Animal Spirits Podcast - Talk Your Book: The "Tech Heavy" Nasdaq

Episode Date: February 27, 2023

On today's show, we are live from the Exchange ETF conference in Miami with Phil Mackintosh, Chief Economist and Senior Vice President at Nasdaq to discuss where interest rates may go this year, if we're in a recession, IPO performance, and much more!   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.) Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. On today's show, Ben and I are live from sunny Miami. We're joined by Phil McIntosh. Phil is the chief economist from NASDAQ. Ben,

did you have a good time during that conversation? And in Miami generally? I had a great time. Yes, Phil is a sharp guy. One of my favorite parts of the conversation is we tried to hold Phil's feet to the fire a little bit and say, hey, recession this year or no recession. He said, I don't know, I'm going to hedge. I respected that because I feel like a lot of people in that economist's seat would say, I know exactly what's going to happen. This is going to happen this year. And I think now is kind of in the macro world.

You're in a better spot if you can hedge a little bit and say, like, I don't really know. I can see two paths here. I respect that. Actually, that's very much in line with economists because there's that old famous Harry Truman saying, where his chief economist kept saying on the one hand, on the other hand, what's with all these one-handed economists? I think if you are 100% certain about what's going to happen in the economy this year, I think you're lying to yourself or you're delusional.

I thought the Eagles were going to win the Super Bowl, so that should be my default to answer to everything. I don't know. Well, I think the spread was one and a half points for that game. If we're giving a spread between recession and no recession this year, it's probably going to be just as close as the Eagles Chief's Super Bowl, right? I'd be leaning towards giving a minus one and a half to a no recession call. Minus one and a half?

I'd say it to pick them. I'd say it to pick them. Anyway, thank you to NASDAQ. I hope everybody enjoys this conversation with Phil McIntosh. We're joined today by Phil McIntosh. Phil is the chief economist at NASDAQ. Welcome, Phil. Guys, thanks for having me.

All right, I want to start off with NASDAQ. NASDAQ is such a big brand name. I think when I think about NASDAQ, I probably think about the NASDAQ 100 tech stocks. I think about the IPO market. I think about, of course, the place in Times Square. But it's such a big business. Tell us a little bit about NASDAQ. What don't we know about NASDAQ? Who is NASDAQ? It's a big company. It actually runs the exchange or the

technology stack runs the exchanges for lots of different countries around the world. We run the Nordic markets under the NASDAQ brand. We obviously run options markets under the NASDAQ. But you're right. It's got 3,000 listed companies. A lot of them are tech companies and biotech companies, growth companies, really small cap companies. And they come into the market to do the IPO at NASDAQ, and then they do their secondary trading primarily with the market makers with NASDAQ as well. So all of those companies obviously create data, the price data, fundamental data, a lot of hedge funds want us to collect data on things like car parking usage and satellite tracking of different metrics for companies. So we have a lot of data that we sell to investors. And then we also

score mutual funds, a company called investment. We do ESG ratings. Like, we do a lot of different stuff. And obviously you're providing some content as well in your role as an economist. What is that like and how did you transition into that role? I would say my job is 50-50 microeconomics and macroeconomics. And so the microeconomics is things like, how do we make the actual bid and offer of the stock market better? How do we reduce the spread cost for investors? And there's actually research that shows if you can do that, the cost of capital for companies comes down as well. And that's good for American companies because it makes them want to come and list in America, hire people in America, grow in the American economy. And then the other half is talking to some of the

mutual funds, some of the issuers, and they mostly care about the macroeconomics. What's going to drive their business in the next year, in the next 24 months? Is the economy going to grow a shrink? How should they think about acting and reacting to the news on the economic cycle? The micro stuff is interesting to me because I've been had this theory lately that in the past returns in the markets had to be much higher because there was so many more frictions involved and there was just frankly more risk. And now that we've taken those costs on those frictions, even if the gross returns are maybe lower going forward on a net basis, investors are still getting as much or more as they did in the past. So maybe you could give us an idea of

