Stay Bullish, Says Economist Ed Yardeni

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I see the S&P 500 getting to 8,000 by the end of the decade. The Dow goes from about 40,000 to 60,000 by the end of the decade. And At this point, I'm not seeing a recession.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Ed Yardeni. He's an economist and the publisher of a popular Wall Street newsletter. He's going to talk to us about the jobs numbers, that big stock market sell-off, and why he's not worried, except maybe about the national debt. Listening in is our audio producer, Jackson. Hi, Jackson.

Hey, Jack.

We don't have any time for getting sidetracked. I mean, there was a lot of market volatility, big sell-off. People want answers. I was going to maybe make some idle chit-chat about the ongoing Olympics. I noticed that breakdancing is in this year. They call it breaking. And I probably would have cracked wise about that. Um, no time. I probably would have mentioned the 1984 movie Breakin' 2: Electric Boogaloo, because it's just always fun to say that. And then I might have done a tangent about, you know, that movie was made by two low-budget film producers who saw the movie Flashdance, the 1983 movie, which had a scene of dancers kind of popping and locking, as the kids probably definitely don't say anymore. And then they said, let's make a movie with all of that, just that. And they made Breakin' the following year, wrote it, directed it, shot it, everything in a year. So it came out in 1984, Breakin', and then Breakin' 2 came out the same year, 7 months later.

That is incredible. And I think that with Breaking 2, the Electric Boogaloo moniker has long outlived people's memory of the actual movie.

It's become a meme.

It's—

yeah, people use it when they want to say like a sequel to something that's kind of farcical or not, or ridiculous or nonsensical or low quality. Although to the credit of these gentlemen that made this movie, they made money. They kept spending down, and they moved so quickly that they got out just ahead of competing films like Beat Street and Body Rock. And I'm not going to tell you the reviews were glowing, but Roger Ebert gave it a thumbs up. He wrote, here's a movie that wants nothing more than to allow some high-spirited kids to sing and dance their way through a silly plot just long enough to make us grin.

It has a 29% on Rotten Tomatoes, but Even those bad reviews aren't that bad here. This one's from Rob Vo. It says, its blithe self-confidence shows not the slightest inkling of just how terrible this movie is. It's a wonderful kind of terrible that makes you weep for joy.

I would love for someone to say that about me. Sounds like high praise. But again, Jackson, and I can't stress this enough, there's no time for any of this nonsense. So stop trying to sidetrack me.

My bad.

Okay, so the US stock market sold off about 8% between mid-July to this past Monday, and the sharpest declines were on the last couple of days. And that was after a disappointing jobs number. Ed's gonna tell us all about that. But one thing to know about the sell-off is— it's pretty normal. Savita Subramanian, the B of A security strategist, put out some numbers on this. 5% stock market pullbacks, those occur on average about 3 times per year. And 10% corrections, those happen on average about once a year. B of A says that a full-fledged bear market, a decline of 20% or more, is unlikely. They write that only 50% of the signposts that they track that have historically preceded S&P 500 peaks have been triggered. And usually before you get a bull market, you get 70% of those signposts. Some folks are now talking about the possibility of an interest rate cut before the Federal Reserve's next regularly scheduled meeting. But the economists at B of A say conditions for that are not even close. There have been only 9 emergency inter-meeting rate cuts since 1987. They've been associated with systemic panics and the bursting of big stock bubbles and wars and the pandemic. Conditions now, one iffy jobs report and a quick sell-off after a long stock market run-up, those just aren't in the same league. Savita and her team point out that timing the stock market is hard. The probability of losing money in any given day in stocks is basically a coin flip. But if you hold for 10 years, the probability of a loss falls to just 5%. That's based on what the market has done since 1929. If you think you're gonna know when to get out and get back in, consider this. Since the 1930s, if an investor had missed the 10 best return days for the stock market in each decade, he or she would've made 76%. But by just remaining fully invested, that same investor could have made 25,000%. 76 versus 25,000. That's a big payoff for doing a lot of nothing for a very long time. Savita and her team at B of A do expect higher volatility from here, and they do have suggestions for investors who are more tactical. They say they're bullish on large-cap value and dividend payers. There are ETFs for both of those themes, like Vanguard S&P 500 Value, that's IVE is the ticker there, and Fidelity High Dividend, that's FDVV. B of A also favors what they call the other 493. In other words, the S&P 500 companies that are not the Magnificent Seven tech stocks. There's no ETF for that, so it's kind of hard to follow that strategy unless you have a lot of money and you're hiring someone to do custom indexing. One last category B of A recommends, what they call old school CapEx beneficiaries. CapEx is short for capital expenditures. It means spending on big ticket items like factories and equipment. There's a construction boom on for data centers and the semiconductors have already been rewarded for that. But by old school CapEx beneficiaries, B of A means look to companies in traditional business lines like heavy machinery, electrical equipment, materials, climate control systems. Companies like that are benefiting too and haven't yet been as richly rewarded by the stock market. But that's enough popping and locking for me. Let's get to my recent conversation with Ed Yardeni. We got a weak jobs number and it's got some people worried about a recession. And I saw that you had put out a report report, and you don't sound as worried as some other folks that I've heard from. Tell me what you saw in the jobs numbers and why you're not worried.

