Michael Batnick and Ben Carlson of Ritholtz Wealth Management rejoin the pod to talk about what they learned from the topsy-turvy 2022 economy and make predictions about 2023 markets.
Host: Derek Thompson
Guests: Michael Batnick and Ben Carlson
Producer: Devon Manze
In the following excerpt, Derek and his guests discuss what they wish they’d known a year ago.
Derek Thompson: What I want to do today is review the biggest stories, make the biggest predictions about the 2023 economy. I thought one way that we could start is that in the interest of beginning a new year with a new slate, I wonder if there was one thing that you could tell yourself on January 1, 2022, tell yourself one year ago, that you know now, what would that lesson be? What is the biggest learning from the last year in financial and economic news? The rule for this game, before you guys each offer me your answer, is that you cannot commit insider trading. You can’t try to tell your 1-year-old self, “Short Tesla,” or, “Sell out of Nasdaq and crypto and buy United stock.” You can’t do that. You have to tell yourself a principle, an idea about the economy or the nature of markets that you’ve learned in the last 12 months. Michael, why don’t we start with you?
Michael Batnick: Yeah, this is an easy one. And usually markets don’t work like this, where if you knew the news ahead of time, if you knew the economic numbers and had all of them, it’s very rare that you could use that information to insider-trade, to know what the market would do in response to anything. Take the pandemic, for example. If you knew that the economy was going to shut down for several quarters, you probably wouldn’t buy stocks, but you didn’t know that the Fed was going to do what it did in response, and fiscal stimulus, and all that sort of stuff. So, 2022 was the outlier in the sense that had I known that inflation was going to be above 7 percent every month for the year, it would be very easy to know what to do with my money. What would I do? I would short the longest-duration stocks and bonds. That’s what I would do.
Thompson: When you say longest-duration stocks, what kind of stocks are you talking about?
Batnick: These are the high-flyer, “Don’t worry about when you pay me back” companies. Lose as much money as you want because money costs nothing. If money costs nothing, who cares? Just burn it and just grow, grow, grow, grow, grow. Well, that trend reversed entirely. The Shopifys and Spotifys of the world and the Ubers ... that had yet to turn a profit because they were being subsidized by Silicon Valley—all of those stocks are the ones that I mean by long duration. And the same thing with bonds, meaning it takes you a long time for you to get your money back. Those are the ones that are particularly sensitive to rising inflation, higher cost of money, and they got absolutely shellacked last year.
Thompson: Ben, you go.
Ben Carlson: I thought we were going to have the same answer here, but we don’t. I would tell myself a year ago that the Fed no longer cares about the stock market as much as people think. Because for years in the 2010s, every financial pundit who was kind of an anti-Fed, anti-government person said, “The only thing the Fed cares about is the stock market.” And every time the stock market falls, the Fed steps in and lowers interest rates or does some sort of monetary policy.
2022 totally turned that on its head, because the Fed not only said, “We don’t care about the stock market,” they kind of said, “We don’t care about the economy in terms of growth and unemployment.” And there were days where the Fed would speak out, and it’s not like they were using some weird, cryptic, try-to-read-into-this thing. Some of the Fed officials were saying, “We’re happy the stock market is falling.” I don’t think I ever would’ve believed that would’ve been the case before 2022. If I would’ve known the Fed was going to be cheerleading the stock market to fall, that would’ve probably helped, going into 2022.
Thompson: I’ll tell you what I would’ve told myself, and it lives at the intersection of your answers. I would’ve told myself, “Derek, you’re wrong about the pandemic being an accelerator.” You guys remember two years ago, especially in the middle of 2020. What everyone kept talking about was how the pandemic is an accelerator. It’s bringing us into the 2030s. So, e-commerce is at X percent. Well, the pandemic is accelerating us into the projected 2030s share of e-commerce in terms of total retail. Streaming was clearly on its way to growing and taking over the movies. And people said, “Well, the pandemic is an accelerator. It’s pushing us ahead five years.”
I bought into that wholesale. I totally bought into that narrative, and that narrative was simply, flatly wrong. And I would’ve said, “Derek, you’re wrong.” The pandemic is not an accelerator for e-commerce and streaming for the most part. For the most part, the pandemic should be thought of as a kind of bubble. It was a bubble for a category of companies that you can think of as promises without profits. And this is the category that I think Michael was talking about, the Metaverse, SPACs, crypto, profitless innovation and software, e-commerce, biotech, all of that stuff.
[An unidentified voice says something in the background.]
Thompson: Was that me or was that you guys?
Batnick: Derek, this is ironic because that was the Ring, which is owned by Amazon, telling me that there is an Amazon package outside my front door. I was going to say that it’s not just those really high-flying stocks that pulled everything forward. It’s Amazon. I was on CNBC this morning talking about this. I’m looking at Amazon’s operating income. To your point about 2020 being the bubble and just pulling forward years of growth, the operating income, I’m drawing with my finger, just completely went off the rails for Amazon and accelerated to $8 billion, and now it’s back on trend. They’re a little bit below. It’s two and a half billion dollars. So, it’s not just the money losers. It’s the companies that are at the center of our technological universe.
Carlson: Derek, my way of thinking about this is, your point is the round trip. I think we saw a round trip in everything technology. We saw this huge pull forward. We saw these enormous gains in these stocks that everyone thought were going to change the world. In 2020 and 2021, it really felt like they were going to. If you just base it solely on the gains and what people were thinking, 2022 erased almost all or most of those gains for almost all those stocks.