Transcript:
Caroline WoodsJoining me now to kick off the week is Ron Insana, CEO of Insana Information Partners. Ron, great to have you back at the desk.
Ron InsanaThanks for having me back and see you.
Caroline WoodsSo I want to get a check in on your market sentiment, because you were last on in December and you were a bear then, and that was before we were in a war with Iran before oil hit $100 a barrel or more. And before some of this pressure that we’ve seen on tech. How are you feeling about the market now?
Ron InsanaAbout as bad as they did then. I know I’m still I think there’s a, you know, 5050 chance that we go from correction to bear market over the course of the next couple of months, which, you know, strictly defined would be a 20% downdraft for the major averages, maybe a little bit more if particularly if the war is not settled in relatively short order.
Ron InsanaI think if you start to see crude oil, you know, jump to 110, 120 here in the States or one 3140 in London. There’s also this lagged effect that the crude oil that we have that’s been distributed around the world from several months ago is just reaching the shores of these destination countries, whether it’s in Asia or in Europe.
Ron InsanaSo this disruption that’s taking place in the Gulf now won’t really hit other countries for several weeks to come. So we may see supply shortages of fertilizer, of energy products, of agricultural products around the world that could create a weaker global economy and by extension, hurt the United States and keep inflation above target for some time to come.
Caroline WoodsOkay, so we have seen stocks rallying a bit this morning on hopes that the war could be over soon. We have seen the Nasdaq dip into negative territory.
Ron InsanaWe also hear that every Monday morning.
Caroline WoodsIf the war ends tomorrow, where does the market go?
Ron InsanaWell you’d have to expect it to be a rocket shot straight higher just on a relief rally. Whether or not it eliminates all the problems that we have as a consequence of not just the war, but the lingering effects of tariffs. As you said earlier, the gutting of some of the technology stocks that are down. And then the alternative asset managers are down 20, 30, 40% as well.
Ron InsanaAnd so there are still these lingering concerns about credit quality in the private credit space. So I don’t think we we have resolved all the issues that this market faces. The war would be one the biggest one, but not all of them.
Caroline WoodsSo you’re 5050 correction to bear market.
Ron InsanaYeah.
Caroline WoodsWhat does that change to if the war does end quickly?
Ron InsanaWell, I think you get a big relief rally and then you go back and contend with a couple of other issues. Can the Federal Reserve cut interest rates even if the war comes to a swift conclusion? Will tech rebound and will alternative asset managers who have been you know, preventing investors from withdrawing their funds from certain private credit vehicles?
Ron InsanaWell, is that a canary in the coal mine that there’s problems in the credit markets that haven’t yet made themselves, you know, fully known in the financial system?
Caroline WoodsAnd we actually saw the market starting to price in the potential for a rate hike later this year versus another cut because of inflationary pressures. How damaging would that be for stocks?
Ron InsanaA rate hike would be. Listen, I mean all bear markets start with a rate hike, right? I mean, so we’ve had just a garden variety correction despite how big the headlines have been. You know the S&P before this morning’s rally was down 9.7% from its high. The Dow, the Nasdaq and the Russell were all down. More than 10% were negative for the year.
Ron InsanaAnd that’s without the Federal Reserve getting less friendly. So by late friend Marty Zweig, you know, very famous investor said don’t fight the fed. Don’t fight the tape. Tape doesn’t look that great. The Fed’s being called into question. If you were to get those two things combined, where the tape gets weaker and the Fed’s leaning towards tighter policy, you could pretty much guarantee there would be more downside in the stock market.
Caroline WoodsWe’re also hearing more about stagflation that has entered the conversation. Is that base case to our base case now or do you think that’s still just a risk case? No.
Ron InsanaThat’s been my base case since last year. Since the end of last year, I think. I don’t know if we talked about it in December, but it’s mini stagflation. I mean, I think Jay Powell was correct in his last public comments to suggest that anything like the 1970s and early 1980s is off the table. I mean, you would need a 15 year period to build that case where inflation is 13%, unemployment‘s 11%, and interest rates go to 20%.
Ron InsanaThat’s not where we are. But you could see the labor market stagnating or weakening. You could see GDP growth slowing. And you could see inflation holding above three three. And a half percent for some period. And that’s well it’s not the worst of all worlds. You know, 1980 was as was the financial crisis 2008. It’s it’s aggravating enough that consumers spend less that the policymakers are frozen because they don’t know which item to focus on, a weaker economy or higher inflation.
Ron InsanaAnd it kind of just locks the economy into this, you know, kind of no go zone, if you will, or low, high or low fire or inflation that’s uncomfortably high for most people, particularly middle and lower income individuals. And you get a stagnant economy.
