New All-Time Highs! (EP.344)

Episode Summary

Executive Summary: Michael and Ben covered a wide-ranging market and culture episode centered on the S&P 500 reclaiming all-time highs after a fairly ordinary bear market, the historically strong returns that often follow, and the unusual divergence between large-cap strength and weak small caps. They also discussed cooling-but-still-solid labor and consumer data, persistent high retail spending, Bitcoin ETF launch disappointment versus long-term optimism, housing affordability and insurance pressure, and several media/entertainment recommendations.

Main Topics: Market recovery after the bear market (Priority: 5/5): The hosts examined the S&P 500 making a new high after the 2022 drawdown, arguing the bear market was historically average in depth and duration and that past bear-market recoveries usually lead to further gains. Large-cap strength vs. small-cap weakness (Priority: 5/5): They discussed the unusual situation where the S&P 500 is at highs while the Russell 2000 remains in a bear market, suggesting index composition, quality differences, and interest-rate sensitivity are driving the divergence. Fed cuts, yield curve, and the macro backdrop (Priority: 4/5): They debated whether the yield curve inversion has been a useful signal, whether the Fed can cut with equities at highs, and how labor-market cooling may affect the pace of cuts. Consumer sentiment and spending resilience (Priority: 4/5): The hosts highlighted improving consumer sentiment, record retail sales, and the possibility that media coverage and falling inflation are helping perceptions, even as some labor-market weakness emerges. Bitcoin ETF launch and crypto speculation (Priority: 4/5): They debated whether the spot Bitcoin ETF launch was a success, concluding flows were meaningful but expectations were likely too high and the price action disappointed early buyers. Housing, insurance, and boomers (Priority: 4/5): They explored rising homeowners insurance costs in Florida, the role of boomers in housing supply, older first-time buyers, and the likelihood that housing prices may stay supported until substantial inventory turns over. Media, TV, and cultural recommendations (Priority: 2/5): They closed with recommendations and commentary on streaming, sports broadcasting, newspapers, and shows/films like Slow Horses, The Creator, True Detective, and Friday Night Lights.

Key Arguments: Historical market data suggests that after a bear market ends and a new all-time high is reached, forward returns are usually strong rather than weak. The S&P 500’s 2022 bear market was largely ordinary by historical standards in both depth and duration, even if individual stocks suffered much more. The Russell 2000’s weakness relative to the S&P 500 may reflect lower quality, higher rate sensitivity, and a heavier junk-stock mix in the Russell index. The Fed is in an unusual position because it may cut rates while the stock market is at or near highs, which is not the typical pattern. Consumer sentiment has improved as inflation has cooled and equities have rallied, but perceptions are still heavily shaped by politics, media, and social media. Retail sales hitting new highs indicates there has been little or no mean reversion in spending behavior despite higher prices. The Bitcoin ETF launch produced significant flows but likely fell short of inflated expectations, making the early price decline feel like a sell-the-news event. Housing affordability remains constrained by low inventory, aging boomer owners, rising insurance costs in some regions, and strong demand whenever mortgage rates dip. A lot of the money parked in cash may be coming from checking and savings, not necessarily from stocks, and may cycle back into bank deposits rather than risk assets. Corporate balance sheets may be less sensitive to higher rates than in past cycles because many firms refinanced or locked in low borrowing costs during the pandemic.

