Fidelity’s Quant Boss Reveals Her Top 3 “Desert Island” Stock Market Indicators

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Ladies and gentlemen, welcome to a special edition of The Compound and Friends. We are live from the intergalactic headquarters of Fidelity Investments, one of the most storied, respected, highly regarded, largest. institutions in the investment business. We are so lucky today. We're joined by a new guest. Denise Chisholm is the director of Quantitative Market Strategy.

in the Quantitative Research and Investments Division at Fidelity. Denise, welcome. Thanks so much for having me. It's great to be here. Okay, I have more to your bio. Can I do the rest? Sure, you can do whatever you'd like. Denise is a data geek at heart. I didn't write that. Who called you that? You? No, I didn't call myself that. She has spent her career in roles including equity analyst, portfolio manager, sector strategist, and now...

quantitative market strategist. So you've worn a lot of hats and you told me that you've been here since 1999, more or less. That's a pretty long stretch of time. And I'm sure you've seen your share of epic markets.

bear markets, bull markets, all sorts of sentiment shifts. Just from the top down, what is it like to do the role that you do at a firm this large and important? I mean, it's great because you have perspective from all of our diversified portfolio managers that come at it in different ways. I mean, we have so many seasoned investors who have been through so many cycles. And some people remember the nuances and some people remember the data. And it's interesting from my...

vantage point to look back at the data historically now within the rearview mirror but to talk to people who actually lived through it at the time even people that you know we'll talk about the bear market of the 70s we have people walking in the halls that know exactly what that bear market felt like. That's such a great point. Michael and I are market historians, amateur market historians, but we do read and listen to everything we can get our hands on.

course we look at data we look at charts but that is not the same as talking to people who were professional investors during those moments and then maybe combining the two things That's exactly right. I mean, I think it provides like you get the perspective and the data. I think the data shows you when to not let emotion take over, but it's important to understand the nuances. If you lived through something, then you understand the nuances and the data that you show.

look at that perhaps you wouldn't have otherwise. What's harder for people living through a bull market or living through a bear market? And I don't mean harder financially. I mean, when you talk about controlling your emotions. Oh, I would say bear market. I mean, I think statistically, when you look back, what's the retail investor's biggest problem is that they don't.

tend to get the returns that are on average the equity markets deliver because they are too busy selling at bottoms. I think it's part of the same thing because it's bad behavior in the bull market that makes them do.

the opposite in a bear market. That's fair. I mean, I always say like stocks bottom on bad news. So if you use bad news to get out, when are you going to get back in? So the getting back in is problematic as well. So we were talking before we started recording about historical data because that's like your whole jam and you look at a lot of it.

But a lot of the nature of the data changes over time. First of all, we didn't have the data. So in like the data from the 60s, it wasn't available in the 60s. And so just having knowledge that the data exists changes the meaning of the data.

And then, of course, companies from the 50s and 60s and 70s look nothing like their companies today. So when you're looking at historical analogs and historical ratios and fundamentals and margins and all that sort of good stuff, how do you make it make sense and not get anchored to? a world that doesn't exist anymore. Because it's almost never an analog. It's really about finding patterns. And most of the time, especially in macroeconomic data, that is...

existed for quite some time. It's about thinking through the things that you think are very significant. And oftentimes, when you actually go back in history and look at it, is more noise than signal. And at the very minimum, it tells you what not to bet.

on. I mean, it's usually one of those situations, what's the old quote, where it's not what you don't know that gets you in trouble. It's what you know for certain that just ain't so that's the problem. And I feel like the more I look at macroeconomic data, the more I see this.

patterns. I mean, uncertainty recently was a great example. Oh, there's very high levels of uncertainty. That's likely to weigh on corporate spending and therefore very likely to weigh on stock returns. The problem is not only can you not prove it in the data, There's the opposite correlation. The higher uncertainty is, the more likely the market is to go up in your face. Does that mean 100% of the time?

No, but that's a pattern that persists historically, even though there's no analog, right? It was tariffs this time, which is not analogous to any other situation we've lived through. But that pattern is kind of like a red web. Red flag waving to your face. It's totally counterintuitive, but I'm looking at how excited you get by that. Is that the best thing as somebody that's looking at data?

to see i don't know watch me on tv say something and all these other people repeating the same thing over and over again and then you go back and look in the data and it's like they're all saying the same thing

And none of them are right. Here's what actually happens. Is that the thing that you get excited about? It's definitely what I get excited about, which is not to say that I know whether people are right or wrong. But it is to say that there is a dangerous presumption that we make all the time with market narratives.

More often than not, to your point, are not true. Well, here's one. Yeah. Speaking of tariffs. Yes. We were told with extreme certainty by many people, whether they're at hedge funds or institutional asset managers or traders. We were told repeatedly that Trump's tariffs, given the nature of how they were rolled out and how messy all the commentary around them was.

was going to have this effect where people from around the world were going to begin gradually withdrawing money from the US dollar, from the US bond market, from the corporate bond market. They were going to pull money out of stocks. In fact, in all cases, it was the complete opposite, maybe not the dollar. But when you looked at inflows six months after Liberation Day and you look at what went on, the international community of investors bought as much stock as they possibly could.

breaking records in some cases. They bought US bonds, they bought corporate bonds. I don't know what the message of that is, but it is the exact opposite of what the prevailing wisdom was. um just after that tariff announcement was made and the way it was executed um was that the kind of thing that you looked at and said

I'm not so sure about the story of the outflows from U.S. investment markets. I mean, it's interesting when you think about it. I think the quote that resonates the most is, you know, the stock market has discounted nine of the last four recessions, right? So the stock market reacts very quickly.