Caroline WoodsYou’ve also been cautious on the AI build out in the AI trade. Do you look at what’s happening now, the gutting of tech, as you said, as just an overextended sector? That’s right sizing? Or do you look at this as the beginning of a bubble unwinding?
Ron InsanaHard to tell. I mean, you know, I think, you know, we’ve had this Apocalypse Now where software stocks, both in public and private markets seem to be marked down rather substantially. I think what we don’t know yet is whether or not any of these prominent AI companies can earn enough over time to fund the trillions of dollars they’re spending on infrastructure.
Ron InsanaAnd if I becomes a commodity and they don’t have pricing power and we can all buy, you know, ChatGPT or clawed for $20 a month, is that market going to be big enough to finance what’s expected to be at least a $3 trillion spend over a five year period? And I think that’s where it gets a little sticky.
Ron InsanaAnd I think it’s still too early to tell.
Caroline WoodsIs there anything in tech that you would look at as a safe bet right now, though?
Ron InsanaI don’t right now. I mean, certainly the valuations have come down a lot in the tech sector. In fact, the entire outperformance of the of the Mag seven relative to the S&P is gone. And you know, we’ve seen Microsoft come down 26% from its highs. We’ve seen a lot of stocks really get taken out to the woodshed including Nvidia which was the premiere company in the space.
Ron InsanaWe might be getting closer to a point where people can nibble safely. I wouldn’t be throwing a ton of money yet, at any area of the equity markets right now until we get some clarity around all the issues we’ve discussed so far.
Caroline WoodsSo if you’re someone sitting here right now with money in the market, what do you do? Do you hold? Do you trim.
Ron InsanaWhat we’ve always I mean we I it was editorial. We always suggest that, you know, if you’re overexposed to a specific area, you reduce it back to the weighting that it’s supposed to be in your portfolio. And you take all those prudent portfolio management steps to make sure that you’re not, you know, too far out on a limb with respect to either individual stocks or specific sectors.
Ron InsanaSo that kind of portfolio management is always wise. If you’ve got ten, 15, 20 years to retirement, you continue to dollar cost average. You put the money to work. You know, my preference like Warren Buffett‘s is for just buying index funds and not getting to shoot unless you really know, unless you really spending time studying individual stocks and you have a complete understanding of what their business model is.
Ron InsanaFor most folks who don’t have the time to pay attention, that way you can go with the S&P, the QS, the Russell, or even the international index and create a basket of those four and just keep putting the money away. Sock it away until you need it. If you need it in the short run, I’d be a little more careful and maybe buy some T-bills and, you know, hedge just a touch.
Caroline WoodsLast time we were on with us, you actually liked international over U.S. opportunities. Does everything happening in the world, and also the recessionary risk that Europe Asia is now facing, change that view a little bit.
Ron InsanaI mean, I think the the rest of the world is still modestly outperforming the U.S., but that differential is how much by how much they’re down versus by how much they’re up. So last year, you know, we had European and Asian markets outperformed by by leaps and bounds. You know 2 to 3 x the United States. Now we have the US down on the year.
Ron InsanaAnd Europe and Asia are in some instances still in positive territory but only by a couple percentage points. So there’s still a spread of positive spread between the rest of the world and the United States. It’s just not as pronounced as it was last year.
Caroline WoodsSo as I think about your sentiment at the end of last year, which felt very bearish to now 50% chance of a bear market, I mean, that’s kind of a safe you know it.
Ron InsanaAnd I it more negative to to I’m.
Caroline WoodsJust curious like are you a little bit do you think that what we’ve seen in terms of the sell off that we’re at valuations now and that maybe are more justified and there’s not necessarily reason to move lower.
Ron InsanaWell, I mean, I think I think there’s still the risk of moving lower. But the valuation question, I guess the PE on the S&P 500 is now down below 20, which is much, much closer to historic average. And so it’s a safer environment relative to where we’ve been. But we have seen an uptick in interest rates as well.
Ron InsanaSure, even without the fed getting involved. So as rates go up they’re down a little bit this morning. But if they do continue higher that changes. You know the relative value between bonds and stocks.
Caroline WoodsSo what is it that you think investors might be underestimating right now.
Ron InsanaWell I think it’s a private credit risk. I, I still think is is an issue whether it’s systemic like 2008. I don’t think it’s that magnitude. To me, it still seems like it may create a shock. That’s more like the failure of long term capital or the Asian currency crisis, where we get a big market disruption that shakes the tree, maybe prompts the federal Reserve to cut interest rates, and then sets the stage for another rally down the road.
Ron InsanaI’m keeping a close eye on that as possible. You know, it’s it’s hard. It’s impossible to escape the war right now as being the principal risk both domestically and globally. I don’t know if that means my time is up, but but I think that, you know, we’re getting closer to where valuations are reasonable, but we still have these, you know, these major concerns principally first around the war.
