Heavy Rotation

news sparks, some historic moves in stocks this week. Finally, small caps value the reopening trade powered higher at the expense of big tech, just after a week after election results had investors thinking that the status quo leadership was here to stay. Another head fake or is this time actually different? Sara, One thing that will not be different about this podcast is that we're all the fans of

crazy things out there. We will conclude with our crazy Things segment, And Sarah, I've got a feeling that this week's guest came in strong with the crazy things. If history is any guide, if past performances indicative of future results, I think this week's guest is going to give us some stiff competition. Do you a great I'd have to agree with you. I have I have a feeling that

we both might go down this week. Mike, all right, Well, no pressure on you, guest, mystery guests whose name is Lauren Goodwin, economist and multi asset portfolio strategists at New York Life Investments. But Lauren, you even pressed me with your crazy things in the past. That's a compliment. By the way, the bar has been set high. The pressure is on. No pressure here, no pressure here, but there's

actually pressure every week. We know, go Laard. I guess let's start with that rotation we saw early in the week in the markets this week that was by all definitions, pretty crazy in itself. I'm gonna give you my take on things with the caveat that. As you know, I'm I'm kind of a cranky old man, and I this could be way off base. So I'm gonna give you my rent, and then I want you to tell me if I'm right or wrong. But to me, I think what happened and I started muchtion in the instruction. This

very well could be a head fake. You know, we saw later in the weeks sort of a reversion back to to what it looked like before the vaccine news. But I feel like investors are rotating out of growth and into growth, just the growth that they expect should

the vaccine come, should the economy reopen. And to me, it's it's kind of you know, it sounds like semantics, but it's kind of an important distinction I think to make because I don't think it's necessarily about a confidence in the value factor or the size factor with small caps. I think it's just investors love growth. They see these beaten down cyclical sectors perhaps rebounding very strongly next year. They want to get in on that growth that's coming.

You know, I think that that alone sort of makes it sort of a temporary rotation, you know, a rented position, rather than a sort of convicted owned position. Would you agree with that sort of thing, And feel free to tell me I'm crazy, I've I've heard it before. No, I agree. I mean what you're describing as investors rotating out of growth stocks and into economic growth these securities that tend to do well when economic tides are raising

all ships, so to speak. And you know, I think investors are faced with you know what feels like and really is a once in a decade potential actual rotation into value. You know, we've discussed time and time again. How you know it's a head fake this time. It's a head fake this time. Unless we see durable economic growth, we might get that. That'd be great news, that'd be

super exciting. But the way we're positioning is thinking about it kind of like a barbell, you know, if you think about the companies and the sectors that outperform over time, so over you know, years and decades rather than weeks and months, it's going to be those that are adding new innovations to the economy, and then secondarily the ones that provide resources to those innovators. You've got to be positioned to capture that, you know, equity growth or um

you know, long term growth. But you know, next year, I think that we we get some boost from the economic growth, and so we're we're dipping into that as well for the first time, frankly in a long time. It feels good. It does. But something I think a lot about, Lauren is the fact that before COVID nineteen hit, before we were all discussing this earlier in the year, the narrative back then was not that we were going

to see this unbelievable pickup in growth. Rather, people were worried that we were at the end of an economic cycle, that the bull market was long in the tooth. Then we had this exogenous factor just come in and take over the entire year. We still don't know how long it's going to last. We do have positive news on the vaccine front, which we are all very, very very

excited about. But what has truly changed in the backdrop beneath COVID nineteen to make people believe that even after a pandemic, even after this exogenous caused recess shin that we're dealing with that even though we were not expecting growth prior to this, we should expect growth now. You know, I think a couple of things. The first is that the markets aren't necessarily reflecting the real economy um in

terms of what works and what doesn't work. And I know it just said that we're excited about economic growth raising tides for markets, but you know, there's certain aspects of the economy that are reflected in financial markets and other aspects that are not. So you know, that's part of it. That the sectors and styles and securities that have had access to capital are the ones in financial markets, and so there's a winners and losers aspect there that

