Navigating market peaks: Insights on the US economy and stock trends – David Shapiro
In a recent conversation, Alec Hogg interviews David Shapiro about the current optimism in American markets, where the S&P and Dow have reached record highs amid falling interest rates. Despite this bullish sentiment, Shapiro highlights lingering scepticism about the economy, driven by political narratives and the aftermath of COVID-19. He predicts that interest rate cuts will stimulate consumer spending and revive sectors like housing, while banks stand to benefit from improved economic activity and potential mergers and acquisitions. Shapiro also discusses the challenges facing Europe and expresses caution regarding foreign investments in South Africa, reflecting on recent corporate governance issues. Observing consumer trends, he notes strong demand for new Apple products among younger buyers, ultimately encouraging investors to seize the moment and invest in the market.
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Highlights from the interview
Alec Hogg interviews David Shapiro about the current state of American markets, highlighting a week of record highs for the S&P and Dow, alongside declining interest rates. Despite these positive indicators, David notes a prevailing scepticism about the economy's direction, exacerbated by political narratives. He believes that recent interest rate cuts will foster market growth, benefiting consumers and stimulating sectors like housing.
David reflects on the long-term impacts of COVID-19 on supply chains and inflation, crediting central bankers for managing the situation. He emphasizes the need for a balanced interest rate environment to encourage investment without stifling economic recovery. He predicts an uptick in mergers and acquisitions as banks thrive in improving economic conditions.
David also discusses the challenges facing Europe compared to the U.S., particularly due to its reliance on global growth. In South Africa, he notes activity in small and medium caps, while remaining cautious about foreign investments. He expresses concern about corporate governance, citing recent corruption scandals involving figures like Mike Lomas.
As the conversation shifts to consumer trends, David shares observations from an Apple store in New York, noting strong demand for new products among younger buyers. He concludes with optimism for the markets, suggesting that now is the time to invest.
Edited transcript of the interview ___STEADY_PAYWALL___
Alec Hogg (00:17.024):
David Shapiro is in New York, and it's such a pleasure to welcome him today. David, we're looking back on a fantastic week for American shares. So you're in the right place at the right time. I know you often visit because your family is based in the United States. What's the mood like there? We've got the S&P and the Dow reaching new records, and interest rates are starting to fall in America for the first time in years. Are people upbeat? Excited?
David (00:52.178):
It's crazy that there's still so much concern about where the economy is going, even though the S&P is at record highs and the markets are very strong. It's taking the market and commentators time to adjust. There's still a lot of politics here. You turn on the TV, and it's all about Kamala and Trump, both talking about the economy. Trump keeps saying the economy is in tatters. So, there's still some disbelief, but I think the interest rate cuts we're seeing now, with more to come, will lift the market.
I see the benefit in commodity prices and also in the weakening dollar. By the end of the year, I expect the market to be much stronger than it is right now. But it's definitely an adjustment period.
Alec Hogg (02:00.268):
That's an interesting comment, David, because the S&P 500 is at a record, the Dow is at a record, and yet you expect it to go even higher. Can you explain that?
David (02:13.541):
Well, we've come through three or four very difficult years, and I don't think we realize how disruptive COVID was. Supply chains were affected, factories closed, and that pushed up inflation. Credit to the central bankers—they've done a good job managing it. Inflation is coming down, but now the worry is that interest rates are too high for the economy to recover quickly. There's concern about employment, as keeping interest rates too high could lead to job losses, which impacts consumers and business investment.
We need to reach a point where interest rates are high enough for savers but not so high that they inhibit investment and risk-taking. Powell has said we're not in a crisis like 2007-2008 or the dot-com bubble burst—we're just facing a slowdown. As rates come down, people will have more money in their pockets, spending will increase, and sectors like housing will pick up. I believe the market will improve as we get closer to that balance.
Alec Hogg (04:11.312):
This has to be good for banks. I'm an Investec client, and today I got a note saying rates are down by 25 basis points in South Africa, and 50 basis points in America. My overdraft is now 11.5%, but the interest I earn on savings has dropped to half a percent. Banks must love this environment because their margins improve.
