Fidelity’s Quant Boss Reveals Her Top 3 “Desert Island” Stock Market Indicators

Summary

Podcast Summary

---

Overview

Episode Title: Fidelity’s Quant Boss Reveals Her Top 3 “Desert Island” Stock Market Indicators
Podcast: The Compound and Friends
Host(s): Downtown Josh Brown, Michael Batnick
Guest: Denise Chisholm (Director of Quantitative Market Strategy, Fidelity)
Date: October 5, 2025

Theme:
This episode features an in-depth discussion with Denise Chisholm, Fidelity’s Director of Quantitative Market Strategy. The hosts dig into Denise’s approach to market analysis, the importance and interpretation of historical data, investor behavior, the mechanics behind market shocks, and, most memorably, her "desert island" indicators—her three go-to data sets for assessing markets. The conversation is rich with actionable insights on what really matters in stock market forecasting, the dangers of received wisdom and market narratives, and how to maintain perspective during market extremes.

---

Key Discussion Points & Insights

1. The Value of Historical Perspective

• Denise shares that working at a storied firm like Fidelity provides access not just to decades of market data, but also to direct experience from investors who lived through past crises, such as the bear market of the 1970s. This dual lens—data and lived experience—enhances her analytical process.

  • [02:43] “We have people walking in the halls that know exactly what that bear market felt like.” —Denise Chisholm

• The hosts and Denise agree there's a significant difference between statistical hindsight and living through actual market cycles—the data can guide, but the narrative and nuance of the moment still matter.

2. Investor Emotions and Market Extremes

• Denise asserts that bear markets are tougher emotionally for investors than bull markets; poor market timing and panic-selling often erode investor returns.

  • [04:00] “Statistically … retail investors’ biggest problem is that they don't tend to get the returns on average the equity markets deliver because they're too busy selling at bottoms.”—Denise Chisholm

• Stock market “bottoms on bad news,” so those who sell on fear often miss rebounds. “The getting back in is problematic as well.” [04:22]

3. Misreading Macroeconomic Data & Market Narratives

• Denise emphasizes the importance of distinguishing signal from noise: Many widely-cited macro “facts” and narratives (e.g., uncertainty, tariffs) often aren’t supported by the data—or even have the opposite effect.

  • [05:02] “What's the old quote where it's not what you don't know that gets you in trouble, it's what you know for certain that just ain't so. That's the problem. And the more I look at macroeconomic data, the more I see those patterns.”—Denise Chisholm
  • High uncertainty, paradoxically, often coincides with rising markets.

• The hosts bring up the narrative around Trump-era tariffs (expected market outflows and economic pain), and Denise walks through the math, showing that the resulting economic “shock” wasn’t enough to tip the U.S. into recession, especially when offset by falling oil prices. [09:31]

4. CEO Sentiment: More Than a Contrarian Indicator

• Denise unpacks a spike in CEO sentiment following corporate tax cuts, noting that rebounds from recessionary levels are usually bullish—whereas euphoria and “top quartile” confidence can signal late-cycle risk.

  • [12:36] “You want CEO confidence to be bottom quartile and rising … that’s exactly the signal we’re seeing.”

• Multiple expansion typically follows as earnings visibility improves—Wall Street pays up for clarity.

  • [14:04] “The more visible earnings get, the more likely multiples are to go higher with no cap.”

5. Inflation, Tariffs, and the Fed

• Denise views tariffs as demand killers—ultimately more deflationary than inflationary.

  • [16:00] “They act like a tax. Yes, the prices of some goods go up, but unless somebody gives you more money … your marginal propensity to consume … goes down.”

• She highlights that current core CPI (ex-shelter) metrics show inflation is actually at a modest run rate, so Fed easing is not necessarily ill-timed even against strong GDP prints.

6. Investor Behavior Evolution

• The pandemic/correction era saw retail investors acting with uncharacteristic discipline—perhaps because market reactions were so rapid there was “no time to panic,” or because investors have internalized lessons about behavioral pitfalls.
  • [18:19] “It was very unique where retail, I think as a group, didn’t sell in what I would call almost bear market.”
  • Rapid declines more likely lead to swift recoveries, rewarding those who hold on ([19:24]).

7. Structural Changes in Markets

• Josh notes persistent inflows from retirement contributions ($1.5 trillion annually) likely dampen volatility and lift multiples over the long-term, even if realized volatility is unchanged over annual periods. [22:28]

8. Housing and the Next Leg of the Bull Market

• Housing remains depressed and “statistically cheap” relative to the rest of the market. Denise expects lower rates may fuse with low valuations for strong risk/reward setups in interest-rate-sensitive sectors (like homebuilders).
  • [24:34] On homebuilder stocks: “Your upside … if you get this transmission mechanism … it's about 35% … you're talking about a 10 to 1 ratio. … I think there are opportunities in housing.”
  • Housing is a large part of the economy—potentially a critical “leg of the stool” for continued expansion.

9. The Bear Case & What Endures

• It's hard to construct a strong bear narrative: euphoria is absent, credit spreads aren’t alarmingly tight, and median earnings growth remains moderate.

  • [28:43] “On a rolling one year basis since 1962, the S&P goes up 75% of the time. … My going in position any given year is I think I’m a buyer, I need to argue with myself … Why not?”

• True danger comes from unforeseen shocks, not length of expansion cycles per se. “Bull markets and economies don’t die of old age.” [32:08]

10. 2022 Bear Market: The Forgotten Correction

• The 2022 drawdown, though severe and lengthy (multi-year for some tech stocks), is often overlooked; Denise and the hosts discuss inflation above 4.5% as the key trigger, and how quickly such downturns are forgotten in financial media.
  • [33:55] “Inflation above 4.5% and rising is the worst setup for the market historically.”

11. Why the Obsession With Market Tops?

• Denise notes that “there’s always a group obsessed with calling the end,” often missing that markets can stay resilient despite “everything being wrong.”
  • It’s vital to weigh the risk of missing out on compounded market returns versus the fleeting satisfaction of calling a downturn.

---

Denise Chisholm’s “Desert Island” Stock Market Indicators

[44:12 – 47:44]

In the episode’s highlight, Denise is asked what three indicators/data sets she would want if stranded on a desert island and unable to access anything else:

1. Median Earnings Growth

   • Reason: The best indicator of whether corporate America is thriving at the middle, not just at the top. Median earnings are more predictive of job growth and economic momentum than cap-weighted averages dominated by a few giants.
   • [44:21] “To the extent that the median company in corporate America is profitable, then they tend to hire. Payrolls are a lagging indicator, profits are a leading indicator.”

2. Credit Spreads (High Yield vs Risk-Free)

   • Reason: Credit spreads are predictive at extremes—wide spreads signal bottoms (fear), tight spreads may warn of tops (complacency).
   • [45:10] “The tighter the credit spreads have been, the more likely the S&P is to go up over the next year.”

3. Valuation Spreads

   • Reason: The gap between cheap and expensive stocks reflects market fear—when spreads are wide, fear is high and opportunity may be greatest for contrarian investors.
   • [46:22] “You usually have this blowout in spreads … an expression of fear. When investors sell anything they think is risky … if you’re willing to be a contrarian, that’s when you want to step in.”