Ron InsanaThen secondly, I think around, deterioration in private credit. That’s very hard to assess because it’s such an opaque market and we don’t know how these loans are being valued, and we can’t see through those markets to get good information about where they stand.
Caroline WoodsWe had Gareth Solloway on not too long ago. He’s a trader. He looks at the charts, technical analyst, if you will, and he has a 5600 price target for the S&P 500 by year end. Yeah. Do you. Is that about right? Is that aggressive. Is it conservative?
Ron InsanaI Trump middle of the road I think you know at this juncture you know if you’re hovering around 6000 and you know another 400 points to the downside would you know, wouldn’t be shocking, that would again put us in bear market territory, you know, effectively, you know, we broke it in technical terms. We broke the 200 day moving average.
Ron InsanaThere’s some talk about a Death Cross in some of the major averages, which historically has led to further downside activity. It’s not always a reliable indicator, but, you know, you’ve seen also what I would call a gutting of the market, right? You see the technology stocks get killed. You see, in the mag seven have lost their outperformance.
Ron InsanaWe’ve seen alternative asset managers and financial stocks also get hit. And usually when when you see that type of internal deterioration, the averages are more likely to catch down to those sectors than the sectors are to catch up to the averages. So you’ve had big, big declines in a lot of different assets and a lot of different asset classes.
Ron InsanaBitcoin is down you know you see.
Caroline WoodsBut is there any reason to be bullish right now. What would flip your outlook.
Ron InsanaThe war coming to a very very swift conclusion and oil flowing again fertilizer flowing again. Some measure of, I guess, stability in the Middle East that would not guarantee because that’s impossible, but would make more likely a much calmer environment that would allow for a big relief rally. But there look, we haven’t had a bear market in quite some time, you know, and we’ve also had a four year bull run.
Ron InsanaSo it’s not unusual that we’re seeing downside. In fact, the average annual decline peak to trough is 14%. So we haven’t even hit that. Just, you know, as a matter of course, it’s not the end of the world. I don’t think that’s what’s happening. But you know, I think people have to recognize that this type of volatility is normal.
Ron InsanaYou know, over the course of my career, you I’ve gotten these questions, you know, you think there’ll be more volatility in the stock market. And the answer is always yes. I mean you know we’ve always had a I mean I started in 1984 and there was tons of volatility. Then there’s tons of volatility now. And it’s just a feature of the market.
Ron InsanaIt’s not a bug okay.
Caroline WoodsWell we’re going to transition to our rapid fire game this or that. Pin you down for some quick answers. Quick questions here. You ready okay. More likely correction or bear market.
Ron InsanaBear market.
Caroline WoodsBuy the dip or wait for lower wait.
Ron InsanaFor lower.
Caroline WoodsRotation or real de-risking.
Ron InsanaReal de-risking.
Caroline WoodsSmall caps ketchup trade or value trap.
Ron InsanaValue trap.
Caroline WoodsFed’s next move. Hike or cut. Neither stay on hold. Inflation. Temporary spike or persistent problem. Persistent problem. Which are we closer to? Stagflation or recession?
Ron InsanaBy definition they’re partly the same thing. So. But I’m still in the stagflation camp.
Caroline WoodsOil’s stabilizing or heading higher.
Ron InsanaHeading higher.
Caroline WoodsGeopolitics. Market noise or real economic risk?
Ron InsanaReal economic risk.
Caroline WoodsAround more priced in or just getting started?
Ron InsanaThat’s a that’s that’s a coin toss. I’m going to say just getting started because I think that there are some risks that have not yet been realized, particularly if we put troops on the ground.
Caroline WoodsDollar, safe haven or problem asset.
Ron InsanaNeither.
Caroline WoodsBetter place to hide. Gold or treasuries.
Ron InsanaTreasuries. Short term treasuries.
Caroline WoodsI build out sustainable are overextended.
Ron InsanaSlightly overextended.
Caroline WoodsI opportunity or bubble.
Ron InsanaBoth.
Caroline WoodsI winner you reinvest I winner you invest in regardless.
Ron InsanaAnthropic.
Caroline WoodsStay invested or raise cash.
Ron InsanaRaise low.
Caroline WoodsCash US markets are international.
Ron InsanaStill international.
Caroline WoodsCredit markets stable are starting to crack.
Ron InsanaStarting to crack.
Caroline WoodsPrivate credit opportunity or risk?
Ron InsanaRisk.
Caroline WoodsOne word to describe the market right now.
Ron InsanaUnstable.
Caroline WoodsOne word to describe how you’re feeling about the market this year.
Ron InsanaUnstable.
Caroline WoodsWe’ll leave it there Ron. And it. He is, CEO of Insana Information Partners. Always a pleasure. Thanks so much.
Ron InsanaSee you.