Decoding 2024's Investment Landscape with Callie Cox (EP.136)

0:28We all need to make smart decisions with our money. of the investment world. And joining me is Callie Cox, a prominent investment analyst at eToro, known for her deep understanding of market trends and investor behavior. Having worked in financial research for her entire career, Callie's passionate about helping all investors of all skill levels learn how to think about investing. And she creates lots of engaging content about markets and the economy that if you want to check out and see, I'll have links to all of our social media accounts in the show notes at thelongterminvestor.com. But in this episode, we'll be exploring the somewhat surprising rally that we saw in the fourth quarter of 2023, delve into the intricacies of market valuations, and unravel what 2024 might hold for investors.

1:16So sit back, relax, and get ready to gain valuable insights that could help navigate your investment decisions in the coming year. Callie Cox, welcome to The Long-Term Investor. Hey, Peter. Excited to be here. Excited to talk about these crazy markets. Well, it was important to me to record with you not too far into the year had gotten started because we just had a huge rally in the fourth quarter of 2023 after seeing markets decline, maybe 10-ish percent mid-year. And as of the time we're recording this, we'll put a timestamp on it. It's January 9th, 2024. Market sentiment remains relatively positive right this moment.

1:57So why don't we start with you giving a little of your thoughts on what happened during this market turnaround in the fourth quarter? Well, that's a good place to start because in many people's minds, I feel like that was such a pivotal turning point in both portfolios, in Fed policy, and I mean, like you said, Peter, in market prices in both stock and crypto markets. So around the end of October, I think stocks bottomed or the S &P bottomed October 27th, maybe. That was a few days before the Fed meeting. And in that Fed meeting, Chair Powell made it so clear. And the Fed never makes promises, let me be clear.

2:33But the Fed was getting really close to being at the end of rate hikes. And we heard a lot of encouraging language on the progress that the Fed has made on inflation. Of course, inflation prices are still high. They're probably not coming down anytime soon, absent an economic crisis that you don't want. But the Fed looks at the growth in inflation, the growth in prices, and that pace of growth has come down steadily since the middle of last year. So markets really heard that. And quite honestly, Powell has told us in some ways or another since July that we were getting close to the end of the rate hike cycle.

3:06But the way that he worded it in November, how he talked about the balance of risks, how he talked about the progress in inflation, I think there was one reporter that even asked him if the rate hike cycle was over and he dodged the question a little bit, which markets took as you don't want to answer it. Come on, like we hear you. I just think that the shift in tone was big enough that people started pricing in rate cuts. And you have to remember, too, that at the beginning of October and throughout October, the concern was another inflation spike and the rise we saw in the 10 year yield up to 5%.

3:40So I think it was a combination of people being way on the wrong side of the boat and then Powell coming out and being so flexible with his language and so encouraging on inflation and the economy that we saw people rush to the other side so quickly. And that turned into a 15 % rally in the fourth quarter. Well, I think an interesting piece of context that I'm often repeating myself in sharing in this show is that stock returns, if you go back and look at what they're comprised of, they're comprised of changes in earnings, the cash flow paid to shareholders, whether that's dividends or buybacks in changes in valuation, which is in many ways a sentiment gauge.

4:19And so hearing some of the things that you're sharing, do you feel like in this rally that the economy actually improved or is this all just kind of a turnaround in sentiment? Well, you have to remember the market is forward looking and you're absolutely right. That is what stock returns are made up of. I would word it as the fundamentals, of course, the profits driven by the economy with a dash of hope in there. And the hope, like you were talking about, Peter, is the valuations. valuations. That's the part of the market where you say, okay, things might not be great right now, but investors are willing to look in the future and they see profits improving by this much over the next six to 12 months.

4:57I think that's what's caught people off guard. I mean, valuations are quite high right now, but we've seen such a dramatic repricing of the future too, especially since that end of October timeframe that yes, it does look like valuations have driven this rally. They've driven much of the bull market that we've seen since October 2022. But at the same time, we're staring at a year where profits could grow 10 % year over year if Wall Street is right. So yes, we've seen a lot of growth in valuations. I think you could compare that to sentiment because, of course, to feel better about the economy, you have to feel something.

