The Upside: February Market Moves with Denise Chisholm

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Hello, and welcome to The Upside. I'm Jordan Chevalier.

 

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It's been a busy start to the year for investors with the US bull run

 

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continuing, some Fed uncertainty and the rise of gold and

 

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plenty happening across the geopolitical spectrum.

 

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Joining us today to tell us what the data is saying about these key market

 

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moves as well as AI, US equities and, of course, to provide

 

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a sector update is Fidelity Director of Quantitative Market Strategy,

 

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Denise Chisholm. Denise, it's great to see you.

 

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Great to see you, Jordan.

 

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We'll get right into it. We've got lots of questions here from investors, they

 

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knew you were on the show.

 

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We're going to start here with sector opportunities.

 

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Now, what is your research pointing to when looking at specific sectors

 

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that investors should be looking at?

 

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If you think about the recent thesis coming into this year it was really all

 

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about durable earnings growth supported by the tax cuts that we saw last year

 

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and the Fed being able to renormalize policy, probably

 

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last year and this year.

 

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But into this I think we can ask ourselves, is the data supportive of

 

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that thesis? This week we saw a very important signal that not

 

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only reinforces the durability but also talks about sector

 

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opportunities from a signalling perspective.

 

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That's the inflection in ISM, which is the manufacturing diffusion

 

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index. This cycle has been very different than any other cycle.

 

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I mean, every cycle is always different, but for the better part of three years

 

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we have seen either a manufacturing recession or a manufacturing

 

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malaise. This was really in line with the fact that the median earnings growth

 

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for the median company in the S&P was in contractionary territory.

 

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We are seeing all of that emerge.

 

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We had a 20% jump in manufacturing new orders so that negates

 

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the probability that some of what we are seeing is like a false start that

 

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we've seen over the better part of three years.

 

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That inflection usually means that manufacturing upside is

 

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durable, earnings growth is durable and from a sector perspective

 

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the more industrial-focused sectors and sub-sectors

 

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have the highest odds of outperformance.

 

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This is an important cyclical inflection that usually supports industrials

 

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and manufacturing-related stocks and sectors.

 

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Denise, that's great. I think there's no surprise here that our next question

 

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is on gold. There was a bit of a sell-off last week and things have

 

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recovered slightly. Can you take us through your thoughts, gold and silver,

 

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commodities as a whole, what are you thinking?

 

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I will say the interesting part when I look at the data is, you know, last year

 

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and into this year we have been talking about the AI bubble and is it a bubble

 

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in technology? If you just define a bubble in terms of the percentage rise

 

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above the 200-day moving average you'll

 

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see the Nasdaq and the dot-com bubble was about 60% ahead

 

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of its 200 moving average and gold is about

 

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the same. And yet, no one has talked about it at all as

 

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a bubble. Look, I mean, that's sort of the interesting side note that I

 

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think is interesting as it relates to gold but when you look at the data, RPMs,

 

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I'm equity research, so they come to me and they say, what does this mean?

 

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Gold is up 80%. It's a top quartile move.

 

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Does this mean I should be scared in terms of equities?

 

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Does that mean it's a move towards we should be worried about inflation?

 

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The interesting thing is in the data, and we have the data obviously going back

 

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to the '70s, is that there is no consistent relationship between gold

 

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and a dollar debasement or higher interest rates

 

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or even lower interest rates, or an equity market advance, meaning

 

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when gold is up in a top quartile way 50% of the time equities go

 

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up over the next year and 50% of the they go down over the year.

 

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It's really not a pervasive signal in any way.

 

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I think gold's strongest correlation is to

 

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the commodity stack, in part because, at the end of the day, it's

 

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been a really solid supply-demand dynamic relative to

 

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the rest of commodities. I think that that is what is different this cycle for

 

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gold. You have seen central bank buying of gold that is

 

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different this cycle than any other cycle.

 

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The problem as it relates to determining whether or not it's a bubble is that

 

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gold, unlike stocks, doesn't have a valuation, it doesn't have

 

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a dividend yield. I think that there is some angst over how

 

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high is too high.

 

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Now, I'm not a central banker but if I were to be one I think you

 

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would be worried about having too much of your reserves in something that can

 

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go up 80% and down, on a silver basis, 35%

 

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in a day. It may very well be that there is an underlying

 

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driver to gold demand but that may have gotten

 

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too far, too fast right now.

 

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I'm pretty cautious on the moves because as a portfolio manager once told me a

 

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long time ago, anything that can go up 80% can go down 80% as well.

 

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Certainly very insightful. I know people at home will definitely appreciate

 

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those comments.

 

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Staying with gold a little bit, part of the gold story was driven by the

 

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appointment or the discussion of former Fed official Kevin Warsh

 

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being tapped to lead the Federal Reserve.