David (04:51.264):
You're right. Banks are slow to reduce the rates they charge, but quick to lower the rates they pay. If you look at bank results—whether JP Morgan, Investec, FirstRand, or Standard Bank—there's not much activity. We need improving economies to spark activity, where companies invest in new factories or equipment. I expect next year will be a strong year for mergers and acquisitions (M&A), which is where banks thrive. Growth is coming, and banks will benefit as economies pick up.
Alec Hogg (06:05.252):
You're in the U.S. often, and you've watched markets in South Africa for over half a century. They say history doesn't repeat itself, but it rhymes. How do you think things will play out in the next year, given that interest rates are now in a declining cycle?
David (06:27.506):
We can expect better markets, but there's some confusion. Europe is under pressure right now. Christine Lagarde pointed out that things aren't in sync because of COVID. Europe, more than America, relies on China and global growth. For example, France's luxury stocks and Germany's industrial sector are suffering. Germany isn't a consumer-driven economy, so they're feeling the pinch. On the JSE, we're seeing some activity in small and medium caps, but it's not yet reflected in the large foreign stocks dominating the index.
The good news is that commodity markets are picking up. China is looking at stimulus, and if their economy picks up, commodities will follow. So, I'd say it's time to be bullish—take that money out of savings accounts and start buying stocks.
Alec Hogg (08:14.268):
Interesting point about the JSE. Many major companies listed there are now offshore. I saw today that Primary Health Properties (PHP), which has zero exposure to South Africa, is now in the JSE All Share Index. What's going on there?
David (09:10.666):
I think we're easy pickings. There's a lot of money floating around, and foreigners love South Africa—it's a great place to visit and sell investments. But I'm always cautious. We've had foreign companies come here and let us down. We've seen a history of that over the years. So, I like to give these businesses time to prove themselves. It's like finding a partner—you can't marry someone after one great date. It takes time to understand a company and its leadership.
Alec Hogg (11:13.62):
Speaking of caution, Mike Lomas arrived back in South Africa in a wheelchair last Friday, surrounded by policemen. He's alleged to have defrauded Eskom of 1.4 billion rand through a company called Tubular Construction. What a sad end for a guy we knew so well from the early 2000s when he was CEO of Group Five.
David (12:23.606):
It's shocking. We remember Mike and others like Markus Jooste from that era. Group Five was a strong company, and it's hard to understand why someone like Mike would get involved in such schemes. These things always come out in the end, and it's just sad to see such a fall from grace.
Alec Hogg (13:53.972):
It's always tragic when smart, successful people take that route. I suppose the period when Madupi and Kusile were being constructed allowed a free-for-all. The Guptas were in charge, Eskom management had almost unlimited signing powers, and corruption was rampant.
David (15:49.417):
Absolutely. The levels of corporate governance were so low that they got away with it. People like Paul O'Sullivan, who fight corruption relentlessly, are invaluable. But it's difficult to understand why someone like Mike would risk it all. Eventually, these things come to light, whether it's 5, 10, or 15 years later.
Alec Hogg (17:04.225):
Exactly. Group Five was thriving when Mike left in 2007. His share options alone would have made him financially secure.
David (17:56.706):
Exactly. It's hard to understand why anyone would go down that path. There's no need, especially when you've had a successful career. It's sad.
Alec Hogg (19:04.003):
David, you're in the U.S. for a few weeks, right? How long will you be there?
David (19:47.284):
I'm here until October 18th. Heading to Boston next. Just one interesting note: Apple released its new phone recently, and the Apple Store on Broadway was packed with pre-orders. It's mostly young men, 20 to 30 years old, who are buying these expensive phones. They're the ones who understand and use the advanced features like AR and gaming.
Alec Hogg (20:50.296):
Maybe it's time to look at Apple shares again. David Shapiro will be in the U.S. for the next few weeks. We look forward to catching up with him every Monday. Thanks, Dave, and love to the family!
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