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Kick off the new year with a big picture look at the global macro backdrop for investors. In Episode 36 we are fortunate to glean insights from Gina Martin Adams, CMT, CFA who shared with us how distortions in the economy driven by the global pandemic are still playing out with bizarre consequences.
Gina Martin Adams, CMT, CFA, is the Global Head of Portfolio Strategy and Chief Equity Strategist for Bloomberg Intelligence, a unique research platform that provides context on markets, industries, companies, and government policy, available on the Bloomberg Professional Service at BI.
Gina provides top-down perspective on the equity market, sectors and industries with a multi-disciplined approach that utilizes fundamental, quantitative and technical analysis. She is a familiar face to many on Bloomberg News, and has been recognized for portfolio strategy, technical strategy and economics in Institutional Investors’ All-America Research survey.
Enjoy this interview with one of the top minds in global equity strategy and understand how technical analysis adds clarity to in a most unpredictable investment landscape.
Fill the Gap, hosted by David Lundgren, CMT, CFA and Tyler Wood, CMT brings veteran market analysts and money managers onto a monthly podcast.
For complete show notes of every episode, visit: https://cmtassociation.org/development/podcasts/
CMT Association is the global credentialing authority committed to advancing the discipline of technical analysis in the financial services industry. We serve members in over 137 countries. Our mission is to elevate investors mastery and skill in mitigating market risk and maximizing return in capital markets through a rigorous credentialing process, professional ethics, and continuous education. CMT Association formed in the late 1960s with headquarters in lower Manhattan, NY and Mumbai, India.
Learn more at: www.cmtassociation.org
Tyler Wood, CMT 0:13
Welcome to Fill the Gap, the official podcast series of the CMT Association hosted by David Lundgren and Tyler Wood. This monthly podcast will bring veteran market analysts and money managers into conversations that will explore the interviewees investment philosophy, their process, and decision making tools. By learning more about their key mentors, early influences, and their long careers in financial services, Fill the Gap will highlight lessons our guests have learned over many decades and multiple market cycles. Join us in conversation with the men and women of Wall Street, who discovered, engineered, and refined the discipline of technical markets.
Fill the Gap is brought to you with support from Optuma, a professional charting and data analytics platform. Whether you’re a professional analyst, Portfolio Manager, or trader, Optuma provides advanced technical and quantitative software to help you discover financial opportunities. Candidates in the CMT program gain free access to these powerful tools during the course of their study. Learn more at Optuma.com.
Hello, and welcome to this final episode of 2023, Episode 36, of season three of the Fill the Gap podcast the official podcast of the CMT Association. David Lundgren, how are you, my friend?
David Lundgren, CMT, CFA 1:57
I’m doing so well. I can’t even stand it. Congratulations on three years with this podcast. How lucky are we? We’re just running through some of the statistics—how well it’s done globally as a podcast in the financial space. And just generally speaking, it’s overwhelming. It’s humbling. And I’m real fortunate to be a part of it, we get to have conversations with folks like Gina Martin Adams, which we just did.
Tyler Wood, CMT 2:19
You know, it’s the guests that make this show, not you and I Dave, but—what an easy job we have. To just bring on these brilliant men and women of Wall Street and Bay Street and the Dalal Street to come share some of their expertise. But I think more to the point, there is a big gap in what people understand about technical analysis. And certainly it’s not for any lack of content. Hit my TikTok reels, Dave, and you’re gonna get a lot of schlocky trading gurus telling you how to buy the line when it goes up. But I think for investors around the world, this hasn’t been an easy market. Post COVID a lot of things changed, and that was a big topic that we discussed with Gina was: a lot of the macro indicators and a lot of the correlations between the datasets have changed in the last three years, which is very challenging for the macro community. Very challenging for investors at large. But talk to us a little bit about what stood out in this conversation with Gina Martin Adams.
David Lundgren, CMT, CFA 3:20
Yeah, what I was really excited to speak with Gina about is—because I’ve known Gina for years back in my days with Wellington when she was a strategist at Wells Fargo and Wachovia before that. And to see her again, Tyler is—here’s another guest who made their way to technicals, because it was something missing in what they were doing. In their fundamental and macro toolkit, all of which is critical. It’s all—it’s what drives the world. But at the end of the day, she herself came to the realization she was missing something. So she went and got her CMT, and then filled the gap on a lot of things for her. And what—and we talk about it in this discussion, but I think what it comes down to is how close to ground zero, to the atomic level, that you can bring technical analysis—trend following. Simply like you can’t get from 10 to 20 without passing 11 first. That is so simple is ridiculous. But it’s true. Right?
And it’s irrefutable.
And it’s irrefutable. It’s exactly right. And so, because of that, it’s what makes the toolkit so powerful, and so beneficial when you incorporate it into your process. So you can’t take macro concepts and reduce it anywhere near to that level of simplicity. And I think that’s the part that people are missing is—take those concepts as [far] down, close to the atomic level as you can, but then incorporate technicals to really get down to the “first principles,” in John Bollinger’s phrasing, and use that to help you get a better sense of what the market itself is saying about the things you’re trying to figure out because the market is the best macro strategist on the planet. Right? So.
Tyler Wood, CMT 5:00
You know, and that translation I think that Gina did early on in her work was to take technical concepts, right?—So forget about any squiggly lines on a chart but—just the idea of looking for trend, for mean reversion, for divergence, and apply that to sets of fundamental data. Earnings revisions trends, or to look at some of the macro data and see where those pivot points are, as Gina said. I think that I didn’t want that to get lost in today’s episode, either, that, you know, people can apply the concept of the methodology that is so prevalent in the CMT curriculum to lots of other datasets. And it doesn’t mean that you throw out your fundamental viewpoints, but you can, you can use some of those concepts in application there, but you can also have a sniff test, if you will, to see where where those, you know, where those concepts are diverging from what the markets telling you.
You know, Dave, we don’t get to be in the top 10% of all podcasts worldwide without the wonderful support of the member community, all of our listeners, but also Wes Walton, who is engineering every single one of these episodes, a lot of editing power, and what a tremendous addition, he has been to the CMT team. So shout out to Wes Walton, and for all of you in the CMT Association. Looking forward to seeing you in 2024. First two events coming up in Tampa and Dubai February 1st and 29th respectively. Looking forward to meeting lots of you in person. And until then, take care of each other. Trade them well.
David Lundgren, CMT, CFA 6:36
Welcome to Fill the Gap, the official podcast of the CMT Association. My name is Dave Lundgren. And once again I am joined by fellow CMT charterholder Tyler Wood. Incredibly This is episode number 36. So if you’re doing the math at home, that means we are wrapping up our third season of Fill the Gap. For this episode, we are really pleased to be joined with what I consider to be one of the smartest equity strategist in the business, Gina Martin Adams. In addition to holding both the CMT and CFA charters, Gina is the chief equity strategist and Global Director of equity strategy at Bloomberg in New York. Prior to joining Bloomberg, Gina was the equity strategist at Wachovia, which of course was later acquired by Wells Fargo securities. But that’s how I got to know Gina and I had the great fortune of being able to read her research religiously, each day and week at while I was at Wellington. Now somehow, Gina also finds time in her busy schedule to serve on the Board of Directors for the CMT Association. And oh, by the way, her husband, very patriotically named John Adams is also a publishing author. So a lot going on in the Adams household, we may actually hear one of their dogs barking in the background, but Gina Adams, please welcome to Fill the Gap.
