The U.S. stock market has been surprisingly strong thus far in 2024. This despite the fact the Federal Reserve hasn’t cut the overnight rate, and doesn’t appear poised to do so anytime soon. So, what is driving the current optimism? How much higher can stock prices climb? What will it take for US investors to finally sell their positions? Should we reimagine the traditional methods of valuing the markets? Are the younger generations changing the rules of the game?
In this week’s Trading Perspectives, Sam Clement and John Norris discuss the surprising continued strength in US stocks, and ask the following question: “how much longer can the market rally?”
Click here to listen to the full episode.
John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friends, Sam Clements. Sam, how are you doing?
Sam Clement (00:36):
I’m doing great, John. How are you doing?
John Norris (00:37):
I’m doing fantastically right now as we record this on the 16th. It is beautiful outside and I’m looking at more green ink in the market.
Sam Clement (00:45):
Kind of hard to be upset right now.
John Norris (00:46):
Listen, green leaves on the trees, green leaves in people’s wallets. The market goes up and up and up just because… what do you think about that?
Sam Clement (00:56):
Just because? Now, there’s always a reason.
John Norris (00:57):
Well, last year we started off the year kind of hot and then we got kind of cold and then we didn’t really know how the market was going to end. We were waiting for Fed rate cuts all throughout 2023 – or a good chunk of the year at least. We never really got them as we all well know. But in November and December people just started feeling really good about the potential for the Fed being very aggressive in 2024 and cutting rates.
And then in December after the FOMC meeting, Jay Powell said pretty much three rate cuts and people took that to mean six or seven and markets just rallied like crazy to end the year and thus far in 2024, the hopes of rate cuts have come. They’ve gone. Now all of a sudden people are thinking, okay, maybe two, we’ve been thinking seven. Regardless, the hope of new money is out there, but at some point is that alone enough to keep fueling the markets? Because when I’m taking a look at stuff for the S&P 500, again as we talk here on the 16th of May, what, 12% for the year?
Sam Clement
Yes, it was almost 12%.
John Norris
Yes – I’m looking at it going, how much wind is left in these sails?
Sam Clement (02:01):
It’s a great question and there’s obviously no way we can fully confidently answer that, but –
John Norris (02:06):
You can look into the crystal ball of this right in front of you.
Sam Clement (02:08):
I don’t see that answer in there right now.
But you mentioned how much more can this have and the shift from seven cuts to zero to 2-3-ish, and again changing on the day. And, really changing on the Fed speaker-of-the-hour seems to be shifting it so much. And I don’t know, I just, my biggest hope is that if the market is going to continue, which I think this story gets a lot harder, is: do you really need rate cuts for stocks to go up? And I don’t think that answer should always be yes. And I think historically that’s not the case. The market in young investors, which I would probably put myself into that boat, you tend to think we have been, for the last 15 years, really, in this market of lower rates, means stocks go up. But that’s not always the case and historically has not been the case.
John Norris (03:04):
Well, I mean a few years ago I could have made the argument that lower interest rates, actually short term, can goose an economy, but a steady diet of longer term rates thereby depresses risk taken because you just can’t make as much money and will ultimately retarded returns over the long haul as we saw in Japan and as we’ve seen in much of Europe.
Didn’t really catch fire here in the United States. But even so, I do believe that lower rates, lower structural rates for a long period of time is anathema to long-term strong economic growth. Now with that being said, sitting around waiting for the Fed to cut rates in the hope of a B12 shot in the economic arm is kind of crazy and sitting around thinking about it, hoping for it, people are wanting the cheaper money, getting more deals done, and in the meantime, the S&P 500 has gone to some valuations, which historically would be kind of difficult to justify, particularly with interest rates where they currently are.
Sam Clement (04:09):
I want to expand on one of the words you just said.
John Norris (04:11):
What word is that?
Sam Clement (04:12):
Historically.
John Norris (04:13):
Historically?
