What the Conor Sen vs. Neil Dutta Debate Is All About

Yesterday on TV we hosted a polite debate between Conor Sen of Bloomberg Opinion and Neil Dutta of Renaissance Macro on the economy and market right now. Both Conor and Neil have been pretty consistently bullish on the stock market and the economy more broadly, so it’s interesting that they have some disagreements.

Conor’s argument, which he spelled out in a recent column, is that the fastest part of the expansion is now in the rear-view mirror. The ISM Manufacturing Index appears to have peaked. And although it’s at a really high level still -- and we’re obviously still growing -- we’re now growing less fast. Throw in all the bottlenecks, the difficulty that some firms say they face in hiring, and so forth, and you have a theoretically more difficult setup for the market.

What the Conor Sen vs. Neil Dutta Debate Is All About

Neil on the other hand argues that historically the only reason that a peaking ISM has been perhaps a negative is that it often coincides with the start of a Fed hiking cycle. But since we appear to be a long way off from the next Fed rate hike, that signal doesn’t apply as much. Furthermore, there’s still a lot of room for absolute improvement.

And so we arrive at a pretty familiar discussion in markets: rates vs. levels. 

This theme comes up all the time in various formats. Do rising yields matter? Or is it all about the pace at which yields are rising? They’re all versions, more or less, of the same debate. Obviously I don’t have a view myself, since I’m just the debate moderator here.

However, in the wake of the Great Financial Crisis, one of the best charts was a simple chart of the stock market vs. Initial Jobless Claims. Here it is between the beginning of 2007 and the end of 2019. I stopped before 2020, because last year was such a weird one and the spike in claims blows apart the y-axes. Now, bear in mind that this chart is kind of chart-crimey. There are two y-axes and one of them is inverted. But even still the point is that for the last decade, we just kept on seeing improvements in the real economy, with jobless claims falling almost non-stop. And as long as we kept improving, stocks kept going up.

What the Conor Sen vs. Neil Dutta Debate Is All About

What’s interesting too is that if you just do the same chart but for just the last year, it’s basically the same. Markets bottomed right as initial jobless claims had their horrible numbers last spring and then started turning around simultaneously.

What the Conor Sen vs. Neil Dutta Debate Is All About

So you can make an argument that speed of the recovery aside, as long as we still see things getting better in the economy, then that's good for the market. And of course there is a lot of room for improvement, objectively, still. Jobless claims are still very high. Air travel keeps getting better, but isn’t back to old levels. Unemployment is high and so forth.

Of course, if the bottlenecks and so forth keep compounding meaningfully and impede the recovery or spook the Fed, or something else, then the whole debate might change. 

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