Market Rally and Warnings

**SPEAKER_1** (0:02)
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**Tom Keene** (0:27)
Alicia Levine is far too young to remember this. Your mother would throw at you a book called The Intelligent Investor. One of the great themes of the Intelligent Investor is if you're not in the game, you don't get to win. There's this whole modern disease of market timing, where if you're not in the game, you don't get to win. She's a BNY. Can we just say, Paul, Jeffrey Yu, Alicia Levine. It's like the mathematics involved here, folks, is prodigious. Alicia, what's the damage to people who aren't enjoying this bull market?
Like permanent?

**Alicia Levine** (1:05)
It's not permanent, but you can't make up what you've lost. One of the most important statistics is that the best month of the year always follows the worst month of the year. And so we show our clients in various ways. Like if you try to time the market, you're likely to miss that massive rally like we had yesterday, because you were so fearful of what was going on from June and July.
The favorites were underperforming, tech was over. I mean, essentially, if you go back 30 years and you missed the best month of the year, you're underperformed by 500 basis points.

**Tom Keene** (1:49)
You're the capital group out in Los Angeles who've done great studies on this. You got to be in the market. We all know that. But you were weaned at Chicago, the land of Fama and French, where you have to play. Discuss that.

**Alicia Levine** (2:03)
Discuss. As my three male children would tell me, you miss all the shots you don't take. And I think there is, as you say, it's a disease of trying to time the market. I'll say this. People can be pretty good at selling more or less near local peaks. Well, you can see deterioration. You can see it. Percent of S&P with advanced decline lines. You can kind of see, you could be headed into a nice little sell-off or consolidation phase or whatever you want to call it.
And then you never get back in. And that's the issue because the lows are ugly. If you think about last Thursday, it just looked like the apocalypse actually turned out to be a clearing event.
And, you know, Citadel did great on that, but I'm sure a lot of people were selling right into it. And it's just, it's too emotional. It doesn't matter how many years you've been doing this, but people fall for it at the same time. You're not going to save yourself anything. You're going to damage your forward returns. The only time you really want to think about next 12 months possibly being lower is if you think a recession's coming. We haven't had a proper recession since 2008 The one in 2020 was man-made, was man-made, okay?

**Tom Keene** (3:15)
That's stunning.

**Alicia Levine** (3:17)
The market since 2010 is up 14% annualized, okay? That includes the 25% sell-off in 2022 That includes the down 6% in 2018
So trying to time it is fruitless. It's from a different era when you actually had recessions every five to seven years and coming out of the market perhaps saved you some losses. So the most important thing is, is there a recession looming? This market, this economy, there's no recession. And by the way, the banks are doing terrific. When banks do great, you're not going into recession. They're the forward leading indicator.

**Paul Sweeney** (3:56)
Technology, AI, focusing on returns on AI capex. How do you guys think about that theme right now?

**Alicia Levine** (4:03)
So I think that's the most important theme in the market. And that of course was the clearing, was the earnings that we had from some of the hyperscalers.
Even where the market was disappointed in some of the others, the revenue was going much higher on the cloud business. And what we saw was the one question, there are two questions.
Can equities rally with the 4.5% bogey on the 10-year being breached, right? And the answer was like, yeah, actually, it was kind of fine, it was fine, okay. So that question was answered. So look, yields probably could get to 5% here simply because between the inflation numbers and from the questioning of the Fed's reaction function and the uncertainty in Iran, they ran well. So that's number one, but equities are fine. The second big question is the ROI on spending. And that could have killed the entire market, okay? You would have wound up with health care, utilities and staples working. And the answer is actually, the business model is working, even if free cash flow is going negative in the short term, even if they have to sell debt to fund it, they're reaccelerating the core business, which is cloud. And so it's working. And once you answer that question, you're off to the races. The whole complex can rally.