I think is playing out in this dynamic. But the other is that the economy has just been a lot more resilient in part um in large part fixed to government support over the course of the year than really anybody expected. I mean, when unemployment benefits UM started to taper off in July, we expected that August and then September and then October would reflect just the true nature of economic pain that some of these service sector parts of the economy are feeling, and it just hasn't been

the case. UM. You know, we see it in UM, in consumers that have been saving, we see it in the corporate sector companies that have been raising debt in order to have cash on hand, dry powder to capture really to bridge the gap created by COVID. But they can now be used to capture the economic upswing if that's what they choose to do. And so there is an underlying strength there that again the financial markets side

of the economy can leverage. There are of course vulnerabilities involved in that, and as investors we have to be frankly very humble in the face of those vulnerabilities, whether it includes rising debt levels, vulnerabilities to the labor market, which I'm particularly worried about. But it's it's just that the economic environment has been a bit more resilient than we anyone would have expected in March or April. I was reading your notes before this conversation, Lauren, and I

know you're you're pretty optimistic, constructive antiquities. I'm a worry word, So of course I I skipped right to those vulnerabilities you're talking about. And one that's sort of caught my eye is you you talk about stranded assets. What exactly do you mean that that? I mean, I'm kind of picturing maybe the energy sector spended assets if this move to renewables picks up steam. Is is that part of it? Is there anything else that that you would consider a

stranded asset that we should be on the look fo. Yeah, that that's a really really good way to think about it. Um, whether it's the energy sector, you know, I think suburban malls. We should be careful to point out that these aren't really surprises. You know that the energy sector has struggled for quite a while. Um, some of the some of these aspects of real estate have struggled for a while, and COVID has only accelerated those developments rather than creating

them out of nowhere. There could be some partially strained assets if we think about um you know, focus on business, travel, office space, these types of things. One of the things I try to point out though, when it comes to these vulnerabilities is that as investors we have the enormous challenge and and also privileged to think about the other side of them, the opportunities that come from them. And so,

you know, you mentioned energy. Potentially there's oil and gas assets that end up being stranded, you know, wells and rigs that end up shut down. But of course there's alternative energy infrastructure, battery power, solar wind that you know, charging stations that become an opportunity. The same is true in in other strained assets like real estate. You know, suburban malls can become virus testing centers or you know,

call centers, which has very much been the case. UM you can have you know, maybe folks use um less office space in the future, but it's used more creatively. There's more spending done on virtual technology that integrates those of us who prefer to be in office versus those that don't. UM So we try to think all the way around a problem when it comes to investment opportunities,

rather than only focus on the stranded assets. You just gotta be careful to make sure you're not overly invested in in the ones that end up being actually stranded. Entire malls as virus testing centers. I mean, I hope we don't need that in a couple of years. It's a little bit of a different um. I don't know if you played, um, what was that board game like malls game where you had to set up your stores in the right place. It looks a little bit different

if it's virus testing, not as glamorous. So I want to bring energy into the picture. Something I heard a lot this week as of Wednesday, coming into the day or by the end the day Wednesday, energy stocks in the SMP on track for the best week on record. All of a sudden, I hear people bubbling up with enthusiasms saying, you know, this is the time for energy,

this is the time for banks. Do you truly believe that we are going to see growth enough to lift those areas of the market as well, or do you have to think about individual micro strategic the environment basically for each sector individually. Like energy, Yes, maybe you're going to get economic growth, but isn't the energy industry facing a lot of indiscriminate challenges itself. The idiosyncratic nature of

some of these value sectors is really important. So in in energy, of course, it's the you know, secular move lower in oil prices that's made it very difficult for energy capex. A lot of consolidation in energy as we went through a manufacturing recession just a couple of years ago. Similarly, if you think about banks interest rates, the path of interest rates is a real challenge, you know, you have

if you expect economic growth to move up. If you don't expect a major curve steepening or or maybe not a durable one, then you're probably not going to be uh super jazzed about financials for the next several years. Um. And so you know, as we've discussed, I think these are tactical moves. UM. I certainly have colleagues who I very much respect to who who disagree, who say that, you know, some of these sectors have been so beaten down that there can only be an upward move from here.

But I gotta tell you, sometimes I mean, we just we're talking about stranded assets. Sometimes securities are cheap for a reason. Um, and so as we as we look through these value sectors and and and try to capture the part of the rising tide that raises some of the ships, it's really important not to fall into value traps.