Denise ranks those in order of importance:

1. Median earnings growth
2. Credit spreads
3. Valuation spreads

---

Notable Quotes & Moments

• [05:02] “It’s not what you don’t know that gets you in trouble, it’s what you know for certain that just ain’t so.”—Denise Chisholm (originating with Mark Twain)
• [14:04] “The more visible earnings are, and earnings are getting more visible … the more likely multiples are to go higher with no cap.”—Denise Chisholm
• [19:24] “There’s a very strong statistical relationship between the speed of the bear market decline and the odds and magnitude the S&P is up on the other side.”—Denise Chisholm
• [28:43] “On a rolling one year basis since 1962, the S&P goes up 75% of the time. … My hurdle is pretty high. What’s that bearish precondition?”—Denise Chisholm
• [32:08] “Bull markets and economies don’t die of old age.”—Michael Batnick

---

Timestamps for Key Segments

• [02:43] — Importance of historical experience and data at Fidelity
• [04:00] — Emotional challenges in bear vs bull markets
• [05:02] — Misleading macroeconomic patterns & the uncertainty paradox
• [09:31] — Denise’s quantitative breakdown of the tariff shock
• [11:38] — Nuance of CEO sentiment and market cycles
• [14:04] — Discussion of multiple expansion and earnings visibility
• [16:00] — Tariffs as deflationary; inflation breakdown
• [19:24] — Speed of market declines and V-shaped recoveries
• [22:28] — Massive retirement flows & structural market changes
• [24:34] — Housing’s role in the economic cycle and the bull market
• [28:43] — What would make Denise bearish?
• [33:55] — 2022 bear market and inflation triggers
• [44:12] — Denise’s top three “desert island” leading indicators

---

Closing Thoughts

Denise’s approach bridges hard data and a deep appreciation for cycles, context, and human behavior. Her three “desert island” indicators—median earnings growth, credit spreads, and valuation spreads—offer a powerful toolkit for investors seeking to cut through narrative noise and ground decisions in historical patterns with predictive value.

Find Denise Chisholm’s work:

• Market Insights Podcast (Fidelity)
• LinkedIn

---

This summary conveys the core ideas, insights, and conversational spirit of the episode, designed for listeners and readers who want the actionable highlights and quotable insights, without needing to hear every minute.

Transcript

[Josh Brown]

This message is brought to you by Fidelity Investments. When timing is everything, you need powerful tools and research that can meet you in the moment. With the all new Fidelity Trader plus platform, your charts and preferences show up consistently synced up across all your devices, so you can act fast whenever and wherever you're trading.

[Michael Batnick]

You can save an order on your desktop at home, get a mobile alert when you're at work, and complete the trade in the Fidelity app without starting over. And with the downloadable Fidelity Trader plus desktop platform, you have more control with multi monitor views, enhanced tools and customization options, and integrated screen sharing with Fidelity Trading Specialists.

[Josh Brown]

Try Fidelity's most powerful trading platform [e-mail] TraderPlus Fidelity Investments and the Compound are not affiliated. Views, opinions, products, services and strategies discussed are not endorsed or promoted by Fidelity Investments.

[Michael Batnick]

Fidelity Brokerage Services, llc Member NYSE SIPC.

[Denise Chisholm]

Welcome to the Compound and Friends. All opinions expressed by Josh Brown, Michael Batnick and their castmates are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

[Michael Batnick]

Ladies and gentlemen, welcome to a special edition of the Compound and Friends. We are live from the intergalactic headquarters of Fidelity Investments, one of the most storied, respected, highly regarded, largest institutions in the investment business. We are so lucky. Today we're joined by a new guest. Denise Chisholm is the Director of Quantitative Market Strategy in the Quantitative Research and Investments division at Fidelity. Denise, welcome.

[Denise Chisholm]

Thanks so much for having me. It's great to be here.

[Michael Batnick]

Okay, I have more to your bio. Can I do the rest?

[Denise Chisholm]

Sure, you can do whatever you'd like.

[Michael Batnick]

Denise is a data geek at heart. I didn't write that. Who called you that? You. You didn't call.

[Denise Chisholm]

I didn't call myself that, yeah.

[Michael Batnick]

She has spent her career in roles including equity analyst, portfolio manager, sector strateg, and now quantitative market strategist. So you've worn a lot of hats. And you told me that you've been here since 1999, more or less. That's a pretty long stretch of time. And I'm sure you've seen your share of epic markets, bear markets, bull markets, all sorts of sentiment shifts just from the top down. What is it like to do the role that you do at a firm this large and important?

[Denise Chisholm]

I mean, it's great because you have perspective from all of our diversified portfolio managers that come at it. In different ways. I mean we have so many seasoned invest who have been through so many cycles and some people remember the nuances and some people remember the data. And it's interesting from my vantage point to look back at the data historically, now within the rearview mirror, but to talk to people who actually lived through it at the time, even people that you know, we'll talk about the bear market of the 70s. We have people walking in the halls that know exactly what that bear market felt like.

[Michael Batnick]

That's such a great point. Michael and I are market historians, amateur market historians, but we do read and listen to everything we can get our hands on. Of course we look at data, we look at charts, but that is not the same as talking to people who were professional investors during those moments and then maybe combining the two things.

[Denise Chisholm]

That's exactly right. I mean I think it provides like you get the perspective and the data. I think the data shows you when to not let emotion take over. But it's important to understand the nuances. If you lived through something, then you understand the nuances and the data that you should look at that perhaps you wouldn't have otherwise.

[Michael Batnick]

What's harder for people living through a bull market or living through a bear market? And I don't mean harder financially, I mean when you talk about controlling your emotions.

[Denise Chisholm]

Oh, I would say bear market. I mean, I think statistically when you look back, what's the retail investors biggest problem is that they don't tend to get the returns that are on average the equity markets deliver because they are too busy selling at bottoms.

[Josh Brown]

I think it's part of the same thing because it's bad behavior in the bull market.

[Denise Chisholm]

That's right.

[Josh Brown]

That makes them do the opposite in a bear market.

[Denise Chisholm]

That's fair. I mean I always say like stocks bottom on bad news. So if you use bad news to get out, when are you going to get back in? So the getting back in is problematic as well.

[Josh Brown]

So we, we were talking before we started recording about historical data because that's like your whole jam and you look at a lot of it, but a lot of the nature of the data changes over time. First of all, we didn't have the data so in like the data from the 60s, it wasn't available in the 60s. And so just having knowledge that the data exists changes the meaning of the data. And then of course, Companies from the 50s and 60s and 70s look nothing like the companies today. So when you're looking at historical analogs and historical ratios and fundamentals and margins and all that Sort of good stuff. How do you make it make sense and not get anchored to a world that doesn't exist anymore?

[Denise Chisholm]

Because it's almost never an analog. It's really about finding patterns. And most of the time, especially in macroeconomic data, there's existed for quite some time. It's about thinking through the things that you think are very significant. And oftentimes, when you actually go back in history and look at it, is more noise than signal. And at the very minimum, it tells you what not to bet on. I mean, it's usually one of those situations. What's the old quote where it's not what you don't know that gets you in trouble, it's what you know for certain that just ain't so. That's the problem. And I feel like the more I look at macroeconomic data, the more I see those patterns. I mean, uncertainty recently was a great example. There's very high levels of uncertainty that's likely to weigh on corporate spending and therefore very likely to weigh on stock returns. The problem is not only can you not prove it in the data, there's the opposite correlation. The higher uncertainty is, the more likely the market is to go up in your face. Does that mean 100% of the time? No. But that's a pattern that persists historically, even though there's no analog. Right. It was tariffs this time, which is not analogous to any other situation we've lived through. But that pattern is kind of like a red flag waving.

