QQQ - The Stock Market Is Starting To Gradually Roll Over

2023-09-23 07:00:00 ET

Summary

• Why the stock market has been resilient; T-Bills' tough competition and bright spots in oil and uranium.
• Rob Isbitts believes that increasing debt levels, including student debt and credit card debt, pose a risk to the economy.
• The bond market, particularly the 10-year treasury yield, is seen as a key indicator that could drive the stock market and impact investor sentiment.

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Rob Isbitts shares why the stock market has been resilient; T-Bills' tough competition (0:35) the salient 10 year yield (9:30) and bright spots in oil and uranium.

Transcript

Rena Sherbill: All right. So it's September 20th. How are you looking at the markets ? What are you thinking about macro, micro? How are you looking at things?

Rob Isbitts: Sure. So, look, I start out with everything, with my number one investment rule is called ABL, Avoid Big Loss. And the corollary to that is any investment can go up in value at any time. So really, the emphasis, every time I look at the markets, which is always, I'm looking first at, okay, where can I really, really get hurt? And also try not to make it too complicated.

So here's how I see things right now. And in terms of evaluation, I keep something called the ROAR score, reward opportunity and risk. It's a 0 to 100 scale. That's how I tend to think of all investing with the idea that if it's a cash and stock world, and that's all you're limited to, I even run a little portfolio for myself with just a cash ETF and a stock ETF, and I rotate it.

So that ROAR score, okay, has been, is at 30 right now. It's been between probably 0 and 30, which means that less than half of that stock cash portfolio has been on the stock side. It's generally been below 40 since like August of 2022, 13 months ago.

And here's why. T-bills are very tough competition for stocks. I think it all starts with there. Again, one of my hard and fast rules is, it's a complex business, but there's a limit to how complex you have to make it. And for a lot of folks who are in retirement mode or approaching it, and I'm not sure that younger investors necessarily understand this yet as much as they should, but 5% on one-year T-bills to wait it out for a year or even getting close to two years, wow.

So, look, I mean, the stock market has been very resilient, okay. And I think I know why. I mean, the news is okay, but nothing is broken. So where does the risk come from? The first is what I would call the lag effect. I certainly didn't coin that phrase, but it was pretty commonly regarded that somewhere around 15, 18 months after the Fed starts raising rates, that's when the economy starts to get hit and it starts to impact consumers.

And I think we are right at that point now as we are having this conversation. There's 40 million people that need to resume their student debt payments, and the notices went out this month. The payments are due again on October 1st. I've seen a survey that says 60 – over 60% of people who are going to get those notices are going to ignore them. That is shocking for people of my generation.

And so I don't know where that's going to go, but it's still money that's owed. And you can't declare bankruptcy from because you're not paying your student loan, you owe it until it's paid.

So I mean, I think that’s a bigger deal than a lot of Wall Street strategists are making, then there's a trillion in credit card debt, but at least the rate is only 23% or something like that. So you see where I'm going. The debt and I mean, then, of course, there's the government with 30 trillion.

So you've got all this debt buildup and I feel like really the post-pandemic era, okay, I mean to me, the – everything about investing made a major shift on February 19th of 2020, it was around the time when the pandemic kind of got real, that happened in March. The S&P 500 peaked pre-pandemic on February 19th of 2020.

So I spend a lot of time these days looking back at kind of what's happened since then. And then really at the beginning of 2022 until now, there's reality and there's perception. And so – and don't think I don't have bullish arguments too, but the main bullish argument is things like, well, maybe the Fed will bail us out, maybe they'll cut interest rates, maybe we'll have a soft landing.

I think there's so many layers of debt. And what this means to me bottom line, Rena, is that there is a day where it comes time for where the debt either is paid off or paid down, or the market starts to care that it’s not being paid down. And I think we're getting very gradually toward this point. I'm a chartist. That's what my dad taught me when I was 16, a mere 43 years ago.

So I've done a little charting. And the markets tell us a story. We just have to listen to it. And the story, I think, they're telling right now is the stock market is starting to gradually roll over. It's taking a long time in the headline indexes. It's already happened in a lot of sectors. I mean, you look at transports and airline – airlines within that, things like that.

