Michael Kantrowitz: The "K"antro Shaped Recovery

Yeah, age creeps up on you. My kids are almost ready for college.

Thank you. Considering most of my career now is post-GFC, and I feel like every couple years there's just... By the way, this is what happens when you stay too bearish too long. I'm actually only 30 years old. Anyway, please go. Yeah, so I've been doing this about... I started in research in '04. Started at Merrill Lynch on a small cap research team. I've been in macro quant strategy my entire career. I left Merrill in early '07 because obviously I knew just like you what was about right. In fact, I was actually about to join a small cap banks team. True story. So anyway, sliding doors went the right way. I joined ISI Group, worked there for a number of years in the strategy team. We left there, worked at Wolf Research for a few years, and then in 2013 we started Cornerstone Macro. Was there for about a decade. Piper Sandler acquired Cornerstone Macro in 2022. So it's been almost 23 years.

Super fortunate to work with a lot of smart people, to be exposed to our clients who help me learn. The fun part about this job is that you're learning every day. We're talking about tariffs and the budget deficit today. We were talking about oil break-evens in 2015. What are we going to be talking about in six months? Probably something new.

Sure. There's... I can't remember a time where the market's been so myopic and reactive. I've always had the view after 22 years on the street that the markets aren't as forward-looking as we all want to believe or are certainly taught. But this has really put an exclamation point on that. So where do you want to start?

We were focusing on what could go right from Liberation Day through when finally something went right on the pause. The way I was thinking about it: we tried to frame it in a bit of a parallel to 2022 with respect to the market going down because of inflation. If you look back in '22, the market basically bottomed twice. It hit a bottom in June when oil peaked and then oil started going down. Of course, oil was related to inflation back then. And then we ultimately had the peak in October of '22. What happened there? CPI started coming down. So after that period of time, I did a lot of work going back and looking every single time the market pulled back over 10% or more, bear markets, everything back to the '60s. And what I realized was that in each one of those market pullbacks, there was a primary issue that the market was focused on. In 2022's bear market, which I ended up staying too bearish too long on, and this is really what led me to learn my lesson and play this out this year, is that when that primary issue stops getting worse, and we know this was Trump just hammering tariffs, tariffs, tariffs, as soon as you got some good news, didn't matter what it is, just had to be good news, the market was going to bottom. And forget about and put aside all your secondary and tertiary fears beyond there. We're going to go into recession, we're going to have inflation, the Fed's going to hike and all those issues. Ultimately, all you needed was something incrementally to go right. The weekend before the pause, it was the 6th, the 7th of April, I remember we put a list together and said, 'Here's what could go right.' Because the bearish case was obvious. Trump's going to just keep hammering tariffs. The narrative by then, everyone believed that he wanted to send the economy into recession to get rates down. And that all just seemed a bit too much of a pipe dream and unrealistic and unproductive on the administration. So we put a list together what could go right. The two things that I think hit that week and beginning probably the later part of the week, the weekend before, was bond yields started spiking the Friday before that weekend. And that continued into Sunday night when the market opened up and into Monday morning. So the two things we put down that could go right is of course Trump said anything positive, literally anything. And the second one was the view that up until Liberation Day, this was really a US market issue. Following Liberation Day, it became a global issue. So you pissed a lot of other people off and you brought them into the fold of problematic issues. So that made me think, well, there's got to be... you start really seeing the global markets collapse. There's more parties interested in putting this issue to rest that's putting the market down. That weekend, everyone was super bearish. I go on X every once in a while and I posted this on Sunday night. There were like 15 spaces running at 8:00 p.m. at 'Where were the signs at?' And it was 'Black Monday market crash,' economic crash. I counted 15 of them and I tweeted out, 'This is probably a sign.' That wasn't in itself a catalyst, but you knew where expectations were. People often do in market downturns: they take the problem and as it gets worse, everyone kind of believes in the problem extrapolating it to get worse and worse. So we figured, why pound on the bearishness? It's pretty clear what the issues are. What can change things? Particularly because I hung on to a bearish call too long in 2022, and part of that was because I did think we were heading into recession. But what I actually think I got mostly wrong, besides that or even more wrong than that, was actually not appreciating the fact that as soon as people thought inflation stopped accelerating, the market was going to bottom and put everything else aside. And that's exactly what happened here with the pause. That's the lens I was trying to help our clients see through, because that was the behavior. If you go back and all market corrections, that is the behavior. So we did get essentially two things that went right in a sense: Trump paused, and I think a lot of it had to do with the bond market and that the global markets all got sucked into the black hole of US equities. When that pause was announced in the middle of the day on the Wednesday, we published a note as soon as we could: 'Peak uncertainty, recession canceled, market low is likely in unless Trump makes it worse,' which we didn't think he was going to. You kind of hit peak panic, peak hysteria. And from there, fortunately, we got a string of positive headlines. Now we're starting to get some action that just kept unwinding all that fear that was built up over the several weeks leading to the low.

