What Went Up: Talking Markets with Mike and Sarah

Episode Summary

Executive Summary: The episode is a year-end market wrap centered on how nearly every asset class rose in 2019, driven by Fed policy, recession fears, and investor demand for safety alongside risk. The hosts and guests debate defensives vs. growth/value, fixed income flows, the role of the Fed “put,” political risk, emerging markets, and the limits of making bold 2020 forecasts.

Main Topics: 2019’s Broad-Based Asset Rally (Priority: 5/5): The conversation opens with the striking observation that almost every major asset class rose in 2019, from equities and bonds to gold and high yield, suggesting a market dominated by liquidity and investors chasing returns. Fed Policy and the 'Powell Put' (Priority: 5/5): The hosts argue that the Federal Reserve, through rate cuts and repo operations, underpinned market confidence and helped keep risk assets elevated despite recession fears and trade uncertainty. Defensive Trades, Falling Yields, and Caution (Priority: 4/5): Consumer staples, utilities, real estate, treasuries, and gold all benefited from investor defensiveness early in the year, especially as 10-year yields dropped sharply and concerns about Trump and recession grew. Growth vs. Value Rotation (Priority: 4/5): The guests discuss how value finally had a strong year, but growth still outperformed. They frame the 'value comeback' as more of a rebound from extreme cheapness than a lasting regime change. ETF Flows and Passive Investing (Priority: 4/5): The discussion highlights how fixed income ETFs attracted more inflows than equity ETFs for the first time since 2009, reinforcing the theme of investor caution and the appeal of low-cost passive products. Politics, Trade, and Market Reaction (Priority: 3/5): The conversation explores how Trump, trade negotiations, impeachment, and the 2020 election could affect markets, but concludes that politics often matters less than investors think unless policies actually pass. Forecasting 2020 and Long-Term Valuation (Priority: 3/5): The guests criticize flashy year-end outlooks as media content with limited practical value, while also noting that high valuations imply weaker long-term returns even if the market can keep rising in the short term.

Key Arguments: Nearly every asset class rose in 2019, implying a lot of money chasing returns rather than a clean macro narrative. The Fed’s rate cuts and repo operations restored confidence and may have been as important as the official rate path. Defensive sectors surged because investors were nervous about recession and politics, not because growth was strong. The S&P 500’s 25% gain looks less extreme when compared with the late-2018 selloff and the rebound from that base. Value’s strong year was driven by deeply unloved cyclicals rebounding from very depressed valuations, not necessarily by a durable shift away from growth. Growth remains structurally attractive because the economy is still low-growth, and investors continue to prefer recurring revenue and scalable businesses. Fixed income ETF inflows outpacing equity ETF inflows show that caution remains widespread even in a strong equity market. Year-end strategist forecasts are useful more for context and media consumption than for precise market timing. Political outcomes can cause volatility, but actual market impact depends on whether proposed policies are enacted. Negative rates are considered unlikely in the U.S. absent a recession, though the 10-year yield may remain range-bound unless growth changes materially.

Data Points: S&P 500 return: 25% - Used to describe the strong 2019 year-to-date equity rally. S&P 500 return in 2017: 22% - Referenced as a prior 'utopia year' for comparison. 10-year Treasury yield decline: 3.25% to 1.5% - Illustrates the dramatic drop in yields during 2019. Fixed income ETF flows vs. equity ETF flows: Fixed income ETFs took in more than equity ETFs for the first time since 2009 - Cited as evidence of investor caution and demand for bonds. Fed balance sheet expansion: More than $250 billion - Describes the scale of Fed repo-market intervention over a few months. Value return: 22% - Performance figure cited for value stocks in 2019. Growth return: 30% - Performance figure cited for growth stocks in 2019. Apple ETF classification: 14 value ETFs and 14 growth ETFs - Used to show how blurred the value/growth distinction can be. Average annual S&P 500 gain: 11.4% - From a Nick Colas note discussing historical return probabilities. Probability comparison: 20%+ gain is three times the chance of a 10% decline - Used to argue that bullish outcomes are historically more likely than bearish ones. U.S. GDP expectation: 1.8% - Mentioned as a sub-2% growth environment relevant to value vs. growth debates. 10-year Treasury range: 1.5% to 1.9% - Described as the yield range for much of the year. Potential next-year equity outlook: Low to mid-single digits - Common consensus among strategists for 2020 U.S. equity gains. Triple-leveraged QQQ performance since inception: About 4,000% over the decade - Used in a discussion of leveraged ETF mechanics and compounding. Leveraged ETF standard deviation example: NUGT volatility around 90% - Used to illustrate the extreme risk of leveraged gold-miner ETFs.

Pivotal Quotes: "Literally everything went up in this year, 2019." — Joel Weber: Introduces the central theme of broad 2019 market strength. "All this would qualify under the Fed has the markets back." — Eric Balchunas: Summarizes how Fed policy supported risk assets and investor confidence. "The fact of the matter is we are in a low growth environment and that is when growth outperforms because people need to go look for growth." — Sarah Ponzek: Explains why growth stocks continued to dominate despite value’s rebound.

Implications: Listeners should expect continued debate over Fed support, valuation, and style rotations, but not a clean break from the 2019 playbook. The episode suggests caution, selective positioning, and skepticism toward headline-driven year-ahead forecasts.