[Michael Batnick]

It's totally counterintuitive. But I'm looking at how excited you get by that. Is that the best thing, as somebody that's looking at data, to see, I don't know, watch me on tv, say something, and all these other people repeating the same thing over and over again. And then you go back and look in the data, and it's like they're all saying the same thing and none of them are right. Here's what actually happens. Is that the thing that you get excited about.

[Denise Chisholm]

It's definitely what I get excited about, which is not to say that I know whether people are right or wrong, but. But it is to say that there is a dangerous presumption that we make all the time with market narratives that more often than not, to your point, are not true.

[Michael Batnick]

Well, here's one. Speaking of tariffs.

[Denise Chisholm]

Yes.

[Michael Batnick]

We were told with extreme certainty by many people, whether they're at hedge funds or institutional asset managers or traders. We were told repeatedly that Trump's tariffs, given the nature of how they were rolled out and how Messy. All the commentary around them was, was going to have this effect where people from around the world were going to begin gradually withdrawing money from the US dollar, from the US bond market, from the corporate bond market. They were going to pull money out of stocks. In fact, in all cases it was the complete opposite. Maybe not the dollar, but when you looked at inflows six months after Liberation Day, and you look at what went on, the international community of investors bought as much stock as they possibly could, breaking records. In some cases. They bought U.S. bonds, they bought corporate bonds. I don't know what the message of that is, but it is the exact opposite of what the prevailing wisdom was just after that tariff announcement was made and the way it was executed. Was that the kind of thing that you looked at and said, I'm not so sure about this story of the outflows from US investment markets.

[Denise Chisholm]

I mean, it's interesting when you think about it. I think the quote that resonates the most is the stock market has discounted nine of the last four recessions. So the stock market reacts very quickly. But when you go through the math, and you can look at this in history, I mean, I always say that the bar is high. Recessions are rare. It takes quite a shock to tip the US economy into recession.

[Michael Batnick]

Well, that one looked like it would have qualified on the surface.

[Denise Chisholm]

I think when you go through the math, I think I had a hard time getting. So when you look at the math historically now, I would say that when I look at the cycles, it takes something between 2 1/2 and 3.5% of a hit to US income to tip the US consumer into recession. I mean, the financial crisis is an interesting example and sort of how time and price can actually converge. So crude oil prices were between 18 and 22 forever for when we were growing up. And then they were 50 and then they were 70 and we were like, why isn't the consumer having a problem with this? And then they went from 70 to 150. That shock was enough to tip the US consumer to negative consumption. And that on top of the leverage we obviously saw that was the tipping point that basically started the recession, obviously compounded it in 2008. So it's an interesting thing to think that all recessions were met by shocks that were pretty sizable. And you can usually look at oil prices and the Fed to see where those shocks came from. You can do the same math behind tariffs.

[Michael Batnick]

Okay, so tariffs, we thought, substitute oil for tax on trade.

[Denise Chisholm]

Correct. It's exactly what it is. Right. We're guessing where the tax ends up. So, you know, you have to make some guesses. But we can say $3.2 trillion of imports. We landed on 15%. Half ends up in the US consumer's lap. None is absorbed by currency. You know, none is absorbed by the foreign producer. The other half ends up in corporate America. What is that as a shock? That's about 250 billion on 25 trillion of inc. That's a 1% headwind to the US consumer. That has not been enough historically to tip us into recession because we have had 1% tax hikes historically that haven't been enough. And the reason why is not. That 1% is not meaningful. It absolutely is. It's just you're so focused on that headline risk of the headwind, you don't notice other things like the tailwinds from oil prices going lower this time that almost completely offset that 250 billion. So you end up going through the math and saying is, yes, it's different, but it's still a shock, it's still a tax. Is it enough? And you come to the conclusion of maybe not. And in that instantaneous almost bear market, the stock market did discount a recession.

[Michael Batnick]

So where were you on April 3rd when I needed to hear this? Where were they hiding you in this building? Okay, yeah, that's. I think a really important point is the offsets that maybe you're not thinking that people aren't thinking about in the moment. We wanted to ask you about your recent take on a couple of things you'd written about CEO sentiment. CEO sentiment, to me, I've always thought of it as a concurrent indicator, like, tell me what the stock market's doing, I'll tell you how CEO sentiment is. But maybe it's more complex than that. In your research, you highlight a historic jump last month in CEO sentiment, which you can tell us about. And the point that you're making is this is not a contrarian signal. It depends. So just because the CEOs get all bowled up is not a signal to investors to start getting nervous that it's some sort of a top. Can you tell us about the nuance that you found in New York?

[Denise Chisholm]

Yeah, let's go back to the nuances of the data was really around the historical instances of corporate tax cuts. And while we didn't have a change in the statutory rate, we have a pretty big cut in the effective rate for corporate America. So it was looking through history and saying, okay, history is some sort of guide as to what this big, beautiful Bill act can actually do. Let's look at the times that we've cut taxes before. Does it mean earnings will grow? Does it mean GDP accelerates? And what you find is what it usually means first is CEO confidence bounces. The second order effect, the year following is GDP and earnings. The interesting part about that is, and you say, okay, it is a little different this time because we CEO confidence was at recessionary levels without being in a recession.

[Michael Batnick]

When last year just early this year.

[Denise Chisholm]

Early this year at recession. At recessionary level. So by recessionary I mean like bottom decile.

[Josh Brown]

But don't you think it made sense because like they had no idea what their inputs were going to cost so they were flying blind?

[Denise Chisholm]

Absolutely. I don't think it. Yes. Let's take it for what it's worth. Right. So I'm not saying that it's worse this time or better this time. The data is the data. And you can see from a historical perspective, is that bad for stocks? No, that's exactly the setup you want. You want CEO confidence to be bottom quartile and rising. And that's exactly the signal that we're seeing because what does that usually lead to? It means that earnings growth is more visible historically to CEOs and because of that you get multiple expansion before you ever see the earnings growth.

[Michael Batnick]

Have we had it though?

[Denise Chisholm]

Multiple expansion?

[Michael Batnick]

Yeah.

[Denise Chisholm]

Yes, but so certainly we're close back to, you know, on forward pes, close back to all time highs. But I think that when you look back historically is that it's not very clear where multiples need to be capped when you think statistically doesn't mean what we think it means you should see some sort of pattern between the more expensive stocks get and the lower future returns are over the next one or three years and you don't. So when I look at valuation data for me again just as a quant like forget the meanings that we think that they have, to me it just means confidence. The more visible earnings are and earnings are getting more visible because we've seen CEO confidence bounce because we've had this legislative activity because now the Fed is on our side. The more visible earnings get, the more likely multiples are to go higher with no cap. So for me I think valuation multiples.

[Michael Batnick]

Go higher because Wall street feels more confident when there is visibility.

[Denise Chisholm]

Yes. And I think in some ways you can think about it as there's a like R star for the Fed. Is there some sort of mid cycle earnings? Right. So in pes for any one period of time is probably not accurate, really. What you want to know as an investor of what are mid cycle earnings and then what multiple should I put on it? And for me, the way I sort of piece together the story is the more expensive stocks are. All they're really saying is be careful, investors mid cycle earnings are higher than you think. Which means at some point we will look back at this and say stocks were cheaper than we thought.