Well, we saw inclement weather. There was over 1.5 million, uh, workers that, uh, were affected by the weather. That doesn't mean that they, uh, were counted as unemployed. Uh, if, uh, you couldn't get to work, uh, but you were still on the, on the books, you were still counted as being in, in the payrolls, but it certainly had an impact on the work week. The work week declined, and that should reverse itself in the next report. So if that's the case, that'll help a great deal in reviving aggregate hours worked. Aggregate hours worked is an indication of how many people are working and how many hours they're, they're working. And again, that ticked down in July, but it's gonna tick right back up to probably a new high in, in August. The other labor market indicators that we're looking at, initial unemployment claims, people have focused on that. And we observed that the past couple of weeks, the boost to initial claims was largely centered in Texas, which just happened to have a hurricane barrel barreling through at that time. And so we, we think that They weren't blaming it on the weather. And by the way, it, it's not as though we saw a decline in employment. It was up 114,000. And over the past 3 months, it averaged 170,000. We know the data gets revised and we know that you're better off looking at the 3-month average. And the 3-month average is kind of back to what we had seen prior to the pandemic in 2018, 2019. So we've, we've been promoting the idea that the labor market isn't weakening, it's just normalizing. It was abnormal over the past couple of years. Now it's back to normal. And oh, by the way, last week on Wednesday, when Fed Chair Jerome Powell, uh, had his press conference to discuss the economic outlook, uh, he used the term normalizing to describe the labor market 12 times. So, you know, he's in accord with our view, and we've had this view before he did. So, uh, Now, he said that before the employment report come out. Maybe, maybe he'll change his tune, but, but I kind of doubt it.

We'll be back with more of my conversation with Ed Yardeni after this quick break.

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Welcome back. Let's pick up where we left off with my conversation with economist Ed Yardeni. So the jobs numbers were no disaster, as you said. Not at all. But, but the reaction from investors was a pretty violent one.

Yeah.

What are, what are, let's talk about some other factors that might have been at play. You mentioned Japan. Sure. And the carry trade and the unwinding there. And I always think of that as having to do with currencies and bonds, but you said there's a stock effect perhaps too.

Oh, absolutely. Absolutely. Yeah. Over the past couple of years, there've been more and more carry traders, speculators who saw a great opportunity to borrow in Japan in yen at near zero interest rates. And so they, they could borrow a tremendous amount in yen. Then some of that money went into the Nikkei, into the Japanese stock market. You can borrow money at zero, it's free money. And then you put it into the Nikkei and the Nikkei just happened to, the momentum players saw that it was going up. And as, as others took their yen and converted them to dollars, Mexican pesos, Brazilian real, they, they took their money and invested it in other speculative areas of the market. Maybe quite a few of them went into the Magnificent Seven or the NASDAQ 100. I mean, it's, you know, borrowing money for nothing and then putting it in momentum trades that seem to have nothing but an uptrend is a, you can make a lot of money that way. And so of course, as they converted some of their yen into dollars and other currencies, guess what the yen did? The yen got very, very weak. And so it was like a double bagger for them. It was a home run. 'Cause not only were they making money in their momentum trade, but the yen was going down. So, you know, when they had to pay back their money, they need fewer dollars and other currencies to do that. And then all of a sudden over the, it really since late July, the Finance Ministry in Japan and the Bank of Japan made it clear they were getting very nervous about this free fall in the yen and they acted. And they acted in a way that suggested that they were gonna tighten monetary policy and they basically talked tough and the yen rebounded. So it started to get strong and suddenly these carry traders got very nervous that they were basically short the yen and the yen was not going their way. And whatever they made on the other trades, they could lose. And then it just kind of like, you know, built in itself in the wrong way. Not only were they short the yen and the yen was strong, But as more of 'em decided, you know, this trade's not that much fun anymore, and decided to get outta, let's say, the Magnificent Seven, the NASDAQ 100, Mexican pesos, whatever, then the trade completely blew up.

And there have been plenty of investors, you mentioned the Magnificent Seven, there have been plenty of investors, not sophisticated carry trade type of folks, but just folks plunking part of their paycheck in their S&P 500 fund, and they feel like stock market geniuses, they've done so well, and they see that their results have been led by these giant technology companies. And everybody's been wondering, is it too much too fast? Have they gotten too expensive? And we also see some other news on the periphery, the monopoly judgment against Alphabet, Google. And so when you look at this group of stocks, what do you see? Do you see reason for concern here? Do you see results that justify the valuations that we're seeing? What do you think?