But when you go through the math, and you can look at this in history, I mean, I always say that the bar is high. Recessions are rare. It takes quite a shock to tip the US economy into recession. Well, that one looked like it would have qualified.

On the surface? I think when you go through the math, I had a hard time getting there. So when you look at the math historically, now I would say that when I look at the cycles, it takes something between 2.5% and 3.5% of a hit to U.S. income to tip the U.S. consumer into recession. I mean, the financial crisis is an interesting example in sort of how time and price can actually converge. So crude oil...

Prices were between 18 and 22 forever for when we were growing up. And then they were 50 and then they were 70. And we were like, why isn't the consumer having a problem with this? And then they went from 70 to 150. That shock was enough to tip the U.S. consumer.

to negative consumption. And that, on top of the leverage that we obviously saw, that was the tipping point that basically started the recession, obviously compounded it in 2008. So it's an interesting thing to think that all recessions were met by shocks. were pretty sizable. And you can usually look at oil prices and the Fed to see where those shocks came from. You can do the same math behind tariffs. OK. So tariffs, we thought- Substitute oil for-

Tax on trade. Correct. It's exactly what it is, right? We're guessing where the tax ends up. So, you know, you have to make some guesses, but we can say $3.2 trillion of imports. We landed on 15%. Half ends up in the U.S. consumer's lap. None is absorbed by current.

You know, none is absorbed by the foreign producer. The other half ends up in corporate America. What is that as a shock? That's about $250 billion on $25 trillion of income. That's a 1% headwind to the U.S. consumer. That has not been enough historically to tip us into recession. Because we have had 1% tax hikes historically that haven't been enough. And the reason why is not that 1% is not meaningful. It absolutely is. It's just you're so focused on that headline, risk of the headwind.

You don't notice other things like the tailwinds from oil prices going lower this time that almost completely offset that $250 billion. So you end up going through the math and saying, yes, it's different, but it's still a shock. It's still a tax. Is it enough? And you come to the conclusion of maybe not. And in that instantaneous almost bear market.

The stock market did discount a recession. So where were you on April 3rd when I needed to hear this? Where were they hiding you in this building? OK. Yeah. That's, I think, a really important point is the offsets.

Yes. Maybe you're not thinking that people aren't thinking about in the moment. We wanted to ask you about your recent take on a couple of things. You'd written about CEO sentiment. CEO sentiment to me. I've always thought of it as a concurrent indicator. Tell me what the stock market's doing. I'll tell you how CEO sentiment is. But maybe it's more complex than that. In your research, you highlight a historic jump last month.

in CEO sentiment, which you can tell us about. And the point that you're making is this is not a contrarian signal. It depends. So just because the CEOs get all bowled up. is not a signal to investors to start getting nervous that it's some sort of a top. Can you tell us about the nuance that you found in your work? Yeah, let's go back to the nuances of the data was really around the historical instances of...

corporate tax cuts. And while we didn't have a change in the statutory rate, we have a pretty big cut in the effective rate for corporate America. So it was looking through history and saying, OK, if history is some sort of guide as to what this big, beautiful bill. can actually do, let's look at the times that we've cut taxes before. Does it mean earnings will grow? Does it mean GDP accelerates? And what you find is what it usually means first is CEO confidence bounces.

The second order effect the year following is GDP and earnings. The interesting part about that is, and you say, OK, it is a little different this time because CEO confidence was at recessionary levels. Without being in a recession. When? Last year? Early this year? Early this year. At recession levels. At recessionary levels. So by recessionary, I mean like bottom decile. But don't you think it made sense? Because they had no idea what their inputs were going to cost. They were flying blind.

Absolutely. I don't think it, yes, let's take it for what it's worth, right? So I'm not saying that it's worse this time or better this time. The data is the data. And you can see from a historical perspective, is that bad for stocks? No, that's exactly the setup you want. You want CEO confidence to be bottom quartile and rising. And that's exactly the signal that we're seeing, because what does that usually lead to? It means that earnings growth is more visible.

historically to CEOs. And because of that, you get multiple expansion before you ever see the earnings growth. Have we had it though? Multiple expansion? Yeah. Yes, but, so certainly we're close back to, you know, on forward PEs, close back to all-time highs. I think that when you look back historically is that it's not very clear where multiples need to be kept. When you think statistically, does it mean what we think it means?

You should see some sort of pattern between the more expensive stocks get and the lower future returns are over the next one or three years, and you don't. So when I look at valuation data, for me, again, just as a quant, like forget the meanings that we think that they have. To me, it just means confidence.

