Listen to the full episode, here.
John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have a good friend, Sam Clements. Sam, say hello John. How are you doing, Sam? I’m doing absolutely fantastic if for no other reason than the election this past Tuesday is over, I’m tired of reading news about the campaigns. I’m tired of backbiting, mud throwing all that stuff
Sam Clement (00:49):
And the text messages, I don’t know if you got as many text messages as I did.
John Norris (00:51):
Listen if you’re on social media as well, all these people saying this crazy stuff. In any event, I’m glad that it’s over.
(00:59):
I’m very glad that it’s over and apparently the markets yesterday were – the Wednesday after the election – as everyone probably listening to this knows the markets took off. I think the Dow was up over 1500 points by the end of the day. The financial sector was up over 11%, small-caps up between five and 6%, energy up around five to 6%. It was a wonderful day for the equity markets. Just in general. Not everyone made money. Real estate market, real estate sector was down, utilities were down, but a lot of people made a lot of . And conversely, the bond market sold off like crazy. Absolutely selling like crazy. So Sam, here we are, it’s the Thursday after the Wednesday and the Tuesday, which is generally when Thursday falls by the way, after Wednesday and Tuesday,
Sam Clement (01:44):
Typically, usually.
John Norris (01:45):
Usually. I think maybe some people thought that it might not. But regardless, what do we make of this? I mean, typically you’ll get a little bit of a bounce in the markets, all that stuff. November’s good for markets, historically. They tend to rally after presidential elections. If nothing else, it’s over with. It’s done. We know what to expect moving forward. The markets hate uncertainty, but yesterday was sort of weird.
Sam Clement (02:11):
So I think we’d start with the equity markets and then we can move into what happened with the bond market. But you mentioned it first off with things before the election, a little more volatile and that’s normal. Volatility picks up and then the second the election’s over or the second it’s known which way things are going to go, maybe a better way to put it, that volatility or that uncertainty is a good way to put it, starts to kind of just be removed. We can now largely predict what things are going to look like over the next four years or at least have a game plan of it. So that uncertainty is largely removed. I think a good point to make is as great as the equity markets – you hint on this – as great as the equity markets were the day after, a lot of names were down.
John Norris (02:56):
Yes.
Sam Clement (02:56):
I mean the breadth, which is the amount of names that are up versus down was really not that great given how much the market was up. I was surprised by that. I think that’s the key takeaway is that is kind of where the markets are going. There is risks with either party to certain sectors, certain areas of the market, certain business models, and that was kind of the game plan or that’s kind of the vision for what people think a Trump Presidency is going to mean for the equity markets. We saw names that had China exposure, significant China exposure. Those names were not doing so great. A lot of them were down on such a big, big up day. Names that were super rate sensitive to the long end. A lot of real estate-related or somewhat real estate-related like home builders, Home Depot-type stuff, what have you, those didn’t have the best day ever yesterday. So those and names with lots of international currency exposure. If you have a lot of business outside of the U.S., those weren’t great. So that’s a long-winded way of saying the markets were great and obviously the tax implications are great for earnings as a whole, but this isn’t a story that every company is going to be impacted the same.
John Norris (04:07):
Well, I agree with you on that, but just kind of taking a look on the entire market as a whole, if someone were to pin me in a corner. I mean not one person, several people have: What in the hell is going on? They might not have used such course language, Sam, but at least they were asking. And there are a number of different reasons without getting too nitty-gritty, but I told pretty much everyone the same thing: Here, we’ve had a wonderful run in the stock market over the last two years, right? I mean 2022 seems like a distant memory in a lot of ways. 2023 we scored great. This year’s been much better than I think a lot of people would’ve expected at the beginning of the year. Earnings have been okay, earnings been pretty good, but when you take a look at the price-to-earnings, multiple or ratio, whatever you want to call it, you’ll see that that has expanded over the last couple of years. So investors have been willing to pay more and more for each unit of profit that corporate America has been able to generate. Part of that has been in anticipation of lower short-term rates, all that stuff. But even so we take a look at most recent earnings announcements. They’ve been good, they’ve been fine, but I don’t think anyone would’ve expected the markets to continue to just go up and up and up…
(05:19):
Unless all of a sudden we saw a marked increase in corporate profitability in 2025 because you just can’t keep on expanding your multiple fiber.
