Apple: ‘It takes a lot of money to move a $3 trillion stock,’ Bianco Research President says
Bianco Research President Jim Bianco sits down with Yahoo Finance Live's Brian Sozzi to discuss market outlook, tech sector leaders, the Fed's economic policies for 2022, and the potential politicization of inflation.
Video Transcript
BRIAN SOZZI: Hey, thanks so much, Zack. I'm here with Jim Bianco, president of Bianco Research. Actually, it's nice to see you in person for a change.
JIM BIANCO: It's great to be in person again.
BRIAN SOZZI: Well, we were coming before-- talking a little bit before we did the interview on just valuations and the markets. You have Tesla, these trillion-dollar market caps. Apple just hit $3 trillion. Can you believe what we're seeing right now in the markets?
JIM BIANCO: You know, it is shocking what you're seeing. You know, Apple at $3 trillion is worth more than the entire Russell 2000 index.
BRIAN SOZZI: Doesn't seem right.
JIM BIANCO: Yeah. It's never happened before recently. But if you deep dive, if you pare back a little bit and go, well, what's going on here, the reality is, in 2022, 2021, when people talk about let's invest in the stock market, they really mean in or out of SPY, the S&P 500 ETF. Maybe, if you want to get a little bit fancy, we'll dabble with the options of maybe Microsoft or Tesla or Nvidia, you know, maybe throw an Apple in there.
And then the rest of the 5,000 stocks, it's either you're in the index or you're not in the index. I'm not going to bother picking stocks. Professional managers have shown that they can't really do a good job of it. So what's been happening with the market is there's a lot of money coming in to the market, but it's all getting concentrated in the indexes, especially the S&P, and it's getting concentrated in these big-caps tech stocks and options. They're doing very well.
As you get to the bottom half of the S&P, those stocks aren't doing very well. When you go into the mid-cap index or the small-cap-- small-cap index is actually down from where it was 10 months ago-- they're not even beating the inflation rate. So yes, money's coming in, but the world of the stock market's one symbol. It's SPY. Either you-- or one of its, you know, forks of it, you know, but same thing. It's either you buy that or you don't buy that. And then yeah, but I want to do something else. OK, buy some Tesla options. That's the whole world of stocks.
BRIAN SOZZI: Is-- does this end badly? Stocks don't go up in a straight line. And these five FANG stocks, if you want to call Facebook FANG, can't go up forever.
JIM BIANCO: Yeah. You know, if the argument is, the money argument, where did the money come from, well last-- 2020, 2021, a lot of people didn't spend money. And they-- so they saved-- they got their savings big. We sent out a lot of stimulus checks. Well, a lot of that money has been spent. It's either been spent on stuff, which is why we have the supply chain problem at the Port of Los Angeles, or it's been spent on these indexes.
But if you look at the savings rate, we're about back to where we were pre-pandemic. So there isn't this other big pile of cash ready to hoard into the market. And once we get back to normal flows, normal, then all of a sudden we're going to find out that those big stocks, it takes a lot of money to move a $3 trillion stock. And if we don't have a lot of money to move it, doesn't mean it's going to go down, but it'll start to languish at first. So we might be in the later innings of this rally, at least from a money flow argument.
BRIAN SOZZI: Do these five stocks-- and I'm just going to focus on them because it's what a lot of people are trading and they're focused on right now-- do those stocks correct come the spring, when the Fed starts to pull back on this liquidity?
JIM BIANCO: Yeah, that's going to be a big issue for the market. When the Fed is going to pull back, and you're right, in March is what we expect the first rate hike, will that affect the economy? Probably not. You know, most people that are running regular businesses, not us financial businesses, they're not going to get too perturbed by a 25 basis point hike in the funds rate, or 50 basis points over two or three months. But financial stocks or the financial markets can. The stock market might be able to because of that pullback of liquidity. And yeah, I think if we do see that liquidity hiccup, it will show up in those big-cap stocks that have been really racing the most.
BRIAN SOZZI: Well, does that make the case that you rotate out of those big-cap stocks and buy some of those-- I would say dogs, you know, at the other end of the index?
JIM BIANCO: Yeah, it depends on what it is-- if you want to rotate out of those stocks into, you know, the stocks that have languished, like the small-cap stocks and stuff like that, if you're doing it for a trade, oh, because I think, over the next two months, they're going to go up, I'm not so sure about that. If you want to say they represent better value, they've got better business prospects relative to the valuations of the big stocks-- I'm not saying Apple's got a bad business model, but relative to some of the valuations, maybe some of these small-cap stocks have better valuations, and you want to see how it goes for a couple of years, yeah, that might probably make sense.
But if you're looking for a hot trade to rotate out of them into something else, I think what you're going to find is that's all the money flow argument. And when the money dries up, when the Fed starts pulling back on the liquidity, it's going to be hard to see that big money flow really just lift all those boats like we were hoping they would.
BRIAN SOZZI: You are an astute Fed watcher. I've followed your work for some time. Are you concerned that the Fed makes a mistake?
JIM BIANCO: Yeah, I think that-- I know my concern, the Fed makes a mistake. I think the market is concerned that the Fed makes a mistake, too. Unfortunately, the Fed is very good at one thing. Well, they're good at some things, but one thing they're very good at that they wouldn't like to be is they raise rates until they break something. And that is what I think is a real fear in the market, that they will start a rate hike campaign this spring and it will go through the rest of this year, and there'll be multiple rate hikes. When are they going to end it?
Well, they're going to do like the Fed always does. They'll go too far and they'll raise rates too much, and either the financial markets have a hiccup or the economy slips into recession or the plumbing of the financial system has a problem. Remember the repo crisis of September of 2019. And so yeah, I am worried that they are, because they're upping their game when it comes to removing accommodation. They're now talking about reducing the size of their balance sheet.
Now, again, my-- I don't have a problem with that in the abstract, but in the reality is you're going to raise rates, you're going to reduce your balance sheet, you're going to get rid of accommodation, how do you know when you've gone too far? When the stock market blows up, OK, I guess we've gone too far? I kind of hope that you don't use that metric to decide this is when we stop, but that's the concern we have.
BRIAN SOZZI: You mentioned that they have historically broken things. Does the Fed ultimately break the back of this rally we're seeing in equities?
JIM BIANCO: Yeah, I think that that is the number one risk right now in 2022, is that the high inflation rate is perceived to be persistent, which pushes the Fed hard to do something about it, and in the process of doing something about it, it puts the rally of the stock market at risk. If I could just put a-- a just position on it, why should they do something about it? Because what is the other side of not responding to inflation?
The majority party in this country is the Democrats, so I'm trying to not be partisan. And they're getting killed in the polling data. Why? The number one thing that is coming up over and over again in the polling data is no longer COVID, it's high prices. It's inflation. So if you don't react to high prices, you've got 40% of the country that rents or has less than $1,000 of savings, and is screaming and yelling they can't stand these high prices they're seeing at the grocery store and the gas pump. Do something about it.
If you don't-- and they're going to take it out on politicians. They don't know who Jay Powell is. They don't know who the FOMC is. But they know who's the majority party. If it was the Republicans, it would be the same thing. And they're going to take it out on the majority party. So don't react to inflation, that's your problem. React to inflation, and then you risk the stock market.
That's where they're in a bad spot right now, because they've got opposing forces here. Whether they do something or they don't do something, one crowd or the other is going to be happy, and the other crowd is going to be sad. There's a very narrow path, if one even exists, that you can have the policy that makes both of them happy at the same time.