 

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Does this mean that gold is no longer a hedge because he's

 

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going to cut rates and respond in a way that will be a little more

 

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favourable?

 

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Yeah, it's a little bit sort of the bubble portion about it.

 

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I think that the dollar debasement trade around the lack of Fed independence

 

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this cycle was one of the drivers to gold.

 

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Again, that was the thesis behind central bank buying that you do actually see.

 

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Now, what we had happen was a more credible central banker come

 

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in to potentially chair the Fed that we haven't seen yet.

 

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From that perspective, that might provide that shakeout of maybe trees don't

 

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grow to the sky because maybe the dollar debasement narrative didn't have as

 

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much legs as the market originally thought.

 

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All of that said, I think that it is more that

 

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we will see what the data brings in terms of inflation

 

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and what the Federal Reserve can do over the course of the cycle.

 

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My going in position is a little bit different than most others, which is to

 

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say that inflation, when I look at the data, and we just saw the ECI come out

 

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recently, you don't see a whole lot of sustainable

 

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wage acceleration such that you would see persistent

 

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inflation down the line.

 

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Warsh or whoever would share the Fed, it very well might be that the data

 

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continues to allow the Fed to normalize monetary policy

 

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which might mean, to your point, that there might be a more

 

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shakeout continued in the gold space.

 

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That's great, Denise. I know this is probably not the last time we'll talk

 

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about it but we'll keep our eyes focused for the future on that

 

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one. Turning now to tech, I can't believe we haven't talked about tech yet,

 

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we'll turn now to some questions here about tech and the AI bubble story.

 

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That bubble story is still sticking around a little bit and we've had some

 

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major tech companies, they've reported earnings so far this year.

 

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What are your thoughts so far on the tech story and, I guess, more closely

 

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how that all relates to AI?

 

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The shakeout that we've seen over the last month, specifically driven by

 

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software stocks, but for the most part what we've seen across the technology

 

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stack is it would have to go down as the worst bubble in history when

 

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you think about valuation.

 

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Not only are we cheaper from a forward P/E basis,

 

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so price-to-earnings basis, than we saw during the tariff tantrum but we're

 

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actually well into the bottom half of the stack when you look

 

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over the course of the data that we have going back to the '60s.

 

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Now that technology as a sector on a relative basis versus the rest of

 

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the market is definably cheap, meaning that it's in the bottom half of the

 

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distribution, that skews your risk-reward positive.

 

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If you're concerned that, yes, they are spending too much CapEx and returns

 

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might be diluted over time and maybe your operating margins come down a

 

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little you would see that that's reflected in the multiples almost

 

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instantaneously over the course of the last month.

 

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I think that this is very similar to what we've seen over

 

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the better part of the last five years, those shakeouts are very, very quick

 

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and you see these sentiment and valuation resets that's supportive

 

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in that it provides the ability for technology

 

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to continue to be leadership for the long term, as

 

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opposed to being what I would call a true bubble, which is when a bubble truly

 

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inflects higher, the only way lower is through popping

 

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that bubble. What we're seeing is something much more sustained.

 

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As soon as you get a shakeout like this you already have valuation support, the

 

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risk-reward improves and the outperformance can continue.

 

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I do think that technology is not ...

 

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when I look at the data it doesn't look anything like the bubbles in 2000 and I

 

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think valuation is already supportive.

 

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That's great, thanks so much for that.

 

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I think we'll end off today's show, of course, with the top three and bottom

 

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three sectors. Let's start with the bottom three and then we can end with your

 

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top three sectors, Denise.

 

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The bottom three is still energy in the sense that I think that the recent run

 

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is a negative risk-reward here, mainly around the fact that the sector just

 

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looks too profitable to me, which means that there's more downside.

 

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Then I'll pull in the defensive stack, given that ISM manufacturing inflection

 

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that we just saw it would be very odd to see a defensive rotation

 

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so utilities and consumer staples are much more negative risk-rewards to me.

 

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Those are my bottom three.

 

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Okay, and looking now to the top three, we'll end there.

 

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On the top three, this will be a restack in terms of what we talked about.

 

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With technology I do think is an outperformer.

 

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I don't think that the risk-reward is massively negative for technology but

 

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I think that there can be room for other sectors to be better situated.

 

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I think industrials is the number one based on what we saw during

 

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this manufacturing inflection.

 

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The other two that I've talked about recently, still financials and portions

 

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of consumer discretionary. The top three are industrials, financials and

 

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consumer discretionary.

 

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Thanks so much, Denise. It was great to chat and we'll see you next time on The

 

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Upside. Thanks again.

 

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Great to be here.

 

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I'm Jordan Chevalier.

 

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