Sam Clement (04:15):
I tend to think, and I don’t have the answer to the question I’m about to ask, I tend to think valuations justifiably should be different than they have been historically.
John Norris (04:26):
Kids these days.
Sam Clement (04:27):
If a company averages 10% margins and a company averages 20% margins, historically that company that averages higher margins is probably going to trade for a premium, right? And that’s where the market as a whole has gone. The comparison I’ve always heard and I like to compare it to is : talking about movies.
I mean movies 10-20 years ago, you can tell when a movie was made 10-20 years ago versus now the quality is that much better.
John Norris (04:56):
You think so?
Sam Clement (04:57):
In film itself.
John Norris (05:02):
Okay, fair enough.
The quality of the production,
Sam Clement (05:03):
The production, sure, yeah, that’s a good word. But I think that has also happened with companies too. So what kind of premium on companies now, with higher margins, is justified versus companies with margins from 20, 30 years ago?
John Norris (05:19):
Well, there are some old folks like myself that would sit there and say, I hear you, but maybe are you outthinking yourself just a little bit? Basically saying that the quality of earnings might be a little bit higher now than they were, and ultimately I would tell you it doesn’t matter.
It’s because earnings per share is earnings per share. It’s how much do investors want to pay for each unit of profit that a company generates per common share. And when I take a look at things, it’s like doesn’t matter if it’s 1970 or 2070, it does come down to how much money am I getting back for my investment? And I would sit there and tell you that historically for long years the first part of my career, people would’ve said 15. That’s what the P/E multiple should be – willing to pay $15 for every unit of EPS.
(06:05):
I’d say that number’s probably, because of some of the things that you’re talking about, comfortably 17-18. I would say that I think we’re more productive now, can use technology more effectively, maybe not as capital-intensive with a lot of our industries, which enables us to be more nimble.
Okay, I’ll grant you that and I’ll say I will spot you two to three percentage points on the PE multiple.
However, when I sit there and take a look at a trailing P/E, like what we have right now on the S&P 500, again here on the 16th, it’s close to 24. And when I take a look at the forward P/E multiple, it’s close to 25, 26.
And so, when I’m taking a look at it, and that’s according to the Bloomberg, when I take a look at things, I’m going, okay, that’s pretty rich. I’ll buy it, however, something’s going to have to happen. Either
- Economic growth is going to have to accelerate or
- Interest rates are going to have to come down in order for me to justify paying that amount of money.
Sam Clement (07:09):
And you hit on something. Stocks can mathematically only go up for two reasons: it’s either earnings or the expectations of earnings.
John Norris (07:17):
That’s fair, that’s better put.
Sam Clement (07:18):
…Expectations are going to be growing or you’re just willing to pay more for that same amount of earnings. There’s no mathematical way, outside of those two, that stock prices go up. And historically, its earnings with fluctuations in the multiples that people are willing to pay, given the time period. And so that’s really what I think you’re hitting at. The main question is: where is this going to come from for the rest of the year? Or 12 months from now? Two years from now? That high multiple that people are seemingly willing to pay right now – tends to sound like it has to come more from earnings. Upside earnings.
John Norris (07:55):
Well, I would agree with you 100%, absolutely not trading perspectives on that at all. However, while you were talking, a question popped into my mind. Recently, we’ve talked about the disconnect between people’s perceptions of the economy and what the official debt and what the administration would like for them. I mean if I’m Joe Biden, I’m beside myself, why can’t people get it? However, the complete opposite is true, it seems like, with stock investors. So why is it the American consumer or the general population are feeling so negative about things but investors conversely are feeling so positive about them? Simply, you would think that there would be a pretty strong positive correlation, but there seems to be almost a negative one right now.
Sam Clement (08:40):
And that’s interesting, because you tend to get consumer sentiment largely off two things and one we highlighted last week. I think gas prices and the stock market tend to give you a good idea of how the consumer’s sentiment is directionally headed. Gas prices aren’t going much higher and the stock market’s going higher. Consumers tend to, at least how it’s measured, feel better, vice versa. That’s kind of been broken.
