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Welcome to Stocks and Translation Broadcasting from the New York Stock Exchange. I'm Jared Blickery, your host, and at my side is the voice of the people, Sydney Freed. Please like, subscribe, and comment on stocks and translation on Spotify, Apple Music, Amazon, or YouTube, and today we are welcoming back Jessica Inskip. She is the director of investor research at Stockbrokers.com, and today we're gonna be talking about two tales of the American economy, the strength that we're seeing in hard data versus a weakening soft data. And our word of the day ties direct.In that it is divergence how exactly relationships change can be more informative than when everything agrees, and this episode is brought to you by the number $18 trillion. That is the level of household debt that has exploded to. And why not, maybe it's not as concerning as you think. So Jessica, talk to us today about the markets that we are in that we find ourselves in right now. We've seen a lot of volatility recently and one more caveat, we're taping this right before the big March Fed meeting. We have no.what's going to happen. So this is great.

It's a great day to be here. So the name of the game is uncertainty. I think from an administrative perspective we don't know what's going to happen strategically that creates unpredictability. We think about volatility, it goes hand in hand with uncertainty. We don't know what's going to happen and we don't know what's going to happen, that means businesses and consumers can't plan accordingly and they tend to retract and save. Hence we get soft data, which is.Happening right now.

Yeah, that's what we want to talk about and this ties right into our word of the day, which is divergence, and we've talked about market divergence in depth before. Classic example is Dow theory. You're watching the industrials to see if they agree with the transports, but we can also apply this to economics, and we're looking at divergence through an economist lens, specifically the hard data of the economy, which might be manufacturing, it might be jobs, and then that soft data which kind of reflects people's sentiment and the surveys and we've seen consumer sentiment surveys just drop.Uh, it's dropped pretty precipitously over the last two readings, maybe 3. So when you put this all together, which matters more?

Well, hard data is important, but there's also this psychological aspect that we have to be cognizant of. So let'sThink about the soft data that we've been getting. We've gotten a lot of downwards, earnings revisions, and some negative forward looking guidance. That's guidance, so that's soft data, that's anticipation, and what's been touted on earnings calls is uncertainty. So we're going to keep that word there.Secondly, like you said, consumer expectations or consumer sentiment that's coming down, inflation expectations are coming down. All of this is expectations and not reality. So what is important is how does that transfer into reality if we look deep into the data, even going into PCE, we see this increase in savings by quite a bit. So that tells me inflation is cooling. There is.is perhaps less spending, but there is capacity to spend more because, which would be good, yeah, which is good. So that's not indicative of a recessionary fear of consumer. It's a consumer that's saving and scared and uncertain.

Let me askyou though, is there no relationship where like if soft data comes in weak first, then hard data comes in a week later? Is that that's not a relationship that exists?

It is a relationship.It all, it's, it's so interesting the way it works. So it always happens first. There is uncertainty, so that's something we have to think about like the yield curve inversion. Immediately someone thinks recession, but then we have to go into why did the yield curve invert and understand Fed policy. But then there's other instances where it doesn't just due to what's happening and the events. For example, post great financial crisis, for example, very, very, very low consumer sentiment.We were fine. We were in the midst of a recovery,

the S&P downgraded US debt, and I remember the market missed a bear market, if you believe in the 20% thing by just a fraction of a percent, but things rebounded pretty quickly. And so in that instance you didn't have the soft data actually lead into the negative hard data, but there are other instances clearly like before the global financial crisis when that thing actually happened.So anything that would help you tell the difference between the two right in the middle of it because it seems like it's decision time right now.

Well, the easiest way to do that is through earnings. We want to understand actual earnings. That's hard data. When we're trying to understand the S&P 500, we're taking all of these other inputs. What's happening with the yield curve, what's happening with consumer sentiment.To understand if they're spending money and what revenue that's going to translate to. So if earnings are consistently beating and on the top line, not just from

revenue and sales, yes, not just what the profit engineers are able to go ahead.

Whatrole though does social media or like headlines play in soft data? Is it that likeThey someone sees all these like recession headlines and they're panicking and that kind of giant echo chamber, giant echo chamber that leads to more soft weak data, weak soft data,

absolutelyit does, and I think that's such a beautiful point. The investors that we have right now are probably, or the vast majority. There is this new cohort that has been introduced since COVID. This is their first correction.They are very loud on social media. We have large, yeah, large, large retail participation, but the recovery and the recovery from COVID, quick, one of the most record quick recoveries and so the downfalls are very, very quick, and I think it's a lot.Do to your point with soft data because soft data is consumer sentiment. If you're spreading this negativity like the word recession is spiking on TikTok right now, then that causes consumers, what do I need to do? Oh, I need to save that will translate over into the soft data that we're seeing.