5:31You have to have some sort of positioning. But I don't think that's a bad thing. I think valuations are really tricky, especially in this environment. And a lot of people look at history and they get thrown off guard by what valuations are telling us. Well, and because at least to me, valuations is this mix of calculus and psychology that's constantly changing of the things that drive stock returns. That's always going to be the hardest to predict. And I also think something that is not terribly unusual, but certainly notable catching a lot of headlines is the fact that we're near all time highs, but not all stocks have done well.

6:05And in fact, you actually wrote an article for the Financial Times stating that 72 % of S &P 500 stocks underperformed in 2023, whereas one third of S &P 500 stocks were just down, had negative returns. Meanwhile, you have the Magnificent Seven, which for those listening, and I'm not going to use their official names, I'm going to use their known names. The Magnificent Seven is Apple, Google, Microsoft, Amazon, Facebook, Tesla, NVIDIA. they averaged a return of 111 % in 2023. The market's always a little bit top heavy, but what do you make of this specific trend? Yeah. Well, first of all, I don't use their official names either.

6:45That's not a choice I'm making. I just, I can't call Facebook, which is something I've been on since 2007 meta. I just can't do it. Yeah. Yeah. It's just ingrained in my brain. There's some psychology. I'm also never going to call Google alphabet, but I almost did right when I started listing them. So that goes to tell you, Maybe they're finally getting to me. Or Twitter X. Never going to do that. Nope. No. So talking about participation in the stock market last year, it was really wild. And the chart that you mentioned of the stocks that underperformed the S &P last year, you're right. 72 % of stocks underperformed the S &P.

7:18I think toward the end of the year, it was around 71 maybe. So not a big change, but we had a historic number of stocks not doing as well as the market. And to me, that was made even crazier by the fact that, you know, I work for a retail brokerage. We talk to everyday investors all the time. We were constantly hearing, everybody says the stock market's up, the Dow is doing really well, but my portfolio sucks. What's going on? I'm not feeling these good vibes that everybody else is feeling. And this stat is the one stat that I think explains how people felt about market returns last year. Not about what we saw in the headlines, but how it actually translated to our portfolios.

8:00And one third of stocks were down as well. So I think of this a few ways. To the customers who talk to us and say, I just don't see a bull market in my portfolio. Totally. I hear you. The numbers back you up there. I think that this is also such a good example of investing in a high rate environment. Because when rates are high and capital is scarce, investors have to make tough decisions. They can't invest in everything. They pick one stock over the other. And that's exactly what we saw in 2023, that gravitational pull toward quality risk toward those companies that people thought could survive a recession because the recession worries were real.

8:37And those companies happen to be some of the biggest on the market. That's big tech right there. So I was surprised at how much feedback I got on that chart. It was a popular chart on social media. I think it resonated with a lot of people who said, hmm, I'm not crazy. You know, this market didn't feel like a bull market, but then again, it wasn't a bull market for most stocks. So I think coming out of that, we could be set up for a really good year ahead, a year of more broad participation, a year that doesn't hurt so bad in your portfolio if you are a stock picker. But we live in interesting times right now.

9:12And I think people also have to remember that high rates, even if we see a few rate cuts here and there, rates could remain relatively high. So you could see a little bit of that weirdness matriculate into 2024. So that's super interesting, Callie. And I can share, first of all, that chart that you were referencing in the show notes at the long-term investor.com. And I often hear about the Magnificent Seven from clients, from families, from friends, really pointing out like these are just doing so much better than everything else. Shouldn't I just go into these because they are feeling a little more certain, a little less risky, to which I tend to think if it's supposed to be less risky, why would you expect it to have a higher return?

9:54If anything, you'd expect it to have a lower return. And the data is pretty compelling. Historically, stocks on their way to becoming a top 10 holding within S &P 500 outperform. That's how they become the biggest companies. And then after reaching that part, they've historically underperformed. That's one thing that sticks out to me. This it's not that unusual that a lot of stocks underperform the S &P 500. It's not unusual that just a handful of stocks make up for all the returns, whether it's in the S &P 500 or the Russell 3000. It's not that unusual for the top stocks to make up a large percentage of the index, even if it is a little bit higher today than it has been in the past.