Data Points: Days from prior peak to new all-time high: 746 days - Time from the early January 2022 peak to the new S&P 500 high in 2024. Average bear-market recovery time since 1950: about 1,200 days - Average time from old peak to new peak across 11 bear markets. Average bear-market loss: 35% - Historical average decline across bear markets since 1950. 1-year return after new all-time high: 16% - Average forward return after a bear-market recovery to new highs. 3-year return after new all-time high: 27% - Average forward return after a bear-market recovery to new highs. 5-year return after new all-time high: 59% - Average forward return after a bear-market recovery to new highs. 10-year return after new all-time high: 206% - Average forward return after a bear-market recovery to new highs. Russell 2000 drawdown: more than 20% from high - Used to illustrate small-cap weakness even as the S&P 500 reached an all-time high. S&P 600 drawdown: 13% off high - A higher-quality small-cap index that was less depressed than the Russell 2000. Mid-cap drawdown: 5% to 6% off high - S&P 400 mids were far closer to highs than the Russell 2000. Money markets plus CDs: $8.8 trillion - Wall Street Journal figure for cash parked in money markets and CDs. China GDP growth since early 1990s: from $500 billion to $18 trillion - Illustrates massive economic growth versus weak equity returns. MSCI China total return since 1992: 15% total, 46 bps annualized - Shows near-flat equity performance despite strong GDP growth. Nikkei vs. Hang Seng comparison: Japan GDP up 12% vs. China up 1,000% since 2003 - Used to reinforce the disconnect between GDP growth and equity returns. Consumer sentiment month over month: up 13% - Reported improvement in consumer mood. Consumer sentiment year over year: up 20% - Shows sentiment recovery from prior year. Share expecting to be better off in a year: highest since June 2021 - December consumer survey result. Retail sales: another new all-time high - Evidence of continued consumer spending strength. Job openings per applicant on LinkedIn: 1 opening for every 2 applicants - A year ago it was 2 openings for every applicant, showing a labor-market shift. Job switcher wage growth: 5.7% in Dec. 2023 - Cleveland/Atlanta Fed wage tracker discussion on still-elevated but easing wage growth. Job stayer wage growth: 4.9% in Dec. 2023 - Shows wage growth cooling but remaining solid. Job switcher peak wage growth: 8.5% in July 2022 - Illustrates how much the wage environment has cooled. Co-brand spend on Amex cards: approaching 1% of U.S. GDP - Highlighting the massive scale of credit-card co-brand spending. Bitcoin ETF price move: down more than 20% from launch high - Bitcoin fell from around $49,000 at ETF launch to below $39,000 two weeks later. Bitcoin ETF net flows: about $1 billion rolling net inflows; $4.5 billion to nine ETFs ex-GBTC - Shows substantial but not explosive early demand. Spot Bitcoin ETF asset milestones: IBIT in 4 days, FBTC in 5 days to $1 billion AUM - Among the fastest ETFs ever to reach that threshold. Florida homeowner insurance example: $4,200 to $11,000 annual premium - Listener example of rapidly rising insurance costs. Large homes owned by empty-nest baby boomers: 28% - Redfin stat on large-home ownership. Large homes owned by millennials with kids: 14% - Shows a mismatch between housing stock and younger family demand. Gen Z homeownership rate: 26% in 2023 - Little changed from 2022 despite affordability concerns. Millennial homeownership rate: 55% in 2023 - Up from 52% the prior year. Gen X homeownership rate: 72% in 2023 - Up from 70% the prior year. Pending home sales: up 4.1% month over month in December - Biggest increase since September 2021. U.S. home prices in 2023: up 4% year over year - Despite mortgage rates near 8% earlier in the period. Americans rating current finances as good: 63% - Axios survey of financial well-being. Americans rating current finances as very good: 19% - Part of the same Axios survey. Americans happy with where they live: 77% - Includes renters despite rising housing costs. Renters not interested in homeownership: 63% - Survey result showing many renters are content renting. Small-business responses saying business is somewhat good or very good: about 60% - Bank of America survey via Mike Ziccardi. Small-business responses saying very poor: near 0% - Very poor responses essentially disappeared by Q4 2023.

Pivotal Quotes: "The average returns are pretty darn good historically." — Michael: After discussing stock-market all-time highs following a bear-market recovery. "The pendulum has swung back, and the power is in the hands of hiring managers." — LinkedIn executive Catherine Fisher, quoted by Michael and Ben: On the labor market becoming less worker-friendly as hiring tightens. "The U.S. seems to be dodging a recession. What could go wrong?" — Ben quoting the New York Times headline: Discussing the uneasy optimism around growth and recession risk.

Implications: Listeners should expect more debate about whether market strength broadens beyond mega-caps, whether Fed cuts become a bullish catalyst, and whether housing/crypto/consumer trends continue to be driven by rates, supply, and sentiment rather than headline narratives.