You know, I'm wondering too if this is not a new normal and um yes, I think it's very instructive that people who are new to the markets are going to have this incredible anchoring experience that is a pandemic. But let me read you something by Fusion Capital that I read yesterday, and they say that you truly cannot make up the climate that we are in. There are 40+ year surveys and they've swung from the highest upside expectations for stocks to the highest worsening conditions for business in less than 5 months. So I've seen them. They're going up like.This into uncharted territory, then they're crashing back down. Is this something that we can look forward to over the next few years? I don't know that we can answer that sitting here, but it's on my mind.

I think that's a wonderful call out, and I think about listening to Fed Powell speak at the Boston Economic Forum about 2 weeks ago earlier in March, and he always gives you a little nugget if you listen to his speeches, and this one was not relying on traditional data for that reason. He was saying how even during the pandemic, he'd look at Uber.And look at open table to see if people are going back out. So there is this need for outside of the traditional economic data that we have due to the volatility that is there and uncertainty. We're bringing it back.

I do like the fact that he's not a true academic, that he has a lot ofBusine experience and he's not just locked into econometric models that were that were kind of made out of a textbook and maybe there's an Uber model that we need to take a look at. Um, I kind of like that. I don't suppose you've seen anything in like the uh the massive Fed output in terms of all the surveys or.Materials that indicate what kind of soft data they're looking at.

Not necessarily. He did state very specifically that it is not indicative of actually consumer action, and that's a good

that's a very, that's a very crypticed thing to say.

Myquestion then is if we're relying a little bit too much on the soft data right now and not paying enough attention to some of the good hard data, what should investors do then? Should they just stay invested? Should they buy?Some of this dip that we're seeing since the hard data is kind of telling us that things are OK right now.

Yeah, well, one, investing, if it depends on where you fall on the investing spectrum, if you will. Are you an investor or are you a trader? This is a trader's dream volatility,

speculation is high.

Yes, that's a whole different cohort, but if you're an investor and you've got a strategy, it starts with staying disciplined. Do you want to get a little tactical with your asset allocation? Sure, that's absolutely fine. So what you could do in these times.I smooth out the volatility, which is adding lower beta names so those consumer staples to yourportfolio

leverage cycle and absolutely

and a part of this because of the retail participation that I do think exasperates those downturns, we have to think about margin calls that come in. People are very top heavy in the Magnificent Seven, even the broader market, we saw that with the Yen carry trade unwind and there was a little brief one the other day. If you are having to meet your margin calls.Sometimes it's on the retail side you don't even get to pick the security and it might be one that you have the the most of which are those Nvidias, the Tesla, the very active traded retail loved names that cause a downturn to go even further because it's sellingpressure.

Maybe with the bathwater that was in the global financial crisis. Gold actually went down because people were getting margin calls and guess what? Good is high high quality collateral, and they were just dumping it to raise the cash. So

it's great to know.Why? That's a good point. Why is it going down? That's what we want tounderstand.

Why is gold going up?

Uncertainty. It's a safe haven

if youhave a few $1000 I'm thinking of people like maybe already thinking about putting it to their Roth IRA for the next year. Are you saying we should just go in on some overall ETFs that track the major averages, or should be go more into sector specific investments, stock specific investments? What do you kind of recommend? So

I mean, I have a rule.Thumbs that are there that's widely used. One, if you don't have $10,000 in any type of passive fund, we're going to do cost average into a passive ETF of some sort. Once you're beyond that, go ahead and explore some sectors, maybe in a few stocks, add some alpha, be a little more tactical to

your recommendation is get in and be passive at first, at first, and then get into the riskier if you've

never invested before, absolutely, because then if you get into the riskier stuff, one, it requires, I call it skill will and time.You're gonna have to really be really be on top of it. You're all in an apple. You need to understand that revenue exposure and everything very well, and that could be very daunting and frankly nobody wants to do that. Now if you have your nest egg built already or your savings or you're starting to grow your wealth and you want to be a little more tactical and add exposure, that's OK too. The largest sell off.Technology. I'm still very bullish technology if you want to addto that.

I was

gonna

ask, so do you like the cyclicals at all? We got a minute to break.

I, I do, I do. I, you know, I'm bullish on the AI narrative, and I, I am, I still am. I think we're early on the AI revolution, especially from the keynotes and the AI foreverything.