10:33But I do think one of the things that kind of is interesting sticks out. You said the retail investor says, hey, the bull market didn't really happen in my portfolio. I know Lizzie and Saunders dating back to the pandemic said, I don't know that we'll have a recession, but you'll see these rolling recessions impacting pockets of the economy. I don't know if you have any thoughts about the Magnificent Seven or any of that with the rolling recessions that you could share with us. Sorry. Yeah. Just kind of rambling. It's an interesting topic. Oh, it's a very interesting topic. And I have lots of thoughts on it, too.

11:05The first thing I'll say is that many people don't know how the stock market works. And that's not to anybody's fault. We're not taught about this in schools. I actually didn't start investing until I was probably four or five years in my career because it's just not an intuitive ecosystem. Parts of it are intuitive. Others just don't make sense. And one part of it that I think throws people off is the guise of momentum. If these stocks are doing well, they're probably just going to do well forever, right? And that's not the case. Companies change, market environments change, investor preferences change.

11:38And you're right. Usually a few stocks drive the market higher. That's not abnormal, although it was a little more unusual this past year how concentrated the returns were in the top 10. Companies change over time, so market leadership changes. And often what leads one bull market doesn't lead the bull market the next time around, which if you think about what led the 2010s bull market, that was big tech. So I'm thinking a lot about that these days. but also how you experience that in your portfolio. The conversation between picking stocks here and there, which has its pros and cons versus just throwing it all in a basket of stocks, index investing, like many of us know.

12:18So, I mean, one thing I'll add to kind of get into this deeper is that many retail investors did own the Magnificent Seven. If you think about the top owned stocks on our platform, I don't have a list in front of me, but I can almost guaranteed, the magnificent seven are in the top 10. So some investors had a good year. Other investors didn't have a good year. If you were a value investor, God help you, you probably had an awful year. But things change. And going into this year, I think big tech told us something very important last year. Big tech was the place where investors ran to hide. That's not the big tech that we knew in the 2010s, the innovators, the small but punching above their weight type companies.

12:59Big tech just looks different. So when I think about big tech, I think about the next chapter for them and the fact that many of them are bigger conglomerate companies that have their hands in a lot of cookie jars, a lot of business lines. So it makes sense that they look a little more defensive. The flip side to that though, is that they may not be the bull market leaders because as you said, in order to lead a market, you have to outperform. Defensive stocks usually don't outperform the market, especially in a bull market. So if you're a big tech investor, if you hold those stocks, keep your mind on how these companies are changing, how the stock profile is changing.

13:36And think long and hard about 2023 and why big tech did well. People were worried about a recession. They gravitated toward that financial strength. That was big tech. But if the animal spirits come back, if people have bigger appetites for risk, they might look at other companies. They might look at some of these startups that are about to come on the market. They might look at private companies that are expecting to flip public. There could be another pocket that gets the good graces of the bull market. If you asked me right now, I'd say manufacturing looks really interesting. The reshoring theme looks really interesting.

14:09Industrials, especially with all the progress we've seen overseas with certain companies coming up to speed and technology could be really interesting. So different pockets outperform no matter what time period you're in. I think big tech could be one of the big surprises of this bull market. I'm not saying they're all going to crash, but they may not be the market leaders that we expect them to be. I find myself saying that often to people who are what I feel like are overly enthusiastic about the space saying like, hey, I don't see these going bankrupt, but it's hard to keep up that growth rate.

14:40And I started my career as a stock analyst and it reminds me of General Electric, the classic diversified industrial. They're completely different business lines, but when you do start getting to use your words and your hands and different cookie jars, it's just harder to move the needle. And that was obviously a big theme of last year, continuing to be a storyline this year. But another big storyline I'd like your thoughts on are just all of the money going into money market funds. What do you think's going on there? I want to talk about General Electric for a bit because I made that exact comparison in a note I wrote earlier last year around big tech.