So it's already happening in a lot of places. But there's less of a public perception of it because the S&P and the Nasdaq are still being held up by a small number of companies. So, I guess the – and the bottom line for the stock market, frankly, is the bond market. I've been watching that 10-year like a hawk.

I have written many times on Seeking Alpha and on social media that, again, I don’t – I try not to make predictions and speculations. So what I do all the time, kind of going back to that ROAR score, a 30 on the ROAR score is like saying, rarely am I putting a 100% or $100 out of 100 in the stock market. But how much risk am I willing to take on a 0 to 100 scale right now? It's been between really 30 and 20 for a while, and it's been 0 and it could go to 0 in a heartbeat because of those high T-bill rates as a nice place to hide.

So, I think the bond market is going to drive the stock market a lot, much more than what comes out of anybody's mouth from the Fed . Interest rates right now, there's 4.3 level on the 10-year treasury is when everybody watches. I'm not watching the level as much as I am the chart and the strength of the chart.

And that is not determined yet, but I will say this. Show me a 4.40, 4.45 on the 10-year with some upward momentum, meaning the rates going up and bond prices going down. I think you have a good chance to see a five-handle, as they say. You could see 5%, 5.5% there. If that happens, then it's a complete domino effect because the stock market can't take it. And frankly, that's the other thing I said before about how the market tells us a story, we just have to listen well.

But the only bright spot I've seen recently is in things like oil and uranium, and I've taken advantage of that. But the thing you always ask with oil, it's so volatile. I think it will continue to be volatile, but it still looks higher at the margin. And if oil starts to spike, guess what? Now you start to have the 1970s nightmare put back on the table where inflation rose, it fell hard, and then it rose even more.

And again, I'm not predicting this. I'm just saying the probabilities, because that's what I deal in all day long, the probability of that scenario is on the rise. And it's all because of the fact that really we're probably about 12 years past when I think central banks around the world could have made it to the stock market did not become such a speculative place and that's where we are.

RS : Can you synthesize why the 10-year is such a salient metric to be looking at?

RI : Well, it is the basis for a lot of other things. Mortgage rates are geared off the 10-year. And, of course, and we talk about the housing market, that's a little different than it was maybe six months ago for a lot of weird reasons. Weird meaning we've never kind of seen this type of environment.

But the 10-year, it is the benchmark. I mean, it just – if you ask a bond professional as opposed to a stock professional, okay, the 10-year yield is the S&P 500 of the bond market. It also represents – it’s not the very short-term rates, but what a lot of folks maybe don't understand, and this is a great education point early on, the Fed has nothing to do with 10-, 20-, 30-year interest rates. I mean, they do indirectly because the market reacts to it, but that's the market, not the Fed.

The Fed only can change overnight rates, okay, that it lends to banks and by association that banks lend to each other, very, very, very short term. But what descends from that is what happens at the longer end and where a lot of money is focused around because it's tied to it as a benchmark. The 10-year treasury rate is X, so your loan from a commercial bank is going to be this much above X, or your mortgage is going to be this much above X.

So the spread-driven market and the credit markets gear a lot off the 10-year. That's also why one of the popular bond market gauges is the spread between the 10-year treasury and the two-year treasury, the 2-10, 10-2, whichever you call it, spread. And that has been what they call inverted for a long time now, I mean, well over a year. This doesn't normally happen.

I mean, there is weirdness ad nauseum in the bond market right now, okay, which is creating tons of opportunity for people that understand the bond market. I think everybody's brought up on stocks, but the bond market after 15 years of virtually 0 rates is kind of in play again for ways to make money whether you're retired or whether you're speculating.

So that 2-10 spread has been inverted. What does that mean? It means that a two-year treasury yields more than a 10-year. That doesn't make any sense in normal times because for 10 years, you're locking your money up for longer. There's more uncertainty . But it's been inverted and that is what normally happens before recessions. It's like eight out of eight going back to like the 1950s, I believe. So maybe this will be the one-time out of nine doesn't happen, but I wouldn't bet that way.