Gina Martin Adams 7:56
Thank you, I’m so glad to be here and do please forgive the dogs, maybe some children might make an appearance as well, you really just never know. So thank you for your patience. And thank you so much for having me.
Tyler Wood, CMT 8:08
Good to see you, Gina.
David Lundgren, CMT, CFA 8:09
Yeah, thanks for making the time during the holiday season to spend this time with us. So before we hop into how you think about markets, your role at Bloomberg and in particular, how you somehow find a way to weave technical analysis into everything that you do, maybe you can give us a quick rundown of your background. So most people here obviously—on the podcast—know who you are, but maybe a little bit more personal, like how do you get into the business? How did you come to study technical research? I know you have your CFA as well. So how do you put this all together? And tell us a little bit about that to get the conversation going?
Gina Martin Adams 8:47
Yeah, so we can spend the next hour if you’d like talking about my background. I’ll try to be as quick as possible. I’ve been in the business quite a long time. So if we go back to how I started in the business, I actually was convinced like every other undergraduate finance major that I needed to be an investment banker. And so went and applied for a bunch of investment banking roles, and was really fortunate to encounter a recruiter who guided me to get into Asset Management instead of investment banking. I ended up in an asset management role for the first couple of years of my career in which I ghost wrote articles for the CIO of Evergreen Investments, which was, of course, the precursor of that was First Union Advisors. I mean, it’s just, you know, the name roulette goes back a long ways. That’s effectively what I was doing was writing articles on, you know, what’s going on in the markets, what’s going on in the economy, how does that relate to the the management of funds in Evergreen? And I was working really closely with our economists at the time pulling in their macroeconomic forecasts, and eventually, they asked me to come over and work to become an economist. So I did that for a bit of time. And in that process of working in capital management moving into the economist role, it was really just pushed upon me that I needed to do the CFA. So I did it. And frankly, I’m very grateful that I did it. It gave me a great foundation for what I needed in order to learn to model, learn to run, you know, a fundamental analysis and certainly also enabled some of my economic capability set. But as I was endeavoring to try to forecast the somewhat unforcastable economy, including interest rates and oil prices, and the like, I got very frustrated that I was unable to hit those bogeys, and so sought out some form of behavioral analysis, sentiment analysis, some way to explain why our fundamental modeling wasn’t working, and that’s how I landed in the technicians realm.
David Lundgren, CMT, CFA 10:52
I love it.
Gina Martin Adams 10:53
So yeah, I went and sought out my CMT designation as an economist actually. Eventually [I] really wanted to get back to markets. So [I] transitioned in a role in which I was able to build an equity strategy product for Wells Fargo Securities formerly Wachovia Securities, and did that for about 10 years before I transitioned into a similar role at Bloomberg.
David Lundgren, CMT, CFA 10:53
Yeah.
Gina Martin Adams 10:53
So that’s a bit of a background and bit of fundamental start with a technical add on that has proven to be kind of the foundation of how I approach markets, the combination of the two.
David Lundgren, CMT, CFA 11:28
Yeah, I love it. Yes. Tyler, here we go. Again. I mean, this is another example of just demonstrating once again, that it’s not fundamentals against technicals, it’s about, you know, you have to have those aha moments in your career where, you know, nobody, Gina, said to you “go get your CMT,” but you knew there was something missing in what, you know, in the body of knowledge that you did have, and the solution you found was, let’s find ways to—I love how you said, you know, “forecast the unforecastable” and, you know, a lot of folks will use technicals to forecast but one of the great strengths of it is to get a full understanding of what is.
Gina Martin Adams 12:03
Right.
David Lundgren, CMT, CFA 12:03
And if you can do that, well, you actually have a massive advantage, because nobody—most people don’t even know what is, let alone what will be, right? And so I love that, I love the way you describe how you do that. And, you know, maybe as a little shout out or as in honor of Charlie Munger, who was a big proponent of thinking with mental models and thinking about, you know, trying to have all these different disciplines and understand them thoroughly, and then reduce them to their, their core, like as John Bollinger would call them first principles, I call them inviolable rules. But you have these mental models and frameworks to think about the world of all these different disciplines and then pulling them all together. So this is what you’re doing. Right? You have macro, fundamental, technical. And what I would love to do is to dig into what your mental models are for those different disciplines that you bring together. And to me—and I think when you have all these fundamental investors who find their way to technicals, I think one of the great things about technicals is that the first principles, or the the mental models of technicals are so reducible to such simple concepts, that it’s extremely, it fills a lot of gaps, great name for the podcast, by the way, as the example I use is going from 10 to 20, you can’t do it without going past 11 first. You can’t get more simple than that, right? Now, I know you can’t get that simple in macro strategy and fundamentals and whatnot. But I’d love to hear how you think about the world in those other disciplines and how technicals help you round out those mental models?
Gina Martin Adams 13:37
Yeah, it’s a really big question, you know, I run eight different models for the US equity market alone. It’s, and they are very quantified models, almost all of them include some technical components. You know, I think in a sum total, the way that I think about it is levels of conviction, if I have a fundamental idea, and that fundamental idea can be backed up by our quantitative frameworks, which can then be backed up by the technical picture, then our conviction levels are as good as they can be. If I’m getting only one signal, and not any other signals, our conviction levels are much lower. So in a really simplistic sort of way of thinking: if I’ve got a price trend that, I’ve analyzed a price trend, and I see the price trend is positive, but I’m also noticing a revision trend that’s positive and I’m also noticing a fundamental shift that’s positive and a framework, a narrative that’s positive, and it fits in a quant box that is also, you know, scoring positively for us, then it’s a really high conviction idea. And anything else, you can go down the spectrum to find lower conviction ideas. You know, I think that one of the things that we also do that’s really unique relative to the rest of the world is because I see so much of the world through a technical framework. You know, I’m always looking for momentum shifts, not just in price, but in fundamental indicators as an example.
David Lundgren, CMT, CFA 15:08
Really? Interesting.
Gina Martin Adams 15:09
Or economic indicators.
David Lundgren, CMT, CFA 15:11
Like second derivative type stuff?
Gina Martin Adams 15:12
And I look for pivot points. Yeah. So I apply a technical perspective on to onto a lot of other things, right? So an example of that might be, you know, we run what I call a market health checklist, which is sort of a sum total of all the things that we want to follow from a fundamental basis, the technical basis and earnings basis, the macro basis and bond prices and the like. We look at all of them together, and all of them are really identified because they have proven to prove leading tendencies for price itself. So I’ll look at something like the ISM manufacturing survey. That sounds super boring, and it’s an economic number and who really cares as a technician. But if you look at a price chart of the ISM manufacturing survey, really consistently, sentiment in the manufacturing sector in the United States economy leads price trends for the S&P 500, especially at tops, which we all know are really difficult to predict. Trom a price perspective, tops —especially in the equity market—tend to form over long periods of time. Bottoms tend to spike and on sentiment alone so I think as technicians, we can find bottoms a lot easier than we can find tops. But I find fundamental indicators—if I’m paying attention to trends in fundamentals, key fundamentals and key economic indicators, I can find tops as well. So I like to kinda cross discipline integrate technicals all over the place also.