[Josh Brown]

So looking back, do you think that we're going to look back and say that the Fed made a mistake cutting rates, given that? So they were responding to weakness in the labor market primarily. But now we're seeing Atlanta fed GDP saying we're going to be at a 3.9% annualized rate for growth in the economy. Spending is still solid with upward revisions and we've got this hyperscaler spending boom is now the right time to be cutting rates.

[Denise Chisholm]

So there are two things. One level and then two. Let's talk about the growth rate for a second. On an annualized basis, you're absolutely right, quarter to quarter. But on an on a year, on year basis, GDP has grown around 2%. What we talked about historically, back since the 90s when we were investors, was that 2% was that tipping point, meaning that the US economy is growing, what I would say quite slow relative to history, or I wouldn't say that it is quite nearly as dynamic as that 4% sequential growth implies. And the level of real interest rate changes should have some proportionality to what you think that underlying growth rate is. So we do have to struggle with what that underlying growth rate is. But when you look historically, if inflation comes in lower than we expect, and that's kind of my base case, because to me tariffs are more deflationary than inflationary, then it means that.

[Josh Brown]

Wait, why do you think that?

[Denise Chisholm]

Because I think that they act like a tax. So yes, the prices of some goods go up, but unless somebody gives you more money, your marginal propensity to consume, if you had to buy that tariff washing machine goes down.

[Michael Batnick]

So somewhere they're demand killers.

[Denise Chisholm]

That's exactly right. And if you think about the underlying rate of inflation, to me it's quite slow. So core CPI ex shelter, which we can debate if shelter is the right sort of calculation from a Fed perspective. But I think you can make a really strong argument that it's driven by a supply shock by the initial Fed hike. So if we think about sort of core X shelter, that run rate was around 2%. So we don't really have a broad based inflation problem. And the tariffs Even the goods we're seeing are off of this decelerating base. So it may very well be the situation that it's not a mistake because the underlying run rate of inflation and oh by the way, GDP growth is such that the Fed can pivot and can renormalize monetary policy from a situation which was too tight.

[Michael Batnick]

Do you think investors have gotten better at being investors sitting where you sit at Fidelity? Because we're talking about this April Liberation Day moment where there was a huge shock to the markets. And we know what professional investors did, they did what they think their job is, which is to hedge risk or protect their investors. But then when we look at the behavior of individual investors, they come through that moment with flying colors. Whether we're looking at Fidelity data or Vanguard Data or Robinhood Data, almost all of the outlets that catered to the individual investor reported the same thing, which is our clients not only were not afraid, they actually added to their accounts, they stayed put, they did not change their investments. There's a concept called the Hawthorne Effect in science, which is when something or someone knows they're being observed, it alters their behavior. I think investors as a group, they've read so much about how bad their own behavior is that paradoxically they're the best behaved people in the room at this point. Cuz they know what they get ridiculed for. So I'm curious, the Fidelity perspective or the Denise Chisholm perspective on the investor class in general, how'd they do?

[Denise Chisholm]

Yeah, that could very well be the case this time. I mean, because it was very unique where retail, I think as a group didn't sell in what I would call almost bear market.

[Michael Batnick]

Now I will say pessimists would say they didn't have time to sell.

[Denise Chisholm]

That's exactly what I was going to say. That's the other side of the coin. And I do think that there is. And I do. I think you're right in that the financial news has gotten to people by sometimes when the market moves very fast, it's too late to be bearish or.

[Michael Batnick]

No time to panic.

[Denise Chisholm]

Right. You are paid not to react very often. Right. And there is a relationship that I actually wrote about in that bed in that bear market or the quasi bear market, which is there's a very strong statistical relationship between the speed of the bear market decline and the odds and magnitude. The S and P is up on the other side. So that was the unique look we always talk about being afraid of those three big secular bear markets. The mid-70s, the.com and then the GFC and those were really defined by taking 300 days to get to bear market territory. When the market discounts bad news very, very quickly and ours was the third speediest in history, then you're almost paid to hold your nose, close your eyes and just wait a year.

[Michael Batnick]

She was just telling us about how V shaped recoveries are actually the norm. That was Char kid.

[Josh Brown]

He has a chart on it. So I'm curious, looking back at history, all of those bear markets that you mentioned, it took time to digest and to price in the worst.

[Michael Batnick]

Well, things got worse as they get worse. Right?

[Josh Brown]

I, I hesitate to say that can't happen again because I feel like. Of course it can. But doesn't it feel like when the news hits it just happens so quickly?

[Denise Chisholm]

Yes, well, it certainly did. The statistic.

[Josh Brown]

Yeah. Those have to be outliers though. That's not the, that's not a business cycle bear market, obviously.

[Denise Chisholm]

Well, right. But I think that that's, you know, well said in terms of COVID different. And I think we have a knee jerk reaction as to thinking Covid and the financial crisis were these two like almost lights out moments where you really have the US economy collapse quickly for different reasons. But that's not historically norm very outliers. So I think that, you know, in some ways even professional investors, that knee jerk reaction is to sort of play what you know, which is the last cycle, which was a lights out situation.

[Michael Batnick]

The, the macroeconomic bears would say it's almost unfair because whatever we did in stimulus for the financial crisis, which was 700 billion worth of TARP and Fed takes rates to zero. Okay. This time we went so far above and beyond. We literally sent money in waves to every business owner, every employee of every business owner, every unemployed person. It was like it was, it made the financial crisis era stimulus look like a dress rehearsal. So the question becomes like it's a V because oh my God, they took $16 trillion and threw it out the window.

[Denise Chisholm]

15% of GDP at the time, of.

[Michael Batnick]

Course it was a V. Right now in that moment, it didn't feel like it should be a V because we were hearing about the potential for millions of people literally dying. So it only seems obvious to us now that it should have been a V. And I think that's one of the hardest things. You're in a correction even if it's lightning fast. I don't care if you're a professional or you're someone with a 401k. All of your instincts are telling you this is going to get so much worse. And sometimes it does, but very rarely.

[Denise Chisholm]

Yeah. That's why I think patterns in history can really help. Right. It is always different. This time there is Nothing the same. 2020 was very different than the financial crisis, which was different than dotcom bust, which was different 1990 recession that I sort of first experienced as a college graduate. So they're all different for me. What is I think interesting is that the patterns remain the same of buyers and sellers. Yes, buyers and sellers and. Yes, exactly. And the longer your time horizon. Right. So sometimes I can't tell you what's going to happen or obviously I can't tell you, but the data can't tell you with perfect foresight what's going to happen in three months or six months. But as soon as you start being willing to extend your time horizon to 12 to 18 months, all of a sudden you can start to see these patterns and say, well, well if I have that kind of view or if I have that duration, then all of a sudden I can look through this volatility to make money. Which is what the name of the game is.

[Josh Brown]

Another massive difference between today and history. Our friend Michael Semblis wrote a piece recently where he said we've got $1.5 trillion in annual defined contribution of defined benefit money coming into the market on an annual basis.

[Denise Chisholm]

Sure.

[Josh Brown]

And then of course the index and just the flows in general. Surely that distorts multiples a little bit to the upside. How could it not?

[Denise Chisholm]

Yeah, no, that makes a lot of sense.

[Michael Batnick]

Volatility dampener.

[Denise Chisholm]

Yes.

[Michael Batnick]

It's a price insensitive buyer who shows up by appointment every two weeks. And we didn't have that 30 years ago.

[Denise Chisholm]

No, I don't disagree. Right. I mean it's interesting, you know, the different ways you measure volatility. A dampener on a day to day basis. But then you know, obviously on a year to year basis you end up having similar volatility.