Sam Clement (05:27):
It works in the short run, but earnings growth is the best long run predictor, and we’ve talked about this before. We’ve had this multiple expansion. At some point the E of that P/E ratio is going to have to start kicking in.
John Norris (05:39):
It has to do, there’s just no other way around it. As sure as the nose on my face, which is getting larger as I get older and as sure as the sun will come up in the East tomorrow, the “E,” earnings, have to accelerate in order to maintain a strong healthy rally. Now, with that being said, and with that in mind, really, you had two kind of divergent sort of views between the two candidates and parties this go around.
(06:03):
One side, the Republicans, were talking about cutting corporate taxes. I think Trump has mentioned something 15%. I think it’s currently now 21% if I’m not mistaken. And the other side was talking about increasing it to at least 25%. You don’t need to be a mathematician or graduate of MIT to know that when corporate tax rates go down, businesses should make higher levels of profit.
Sam Clement (06:26):
Yeah, that’s not a political point. I mean you can talk about ramifications after and tax revenue or what have you…
John Norris (06:34):
We can talk about all of that. But where investors are concerned, a lower corporate tax rate is good for profitability, which should be good for share prices. I mean, that’s just, take the politics out of it. You’re just simply investor thinking solely about your investment portfolio. Someone comes up to you and says, what’s better for your investment portfolio: lower corporate taxes or higher corporate taxes: what are you going to say? Lower. Of course. And so, that is I think part of it yesterday. I mean, I cannot imagine that that didn’t play a part in some people’s mindsets. Everything that you said is absolutely spot on accurate. So does this rally continue? You can’t expect it to continue at 1500 points in the Dow every day.
Sam Clement (07:22):
That’d be sweet.
John Norris (07:23):
Listen, tell me about it. How much longer does the rally continue and to what sort of depth and breadth do you think we should be telling folks?
Sam Clement (07:35):
Well, it’s hard to know right now. That’s a tough question. He’s Trump is not even president yet. We have a few more months or really, I guess around two months, before we start to actually see any sort of substantial changes in policy.
John Norris (07:50):
And then it takes months for policies to, listen…. I mean no matter what happens ultimately we have the Trump part two. The first six months of the year is already largely baked in.
Sam Clement (08:04):
As far as corporate earnings and GDP growth.
John Norris (08:08):
It’s already baked in.
Sam Clement (08:08):
But how much does just sentiment around something like the Tax Cuts and Jobs Act being extended another 10 years?
John Norris (08:18):
Listen –
Sam Clement (08:19):
The markets are pricing in, typically what’s happening next year, right, so…
John Norris (08:22):
The investor psyche could be completely different. But in terms of just where we’re in terms of economic growth, in terms of corporate profitability, just hard numbers… a good chunk of the first part of next year is already baked in.
Sam Clement (08:34):
Absolutely. On companies, the GDP of the country as a whole. Again though, the tough thing to pan out or plan out is how much does sentiment change things?
John Norris (08:45):
That’s right.
Sam Clement (08:46):
I mean, yes, so much of this is already… I mean, first quarter spending is largely planned out for most companies already. But how much does this sentiment changing, if companies are more optimistic or pessimistic? Again, take your political viewpoint out of it. Sentiment does have some impact, but that’s I think a hard thing to predict.
John Norris (09:07):
I agree with you on that.
Sam Clement (09:08):
It’s a hard thing to predict out how much that’s going to play a role in actual dollars and cents.
John Norris (09:14):
Actually, I agree with you 100% as I always do, Sam. Well, most of the time. I agree with you hundred percent of the time, like 80% of the time. Sort of like with that line from Anchor Man.