The Dow crossed 40,000 today. Phenomenal, and consumers still don’t seem to be all that happy.
John Norris (09:18):
But why?
Sam Clement (09:21):
That’s a good question.
John Norris (09:22):
That’s a real good question. It’s like, I wish I had the answer for that. I wish my crystal ball would tell me that. And I keep on coming back to, well, what else am I supposed to do with my money? Everyone would tell you that ownership, equity, is the best way of generating wealth. It’s not putting your money in a mattress or underneath the mattress or in a coffee can or what have you. It’s ownership. You’ve taken that risk. Now, you get the upside. You also get the downside, too, if it doesn’t work out. But everyone’s heard that you have more people than ever participating in 401k plans, passive products, all that stuff. Do you think, arguably, maybe or inarguably, as the case may be that the prevalence of passive products and the sheer numbers, millions of people participating in 401k plans and the like, with passive products, is driving the market higher and could potentially justify slightly higher multiples because moving forward, because people are setting things and forgetting them.
Sam Clement (10:32):
We may be trading perspectives here.
I don’t think passive has as big of an impact because I think prices are set on the margins, largely. I think the active community and the active traders and investors, on the margins, are who are setting prices. I think the 401k community, and I do think multiples, I think you’re always going to a little extra demand, but I think at the end of the day prices are set on the margins and I think we’ll continue to see that. And I could almost argue that more people getting out of the active space could start to better regulate prices and better regulate where stocks should be.
John Norris (11:11):
Believe it or not, I don’t disagree with you on that. I am just throwing that out there.
Trying to play a little bit of devil’s advocate because I believe people in their 401k plans are more reactive than proactive and it is the hot money and the active guys that when they rebalance back and what have you, that’s what sets prices in motion. And then typically, the weekend investor or the Monday morning quarterback or what have you, they follow suit and that’s just the way it happens.
But when I’m taking a look at things, taking a look at how pretty it is outside taking a look at the stock market, frankly Sam, we can talk about it until we’re blue in the face. I just don’t know what the markets can continue to do for an encore.
I’ve been pretty forthright with it. I think the summer could be pretty volatile. May has been confoundingly, although in a good way, confoundingly strong. I don’t see how we keep on having these 4% type months without the ultimate and inevitable correction being greater than what I thought it was going to be at the beginning of the year.
Sam Clement (12:18):
Yeah, like you’ve said, and like I said earlier, the story going forward gets harder when you just look at the pure math of the two reasons that stocks can go up. That by no means means they won’t continue to go up, though. So it’s that balancing act of where is this going to come from? Not having an answer, but also pointing to some historical trends that on average stocks are up 20% or more in a year more often than they’re down in a year and that average eight to 10% return that we’ve gotten over time or eight to 12%, almost rarely actually happens in a calendar year. So we tend to get those big wild swings in the market.
And that’s what you mentioned, you’re owning companies, you’re owning equity, you’re owning the risk in it, and that risk kind of wildly fluctuates between years and years over any sort of time horizon.
John Norris (13:08):
What do you think, and this is shifting to the side just a little bit, what do you think could alter this era of good feelings, good tidings to change the investor psyche from I would say pretty doggone positive. What could change it to being negative? Because when I take a look at the news out there, read the headlines, see what’s going on, see the trends in society, it all seems pretty negative and yet we seem to be pretty positive about things. What would, could or should happen this summer to get people to quit feeling so positive about their stock portfolios?
Sam Clement (13:47):
The easy answer would : One, be if earnings collapsed, which I just don’t see.
John Norris (13:52):
I don’t see them collapsing.
Sam Clement (13:54):
That’s always a reason why people would. If you start seeing big misses from big companies and not just a handful of them with some idiosyncrasies.
John Norris (14:00):
Much of that stuff is now on autopilot, truthfully.
