Everyone’s Bracing for a Crash. The Economy Says Otherwise.

Chris Galipeau (0:00)

People are seemingly waiting for the world to end. I've got news for you, the world doesn't end that often. The semiconductor names go in a complete speculation mode. That was a casino, not investing. You can't tell me it's a bubble, that's not a bubble. Volatility favors the prepared investor. We like volatility, bring it on.

Maggie Lake (0:22)

Hello, and welcome to Wealthion, I'm Maggie Lake. Joining me today to discuss the outlook for rates and what that means for equities is Chris Galipeau, head market strategist for the Franklin Templeton Institute. Hi, Chris, great to have you back on.

Chris Galipeau (0:34)

Hey, Maggie, thanks for having me.

Maggie Lake (0:36)

So it's been quite a September to navigate through. We've had concerns about spiking oil prices and rising bond yields, creating a lot of investor anxiety, I feel like, but we saw the NASDAQ hit a record high. So what are you looking at? What's the direction of travel as we look forward and what's in the rear view mirror? How are you sort of separating that out?

Chris Galipeau (1:01)

Yeah. Well, first of all, it's been the S&P is up 13.5% here as we're talking for the year.

I think we've had four or five pullbacks between four and 9% normal course of business. We just had another one.

As I told our clients this weekend, if you had told me that long rates would back up 100 basis points, that oil go from 65 to north of 100, and you'd have the tape up low double digits, 13%, especially starting at 22.5 times multiple in January 1 I would have thought, I don't know. But the earnings power has been great in the first six months of the year, well ahead of street forecast, we're looking at a good third quarter year ahead of us, which starts in a couple of weeks. So we've got this void here now where the tape will probably be whipped around by the headlines. But here's what people forget. It's very easy to get swayed by all the noise that we have to deal with every day. And in point of fact, what matters for the stock market is the level, I was going to say the level and the direction of interest rates, which is also important. But by far the most important variable here is earnings growth. That's been phenomenal. And that looks like it's set to continue through calendar 26 into 27 and into 28

Maggie Lake (2:17)

Does it feel like investors are too bearish here? It feels like everyone's waiting for this thing to roll over and the bubble to pop or the market to correct or crash. I mean, you just hear that constant drum beat. Is that just too much negativity?

Chris Galipeau (2:31)

Yeah, it's been the case my whole 35 year career.

And people are seemingly waiting for the world to end and the shoe to drop. And I've got news for you, the world doesn't end that often. The stock market just doesn't crash on its own. It's usually Fed induced or Fed related, meaning they take rates up too high, hold them too long and break something.

But you're right. I mean, that's the drum beat. It's been that way certainly for the last couple of years. It's been that way for the lion share of my career. Ignore that. Focus on what matters. Earnings matter. Period. End of story. And earnings have been fabulous.

Maggie Lake (3:08)

So when we look forward, you mentioned the Fed. We do have, we just had a Fed raid hike. There are a lot of folks who believe the Fed is at the beginning of a hiking cycle, not one and done.

Are you concerned that they are going to be hiking aggressively? And that is what eventually hits equities? What's your expectation for the Fed?

Chris Galipeau (3:31)

It's a risk. I mean, they don't just hike once and stop. They've done that once in history, right? So I wouldn't expect that. We'd expect one more, maybe two more. I think the economy is strong enough, the market is strong enough, but that is a risk, and that's something we need to be mindful of. And if I think back, when I think about all the folks that talk about eminent recession, right? We've had, I've run money through three recessions in 35 years. So we're talking about something that happens once in a decade. Now, the mechanism for that usually is the Fed raising rates and breaking something, or you get a black swan like COVID. I can't forecast the black swan.

My guess is that we'll see one or two more hikes from here, and stock market can probably handle that. Economy seemingly can handle that. We're not overheating here. We're dealing with an inflation problem that, I agree, has been sticky for five years.