Ryan Detrick, Chief Market Strategist at Carson Group joins Benzinga's Premarket Prep team to discuss how the US economy performs in election years.
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00:00All right.
00:01Ryan Dietrich.
00:02Good morning.
00:03How are you doing?
00:04Good morning, guys.
00:05I'm excited to be here.
00:06I think I might've set a record for charts.
00:07Yeah, I know.
00:08There's just a lot going on, so I'm excited about it.
00:11We got to get into it.
00:12I don't know if you were listening earlier, but I gave you some props where you were dead
00:16on and saying everyone was freaking out when we started raising interest rates above 3%
00:20and I don't know how long ago this was now, a year and a half ago, and you were saying,
00:23wait a second, stocks tend to do well when we're raising interest rates because it's
00:29usually with a strong economy, which is good for stocks.
00:32Is the same true for the other side, that everyone might be excited about rate cuts,
00:37but then the underlying effects of why we're cutting rates actually bring stocks lower?
00:41No, that is a great point.
00:43Thanks for remembering that.
00:44We've been in that camp that, listen, higher interest rates aren't bad because it probably
00:48means the economy's good.
00:49Earlier this year when they said seven to six cuts, we're like, whoa, if we see seven
00:52to six cuts, it probably means bad things are happening.
00:56We've talked about this before in our shop, but if you have a couple of surgical cuts
01:00because maybe they hiked a little too much, kind of a la the mid-90s, it's kind of that
01:05scenario we keep seeing.
01:06We don't think it's that bad.
01:07I believe if they cut four, five, six times, yeah, that's probably a problem, but we're
01:11still ... I've got some charts that will say this.
01:13We still think there could be two cuts this year, it's more kind of surgical.
01:15Again, inflation's coming back, like I'll talk about here, but big picture, a couple
01:20of cuts would be perfectly normal and okay, but multiple cuts, yeah, then that could be
01:25the problem area, so they say.
01:27All right, well, Ryan, let's get your charts up and we can start ripping through them because
01:31I am curious.
01:32I mean, once we started getting some of this lighter economic data a couple of weeks ago,
01:36I was saying that too, like, oh, rate cuts back on the table.
01:39A lot of people were like, no way, B, you're crazy.
01:41Inflation's still too high.
01:42I'm curious what you have that shows that you do still think two rate cuts on the table
01:48for 2024.
01:49Yeah.
01:50Do you see election years are still strong, hopefully?
01:52We do.
01:53Perfect.
01:55I mean, I've shared this chart every time with you guys.
01:56I'll just do it quickly.
01:59Last year, pre-election year, normally pretty strong, especially with the first term president.
02:02Boy, oh boy, that played out.
02:04And then this year, 10 of the last 10 times you had a president up for re-election, like
02:08we currently do, obviously.
02:10The market's been higher, 12% average, ballpark where we are on the S&P, on a total return
02:15for the year.
02:16We still hear some more upside, as I'll discuss, but that's just big contextual things to think
02:20about that.
02:21Election years, we hear all these things, 2008, 2000, 1960.
02:25Those were lame duck presidents, and I know there's different scenarios in those particular
02:29years, specifically tech bubble, GFC, but just big picture, election years usually do
02:34just fine.
02:35Now, here's a cool one seasonality-wise, and I'm aware April's usually strong.
02:38Well, we were down almost over 4% or so in April, then we had bounced back with over
02:434% in May, but just be aware, June and August, which usually aren't all that great of months,
02:48we know that, in an election year are strong.
02:50We've been, on our shop stand, there could be a summer rally for a while, and I'm going
02:54to cheat a little bit, saying summer started in May here with some of this rally, but we're
02:58not too surprised by this.
03:00I will say, I looked this up, the times you had more than 4% drop in April and more than
03:064% gain in May, it's super, super rare, because normally the opposite happens.
03:11It was 1936 and 1942, so that was right before World War II started in 42, and 36 was a very
03:19contentious time with the Olympics, and Germany, and Hitler, and all those things, but you
03:25know what?
03:26The rest of the year, those two years, guys, gained almost 20% from the end of May through
03:29the rest of the year, so just think about that.
03:32We have a washout in April, strength in May, but I'm going to dig in a little more.
