Hello and welcome back to Trader Talk. I'm Kenny Polcari, your host. And today I am joined by Amy Silverman, which we know she is head of derivatives strategy at RBC Capital Markets. And we've had her as a guest before, and welcome back. And Gina Martin Adams, who's the chief market strategist at HB Wealth here in New York City. Gina, thank you for joining us as well. Listen, there's a lot going on, so let's just jump right into it, right? So let's start first with kind of where we are in the markets. We're where on the one hand we're kissing new highs, yet there's a lot of kind of nervousness I think underneath the market that's not really showing itself on today specifically. The market's higher, but you know, tomorrow could be a different story, and you get one negative headline and suddenly the bottom falls out. So let's talk about kind of your sense first of all on where you what you think is happening underneath, you know, underneath the market, and then maybe what you're hearing from clients and what they're concerned about. Gina, why don't we start with you?
Yeah, I mean, as far as we're concerned, the bull market in stocks is intact, but the bond market is a little bit nervous, and that's creating a little bit of volatility in stocks at a time when we are coming off of an extraordinary sort of parabolic move in semiconductor stocks and the AI beneficiaries inside the market. So the momentum trade has lost a lot of momentum inside the equity market, and that's the weak spot, right? Along with anything exposed to bumps. So yield-sensitive segments of the market are definitely moving quite a lot. But broadly, the bull is still very much intact. Stock prices rising, 50-day moving average rising, 200-day moving average rising.
Yeah, it all sounds great. Right. It does all sound great. But do you think now we're in a position that the bond market is I think the bond market is clearly leading because we've seen the Fed do absolutely nothing with rates yet the long the 10-year and 30-year have moved higher on their own. So Kevin Walsh doesn't in fact have to do anything at the moment because the bond market is doing the work. I I'm in the camp that we're in, you know, I think we're kissing the danger zone. You know, 4.75ish on the 10-year, somewhere between there and five, to me is a danger zone where it's going to be a headwind for stocks. There are some analysts that have 6% as the as the danger zone number. You know, where do you guys where do you stand on, you know, where do you think that that tipping point is?
I think the danger zone is actually a little bit higher now. And the reason I say that is because the earnings acceleration has been much stronger than anyone anticipated coming into this year. And it looks like it's going to continue at a much stronger rate than even analysts are anticipating into the second half of the year. Okay. But that's the critical point. I would agree with you. 5% used to be the danger zone when we were at a run rate of 12 to 15% earnings when we were younger. But we suddenly have catapulted into a new range of earnings growth that is closer to 20 to 25, maybe 30% earnings growth as we just got through in the second quarter. And that means the market itself can sustain higher yields. Okay. Now there are triggers that I think you should watch, right? Because we're all taking a best guess at this all based on historical models. And the biggest trigger is I feel somewhere in the fives. I think we can probably get to five and a half before it gets terribly dangerous. I think, and we might even get to six. Really? Yeah. Because and if you look back at the last time we saw earnings growth rates at this speed, it was the 1990s. Rates were a lot higher at that point in time. But it depends. We are now starting to see the AI companies issue debt. And to the degree that the bond market starts to push back on that issuance, we might have to moderate our expectations.
Well, but let me just you you made one point. The last time this happened was in the 1990s. Okay. So, the great financial crisis hadn't happened yet, right? Rates weren't held at zero for 15 years. We didn't have a generation of professionals that are now in this market that that only experience zero rates for 12 or 15 years. So to them four and a half or 5% or 6% it's like oh my god that's furious when in fact it really isn't. Right. Right. And so to your point, maybe we can sustain, but to my point, I think there's I I think there's a there's a generation of people out there that are very that are right here very nervous at this rate because they've never seen anything like this, right?
Yeah. It's interesting you say that, too, because this generation, we we've talked about them a lot about what they're used to, what they're not used to, you know, what their left tail anchoring is. But the other thing this generation often does in my mind is they like to buy the dip. Yes. Right. They they've been trained in that. So I I do wonder if you know what triggers them first. They have these two habits that they sort of always come back to. One is buying the dip, but the other is being comfortable with certain regimes and believing that is the entire regime.