15:16Actually, GE had a great year last year, which is kind of ironic considering all the market forces we had to think about. But if you're thinking toward financial strength, maybe it makes sense. Anyway, I just thought it was funny that you brought up General Electric. That's funny. Yeah, I didn't know that. I feel like I read everything you wrote in the last year, but I didn't go far back enough to capture that one. Great minds think alike, though, so this makes sense. Yeah, it's the quintessential conglomerate that was on fire back in the day and then now does a thousand different things and is trying to shut them quickly to become a more nimble, small-focused company.

15:50So yeah, maybe big tech is heading there. But anyway, I kind of deflected the question there. The dash to cash, the obsession with cash, I think it boils down to high rates, Peter. And I'd love to hear about what you're hearing from clients and other colleagues, because this is one of the most interesting dynamics that's come out of the ear in my mind. We saw the stock market at large do really well. We saw the S &P rise 24%, but cash levels built up as well. So people were investing and they were also saving a lot of cash. Doesn't really make sense if you think about it. And that's not what we've seen in previous bull markets either.

16:25Usually over the past two bull markets, we've seen cash levels draw down quickly at the beginning of bull markets. And I think that's a signal of the rate environment we're in. We do this survey at eToro. It's called the Retail Investor Beat Survey. We survey investors all around the globe, asking them what they're investing in, what they're thinking about. I look at the U.S. cut, but we do have a broader global operation, of course. So we like to look at different countries. But one thing that really jumped out to me is that investors see cash as more of an opportunity. They see the high rates and they say, I don't know how long I can get 5 % on a savings account.

17:02So I'm taking advantage of that, especially because I'm feeling uneasy about what's going on in the world around me. So, hey, if I could get a relatively riskless 5%, then why not? I mean, that's a very broad statement. And I'm sure that there are many Americans who are saving money for a house down payment, for example, saving up their emergency fund because they really are worried about the economy or God forbid they're out of a job. But we see this large swath of investors that are saying, I'm building up cash because I want that interest rate. And I actually feel great about the economy. I feel great about my finances and my prospects, but I can't ignore that interest rate.

17:37And it gives you a lot to think about as you head into a year where that interest rate might not stay around for very long. Now, I can't prove what I'm going to say, but there's a part of me that thinks a lot of the flows came from people who are keeping large balances in sweep accounts or checking accounts that weren't earning anything. Obviously, not enough to move a trillion dollars over the course of a year like we saw, but it is interesting. There are periods of time when the yield curve makes it such that cash is the best yielding thing you can get bonds, stocks. Otherwise, you and I both know long term, If we're thinking a 10 or 20 year horizon, and you have the choice of sticking money in cash and not being able to get to it for 20 years or stick it in the market for 20 years, you know, the likelihood that long term money in stocks outperforms cash is really, really good.

18:26But kind of honing in on something you said where people feel a little bit nervous. That's been my big take. Here's a certain return. It makes the bar higher for taking risk. I mean, that's literally what the Fed's trying to do. anyways, when they raise rates. So job well done to the Fed. I notice in a lot of what you publish, though, you seem to have a pretty optimistic tilt, which I like. I think anytime you're in this business, you can recognize that bad things will happen. Being an optimist doesn't mean that you're ignoring the bad things. It just recognizes how amazing human society is at creating and making things better and the emotions that drive it like greed and wanting more.

19:06You had sort of mentioned manufacturing as a bright spot, but I'm kind of curious, what has you optimistic going into 2024 about the economy, about markets in general? I think if you're honest with yourself and you study the history of the stock market and of the U.S. economy and of U.S. history, quite frankly, it's hard not to be an optimist. For me, it really boils down to the stock market being a call option on human progress. And I know you can't say that about other global markets, but at least in the US, this has been true. I mean, yes, we go through crises. Yes, we've been through, I think, 13 economic recessions since the 1950s, 10 or 11 bear markets, countless pullbacks of 10 % or more, yet the S &P is up an average of 8 % annually over that period.

19:52And there's a reason for that, right? Like life, you run into obstacles, you hit crises, but like most humans do, we figure out a way to get through it and we ultimately come out of it stronger. I mean, necessity is the mother of invention after all. So I think that's really where my optimistic attitude comes from. It's from the numbers telling me that, but also from the fact that you can't just look at the world in front of you, right? You have to think about where we're going and you have to realize that there are certain trends and truths that you can lean on day by day. Like we will hit crises.