03:35When you gain at least 4% in May, and I thought this was funny, maybe a sign, I don't know,
03:40it's early in the morning, I thought that was funny, maybe a sign, get it, get it, May.
03:43Anyway, so when you have a strong May, an abnormally strong May, like we just did, we
03:48just gained over almost 5%, just missed it with that late, late rally that we saw last
03:52Friday, but nonetheless, June, it is one of those, it is what it is.
03:56You see it here, June's up 8 out of 10 times of 1% on average, median higher, June's down
04:00on average, right?
04:01June's usually not a good month, I mean, we know that, but when you have a strong May,
04:04you tend to get continuation, and check out the rest of the year, it is what it is.
04:09Median return darn near 13%, look at the last couple times, 2020, 19, 2003, 1997, the rest
04:17of the year, gained double digits every time, right?
04:19So just imagine if we gained double digits in the S&P, how angry some of these pairs
04:23would be, you know, but so again, these are some reasons, we've been overweight equity
04:27since December of 22, I'm on you the whole time saying, we still think stocks are the
04:31place to be, stocks still look pretty good to us, and that is still, these things are,
04:35don't see any changes when I see these, a couple more here, we're up 10% for the year
04:39as of the end of May, like we just were for the first time in three years, you see it
04:43here again, June usually does better than average, and the rest of the year again, pretty
04:48strong returns, rest of the year up 16 out of 19 times when you're up at least 10% as
04:54of May, so again, just some things to think about, that's like double the average returns
04:57as you see there, so just some contextual things to think about, now big picture, this
05:02bull market is about 20 months old, give or take, you know, from October of 2022, actually,
05:08you know what, I'll go to that one first, here, we'll go backwards, anyway, so about
05:1120, and the average, no such thing as average, I get it, but still, your average bull market
05:15lasts about five months, I'm sorry, five months, five years, about 60 months on average, so
05:20again, you could argue, and this is what we are arguing, this bull market is still relatively
05:24young, reasons to think it has time to go, now going backwards to where I just was, one
05:29year, remember, I came on with you, we talked about this, one year off those lows, October
05:33of 23, one year off the October 22 lows, up only 21%, worse, one of the worst starts to
05:39a bull market, everybody's knocking it, we said, you know what, maybe there could be
05:42some catch up, because off the 87 bear market, we saw one year kind of low, and then the
05:46second year really played catch up, and we think we're seeing that, now clearly, this
05:51year two expires, if you will, in October, so you can see here, two years off the lows,
05:54you're up about 58% on average, this one's up about 48, 49% on average so far, with time
05:59to go until October, so again, just reasons, in our opinion, to think that there still
06:04could be a summer rally, if you will, in this election year, here's one I've shared before,
06:09lame ducks, I use a little emoji of a duck there, lame ducks are bad, meaning the second
06:13half of the year, when you have a lame duck president, stock market doesn't do that well,
06:17yes, it is skewed by the great financial crisis in 2000, I'll be honest, so maybe you could
06:22say small sample size, but bottom line is just, again, something to think about, and
06:26why is that, believe me, I could talk for an hour on this, markets do not like uncertainty,
06:30as we all know, we have the next president and a current president, I don't think the
06:34markets are going to be overly surprised with whatever happens with the next president,
06:39that's kind of why we think markets tend to do okay when you have up for re-election,
06:42this is cool, I work with a guy named Sonu Varghese on our team, do a podcast with him,
06:46Facts Versus Feelings, Sonu's one of the smartest, nicest guys in the room, he looked at 178
06:51components of core CPI, just remember, no, no, PC, PC came out last week, and this is
06:56a little confusing, but I'll just explain it, he looked at all of them and did like
06:59this plot here, we're seeing outright negative year-over-year inflation on, this is on the
07:06bottom, 30 components out of 178, so when you hear, oh, inflation's stubborn, there's
07:12a lot of parts of inflation that are really, really improving, okay, and we know what's
07:17going on, it's because of shelter, it's because of financial services, my industry, our industry
07:21charging a little bit more, why are we doing that, because stocks are up like 20% the last
07:25year, so that wasn't really factored in, and auto insurance, those things we think are
07:28going to come back, and we're seeing under the surface, we talk about market breadth