(09:26):
One of the things that I, and taking a look at and reading social media leading up to the election and while we’re on topic of corporate tax rates and profitability, there seems to be really, in my estimation, maybe some lack of understanding of exactly how the corporate world works. Now, I’m not going to sit there and defend people that are making $50 million, a hundred million dollars a year when they didn’t start the company. I’m not going to do that. I’m just simply not. However, there is absolutely no downside in my estimation to corporations making a higher level of profit. The higher the level of profits, the higher the wealth generation in society as a whole. And by the way, there’s more money left over, literally and physically, in the bank accounts in order to do more research and development, and then Sam, even hire more people and even have money to give out bigger raises.
(10:27):
So when I’m reading: we need to increase corporate tax rates in order to increase federal revenue, I’m thinking to myself, you got that backwards. And actually to increase corporate revenue, you really need to cut corporate tax rates. So there’ll be more money floating around the private sector in order to generate more economic activity. And by the way, I know people will talk about inequality in society and what have you in terms of wealth, growing wealth by increasing corporate profitability, by stock prices going up, all that does is expands the pie that much more, I mean completely expands the pie. So some billionaires get wealthier. If my 401k plan is up 15%, I’m okay with that.
Sam Clement (11:17):
It’s hard for lower class, lower quintiles to…
John Norris (11:23):
To grasp that?
Sam Clement (11:24):
To frankly move up. For their net worth to grow without the high income earners, the billionaires of the world’s income,not growing net worth to not grow.
John Norris (11:37):
The places where we have seen a significant reduction in the top quartiles wealth and a significant increase in the bottom quartile’s wealth… but when it happens at the same time generally leads to poor overall results.
Sam Clement (11:49):
And that’s kind of an obvious thing. This idea that the rising tide lifts all boats is very valid, right?
John Norris (11:58):
It leads to inequalities in absolute sense it does. I mean if Jeff Bezos grows his wealth 15% next year, it’s just a math thing. And you grow your wealth 15% next year, then obviously, hey, your wealth still will increase by the same percentage; by the same amount. But the absolute dollars are so much different. However, in that situation, Sam, how have you gotten screwed?
Sam Clement (12:24):
Well, you haven’t, and frankly, a lot of times you can see it the other way percentage wise. If my portfolio is up 15%, my income’s up 5%, I’m doing much better. A lot of these billionaires aren’t making active income right now
John Norris (12:40):
No.
Sam Clement (12:41):
And 15% on their portfolio is obviously going to be a bigger thing. So it’s just a compounding interest, frankly.
John Norris (12:50):
I mean, it is awful when two people were sitting there staring at each other saying, yeah, I get it.
Sam Clement (12:54):
Like, wrap It up.
John Norris (12:56):
I get it. But really we started off talking about just the market rally. We’ve talked about stocks and then we kind of went down a little bit of a rabbit hole. I apologize for that. Everyone is listening. What in the world happened with the bond market yesterday? I mean, I woke up, this is what I do every morning when I wake up. I wake up at 5:30 AM. What time do you wake up?
Sam Clement (13:17):
5:45, 6.
John Norris (13:18):
Okay, I wake up at 5:30 and I could be more productive, go to the gym or what have you. I’m not that way at all. I get up, I play a game called the Quordle from Merriam Webster. I play a game called the Waffle, all word games, and then of course the last game, the Wordle from the New York Times. And so I get that. I do that stuff, knock it out, get the cobwebs out of my head, and then immediately I go to the futures market, take a look what’s happening, go read my stuff, what’s going on overseas, overseas markets, all that. Take a look at bond rates. And the first thing I did on Wednesday, because I went to sleep at 9:30 on Tuesday, I did not know who won. I didn’t know at all. Woke up. I saw the market was up 1200 points, futures, when I first turned them on. And I went, what? Holy smoke. And then I immediately went over to the bond market. I did it on Yahoo Finance and I went on Bloomberg and then I went everywhere and I go, what?