And I wouldn't say necessarily that energy or financials are you know, value traps across the board, But that's where investors work is really cut out for them, is determining, you know, where are there, you know, potential long term opportunities versus really just a few months worth of rotation that we haven't seen in value for for quite some time.

I'm glad you brought up sort of the idea of a tactical trade versus a more fundamental long term trade, because I feel like so much of this year and the current market positioning and and anything you hear people talk about is kind of seeing through just trying to ignore this year completely, trying to focus on life getting back to normal with the vaccine. We've got something resembling clarity on the election, maybe uh, not quite crystal clear clarity,

maybe possibly a little more clear than it was. Maybe I don't know, but I do wonder about the rest of the year and early. I mean, this virus is raging. Every hour there's another state announcing a new restriction, sort of going back in the semi lockdown mode. Does that have the potential in your opinion, to cause a deterioration and sentiment in the very near term, say between now and and when the vaccine is really available at your

your local CDs. I mean, this kind of brings back the idea that stimulus and the idea we're not It doesn't look like we're getting another one at least until say the middle of the first quarter of A lot of those unemployment benefits that the federal government gave to gig workers and and some sort of that other stimulus is all rolling off at the end of the year. Those programs are expiring. I'm just worried about the next few months. I mean, is is the market you know?

Is everyone just gonna position for the other side of of the tunnel and not worry about what the next few months are gonna look like, or do you see the potential for a little bit of volatility as the case counts grow, the restrictions come, come on, people lose those extended benefits and maybe after the time up in the savings that that high statements rate you're talking about, or is it foolish even bother thinking about the next three months if you're a long term investor, I mean,

how do you how do you think about this sort of near term compared to the Rosey outlook for say that the back half of yes to all of the things you just said, that's right to answered. By the way, just Mike is right, You're you're now officially a cranky old man. He's going to be inviting you on the podcast every week from that one with but with the mandatory discretion that you say that every time this podcast has been brought to you by Mike Lauren to say

that he's right. Affirmation bias is, you know, I think the cyclical trade, the value rotation, is the tactical trade. So I do think that investors are, as we are, frankly, starting to move in that direction on the expectation that you just can't time the vaccine announcement. Um, you know it's coming soon, you don't know exactly when, So you

move into some of these value and cyclical sectors. That is to a certain extent the tactical trade, because what has worked during COVID is also to a certain extent what worked over the last five ten years, which is that when you have a low interest rate environment, a global search for yield. None of these, by the way, are changing anytime soon. If you think, you know, in terms of years and decades, UM, that's that's a story

for US growth, tech equity. UM. You know, there's no alternative, and and that if you're seeking that yield, you have to look for it in these securities. I don't think that as a secular story that's likely to really change, and so the value rotation is local move or the i'm sorry, the tactical move, but I do think that there's going to be near term volatility. The little elf in the room, elephant Elf, the elephant of the room that we haven't discussed here of course. Elf, it's almost

the holidays. I'm so scared of our elf on the shelf. I I don't know if you've seen the the memes of elves on the shelf inside quarantine chambers, but I'm absolutely doing that in my home. So the oh my gosh, the elf on the shelf in the in the room, of course is um. The is policy support, you know, UM, I do expect that we're going to have several fits and starts. Well we learn more about this vaccine, whatever

it looks like, it's gonna be hard to distribute. It's going to take, you know, a year and a half before we get to anybody who isn't a health care worker or vulnerable segment of the population. You know, any number of things that could be challenging about the vaccine are going to cause fits and starts in this rotation.