Well, I always get nervous when I see stocks going straight up and seeing that more and more people are getting excited about the particular story. And so actually, I think it's a good thing that we've had some correcting here and that maybe that they stall out for a while and let the earnings story catch up. Let people have a more realistic view of what these companies are doing and what the risks are. By the way, also on Friday, I think the Justice Department announced that they were investigating NVIDIA for antitrust monopoly pricing. So that's another thing that hit the market because obviously that's a widely held stock and it's a real darling of the whole AI phenomenon. But I think it's a healthy thing that people are saying, well, wait a second, these companies are spending all this money on AI. You know, where's the beef? Where's the return on all this investment? And even the companies themselves like Google and Meta confessed in their conference calls, their earnings conference calls that, you know, they were, you know, had no choice but to spend a lot. And if they could, they'd spend even more. But on the other hand, they were kind of clueless about, you know, what the return would be on this and when one could see it. So I think people are getting a little bit more realistic about that. But the demand for semiconductors remains extremely strong on a global basis. High-tech revolution remains very much in gear. And so I think again, the market maybe got a little bit ahead of itself on some of these tech names. And I think I'd like to see it broaden, which is what it was starting to do. Maybe moving to the S&P 493 that are reporting decent earnings pickups.

What do you think is the path from here? Let's say over the next year or couple of years for the US economy? Is there anything that investors should be thinking differently from here?

Well, you're asking an optimist. I've been optimistic for a while. At the beginning of the decade, kind of dawned on us that 2020 rhymes with 1920s. And then people remind me, yeah, but that 1920s ended badly. Well, you know, we'll address that at the end of the decade, but for now, We've got until 2029. Yeah, exactly. So, and by the way, what caused the Great Depression and what caused the great crash wasn't the market. It wasn't a bubble that burst. What it really was was the Smoot-Hawley Tariff that was passed in June 1930. So yeah, I will not deny that the government could screw this thing up royally as it has often in the past. And that is something to watch out for. With all due respect to your profession, journalism, financial journalism, the headlines tend to be full of you know, Washington fiscal policy, monetary policy, you know, Janet Yellen, Fed Chair Powell. And we don't really pay enough attention to the economy itself, to all these millions of people, you know, the working stiffs like, like you and me who come to the office or the home office and try to make things better for ourselves or families or communities. And, and we do that recognizing that the, Washington probably gets more in our way than, than is very helpful. And somehow or other, we managed to create record real GDP, record consumption per household. The economy just continues to, on a, on a trend basis, do extremely well. And maybe one of the reasons we might find that employment growth is slowing is because the workers aren't there, and companies increasingly are using technology to augment the productivity of the workers they have. And sure enough, the productivity numbers last year were really good for the US economy. And, uh, we just had a really good number, uh, for, for the second quarter. And a year-over-year basis, we're up 2.7%, uh, for productivity, which is a very strong number. Historically, the average is about 2%. And so I think we're going to have productivity-led economic growth over the rest of the decade, the, the roaring 2020s. Productivity is fairy dust. It makes everything better. It makes all of our dreams come true. It allows real GDP to grow faster. It reduces unit labor costs, which is really the determinant of inflation. Unit labor costs are up only 0.5% in the second quarter on a year-over-year basis. So that argues that we're gonna get to 2% on inflation shortly. And all of a sudden, central bankers may be all obsessed about why can't we get it back up to 2%. But we'll talk about that on another podcast perhaps. But yeah, I think things look pretty good. I think earnings, are gonna grow. I've got earnings for the S&P 500 at $250 a share this year and $400 a share by 2029. So it's not gonna be the fundamentals in my scenario that causes the great crash of 2029. It'll be screwed up fiscal policy or monetary policy. But short of that, I've got the, the S&P 500 going up from, let's call it 5,200 right now. Not too long ago it was more like 5,600, a few weeks ago, maybe a few days ago even. And I see the S&P 500 getting to 8,000 by the end of the decade. The Dow goes from about 40,000 to 60,000 by the end of the decade. And at this point I'm not seeing a recession. I've been talking about rolling recessions and hitting the economy without an economy-wide recession. And I've been talking about the resilience of the economy and the consumer. And I think that's still the case.

It was a great lead into my next question because you mentioned fiscal policy and fairy dust, and I feel like maybe we're going to need a little abracadabra to figure out a way out of the national debt situation. When you look at that and you make your projections, is there a path to a benign outcome with regard to the federal debt?