And are you looking at like traditional indicators, oscillators like rate of change for ISM manufacturing and seeing that diverge from from what’s happening in price?
Honestly, all you need to do with ISM is observe the level. It’s very—it’s one of those super simple ones where ISM, once it peaks and you do see the rate of change—that you see the peak form and then you start to see a deterioration in the trend. On ISM, it tends to lead S&P 500 peaks by up to a year, for example. So if you’ve got that combined with something like an earnings trend shift or defensive sector earnings, overwhelming cyclical sector earnings trends, combined with financial conditions, tightening combined with credit spreads, starting to widen, you know, you get this accumulation of evidence that ultimately leads into a top. This happened in 2021. I mean, it was unbelievably, you know, coming into 2022. A lot of people thought 2022 was this risk off event sparked by Russia/Ukraine. But all the economic signals were starting to peak in 2021, the earnings cues were starting to turn over and 2021, there were a ton of clues that 2022 was getting set to be a really rough year. Now, none of these things work perfectly to find the bottom. And I think that that’s a-whole-nother kettle of fish because bottoms I have 100% believe the only indicator of bottoms and stocks is sentiment. And I have, you know, worked on this for my entire career because finding that bottom is like finding the Holy Grail. So we developed our own indicator of market sentiment itself, which is purely technically based is just based upon clues that we can derive from the market itself to find lows, but tops are a different story. Tops really are about rotation. That, an accumulation of evidence across the board tends to form tops and stocks. So you know, that’s those are just a couple of examples. We integrate technicals into our scorecards for sectors, it’s our scorecards for quant we’re constantly looking at price momentum as an indicator of where we should be pivoting inside the market itself. So there’s a lot of ways in which we integrate it across the board.
David Lundgren, CMT, CFA 19:17
Can I ask you, because you’ve mentioned a lot of really interesting relationships between the market and economic data and I think we all know that. Sometimes markets can go up with a certain set of economic drivers. But then in the next cycle, those economic drivers can be completely absent and the market still goes up anyway. Or sometimes those drivers could be doing the opposite, like interest rates. The past 20 years rising interest rates have been good for the market. And prior to that rising interest rates were bad for the market. And now it kind of looks like maybe we’re transitioning again. And maybe we’re going back to a rising rate environment. So recognizing that those things are, can be, from day to day, week to week once a month can be drivers of equities. because they’re not constant, I still don’t consider them to be like first principle of investing from a macro standpoint. So I guess the question is: is it possible to reduce your sort of Macrospace to a series of first principles that, like there has—in the history of markets, there has never been a bull market, ever, —and there never will be a bull market ever—that happens below the 200 day moving average, ever.
Gina Martin Adams 20:33
Right, right, yeah.
David Lundgren, CMT, CFA 20:34
That’s first principle kind of stuff. And you can do that in a technical framework. Is there anything like that, that we can rely on in macro fundamental landscape that can help us like that?
Gina Martin Adams 20:46
Um, I think there probably are, I don’t want to say never or, we can always rely on these things. So you know, I—let’s take your point on bond markets as a good example. That correlation analysis tells you a lot about the broader framework and what to expect for stock price returns overall. When stock prices and bond yields are positively correlated, versus when stock prices and bond yields are negatively correlated sets, it sets you up for a secular framework, where you set your expectations very differently than how you set your expectations over the prior 20 years. As a general rule, inflation becomes a much bigger indicator of margin risk and is a negative indicator as opposed to a positive indicator. So if I get a clue from correlations between stocks and bonds, that I can observe real time that the correlation has shifted into a different regime as we did starting in the year 2000, then I know as an investor that I need to think about inflation dynamics really differently. And I need to think about margins, as driven by inflation as behaving differently in this cycle than they behaved in the last cycle. And we did indeed get a lot of great clues from margins, as an example, which are really related to inflation. So let me just give you an example because it’s sounds super nerdy. But if you’re going through 2022, and you’re thinking about okay, price trend really started to turn over in early 2022. That was confirmed by a massive spike in inflation, which pushed margin forecasts lower. Margin forecasts are consistently one of the great leading indicators of equity prices as well. And so that inflation forecast accelerating inflation pressures, accelerating created pressures on margins that were coincident to the signals that you were getting in price. Coming out of the lows in 2020, late 2022. We had a major sentiment low in late 2022. We knew this given our sentiment work. But really starting in January of 2023 inflation indicators were flipping into positive territory, creating a margin acceleration in the S&P 500 that confirmed a much stronger price trend was set to emerge for the index. And I would venture to say many, many technicians were not yet on board with the market recovery in early 2023. Many technicians were still fading the market recovery in 2023, partially because stocks had experienced so much weakness by the end of October of 2022, that we weren’t getting the big positive signals, we weren’t getting the share of stocks trading above their 200 day moving average confirming, we weren’t getting price trend moving above its 200 day moving average. And so some of the fundamental indicators that we follow are suggesting, hey, look, the economy already saw its biggest momentum loss and economic momentum in 2022. Inflation was an incredible impediment that’s now turning to a positive. So fundamentally, we need to get a lot more constructive about stocks, even though the price trend wasn’t yet telling us that we had to be extremely constructive. And that guided us really well through the early parts of this messy 2023 to get—started to get more optimistic because the fundamentals were turning. Now, I think a lot of sort of what technicians sort of throw shade on fundamental analysts is mostly because of the way that fundamental analysts read the tea leaves. I think there is a lot of improvement that we can do to how to read the economic signals and how to read the fundamentals so that they are really indicative of price trends, because what tends to happen instead, is this narrative. Right? And the narrative dominates decision making and the narrative for the last two years has really consistently been the economy’s going to fall into recession. It’s been the, really, sole narrative. But if If you dig a little bit deeper, you can find movements in the economy and movements in inflation that have been incredibly meaningful to driving expectations of shifts in price that I think are worth noting. If you can get a little bit deeper, and you can get beyond kind of that headline narrative that creates a lot of fear that the economy may or may not be in recession. That’s a really long winded answer to a great question. So we kinda got there. I think that’s where we started and Gina just went on, like a tailspin, so sorry for that.
David Lundgren, CMT, CFA 25:35
I think what you’re what you revealing, though, in your answer is how, how difficult it is to process all the all those relationships that are they’re not, they’re not stable over time, they change over time. Sometimes some things matter, sometimes other things matter. And in other cycles, things that completely drove the cycle don’t matter now. And I think that’s why—
Gina Martin Adams 26:00
Yeah.
David Lundgren, CMT, CFA 26:01
—so many fundamentally minded and macro minded investors eventually find their way to technicals, because that—every bull cycle in the history of bull cycles has always looked the same technically. Always.
Gina Martin Adams 26:13
Yeah.
David Lundgren, CMT, CFA 26:13
Even though what’s making it happen might be different, fundamentally.