The more visible earnings are, and earnings are getting more visible because we've seen CEO confidence bounce, because we've had this legislative activity, because now the Fed is on our side, the more visible earnings get. the more likely multiples are to go higher with no cap. So for me, I think valuation- Why do multiples go higher? Because Wall Street feels more confident when there's visibility. Yes. And I think in some ways you can think about it as there's a like-

our star for the Fed is there's some sort of mid-cycle earnings, right? So in- PEs for any one period of time is probably not accurate. Really what you want to know as an investor of what are mid-cycle earnings and then what multiples should I put on it? And for me, the way I sort of piece together the story is the more expensive stocks are.

All they're really saying is, be careful, investors. Mid-cycle earnings are higher than you think, which means at some point we will look back at this and say stocks were cheaper than we thought.

So looking back, do you think that we're going to look back and say that the Fed made a mistake cutting rates given that? So they were responding to weakness in the labor market primarily. But now we're seeing Atlanta Fed GDP is saying we're going to be at a 3.9% annualized rate for growth. Yeah. The economy. Spending is still solid. We had upward revisions. And we've got this hyperscaler spending boom. Yeah.

Is now the right time to be cutting rates? So there are two things. One, level. And then two, let's talk about the growth rate for a second. On an annualized basis, you're absolutely right, quarter to quarter. But on a year-on-year basis, GDP has grown around 2%.

What we talked about, you know, historically back since, you know, since the 90s when we were investors was that 2% was that tipping point, meaning that the U.S. economy is growing what I would say quite slow relative to history. Or I wouldn't. say that it is quite nearly as dynamic as that 4% sequential growth implies. And the level of real interest rates should have some proportionality to what you think that underlying growth rate is. So we do have to struggle with what that.

underlying growth rate is. But when you look historically, if inflation comes in lower than we expect, and that's kind of my base case, because to me, tariffs are more deflationary than inflationary, then it means that the Fed- Wait, why do you think that? Because I think that they act like a tech. So yes, the prices of some goods go up, but unless somebody gives you more money, your marginal propensity to consume if you had to buy that tariffed washing machine goes down. So somewhere else-

It's exactly right. And if you think about the underlying rate of inflation, to me, it's quite slow. Core CPI ex-shelter, which we can debate if shelter is the right sort of calculation from a Fed perspective, but I think you can make a really strong argument that it's driven by a supply shock by the initial Fed hike. So if we think about... sort of core ex-shelter, that run rate was around 2%.

So we don't really have a broad-based inflation problem, and the tariffs, even the goods we're seeing, are off of this decelerating base. So it may very well be the situation that it's not a mistake because the underlying run rate of inflation, and oh, by the way, GDP growth is such that the Fed can pivot and can renormalize monetary policy from a situation which was too tight. Do you think investors have gotten better at being investors?

Sitting where you sit at Fidelity, because we're talking about this April Liberation Day moment where there was like a huge shock to the markets. And we know what professional investors did. They did what they think their job is, which is to hedge risk or protect their investors. But then when we look at the behavior of individual investors, they come through that moment with flying colors, whether we're looking at fidelity.

data or Vanguard data or Robinhood data, almost all of the outlets that catered to the individual investor reported the same thing, which is our clients not only were not afraid. They actually added to their accounts. They stayed put. They did not change their investments. There's a concept called the Hawthorne effect in science, which is when something or someone knows they're being observed, it alters their behavior.

I think investors as a group, they've read so much about how bad their own behavior is that paradoxically, they're the best behaved people in the room at this point because they know what they get ridiculed for. So I'm curious, the Fidelity perspective or the Denise Chisholm perspective on the investor class in general, how'd they do?

Yeah, that could very well be the case this time. I mean, because it was very unique where retail, I think as a group, didn't sell in what I would call almost bear market. Now, I will say- The pessimists would say they didn't have time to sell. That's exactly what I was going to say. That's the other side of the coin. And I do think that there is, and I think you're right in that the financial news has gotten to people by, sometimes when the market moves very fast, it's too late.

to be bearish. No time to panic. Right. You are paid not to react very often. And there is a relationship that I actually wrote about in that bed. in that bear market or the quasi bear market, which is there's a very strong statistical relationship between the speed of the bear market decline and the odds and magnitude the S&P is up on the other side. So that was the unique look. We always talk about being afraid of those three.

big secular bear markets, you know, the mid 70s, the dot com and then the GFC. And those were really defined by taking 300 days to get to bear market territory when the market discounts bad news very, very quickly. third speediest in history, then you're almost paid to hold your nose, close your eyes, and just wait a year. Who was just telling us about how V-shaped recoveries are actually the norm? Charkhead. That was Charkhead, Matt. He has a chart on it. So I'm curious.

Looking back at history, all of those bear markets that you mentioned, it took time to digest and to price in the worst. Well, things got worse as they went on. Things did get worse. Right. I hesitate to say that can't happen again because I feel like, of course, it can. But doesn't it feel like when the news hits, it just happens so quickly?

Yes. Well, it certainly did this time statistically. Those have to be outliers, though. That's not a business cycle bear market, obviously. Well, right. But I think that that's well said in terms of COVID was very different. And I think we have a knee-jerk reaction as to thinking COVID and the financial crisis.

where these two like almost lights out moments where you really have the U.S. economy collapse quickly for different reasons. But that's not historically the norm. Very outliers. So I think that, you know, in some ways, even professional investors, that knee-jerk reaction. is to sort of play what you know, which is the last cycle, which was a lights out situation. Well, the macroeconomic bearers would say it's almost unfair.