Well, you might have noticed from our current conversation and previous ones we've had that I do tend to be an optimist. I've sometimes been accused of being a permable, which by the way, I view as a compliment because I want my tombstone to say, "Edgar Denny was usually bullish and usually right." I'm pretty sure you can arrange for that with the right will and trust and instructions. I'll put that in my will. Exactly. So I do tend to be an optimist, but I have to say I can't put lipstick on this pig. I mean, the fiscal deficit It is a pig and there, there's no will at all in Washington to do anything about it. I mean, it's pretty easy to fix. All we gotta do is cut the spending and increase taxes. How hard could that be? Well, politically right now it's impossible and nobody's even really talk, talking about it. But I do think that we may very well have somewhere along the lines in my happy forecast, a debt crisis could last for 6 months, scare the living daylights out of the stock and bond markets. You suddenly are back at 5% or higher. And maybe it'll be scary enough that the politicians, believe it or not, might actually come up with a credible plan to reduce the deficit. Obviously they couldn't do it right away because that would only exacerbate the debt crisis impact on the negative impact on the economy. But they certainly could come up with a 10-year plan if it's credible to slow the pace of growth of spending and do more to boost revenues.

So let's put it all together and you tell me if there's anything that investors should be doing differently right now. I feel like there are many investors the past few years who've been complaining like, you know, why do I need this diversification stuff that everyone keeps recommending? Because all I have to do is put it in NVIDIA and it goes straight up and my bonds stink. But you know, the past few days maybe they've felt better about having some of that diversification.

I wish I had listened to them the past 2 years.

And is there anything people should be doing differently with their asset classes now? And the person who's, got an eye on what you just said. Even the permabull is worried about the pig that is the federal deficit and the possibility of a debt crisis somewhere down the road. So is there anything differently that investors should be doing right now with their asset allocations?

Well, I often say that I'm in the same camp as Warren Buffett and Professor Marty Siegel, that stocks are meant for the long run. And having just said that, I do have to acknowledge that Warren Buffett has never held more cash in his fund than he is holding right now. So, you know, he sold a lot going into this sell-off, but he's always looking for opportunities. And so he's not getting spooked by these sell-offs. He's looking for places to put some money. Right now he's, you know, pretty comfortably sitting in treasury bills earning a pretty decent return, but he knows that in the long run he's better off buying a cheap company that is well run and well managed and that will appreciate over time. So I would go with that basic philosophy of, not trying to trade these things. You know, if you were brilliant enough to get out of the market on July 16th, which was its all-time record high, are you going to be brilliant enough to pick the bottom? What if the bottom was just made on Monday? You know, do you have the guts to kind of jump back in and invest? So you have to pick not only the top, but you also have to pick the bottom. And even in 2022, a lot of geniuses who were very bearish forgot to tell all of us to get back in, in October of '22. So yeah, I, I don't think you want to be all in the Magnificent Seven. I think you do want to be diversified. Having said that, it's been frustrating being diversified in this mid-caps and small and mid-cap stocks. It's been frustrating being invested on a global basis. You had to know to overweight India and to stay the hell out of China. So it's not easy and I wouldn't be panicking here. I'd, I'd, I'd, I'd stay with the, the portfolio.

Thank you, Ed. You can subscribe to Ed's newsletter at yardennyquicktakes.com. Also, thanks to Savita at B of A whose research I cited earlier. And thanks to all of you for listening. Jackson Cantrell is our producer. Jackson, a quick note on food inflation. I mentioned on this podcast the loophole I had found at McDonald's. They have, they have the new $5 value meal where you get that, that burger, that McDouble with the 4 nuggets and a small fries and a small soda, and it's $5. It's a decent price. And if you put 2 of them together, that's $10. And that's the minimum required to use this digital coupon that they had on the app where it's 20% off $10 or more. So I was getting really $4 value meals. As I described it on a recent episode, I was living life in the fast lane. Oh yeah. I just want to mention that I went back to try the same thing again and two things went wrong. First of all, the $5 value meal is now only for the chicken sandwich, at least at the restaurant near me. If you want the one with the burger, that's now a $6 value meal. And when I went to apply my 20% off $10 or more coupon, it's now a 20% off $15 or more coupons. So last we heard about McDonald's, they were moving towards value, but it seems like maybe there's been a little backpedaling. I don't know what that means for the economy.

I think they adjust the price based on everyone's individual app too. Did you, have you heard about this? They like, you know, that's part of the app pricing is they can charge people.

So what you're saying is the first time I try this, they give me a good deal. The second time they say, okay, Mr. Eager Hungry Boy, let's just see if you're willing to pay a little bit more. That's what's happening.

Yeah, you got to play hard to get.

I don't know how to do that digitally at the drive-thru lane.

Maybe I'll just pull up and say, uh, I'm just, I'm just doing a couple of U-turns. Pull up every day, do a U-turn, don't get anything. And the third day you're going to get a great deal.

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