Is this rally sustainable? Our next guest says based on the four year presidential cycle, this bull market should continue at least into 25. Joining us this morning, Fidelity Investments Director of Global Macro, Yuri and Tim or Yuri and great to see you. Thanks for the time today. Good morning. Lot of people looking at analogues of prior election years and are surprised at the way seasonality has been stronger at the start. What do you make of it? Yes, Well, usually years three and four in a presidential cycle are the strongest. Years and years 21 and two are below average. But what’s interesting is that when this when the midterm year is down, which it was in this case 2022, the recovery pattern is very strong and we’re actually following that pattern very, very closely. So you know we obviously are are on a good run here even even though the soldiers are following the generals, which is a very heartening to see that the market is resilient enough that even as some of the MAG Seven are starting to fray that the bullish broadening is sort of taking over. And you know in in a previous segment you you were talking about earnings or nominal growth versus interest rates. And it’s interesting when you think about the math of a discounted cash flow model, when earnings is when earnings are weak, changes in the discount rate and the cost of capital are very important. And This is why last year the market was so obsessed with with you know what the Fed is going to do and when. But now that earnings are coming through, the market is less obsessed with that. And that’s also a very good, you know it’s a very good thing to see that the market is, is resilient because the earnings side is coming through. That is such an important point I was going to ask you. Of the three buckets that some argue have led to this rally so far, resilient earnings hopes for AI, Hopes for rate cuts, Our profits, the most important one that they are and and you know fourth quarter earnings season was very pivotal. Earnings grew 8% year over year and the forward earnings estimate, the consensus estimate is now growing at 10% year over year and that relieves the pressure on the Fed to have to pivot a lot. And even if the Fed doesn’t pivot at all, at least not this year, the market is not hanging on that. But just the fact that the Fed is no longer tightening and at least is sort of biased to to ease at some point even if it’s less than the three rate cuts that are that are signaled by the Fed earnings are are are doing the heavy lifting now and that allows the baton to be passed from the valuation phase of this bull market to the earnings phase. And valuations no matter how you slice it are are pretty rich right 21 times forward, 23 times trailing. The market needs to grow into those valuations and it has a lot of growing to do because those numbers are high. But at least the earnings momentum is, is taking hold here. Yeah, I mean we haven’t talked a lot about this morning the fact that the 10 year treasury note yield started below 4% this year and is now back to 420 or so. And how the equity market outperformance has really been even more impressive given what’s happened on the on the bond side. What? What is your forecast for what happens to Treasuries from here and whether it will impact stocks? I think Treasuries are sort of in a coupon clipping phase, if you will. So I don’t really see a lot of gains for bonds, especially if the Fed is not pivoting as much and especially given the resilience of the economic cycle. So I don’t really see yields going below 4/4 and 1/4 is about fair value according to my my math. Yeah. We still have a term premium sort of issue that in an era of fiscal dominance and large deficits, does it make sense for the term premium to be 0 to negative, which is where it is right now? And the answer is probably not. It probably should be positive. So I do think there is more upside to yields then downside, but yields are high enough and the duration is low enough on those yields that even if yields go you know to 4 1/2 or even 5%. A bond investor is is OK as long as the expectations are not there that you’re going to get much more than than just the coupon. But real rates are positive, so investors are getting paid to own bonds again.
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