Because whatever we did in stimulus for the financial crisis, which was 700 billion worth of TARP and Fed takes rates to zero. Okay. This time we went so far above and beyond. We literally.

sent money in waves to every business owner, every employee of every business owner, every unemployed person. It was like, it was, it made the financial crisis era stimulus look like a dress rehearsal. So The question becomes like, it's a V because oh my God, they took $16 trillion and threw it out the window.

15% of GDP at the time. Of course it was a V. Now, in that moment, it didn't feel like it should be a V because we were hearing about the potential for millions of people literally dying. So it only seems obvious to us now that it should have been a V. And I think that's one of the hardest things. You're in a correction, even if it's lightning fast. I don't care if you're a professional or you're someone with a 401k. All of your instincts are telling you this is going to get so much worse.

And sometimes it does, but very rarely. Yeah. That's why I think patterns in history can really help.

Right. It is always different this time. There is nothing the same. You know, 2020 was very different than the financial crisis, which was different than dot-com bust, which was different than the 1990 recession that I sort of first experienced as a college graduate. So they're all different. For me, what is, I think.

interesting is that the patterns remain the same. Of buyers and sellers. Yes, buyers and sellers. Yes, exactly. And the longer your time horizon, right? So sometimes I can't tell you what's going to happen.

Obviously, I can't tell you, but the data can't tell you with perfect foresight what's going to happen in three months or six months. But as soon as you start being willing to extend your time horizon to 12 to 18 months, all of a sudden you can start to see these patterns and say, well, if I have that kind of.

view or if I have that duration, then all of a sudden I can look through this volatility to make money, right? Which is what the name of the game is. Another massive difference between today and history, our friend Michael Semblis wrote a piece recently where he said, well, you've got... $1.5 trillion in annual defined contribution and defined benefit money coming into the market on an annual basis.

Sure. And then, of course, the index and just the flows in general. Yeah. Surely that distorts multiples a little bit to the upside. How could it not? Yeah, no, that makes a lot of sense. Also a volatility dampener. It's a price insensitive buyer who shows up by appointment every two weeks. And we didn't have that 30 years ago.

No, I don't disagree. Yeah. Right. I mean, it's interesting, you know, the different ways you measure volatility, a dampener on a day-to-day basis. But then, you know, obviously on a year-to-year basis, you end up having similar volatility. Fun fact, I came to that insight 10 years before Michael Sembalist. on my blog. But here's where we're recording that part. So, but if you look at like rolling 30 day, rolling anything.

Standard deviation. Yeah. There's no difference between today and history. Correct. In that regard. Correct. It looks exactly the same. Okay, we will edit that out. No, we will not. We will definitely edit that out. John, all right. I want to ask you about housing. Sure. One of the things that I'm bullish on, not like…

crazy bullish on, but the housing market has been terrible for, I don't know, some people would say five years in terms of unaffordability. I would say that's three years because. The rates just made it so that a lot of people were frozen in place, not sure what to do, not willing to do anything. We're getting some relief on the mortgage rate front. I understand the Fed is not directly going to drop the mortgage rate. It's not how it works.

There's demand for MBS and that. OK, fine. But let's assume if the Fed is going to get down to a cycle low of 4% this time or 375, mortgage rates are not going back to 7. OK. So at the very least. We're getting some help now in existing home sales we just saw. We also saw new home sales. Like those things are starting to react to the lower mortgage rates. Is this like one of the legs to the stool?

for how this bull market can continue into 26? Well, it definitely is. I mean, the interest rate sensitives is an asset class, but let's talk about home builders specifically, have largely been left behind. I mean, they're the same multiples they always were at the trough, but relative. They're tiny.

like add up all the interest rate sensitives, they're all very similar in terms of relative valuation is what I would call statistically cheap, meaning at the bottom quartile. Relative to itself? Right. Yeah. So relative to the S&P, relative to its own history back to the 60s. So the interesting part about, you know,

quoted the GDP of 3.9%. Housing is in recession, right? Residential investment is contracting, right? This is not a dynamic US economy. And it's been a rolling recession. We're not at the troughs that we were in 2022, but we're not.

far removed from being that bad as well. And again, the stocks have been still statistically cheap. Now, what was different this time than the last time the Federal Reserve was cutting is that the last time the Federal Reserve was cutting, we saw very little translation.

to mortgage rates, or even to the 10-year treasury for that matter, partly because overall inflation or core inflation was above median levels. The irony is this time that they're cutting, core inflation on a median basis is actually now below.

those levels historically, despite tariffs. So you see that when you look through history and you say, OK, when the Fed's cutting interest rates, what percent of the time do long yields drop? It's about 70. So it's not 100% of the time. But when you're at that below. average level in terms of core inflation, all of a sudden it's 85. So you do see a statistical boost. And the only 15% that where you didn't see that translation was basically 95, 96, 98, 99, and 03, 04, where you saw this big.

inflection to 4.5% GDP growth. I don't think we're going to get there. So that leads to the transmission mechanism being much better this time around than a year ago. Now you couple this out with the starting point on relative valuation, which which is advantageous for the stocks historically.