Gina Martin Adams 26:16
Right.
David Lundgren, CMT, CFA 26:17
And it’s because of that, I would still, if we can get a little closer to like, what might be the first principles of macro investing, you went up? And I’m asking because I’ve studied it a lot. And I’ve thought about it a lot. And I can’t really get anywhere near as simple in macro as I can in technical and I think that’s why technicals just provide such a clarity. In a world where it’s just so difficult to really stay ahead of the information. And it’s like, we think we’re on top of the information. But there’s information we don’t even know, we don’t know. What the market does. And so by by incorporating—not fighting with but incorporating—the markets message into what we’re thinking and how we’re processing this information, it’s just a great advantage.
Gina Martin Adams 26:59
Yeah,
Tyler Wood, CMT 27:00
I also think the clarification of, you know, what do you mean by equity rally? What timeframe Are you looking for? I think a lot of debates on Twitter could be settled quite quickly, if people had the patience or the attention span to dig a little deeper. So when you talk about the equity rally of 2023, do you know what are you talking just at the index level? Or are you saying that, broadly speaking, the inflation data changing ahead of time, maybe now we’re just experiencing some of that lagging effect where breath is starting to expand? You’re seeing other sectors of the market also catch up to what had just been a very narrow lead rally here in 2023?
Gina Martin Adams 27:41
Yeah, I mean, look, I think that the rally was a lot actually a lot broader in 2023. It just so happened that the biggest gains were in the biggest stocks. And so as much as the biggest gains were in those biggest stocks, the vast majority of the S&P 500 participated in the rally in 2023. Most stocks made their lows late 2022 and started to recover by early 2023. They weren’t producing 30 to 50% growth in price like some of big tech stocks were—
Tyler Wood, CMT 28:11
But that’s what investors demand, Gina! “We only want the 50%…”
Gina Martin Adams 28:14
But nonetheless, when I think about the market, I do think about the S&P 500 at large, and I think about it as an aggregate, which is sometimes not fair, because certainly what we saw in small-caps was very divergent from large-caps, throughout most of 2023 until the October lows, and since the October lows, it’s been a very different story. But nonetheless, I do think of the index as the S&P 500, which is just my conditioning. It’s where I live, it’s my comfy cozy space.
Tyler Wood, CMT 28:41
Biases are okay as long as you know where they are, right?
Gina Martin Adams 28:44
But we did have great we had fantastic gains in Europe, we had really strong gains across Japan, we had very big gains in Taiwan and Korea over the course of 2023 as well, we just didn’t have a lot of participation from China, but Indian equities have been on fire. So, you know, Brazilian stocks had a great run in the middle of the year as well. So I think that there’s just, you know, definitely conditions change throughout 2023 globally, particularly relative to 2022. Even if it wasn’t a broad, you know, significant gain for all stocks. It was enough of a gain that I think it—we did start a bull trend.
David Lundgren, CMT, CFA 29:23
Yeah, I think I saw this chart the other day, that was on social media where it just basically showed the Magnificent Seven, and how much they’ve done year to date, along with the S&P and then the other 493 stocks. So what the index look like if you strip away those seven stocks into the October bottom, recent recent October bottom, the average stock was down like 7%.
Gina Martin Adams 29:48
Yeah.
David Lundgren, CMT, CFA 29:49
Right? So we’ve all been doing this long enough to know—like we’ve all experienced bull markets like when we say bull market—Let me ask you this question—we’re talking about: was 2023 a bull market? Gina.
Gina Martin Adams 30:02
Yes?
David Lundgren, CMT, CFA 30:02
In the way that you’ve experienced bull markets, in the way that you really truly know what a bull market is, like, you know it when you see it, like it’s the fact that we’re sitting even asking if it was a bull market or not. In that, in that vein, would you say 2023 was a bull market?
Gina Martin Adams 30:18
I do not think we had enough participation because energy stocks were getting obliterated throughout 2023. That’s the only hole though. And so I think it’s very debatable. I think what’s gone on in energy and materials stocks has masked what is a much stronger market overall. And energy and material stocks had a fantastic 2022 while the rest of the market crashed, so this is indicative for me of a much bigger change. And that is about inflation. And where inflation is in this cycle is very different, and will probably make us think we’re not in a permanent equity bull market for a long time. So while inflation is decelerating, we’re all going to feel like it’s a big bull market, because we all grew up in an environment from—most of us started in the business sometime in the mid 1990s. Right at the very latest, the oldest of us started in the 90s. Right now, maybe we got some 80s people, but most of us started in the 90s.
David Lundgren, CMT, CFA 31:18
I’m an 80s people.
Tyler Wood, CMT 31:20
I was born in the 80s, does that count?
Gina Martin Adams 31:22
Yeah.
David Lundgren, CMT, CFA 31:22
Ah, Tyler.
Gina Martin Adams 31:23
You think about the inflationary conditions that have dominated the bulk of our career, those inflationary conditions are gone. So the bull markets that you and I grew up with that you and I believe are bull markets probably don’t exist anymore. I think that the inflationary conditions that exists today, we live in an environment of much greater inflation volatility, we live in an environment where inflation is having a much stronger impact on market dynamics and market price trends. And we are going to have to live in an environment where there are going to be big dispersions inside the index for quite some time. When inflation is rising, we have a different market condition than when inflation is decelerating. And if we’re in a period of time, where inflation is just on this roller coaster, then we’re gonna have to contend with that. And, you know, honestly, do I care if I want to call it a bull market or not? I just want to make money. You know, I really just want to find those opportunities to help investors make money. And if that means it’s a narrow opportunity one year and a broader opportunity the next then so be it. But I think structurally, we’re in for a really different climate than we’ve been in for the last 20-25 years. And that’s going to require us to really challenge our thinking as to how to invest and how to do well in this environment.
David Lundgren, CMT, CFA 32:45
And there’s nothing new under the sun. So this won’t be the first—whatever period we experience in the next 20 years, it won’t be the first time. So is there a period that you think somewhat matches what you think is coming?
Gina Martin Adams 32:57
I think it’s closer to the 1960s, then any period of the past. I think, you know, there’s some hints of the 70s. But not enough, I think it’s closer to the 60s where the business cycle is much more compressed, where growth is accelerating, and so is inflation. But the volatility of the cycle is incredibly important. So you might have an overall bull market at large. But it’s a very rolling bull market with a lot of a lot of rips and a lot of dips in the process. I think the 70s is is a close corollary because of the inflationary conditions. And inflation volatility was so extreme in that period, but it’s not perfect for a lot of reasons. The 60s is closer also because of the degree of government intervention, not just on the monetary side, but from a fiscal perspective. You know, you go back to the 50s and 60s, and you’ve got interstate highways, and you’ve got all kinds of government expenditure, and you’ve got all kinds of social programs, you’ve got a lot of social dissent and dissension across the nation, these types of conditions. I think behaviorally set us up for something closer to the 60s than any other decade that we’ve experienced.