Sam Clement (14:03):
Truthfully, right. I think the biggest risk to the market, personally, is if term premiums start rising. And that could get real into the weeds, but if the money required to invest longer term and in bonds starts going up more than it has, I think that’s where the market starts to have some risk.
John Norris (14:21):
Well, given the fact that the Fed has now pretty much said that they’re going to unwind their quantitative tightening or shrinking of their balance sheet, would you argue that that could potentially put a defacto put on the bond market? And if that’s the case, if interest rates aren’t going as high as they would’ve, could’ve, or should have, do you think that would enable stock investors to remain more positive for longer?
Sam Clement (14:44):
I think that’s a big part of it and I think that is the optimist’s story. There’s several outcomes we can have over for this market cycle. We can have this hard landing that some people are talking about where it’s an earnings collapse, it’s what have you, a significant drawdown.
John Norris (14:59):
But do earnings really collapse when inflation’s percolating? No.
Sam Clement (15:03):
We could have this soft landing where inflation continues to come down a little, maybe not the best economic growth, but right now we’re still having pretty strong economic growth or:
- maybe we get this economic nirvana where it’s earnings remain strong,
- we get 10 to 12 plus percent earnings these next two years.
- We get term premiums that don’t really rise if 30 year goes to 4% or what have you,
And that’s kind of that sweet spot and it’s a tight window where it becomes nirvana for stock markets.
John Norris (15:32):
I mean, what you just described certainly would be nirvana. I mean just would be sort of like, let’s throw out everything we learned in school. Let’s throw out everything that we learned in, or at least I learned, in graduate school 30 years ago. Let’s throw all that out because it just doesn’t apply any longer.
Do you think that the rules have changed?
Do you think moving forward, people of a younger generation are going to view the markets differently, view things like P/E multiples, PEG ratios, term premiums… they’re going to view them differently than people of my generation?
Sam Clement (16:06):
I think so a little bit. I think the P/E is the most commonly talked about ratio for how expensive or cheap the market is. I think that’s one that is already relatively antiquated just talking about price to earnings multiples because some of these companies are consistently growing at higher rates than we thought were possible, previously.
They’re growing 30- 40 plus percent with 50, 60, 80% margins on their products and continuing to do it at scale that previously seemed to possible for a company that was one, two, $3 trillion. So I think some of these metrics that we’re looking at, I think you’re already seeing consumers, younger consumers, invest in companies that they just believe in the products and dismissing multiples. I’ve seen it with restaurant companies. People just love the food at a restaurant and this stock may be trading at 50, a hundred times forward earnings, but they believe in it and they believe the company’s going to grow its way out of that extreme multiple.
John Norris (17:09):
So do you think it’s virtue investing? I mean, is that what you’re saying? Virtue investing from your generation?
Sam Clement (17:17):
A little bit. And anecdotally, I feel like I’ve seen more advertisements for that in the brokerage industry, how you can customize these kind of trends you want to do. I think it was Schwab that talked about these themes that you can invest in and you can tweak the percentages and take out companies that you don’t believe in. And so you are getting more away from, slightly away from, this invest broadly in the market and then shifting it towards investing in this theme or this company that you believe in the company, independent of the multiple, you believe in the company. It is almost a ballot box for people.
John Norris (17:54):
Well, it’s going to take a little while your generation accumulates its wealth, right? I mean, it’s not going to have quite the same amount that the baby boomers have and the Gen Xers have. People that are largely fueling the markets with excess, well, not excess, but savings and balances and 401ks and what have you. What’s it going to take for your generation to convince my generation that you’re right.
Sam Clement (18:18):
I don’t know if we have to. We’ll just wait it out. That’s my dark answer
John Norris (18:28):
On that. Well, there I am. I’m dead man. Walking, I think!
Sam Clement (18:32):
You see trends in markets and I think there are long-term cyclical trends that you see and the democratization of the markets I think is one that we’re still early in the process of. I think the markets as a whole have gone from stock brokers, in the past. What you were buying or what you were paying them for was this knowledge and information gap… that they could provide you tips and stock tips that you couldn’t get otherwise.