If we say this quartile, I see this nice monotonic distribution, which is I have higher odds of builders' outperformance when they have been cheaper, which is kind of a statistical way of saying, hey, these stocks price in bad news in advance, right?

you get 64% odds when they're this cheap. When you have long rates come down, all of a sudden it's 75 and X the financial crisis, which maybe you say, this is nothing like the financial crisis. You're close to 90% odds. So that's a viable risk reward, right? really strong odds and you've got really strong outperformance. Your downside is the fact that, to your point, affordability is likely solved by housing prices either being flat or potentially going down. Not rallying.

Correct. Now, the interesting part is you can say, OK, what's my downside to home builder stocks historically if home prices fall? And there is downside in every vertical evaluation, but it's minimal when your starting point is cheap. It's about 300 basis points. What's your upside?

in terms of that starting point on valuation, if you get this transmission mechanism from 10-year all the way to mortgage rates, it's about 35%, which is the math that I look at in terms of risk reward, right? There are no guarantees. Cheap stocks could be cheap for a reason.

But if I think about the catalyst that could provide more underperformance, if I look at history and say, has valuation been able to price bad news in advance? If it's not as bad as the stocks have already priced, what's my upside? You know, you're talking about a 10 to 1 ratio.

I think that there's opportunities in interest rate-sensitive stocks, specifically in housing. Do you think that that is big enough to prolong the bull market, the ripple effect from a new housing cycle? It's a very important asset to...

the majority of the middle class in this country. Is it a third of the economy? Yeah. Oh, absolutely. So stipulating that you're bullish on the housing story, which is a big part of the economy that's been left behind for the last couple of years, you've got hyperscalers.

They're looking at increasing their CapEx spend by 30% a year. And there is a wall of worry. It's not like the average investor is going crazy all in. I'm not getting a lot of questions from my friends about the market. So you still have that dynamic. And the Fed is cutting.

Aside from the obvious, what's the bear case? It's hard to be, it's hard to not be bullish. Or said differently, like, why wouldn't we be at 22 times? Right. It's hard. It's hard to be bearish. Yeah. No, so when I look, I mean, so. The hurdle rate, when you look back in history on a rolling one-year basis since 1962, the S&P goes up 75% of the time. So for me, as a data person that's coming in saying, OK, my hurdle is pretty high.

What does that bearish precondition look like? A hurdle to find something wrong. Yes, exactly. So my going in position any given year is I think I'm a buyer. I need to argue. with myself from a data perspective, why not? And the three things that I've looked at statistically that I think give, give concern is around things being too good, which we've been talking about. Like euphoria is the enemy of.

Of markets, of bull markets. Right. You usually see that statistically at top quartile or top decile earnings growth of like 25% to 30%. We're grinding it out at 10 on a cap-weighted basis. And median earnings has gone nowhere in three years, right? That's far from euphoric, meaning that the more sort of muted it is.

the longer it can continue. So it could be durable. But that's data point number one that I watch. Data point number two is in the high yield market, right? So the credit market usually is the smarter market. It's asleep. It's asleep, but it's not nearly as tight. So we have the data going back to the 80s. Now, you can sort of argue whether it's synthetic data, but the credit market has been way tighter. The types that we're seeing right now.

Don't statistically say, okay, that's a negative risk. When you say tidy, you mean like. Of credit availability or spreads? No, spreads. So high yield versus the risk-free rate. But isn't that good? Yeah. So it is, but there is a point where it gets too good, right? So my indicators for being a seller- Why, because investors are being complacent? Correct. Anyone can raise money and all of a sudden-

Like people are taking too much risk. Right. Just like when the news is bad creates a buying opportunity because it's all priced in. Sometimes when the news is good, that creates a selling opportunity because it's all priced in. Those factors have to come together statistically. And I just think that we're along.

away from there, partly because I kind of think of 2022 as a landing. So I think it was either a very hard, soft landing. Nobody's distressed. Right. No one in the mainstream high yield indices is distressed. That's one. Two, I don't know, was there a trillion dollars in private credit ready to race in any time? One of the funniest things I saw was in 2022, the Wall Street Journal was running these articles about rescue funds being.

launched at Goldman Sachs and other large, like we're going to rescue commercial real estate. It's like, well, can we let it die first? It doesn't need to be rescued. It's almost like there's this unlimited pool of capital.

begging for the opportunity to rescue something. They were raising money for that kind of activity before anyone even asked for it. And I don't know if they put the money to work or not. I know there were some buildings that were impaired, but it's none of the predictions about.

entire cities were going to be filled with, you know, empty commercial real estate. None of that actually ended up happening. Right. So we're in a building right now. So, so I guess my point is how distorted is that data? in, in credit, in high yield, like what is there even to look at is endless amounts of money right now. I know that could change if sentiment changes, but don't you kind of have to wait for that to happen? I think you're getting nervous. Yeah. And, and that's.

creates the problem that we're all talking about, which is, you know, it's difficult to predict recessions because they come from shocks and it's very difficult to predict a shock. Okay. Bull markets.