David Lundgren, CMT, CFA 34:08
Yeah, very, very good point. And obviously, the thing that’s changed a lot in the economy over the past 100 years and only accelerating the past, say 20-30 years is that we’ve gone from manufacturing to services, but not just services, but low asset touch, you know, asset light, technology, software and things like that. So how does that change your thinking about the macro setup in the economy and things like that?
Gina Martin Adams 34:37
Yeah, so I actually think we’re on the cusp of shifting back. So I think that while services is still the dominant portion of overall growth, the areas where we’re growing fastest are all in goods production, facilities, investment, manufacturing intensity, onshoring, reshoring you know Deglobalization you call it what you will but those are the areas of growth, so we’re actually building entire new industries in the US economy based upon the idea of energy transition, for example, and reshoring of manufacturing, conditions and manufacturing. So I think we are shifting our dynamics of growth as we speak, and becoming much less services—we will become over the next decade—much less services intense and much more goods intense, because we will start to start producing our own goods again, to a great degree, I think we’re always going to be somewhat more dependent upon trade and, you know, global markets than we were 50 years ago without a doubt. But I do think the era of globalization probably peaked back in 2008. With the financial crisis, and we’ve seen trade as a share of GDP decelerate when the pandemic hit, it really unveiled the inefficiencies in supply chains globally, that companies really have to address through rethinking those supply chains diversifying those supply chains, and the result is that they’re getting much closer to home in terms of their investment. So I think what we’re going to see is a little wave back as the pendulum probably swung a little bit too far. And then we, you know, you pile on top of that, just the intensity of geopolitical distress. And, you know, the political leaders around the world’s desire to really put up walls around their own independent nations. And the United States is no different than that. I mean, we are really quickly putting up as many walls as we can, and have been for quite a time. So I think it’s going to force companies to really think about how they can get their supply chains closer to home and closer to their end market, which is still predominantly the US.
Tyler Wood, CMT 36:56
Do you think—with all those trends in mind and thinking about the macro data sets that you use to get a sense of the secular trend, do you think that onshoring is also going to impact jobs and job creation? Or is the manufacturing all going to be led by robotics and automation? I mean.
Gina Martin Adams 37:15
Well we’re not to the point where we can do everything with robotics and automation, even the most advanced manufacturing facilities still need a hefty labor force to accompany that robotic, more automated labor force. So I think that we will absolutely continue to have desire for and need for more workers. It’s one of the reasons why I have this view that inflation is going to be in a much more much different condition than has been in the past because as we’re de-globalizing as we’re re-onshoring, as we’re reinvesting in the US economy, we are commanding more workers, many of whom, you know, are very scarce in supply and difficult to find.
Tyler Wood, CMT 37:58
Yep. And wage inflation is some of the stickiest.
Gina Martin Adams 38:00
And so I do think we’ve drifted into a different landscape. It also though, creates, if you think about the intensity of labor as a component of cost for a services entity versus a goods entity, that dynamic is really different. And so it also is very inflationary, long term. The skill set required of these workers is quite different than that which we’ve trained our labor force on over the course of the last 20 years. So I, you know, I think that we’re an environment where labor is going to be quite scarce for quite some time. And wage is going to become a component of decision making. And frankly, for the S&P 500 We have not had to consider margins driven by wages for a very, very long time. A long time. Yeah. Yeah.
Tyler Wood, CMT 38:46
Go to any fast food restaurant and see a six figure salary advertised in the window.
Gina Martin Adams 38:50
Yeah, exactly.
Tyler Wood, CMT 38:51
Shift manager. Yeah, we’ve certainly entered a new era.
Gina Martin Adams 38:53
We’ve entered a bizarro world, for sure.
David Lundgren, CMT, CFA 38:56
Yeah, so that, you know, the more you describe this, the more it does seem like it’s the 1960s and it was a bull market, but it was fits and starts there’s a lot of turmoil, like everything you just described, and it was kind of leading up to what ultimately became—because I always thought about the 1940s to the 1960s as being the great reflation following the depression. And I kind of feel like maybe that’s what we’ve just experienced here, but it was massively accelerated because of what the Fed did to get that to happen. So we’ve kind of fast forward the reflation. So now we’re just kind of like, are we on this, we’ve kind of, you know, walking this fine line between reflation, and, you know, inflation is kind of like the 70s. And so, I mean, how do you grade, I guess the the Fed and how they’ve done walking this fine line, because it’s a tough one. I think I wouldn’t want to be in their shoes right now.
Gina Martin Adams 39:51
I think it’s very, it’s very, very hard because of the uniqueness of the pandemic and I think the Fed did frankly a magnificent job of contending with a great financial crisis and keeping policy easy for a long period of time, because of very, very low inflationary conditions, they started to tighten the belt on that policy at, I think, an appropriate time prior to the pandemic. But then the pandemic hit, and really just the gloves came off, because the federal government was spending to the beat of the band, the Fed had to do whatever they had to do to support overall conditions at the same time. And we’re still contending with the impact of that, I think they were too slow to take their foot off the gas and 2021. But I think they acknowledge that now too, like, they should have very clearly been taking their foot off the gas and 2021. And they didn’t get started until 2022, which is why they had to catch up so fast.
David Lundgren, CMT, CFA 40:45
So you said we’re still contending with it. Can you give us a couple examples of how you think we’re still contending with it? And what that might look like for equity investors?
Gina Martin Adams 40:53
Yeah, so a couple of things. The inputs of housing and autos in the cycle, are completely bizarre relative to past cycles throughout 2023, while interest rates have been rising home prices, and housing activity and auto sales have been rising. Yeah, it’s very bizarre, because, and part of this, I think, is just the lagged effect of all the way back in 2020-2021, when interest rates were incredibly low, we didn’t have access to houses and cars, we weren’t going out and buying houses and cars, when interest rates were at their all time lows. We tried for a tiny bit of time, in 2021. And then 2022, hit interest rates go higher, everybody reacts. And now they’re trying to react to 2022 and 2023. So it’s just this incredibly volatile condition, where, you know, auto sales and housing—and autos and houses are the two biggest goods inputs to GDP. So you’re experiencing really, really bizarre impacts. The labor market is another, you know, we laid off more workers in 2020 than ever before, going all the way back to the Great Depression, we saw the unemployment rate skyrocket to levels that, you know, you plot a chart, you can’t even include 2020 on the chart or you can’t see anything else. So it just—the distortions that we experienced from 2020 are still playing out throughout the last three years. I think what happened in the labor market, for instance, 2020, we laid off everybody but tech and financials in some of the services industries. So 2022, we laid off those people. Yeah, and now all the labor distress is over. So we’re still looking for when are we going to see the unemployment rate rise, which is starting to just inch higher, because we’re getting those people coming back to the labor force. But even that reaction function is completely bizarre relative to history. So there’s just so many dynamics that are paybacks from the pandemic that are really hard to read through. And I completely sympathize with the Fed because it creates a very difficult environment. But the biggest takeaway for me from an investor standpoint is we probably are not going to get the unemployment rate rising to the degree that we normally would see, we’re not going to see that easing, labor force, companies have to adjust to an environment where labor is almost more permanently scarce, as a result of the pandemic, particularly for the industries that we’re creating, and the industries where we need jobs. And that dynamic is very difficult for companies, companies have been phenomenal at adjusting to it so far. But I do think that’s going to create some tension and definitely some investable outcomes. The other thing I would say is just the industries that are growing today are not the same industries that were growing five years ago, this is just a completely different kind of economy than existed five years ago, with the exception, of course of tech, which is at the center of all of our lives. I think the reason that AI has become as popular as it has is because AI is the solution to our inflation problems.
