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“The Road to Wealth in 2024: A Benzinga Seminar” – an insightful event designed to guide you through the financial landscape and unveil the strategies leading to wealth creation in the coming year. Join us for an enlightening journey as we explore the latest trends, market insights, and investment strategies propelling individuals towards financial success.
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00:00 We've got our first guest today hanging out backstage, my man Charles Lieberman,
00:04 the Chief Investment Officer at Advisors Capital Management. Super excited to bring Charles on
00:12 and hear his thoughts on the market right now. So without further ado,
00:15 Charles, how are you doing on this beautiful Thursday?
00:18 I'm doing well, thank you.
00:19 All right, glad to hear it. So Chuck, I guess let's start with what's really driving the markets
00:27 right now, and that's, in my opinion at least, federal interest rates. A lot of people now
00:33 worried after Waller's comments the other day that interest rates may stay higher for longer.
00:38 What's your view on this?
00:40 Well, I think Waller's got it right. I think the market was just way overboard. The Fed
00:47 is trying to bring inflation down, and the market is assuming the Fed is going to be successful.
00:54 Inflation has come down a lot, but we're still pretty far away from their 2% target. So they've
00:59 still got a fair ways to go, and the market is assuming they're going to get there. But the fact
01:04 of the matter is the economy is holding up very well. The fears of a recession have dissipated,
01:10 and in my judgment, we're never very good. The prospects of a recession, the economy is holding
01:16 up very well, and as that gets embedded in the market, we're seeing the bond market retreat.
01:22 Got it. Well, I know we have some slides that you provided as well.
01:26 Do you think right now, I guess, bonds still offering a decent yield, depending on what you
01:35 go with, do you think that's a sound investment out there for some retail investors?
01:39 It's a place to hide to protect capital, but I don't think of it as a great investment.
01:47 Take the 30-year or the 10-year. When you adjust for taxes and inflation, you get almost a
01:56 negligible rate of return. So bonds are really a place to protect capital. They're not a great
02:02 investment. So Chuck, let's talk about inflation for a second here. We've seen inflation now come
02:09 down from when it hit 9% in 2022, when it was at 40-year highs. Certainly, the Fed has made
02:18 progress, but I think right now, still probably a little higher than what they would like above,
02:22 of course, that 2% target. Do you think it's going to just be high rates until we get to that 2%
02:28 target? Do you think they could eventually say, hey, you know what, we're fine with 2.5%. That's
02:33 fine. What do you think there? I don't think they're going to be fine with 2.5%.
02:40 You know, they've said they need to get to 2%. So for them to backtrack on that now really undoes
02:47 the goodwill, the confidence that the market has in the Fed. If they say they're okay with 2.5%
02:55 today, who's to say they won't say they'll be fine with 3% tomorrow? So the Fed's got to
03:02 maintain its credibility, and that means getting close to 2%. And the easy part has been done
03:09 because that 9% inflation rate that you mentioned, that was a large amount of spike because of a
03:17 disruption to supply chains and a whole bunch of other things that were artificial and really
03:22 pushed up prices. All of that's now out of the system. In fact, it's reversed. So we saw car
03:28 prices run up, and now they're coming back down. But they're still higher than where they were
03:34 prior to COVID, and we're not seeing labor costs moderate enough. And that's the ultimate driver
03:41 of the rate of inflation. Inflation is essentially increases in compensation to workers minus the
03:48 rate of productivity. And productivity bounces around quite a bit, but the underlying trend's
03:52 about 1%. So if wages are running 4% or 5% at an annual rate, we're not getting to 2% inflation.
03:59 Yeah. And I mean, right now, do you expect the CPI to continue to move lower? Do you think we
04:08 can see that happen without any sort of meaningful or significant pain in the labor market?
04:14 I think we have to see some significant pain in the labor market, and that's why I don't think
04:20 the CPI is going to continue to come down. Recently, it has held up. It's basically been a
04:27 flat type of CPI, and we're seeing some parts of the economy bounce back like housing. So I don't
04:35 think we're there yet, and I don't think the Fed will lower rates in March. I think they'll have
04:40 to let more data come in in the hope that inflation comes down. Got it. And then, I mean,
04:47 as far as the market right now, it seems like the market has at least started to price in
04:52 the fact that the Fed might not be cutting rates as soon as March. I mean, after Waller's comments
04:59 kind of shaking out, do you think we're now trading-- that that's fair? Or do you think
05:04 the market will continue to move lower in anticipation of these rates staying higher?
05:08 Well, if you recall, the Fed said that they were going to cut rates three times in 2024.
