Let's take a deeper look at the markets this morning
. I want to bring in Jack Ablin CRE Capital
, founding partner and chief investment officer. Jack is
great to have you this morning. Stocks fractionally lower
. What's your outlook for the market? Yeah,
I mean, I think there's certainly a lot of
expectations built in. We also have to take into
account that we started the year at the 10 year
Treasury, which is really the driver of Mark multiple
at 3.8. Uh we're, you know, closer
to 4.3 now, which would suggest multiple compression which
we haven't seen. Um And so, you know
, I think that uh what we're finding a lot
of the, the, the news and a lot
of the, the momentum in the market, of
course, has been driven by still a handful of
stocks. We're going to get uh NVIDIA tomorrow afternoon
. We'll see how that plays out. That's right
. A lot of hype definitely amid these growth names
. Magnificent. Seven, Jack and NVIDIA is one
of them. You're exactly right. How could that
impact the overall direction for stocks? Yeah, I
mean, I think that the problem here is uh
expectations for NVIDIA are very, very high, they
delivered certainly uh last year uh analyst, I mean
, yeah, analysts are expecting nearly$60 billion in
revenue, which would be about 100 and 20% increase
. Now keep in mind, very few companies once
they reach a billion in revenue are able to double
their revenue. And here they are in the,
you know, high twenties doubling to uh to 59
billion. And then for next, for this year
, uh they're expecting 92 billion. So still high
expectations, high bar, but this is really,
this is, this company is really the most tangible
way to play this a boom. So we'll see
how it plays out. Very interesting to see how
these results come in tomorrow afternoon. Yes, indeed
, Jack, as we're speaking, the dow in
just a hair higher up about 25 points, not
even 1/10 of 1%. Wal Mart. Of course
, I would say a positive in the stock market
today. What are some of the stocks or sectors
that you have your eye on that do look attractive
in this market? Sure. So I think it's
gonna be a tale of two markets. Uh Obviously
pivoting around where the fed finally starts to cut rates
. I think in the near term, as we
are seeing with the inflation report, we're going to
get another inflation report later this week, perhaps that
the P ce could show perhaps uh some cooling this
is obviously the Fed's favorite index. So we want
to put some emphasis there. Um but in the
event that rates stay higher for longer, we probably
want to focus on, you know, the big
large cap growth names like the NVIDIA, unfortunately,
and all these other ones that have been working,
um and also private credit. We do like uh
direct lending to private companies, it's floating rate.
And as long as these, these rates stay high
, the flooding rate will stay high too. But
once we start to move into the second half of
the and in, in investors start to anticipate lower
rates, we do expect a broadening. We do
think financials will do well. Now the problem with
uh financials is, you know, it does include
the regional banks and there are gonna be some potholes
there. So to try to avoid that we're looking
at things like Essex property, it's a re apartment
re has a nice dividend of 3.9% and it's been
growing its dividend of 4.3%. We like Franklin resources
. So this is uh the mutual fund Money Management
company, ticker symbol, Ben dividend yield of 4.4
growing its dividend consistently over the last five years at
3.5. And then lastly realty income Corp, this
is a company that owns uh a lot of uh
stand alone retail uh store uh properties and fast food
properties. Pretty stable business dividend yield of 5.9 growing
its dividend at 3% annually. So, you know
, trying to keep giving you a healthy income but
also growing that income at or around inflation and just
to break it down, Jack for our viewers,
how do they need to be thinking about income if
we do see rate cuts on the horizon? Yeah
. So if we start to see some rate cuts
that should help shorter term rates obviously and it will
make financing uh from most companies easier. So keep
in mind part of the reason why these mega cap
companies are doing well so well, relative to the
rest of the market is because these companies like Apple
and Amazon and NVIDIA have unfettered access to capital,
whether rates high low or whatever they're generate, generating
cash and they don't have to rely on bank lending
. But as rates start to come back down,
then smaller, perhaps value oriented names, those companies
certainly high quality still, but they do rely on
financing will start to be advantaged relative to the mega