how far costs have fallen. I know like the 1975 May Day thing was a big reason for that, but maybe you could talk about how much people used to have to pay in the past just to transact. Even in the last 20 years, costs have come down dramatically. Obviously, retail now have free commission trading, so that's zero cost. And they used to pay $20, $30, $40 per trade. But even things like spreads, we used to trade on eighths of a dollar tick. And now we trade on one cent ticks. And so a lot of companies are trading one cent wide on a $50, $100, even more stock and that's a super cheap spread across. And so trading costs have come down. Everything's been automated in the last 20 years. So in the old days, you used to have to call an order

down to the floor and a human would trade with another human. Then it'd get put on a ticket and reconciled. These days, everything's electronic from the order entry on the buy side through to the algo, through to the exchange, working on the exchange, the fills go back, the allocations book. It goes down to the settlement. Everything gets cleared and settled electronically. And that's just taken a lot of frictions out of the operational side of the business as well. So, yeah, trading has become a lot cheaper. Because of that, you're right. That means the investor gets to keep more of the returns that they thought they were going to get when they bought the stock in the first place. Michael's still suck in the 80s because he still talks about mortgage rates and

fractions as opposed to decimal. Those are still quite an eighth in my mind. Well, the bond market does still trade in fractions. It's kind of bizarre that it's taken a lot longer than the equity market. See, I'm the smart money, Ben. I don't want to spend too much time on the NASDA 100, but I do have questions because we speak about this quite frequently. Whenever it's in the financial publications, it's always mentioned as the tech-heavy NASDAQ, which is true, because Apple's 12% of the Q's, Microsoft is another 12%, so it is obviously dominated by tech. But I've noticed over the years more and more companies in the NASA 100 that I'm like, huh, Marriott, not even close to a tech stock, Dr. Pepper, Kraft Heinz, Old Dominion. How do these companies make their way into

the NASDAQ 100. Yeah. And so it's really down to the rules of the NASDAQ. It is all of the listings on NASDAQ. We sought them by market cap and basically the biggest 100 get in without the financials. So the NDAQ, which is us, CME, which is another financial, because the exchange, are out. But every other stock is able to be qualifying for entry. So it's one of the biggest hundred. It goes in. And what you've seen over time is actually healthcare has gotten bigger as the tech has kind of got smaller. But obviously in the last few years with low interest rates, the tech stocks themselves, valuations have gone up, and that's kind of brought tech back as a higher weight in the index, too. All right, that makes a lot of sense, because I was also going to say,

how do some of these ADRs get on there? J.D., Pinot, Duo. I don't know. We have foreign companies. It's one of the unique things about the NASDAQ 100 is if you talk about the S&P or you talk about the Futsi Russell indexes, they first go through and work at what country the stock belongs to and sort of go and allocate that stock to that country, whereas we just look at all of our listings. So it can be a foreign company. It can still qualify for the NASDAQ 100. Quite a few do. I have a basic question about how exchanges work. So when a company comes public, they can go public on the New York Stock Exchange, the NASDAQ, there used to be a bunch of others. Can a company shift what exchange they trade on if they don't go public there? So America is a little unusual in that it doesn't matter where you actually do your IPO. You're basically allowed to trade on any exchange that America has, and we have 16 exchanges.

A lot of them are just set up for trading so that the company makes money off the trading, not charging listings and supervising listings. But there's a few different listings exchanges, and you can also switch which primary listing exchange you have if you want as well. So I want to shift into the macro side of things that you talk about, because I actually think we've kind of gone back and forth these past few years between the market being very exciting, then the economy had been exciting. I think the economy, just to me, is more interesting right now just because of what's transpired and how rapidly things have changed and how the narratives have changed.

So, Michael and I were on a podcast just, I guess, a month ago, and the host of the podcast held our feet to the fire. And he said, do you think there's going to be a recession in 2023? And, of course, being the level-headed guys we are, we started playing both sides. Well, I could see this and I could see this. He said, no, no, I'm holding your feet to the fire. What do you think? So we talked about how there was a Wall Street Journal survey, I guess the beginning of the year,

like 60% of economists said there's going to be recession this year. It's almost the baseline for most economists. Are you in the 60 or the 40? I'm in the hedged category, actually. I've been surprised there's a lot of economists that are hedging their bets this year because you look at a lot of indicators like the slowdown in manufacturing, like a lot of the CEO confidence indicators, like the wind down in profitability and margins on the corporate side, and you think there's a slowdown coming, it has to be a recession.

