the longer you go on with a truly uncertain global economy, it's very hard. You know, that could be a real drag on stocks. But right now that's not where investors mindsets are.
- [30:06]
A
Real quick, we'll get right back to the interview. Just wanted to pop in and say if you like this content, I write a newsletter every single morning called Opening Bell Daily. I cover macro, the stock market, asset prices, why things are going up, why they're to going going down. And if you want to get that for free, you can sign up at the link in the description. Let's get back to the interview. So between political chaos and prolonged conflict in the Middle East, I don't know if we're too far off from those two variables becoming reality. But let me ask you favorite opportunities in the market right now?
- [30:41]
B
Well, right now I'm sort of skeptical just because of valuation. I, I, you know, I, I actually did think there was a bit of a buying opportunity before and I saw a lot of customers actually of ours buying voo. And I said nothing to because that to me is a tell about investment money, not because VOO is cheaper than spy. So SPY is a very active option trader. VOO is a very, is a cheap way to sort of buy and hold because it doesn't have the same liquidity or same ability to hedge. But you could just sort of buy it and buy it and put it away. I think right now I just can't chase tech up here. I can't do it. Let's see if earnings season proves me wrong. By all means, I'll eat my hat. You know, so well I Don't have it on right now. But yeah, I think right now the better place to hide is Staples. Low beta, high dividends, assuming the company's cash flow carries the dividend, not borrowing. I think, you know, low beta being, I think we're. Because we're so extended, because we're so, again, there's this word unprecedented in terms of the type of moves. I think again, barring an immediate end to hostilities, I think we're in for a bit more of a grind than the market has, has expected. And that's why I would be judicious at trying to find some opportunities in stuff that, you know, I'd look, I'd look to the stuff that really hasn't moved because it's low beta as opposed to stuff that has, that has moved. I really, for example, you know, it's hard to say buy socks up 40%. I regret not pounding the table and saying buy it 40% ago. I didn't and I regret that I did not see, I didn't see this coming. But I defy you to tell me who saw this kind of move coming. You know, they saw positives and to be fair, they were right. But this is a bit much, so I think you got to be a little judicious. It's not a bad place to hide in some short term fixed income either if you really have troubles because at least for now you're earning some real interest on short term fixed. Call it two to five year bonds. That may change and that may not prove such a good thing. So do something that has a bit of liquidity if you're going to do it. Whether that's Treasuries directly, which are liquid, or, or some ETFs that hold shorter term fixed income could be a good hiding spot.
- [33:05]
A
Okay, those are, I would say those calls fit your year end price target. Yeah, more. More cautious and defensive. Steve, where can people find your work online?
- [33:18]
B
Thanks for asking. It's IBKR Campus. It's all free. I try to publish something daily. I don't. Life interferes, you know, travel.
- [33:27]
A
You have a very good daily column. I read it every. Every day.
- [33:30]
B
Thank you. Well, so that. So go to IBKR Campus. We've got all kinds of free resources for investors. Specifically though, you can subscribe daily to our Daily Traders Insight newsletter. Usually my stuff is first or second in there just because of seniority.
- [33:46]
A
Of course. Of course.
- [33:48]
B
So I encourage anyone who hasn't already turned off the podcast to sign up, to check it out, sign up for it, and love to have you reading our stuff.
- [33:59]
A
Fantastic. Steve, we'll do this again very soon. Thanks for coming on.
- [34:02]
B
My pleasure. Phil. Great to see you.