[Michael Batnick]

Fun fact. I came to that insight 10 years before Michael Semblist on, on my blog. But here's where John was recording that part.

[Josh Brown]

So, but if you look at like rolling, 30 day rolling anything, standard deviation.

[Denise Chisholm]

Yeah.

[Josh Brown]

There's. There's no difference between today and history. Correct in that regard.

[Denise Chisholm]

Correct.

[Josh Brown]

Looks exactly the same.

[Michael Batnick]

Okay, we will edit that out.

[Josh Brown]

No, we will not.

[Michael Batnick]

So we will definitely edit that out. John. All right. I want to ask you about housing.

[Denise Chisholm]

Sure.

[Michael Batnick]

One of the things that I'm bullish on, not like crazy bullish on, but the housing market has been terrible for I don't know, some people would say five years in terms of unaffordability, I would say three years because the rates just made it so that a lot of people were frozen in place. Not sure what to do, not willing to do anything. We're getting some relief on the, on the mortgage rate front. I understand the Fed is not directly going to drop the mortgage rate. It's not how it works. There's demand for MBS and that affect. Okay, fine. But let's assume if the Fed is going to get down to a cycle low of 4% this time or 3.75, mortgage rates are not going back to 7. Okay. So at the very least we're getting some help now in existing home sales. We just saw, we also saw new home sales like those things are starting to react to the lower mortgage rates. Is this like one of the legs to the stool for how this bull market can continue into 26?

[Denise Chisholm]

Well, it definitely is. I mean, the interest rate sensitives as an asset class, but let's talk about home builders specifically have largely been left behind. I mean, they're the same multiples they always were at the trough, but tiny market there. They are tiny. But even if you add up all the interest rate sensitives, they're all very similar in terms of relative valuation is what I would call statistically cheap, meaning at the bottom quartile relative to itself, right? Yes. So relative to the S and P, relative to its own history back to the 60s. So the interesting part about, you know, you quoted the GDP of 3.9%, housing is in recession, Right. Residential investment is contracting. Right. This is not a dynamic US Economy and it's been a rolling recession. We're not at the troughs that we were in 2022, but we're not far removed from being that bad as well. And again, the stocks have been still statistically cheap. Now, what was different this time than the last time the Federal Reserve was cutting is that the last time the Federal Reserve was cut, little translation to mortgage rates or even to the 10 year treasury for that matter. Partly because overall inflation or core inflation was above median levels. The irony is this time that they're cutting, core inflation on a median basis is actually now below those levels historically, despite tariffs. So you see that when you look through history and you say, okay, when the Fed's cutting interest rates, what percent of the time do long yields drop? It's about 70. So it's not 100% of the time. But when you're at that below average level in terms of core inflation, all of a sudden it's 85. So you do see a statistical boost. And the only 15% that where you didn't see that translation was basically 95, 96, 98, 99 and 0304 where you saw this big inflection to 4.5% GDP growth. I don't think we're going to get there. So that leads to the transmission mechanism being much better this time around than a year ago. Now you couple this out with the starting point on relative valuation, which advent which is advantageous for the stocks historically. So if we say this quartile, I see this nice monotonic distribution which is my. I have higher odds of builders outperformance when they have been cheaper. So which is kind of a statistical way of saying hey, these stocks price in bad news in advance, right? So you get 64% odds when they're this cheap. When you have long rates come down, all of a sudden it's 75 and X the financial crisis, which maybe you say this is nothing like the financial crisis, you're close to 90% odds. So that's a viable risk reward. Right? You've got really strong odds and you've got really strong outperformance. Your downside is the fact that to your point, affordability is likely solved by housing prices either being flat or potentially going down.

[Michael Batnick]

Not rallying.

[Denise Chisholm]

Correct.

[Michael Batnick]

Right.

[Denise Chisholm]

Now the interesting part is you could say, okay, what's my downside to homebuilder stocks? Historically, if home prices fall and there is downside in every vertical of valuation, but it's minimal when your starting point is cheap, it's about 300 basis points. What's your upside in terms of that starting point on valuation? If you get this transmission mechanism from 10 year all the way to mortgage rates, it's about 35% which is the math that I look at in terms of risk reward. Right? There are no guarantees. Cheap stocks could be cheap for a reason. But if I think about the catalyst that could provide more underperformance. If I look at history and say has valuation been able to price bad news in advance? If it's not as bad as the stocks have already priced, what's my upside? You're talking about a 10 to 1 ratio. So I'm with you. I think that there's opportunities in interest rate sensitive stocks. Specifically in housing.

[Michael Batnick]

Do you think that that is big enough to prolong the bull market? The ripple effect from a new housing cycle, it's very important asset to the majority of the middle class in this.

[Josh Brown]

Country, is it a third of the economy?

[Denise Chisholm]

Yeah. Oh absolutely.

[Josh Brown]

So stipulating that, that you're, I'm sorry, you're bullish on the housing story, which is a big part of the economy that's been left behind for the last couple of years. You've got hyper scaling scalers. They're looking at increasing their capex spend by 30% a year and there is a wall of worry. It's not like the average investor is going crazy all in. I'm not getting a lot of questions from my friends about the market. So you still have that dynamic and the Fed is cutting aside from the obvious. What's the bear case? It's hard to be, it's hard to.

[Michael Batnick]

Said differently like why wouldn't we be at 22 times?

[Josh Brown]

Right. It's hard, it's hard to be bearish.

[Denise Chisholm]

Yeah. No, so when I look, I mean so the hurdle rate, when you look back in history On a rolling one year basis since 1962, the S&P goes up 75% of the time. So for me as a data person that's coming in saying okay, my hurdle is pretty high. What does that bearish?

[Michael Batnick]

Preconditional hurdle to find something wrong.

[Denise Chisholm]

Yes, exactly. So my going in position any given year is I think I'm a buyer, I need to argue with myself from a data perspective. Why not? And the three things that I've looked at statistically that I think give give concern is around things being too good, which we've been talking about, like euphoria is the enemy of, of markets, of bull markets. Right. You usually see that statistically at top quartile or top decile earnings growth of like 25 to 30%. We're grinding it out at 10 on a cap weighted basis. And median earnings has gone nowhere in three years. Right. That's far from euphoric. Meaning that the more sort of muted it is, the longer it can continue. So it could be durable. But that's data point number one that I watch. Data point number two is in the high yield market. Right. So the credit market usually is the smarter market. It's a sleep, sleep, it's asleep, but it's not nearly as tight. So we have the data going back to the 80s now you can sort of argue whether it's synthetic data, but the credit market has been way tighter. The tights that we're seeing right now don't statistically say okay, that's a negative risk.

[Josh Brown]

When you say tighter you mean like credit availability or spreads?

[Denise Chisholm]

No spreads. So high yield versus the risk free rate.

[Josh Brown]

But isn't that good?

[Denise Chisholm]

Yeah, so it is. But there is a point where it gets too good. Right. So my indicators.

[Josh Brown]

Why? Because investors are being complacent.

[Michael Batnick]

Anyone can raise money and all of a sudden like people are taking too much risk.

[Denise Chisholm]

Right. Just like when the news is bad creates a buying opportunity because it's all priced in. Sometimes when the news is good, that creates a selling opportunity because it's all priced in. Those factors have to come together statistically. And I just think that we're a long way from there. Partly because I kind of think of 2022 as a landing. So I think it was either a very hard soft landing.