(14:19):
Because I have been doing this a pretty long period of time, longer than you’ve been alive, and I have not seen very many days when I’ve seen the bond market sell off as much as it was selling off prior to officially opening on Wednesday. It came back a little bit as the day went along, but we were talking about a 10 to 15 basis point increase in the 10-year and what have you, in one trading session. That’s weird. What happened?
Sam Clement (14:52):
Well, again, it’s obviously different, but it’s cut from the same cloth of what worked on the other side of things. I mean the equity market moves, I would say the fixed income market moves were more significant even than these 3% across indices on the equity side of things.
John Norris (15:07):
I agree.
Sam Clement (15:07):
But the higher long-term rates has been, again, whether it should be or not, we don’t even have the policies yet, but higher long-term rates has been part of the Trump trade.
(15:19):
And that in a silo doesn’t tell you why. If long-term rates, you could say we’re going to blow it out with inflation. We’re going to have 4% inflation over the next 30 years. That’s why it’s going up. Or you could say, we’re going to have higher long-term growth rates. So you have to take that as a piece of this overall mosaic with what’s happened in the equity markets, what’s happened with the U.S. dollar… piece all these pieces of the puzzle together. And that’s been the story. And it seems like the market was pricing in higher growth rates as a reason for why long end of the curve is steepening. So significantly.
John Norris (15:54):
That would have to be really the only answer I could think of as well, because when you take a look at the current administration, the Biden administration’s predictions for the next 10 years, you get a Table S-2 of the budget there Sam.
Sam Clement (16:07):
I have it bookmarked.
John Norris (16:08):
Yeah, there you go. You’ll see that current administration is predicting the accumulated deficit will grow another $19 trillion over the next 10 years. I’m not sure there’s much that the Trump Administration could do to increase that significantly. Maybe so, and there are people out there may be yelling and screaming when I say that type of thing. However, I don’t think bond investors are thinking that there’s going to be that much difference between the two parties in terms of deficit accumulation, if you will. So it would almost by default, in my estimation, I could be wrong, but in my estimation, people are anticipating high rates of growth. That’s the only thing I can think of that would cause that sort of market sell off. That, and the fact that since so much money was going into equities yesterday, money had to come from somewhere. Believe it or not, no matter what Washington thinks, money still somewhat finite. Money has to come from somewhere. So I’m going to sell these bonds that I was holding onto in case of a gloom and doom scenario, and so I can go out and buy stocks.
Sam Clement (17:10):
Yeah, again, it’s this mosaic of where money is, money flow is, I mean, it’s kind of everything. RIght? Where is money coming from and where is it going to be going?
John Norris (17:21):
Well, listen, I worry about that all the time.
Sam Clement (17:23):
I think everyone does. And again, taking that uncertainty out, right? Not the uncertainty of what things are going to look like, but what policy is going to look like over the next four years. I mean, we have a strong Republican Senate right now. I mean the strongest it’s been in a while.
John Norris (17:40):
Yeah.
Sam Clement (17:41):
There’s a chance…
John Norris (17:41):
Probably end up with 53 Republican senators?
Sam Clement (17:44):
Probably not 54, but that seems to be the high possible.
John Norris (17:48):
Yeah, that seems to be the absolute limit. I think last I checked, we’re 52. One seems like, okay, let’s go ahead and call the other one’s a real toss up.
Sam Clement (17:57):
Probably the other way. But nonetheless, you take that uncertainty out, strong Republican Senate, Republican President leaning Republican House, you have an 18 month runway, really.
John Norris (18:09):
Yes.
Sam Clement (18:10):
I mean there is a lot that can be passed the first week. They’re going to pass bills, they’re going to… young judges are going to be stamped for approval every day, just about. Policy can change really quickly when you have a clean sweep.