Jensen. Oh yeah, that was an event the other day.Um, there's a lot to impact there. I think we actually are up against a break, so let me do that real quick and we'll discuss this on the other side. All right, we have to pause for a quick break here, but coming up we're gonna be talking about the US yield curve, and we've got a runway battle that pits the mag 7 against the S&P 493 just in time for earnings season.This episode is brought to you by the number $18 trillion. That is the dollar amount of the debt burden for the US consumer, and that's a record with credit card balances, the biggest driver, but record debt doesn't mean unsustainable. So if people can handle the payments, great, and that's kind of what we're seeing right now. We're not seeing those delinquencies get up, go up too far, but what does this figure mean to you? Is it anything concerning?

Uh, so it can be concerning from the surface level, which I think goes into the pessimism that we're seeing from the consumer perspective, but if we zoom out, it's actually not that bad of a number. If we look at percentage, uh, we can pull data where we can see percentage of your income that is to servicing that type of debt. We're below where we even were pre-pandemic, which tells me, which is it.I like to use pre-pandemic because the Fed uses pre-pandemic. We're at maximum employment pre-pandemic, always comparing to that era, and since they're the ones making the decisions moving the markets, let's use their benchmark.

Wait, so are you saying that people are spending less now than pre-pandemic relative to their income? Is thatwhat that means?

It means they're paying down less of their debt relative to their income, which might be why we saw that increase in savings as well. That

that mightbe interesting point and.We're talking about the yield curve, I wanted us to go through a little exercise here just kind of relate what the yield curve is and to the various ways that it affects people's lives. So on the yield curve we have the short end, and you're

laughing. I'm laughing because I'm dying to understand the yield curve. So please,

right, so on the very short end you have, let's say one day. That's the Fed is in the market for overnight lending. That's its benchmark Fed funds interest rate. That's only one night and it's.Unsecured, meaning that banks don't have to put up collateral for it. Then we get into T bills, so you have, uh, from everything from a couple of days all the way up to 1 year. Then you have the treasury notes. Those go from 2 years to 10 years. Then you have the bonds which get into the 20 and 30 years, and all these different points, uh, all these different maturities or tenors as they're called, uh, kind of relate to people in interesting ways. So Jessica, at the very short end of the curve, there's something interesting happening right now.It's getting people to talk about their savings accounts. Oh,

absolutely. Instead, I have a little trick to help you remember the difference between bills, notes and bonds. Oh yeah,

I hope it rhymes.

Oh, it doesn't it? It is not a song. No. So I always like to remember that a note is like a like an IOU, very, very short term bills.That's it, dollar bills. There you go. So, bonds. You are bonded to someone.

But isn't a bond? I

mean they're all I meant. That's all the

tur

This freaked me out for about a good, and then because bonds move, the prices of bonds move inversely to yields, that's another thing that's easy to trip people up

on. Well, and what does it mean when someone says you're going further out on the curve.

So they might be adding bonds.

Put all the words togethernow.

Well, that's that's it. They might be adding bonds to their portfolio or adding longer maturities because it looks attractive, OK.And and it's this competing of rates. So that's the risk-free rate versus the market. Is it worth being risky?Versus what I can get risk free, which is you're gonna find on the curve

that's that's excellent. It introduces something called the spread and you mentioned the risk free rates. So in theory government debt, the US government debt specifically is risk free. You can argue with that, but that's the way it's defined. Now a company, uh, a corporation can borrow, but it's typically gonna be higher that it's gonna have to pay a little bit more.Money, so it's yield is going to be higher and you have different ratings from the ratings companies that come in, but that difference is called the spread, and we've seen corporate spreads not only on good quality corporations but also those that have to borrow in the high yield market. We've seen those pretty tame recently or over the last few years, but they've started expanding just a little bit recently. So does thatI mean historically that it's not anything that would cause trouble, but it gets people's attention because then you're thinking, well, if corporations can't borrow money or if it's costing them more money, that affects their margins, then that affects earnings and it all kind of bakes into everything we're talking abouthere.

Yeah, well, I think a lot of that also has to do with the volatility that we're seeing within the treasuries because it's the way the government funds our debt. OK, which we're talking about a lot and

if I want to be like really.Fun at parties and talk about the yield

curve. Yeah, this is the right is

the right question for that. What is like what could I say the current yield curve says about the economy rightnow?

Oh, that's good. So the slope of the curve gives you indications. You've got your normal yield curve. So think about it. If I have a shorter term rate, the Fed influences the front end of the curve. That's the Fed, and they don't control it, they influence.That normally is low, if it's lower, the Fed lowers rates, you expect what?Growth in the economy growth in

the pop quizzes,

please. Yes, sorry. OK, you expect growth in the economy, but so the line should be sloping up if it's if it's flat, that means we might have the growth expectations are kind of stalled. That's a stag.inverted. Yes, we don't love sex.

I like the word, notthe term.