David Lundgren, CMT, CFA 44:03
Right, right.
Gina Martin Adams 44:04
And so it will remain incredibly popular. And a huge part of the investment thesis over the course of this cycle, because it is the only solution we can find to enhancing productivity to diminish the impacts of this more pervasive inflation environment that we’re in. So those are a few.
David Lundgren, CMT, CFA 44:26
Yeah. It’s just like, you know, the pressure that the tax base has kind of brought upon the economy in terms of pricing has contributed largely particularly over the past 20 years so the quote unquote “deflation” or at least stable calm pricing environment. And you know, in the old days that would be considered like deflationary and it’s negative but it’s that’s actually that’s actually very positive price stability right so maybe that’s what, like, just trying to think about when you know, we have record amounts of debt we have all these ramifications from COVID. You could even say the global financial crisis—that hasn’t played out yet, like, fully played out yet. We have banks that are still kind of like on the brink. And we have all these negatives—potential negatives, geopolitics, all these things right. And for the first time, as you mentioned earlier, that rally off the October bottom was different enough to say that the markets—okay, we’re looking forward to 2024, and as a collective market in its infinite wisdom, we like what we see. Right. So when you look forward to 2024? What is it that you think the market might be looking through all these things and seeing instead, I’m focusing on this, because this is the good news?
Gina Martin Adams 45:40
Yeah. Well, the first is that the hiking cycle is over. To the degree that the hiking cycle is contributing to limited risk tolerance. That’s done. And so just having that overhead removed from the equity market is hugely positive, you don’t have to worry about the Fed hiking rates, at least in the short run. It doesn’t mean by like, 2024, we’re not going to be talking about it again, we could be talking about it for 2025-2026. I think that there’s a real possibility that we’re in this more volatile environment than anybody wants to believe. But nonetheless—
David Lundgren, CMT, CFA 46:15
Do you think, okay, so we have—rates are not going to be hiked again.
Gina Martin Adams 46:18
Yeah.
David Lundgren, CMT, CFA 46:19
But looking for the route, what do you assign more odds to another hike eventually, or a rate cut?
Gina Martin Adams 46:25
I think they’ll cut first. I think you’ll get cuts first, because inflation is easing enough that they’ll feel comfortable that they’ve got inflation contained. But I think there’s a really strong possibility that that inflation is actually not contained. They’ll get comfortable and complacent again, inflation won’t be as contained as they’d like to see, and then they have to hike again.
David Lundgren, CMT, CFA 46:46
You know, you’re describing the 70s. Right?
Gina Martin Adams 46:48
Yeah, it’s very much 60s/70s mentality.
David Lundgren, CMT, CFA 46:51
Yeah. Yeah, that’s kind of incredible.
Gina Martin Adams 46:53
So I’m not sure that they have a completely contained because I don’t think that the inflation was the result of EZ Fed policy alone. And this is where I think we get a little distorted: the Fed can only control so much. They can control the flow of money. But frankly, if inflation is perpetuated by the combination of deglobalization, decarbonisation just, you know, federal government deficit spending, even demographics, these are not controllable events by the Fed, they can’t, you know, tighten their way into controlling that kind of inflation. Those are supply side inflation issues predominantly. And if we have supply side inflation issues, the Fed can only do so much. They can try, and they certainly will try, but I’m not sure that they’re going to be able to have this huge impact on containing inflationary conditions. You know, I think you would really struggle to suggest that this inflation that we had from 2021 and 2022 had anything to do with debt accumulation. Was it really a function of lower interest rates, driving accumulated debt and driving economic activity? I would say no, I don’t think a lot of people borrowed a ton of money in 2021 and 2022, when rates were much lower, and in order to falsely amplify growth, it was really about supply side. So the supply side seems to have temporarily been contained, as they’re reducing demand with their policy, we could easily have another supply side spike. And that I’m concerned about. Weather events create inflation not controllable by the Fed, geopolitical changes create inflation, demographic shifts create inflation. None of this is about the supply of money.
Tyler Wood, CMT 48:45
And we all love the fairy tale that there’s a separation of church and state between what the Feds doing and what our elected officials are doing, but do you think government spending and debt servicing plays any role in what the Fed is considering for setting those rates?
Gina Martin Adams 49:01
I would like to think no.
Tyler Wood, CMT 49:04
Sleep well, children, they’re totally separate. There’s no connection.
Gina Martin Adams 49:08
I would like to say no, but I do think there is a lot of pressure, when the deficit is as high as it is when we have to fund the deficit, there is a lot of pressure to keep rates as low as possible and allow inflation to move at a higher pace. And I think that’s the state that we’re in, is inflation is going to mask away some of the debt. Will they be able to keep interest rates low and allow that inflation to potentially get out of control? I don’t know.
Tyler Wood, CMT 49:40
Isn’t inflation how we paid for our debts after World War Two?
Gina Martin Adams 49:43
That’s right. This is why we have— yeah. So inflation is not always a big a horrible thing if you’re an indebted nation as long as you can keep the capital flowing to you. And it doesn’t become pervasive throughout the country. But I think we’re flirting— we’re very much flirting with it.
David Lundgren, CMT, CFA 50:01
Exactly.
Tyler Wood, CMT 50:02
I had a chat with a good friend in Cairo this morning, who was lamenting the government spending and the runaway inflation and what, you know, what that really dark outcome can be if it is left uncontrolled. So hopefully our our needle threading Fed maintains that very delicate balance.
Gina Martin Adams 50:21
Yeah.
David Lundgren, CMT, CFA 50:21
We have about, I think about 10 minutes here. So let’s see if we can swing this conversation to 2024, everything we talked about, what what to you—you’re more optimistic on the coming year, but obviously, in the context of a very volatile environment. So what has your attention in terms of sectors likely to lead in the coming year? Where would you steer our clients towards in terms of their capital?
Gina Martin Adams 50:48
Yeah, so we run a sector scorecard that actually equivalently rates, price momentum and price spreads, earnings revisions, earnings trend, and relative valuations across all sectors. And it’s a very tactically oriented scorecard. So we update it every quarter. But as of the most recent quarter, it was still pointing to tech and communications as two sectors that are very, very well positioned. A lot of that is the trailing price momentum, which is still very strong for this space, but also the earnings trend, which is leading the index higher. But the two surprises at the top of the scorecard joining tech and communications are financials and energy. And I think this is a really compelling sort of story for 2024. Everybody hates financials because we’re all terrified of the banks. But nonetheless, the yield curve does appear to have passed its maximum inversion point, which is historically pretty good for financial sector, the sector is producing some degree of earnings momentum after the major losses of 2023. The comp is pretty easy. Revisions have been generally quite stable for financials, and it’s not as much about the banks anymore, which I think is also interesting when you look at large-caps as well as small-caps, the banks are smaller portions of the market cap as a result of the distress that they went through in 2023. So leadership is really, really sort of sneakily transitioning into FinTech, asset management, consumer finance, kind of the non bank industries, within financials. So that’s one interesting sort of tidbit on the scorecard, and definitely meant by consensus.