07:31all the time, well, market breadth, in our opinion, on inflation is really improving
07:36with a lot of things, seeing negative year-over-year inflation, just a couple more, the consumer,
07:41obviously has been marked dead many times, this is another cool chart that Sonu put together,
07:46he looked at assets and liabilities, okay, big deal, there's a lot of assets, a lot of
07:51liabilities, you've got to normalize it, right, denominator blindness, we do it by disposable
07:55income, doing that, guys, on a percentage basis shows assets, that's the part on top,
08:00is the highest it's been, you know, in 25 years, so people own a lot more, they own stocks,
08:04they own houses, they own, you know, cash getting 5%, so people are worth more, but
08:08then you hear, oh, my goodness, what about that liability, liabilities as a percent,
08:12and you see there at the bottom, liabilities as a percent of disposable income is the same
08:16it's been for 25 years, so yeah, there's more debt, there's more liabilities, but people
08:20are worth a lot more, this is a way of showing the balance sheet of consumers, and we get it,
08:25there's different income brackets, people are struggling, but overall, your average
08:29consumer is in pretty good shape, here's one that makes people furious, this breaks it
08:34down by, which one is it, percentile of income, income, income percentiles, bottom line, lower
08:42percent, people make less money, honestly, I've seen bigger improvements in their liabilities
08:47relative to their assets, we've seen it across the board, but you hear all the time, the
08:50higher inflation, higher rates, and it is hurting people, we're not naive to that,
08:53but overall, there are risks, data straight from the Fed, this is really, there are some
08:57improvements under the surface, I got like two more, bankruptcies, right, bankruptcies
09:02are running 40% less than they were in 2019, 40% less in 2019, if the big monster was coming,
09:11we would expect to see bankruptcies and honestly foreclosures run or two, start to spike up,
09:14I mean, check it out, for years, in 2005, 6, 7, we saw this spike before the, you know what,
09:20hit the fan in 2008, so again, we're not seeing bankruptcies or foreclosures yet,
09:25then this could change, but we're not seeing that yet, two more, two more, there are cheap
09:30parts of the market, when you get into this, if you want, we've overweight small caps by a little
09:34bit, but by a good deal, overweight mid caps, because those are some cheap areas, we've been
09:39neutral tech, doesn't mean we don't like it, I want to be very clear, but we haven't been
09:41overweight technology, we just think it's quite pricey, and this is one way of showing it,
09:45then this is a different way of showing sectors, we like financials, we like industrials,
09:49some of those cyclical areas, which honestly aren't all that expensive either, which are good,
09:54and this is my last one, I've shared this with you, I think every time, but I'll keep doing it,
09:57if you invested just in a Republican president since Eisenhower, you'd have about 27,000 bucks,
10:02okay, if you started with 10,000 or 1,000, you start with $1,000, okay, it's 1953, that same
10:07$1,000 would be worth over 60 grand, if you did only Democrats, okay, a little bit better under
10:10Democratic presidents, if you just stayed invested the whole time on the S&P, you'd have 1.7 million,
10:16so just something to think about there, so all right, I talked a ton, I know I went fast,
10:22but there's a lot there, did I stop sharing my screen, I think I did, right?
10:25Yeah, you did, all right guys, I need to get my time machine and go back to the 50s and invest
10:34$1,000 or $10,000 in the S&P, this goes to show you, if you're a long, like I mean, I love your
10:41charts always, Ryan Dietrich, you do such a fantastic job, but it just goes to show you
10:46that if you're a long-term investor and you're listening to the show,
10:49you know, like enjoy, but stay invested in good companies at reasonable valuations and the results
10:56speak for themselves, I mean, now some of us are traders and we're gonna buy and we're gonna sell
11:00and we're gonna do other things, but I try to hold that long-term core portfolio just to try to get
11:06that performance that you're talking about and the things that I do wrong,
11:10Ryan, more often than not, is selling stocks in my long-term portfolio, like I look back at what
11:15I've owned and I wish I would have never sold anything, if I saw all those stocks that I bought
11:20back in 1999 and 2000, 2001, you know, like I had like, I remember I had like Microsoft, you know,
11:26like I own like 500 shares of Microsoft back in like 1999, like I mean, and then it went down
11:32and you're like, you know, 2000, 2001, but if you held through all that, just think about,
11:37you know, man, that's what you got to do, you're a long-term investor, just hold on, hold on.