And so as you start to see the yield curve, the yield curve is going to un-invert. In other words, 10-year treasuries are not going to yield less than two-year treasuries forever. The process of that inversion either comes from, and by the way, if you're a stock market investor, I'm talking to you too, because the stock market is driven off of a lot of what happens in the bond market. The bond market is so much bigger than the stock market. I don't know what the numbers are, but it dwarfs the size of the global stock market.

So back to the 2-10, very simply, okay, there's two ways that you can take a two-year yield at what we call it 5.05%, something like that, and a 10-year around 4.30%, 4.35%, and get it back to normal eventually. Either the short-term rates can fall, the long-term rates, the 10-year rate can go up, or both can happen.

And that to me is one of the leading things when you say, okay, unless you believe that the yield curve is going to never go back to normal where a T-bill yields, as an example, three and a two-year bond yields 3.5 and a 10-year yields 4 and a 30-year yields 4.5, that's normal bond market activity. That's a normal sloping yield curve, as they say.

But I don’t – and so it all comes back to me to, the 10-year has a lot of reasons to go up unless something is going to happen to force the Fed to jack down, not jack up those short-term rates. And again, having been through many cycles, I started the business in 1986, okay, so I guess I have – I haven't seen it all, but I've seen a lot.

And when I go back in my own history, I say, okay, if the Fed lowers rates, it's not going to be for a happy reason. It's going to be because something broke, something in the credit markets or something like that. And they have to bring short-term rates down in order to get the economy functioning again, like a car that needs an oil change.

RS : Yeah. I'm curious also, you mentioned oil and uranium. Can you kind of explain a little bit further how that relates to this and also how long you look at that until or I guess how long you're looking at that in this scenario, and then how do you think about it further if things change?

RI : Great. If you don't mind, I'm going to start with the second part first.

RS : Okay. Sure.

RI : And I'm going to use a football analogy because in the U.S. anyway, it's NFL and college football season. So if you have fourth down and its fourth down in inches, okay, you only need a few inches to be able to keep the ball and not give the ball over to the other team. I'll try to explain the football rules as I go for those who are not.

Okay, so you say, all right, we're going to give the ball to our big running back and to try to get those few inches. All right. Now if the running back gets those few inches, you keep the ball. If he doesn't, the other team gets the ball, it's fourth down.

Is there anything stopping that ball carrier from busting through the line and not just getting the first down, but going all the way to the end zone and scoring a touchdown. There is nothing to stop that. That's the answer. There's nothing to stop them, okay? You're going for a few inches, you might run 70 yards or 50 yards, okay?

So that to me is analogous to how I look at every investment that I make, okay? In the first two to four weeks, I'm going to see if my assessment was accurate, okay? You get to find out once you put your money in, right, then it's real. And that really is all that matters, right?

I mean, all this other talk about macro and this and that, what happens to your money, when it's invested from the time you buy it till the time you sell it, is the only thing that ultimately matters to any investor.

So, yeah, I will own something, but virtually everything I buy, now I get back to the oil and uranium, okay, my biggest frustration as an investor, and frankly, I think some of my biggest errors as an investor in the last couple of years have been thinking that something like oil, which can rally 20% before you can blink, that it can actually keep going.

But the biggest issue in markets today is lack of sustainability of most moves. Now, oil may be the one that eventually takes off, and I'll probably have some oil-related position on for quite a while, even if it pulls back. I don't normally invest that way. I don't normally say, well, if it pulls back 20%, I'm still okay with it, it's cheaper now. Again, position weighting is everything in investing.

So you look at something like that. And I mean, that's been the nature of markets for the last couple of years, really, since the beginning of 2022. You can find things that make good tactical buy and sell and you can make 5% or 7% or maybe 10% on something in a matter of weeks, a lot easier than you can make 25% on something in 12 months.

The moves don't last. And that leaves us with a very stagnant stock market, which is why the stock market, even the broader averages like the S&P, really have gone nowhere for over two years now. That's the environment we're in.

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