David Lundgren, CMT, CFA 52:25
Yeah, no, I exactly. But I think you touched on one of the questions I was going to ask you, because financials is an interesting sector, because it has lots of very growth-y names like Visa and MasterCard, others. But then it’s also laden with banks. In communications, the media is the same. So there’s newspapers and Google in the same sector. So when you say communications and media, can you drill down a little bit more and distinguish between those two?
Gina Martin Adams 52:54
Yeah, so inside communications, you’ve got media and entertainment, you’ve got internet and you’ve got telecoms, basically, as your three major segments. The internet is toward the top of the scorecard with media toward the middle, and then the telecoms at the bottom. So it’s not by any stretch of the imagination a defensive telecoms call.
David Lundgren, CMT, CFA 53:16
Yeah, exactly where I was going with that.
Gina Martin Adams 53:17
It’s, yeah, it’s definitely allocated toward where you see the price momentum most recently strongest, which is, frankly, that’s also been complemented by earnings momentum. This is the area of the world that is experiencing the very rapid earnings recovery right now. And according to the consensus of analysts that earnings recovery is supposed to sustain right through the middle of 2024. So it should maintain earnings leadership, at the same time as it has pretty strong price momentum. And frankly, the valuations of the sector are incredibly suppressed relative to long term. So it’s this trifecta. According to our scorecard methodology, it just it just checks all boxes—the communication sector. And it has for three quarters so this tactical position is getting a little long in the tooth, it makes me a little nervous to still be hanging on to it. But nonetheless, it’s still quite strong.
David Lundgren, CMT, CFA 54:11
Yeah, you know, conspicuously absent from your list given our conversation so far with, you know, onshoring and the government spending and whatnot on infrastructure and things like that are two things like the cyclical part of materials and industrials, broadly speaking, physical out of industrials. I mean, I—when you look at—what’s intrigued me about industrials, is that the relative performance on industrials bottomed when the market peaked in the beginning of ’22. So it actually outperformed throughout the entire bear market, which is always in my mind is the market’s way of telling us that when this next bull market starts, this is going to be leadership. If you look at the industrials equally weighted, it’s already broken out to new highs, relative performance has been very very strong throughout the whole bear market and the subsequent bull. So why do you think industrials, don’t make it onto the top four leaderboard?
Gina Martin Adams 55:02
Yeah. So industrials are there in our small cap scorecard. They’re not in the large cap scorecard. So I think that the story there is yes, cyclical recovery all the way—
Yeah, yeah.
—but the biggest of the big industrials have already had their gains and they’re kind of setting to the side. So things like you know, FedEx and UPS—not looking fantastic. They tend to be dragging down the broader industrial sector. We already had a massive riff in the defense stocks that are biggest names in the bigger industrials. So I think the smaller industrials. Do you tend to you know, show up as that domestic growth story maybe is in the smaller cap industrials, as opposed to the bigger cap names which are just looking a bit top heavy.
David Lundgren, CMT, CFA 55:46
Yeah, the machinery the mid cap machinery, there’s tons of them that look fantastic. Yeah, that makes a lot of sense. And materials, cyclical materials. Building materials…
Gina Martin Adams 55:55
Materials is a little trickier because in the large cap index, so much of materials is chemicals. So chemicals is a huge portion of the materials space. Chemicals is also highly linked to healthcare. So I don’t know why this this connection seems to be very very underplayed. But chemicals and healthcare are closely linked. Healthcare has been dramatically underperforming as the drug producers just haven’t been able to come to market to the degree that anybody had hoped with anything other than the obesity drugs. So there is a story there, but it’s not impacting earnings. Chemicals, is also facing potential higher cost inputs. So it’s a little bit of a drag where metals and mining you would naturally think as a beneficiary, you would think that the industrial producers, production and recovery might end up benefiting chemicals, we’re just not seeing it as vastly. So it’s a second fiddle to us to energy, which is a really clean play on commodity prices appear to have finally bottomed and that should benefit the energy space, it’s just looks like a better opportunity in large caps. In relative terms.
So oil you think is bottomed out here?
It looks to us that way. At the very least, there’s no way that energy companies, even if oil edges a little bit lower will have the earnings declines that they had in 2023. So some of our work is really about those pivot points and trends shifts. Energy, no matter how you slice oil prices, unless oil prices go down by half again, energy earnings are going to stabilize in 2024, relative to 2023. And that should be enough to create a little bit of a lift. But it is incredibly sensitive to oil prices. So if we get another downdraft in oil, that’ll be really tough for energy stocks to perform as our scorecard would anticipate.
David Lundgren, CMT, CFA 57:48
So all of this makes sense. And when you when you sort of take that sort of storyline, and you kind of project it tangentially into other areas of the market, it sounds to me like maybe, maybe the US reign of leadership—is it coming to an end? I mean, should we should be looking at like Japan and India and Europe and emerging markets and things like that?
Gina Martin Adams 58:10
Yeah, our scorecard for global actually says you do want to look at emerging markets, but we have developed markets below the US. So within developed markets, it’s actually pushed into Canada, a little bit into Australia, the commodity producing nations and develop markets have moved toward the top Japan actually was at the top of the scorecard until this most recent run, and then it fell beneath Canada. So I think that the developed markets are a little bit mixed. Europe and the UK are both at the bottom of our developed markets scorecard. So given that those are really big markets, they’re just not producing and Japan’s kind of in the middle, there’s not a lot to kind of get excited about in developed markets.
David Lundgren, CMT, CFA 58:51
Yeah, yeah.
Gina Martin Adams 58:52
Emerging markets are a different story. And this is where I think a lot of interesting opportunities have emerged. I actually think China could give you a nice tactical opportunity to the upside in 2024. And this is really just a sentiment call. Everybody hates China. So I have to get a little bit constructive on China.
Tyler Wood, CMT 58:52
Yeah.
Gina Martin Adams 58:52
It’s not popping to the top of our scorecard. But it we do see the correlations starting to normalize between China and the rest of emerging markets. And that’s usually a bit of a clue that some of the distress that was evident in China, which was an anomaly, frankly, in emerging markets last year, should be easing. And if China even stabilizes for 2024, that immediately gives emerging markets a lift. The other thing to consider is, and I don’t know why nobody’s really talked about this, but, when the Fed ease is emerging markets are usually the bigger beneficiary than any other markets in the world. So I want to kind of be respectful of that historical trend. But really, in emerging markets, again, is the story of this commodities idea this commodities play because Middle East and North Africa is actually at the top of our scorecard for emerging markets, that’s a combination of commodities and financials. So there’s some, some rhymes with our scorecards at the country level when we look globally. And then Latin America is just behind the Middle East and North Africa region. And then Asia is actually toward the bottom of our scorecard. So I think some of the stories that really dominated this year will reverse to some degree and in 2024. I don’t want to say I’m in India besr because God forbid, I work against those charts, they’re just far too strong. But I think you’re gonna see the story shift a little bit in favor of some of the laggards of them in emerging markets in the 2024, as the Fed reverses policy as commodity prices stabilize the dynamics of recovery shift a bit.
