The Upside: April market moves with Denise Chisholm

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Subtitles are AI-Generated.

 

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As global markets continue to shift how might investors look at

 

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navigating current sector dynamics, and how exactly do oil prices

 

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function, and what might continue to shape prices for consumers?

 

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Joining me today to share her expertise, as well as her top and bottom sectors,

 

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is Fidelity Director of Quantitative Market Strategy, Denise Chisholm.

 

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Welcome Denise, it's great to see you.

 

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Hey Jordan, it's great to be back.

 

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We mentioned oil a little bit off the top and prices seem to be all over

 

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the news, can you explain a little how prices rise and fall in terms of

 

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conflict or turmoil?

 

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Certainly, when there is conflict involving oil supplying regions

 

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you tend to see price spikes based on the fact that there is a concern

 

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around supply dynamics.

 

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When supply goes down, holding demand constant, price actually goes

 

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up. The concern when you look through in terms of the mechanism

 

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is a tax hike, essentially, on US consumers as

 

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you have to pay more for gasoline prices, prices at the pump, other

 

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energy prices, because in the short run your demand is relatively inelastic,

 

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meaning that you can't reduce your trips to the grocery

 

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store or anything else. Tax hike for the US consumer is

 

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headwind number one, or concern number one.

 

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Concern number two is the throughput to inflation, overall inflation,

 

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because energy goods and services are just a portion of inflation but there

 

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is concern around the fact that this would filter through into other prices

 

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as well.

 

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History can kind of help tackle what the impact is, at least historically.

 

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There's been a lot of headlines suggesting that this might be a return

 

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to the '70s and '80s. I think what investors should really understand is

 

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that this is hitting a very different economy.

 

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Oil intensity has declined substantially, meaning that the US needs

 

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less barrels of oil to produce the same amount of GDP.

 

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If you rebase oil prices in corporate profits,

 

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meaning that how much of an impact would it be, to have the same strain that

 

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we saw during the 1980s for oil prices, oil prices would need to

 

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be at $1,000 a barrel.

 

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That's not to say that higher oil prices don't hurt currently but it

 

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is to say that this is very different from what we've seen in the '70s

 

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and '80s.

 

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The other thing in terms of a throughput to overall inflation is

 

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also history can help. What you usually see when oil prices

 

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spike is actually ...

 

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the higher the oil price spike the more likely they

 

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come down in the future, as high prices cure high prices.

 

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What you see is that it would take six months or longer, historically

 

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speaking, to have a higher than 50% chance of the

 

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rest of the CPI actually accelerating with it.

 

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You've mentioned a little bit about how prices rise and fall.

 

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Looking now as investors what sort of elements of the market should they

 

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be paying most attention to because the headlines seem to be shifting daily.

 

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What are your thoughts there?

 

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This is the trickiest part because I think that there is a knee-jerk reaction

 

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to follow the news given the fact that in the short term oil is inversely

 

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correlated with stocks.

 

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The question for a long term investor, is that the right strategy?

 

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Should you think about trading on news flow?

 

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The problem as it associates with the market is that we know empirically that

 

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markets bottom on bad news.

 

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If you're selling on bad news it sort of calls the question what are you

 

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going to buy back on? You have to buy back on even worse news.

 

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It's very complicated looking at headlines as a signal through

 

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history.

 

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What I have found more helpful is looking at fear indicators

 

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or sentiment indicators in the market because that tells you ...

 

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it certainly doesn't tell you that a bottom is in but it starts to tell you how

 

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much of that is priced in ahead of time.

 

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It's not that you need ... remember, historically, you don't want to wait for

 

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the all clear signal. We saw this over and over again through history.

 

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I think that there is still a knee-jerk reaction that maybe we should wait

 

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until we know the ceasefire is holding and that there are still more

 

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barrels transporting through the Strait of Hormuz.

 

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By the time you have the all clear signal, historically speaking, you've

 

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usually missed the bulk of the move in stocks.

 

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That's very helpful.

 

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You mentioned long term investing, looking at the broader US equity market how

 

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well do you feel the oil stock has been priced in because it seems like there

 

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has been an element of that. I'm just curious your thoughts.

 

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Back to the data that I look at, that I find interesting and unique, I would

 

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say that I'm not interested, or in some ways I don't have the process

 

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to pick bottoms. I usually look over a longer term time horizon like one

 

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year. This has been the interesting thing about whatever we call this

 

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cycle since, really, the pandemic and since what I call the kind of

 

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soft hard landing of 2022, there has been much more fear in

 

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the equity market on a persistent and pervasive basis as soon as

 

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there is any kind of what we think of as a shock.

 

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You tip down into recessionary sentiment very, very quickly relative

 

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to any other cycle. You can measure it in terms of the American Association of

 

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Individual Investors.

 

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We're back down in that bearish sentiment, typically seen only in recessions

 

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like 2022 and 2020, and briefly in the tariff tantrum.

