00:00Lisa Shannon of Morgan Stanley writing with much ink spilled on equity volatility, transparency and composition matter in this moment
00:07with selectivity key for fixed income investors.
00:10Lisa joins us now for more. Lisa, good morning. Good to see you. It's great to see you. Let's start
00:13with small caps. Are you fading that trade? Is it time to get out?
00:16We have 100 percent faded the small cap trade. You know, our sense is that there was a lot of
00:22enthusiasm, you know, premised on this idea that we're going to get this big reacceleration in the economy.
00:27But what people forget is that the small cap cohort is really, really low quality at this point.
00:33We've gone through, you know, literally a decade of private equity picking off the most durable, leverageable business models.
00:43And what's left in the public market, you know, literally 43 percent of the Russell 2000 is unprofitable.
00:49Eight percent of the Russell 3000 is unprofitable.
00:53These are companies that are unprofitable against a backdrop where U.S. nominal GDP growth has been over five percent.
01:00I mean, we've had a wind at most companies' backs between inflation and pricing power and real growth.
01:08And if these guys can't be making money in that environment, my goodness, are they going to, if the economy
01:13slows, God forbid, are they going to be able to make money?
01:17So we think that this was definitely a knee-jerk playbook trade, you know, hey, we're going to get stimulus,
01:23we're getting reacceleration, pile into small caps.
01:25I think it's going to be really hard when it comes to show me the money in the earnings season
01:31for these guys to meet and beat.
01:33So if the bias is large cap over small cap, where's the leadership coming from in large cap?
01:37So, you know, we think we're going to go back to a high quality, large cap trade.
01:43That means, in fact, some of the MAG-7, right?
01:46I think we've seen some of that selling off or that dispersion trade a little bit overdone.
01:52So there's probably some of those guys that you can start picking.
01:55Some of the software trade is probably overdone.
01:58We're continuing to buy.
01:59We loved the sell-off in financials yesterday, because financials is our number one high-conviction sector.
02:06So we're, you know, piling into that silly sell-off yesterday, and we genuinely think it's silly.
02:13We like industrials.
02:15We like energy.
02:16We like health care.
02:17So, you know, we think it's a stock picker's market, so you've got to be selective.
02:21But the idea is rotating back to quality here.
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