I think we should just expect it. But I also think that those moments of weakness in the face of policy support, not only from the FED but also potentially on the fiscal side, those moments of weakness are going to be buying opportunities for investors who expect the second half of one to have that real economic resurgence, and so volatility is my base case scenario. But I don't think it will stop the rotation. And I do think

that rotation is a tactical trade. That's your that's your you know, six to twelve month idea, it's not your three to five year idea. So it's my turn to be the cranky one now, and maybe maybe it's maybe it's possible. Uh, maybe it's due to proximity or timing of headlines that have been coming out. But just before we began recording the podcast, we got headlines from Chicago about them starting to impose lockdowns. We have sharper restrictions that are going to begin over the weekend in New

York City. I mean, part of this does feel eerily similar to back in March. Granted we know much more now, interest rates are at zero, but this sense that because you have a vaccine coming one day, there is plenty of enthusiasm from investors in markets. Oh, COVID nineteen, We're not going to have a lockdown to the extent that we saw it back then. Do you get the sense at all, though, that people are being a little bit

too enthusiastic about the possibilities here? Uh? I mean, like, I'm not completely convinced that no, we won't see lockdowns like we saw back then, but that we could see some pretty strict economic restrictions if these cases continue to rise. You know, if I put on my economist heet, which I'll also call my real person hat, although I don't know if economists real people. UM, and you guys, I hate being the optimistic one. I'm so used to being the doom and gloom in the room. Uh usually I am.

But Mike's Mike's getting in my head. Um well, he when he paid me off to say he's right, he also paid me off to be optimistic in your stead. But if I put on my my real person, had my economist set, this virus is completely out of control. I mean, a hundred and thirty thousand cases in a day, sixty thousand hospitalizations. I mean, this is this is an enormous risk to human health. And you know, I think that we who were in New York or in other

cities that experienced um, really bad first waves. You just you know what those ambulances feel like. Um. And the impact to just real people and real families is happening, and it does frustrate me to a certain extent that this doesn't appear to be what market story or economic story reflects. You know this, this virus is out of role and it will have an impact. Um I And I agree with you, Sarah. I think that we will see restrictions to activity, but the expectation that it's not

gonna last forever is really important, you know it. It helps companies to start making plans um, you know, saying Okay, if we only need to make it six or nine more months, then yeah, we you know, maybe we shutter our doors, but we don't have to close down entirely. Those expectations are really important. It might mean that you can invest a little more in you know that you know, factory or warehouse because you're going to be shipping more. It might mean as a household that you can plan

your trip. Um. You know, you stay inside for the next six months and don't leave your house in Chicago because it's freezing, but you plan that trip to Hawaii for July. I mean, expectations are really really important. And UM, so I do think that there's you know, despite this um you know, dark winter, there's you know, the dawn is coming, there's a light at the end of the tunnel, etcetera. And and and that those expectations are what matter for markets.

UM And so real real person Lauren does get does get a little bit frustrated by that. UM, But I think we do have a case to be optimistic. Stand clear of the craziest things we saw in markets this week alright, Mike, I trust that you have something a bit more creative though this week, and I wonder if we have a price is right? Maybe? Oh? Shoot, no prices Okay, I can turn the cinema prices right, you always can. I can turn the cinema prices right. All right.

It's been a while since algorithms and high frequency trading has made the news, which much to my sugrined because I love that stuff, I love all the controversy surrounding it. But we had a good story this week out of London. UM Citadel Securities, the big hedgephone and market making firm out of Chicago, is suing this former employee in London because they allege he left to go to another hedge fund and brought with him basically the secrets of one

of their their main algorithms for trading stocks. Um, alright, let me figure out how to make this as a prices right. There's several there's several really interesting numbers. They're gonna ask us how much he's suing them for or is this going somewhere else before I we make that the prices right number. For one thing, they say, this algorithm, this one algorithm and I guess maybe just calling it an algorithm is a little too uh simplified. It's a

a trading automated trading strategy. It's called the ABC strategy. They put a lot of time into this strategy, not a lot of time in the name of it though, So the ABC strategy is what it's called. They say this one strategy alone makes hundreds of millions of dollars a year for Citadel. It costs a hundred million to develop. Um. And what's really fascinating is the for that the guy was being recruited by g S, a uh London based head firm, is uh basically saying it's not that valuable

to us. In fact, the guy who recruited him printed out the document that it's based on, and his argument for why it's not that valuable is he said, um, you know, after I got this, I used to to jot down some personal notes, including quote, the measurement of a towel rail he was planning to fit at his house. So I don't know, it's funny to me to picture these hedge fun mesters of the universe, uh being like the rest of us. And you know, after a long