Tyler Wood, CMT 1:00:52
Oh, my goodness. And would you say that the onshoring for that trend with labor, would that support the North to South American corridor from an economic expansion for Mexico and everything south?
Gina Martin Adams 1:01:03
Yeah, it should. I mean, there’s a there’s volatility and investing in Brazil and Mexico in general. And so I think you have to get over that hump capital has really has a hard time getting to that area of the world, frankly. And so that is the bigger challenge for Latin America than anything. You know, you go and talk to any Swiss asset allocator and they don’t think of Latin America as really an investable part of emerging markets. That’s just an example. Right? It’s just, it’s tough to get capital there. That said, you should see Mexico as a natural beneficiary of an onshoring trend in the US provided that we can maintain positive relations over the border. Now, I do think this is a big if going into the 2024 election and into 2025. It’s something to watch, because this is a risk that we need to be aware of the relationship between the US and Mexico, we may be taking for granted. But for now, Mexico does seem to be a beneficiary of US strength. And then the other thing to consider is Brazil and Mexico are way ahead of us in the easing trend. So central bank policies already shifted there, in particular, in Brazil, where inflation does appear to have become contained, and it’s commodity—they’re both commodity sensitive segments. So as long as commodity prices are stabilizing, then they generally tend to do quite well.
Tyler Wood, CMT 1:02:25
We talked commodities, and we talked about Fed rate cuts. Do you also study, you know that correlation to the US dollar and the end of dollar strength being a tailwind for emerging markets?
Gina Martin Adams 1:02:37
It should be, you know. I don’t want to get caught and trying to figure out where the dollar is headed, because that is a trap that I would fall into.
Tyler Wood, CMT 1:02:45
Well sidestepped.
Gina Martin Adams 1:02:46
If the dollar strength can ease, if we do see the dollar keep easing. If we do see the dollar sort of this surge minimized over the course of the next year, it should generally benefit emerging markets over developed markets, and especially over the US. The dollar has this interesting storied history with stocks though, so I try not to lean on it too much. There are just periods of time when the dollar and stocks are very strongly positively correlated, and there are periods of time when they’re negatively correlated. So I think that I tend to lean on commodities as a big cue for global strategy a little bit more than the dollar and then relative rate differentials I think are pretty important to follow for global strategy as well.
So Gina, it’s the holiday season, Christmas season. So let’s put a bow on this one with your topic, what your favorite topic is—a target for the S&P in 2024?
Tyler Wood, CMT 1:03:46
Putting Dave on the naughty list, right?
Gina Martin Adams 1:03:48
Yeah, I am—actually I can, I can wiggle right out of this one. Because I’m prohibited from offering a target by compliance believe it or not. What I will say, I can give you some of the output from our market regime model [which] says that you should expect high single digit average annual returns for stocks, just given the conditions that we’ve laid out in the past as well as the internal dynamics of the market itself, I would lean with a probability of the market doing better than that 6% In the course of over the first part of 2024. Anyway, just given the movements that we’ve seen, in terms of breadth and recovery to the equal weighted index and the small cap index, we’re on the verge of, you know, pretty big breakouts in both of those. So I would watch those really carefully. Because if you see those breakout, you see the S&P 500 break beyond its former peak, you’re gonna see capital flood into the equity markets to chase that trend, and then we can’t really predict how strong it’ll get. I do think, though, that we’re at a point in the earnings cycle and the inflation cycle that is very constructive. And so at least in the short term, tactically, we’re pretty constructive. But thankfully, I don’t have to, you know, put my finger in the air and put a number on the S&P 500 anymore.
Tyler Wood, CMT 1:03:48
And I think, for our listeners, to remember that short term and tactical for your process is quarterly, correct?
Gina Martin Adams 1:04:38
Yeah, it’s quarterly. Its quarterly, sometimes I can extend it to semiannual and annual, but it’s very rare that I would. I want to, I need to be nimble, you know, my models are gonna move pretty quickly. So, you know, we got tactically pretty conservative in July, because our sentiment models were way over done. We got tactically very aggressive at the end of October, you know, I can see a point or sentiment might be getting a little bit overdone in the short run. And we may have to back off a bit, but we’re not quite there yet. Fantastic.
Tyler Wood, CMT 1:05:52
And our final question for today, when you think about that regime shift, a different kind of inflationary environment, is there anything that you do different from a process perspective? Do you shorten up your timeframes? Do you think about rotations happening faster through the sectors or through factors or through other markets?
Gina Martin Adams 1:06:13
Yes, 100% shorten my timeframes, I pay a lot more, a lot more attention to short term shifts and economic momentum. You know, the normal long term cycle, my economic models give me very few signals that are tradable. It just sits there and it says, Hey, the economy’s in recovery or in expansion, don’t do anything with it. Over the last two years, I’ve actually gotten tactical trading signals out of momentum shifts in the economy at large, which has been really helpful. I think sentiment is incredibly important to follow in a market like this. And inflation dynamics are incredibly important to follow. I mean, name me anybody who five years ago was watching CPI. Nobody was, it didn’t matter, it was not part of our conversation, it wasn’t part of the trading. But it’s really, it is really consequential to trends in the equity market right now, if we see inflation stop decelerating, it is likely to be a big turning point for stocks and not to the positive.
David Lundgren, CMT, CFA 1:07:14
Yeah.
Gina Martin Adams 1:07:14
Yeah we saw that in July to October. Nobody really talks about it. But inflation stalled in July to October, created massive panics everywhere. Yeah, just that stall. Now we’ve had a nice little recover—a little continued deceleration, which has helped a lot but a stall in inflation, particularly at these levels I do not think would be received kindly.
Tyler Wood, CMT 1:07:14
Yeah. Fascinating. Gina Martin Adams, ladies and gentlemen here on episode 36. Rounding out season three. For everyone who is paying attention to Bloomberg intelligence, make sure you tune in. Gina is going to be hosting the morning show on Bloomberg News. Any other place that we want to direct our listeners to reach out to you Gina?
Gina Martin Adams 1:08:00
Oh, sure. I am an active user of social media, much to my peril. So feel free to interact with me on LinkedIn. I’m at Gina Martin Adams and on X I am also. Had to remember that name.
Tyler Wood, CMT 1:08:13
Nailed it.
David Lundgren, CMT, CFA 1:08:13
Well done. Yeah. Yeah, way to keep current.
Tyler Wood, CMT 1:08:17
Thank you so much, Gina. I wish you and your family very happy holidays. Thank you for joining Dave and I and looking forward to catching up with you in 2024.
Gina Martin Adams 1:08:27
Okay, amazing. Thank you both so much. I really appreciate it.
David Lundgren, CMT, CFA 1:08:30
Thanks so much Gina. You got it.
Tyler Wood, CMT 1:08:32
Bye bye.
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Originally Posted January 5, 2024 – Fill The Gap Episode Thirty-Six, with Gina Martin Adams, CMT, CFA
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