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Markets reacting to 'realization' that a recession may not come: Analyst

Has the stock market entered a new bull market? Ryan Detrick, Carson Group Chief Market Strategist breaks down what consumer data says about the health of the market ahead of the June Fed meeting.

Video transcript

SEANA SMITH: Well, markets on track to end the week in the green. The S&P holding on to bull market territory after rallying 20% off its October low. Tech giants have been leading the rally over the last several months since it started the year, but can it last? We want to bring in Ryan Detrick, the Carson Group's chief market strategist. Ryan, it's good to see you. Lots of investors out there wondering whether or not this momentum to the upside, if this rally has enough legs to continue. What do you think?

RYAN DETRICK: Yeah, thanks for having me. And TGIF, everybody. We think it does, right? I've been coming off for a while saying, we think this is a new bull market. I know now up 20, everyone's saying it's a new bull market. We went overweight stocks in late December when the Carson investor research team laying out some of these things. I'll just start with this. I love this little factoid. Today's a Friday, right? Look, this is one of the strongest years ever for stocks on a Friday.

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Think about the last couple of Fridays. We've got buyers. I know we'll see where we close here, but it looked like another up Friday. Keep this simple. This is like-- this would be the best year ever for stocks on a Friday. Some of the other years, guys, that had good Fridays-- '99, '98, 2013, 2017, 2019, '75, 1958. You get the picture.

Good bull markets have strength on a Friday because people are willing to hold over the weekend. That's wildly different than what we've seen, obviously, last year in a bear market. So that's one thing that says, you know what? This bull market very well could continue because people are buying on a Friday.

AKIKO FUJITA: And how much of that-- well, it's very optimistic view here, but how much of that enthusiasm that you have is really contingent on the Fed pausing?

RYAN DETRICK: Not a lot of it, honestly. I mean, since the Fed started hiking 500 basis points since I think it was March 16th, I believe-- last year was the first Fed rate hike-- might have been the 14th-- close enough for government work. The stocks are up, OK? Now I know we had a bear market, and I know we've bounced since then. We think we're very close. Our personal opinion is the Fed, indeed, is done hiking. The inflation data is coming back. The supply chain's opening up. We don't think they need to hike again, but they're close.

But, you know, again, when you look at, let's say the Fed is done hiking, OK, looked at the last 10 times, one year later, stocks were higher, eight of them, only 1981 and then again in like 2000-- yeah, 2001, I believe is when it was when the Fed stopped hiking and stocks were down a year later. So it's rare. Where you got to worry is when the Fed starts cutting. We don't think we're anywhere close to cuts. I think they're done, and again, the economy is strong. We did all that stuff.

I mean, last week's jobs number, obviously, opened the door to more broad-based strength. I know a lot of people have talked about that. We've been overweight small caps for a while. We think the realization there is no recession coming this year, the realization of that makes small caps and cyclicals look really good. And the second-- the theme of the second half of this year, we think, will be more broader-based strength, not just tech and communications.

SEANA SMITH: Ryan, we'll get to that in just a second, but going back to what you just said about the Fed, you don't think the Fed is anywhere near cutting rates before the end of the year. How much longer, what's the timeline that you see for the Fed holding rates higher where they potentially are today, or if they raise another 25 basis points next week?

RYAN DETRICK: Yeah, I mean, we think-- let's not forget is there are some-- look at the guest before me. That was a real good conversation, by the way. I'm not I'm not going to be nearly as controversial as he was, but I saw he had LSU. I'm an Ohio State fan, so it's a little bit of that there. But nonetheless, we think the Fed will probably keep things where they are the rest of this year. I mean, it is an election year coming up. Yes, things aren't perfect when you look at some of the inflation data, but the truth, again, wages are coming down. The rents have been coming down significantly. The economy is still strong. We just think that they're going to leave things where they are for at least the remainder of this year, in our opinion.

AKIKO FUJITA: So let's talk about where the focus is in terms of your investments. The focus for markets has been tech. You mentioned it, the major AI-driven rally, but you say industrials are a good bet for the rest of the year. Walk me through your thesis.

RYAN DETRICK: Yeah, we think so. I mean, tech's obviously doing great communications. We know they had a rough year last year, so they've bounced back. But now what we've seen with a lot of this economic data just recently, the realization there's no impending world ending recession that we've been hearing about for 15 months, we haven't been in that camp at all. We were in the very quiet camp there'd be no recession this year because the consumer is just too strong for a recession to happen. Sure, housing's been in trouble. Manufacturing has been in trouble. We think we're getting through that.

Now, back to industrials, we like industrials and small caps. I'll focus on industrials, though. Just look at this recent earnings season. Industrials did really well. A lot of big industrial companies had positive things to say about the future increasing their earnings guidance for 2023. Valuations are solid, and honestly, when you look at industrials versus, like, the Russell 1,000, the r-squared is very high.

What I'm getting at, industrials tend to move with the market. The market probably has been stronger than industrials lately. We think industrials play catch-up here again with the realization that there's no recession and things broaden out. And small caps also, we have an overweight to small caps relative to large caps. We think that's another area that should do pretty well the second half of this year.

SEANA SMITH: Ryan, there's been some focus on the FOMO trade, Fear Of Missing Out. That's what's luring traders, luring investors back into the market. How big of a driver do you see the FOMO driven trade being at this point in the rally?

RYAN DETRICK: Yeah, it could be a very big point. I mean, that's a great point, right? We just saw yesterday the AAII sentiment poll, huge jump in bulls, where finally people are looking around, saying, oh, OK, maybe it's safe to dip our toe in. From a contrarian point of view, sure, we could have some type of peak, but I'll just say this.

I created something called the Carson Composite. It looks at your average year, your average third year of a presidential cycle, your average third year of a new president, what happens when you have a 5% gain in January. And you smush all that up-- what's that year look like? More strength in June and July with an August peak, and then that seasonal fall weakness, which we wouldn't be surprised at all.

So I think my base case is still a surprise summer rally. Then people get a little too excited, and then the fall, they get smacked a little bit. And that's how it works. But we're still bullish, and we'd absolutely be buying some fall time weakness for continued higher prices.

AKIKO FUJITA: Yeah, I mean, it also sounds like your argument being that things aren't going to be so concentrated as they are right now in tech. We are going to see the rally broaden out. With that said, we have heard over and over about that AI trade. Are you buying into that right now, or do you see so many other opportunities where you think that maybe AI isn't the play because things have gotten a little frothy?

RYAN DETRICK: Yeah, we think a little frothy with AI. It wouldn't it be something if tech took a little bit of a break when all this excitement took place. I mean, look at, like, even weight S&P 500, even weight NASDAQ 100. We're starting to see outperformance there. We get it, everyone said the five stocks were leading for the longest time. That's not been the case recently. So things are broadening out, and that's a positive.

And again, it doesn't mean tech has to go down. Tech and price still go up, honestly, the rest of this year. We just think there's probably some areas that would probably do a little bit better as that baton-- let me put it like this. The lifeblood of a bull market is kind of passing the baton back and forth, right? Tech took it in a big way recently. We're going to pass it around and let some of the cyclicals take the leadership the second half of this year.

AKIKO FUJITA: Ryan Detrick, Carson Group's chief market strategist. You said it, TGIF. Good to have you on today.

RYAN DETRICK: Yes. Thank you. Appreciate it. Goodbye.