caps who are quite frankly indifferent. And I think
we'll see a broadening of the market as we really
get a better sense of the short term rates coming
down. Probably. May June. We're in that
time frame. We do see the S and P
back below five 1000 had closed above that level for
the first time ever about 10 days ago, two
Fridays ago. That is, but still right within
record high territory. And so with the inflation data
, the PC personal consumption expenditures index I Jack that
you referenced earlier that is on the horizon. How
do you think that impacts the path forward for races
and whether or not we will see a rate cut
from the fed on the horizon? Yeah, I
think one of the advantages uh for those of us
who are looking for lower rates, one of the
advantages of P CE is that it does isn't as
concentrated in kind of the what we call owners or
equivalent rent or the home sector, which has really
been stubborn and keeping the P the CP I higher
than most of us would have expected it to be
. Um you know, nowadays, so, you
know, it came in at 3.1 I think the
market was looking for three or even 2.9. It
would love, you know, just like a logically
, it would be great to have a two handle
on that inflation report on a year over year basis
. But the nice thing about PC is it doesn't
have such a big waiting in that stubborn housing sector
and perhaps it will start to show some easing.
And again, the fact that the Fed really puts
more emphasis on PC would suggest maybe there could be
some incremental optimism that we see lower rates sometime in
May or maybe June, perhaps even May. It's
interesting earnings obviously very much in focus Jack, we're
kind of on the tail end of earning season but
this week I delivering quite a punch. We got
Home Depot Walmart this morning. I moving in different
directions. I see Wal Mart stock of about 5%
Home Depot I share she about 1% early on this
Tuesday and video as we discussed on top at tomorrow
. What's your overall take away from earning season?
The health of corporate America and what that means for
investors? Yeah, I mean, remember, um
, this last quarter, so Q 4 2023 is
really the first quarter in about three quarters where we've
actually had positive earnings growth. So and now expectations
for earnings for the rest of the year um are
pretty solid. So the, the good news,
uh, Kristen is that 2024 looks like we could
get uh 11% per perhaps even 12% uh earnings growth
of the S and P this year. And if
rates stay stable, even if they just stay around
4% in that 10 year, then the multiple will
be the same. And so the market should just
map along with earnings growth and we could get perhaps
an 11% gain in the S and P for this
year. If on the other hand, rates stay
, you know, in the 430 or somewhere in
here, which we do believe that the fair value
is somewhere between 4, 4.5, then perhaps earnings
, multiple has to compress it a little bit,
but we're still in the mid to high single digit
gains for 2024. How can the rally broaden out
from here? We talked about the magnificent seven at
the start of this segment. I know you have
some dividend picks as well. Jack, but I
think a lot of people might trust this market more
if we can see more breadth across sectors and stocks
rising. Yeah, that's it. And I think
that's to me, the catalyst will be these lower
rates because it starts to get more equal access to
credit uh versus just, you know, the exclusive
few uh have have unfettered access to credit. So
that's I think part of it, the other part
of it, of course, is valuation. The
fact is that, you know, magnificent seven was
up 100% last year, they were down nearly 50%
the year before. But the fact is now that
if you look at tech relative to the rest of
the market, it's trading at a roughly 52% premium
. Now, historically, you would expect that tech
should trade at a premium to the rest of the
market and it has, but when it gets into
the 52 50% premium plus it's very difficult uh history
is shown protect to continue to outperform the market,
which I would suspect this is where perhaps this leads
into that broadening thesis that, you know, there
are large parts of the S and P underneath the
surface, perhaps the middle and smaller names that really
are trading at a decent discount to the market itself
. Remember the market is trading at 20 the average
stock is trading at around 18 times, which is
I would call more fair value. So while I
don't necessarily see that the tech sector has to fall
substantially for the rest of the market to catch up
. Perhaps they, they tread water move sideways.
And then we start to see the smaller names,
particularly financial health care industrials start to move ahead of
tech this year.