05:15 And the market was priced for six to seven. That's the part where the market was just way
05:21 out over its skis. Waller's statement could be applied to the Fed saying they're going to cut
05:27 by three times. Maybe they won't even cut by three times. So the market is really way out ahead of
05:34 the Fed, and it's really premature for the market to think that. And that's why the bond market
05:40 is eroding. We're going to see probably more erosion over time. I don't think it'll be a
05:45 big sell-off, because I see the economy-- the hope of inflation coming down staying intact,
05:53 at least for a while. And so I think that the Fed is going to be patient. The market's going
05:59 to have to adapt. Got it. And we do have these slides you provided here. This morning, we got
06:07 slightly stronger than expected labor data with the fact that initial jobless claims came in lower
06:13 than expected. Do you anticipate the unemployment number ticking higher if we are going to see the
06:20 inflation? Do you think at some point, people start then selling stocks because they're worried
06:26 about a recession instead? No. I see stocks holding up. Stocks have a push-pull to them.
06:33 Higher rates are a headwind for the stock market, no doubt about that. But at the same time,
06:38 the market's worried about a recession, as you just suggested. If the economy holds up,
06:43 and that means corporate profit's going to do well. So I think that's going to be the support
06:47 for the stock market. I fully expect it to bounce around quite a bit, both to the upside and the
06:52 downside. People overreact to every piece of news that comes down the pike. And so good news
07:00 sometimes helps the stock market because it means no recession. But at the same time,
07:04 it also means that rates don't come down. So we'll see a lot of bouncing around.
07:09 But we also got housing starts today. And that, I think, is one of the more interesting charts.
07:14 Take a look at number 17. What's interesting here is that mortgage rates shot up a lot,
07:21 and that really crushed housing in 2022. But mortgage rates went up beyond that. And notice
07:30 that the housing market has flattened out. And that's because there's a major shortage of housing
07:34 in the US. And so with mortgage rates now coming down over the last month or two, we're seeing a
07:41 pop, a rebound in housing activity. And I think housing is going to be very strong, another tail
07:47 wind for the economy. So do you think retail investors like our audience out there will be
07:52 able to play some of these housing names? I mentioned earlier, I guess, that-- or actually,
07:58 with my previous guest, that the XBI Biotech underperformed the market last year. And so
08:03 did Home Builders. Could you see Home Builders having a bounce back year?
08:06 Absolutely. And in fact, Home Builders had a really good-- the Home Builders stocks did very
08:14 well last year. They gave some ground towards the end of the year and then rebounded. I think
08:19 they're as cheap as anything. And I think they're going to have a lot of tail wind going forward
08:24 for the next few years. Even if we have higher interest rates, people need to live somewhere.
08:31 And there's a real shortage of housing in the US. So people will have no choice but to either buy
08:39 or to rent. And if they rent, that means somebody else has got to build a rental unit.
08:44 So either way, housing does well. And I think that's very good for not only Home Builders,
08:49 but the suppliers to the industry. They should all do well. And we've seen them do
08:53 reasonably well recently. But I think there's a lot more ahead, given how cheap they are.
08:57 I've seen a lot of articles now and headlines about credit card debt and things like that.
09:04 And I know looking at household debt compared to the GDP, do you think this could be a problem
09:11 for the economy going forward? Well, it's amusing. Because when people look at household debt,
09:19 they look at the absolute dollars. So take a look at chart number 12.
09:23 One before this one. Yeah. That's what gets reported. Oh, my god, this is scary. Look at
09:30 credit card debt. It's now over a trillion dollars. But the next chart, the very one that
09:35 you were just looking at, yep, shows you debt relative to GDP. And what this shows is we're
09:42 a growing economy. Most things grow over time. But if you look at household debt relative to GDP,
09:48 or relative to household income, or any other appropriate benchmark, you see that households
09:55 are actually in very good financial shape. Households are doing fine. Job growth is strong.
10:00 And because job growth is strong, that means income growth is strong, which gives consumers
10:06 the ability to go out and spend. So again, I don't see a recession in '24. I just-- I can't put
10:12 together a scenario for a recession. There's always the possibility of a shock coming from
10:17 somewhere. But in terms of fundamentals, the fundamentals are very sound. Yeah. And that's
10:22 what I think is so funny about some of these headlines that seem to be pretty doom and gloom.
10:26 They're like, credit card debt hits new all-time high. And like you said, well, when the economy
10:30 grows and expands over time, what's going to happen is that's going to happen naturally.
10:34 And it doesn't even necessarily mean it's a bad thing. So Chuck, any other industries? I mean,
10:40 you mentioned that you think homebuilders will have a strong 2024. Are there any other sectors
10:45 that you're watching specifically that you're looking for for outperformance?