[Michael Batnick]

Nobody's distressed, right? No one in those, in these, in the mainstream high yield indices is distressed. That's one to, I don't know. Was there a trillion dollars in private credit?

[Denise Chisholm]

Right.

[Michael Batnick]

Ready to race in any time. One of the funniest things I saw was in 2022, the Wall Street Journal was running these articles about rescue funds being launched at Goldman Sachs and other, you know, large, like we're going to rescue commercial real estate. It's like, well, can we let it die for rescue?

[Denise Chisholm]

Not like it doesn't need to be rescued.

[Michael Batnick]

It's almost like, it's almost like there's this unlimited pool of capital just begging for the opportunity to rescue something. They were raising money for that kind of activity before anyone even asked for it. And I don't know if they put the money to work or not. I know there were some buildings that were impaired, but none of the predictions about entire cities were going to be filled with empty commercial real estate. None of that actually ended up happening. So we're in a building right now. So I guess my point is how distorted is that data in credit in high yield? What is there even to look at? There's endless amounts of money right now. I know that could change if sentiment changes, but don't you kind of have to wait for that to happen?

[Denise Chisholm]

I think you're right to get nervous. Yeah. And that creates the problem that we're all talking about, which is it's difficult to predict recessions because they come from shocks. And it's very difficult to predict a shock.

[Michael Batnick]

Okay. Bull markets and economies don't die of old age.

[Denise Chisholm]

That's correct. Well said.

[Michael Batnick]

Economic growth. It's not a scenario where it's like, well, we're in year eight, time to start digging a hole in the backyard.

[Denise Chisholm]

Exactly.

[Michael Batnick]

That's not how it works.

[Denise Chisholm]

Exactly.

[Michael Batnick]

Okay. Very helpful for people. Let's Talk bear markets. While we're on the subject, do you count Covid and the tariff tantrum, which were both statistically 20% bear markets? Michael and I walked down the hallway to get here, which had some of these historical long term charts as murals on the wall, which is so cool. We love it. Where would those fit in in the history of bear markets? They're like almost. They almost remind me of like a flash crash in 2010. They were just like anomalies almost the.

[Josh Brown]

Modern day bear market.

[Michael Batnick]

I know they were real events that had real impacts on real people. I don't want to downplay the pandemic. I don't want to downplay, you know, any. But like, is that a bear market in real life?

[Denise Chisholm]

No, it's different. There are cyclical bear markets, these things.

[Michael Batnick]

Right.

[Josh Brown]

By the way, you didn't talk about 2022. That was bear market. We kind of forgot about that one.

[Denise Chisholm]

Right?

[Michael Batnick]

No, good point was down 35 in 2020.

[Josh Brown]

That was almost two years. All these, all the Mag 7 got cut in half.

[Michael Batnick]

So that one I would call a real bear market. Because it went for eight, eight months.

[Josh Brown]

No, no, no. It was almost two years. It was January 2022. It was January 20th to October 23rd. Yeah, yeah, it was like two years.

[Michael Batnick]

I think we bottomed in October 22nd.

[Josh Brown]

It was like two years.

[Denise Chisholm]

We double. We kind of double bottom.

[Michael Batnick]

Double bottom. Okay. That's legit to me.

[Denise Chisholm]

But I think that's the debate between like secular bull markets and cyclical bull markets. Right.

[Michael Batnick]

What would you point to that bear market? What would. If somebody says, I know it's really hard to do this. If someone says what's the reason for the 22 bear market? Would you say overvaluation in stocks or would you say the fastest interest rate hiking cycle since the 70s?

[Denise Chisholm]

Yeah, inflation, which.

[Michael Batnick]

But when you look statistically caused that.

[Denise Chisholm]

Bear market inflation above 4 and a half percent, which is the break point for the top quartile and rising is the worst setup for the market historically. The irony is above 4 and a half percent and falling is the best setup for the market historically. So you need to be able to pivot and understand that high prices are the cure for high prices, which was sort of the, the Venus of that shape.

[Josh Brown]

The 22 bear market bothers me that we forget it so quickly.

[Michael Batnick]

I totally forgot.

[Josh Brown]

It's like, oh, we've been in a bull market for 15 years. Oh really? Because Amazon got cut in half. Amazon and Google got cut in half. Nvidia fell 70% sort of meta, Apple and Microsoft held in a little bit better. But if that wasn't a bear market, what? I'm sorry.

[Denise Chisholm]

Come on, I'm with you.

[Michael Batnick]

You're exactly right. It's funny, I'm reminded of Ken Fisher very long ago told me something similar about like the best bull markets are when things are really terrible, but getting just normal terrible. Like that improvement is second derivative. Right. It's not terrible to good, it's terrible to. Slightly less terrible is where like all the, all the real money is being made. And that kind of, that kind of stuck with me. And I think about that not just on a market level, but even on a sector or an individual stock level.

[Denise Chisholm]

That's right.

[Michael Batnick]

And it holds true.

[Josh Brown]

Denise, why do you, why do you think people are obsessed with trying to guess when it's going to end instead of trying to maybe enjoy the ride and not be irresponsible and forget about risk? Because obviously you have to be sober about this. But why that obsession with this is going to end? This is going to end, this is going to end.

[Denise Chisholm]

I don't think it's ever different from history. I think that there's always a group that's going to be obsessed with that ending. And it's probably around the fact that there's always something wrong. Right. It is always different this time. And there's always something that you can point to to be the problem indicator. That's sort of, when I look at the historical data, I think that that's where it can help. Okay, if you're right this time and this is what's different. Payroll revisions, uncertainty. Let's see if that's predictive. Let's see if I would bet on that as a statistician or look at that as an indicator and say, yes, I want to trim my equity exposure. And to the extent that you can't look at those patterns and see a negative risk reward or see some sort of pattern, then I think you have to step back and say, yes, there are all kinds of things that are wrong, and yes, there are all kinds of things that are different. But do I want to give up my 8% returns to get that right? I mean, there's. You can be right and still not make money.

[Josh Brown]

So if we, if the S and P were to get cut in half from today, it would take us back to the lows in 2022.

[Denise Chisholm]

Ironic.

[Josh Brown]

Isn't that kind of wild?

[Denise Chisholm]

Yeah, that is.

[Josh Brown]

And think about from 2022, from 15 to 22, how long people were saying this is going to end badly. This is going to end badly.

[Denise Chisholm]

Yep. Well, it's, you know, in some ways, when you think Back to the 70s and 80s, the ultimate low of the bear market, when I usually give people the option, like between, what do you.

[Josh Brown]

Give for the ultimate low?

[Denise Chisholm]

So between 1976 and 1985, for me on what, when I look at the charts, I mean, I think it's observable. The low was 1978. The low in 1980, obviously we corrected during that recession was higher than the low in 1978, and the low in 1982 was higher than the low in 1980. Right. So you could enter like when Volcker came in and said, hey, I'm going to create a recession.

[Michael Batnick]

The low in 82 was the last of the low lows.

[Denise Chisholm]

Was higher than the lows, the two lows before.

[Josh Brown]

Right, but nobody uses 82 as the low. People use 75.

[Denise Chisholm]

Yes, true, true.

[Josh Brown]

Which is kind of odd.

[Denise Chisholm]

Yes. But my point is, like in the mid-70s, if you sort of started and somebody would have came to you and said, hey, wait a minute, I think we're going to have two back to back recessions. Never happened in U.S. history before. And I think the second recession is going to be the longest and deepest since the Great Depression. You made money through that five years. That's how you can be. Right. And still not make money.

