Revisiting the K-Shaped Economy.

SPEAKER_1 (0:00)

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Jack Hough (0:19)

Hi, it's Jack Hough. Don't think of this episode on the K-shaped economy, originally recorded back in December, as a rerun. Think about it as me recharging my batteries so I can come back and dazzle in our next episode together while you hear about this topic that's still very relevant for the economy and the stock market. And if you haven't listened to this episode before, it's an opportunity to fill in that hole that you've felt in your life, probably an S-shaped hole for sad, but not for long.

Thanks and see you soon.

Mike Reed (0:53)

What we're seeing is a divide in kind of the sentiment, the feeling, the economic prospects. And the divide is between those who are on the upper income end of the spectrum versus those on the lower end of the income spectrum.

Has there always been a divide? Yes. But right now, that wealth effect is just so pronounced. What we're looking at is this K, going from a lowercase K to an uppercase K.

Jack Hough (1:19)

Hello, and welcome to the Barron Streetwise Podcast. I'm Jack Hough, and the voice you just heard is Mike Reed. He's an economist with the Royal Bank of Canada, focused on the US. He's going to talk to us about the K-shaped economy. There's a little K moving toward a big K, could be a special K, have some banana slices ready just in case.

Listening in is our audio producer, Alexis Moore. Hi, Alexis.

Mike Reed (1:48)

Hi, Jack.

Jack Hough (1:49)

Could this possibly be, I saw something about the 300th episode. Is this number 300?

Mike Reed (1:55)

This is number 300 On Apple, it will say 301, but we don't count the trailer. That's not a real episode.

Jack Hough (2:02)

They're filthy liars, is what you're telling me. I feel like we should have some fanfare. Have you prepared, is there a heavenly choir of angels that's gonna come out from the behind the scenes and sing hallelujahs?

Mike Reed (2:15)

Not quite that.

Jack Hough (2:17)

How about a college football band? It doesn't have to be Division 1 I'll take two or three. It's fine. I think we could do that.

Ah, sweet music. Reminds me of the time when I played the sax solo to Wham's Careless Whisper at the middle school band concert. Have I told that story before? Eleven times, right? I tell anyone who'll listen, frankly.

I think, Alexis, we have to move beyond alphabetical analogies for financial conditions. I'm excited to talk about the K's coming up. The K's are important right now, but we already have S-shaped growth curves and L-shaped recessions, V and U-shaped recoveries, and there's something with a W-shape I can't remember. And now we're differentiating between upper and lower case, and I'm worried that my penmanship is not good enough to handle all this. I wrote about this recently in Barrons. We just need to think up some new metaphors for the specific conditions that are going on now. I'll give you an example. Mike Reed from RBC, who we'll hear from in a moment. Remember Alexis when he was talking about this interesting condition about how the ratio of retirees leaving the workforce has changed relative to young people entering the workforce, and that's really important right now.

And I haven't heard this analysis before, so I feel like it deserves its own metaphor. The ideal metaphor would evoke young people waiting for old people to turn over their spots. Tell me which one you like more. The first one is Pickleball Hours at the Town Basketball Court Effect, right?

You're waiting to play, but the pickleball, all right, that one's... A little long. Here's a better one. Restroom at a Rolling Stones concert dilemma. Now think about it. That's an older crowd going to see the Stones, but there's some young people too, right? It's a big band. I would gather that there's some older folks who are Stones fans, maybe in the restroom, maybe younger folks who are curious about the Stones waiting outside. As I hear myself say this aloud, I don't think I've hit a home run with this one. I'm going to continue to workshop it.

Now I've got one or two others I feel more confident about. I want to talk to you about Small Caps. I saw a grabby piece of analysis from Jill Carey Hall. We've had her on the podcast before. She oversees US. Small Company Research for B of A Securities. And Jill points out that earnings growth underlying the S&P Small Cap 600 Index is expected to jump from 6% this year to 17% next year, a near tripling. And if that happens, small companies would go from being growth laggards to growth leaders. And historically, when that has happened, small cap stocks have outperformed large cap stocks 75% of the time, by an average of 9 percentage points a year. That's a big deal. Those numbers, to me, are too tempting to ignore, yet the big small cap rally is too long-awaited to quite trust. Over the past 15 years, the large cap S&P 500 Index has returned 640% in total. It has trounced its small cap sibling by more than 280 points. That's left small caps cheaper, about 30% cheaper than large caps relative to this year's projected earnings. There's a lot of drama here about whether those small caps are going to have a big comeback next year, like Jill is predicting. This is the kind of thing that needs a metaphor, and the ideal one will call to mind something that's small and poised to go fast, but it's not nearly assured up success. I'm calling it the Chihuahua on an e-bike setup. Now, hear me out.