Yes, yes, um, but then if it's inverted, now think about the inversion because a lot of times we will say that the yield curve has inverted. We expect a recession. It takes about 13 months before that happens. The Fed inverts the yield curve because they influence the front end. We expect growth to slow down, hence why it starts going down.The front end affects your high yield savings account, very, very short end.And that's, you want to pay attention to the Fed if you've got fluid cash, and it's very prudent if you expect them, especially if we get a dot plot that says, we're going to lower rates at this time, you might want to lock in the rates before they do that if you've got the extra cash.Then it's all the way that the government borrows money is very tied to the way that we borrow money. The 3 to 5 year periods is tied to your auto loans, right? There's prime and there's margins attached to that. And then the 10 year housing, right, exactly. And that's market mechanics that influence that, which is a whole another

me an expert over here.

I love it because the inversion is telling you something is kind of a mess and that's when, uh, that's when long term money is cheaper.Than short term money, which is just kind of, that doesn't make sense. All right, we do need to move on and pivot here to today's runway battle. So two powerhouses, we got the Magnificent 7, the tech titans that have dominated markets for years versus the S&P 493. The rest of the pack finally stepping into the spotlight. Now the mag 7 are the high fashion veterans draped in sky-high valuations and AI fueled ambition, but their growth is slowing, and the once effortlessness dominant that.It's kind of showing some signs of wear. So can they still turn heads or are they overdue for a wardrobe refresh? Meanwhile, we have the S&P 493. Those are the comeback kids, the leaner, stronger, and broadening their earnings runway. Their profits are accelerating just as the mag 7 are cooling. Could this be their moment to steal the show? So Jessica, is it about big techs flash or the broad market's fundamentals here? Where do you see this going playing out into the rest of the year?

Well,It's so hard because of the uncertainty, to be honest, and I think this might be one of the hardest questions you've ever asked me in our many years of working together. Yeah, it really is. Well, because we do see a normalization of tech earnings, but they're consistently beating, and it's, I think we're still on this next layer and it might be pieces of.The Magnificent 7 that I'm going to say wore it better.

Nice. And it could be that neither one of them, and we end up in a bear market and it's kind of a moot point, so I just have to throw that out there too.

Oh, absolutely, but I do think if we think about valuations and the way that the market moves and who could survive that, it is big, big mega cap tech.

What is investing in the S&P 493 look like without the big tech? Like where do you, no, that's that's what I mean. So how do you that's like kind of a broad way to get exposure. Like how do you get more specific?

Well, you can go into specific sectors if you want, um.I mean there's the equal weight, but sometimes that doesn't necessarily make sense. Yeah, it doesn't move very much and there's a reason why it is mega cap weighted or it's, it's market cap weighted because that's what it's moving. It, well, yes, and but it's a bigger company. If it's a bigger company, it should impact markets more. It's literally bigger in value, therefore it moves the markets. But now you think about the transformation of the S&P 500, which was largely industrial, so I'm going way back, and remember the S&P 500.It adds companies in and out every quarter when it does

its it's kind of like a big hedge fund. Yeah,

itis. I like to say it's like an elite club. It's you can only stand if you meet the criteria and then you're kicked out, which is the way it works, which means if you're still invested in that if theCompanies do not become profitable over a certain period of time. That's part of the criteria of being in the elite club. They'll be kicked out. Somebody is cleaning that for you. So for the self-directed investor that is concerned about what's happening in the S&P 500, someone is still going to address that for you.

There is the question of timing, and I'm just gonna throw this wonky bit out that by the time a company like Tesla was a huge one, it it had to become profitable because S&P companies, they have to be profitable to be in the index. By the time it was ready to be added, that was kind of an interim top. Investors front run that whole thing and so, uh, the indices themselves kind of add at the worst time, but maybe that's just a case of market front running.We have about a minute left here. I'd love to get guests take on risk management. This is a very tumultuous time. We've been talking about volatility. How, how are you getting your head straight to operate in these markets? I know it's opportunity for you, but not for everybody, so you know it can be kind of treacherous.

Imean, my risk management one, I think every decision should be calm and calculated and collected.As self-directed investors, we spend, we spend so much time figuring out vacation where we're going to eat, what we're going to do we research it and sometimes we don't do that with the market because it's so easily accessible. I can click it with a button that's you should apply the same rigor to your investments. I do trade options. I like to beta weight and delta hedge and I know that's not.Um, but there are ways to at least smooth out the volatility by not having such volatilestocks.

And on that note, we're going to wind things down here at Stocks and Translation. Be sure to check out all our other episodes on the Yahoo Finance site and mobile app. Uh, we are also on all your favorite podcast platforms. We'll see you next time on Stocks and Translation.