The inverted interest rates that everybody says is a perfect indicator in historic terms has been well and truly extended, which means the short-term rates are higher than the long-term rates now for a while. That's a recession indicator. So it's like, oh, it has to be a recession. But then you look at some of the data, especially like last week with the employment data is still really strong. A lot of the spending and income data is still really strong. And so I think most economists are like, I'm not really sure which is going to win out. I think what's interesting is last year we were obviously really focused on inflation and the rate hikes that came because of the inflation. But we've now seen inflation top out.

it's been falling, the headline inflation being falling for about six months. You can see the bond market is priced basically a 5% peak in rates now for quite a few months. So I think everyone's kind of getting their head around the fact that inflation's basically going away. Interest rates are going to get to 5%ish and that's it. So we're pretty much there. Next year or this year is going to be more about whether we have that recession and whether we have an earnings recession with it. And so I think we're going to get away from that inflation concern and we're going to start to worry about company performance again. And that's going to where I think this year is going to be much more interesting because then the recession factor comes in. And I think do we have a recession

or not is going to depend on what the Fed does. So on Friday, when we got that enormous upside surprise to the job report, I think it was 517 versus like 180 expected. And on top of that, you're also seeing employment wages, inflation, roll over, which is incredible. I mean, that is what a soft landing is. But the bond market was predicting, I guess, a cut in the second half of the year. But the two year closed at like the lowest level in a couple of months on Friday. And then when the report came out, it went from almost as low as 4% in the last three days it rocketed all the way up to almost 4.5%. So as the bond market now saying, actually, there's no way that the Fed is going to cut with the economy they're strong. One of the problems the Fed has is obviously they're

focus on unemployment and inflation, and maybe inflation's coming down, but it's still above the interest rates. The unemployment is record low, 53-year low, and it doesn't look like it's going to go up much in the short term. So even though you're right, things like wages, they're still growing quite strongly. It's not growing as strongly as they were. The temp work is actually elevated. The number of jobs per person looking is close to two. So twice as many jobs are our people out there. There's a gap in the labor force that sort of opened up during COVID, where a lot of people that were older, retired, and they just haven't come back. The immigration changed. And so a lot of the STEM workers that were used to bring in from other countries haven't come into the country.

So we've got a gap in skills and a gap in labor, which I think gives the Fed a chance to your point to have a soft landing where you slow the economy down, but you don't necessarily create joblessness. As this environment caused you to rethink any of the historical relationship that you look at? Because a lot of people are looking at, I'm using the 70s as a framework. I'm using the early 2000s, whatever it is, a lot of people were thinking, I'm going to use this framework. And all the, you mentioned the both sides thing, a lot of these historical relationships are arguing with each other. And it seems like this, because of the pandemic and the spending and all the having to put rates to zero, all that weird stuff that we did. And we threw on remote

work and all this sort of stuff. And you said, people not coming here for jobs. And you have wages rising even faster on the low end than the high end. It seems like this is just its own sort of thing. And it's hard to fit this in some sort of style box of this is how it worked in the past. So this should work in the future. What's been one of the most surprising things to you of how this has all worked out? Because I think for me, it's the labor market remaining strong when the Fed has said, our goal is to bring unemployment up. And it's not happening. Inflation is still coming down. And I think they have to be questioning themselves, too. So is there anything like that that's really surprised you in this last 24 months or so? You're 100% right. People are trying to see

whether the 70s is what we're in now or whether there's parallels. And the reality is there's not that mean recessions in the last 50 years. And they're all different. And one of the things we've been looking at, which is quite interesting, is the last two recessions were pretty bad ones. So COVID was the deepest recession, although it was a very quick recovery that we've had in that period. And then the credit crisis was the longest recession to recovery. And so anyone that's youngish thinks recession is like really dire for the economy, there's plenty of recessions that were still recessions, but not nearly as bad, not massive job losses, not huge losses of income, just the economy slowed down for a bit and then it picked back up for a bit. And so it's

possible that we actually have a recession more like some of the historic recessions going forward. So I agree with you. Saying we're in the 70s and we're going to have to get rates up to 15, 16%, just to tackle inflation, just because it's happened once before is probably the wrong way to look at it. The 70s as well, if you look at what we just talked about, like immigration, population growth, labor force growth were all really strong and positive. Now we've got an aging population, which is shrinking the workforce, but also when people retire, they don't spend as much. So it's not like we need to go build a bunch of houses for the retirees to buy white goods and furniture for. The spending and the natural sort of rate of the economy is going to slow down as it ages.