And economies don't die of old age. That's correct. Well said. Economic growth. It's not a scenario where it's like, well, we're in year eight. Time to start digging a hole in the backyard. Exactly. That's not how it works. Exactly. Okay. Very helpful for people. Let's talk bear markets while we're on the subject. Do you count COVID and the tariff tantrum, which were both statistically 20% bear markets?

Michael and I walked down the hallway to get here, which had some of these historical long-term charts as murals on the wall, which is so cool. We love it. Where would those fit in in the history of bear markets? They're like almost.

They almost remind me of like a flash crash in 2010. They were just like anomalies almost. It's the modern day bear market. I know they were real events that had real impacts on real people. I don't want to downplay the pandemic. I don't want to downplay, you know, any, but.

Is that a bear market in real life? No, it's different. There are cyclical bear markets. You have to asterisk these things, right? By the way, you didn't talk about 2022. That was a bear market. We kind of forgot about that one. Right? No, good point. NASDAQ was down 35% in 2022. That was almost two years. All the MAG-7 got cut in half. So that one I would call a real bear market because it went for eight months? No, no, no. It was almost two years.

It was January 2022. It was January 2022. I think so. October 23. Yeah. Yeah, it was like two years. I think we bottomed in October 27th. It was like two years. We double, we kind of double bottomed. Double bottom. Okay. That's legit to me. But I think that's the debate between like secular bull markets and cyclical bull markets, right? What would you point to that bear market? What would you, if somebody says, I know it's really hard to do this. If someone says.

What's the reason for the 22 bear market? Would you say? overvaluation in stocks, or would you say the fastest interest rate hiking cycle since the 70s? Yeah, inflation, which is related to rates. But when you look statistically- Inflation caused that bear market. Inflation above 4.5%, which is the break point for the top quartile.

rising is the worst setup for the market historically. The irony is above 4.5% and falling is the best setup for the market historically. So you need to be able to pivot and understand that high prices are the cure for high prices, which was sort of the... Venus of that shape. The 22 bear market bothers me that we forget it so quickly. Yeah. I totally forgot it. It's like, oh, we've been in a bull market for 15 years. Oh, really? Because Amazon.

got cut in half. Amazon and Google got cut in half. Nvidia fell 70%, sort of meta. Apple and Microsoft held in a little bit better. But if that wasn't a bear market, what was? I'm sorry. Come on. I'm with you. I think it was. You're exactly right. It's funny. I'm reminded of Ken Fisher very long ago told me something similar about like the best bull markets are when things are really terrible. Yeah. But getting.

Just normal, terrible. Like that improvement. It's the second derivative. Right. It's not terrible to good. It's terrible to slightly less terrible is where like all the. all the real money is being made. And that kind of stuck with me. And I think about that not just on a market level, but even on a sector or an individual stock level. And it holds true. Denise, why do you think people are obsessed with

trying to guess when it's going to end instead of trying to maybe enjoy the ride and not be irresponsible and forget about risk because obviously you have to be sober about this. But why that obsession with this is going to end. This is going to end. This is going to end. don't think it's ever different from history. I think that there's always a group that's going to be obsessed with that ending. And it's probably around the fact that there's always something wrong.

Right. It is always different this time. And there's always something that you can point to to be the problem indicator. That's sort of when I look at the historical data, I think that that's where it can help you saying, OK, if you're right this time and this is what's different.

payroll revisions, uncertainty. Let's see if that's predictive. Let's see if I would bet on that as a statistician or look at that as an indicator and say, yes, I want to trim my equity exposure. And to the extent that you can't look at those patterns and see a negative.

risk reward or see some sort of pattern, then I think you have to step back and say, yes, there are all kinds of things that are wrong. And yes, there are all kinds of things that are different. But do I want to give up my 8% returns to get that?

Right. I mean, you can be right and still not make money. So if the S&P were to get cut in half from today, it would take us back to the lows in 2022. Ironic, right? Isn't that kind of wild? Yeah, that is. And think about from 2022, from 15 to 22, how— long people were saying, this is going to end badly. This is going to end badly. Yep.

Well, it's, you know, in some ways, when you think back to the 70s and 80s, the ultimate low of the bear market, when I usually give people the option, like between- What do you give for the ultimate low? So between 1976 and 1985, for me, on what- look at the charts. I mean, I think it's observable. The low was 1978. The low in 1980, obviously we corrected during that recession, was higher than the low in 1978. And the low in 1982 was higher than the low in 1980.

Right? So you could enter like when Volcker came in and said, hey, I'm going to create a recession. The low in 82 was the last of the lows. Was higher than the lows, the two lows before it. But nobody uses 82 as the low. Right. People use 75. Yes. True. True. Which is kind of odd. Yes. But my point is, like, in the mid-70s, if you sort of started and somebody would have came to you and said, hey, wait a minute, I think we're going to have two back-to-back recessions.

Never happened in US history before. And I think the second recession is going to be the longest and deepest since the Great Depression. You made money through that five years. That's how you can be right and still not make money. I'm going to give you the thing that... I think is the most worrisome stat. The NASDAQ is compounding at 30% a year for the last three years. If I only told you that stat and, and all the other stuff you just told us, you didn't know.