20:24The economy won't be infallible all the time, but we will find a way to get through that. And most likely that will be reflected in profits, which is ultimately reflected in the stock market. I think about that a lot, especially because I have friends who I talk to about the stock market and I almost want to ask them to draw a picture of how it's performed over the past few decades. And I'm sure it would be down and to the right. But if you look at it, it's just up and up and up with these random blips here and there. So I digress there, but I'm thinking about what I'm optimistic about next year.

20:57What could drive this bull market? I mean, I think AI is the obvious conversation point here for both a macro analyst and a micro analyst. NVIDIA was actually one of the few stocks that we saw translate AI into sales last year, which was really encouraging because with these young stories, with these themes that we're watching, the big question is, will it actually matter? Is it just all hype or is this actually going to translate into profits for corporate America and efficiencies for your daily life? And so far for AI, that answer is yes, from what we're seeing. And going into 2024, I think the AI trade could broaden out into industries that are tangential to AI technology or that benefit from AI technology, but aren't those big tech companies or semiconductors that we've all been talking about.

21:45And you're right too, manufacturing, I mean, the reshoring that we've seen, the factory construction spending that we've seen over the past year. I believe factory construction spending was up 60 % in either November or December, which is one of the biggest year over year gains we've seen on record, which blows my mind because you think about manufacturing, you see that as the old economy. The America that we knew back in the 50s, 60s and 70s, not necessarily now, but it's all coming back because of reshoring and different policy initiatives. And these are the trends that are happening underneath our feet.

22:19This is what will drive portfolios in the years ahead. I think it's so interesting, the fact that you have all this access to investor data, behavior, sentiment. I mentioned earlier, or maybe you had mentioned the Retail Investor Beat Survey that was actually coming out right after this recording. Could you talk a little bit about what the survey is? And even though I gave a little introduction to eToro before bringing you on the show, maybe you could talk a little bit about your customer base and the background. Then we can dive into some of those results. Sure, sure. So I love talking about eToro.

22:52I've been with eToro since December of 21. eToro is a big global brokerage. We're very well known in Europe. We're based in Tel Aviv. And our ethos is basically that investors can use their money however they want. We want to give them the education and tools so that they can make the best decisions. So we really pride ourselves on offering a bevy of products to investors so they can build the kinds of portfolios they want with a certain kind of transparency because we are a social investing app that allows them to see how other investors are performing, what they're investing in, what they think about certain stocks and crypto and investments that they're making.

23:28It all goes back to giving them the facts they need to make the smartest investments. eToro started in the US in 2018. So we're a five-year-old brokerage here in the US. We offer stocks, crypto, and options. We're very well known for our crypto offering. And we're doing lots of really cool things. I'm building a research product there. We have lots of great education and videos on stocks, ETFs, options, crypto. You can go to eToro's website to find all of that. But we have 2 million registered accounts here in the US. And yeah, we're looking at a couple good years ahead of us. And yeah, one of the things you mentioned, we do the Retail Investor Beat survey.

24:05It's a quarterly survey. We survey investors all across the globe, asking them what they're investing in, what they're seeing in the economy, what they're expecting to do with their money in the future. And every time I get the results, I am shocked by some of the details we hear. So what are the vibes out there? What has you surprised right now? What are the vibes? So I am so proud of the everyday investor. Investors have stayed consistently invested throughout the bear market and into this bull market. I'm not quite sure why that surprises me. When you think about it, the fact that the job market is so strong is probably one of the pillars of the fact that people are invested.

24:41Because on a very basic level, if you're making money, you're spending it, investing it, saving it. There's like a finite number of things you can do with it. If you feel good about the future, you're probably investing it. Add to the fact that investing is more accessible than ever, and the conversation around investing really picked up around COVID. And it's led to a cohort of investors who have kind of held the line. They're trading less these days compared to 2021, no surprise there, but they haven't really sold out and run away. They've stayed invested and tried to think strategically in an environment where there are high rates and inflation.