That was based on... that's a 10-year yield. That was a number that we put out probably at some point in 2024, and that was based off the little history we had leading up until mid-2024 in terms of how the market reacted to higher rates. In '23 and in '24, I think a narrative got believed that the US economy and the stock market were no longer interest rate sensitive. And I think this is an example of a bigger issue that is an issue today, I believe, because we have what I would describe as the most bifurcated stock market in terms of fundamental earnings and bifurcated economy in certainly in my lifetime, and probably going back as far as the data go. The question of whether the economy or the stock market or the consumer is sensitive to interest rates gets lost because when you look at the aggregates, you could see the aggregates have held up. We haven't had a recession. The consumers continue to spend. The stock market's obviously gone up a lot since the lows in '22. But under the surface, the bifurcation that we're seeing I think is largely a result of higher or more normalized interest rates. And that continues into today. I think we're a bit trapped between a soft landing and a hard landing, a rock and a hard place.

Yeah, but let's call it a K shape. The top part of the K is just much larger than... it's not just because your name's Cantro. It's just the K.

Yeah. So the top part of the K is much larger and much healthier. Think of consumers. It's larger cap profitable S&P 500 companies. For consumers, it's the middle-upper income and higher. It's homeowners. It's those who are benefiting from savings and higher interest rate environments, own equities, own assets, etc. And then the bottom part of the K is those that are paying where the pain is. So 4.75 was a level where we thought stocks in aggregate could no longer rise above if rates were above their... rising. What you often see is that people look at interest rates over the last few years and they're like, 'Look, interest rates are up and the market's up, things are fine.' And that's true. However, when you look at interest rates on my Bloomberg, I have one of my favorite charts to show the 10-year and show market breadth. I love when I can connect a macro idea to a technician's idea. The biggest driver, explanatory variable of changes in market breadth in the last three years has been the 10-year yield going up and down. What we start to see is when rates start going up... A good example would be September of 2024, right when the Fed cut 50, the 10-year was at 3.6. A bunch of stocks had hit their peak and I don't think have moved above those peaks. The same day the Fed cut, the 10-year bottomed. A lot of them were home builder stocks, the rate sensitives, biotechs, real estate names. So as rates started going up from that rate cut, the market went up for another month until it became problematic. We got up to about 4.5, and that's where markets started to struggle. But before that, you started seeing the breadth of the market deteriorate, and it was just Mag 7 left carrying it into the end of December and early January. We're beginning to see that relationship reconnect now that the tariff volatility has taken a downshift. The focus has been back on bond yields. In many ways, yes, we have a new administration, new policies, tariffs, but in many ways, I don't think things have largely changed all that much in the macro and market environment. We're still bifurcated. We still have rates around 4.5. The Fed hasn't cut anymore, and they're probably not going to aggressively anytime soon. Nothing's really changed. You still have housing in a really difficult backdrop. Small cap earnings are going down for the third year in a row, and you're continuing to see larger cap dominance of the market.

It's hard to attribute changes in interest rates to deficit fears because what are we going to quantify? The budget deficit every month or every quarter doesn't exactly line up. Of course, bond yields are a global market, so they're influenced by many different economies like Japan, for example. The thing is that every time rates have gone up, and I'll give you a number now, I think we may be beginning the ninth narrative rotation around interest rates since 2023. Maybe nine. We've had eight so far, and I can walk through a couple of those.