But you sort of knew about markets. But wait a minute. Include 2022. This is my point. Start in 2022. It's a lot different. I am. No, you're not. I said the last three years. You're doing three, four, and five. I'm doing midpoint of 22 when the NASDAQ bottomed. All right. Well, okay. So yeah, from the bottom. Whatever. Yeah. Do four years. But I'm just, but I'm saying like, all right, if you did four years, what is that 30%? I'm not doing math in my head. I did that last week. I got in trouble.

That like to me, just on the surface, I understand all the context, but it's not like the NASDAQ spent the prior decade depressed. It went up nine out of 10 years. The last 15 years for the NASDAQ, is it 18% a year? It's absurd. It is. It's absurd. So if I just. Gave you that fact, knowing everything that you know about markets, absent all of the other contexts, though, about the other things that are happening right now. Like you would say the closest thing that that looks like is the 90s.

And which was not a happy ending. I mean, just eyeballing. Like, is this worse? It's a little bit up and to the right. Yeah. A little bit. I don't know. So when I look again, so back to the statistics, right? So we had two instances out of 2022 and just recently. The S&P was up 25% over the course of, I think, 13 or 15 weeks, right? When you look at that historically, you say, okay, wait a minute. Yes.

And not just bullish, monotonically bullish, meaning that the more the S&P advances, the more likely the S&P is to advance. Wait, you bomb atomically? Monotonically. Monotonically. I love that data, too, because that can only happen in one scenario. where everybody's bearish and wrong, and everybody has to reverse course and get back in because the bad news didn't come to fruition. So that sort of historical patterns always persist.

Right. And it looks like statistically a catch-up trade, right? Meaning that you already delivered the below average returns, you know, you're sort of cherry picking your data, and then you have that catch-up trade. So I do, like, I just think it's, I'm cautious in saying that. Price creates a negative risk reward because when you see that pattern historically, momentum usually begets momentum. So it doesn't mean it won't work this time. Our friend Adam Parker had a piece out last week.

You nodded. You know him? He's a good guy. He is a good guy. So smart. Yeah. He put out a piece talking about a dinner he attended with seven other geniuses like him. And they were trying in vain to come up with. what the bear case is um these were the three that they came up with and i would love to hear which of those you think warrants the most attention from investors who are focused on what could go wrong um one of them is

the AI CapEx story falls apart in some way. Either it decelerates faster than people are expecting or it slams into a wall, but some sort of like change to what we all think is going to be this five-year build-out. Okay, so that's one. Two is AI not only does not slow down, it works so well that we start to see it show up in white collar employment data. And that produces a new risk that maybe people are worried about now, but not quantifying.

And then the third is aliens. What did I say? Solar spots? The third was debt and deficits, which we are not going to do a whole thing on. But of those three, unless you tell us we should. Of those three, what's the thing that you think maybe could be the shock? that could change the outlook. I'm not even going to guess. I'm not going to guess because, and people do ask me, whenever I present to clients, they're like, you know, what keeps you up at night? We'll turn the cameras off.

What are you worried about? And I say there are smarter people than me that know. I do try to focus really hard on what I think the market is already discounting. So that's where like whatever shock that you think you're hit with, tariffs, right? Uncertainty. What will...

be the tipping point, or will the market be able to climb the wall of worry? So where are those statistics is what I focus on, meaning that if there is a lot of statistical fear in stocks, and you can think about this from a VIX perspective. You can also think about this to get pretty quantity from a valuation spread perspective. When there is a big gap in valuation spreads, and we're seeing this certainly on a median basis in the S&P 500, when there's a lot of fear in the equity.

market and there's not a lot of fear in the credit market, then you have, again, that sort of linear relationship. The more likely whatever. you're worried about going bump in the night, the market can climb that wall of worry. We saw the opposite. The credit market was saying, hey, credit spreads are rising. We think that there's solvency issues going back. And the equity market was saying, yeah, there's no problem here, right? VIX was.

Very low, but more importantly, valuations are very low. Is that the GFC you're talking about or something else? Going into the financial crisis and also going into the dot-com bubble. The credit market was saying, hey, there are companies going bankrupt. This is going to be a problem for the cycle. We're just not in that situation.

So I would – Right. And that process, it's not one month. The credit problems started to surface in 06. The Bear Stearns mortgage hedge funds start to blow up. Yep. It's – The stock market doesn't peak until October of 07. That would never happen today. The news would get out so fast. It takes too long. But that would never happen anymore. That's probably true. For it to get out. Like if there was a Subtime 2.0 today, it would get out in 24 hours.

Yeah. We'd have the bear market in two weeks and then it'd be over. Okay. Right. Last question. Yes. You're on a desert Island. Okay. And I can only give you one CD. One CD. I can only give you three pieces of data or data sets that you can use to formulate a stock market. And I know you're not a big prediction person. You're a quant. We're trying to get to what's important to you and what would you throw away. And you could ask for anything. You could ask us for economics.

You could ask us for technicals, valuations, fund flows, sentiment. What are the three things that you would most desperately want? And if you solve the market with these things, we'll rescue you from the island. We'll take you off the island.