11:41Well, the other one is time man of the year in 99 was Jeff Bezos, right? And then Amazon
11:45stock goes down 86% during the tech bubble and implosion and now obviously it's Amazon,
11:51so I'm with you and of course I'm a market strategist, so we're, I try to teach about,
11:55you know, the long-term and things and I look at tactical things as well, but I mean, I'm with you,
11:59I talk to a lot of people and so many times I hear, well, I sold in 2009, I sold in 2020,
12:05what do I do now? I don't really have the best answer there, don't sell this time,
12:09it knocks me down a lot, but I mean, you know, I think it's important, it's also important to
12:12point out that there are cheap parts of the market, I mean, we've been, we added some gold,
12:16just a little bit tactical, tactical models of some gold back in March of 2023, we were,
12:20I've been bullish whole time, you guys know that, but there's some reasons to think that,
12:25you know, maybe gold could do well. Right now, guys, we actually added treasuries back in April
12:29for the first time and I've worked at Carson Group because we haven't liked treasuries,
12:31but this whole swing of, and this is the earlier conversation, Aaron, with, you know,
12:36six or seven cuts and then two months ago, we're hearing maybe no cuts, we're still think,
12:40like I showed on that inflation chart, that there's a chance for some cuts, but the pendulum
12:44swung too far, so we added, we added a little, getting geeky, we added a little bit of duration
12:49in the models that we run, we've also added some diversifiers, right, we've added some gold,
12:54we've added some other areas that maybe we look at kind of like a proxy to bonds, but not pure
12:58bonds, we're still overweight equities, but again, we added duration for the first time in
13:01a while, so I think yields are going to go lower because I think everybody went on the other side
13:04of the boat again. Do you see the cover of Barron's this weekend? Why there won't be cuts?
13:08Hey, they gave all the fundamental reasons, but I think they ignored some other things
13:11that inflation is still going to improve a lot, that's our base case.
13:15What about small caps? Yeah. I mean, you know, rate, I just haven't participated,
13:21I know Dennis put some stats in about going back a couple years, I mean,
13:26song remains the same here, what, is it going to take that, that, yeah, just hate it, I mean,
13:31it's just not the place not to be, and I know you've been sticking with them, but I mean,
13:38are we going to have to wait for a rate cut, I mean, or is it just, it's just the way it's going
13:42to be, it's just the way it's going to be. I think we do, it sounds like, or looks like,
13:47we're probably going to have to wait for a rate cut, it feels like the Russell 2 is always right
13:50around 2000, right? I mean, it's like, but, but yes, I mean, again, that's, if you think about,
13:58like, you know, talking about the long-term investors, I know a lot of traders on this
14:01program, obviously, but small caps are historically cheap, relevant to large caps.
14:05Last time they were this cheap on like a book value and PE values were like 99,
14:09small caps outperformed for like 13 years after that, that doesn't mean it's going to happen
14:13again, I want to be very clear, but again, that those are very under love, like we said,
14:17but honestly, our biggest bet, the biggest bet that we've made in the money that we
14:20wrote, we managed over $2 billion for our Carson partners, has been mid-caps, right?
14:24Mid-caps are kind of that Jane Brady area, they're doing pretty well, and mid-caps have
14:27them better than small, we get it, not quite as well as large, we're aware, but again,
14:31we're just optimistic that there's not going to be a recession, the economy, these recent
14:35economic data we've seen, some of the cracks, I mean, again, it's like the surveys, the
14:39manufacturing surveys, you look at the hard data, it's not quite as bad, we don't see a recession,
14:43we think earnings, again, will be pretty strong here, and again, that means why we
14:48like the sickles, why we like small caps, why we like mid-caps, those are the areas
14:51we've been overweight, believe me, small caps have been frustrating, one other thing to
14:56think about, I know we all remember this, the last two months of last year, the Russell
15:00II gained like 25%, I'm going to ballpark that, it was somewhere around, it gained over
15:0320% in two months, I looked at the best two-month rallies ever, okay, 10 out of the 10, that
15:09was like the third or fourth best, going by memory here, but looking at all best two-month
15:12rallies ever of the Russell II, a year later, which again would be like December next year
15:17or this year, was higher every time, 10 out of 10, and the average return was like well
15:21over 20%, so you got to still think, are we consolidating that record rally we had at
15:26the end of the year, of course, I'm biased, I think that could be some of it, but we still
15:29think there's some reasons to think that in the end, small caps will do pretty good, I
15:32mean, from right now to the end of the year, I feel pretty comfortable saying I do think
15:37small caps and mid-caps do a little bit better than large caps, and I think large caps do
15:40just fine, but I do, we do think there's some opportunity there, and again, they are
15:44hated, no doubt about it.