Right. Agreed. And I think there's listen there's there's the AI trade for sure has made everybody wealthier, right? As long as you're in that trade has made everybody richer. But you know it is to the point and I think part of your part of the reason we saw such a draw down was cuz it there gotten way too much excitement in certain parts of the market. Um because what we saw was we saw the draw down in parts of the you know semis for sure and parts of the tech market but you didn't see the draw down in the broader market. You actually saw a rotation into you know other parts the healthcare industry financials industrial basic materials have all actually consumer staples have all actually done better. So I think that's also a positive, right? So from your world where you sit in terms of derivatives, talk about what the derivatives market is telling you.
Yeah. I I'd say there's one key point that you actually just made reference to, which is there hasn't been this kind of global sell-off, right? Uh there's just been rotation. And essentially what's happened is sort of on the index level, everything has remained calm and smooth. You know, this is the paddling duck we keep talking about. Looks calm and smooth on the surface of the lake, but those little duck feet, you know, they're violently paddling. You can get semis here, software here, but that cancellation is what makes VIX look smooth, is what makes index volatility look suppressed. The thing in our world that we've been really worried about, that we keep talking about that hasn't come to fruition yet, but is really important is just this idea, what if we wake up one day and correlation just picks up? So instead of zigging here and zagging here, we just we just move in the same direction. That's really all we need, right? So instead of a rotation, we just get nervous and we take our chips off the table across the board. Across the board.
What What's the trigger for that? I I've heard a lot of different views on what that could be. One is what's going on with the bond market, right? That's one trigger. Another could be midterms coming up and this kind of political sentiment that's very anti-AI. But the question, but I think that is a I think that is a trigger. I was going to talk about that. You brought it up. I think that very much this cycle and this time of year, I think that is very much a trigger. Look, we got what 11 weeks until until election day. Yeah. Um and it's getting I think it's getting hotter in the room, right? Because now you're starting to see who the candidates are. We've gone through all these primaries. You're starting to see who's coming to the top and who's and who's going after who. And so I think it is going to get a little bit more anxious if you want my opinion.
And the thing is we're not pricing any of that anxiety yet. So, so I I would say a lot of people, you know, who we both talked to probably, you sit across from them and they seem anxious. They've got all these worries. It's like Iran, it's it's energy, it's oil, it's credit markets, the divergence we see and none of that is actually reflected and none of them are actually hedging. So, one, downside protection is relatively inexpensive, right? And two, you've been caught in this sort of like because we've just been rotating, because we've just been zigging and zagging, you're not seeing that angst in equity vol, but you are seeing it start to flag in bond vol.
So when do you think that's an interesting observation so when do you think you're going to see it in equity or you think you don't know when you're going to see it? I so so one thing that we've written about is that one midterms will be a catalyst and two so Gina I take your point of what you're saying the the equity market can sustain in terms of how far bond yields are going up but I do think I'm more in the camp of you're going to start to see that nervousness if we start ticking up you know to these different handles we're going to get a pickup in equity and we might get a pickup in correlation from that right see so it dep I guess it depends I'm in the camp that, you know, 475 and five is where that's going to happen. You're in the camp that maybe maybe we get through that is somewhere in the fives. Five and a quarter, five and a half maybe is more where it happens, right? Um which is interesting. I hadn't really given it I hadn't thought it through the way you described it, but I guess as I think about it now, maybe you're right. So maybe we're not there yet, right? Um but I do think that what happens is maybe we're not there yet in terms of the broader market, but I think as we get there, we'll start to see it. Yeah, maybe show its face.
Well, what I would say is from our perspective, the bigger signal, we already got it right. It the yield by itself is one signal, but what is more important is the y the correlation between stocks and bonds. Yeah. And we look at a rolling correlation between stocks and bonds. We saw that correlation breakdown in May. That correlation breakdown in May created the momentum drawdown that we saw over the summer months.
So what was the define what that breakdown was in May?