 

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Once you get back to those sentiment levels you see ...

 

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if you're just willing to extend your time horizon over 6 to 12 months you see

 

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a very positive skew. The more bearish sentiment is the more

 

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likely the market is to go higher despite the fact that the bad news

 

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will remain. It's back to that be careful waiting for that all

 

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clear signal because COVID wasn't resolved, arguably,

 

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until late 2023 but the market bottomed in 2020.

 

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Inflation, you could argue, is still not really resolved in the US but

 

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yet the market bottomed in 2023 into that 2022

 

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low. The market moves on second derivatives and that's also

 

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important to understand.

 

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You need to be looking for news to get less bad as opposed

 

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to good news.

 

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As opposed to perfect, right, getting the sort of all clear from the headlines

 

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to say everybody come back in, you're sort of looking at that moment, okay,

 

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things seem to be trending upward.

 

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Correct. Well said.

 

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You mentioned the pandemic a little bit as well as

 

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the sort of tariff shock. Are there other instances of historical precedents

 

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for something like this or is there one of those that you're sort of focused on

 

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the most, or the data is the most interesting?

 

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I actually wrote a note on this and I think it's intriguing because all of the

 

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parallels to the '70s and '80s, people were saying the oil price spike is like

 

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that and look at the economic pain that actually ensued in the '70s and '80s,

 

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maybe we're in for that, there's more downside risk.

 

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Look, all of that might be true but the interesting pattern in the '70s

 

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and '80s to me is that stocks bottomed well before either

 

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of the two back-to-back recessions, meaning if you look for the low between

 

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1976 and 1985, the recessions were in 1980 and 1982,

 

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it was not the longer and deeper recession of 1982 that was the ultimate

 

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low. It was 1978 before either of those things happened.

 

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Now, yes, you had downdrafts so stocks did correct by about 15%

 

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into the 1980 trough, and 25% into the 1982 trough.

 

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The 1982 low was higher than the low in 1980, and the low in 1980

 

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was higher than the low of 1978.

 

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If you had said in 1978, hey, we're gonna have two back-to-back recessions,

 

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you've got it directionally correct in terms of the economic pain

 

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seen. Stocks actually went up through it.

 

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That just highlights the fact that, look, I think we all struggle with what are

 

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the impact of oil prices gonna be, how long is this gonna be closed, all of

 

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that, and just shows you that even if you had perfect foresight and knew

 

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exactly what was going to happen to the economy the call on stocks

 

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is not straightforward.

 

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That's why you have to get back to, I think, the very difficult math of what

 

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the market is actually discounting.

 

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Looking now, discounts or otherwise, your top and bottom sectors.

 

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This is always a great place to end.

 

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Let's start with your top sectors, Denise, let's go there first.

 

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Top sector is technology which is back down to bottom tercile levels in terms

 

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of valuation. If you're worried about excessive CapEx growth or if you worried

 

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about the Mag-7 concentration risk, I think some of that is priced in

 

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so the risk-reward is much better now.

 

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Industrials is number two because I think we are in the nascent stages of what

 

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could be a long lived manufacturing recovery, and I think things like

 

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transports and machinery are levered to that.

 

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Three is, it's a little bit of a tie between financials, which I

 

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think have also priced in a fair amount of bad news, and housing stocks, or

 

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homebuilders, in the US which again, I think if you're worried about recession

 

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risk you want to gravitate back towards sectors that you

 

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think have already priced in the recession, and that's where I see those two.

 

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On the bottom three I would say anything defensive that is still at risk

 

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for higher energy prices from a margin contraction perspective anyway, which

 

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would be staples. I would add utilities there which had been one of the best

 

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defensive sectors but still act like a defensive sector, and

 

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they're well-priced as well.

 

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Then I would add in, and I just penned the final touches on my note for energy

 

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stocks, and I would add in energy.

 

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For the first time, basically, in history energy is

 

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trading above 20 times and above a market multiple

 

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now, not on trough margins.

 

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That has not been a good setup historically.

 

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Energy seems to be the flip of the market where I say, look, I think that

 

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based on the fear I'm seeing in the equity market relative especially to fear I

 

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am seeing in the credit market, that is well-priced for the bad

 

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news. Energy seems to be opposite, meaning that a lot of

 

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the good news is already priced into energy stocks so I would say buyer beware

 

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on that end.

 

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You mentioned you've got something coming out, can investors find that on

 

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LinkedIn? Is that correct, your LinkedIn page?

 

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Yes, that's exactly where you can find it.

 

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You can go to LinkedIn and then you can subscribe to the newsletter, that way

 

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it'll come directly to your email so you don't have to fish around on LinkedIn.

 

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Fantastic. Well, thanks so much, Denise, for your time.

 

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We'll see you next time.

 

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You're very welcome.

 

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