[Michael Batnick]

I'm going to give you the thing that work that I think is the most worrisome stat. The NASDAQ is compounding at 30% a year for the last three years. If I only told you that stat. And, and all the other stuff you just told us, you didn't know, but you sort of knew about markets.

[Josh Brown]

But wait a minute. Include 2022. This is my point.

[Denise Chisholm]

Right.

[Michael Batnick]

I am.

[Denise Chisholm]

Yeah.

[Josh Brown]

No, you're not.

[Michael Batnick]

You're doing the last three years.

[Josh Brown]

You're doing three, four and five.

[Michael Batnick]

I'm doing midpoint of 22. When the NASDAQ bottomed. Oh, October.

[Josh Brown]

Well, okay, so do four years.

[Denise Chisholm]

Yeah, from the bottom.

[Michael Batnick]

Whatever.

[Denise Chisholm]

Yeah, do four years.

[Michael Batnick]

But I'm just saying, but I'm saying like, all right, if you did four years, what is that? 30%?

[Josh Brown]

I'm not doing math in my head turn into 25%. I said that last week. I got in trouble.

[Michael Batnick]

So that like to me, just on the surface, I understand all the context, but it's not like the NASDAQ spent the prior decade depressed. It went up nine out of 10 years.

[Josh Brown]

The last 15 years for the NASDAQ, is it 18% a year. It's up to absurd.

[Michael Batnick]

It is, it's absurd. So if I just gave you that fact, knowing everything that you know about markets, absent all of the other context though, about the other things that are happening right now, like you would say the closest thing that that looks like is the 90s and which was not a happy ending.

[Josh Brown]

I mean, just eyeballing, like, is this worse than. It's, it's a little bit up and to the right.

[Denise Chisholm]

Yeah, a little, little bit. I don't know. So when I look again. So back to the statistics. Right. So we had two instances out of 2022 and just recently where the S&P5 was up 25% over the course of, I think 13 or 15 weeks. Right. When you look at that historically you say. Okay, wait a minute. Yes. And not just bullish. Monotonically bullish. Meaning that the more the S and P advances, the more likely the S and P is to advance.

[Michael Batnick]

Do you mean bombatomically?

[Denise Chisholm]

Monotonically, Monotonically.

[Josh Brown]

I love that data too, because that can only happen in one scenario where everybody's bearish and wrong and everybody has to reverse course and get back in because the bad news didn't come to fruition. So that sort of historical patterns always persist.

[Denise Chisholm]

Right, right. And it looks like statistically a catch up trade. Right. Meaning that you already delivered the below average returns. You know, you're sort of cherry picking your data and then you have that catch up trade. So I do like, I just think it's. I'm cautious in saying that price creates a negative risk reward because when you see that pattern historically, momentum usually begets momentum. So it doesn't mean it won't work this time.

[Michael Batnick]

Our friend Adam Parker had a piece out last week. You nodded. You know him? He's a good guy.

[Denise Chisholm]

He is a good guy.

[Michael Batnick]

So smart.

[Denise Chisholm]

Yeah.

[Michael Batnick]

He put out a piece talking about a dinner he attended with seven other geniuses like him and they were trying in vain to come up with what the bear case is. These were the three that they came up with. And I would love to hear which of those you think warrants the most attention from investors who are focused on what could go wrong. One of them is the AI Capex story falls apart in some way. Either it decelerates faster than people are expecting or it slams into a wall. But some sort of change to what we all think is going to be this five year build out. So that's one, two is AI not only does not slow down, it works so well that we start to see it show up in white collar employment data and that produces a new risk that maybe people are worried about now but not quantifying. And then the third is aliens. I think what did I say was, what was the third was? Oh, deficit, debt and deficits which we are not going to do like a whole thing on. But of those three, unless you tell us we should. Of those three, what's the thing that you think maybe could be the shock that could change the outlook?

[Denise Chisholm]

I'm not even gonna guess. I'm not gonna guess because. And people do ask me whenever I present to clients, they're like, you know, what keeps you up at night?

[Michael Batnick]

We'll turn the cameras off.

[Denise Chisholm]

What are you worried about? And I say there are smarter people than me that know I do try to focus really hard on what I think the market is already discounting. So that's where like whatever shock that you think you're hit with tariffs, right? Uncertainty. What will will be the tipping point or will the market be able to climb the wall of worry? So where or where are those statistics is what I focus on meaning that if there is very. If there is a lot of statistical fear in stocks and you can think about this from a VIX perspective, you can also think about this to get pretty quantity from a valuation, valuation spread perspective. When there is a big gap in valuation spreads and we're seeing this certainly on a median basis in the S&P 500 when there's a lot of fear in the equity market and there's not a lot of fear in the credit market market, then you have again that sort of linear relationship. The more likely whatever you're worried about going bump in the night, the market can climb that wall of worry. We saw the opposite. The credit market was saying hey, credit spreads are rising. We think that there's solvency issues going back and the equity market was saying ah, there's no problem here. Right. VIX was very low.

[Josh Brown]

But more importantly valuation you're talking about or something else.

[Denise Chisholm]

Going into the financial crisis and also going into the dot com bubble bubble. The credit market was saying hey, there are companies going bankrupt. This is going to be a problem for the cycle. We're just not in that situation. So I would.

[Michael Batnick]

Right. And that process, it's not one month. The credit problems started to surface. In 06 the Bear Stearns mortgage hedge funds start to blow up. The stock market doesn't peak until October of 07.

[Josh Brown]

That would never happen today. The news would get out so fast, takes too long. But that would never happen. Anymore for it to get out. Like if there was a subprime 2.0 today.

[Denise Chisholm]

Right.

[Josh Brown]

It would get out in 24 hours.

[Michael Batnick]

Yeah, I would have to.

[Josh Brown]

One day we'd have the bear market in two weeks and then it'd be over.

[Denise Chisholm]

Yeah.

[Michael Batnick]

Okay.

[Denise Chisholm]

Might be right.

[Michael Batnick]

Last question.

[Denise Chisholm]

Yes.

[Michael Batnick]

You're on a desert island.

[Denise Chisholm]

Okay.

[Michael Batnick]

And I can only give you once a day, once a. I can only give you three pieces of data or data sets that you can use to formulate a stock market outlook. And I know you're not a big prediction person, you're a quant, but just we were trying to get to, like, what's important to you and what, what would you throw away? So you, and you could, you could ask for anything. You could ask us for economics, you could ask us for technicals, valuations, fund flows, sentiment. What are the three things that you would most desperately want? And if you solve the market with these things, we'll rescue you from the island. Okay, well, we'll take you off the island.

[Denise Chisholm]

Median earnings growth.

[Michael Batnick]

You want to know what? But prospectively, you want to know how it ends the year?

[Denise Chisholm]

Or either you can give me the historic data.

[Michael Batnick]

Median earnings growth.

[Denise Chisholm]

Median earnings growth.

[Michael Batnick]

Okay, let's start there. Why is that important?

[Denise Chisholm]

Yeah, so that is actually the driver. I mean, ultimately, we always say, especially if Fidelity stocks follow earnings, the median.

[Michael Batnick]

Stock in the S and P, you want to know, note the earnings growth for each stock. But the median.

[Denise Chisholm]

Median level. Median growth. Yes.

[Michael Batnick]

Okay.