It's going to be China's big problem soon too. So we're kind of in a different phenomenon where once the inflation comes out and the inflation was a lot of supply side inflation, we remember it was all caused by COVID when people weren't working and so there wasn't stuff coming out of factories. And then we had ports that were bottlenecked and things that were sort of on the supply side have now resolved. Is this not the 70s where we had a lot of demand push inflation? Yeah, I think that's a good point about a recession not necessarily having to be a crisis, just because the last one was, or last two, I guess. One of the interesting things that's happened over the last 24 months or so is you've seen a lot of bubbles pop, or you call them what you want, but you've seen a lot of high-priced, high-flying,

whether it's the SPACs, some of the names in the R-complex, for lack of a better word, crypto, and then the IPO market, of course, which I think is synonymous, with NASAC in some ways. Can you talk about where we are, where we were in 2022 versus 21 and what 23 might look like? The IPO market has definitely been slow, but you tend to see that happens every time P multiples come down. So every time valuation start to fall, the IPO customers sort of back away, like, I don't really want to pull my company to market if it's going to be a tough time for my stock price. So now that we've seen the market sort of slabilize a little bit the last few months, now that we know rates have peaked, it's possible that if we can

muddle through for the next year, we get valuations to start increasing. we get some companies with earnings to come back and get better valuations and we'll see the IP market pick back up. There's plenty of private equity funds out there. There's plenty of companies that want to come public. It's just the timing doesn't work when the market's sort of nervous and there's no real natural bias. So I think from that perspective, we could see a pick up as as soon as we see valuation stabilize. The real question comes back to are we going to have a recession. And if we have a recession, if it's a small one, does it affect earnings? Because company valuations are driven a lot by earnings. If you look over decade long periods, the market

goes up pretty much at the same speed as earnings go up. And so if earnings start to recover, right now they kind of were flatlined last year. If we start to get earnings growing again, we should see the market valuations go up again, especially if interest rates stop being the headwind that they've been last year. You talked about rates possibly peaking. So I think the 10 year peaked at like four and a quarter, Michael? I'm looking right now. Four and, yeah, I think so. That was a fraction job. I'm sorry. And obviously that's really high compared to where we were 18 or 24 months ago at zero, and you had this huge upswing in rates. But historically, a 4% interest rate in the 80s or 90s, or even the early 2000s would have

seemed relatively low. Why do you think rates didn't go higher? Because I would assume with 9% inflation. Usually you don't see that much of a spread with inflation still being that much higher than rates. Do you think that the bond market just didn't believe it? Are there longer term trends like, I don't know, technology and demographics and stuff that kept the cap on that? Why didn't rates go higher when inflation was 9%. Demographics is a big one. And like we talked about how as the population ages and the workforce shrinks, you naturally get a slower growth rate, which means what they call the R-star, or the rate of interest that pivots the economy between being expansionary if it's lower or

contractionary if it's higher has been falling and falling and falling. And you think about like Europe 10 years ago, its workforce actually started to contract and we went to negative interest rates in Europe. You think about Japan in the 90s. Same thing happened there. They cap their rates at zero, arguably maybe they should have gone to negative rates too because their economy is stalled out because of that. We'd have this underlying demographics which says there's just less heat in the economy anyway because we're all getting older and spending less. But the flip side is COVID was a bit unique, right? It was a supply chain problem for the first year and almost all the economists, if I was sitting here a year ago, we would have said, yeah, inflation's going

to come down really sharply last year. It didn't. We know it didn't. One of the problems was Ukraine. And the other problem was there was this other wage push and housing push that came through on the inflation side as well. So people basically were looking at the supply chain as the reason for the inflation two years ago, and that's gone away. But it's been replaced by rent, housing prices going up, and it's obviously been replaced by the Ukraine war making food prices go up and energy prices go up. That's all coming out now. Even the housing and rent, if you look at the month by month, that's starting to come down. It's just it's going to take 12 months because So the annual inflation rate to really impact inflation.