John Norris (19:03):
Also then just sheer access to individual shares.
Sam Clement (19:05):
Right- It was this access to knowledge and actual securities.
John Norris (19:09):
No, you can get that access anywhere.
Sam Clement (19:11):
The whole environment and the value add and the value proposition has changed entirely and I think we’re still in the early innings of that.
John Norris (19:20):
So does that cause some of the premium that we’re talking about? The democratization of the investment markets as more people have access to it and knowledge is more perfect?
Sam Clement (19:37):
I don’t know. Again, I think an individual company’s circumstances in the short term, a hundred percent can impact it. I mean we’ve seen it these past couple of weeks with the GameStop and AMC reviving themselves with the meme stocks.
John Norris (19:54):
I find some of that frustrating, by the way
Sam Clement (19:55):
To me, it’s exhausting to even talk about, so I think we’ll leave it at that. But I think the margins are where prices are still set. I think the smart money, and I almost hesitate to use that term, but I think the smart money is where prices are set.
John Norris (20:14):
I think you’re right about that and we’re getting a little bit long here today, so I’ll tell you that the markets have been red hot. There’s just no way around it. I guess the oft-given reason why the markets have been hot for the last seven months, really, in particular, and a good chunk of last year, but not all of it, but the last seven months in particular understanding we’re in the fifth month of 2024… it is due to the fact that people were anticipating cheaper money at some point in the not-so-distant-future that would cause earnings to accelerate more rapidly. However, we haven’t had that cheaper money and earnings still continued to be strong, so people didn’t see any real reason to sell what they purchased in anticipation of cheaper money. And now we’re sitting here waiting. Maybe we get rate cuts this year, maybe we don’t. But as long as corporate America continues to put a decent, it doesn’t have to be awful, but as long as they put in a decent earnings results, you’re going to be very hard pressed to have a lot of people sit there and say: I’m going to sell these stocks and realize a pretty sizable tax bill – when things are moving along okay.
Sam Clement (21:18):
Yeah, you need a bigger reason to do it, especially we said, what, up 12% almost on the year and people are talking about 5% yields being awesome. You got that in like four weeks. You need a better reason than 5%, I think.
John Norris (21:35):
I think you’re probably right. And so I think when push comes to shove and absent some sort of massive flock of black swans, we’re not going to see that market collapse that most people were concerned about. I would be surprised if the markets continue to increase the way that they have just, if nothing else, outside of sheer exhaustion. However, it’s going to require something. Earnings misses, a dirty bomb going off in the U.S., something along those lines in order to, I think, shake the U.S. investors out of their positive nature right now.
Sam Clement (22:12):
Yeah, I think that’s human intuition.
John Norris (22:13):
I think that’s human intuition, and if the news isn’t bad, there’s no reason to pay the tax man all that bad stuff. So, that’s kind of where we are. It’s kind of a vague answer, but until something a little bit more negative happens in the economy or geopolitical events- and it can’t get much more negative in a lot of ways – until something really detrimentally impacts United States directly, either on the economic front or military or what have you.
I see U.S. investors continuing to be relatively sanguine about the future.
Sam Clement (22:47):
I agree.
John Norris (22:47):
Alright guys, we always love to hear from you. So if you have any comments or questions, please by all means, let us know. You can always drop us a line at or you can leave us a review on the podcast outlet of your choice. As interested, If you would like to hear or see and read even more than that, you can go to our website, oakworth.com. Take a look underneath the Thought Leadership tab and find links to all kinds of exciting information, including previous episodes of Trading Perspectives, our blog / newsletter, Common Cents, and then our quarterly analysis and magazine, Macro & Market on top of all other kinds of exciting stuff. With that, I’m going to give Sam one last time to say something just cripplingly intelligent about this stuff.
Sam Clement (23:39):
I’m letting you down. That’s all I got.
John Norris (23:41):
I’m going to let myself down here today too. Y’all take care.