John Norris (18:29):
Well, it can change really quickly and unfortunately history suggests it doesn’t always work out so well. It seems as though when either political party has all the levers of government, they don’t do as well as what their adherence would like for them to do. And oftentimes gridlock is best because nothing gets done. However, if it’s your party that does a clean sweep, you’re very joyous. And so we’ll just have to see whether or not the Republicans can maintain control of the house. If that happens, I can’t imagine that they won’t extend the 2017 tax cuts. I just can’t imagine that they wouldn’t, which would be bad for estate planning attorneys, but at the same time probably be pretty good for investors longer term. And then when you kind of take a look at everything, it’s just like this is not… Trump, believe it or not, is not an unknown quantity.
(19:21):
We know he can be boorish. We know that a lot of people don’t like him. He doesn’t have very many filters, all of that stuff. We know that. But we also have four years worth of experience with him. In 2020 with the pandemic…. Listen, I don’t care. Biden had been in there… Barack Obama, George Bush, Donald Trump. It was going to be a weird year and things are going to get a little screwed up really. But if you take a look at 2017, 18, 19, what did we see? But lower taxes, which historically has been good for corporate profitability and fewer regulations. I mean, regulations actually came down a little bit. If nothing else, there wasn’t any growth in regulations. And for everyone that thinks regulations are great, all they are is a cost on business. When you put a regulation on a business, businesses obviously have to adhere to it. And so that means that there’s going to be a cost involved in it, either through lost opportunity costs or outright compliance costs.
(20:23):
And so when that happens, money’s not being spent to, arguably, maybe its highest and best use in terms of generating corporate profitability and therefore wealth for investors. So we know kind of what Trump’s policies are in that regard. Lower regulations, lower tax rates, and if that is what you like as an investor, which most investors probably would, at least those who are out to make as much money as they possibly can, and we can talk about greed maybe some other time when we have the podcast on politics and religion at the same time. That will be our last podcast, by the way.
Sam Clement (21:00):
It’d be a good sign off.
John Norris (21:01):
It would be fantastic, but if you’re out there simply to make money, we have a pretty good idea what Trump’s going to bring. Not that the last couple of years during the Biden Administration hadn’t been great for investors making money. I’m not trying to denigrate that, but we have a decent idea of what Trump brings and right now with how strong the market has been in the last couple years with the question mark out there, what can corporate America do to increase their profitability moving forward? This came at a great time for a lot of investors that kind of had that big question mark over their head.
Sam Clement (21:36):
Yep. Just remove that question mark. Again, we have a little bit of a blueprint for what things are going to look like. Trade war is a question mark, but overall lower tax rates on companies…
John Norris (21:48):
And at least maybe not as many regulations moving forward, add the two together should be an increase in EPS, all of the things being equal, earnings per share. And then we’ll just have to see where it takes them from there. Now, in terms of the remainder of the year, historically, November and December have been good for the stock market, historically, on average, all that stuff. Past performance is not indicative of future results, all that good stuff. Historically, it’s been okay. So I anticipate we’ll probably skate through the remainder of the year, probably in the green, but it’s because of the strength of the rally yesterday. The green might not be as dark for the remainder of the year as it was yesterday. Alright. Well guys, thank you all so much for listening. If you have any questions or comments, please by all means, let us know.
(22:33):
You can always drop us a line at or you can leave us a review on the podcast out of your choice. As always, if you’re interested in reading more or hearing more of what we got to say or how we think, you can go to oakworth.com, O-A-K-W-O-R-T h.com. Take a look underneath the thought leadership tab and find links to all kinds of exciting information, including links to previous Trading Perspectives episodes, as well as links to our newsletter slash blog Common Cents, our quarterly piece, Macro & Market. And then also our advisory services group by Mac Frasier puts out a lot of good stuff. It’s all there just waiting for you. And Sam, the best part about it is it completely free.
Sam Clement (23:18):
Love it.
John Norris (23:19):
Well,
Sam Clement (23:20):
No strings attached.
John Norris (23:20):
Well, I think people should love it. Well, I wouldn’t mind making a little bit of money on it, but maybe one day. Sam, anything else to say on this exciting topic?
Sam Clement:
That’s all I’ve got.
John Norris:
That’s all I’ve got to do too. Y’all take care.
Please note, nothing in this podcast should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.