15:46Like mid-caps, which sectors are you thinking mid-caps, like the banks, like where are you
15:51thinking when you, like go into a couple sectors, just mid-cap sectors for us.
15:56Yeah, I mean, the same sectors I mentioned, but you're right, banks, financials, industrials,
16:01I mean, those cyclicals, those are the areas that are looking pretty good, honest to goodness,
16:05you look at earnings growth, expect, and I get it, expected could change, I'm aware,
16:09but there's a good deal of expected earnings growth from small and mid-caps over the next
16:13two years.
16:13I mean, that's where a lot of the growth, we all know the mag seven, done wonderfully,
16:17video, all that stuff, you get all that stuff, but I mean, there's a broadening out of earnings
16:22that we really do expect as this economic cycle ages a little bit, but also starts to
16:27benefit some other areas, but yeah, our two favorite areas are financials and industrials
16:31and mid-caps, that's exactly where we are with those areas, and again, you could argue,
16:35at least with banks a little bit, I mean, some of that is, if the Fed were to cut a
16:39little bit, I mean, the bottom line with banks, in our opinion, is if the consumer
16:42is in trouble, yeah, banks are probably in trouble, I think it makes sense, right?
16:46But we just don't see that yet.
16:49Ryan, real quick, because you mentioned, I mean, looking at this bull market to continue
16:53for a little bit longer, you have a lot of the mega-caps at all-time highs, at what point,
16:59what would be the signs that you look at when maybe the market does start to look a little
17:04toppy or that euphoria is driving the market?
17:06Because right now, I saw it the way you do that, it's like, sure, NVIDIA is at all-time
17:09highs, but I don't see it as like this bubble top, it's kind of orderly moving up like every
17:14single day a little bit, when does that change?
17:17What would be your sign that, okay, now we're overextended?
17:20Yeah, well, NVIDIA is amazing because, I mean, it's literally like cheaper than it was a
17:23year ago because-
17:24Right, that's why people are like, oh my God, this is a bubble, I'm like, no, you're not
17:28looking at the valuation, it's not even-
17:30Fundamentals.
17:31Yeah, I saw, I didn't read the article, but Market Watch had a thing about looking at
17:35the 10 biggest bubbles of all time or something, almost like, I didn't read the article, but
17:39like almost implying we're in a bubble now, like, I don't know, earnings are justifying.
17:43I mean, the things I like to look at are advanced decline lines, NYSE advanced decline lines,
17:47small cap advanced decline lines, all these are making new highs just two weeks ago, right?
17:5152-week highs on small caps across the board on different advanced decline lines.
17:54And then credit markets, I mean, everybody talks about the yield curve inversion, I've
17:57come on with you before saying, no, we don't think it's necessarily the end of the world,
18:02and here we are over two years later, and inverted, let's not forget, April
18:05Fool's Day of 2022, you can't make that up, that fooled a lot of people.
18:09But the credit spreads have remained tight.
18:11I mean, we're not seeing stress in the credit markets.
18:13So until I see stress in the credit markets and breaking down in various advanced decline
18:17lines, we're going to be clear, I'm not seeing that yet.
18:20That's when I think we'd be more worried and we might move from overweight equities to
18:24more even weight, but we are comfortably overweight equities.
18:27Two months ago, in April, when we had that pullback, what if that was, in April, we had
18:30that pullback, we sold a little bit of high yield.
18:32We've been in high yield, it's done well.
18:34I mean, believe me, high yield is a lot better than Treasury's last I looked.
18:36So we actually sold about high yield, added more to industrials and added more to financials
18:41on that little pullback we saw in April.
18:43Again, as we think those are still the areas that will do pretty well.