Are Stocks Cheap? (EP.312)

Episode Summary

Executive Summary: The episode argues that the economy and markets are normalizing faster than many expected: inflation is cooling, labor-market distortions are fading, and broad equity weakness has largely reversed, though recession risks and valuation concerns remain. The hosts debate whether the recent rally is a new bull market or just recovery from a long bear, while also touching on AI, crypto’s funding collapse, housing strength, and everyday inflation experiences.

Main Topics: Market recovery and the changing narrative (Priority: 5/5): The hosts discuss how quickly market narratives have shifted from recession fears to a renewed bull-market case, noting the S&P 500’s rebound, the role of mega-cap tech, and how hard it is to call turning points in real time. Inflation is decelerating toward normal (Priority: 5/5): A major theme is that inflation has fallen meaningfully from its peak, with the speakers emphasizing the pace of disinflation and the possibility that the Fed can pause or eventually cut rates if the trend continues. Labor market and recession debate (Priority: 5/5): They compare recession signals like LEI, yield curve inversion, and truck sales against strong employment, low unemployment, and normalizing quit/job-switch behavior, arguing that the labor market has delayed or even prevented a recession. Mega-cap tech, valuations, and index concentration (Priority: 4/5): The conversation focuses on how a small number of huge tech companies dominate index returns and valuations, and why any fundamental bearish case on the S&P now requires a view on big tech and AI. Housing and construction strength (Priority: 3/5): They note that new-home sales, homebuilder stocks, and construction spending remain robust even as existing-home sales remain weak, reflecting supply shortages and pricing power for builders. Crypto, VC funding, and capital reallocation (Priority: 3/5): The hosts interpret the collapse in crypto venture funding and the ongoing SEC pressure as evidence that capital is moving away from speculative crypto projects toward other opportunities. AI optimism and limits (Priority: 3/5): They discuss Marc Andreessen’s bullish AI vision and agree AI could materially boost productivity and create new jobs, while also noting it may not change the day-to-day activities that make life enjoyable.

Key Arguments: Inflation has fallen quickly enough that the Fed may be close to pausing, and if disinflation continues, rate cuts could follow. The stock market often moves before the macro data ‘looks’ safe, so waiting for perfect confirmation can mean missing the move. A bearish view on the S&P 500 increasingly depends on being bearish on mega-cap tech, since those names dominate index earnings and returns. The recent bear market was unusually long even if it was not especially deep, so the recovery can be real without every recession warning being resolved. The labor market is normalizing rather than collapsing: quits, switching premiums, and self-employment behavior are reverting toward pre-pandemic patterns. Historical recession indicators can conflict with one another, especially after the pandemic, making simple rule-based forecasting unreliable. AI is likely to expand productivity and create new jobs rather than permanently reduce employment, though it will be disruptive in the near term. Housing remains bifurcated: existing-home sales are weak, but builders benefit from limited supply and are seeing strong demand and rising stock prices.

Data Points: Inflation peak to recent level: 9.1% down to 4.9% - CPI fell from its June 2022 peak to the latest reading discussed, highlighting rapid disinflation. Inflation deceleration streak: 11 consecutive months - Bespoke data cited that annualized inflation has decelerated for 11 straight months, the longest such streak since 1921. CPI rise vs. decline duration: 11 months up; 11 months down - The hosts noted CPI took 11 months to rise from 5.3% to 9.1% and 11 months to fall back to 4.9%. Fed funds vs. inflation: 2.0% inflation on a 12-month basis versus a higher Fed funds rate - Used to argue the Fed may have room to pause as policy is now restrictive relative to inflation. S&P 500 performance since hiking cycle began: Flat - The index was described as flat since the Fed began raising rates in March 2022. Bear market duration: 248 trading days - The S&P 500 spent 248 trading days in bear-market territory, the longest such bear market since 1948 by duration. Unemployment rate: 3.5% - Used as evidence against a conventional recession despite negative GDP readings and other warning signs. Google payments to Apple: Nearly $20 billion - Annual default-search payments to Apple were cited as an example of the scale of platform economics in big tech. Apple operating cash flow since iPhone launch: Nearly $915 billion through Q4 2022 - Illustrates the enormous cash-generation of mega-cap tech firms. Mega-cap drawdowns in 2022: Google -46%, Amazon -56%, Netflix -76%, Facebook -78% - These declines were used to show how severe the 2022 reset was before the rebound. Total-return drawdown from highs: Dow -4.5%, S&P 500 -7%, Nasdaq 100 -9.8% - Current levels were presented as approaching new all-time highs on a total-return basis. S&P 500 ex-top 50 valuation: 15x earnings - BofA/Cofin chart cited to argue the index excluding the largest 50 stocks is cheaper than historical norms. Russell 3000 deep drawdowns: 1 out of 4 stocks down over 75% from 2021 highs - Used to emphasize how many stocks remain severely impaired even as indices recover. Quit/job-switch normalization: Back to normal - Preston Mui charts showed quit rates, switching rates, and the job-switcher premium reverting toward normal levels. Atlanta Fed wage growth tracker: 6% - Wage growth remains elevated enough to keep pressure on inflation and spending. Homebuilder performance: Pulte +61% YTD - Homebuilder stocks were highlighted as beneficiaries of strong new-home demand and tight existing-home supply. Netflix new subscriptions spike: Largest four-day U.S. gain since 2019 tracking began - Antenna data showed subscriptions surged after Netflix cracked down on password sharing. VC capital for crypto firms: Sharp collapse - Cited as evidence that venture capital has moved away from crypto projects. Typical workers’ real wages since 1990: Up by one-third - From the cited book/statistics arguing against a broad stagnation narrative. Younger-generation income mobility: 73% of Americans in their 40s earn more than their parents; 86% of bottom-20% kids earn more than parents - Used to challenge pessimistic stories about the American Dream.

Pivotal Quotes: "The year so far. January, soft landing. February, no landing. March, hard landing. April, credit crunch, surely. May, it's just mega cap tech. June, it's a bull market." — Jonathan Farrow (quoted by the hosts): A shorthand summary of how quickly market narratives changed in 2023. "I think my record is as much knowing not when to play as when to play." — Stanley Druckenmiller (quoted): Used to frame the difficulty of finding obvious 'fat pitches' in markets. "Bull markets rarely feel like bull markets at first." — Callie Cox (quoted): Supports the idea that investors often miss the start of recoveries because conditions still feel bad.

Implications: Listeners should expect more normalization: cooling inflation, a stabilizing labor market, and continued bifurcation across sectors. The key risk is mistaking a still-fragile recovery for certainty; the key opportunity is that markets may keep rising before consensus feels comfortable.