And so I think if we get a year from now, we're going to have inflation, especially if rates to your point are about 4%. We'll probably have inflation back to that level or a bit below it, and suddenly we'll have a positive real interest rate. So the next question, which is kind of related to what you're talking about, is if I'm a company and I got used to zero interest rates and being out of refinance when the long-term rate was sub 1%, I don't think that's going to be how a company has to think about its cost to carry, it's required return on investments going forward.

So that's going to be a little bit of a headwind on the economy as well because companies don't have free money. And I don't think there's any expectation we're going to get back down to zero rates either. So what does this mean for growth and value? I'm looking at a chart of the S&P 500 growth divided by the S&P 500 value. And that went vertical in 2020 and has completely round-tripped in a really spectacular way. Where do you think we are in that cycle? Yeah, if you look at those sorts of our performance metrics, I mean, obviously last year was all about the rates rising because earnings didn't change. So in terms of company valuations, the reason the market sold off.

Every time the rates went up, market went down and vice versa. Pretty much all of the performance last year was explained by rate rises. And what you saw was the growth companies got discounted much more heavily than the value companies, which makes sense when you're thinking about if you're waiting 10 years for the income to come through, then 10 years worth of interest rates going to discount that more than a value company that pays you a constant dividend. And so the value companies performed pretty well last year. If you look at the outperformance on a multi-decade level, though, it's pretty rare for it to be a one-year window and then it flips back to growth.

So if interest rates like we just talked about do sort of come back down, but stay at that 3, 4% level, we have a real required rate of return on investments. It's possible the value does keep outperforming because the growth company is going to have a higher hurdle rate to start new projects and to get to that positive income point where they really add some value to their customers and to their investors. It's funny because I think if you would ask someone last year, say that Fed's not going to cut rates in 2023, they would have thought that's really bad news because that probably means inflation is still going higher. And that that's a terrible scenario. Now we could potentially get a situation where the Fed is not cutting rates because the labor market remains strong and the economy is stronger than people thought. What level of Fed rates can the economy actually handle? To this point, it's kind of surprising that it's been able to handle this much aggressive hikes. But can that last if rates plateau for a while and say it, I don't know, 5% or whatever? Yeah, interesting question, Ryan. We've just had China start to reopen. So there's a whole lot of people saying, oh, they've got a trillion dollars worth of COVID savings that they can spend as well. And so that could be inflationary. It could at least push demand side on a lot of different products around the world, food products and other sorts of things that are manufactured. So that combined with the fact that a lot of people are now trying to re-onsure, at least friendshore, a lot of the labor costs when you're frensuring are higher than when you're outsourcing the cheapest manufacturer in Asia. And so I think that's one of the reasons why people think the underlying inflation is going to stay a little higher just because some of the geopolitical things that are happening at a company level are going to require slightly higher costs going forward, but it'll firm up the supply chains. It'll reduce our exposure to some of the geopolitical risks if they happen. And so for the next four or five years, if you think about how long it takes to build out

a factory and change your supply chains around, you could have slightly higher costs in things, even like electronics, which have been massively deflationary in our lives, holding the inflation rate up relatively. What does that mean, like, three or four percent instead of two percent? I think so. It's everyone's guess of where it's going to end up. You look at inflation over multiple decades until we got to COVID, and it was below 4% down to 2-ish percent, really struggling to get above 2%, which was their target rate. You could see it up a three. I don't think that's a stretch, and it's not actually that distortive in terms of what it does to people with bond income and equity income. Arguably, going back to a zero rate interest rate policy creates other distortions

because it overvalue certain assets, to your point about bubbles popping. As rates came down, over the last couple of weeks and months, we saw a massive spike in the growth versus value chart. Mike Saccardi had a tweet showing that over a three-week period, growth had outperformed value to the highest extent in 19 years. And I think we almost didn't notice that because it was coming off of such a low base, a lot of these growth companies that have gotten killed. Is it possible that interest rates are less important now that maybe momentum has taken hold

and there's a lot of different reconstitution indexes and the way that people are thinking about these value stocks. Can that become a primary driver of these companies in at least the short term? So two aspects to your question there. And what's happening is some of these tech stocks, which we used to think of as not earning any actual profit and being massively growth exposed, are starting to have real businesses. Google and a lot of the tech stock research make heaps of money now. And so they are actually looking more like value stocks. They have a solid income stream. It's pretty reliable. You look at the way the value stocks are created, and that's mathematically how you put them in the value bucket. So some text.