day of making millions of dollars. They go off, and now I gotta hang a towel a towel rack in my bathroom, and I'm gonna take the I'm gonna take the measurements on this this uh printed out algorithm worth? Uh how much is it worth? Sarah? That's the prices rate? How much would you sort sue if you were Citadel? Al Right, so you said a hundred million went into making it. If it makes them a hundreds of mill million dollars a year, I mean I'm I'm going to

go that they suit a couple billion. Keep my poker face on, Lauren. What would you sue for if that was your algorithm plus lawyer's fees based on standard prices? Right? Roules. I got to give it to Lauren because I think if you go over, if you go over your only forty million there, I would go for a lot more. Really, I guess maybe it isn't actually that valuable. I mean, forty million is obviously very valuable. All right, Lauren, Now the pressure really is on. What is the craziest thing

you have for us this week? Alright, guys, I have three things to say, because if you know, the market gives you this many gifts, you have to take advantage. So the first thing is that in my first attempt to shock and awe I I failed miserably, which is that when I listened to this podcast and I hear Mike's voice say hold on to your parachutes, it's what goes up. I was like, I gotta find one of parachutes, and I just couldn't. There is nothing good about that's truly,

by the way, that's not me. That's our very best impression. Stand clear the closings. That's the Charlie has the most soothing voice. Yeah, he's the voice of the New York City Subway system and he also works at bloom Big Radio. So the second thing is we got to get to the sigmas UM six standard deviation rotation and value on Monday, Like that's crazy UM and fifth screen standard deviation move out of momentum and UM as the Twitter's fear would say,

um over the course of the week. When you see UM, you know a couple of six sigma moves in a single career or a single decade um either you've lived a bazillion years or UM or the models are wrong. Yeah, Twitter was blowing up a bit on Monday over over these Yeah, you know, you could you could, um, you could have argued on Monday that maybe it was a little bit overblown. UM. But we'll see, right, we'll see

if that rotation story ends up being true. And then the one more thing I'll add, because the stigmas are a little too easy. Um. It's just kind of an interesting, UM note about seasonality because I think a lot of folks are going to focus on you know, usually the couple of months after an election are really positive, um. And historically that that does tend to be true. Um, and even not in election years, the November December months

team tend to be pretty positive for seasonality. UM. But we're already up um, you know, eight percent months to date, so in the last couple of weeks, and that seasonality, UM, when we think over the last thirty years, is has been much you know, two to five um, over the course of those couple of months. And so I'll we we do look at seasonality. We think it's interesting we've

already gotten a lot um. And so with all the risks both political and economic, over the next couple of weeks, we expect a little bit of bumping nous headed into the end of the year. Has anything this year? Yeah, but has anything this year aligned with historical normality? Yeah? I love that six What was it? A fifteen sigma move out of momentum. So we're going to read about some hedge fund that had like the most out of the money puts on some momentum ETF or something that

is up for the year. It will be the one hedge fund that's done well in the last ten years. We'll be looking for it. That'll be Mike's crazy thing. Uh what in a couple of months. Probably probably keep an eye out for that. He'll be on the lookout. That was good. I give it to Lauren. I think she came through. She lived, She lived up to the hype. No, no parachute though, next time. Maybe a golden parachute next time. If you can find a parachute related crazy thing, we

will cancel whatever. Guess I'll call in. Oh please do, please do. And that's a reminder for everyone else. We already told you the number twice. But calling to you if you have any ideas, if you let us say you're crazy things, you have any questions for Mike and I or our guests, we will happily play it on the show. But with that said, Lauren Goodwin, thank you so much for joining us this week. Thanks for having me, guys, always a pleasure to catch us What Goes Up. We'll

be back next week. Until then, you can find us on the Bloomberg Terminal, website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show on Apple Podcasts so more listeners can find us, and you can find us on Twitter, follow me at Sarah plant Sec, Mike is that Reaganonymous, and you can also follow Bloomberg Podcast at podcasts. Also thank you to Charlie Pellett of Bloomberg Radio and the voice of the New York City Subway System.

What Goes Up is produced by Jordan Gospore. The head of Bloomberg Podcast is Francesco Levie. Thanks for listening. See you next time.