Median earnings growth. But prospectively, you want to know how it ends the year or the current growth? Either. You can give me the historic data. Median earnings growth. Median earnings growth. Okay, let's start there. Why is that important? Yeah, so that is actually the driver. I mean. Ultimately, we always say, especially at Fidelity, stocks follow earnings. The median stock in the S&P. Yeah. You want to note the earnings growth for each stock.

but the median across the market? Median growth, yes. I mean, you can say cap-weighted growth, but median growth is actually a little bit more predictive, especially as it relates to the job market. So to the extent that the median company in corporate America is profitable, then they tend to hire.

So that's why payrolls are a lagging indicator. Profits are a leading indicator. So you care about the median versus the overall growth level? Because the overall growth level could be like NVIDIA and Microsoft, and then that tells you nothing. about the direction for all these other businesses. Correct. It gives you a clear perspective. That's interesting. Have you ever heard that before? Of the overall economy.

Never. Oh, I'm going to put that out in my note this week. Okay. So stay tuned. We like that. Give us number two. Credit spreads, which we just talked about. So credit spreads, sometimes when they're very wide, it's usually indicative of a bottom. Sometimes when they're very tight, it's usually indicative of a top.

Are they predictive, though, or are they in the moment? So no, they're pretty predictive. So the quartiles, again, there's a statistical relationship. The tighter the valuations, the tighter the credit spreads have been, the more likely the S&P is to go up over the next year.

So you can give me trial and credit spreads, and I can say that there is a relationship here between that and future. What credit spread data do you want? High yield. You want to know how tight or wide? Yes. Okay. The differential.

Very interesting. Oh, wait, but probably only at the extremes, right? Because if they're very wide, you say, okay, stocks probably get killed. It's probably close to a bottom. Yeah. And if they're very tight, you say the economic backdrop is probably pretty good. Yeah. What about if you're sort of in the middle? Yeah, in the middle, there's like a relationship. Oh, yeah? tighter the credit spreads are, the more likely the stock market is to advance the year forward. Yes. Number three.

Yes. So number one is median earnings. Number two is credit spreads. And number three would probably be valuation spreads, which is another quanti expression if you're in the market, which has very little relationship to. Wait, wait.

You got to give us more on that. Valuation spreads of what? So it's just the difference, and this is, you know, Adam Parker would love this. It's just the difference between cheap and expensive stocks. And the names change every single cycle, but you usually have this blowout in spreads, which is an expression of fear.

when investors sell anything they think is risky, they buy anything they think is safe, and they have this gap. If you are willing to- Bigger gap means more fear. And that's good or bad.

That's good for a contrarian investing because the more fear there is, the more likely it is that you've already priced in the fear. So you actually want to see that? Yes. Okay. So that's what I would always want because if you see that very wide. Relative to a year earlier? Like what are you measuring it against? Relative to history. Relative to history. Yep.

Where are we today on something like this? On a median basis. So when you look at sort of the equal weighted S&P 500, we're still in the top quartile, meaning that there is still a lot of fear. So good. Yes. So where are those spreads, like healthcare stocks versus semiconductors?

So, yeah, I mean, you could take individual stocks like that. And again, it rotates pretty fast. So the cheap and expensive will always change. But we have like the depressed part of the market. And then the – problematically, though, the depressed part of the market is the defensive part.

right now. Does that change your opinion at all? No. I mean, it definitely doesn't change my opinion. Yeah. I think that, yes, I still want the data. Okay. Yeah. Is that the order in which those three things are important? Probably, yeah. Okay. I'm asking you that very specifically because I think we're going to title the video, like, these are the three desert island indicators investors want. So, okay.

If I spotted you a fourth, is there one that comes top of mind or those are the big ones? No, I think those are the big ones. Okay. All right. Did you have fun on the show today? I did have fun on the show. Thank you. We're going to do another two hours. Okay, great. I'm ready to talk. Denise, where have they been hiding you? I know you have a podcast.

I want to listen to your podcast now. Sure. Let's tell the audience what it's called. It's called Market Insights Podcast. Market Insights Podcast, produced by Fidelity. Produced by Fidelity. And you're going weekly, monthly? Monthly. Monthly. It's monthly, yes. Who do you talk to?

So it's a Q&A with sometimes our diversified portfolio managers, sometimes our quant portfolio managers, sometimes research. Anybody who will talk to me, I'll talk. It's crazy how many smart people you have just in this building alone.

Like Michael and I have to bring in guests from the outside because at a certain point we'd be talking to the same five people. You have a whole building filled with fidelity research analysts. It's got to be pretty exhilarating. It is. It's fun. There's no shortage of people to talk to. Are any of them like begging to be on the show that you're just.

I don't think you'd be good for this. This has been so much fun for us. I really want to say thank you for doing this. Everyone follow Denise's podcast and you're a LinkedIn person, which I am too. Nice. Okay. Why do you publish on LinkedIn? Yeah. I think it's the easiest way to reach a client audience. I think that's right. You know everyone on LinkedIn at a minimum has a retirement.

portfolio. That's right. You're not talking to like 20% investors. You're talking about a hundred percent investors. Okay. I totally agree with that. I think that's why I like it too. Are there any things you'd like to say to us before we conclude? I'm just kidding. No, this was great. All right, Denise, thank you so much for joining us. Guys, this has been Denise Chisholm of Fidelity Investments. Please follow her.

everywhere she's posting, LinkedIn, podcast, et cetera. Thanks for watching. We'll talk to you soon.