[Denise Chisholm]

So you could say cap weighted growth, but median growth is actually a little bit more predictive, especially as it relates to the job market. So to the extent that the median company in corporate America is profitable, then they tend to hire. Right. So that's why, like, payrolls are a lagging indicator, profits are a leading indicator.

[Michael Batnick]

So you care about the median versus the overall growth level. Cause the overall growth level could be like Nvidia and Microsoft. And then that tells you nothing about the direction for all these other businesses.

[Denise Chisholm]

Correct. It gives you a clearer perspective.

[Michael Batnick]

That's interesting.

[Denise Chisholm]

Have you ever heard that the overall economy.

[Josh Brown]

Never.

[Denise Chisholm]

Oh, I'm going to put that on my note this week.

[Michael Batnick]

Okay.

[Denise Chisholm]

So stay tuned.

[Michael Batnick]

We like that.

[Denise Chisholm]

Give us number two, credit spreads, which we just talked about. So credit spreads, sometimes when they're very wide, it's usually indicative of bottom. Sometimes when they're very tight, it's usually indicative of a top.

[Michael Batnick]

Are they predictive, though, or are they in the moment?

[Denise Chisholm]

So, no, they're pretty predictive. So the quartiles, again, there's a statistical relationship. The tighter the valuations, the tighter the credit spreads have been, the more likely the S and P is to go up over the next year. So you can give me trialing credit spreads, and I can say that there is a relationship here between that and future.

[Michael Batnick]

What credit spread data do you want? Do you want high yield? You want to know. You want to know how. How tight or wide?

[Denise Chisholm]

Yes.

[Michael Batnick]

Okay.

[Denise Chisholm]

The differential.

[Michael Batnick]

Very interesting.

[Josh Brown]

Oh, wait. But probably only at the extremes, Right? Because if they're very wide, you say, okay, stocks probably get killed. It's probably close to a bottom.

[Denise Chisholm]

Yeah.

[Josh Brown]

And if they're very tight, you say. Say the economic backdrop is probably pretty good. What about if you're sort of in the middle?

[Denise Chisholm]

Yeah, in the middle, there's like a relationship. So the tighter the credit spreads are, the more likely the stock market is to advance the year forward.

[Michael Batnick]

Yes, number three.

[Denise Chisholm]

Yes. So number one is median earnings, number two is credit spreads, and number three would probably be valuation spreads, which is another quantity expression if you're in the market, which has very little relationship to valuations.

[Michael Batnick]

Wait, wait, you got to give us more on that. Valuation spreads of what?

[Denise Chisholm]

So it's just the difference. And this is. You know, Adam Parker would love this. It's just the difference between cheap and expensive stocks. And the names change every single cycle. But you usually have this blowout in spreads, which is an expression of fear. When investors sell anything they think is risky, they buy anything they think is safe, and they have this gap, if you are willing to.

[Michael Batnick]

Bigger gap, and that's good or bad.

[Denise Chisholm]

That'S good for contrarian investing. Because the more fear there is, the more likely it is that you've already seen the price of fear.

[Michael Batnick]

So you want to see that?

[Denise Chisholm]

Yes.

[Michael Batnick]

Okay.

[Denise Chisholm]

So that's what I would always want.

[Michael Batnick]

Because relative to where you're wide, like, what are you measuring it against?

[Denise Chisholm]

Relative to history.

[Michael Batnick]

Relative to history.

[Denise Chisholm]

Yep.

[Michael Batnick]

Where are we today on the top quartile?

[Denise Chisholm]

Rank this on a median basis. So when you look at sort of the equal weighted S&P 500, we're still in the top quartile, meaning that there is still a lot of fear.

[Michael Batnick]

So good.

[Denise Chisholm]

Yes.

[Michael Batnick]

So where are those spreads? Like healthcare stocks versus semiconductors.

[Denise Chisholm]

So, yeah, I mean, you could take individual stocks like that. And again, it rotates pretty fast. So the cheap and expensive, but we.

[Michael Batnick]

Have like the depressed part of the market. And then the problematically though the depressed part of the market is defensive part right now. Does that change your opinion at all or.

[Denise Chisholm]

No? I mean, it definitely doesn't change my opinion.

[Michael Batnick]

I still don't want that data.

[Denise Chisholm]

Yeah, I think that. Yes, I still want the data.

[Michael Batnick]

Okay.

[Denise Chisholm]

Yeah.

[Michael Batnick]

Is that the order in which those three things are important?

[Denise Chisholm]

Probably, yeah. Yeah.

[Michael Batnick]

Okay. I'm asking you that very specifically because I think we're going to title the video. Like, these are the three desert island indicators investors want. So, okay, if I spotted you a fourth, is there one that comes top of mind or. Those are. Those are the big ones.

[Denise Chisholm]

Yeah, I think those are the big ones.

[Michael Batnick]

Okay. All right. Did you have fun on the show today?

[Denise Chisholm]

I did have fun on the show.

[Michael Batnick]

We're going to do another two hours.

[Denise Chisholm]

Okay, great. I'm ready to talk.

[Michael Batnick]

Denise, where. Where have they been hiding you? I know you have a podcast. I'm gonna listen. I wanna listen to your podcast now. What is it? Let's tell the audience what it's called.

[Denise Chisholm]

It's called Market Insights Podcast.

[Michael Batnick]

Market Insights Podcast. Produced by Fidelity. Produced by Fidelity. And you're going weekly? Monthly.

[Denise Chisholm]

Monthly.

[Michael Batnick]

Monthly.

[Denise Chisholm]

It's monthly.

[Michael Batnick]

Okay. Who do you talk to?

[Denise Chisholm]

So I. It's a Q and A with sometimes our diversified portfolio managers, sometimes our quant portfolio managers, sometimes research. Anybody who'll talk to me.

[Michael Batnick]

It's crazy how many smart people you have, like, just in this building alone. Like, Michael and I have to bring in guests from the outside because at a certain point, we'd be talking in the same five people. People. You have a whole building filled with Fidelity research analysts. It's gotta be pretty exhilarating.

[Denise Chisholm]

It is. It's fun. Okay, so there's no shortage of people to talk to.

[Michael Batnick]

Are any of them, like, begging to be on the show that you're just like, I don't think you'd be good for this?

[Denise Chisholm]

No. Nobody's. Yeah. Yeah.

[Michael Batnick]

All right. This has been so much fun for us. I really want to say thank you for doing this. Everyone. Follow Denise's podcast. And you're a LinkedIn person, which I am, too. Yes.

[Denise Chisholm]

Nice.

[Michael Batnick]

Okay. Why do you publish on LinkedIn?

[Denise Chisholm]

I think it's the easiest way to reach a client audience.

[Michael Batnick]

I think that's right. You know, everyone on LinkedIn, at a minimum, has a retirement portfolio.

[Denise Chisholm]

That's right.

[Michael Batnick]

You're not talking to, like, 20% investors. You're talking about 100% investors. Okay, I totally agree with that.

[Denise Chisholm]

Yeah.

[Michael Batnick]

I think that's why I like it, too. Are there any things you'd like to say to us before we conclude? I'm just kidding.

[Denise Chisholm]

No, this was great.

[Michael Batnick]

I'm just kidding. All right, Denise, thank you so much for joining us, guys. This has been Denise Chisholm of Fidelity Investments. Please follow her everywhere she's posting, LinkedIn podcast, et cetera. Thanks for watching. We'll talk to you soon.

[Denise Chisholm]

Thanks. You guys are fun.

[Michael Batnick]

Should we do it one more time just to make sure?