10:49 Yeah. So I think energy is a good area for outperformance. And I suspect the banks are as
10:55 well. In the case of energy, the US has hit an all-time high in oil production, over 13 million
11:02 barrels at an annual rate. The price bounces around a fair amount. And that has a big impact
11:08 on the P&Ls of the oil producers. So when prices go up, they make more money. When prices go down,
11:15 they make less. But the pipeline companies need to transport all of that oil. And we're at record
11:21 levels of production, both for oil and gas. And we're exporting record levels of both as well.
11:27 So the companies that are in the business of moving the stuff around or processing it,
11:31 they're all going to do very well. So we like that. And many of them pay very high
11:36 distribution. So you generate a lot of income with those holdings.
11:40 Another area I like are the banks. The banks got crushed after Silicon Valley Bank failed,
11:47 understandably. And they're all very, very cheap. But they're all making a lot of money.
11:53 They are being harassed by regulators. But at some point, they're going to be buying back a lot of
12:01 stock and raising their dividends. I think all of them is really attractive long term.
12:06 Yeah. And of course, in the earnings season right now, you had most of the big banks report
12:11 last week. And even JP Morgan, who reported good earnings, you saw that stock end up moving lower.
12:18 So it could be a buying opportunity, like you said, in the banks long term,
12:21 especially if you're someone that likes to have those dividends rolling in.
12:26 And I guess, do you have any individual names? Are you able to talk about those, Chuck?
12:32 Sure. So the ones we like all the big ones, meaning JP Morgan, Citi, Wells Fargo, Bank of
12:39 America, of all of them, JP Morgan is the most expensive by far. But you could argue deservedly
12:46 so. It's just an extremely well-run institution, extremely profitable, high return on equity.
12:53 So we like all of them. Some of the super regionals are also very attractive. Fifth Third Bank,
12:59 Regions Financial, Comerica. These are all banks that were taken out and shot in the aftermath
13:06 of Silicon Valley. And so I think they're all cheap. Again, a little patience. These companies
13:12 are making plenty of money. And they'll all be buying back stock. Some of the embedded losses
13:18 they had in their bond portfolios have reversed in the fourth quarter. You're going to see that
13:23 with their fourth quarter reports. So we think of them as all attractive long term holdings.
13:28 And they're very cheap. Yeah. And I mean, like you said, those regional banks got absolutely
13:32 clobbered and still haven't made their way back. The KRE, Regional Banking ETF, still trading lower.
13:38 And some of those names that you mentioned, Regions and Comerica, are reporting tomorrow
13:42 morning. So it could be some short term volatility just for anyone out there. If you're looking at
13:48 those stocks. You also mentioned energy, Chuck. I mean, the last few weeks, oil prices have been
13:55 volatile. You have this tension, obviously, in the Middle East and some other things going on.
14:00 But overall, oil prices have been trading lower. Do you think that we'll see that change soon?
14:06 Not really. There's a lot of supply. OPEC is struggling because they would like to sell
14:15 more at higher prices. But there's enough coming on in the US and elsewhere that we're eating away
14:22 at their market share. They've created a pricing umbrella under which everyone else can increase
14:28 production and take advantage of the opportunity. So US production, as I mentioned, is at an all
14:33 time record high. And that means that OPEC is being squeezed. They've almost been forced to
14:40 reduce production in order to avoid prices coming down. So at some point, they may give up on that
14:47 proposition and they may be forced to try to push others out of the market by cutting their price.
14:52 They've done that before. But the big beneficiaries are all the pipelines and all the users of energy.
14:59 So chemical companies, anyone who uses a lot of energy as an input is ultimately going to be
15:05 better off. Yeah, and you like those companies that are transporting the oil and commodities
15:11 right now. So, all right, Charles, we're running up on time here. Is there anything you want to
15:17 leave us with that we didn't get to touch on today? Well, the big driver, of course, in the
15:21 short run is the Fed. And as long as the Fed thinks that it's going to cut rates at some point,
15:28 the market is going to hold on to that belief steadfastly. But ultimately, the Fed is going
15:34 to have to follow the data. And if the economy is solid, there'll be fewer rate cuts than the
15:40 market expects and the market's going to have to adapt. Yep. So, yeah, right now the market,
15:45 I think, is kind of pricing in like five or six cuts. And it was originally seven, as you pointed
15:50 out. So, you know, definitely the market is adapting to updated Fed outlook. We'll see
15:56 if the labor market and the economy remains hot and the Fed is able to end up keeping those rates
16:01 higher. I mean, definitely, you know, just those Waller comments last week, you can tell the impact
16:06 that it had on the markets. Chuck, thanks again for joining us on our Road to Wealth webinar today.
16:12 Hope we get to chat again soon. It's been an awesome discussion. Thank you.
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