stocks are becoming more like value stocks because they've got real businesses. So that's helping. It's interesting because there's even some other future reconstitutions of the gig sectors, which MSCI and S&P use, which is going to start to reallocate some of those tech stocks into the industries that they're in. So whether it's online retail or bricks and mortar retail, they're both retail now. So you'll start to sort of allocate them away from just tech because it's tech. And so I guess that's going to make the NASDAQ a bit unique because we actually have a lot of tech stocks, whichever category S&P puts them into, you know their tech stocks. And there's actually, there's a couple of different ETFs, seems we're an ETF conference today. One of them is the

NASDAQ 100 tech stocks, and the other is about 40 of them. And the other is the NASDAQ 100 X-Tech stocks. There's about 60 of them. So you can kind of slice the NASDAQ 100 into two pieces, one that's tech and one that's not. There's a NASDAQ 100-X tech? Mm-hmm. I didn't know that either. That's interesting. What does that even look like? To your point, and it's got a healthcare component, but it's got airlines, it's got some industrials, it's got some really interesting different companies. I mean, there's a lot of different companies that list on NASDAQ, to your point, don't really think about it. So last year, probably outperformed? It probably did.

Does it perform like the Dow, or I would be curious to see that? Now you're giving me some ideas to do research. Yeah, anyway, so sticking with that idea of, like, value and maybe momentum taking over. So when S&P did a reconstitution, I forget the exact numbers, but I don't think that Amazon was in the value bucket at all, and now it might be entirely, or maybe I'm mistaken that, but directionally, it's right. What does NASDAQ do different? in terms of reconstitution versus some of your competitors. So it depends what index you're talking about.

To the first question you guys asked, NASDAQ does have an index business. And so we produce indexes for lots of ETFs to track. And some of those indexes are kind of more classical. So to your point about Amazon shifting from growth to value, the way you look for a growth company is you look for things like earnings growth, sales growth, expensive PE multiples, because the market's basically saying, I think this company's got more going forward than it's got right now.

the way you do value is totally different. You look at book to price and you look at sales to book valuations. And so when you start to look at the two scores together, sometimes a company will score well on both metrics or not well on either. And so what do you do with those companies? And what most index providers do is they actually blend those companies into a 50-50 or 60-40 components allocated to bit to both indexes so that if you plug the value and the growth index together, it becomes the core index or the whole index. So that's how most indexes work. But the NASDAQ 100 is different, right? It's just the NASDAQ 100. They're not a value in a growth component to it. So it's just a list of all the companies in the NASDAQ 100, ranked top 100, put them in the index. So scoring changes won't really affect the NASDAQ 100 at all. What will affect it is market cap changes and the companies that we list. One of the things Michael and I have been debating back and forth is with yields so much higher on the short end, I think so the status I saw yesterday was that the 12-month T-bill hit the highest level since like 2001. And so you've mentioned the inverted yield curve. And obviously a lot of the

reason that's happening is because of the Fed. Is there a point where, I mean, if people are able to earn 5% on just cash or cash equivalence, that it impacts the stock market at all? And I guess the other question is, how long can the Fed allow that inversion to happen and do they reach a point where they just have to normalize things there? In terms of rates being actually a decent return now, I mean, there was a period a year or so ago where we're talking about the Tina trade. There's no alternative to buying stocks. And I think that's gone away because the dividend yield on stocks is now lower than you can earn on a short-term bond fund. And so people, what we're looking at when we look at the retail flows is we can see people starting to buy some of the bond

ETFs. And so we've definitely seen retail start to shift their mentality from just buying stocks to buying bond ETFs. It's kind of interesting when you look at retail trading. Retail tend to trade about a third of the time using ETFs, the rest of the time using stocks. But their ETF trading week after week after week is net to buy. Their stock trading tends to fluctuate. So when the market was selling off early this year, they were net to sell stocks, especially tech stocks, especially healthcare stocks. When the markets were stabilized in summer, they stopped selling. And then in the last few months, when sort of rates started to come back up again, they started to sell tech. And basically, by the end of the year, they were selling all sectors. So they do that on the

company level, but on the ETFs across the spectrum, but what they've done is twisted into buying even more bonds than they used to buy, especially because now the yields are getting slightly better. One of the questions that I was asking us in 2022 was, is the stock market gas gaslighting us a little bit into making us believe that things are worse than they are? Because the markets were crashing, especially high multiple tech stocks. The hard data wasn't really supporting that other than rapid interest rate increases and inflation. Those were very good reasons for the market to do what it did. But I wonder if we're on the other side of it now, where stocks are bouncing and are we being led to believe that things are actually going to be okay just because

the market is up a little bit. To your point, the hard data was expected to weaken so much faster and so much more than it has. And so the fact that we just keep seeing persistent spending coming through from the consumer and that that's keeping unemployment as strong as it is and the incomes are still pretty high and wealth is still pretty high, it means we're probably getting closer and closer to believably having a soft landing because all those factors are holding things up. The next negative side of the economy is coming through the corporates. If you look at the corporate CEO indexes, you look at the leading indicators, especially on the manufacturing side, really weak, really weak forward orders, really weak PMI indexes, which when you survey the companies and say,

how do you think next quarter is going to look? They're like it's going to look pretty bad. And usually when that happens, earnings fall. And so to your point about where's the stock market valued, if we look at the price earnings multiple last year, it came down as the prices came down. But we were basically at a fair value historically. What you tend to find is, as rates go down, the PE that's justified goes up, which makes sense even if you think about a bond. If you're able to get 5% on a bond, you'll pay more for that bond if the real rates are 2% than if the real rates are 5%. Same thing for a stock. And so as rates went up, the stock market valuations came down. I would argue we were probably fairly valued at the start of the year.

We fell 20% because rates went up, 4% fairly valued at the end of the year. Where the market's at right now, though, to your point is we're pricing in earnings not going up and we're pricing in rates not going up. So the question is what does happen this year. Do we, earnings recover or do they go worse? Do rates actually keep going up because the Fed's so stubborn about this headline data that they kind of overshoot and create extra discounting? Or does the Fed actually follow what the futures curve is doing? And the futures curve is saying, we're not going about 5%. I know you keep saying two more rate hikes. That gets us to 5 and a quarter. But we can see all the data that's forwarded heading being really weak. You're going to see inflation coming down

really quickly. And by the time we get to March, you're going to be double thinking that extra 25, let alone the one after, we think by the time you get to the end of 23, you're actually going to be pulling rates down because inflation's below that four and a half percent rate. And so all of a sudden, we're in a different world next year where rates are starting to come down. Maybe not like recessionary collapse of rates, but everything's like coming back down to a more normal level. Michael did say that the bond market is a smart money. So I guess this year is going to be a test of that. It's like the Fed versus the bond market, basically. The Fed has been saying, and to a degree, right, if they're in hike mode, they can't really say we're going to keep in hike mode. but we know at 12 months we're going to be coming off. It's like, what's the point of doing that last hike if you know you're going to come off so quickly? And typically they don't. Typically, they get to a point and they pause.

That's what they're saying they're going to do and they're going to pause at 5.25. But the bond market is basically pricing in us coming back down to sort of four and a half pretty much by the end of 23. So, fellas, we come to a close and that's how professionals let the guests know that we're almost done. That's the orchestra playing in the Grammy or Oscars to get you off stage. All right. So you're the chief economist of NASDAQ. Who are your clients and what sort of conversations are you having these days? So obviously we have market makers that are customers. We have people that are managing investment money that are customers. We have retail brokers that are customers. We have corporates that want to list with us. We have corporates that have board meetings and do a whole lot of other things that need help from us. So my customers are all those different people. And that's why I'm doing a little bit of microeconomics, a little bit of macroeconomics. But what's been really interesting is going and talking to the corporates, you see some of that negative sentiment that we've been talking about. going out and talking to some of the investors, you're hearing much more positive news. And I think the investors are starting to see services is holding up, a lot of the hard data is

holding up, and that could be enough to get us a soft landing, sort of muddle through and have a pretty nice 2024. Where can we send people to go find more of your work? NASDAQ.com. Just Google my name. Perfect. Thank you, Phil. You're welcome. Thanks for having me. Thank you.