Transcript:
CAROLINE WOODS: Joining me now is Simeon Hyman, Global Investment Strategist at Pro Shares. To break down where the money is flowing and what it says about the market right now. Simeon, great to have you.
SIMEON HYMAN: Thanks for having me.
CAROLINE WOODS: We appreciate you being at the desk. And you have an interesting perspective because you really have a front row seat to investor flows to know how investors are feeling, where they’re putting their money and where that money is coming from. So I want to start with space because of course it’s been the hottest trade for the past three days. Lower today. Last I checked. But when investors decide to add space to their portfolios, where is that money coming from?
SIMEON HYMAN: There’s a ton of money on the sidelines, for starters. So I think that’s an overlooked thing, this notion that it has to come from some other piece of a portfolio or other technology stocks, there’s a lot of money on the sidelines. And I think the other thing that’s missed when that question is asked is the fact that actually IPO volumes have been pretty low. We are not even at the levels of 2021, 2020 and 2021. We know there were SPACs back then, so we know there were some drivers, but there’s still pent up demand for IPOs. And of course, these companies can’t even call it incubating. They’re staying private longer. So I think the the look for a source is almost a little misguided. Pent up demand for IPOs, plenty of cash on the sidelines. I almost think the question isn’t really that germane.
CAROLINE WOODS: Okay, so this is more cash than trimming some of the other AI winners. Basically, SpaceX can do well, and it doesn’t have to be at the expense of other tech.
SIMEON HYMAN: And interestingly, a lot of the chatter has been about the early inclusion in indices. And that’s going to be important as stabilizing demand. But to keep it in context, only a small piece of space has been IPO. So you know a couple of takeaways from that one. Anybody who’s involved has the incentive for this to work for the long run, because it’s almost like a trial balloon. And the other piece is that it’s allocation in the indices will be important but not disruptive. So again, not necessarily cannibalizing anything.
CAROLINE WOODS: What does the demand for space specifically though, tell you about investor psychology right now? Is this fundamentals driven because it is a profitable company. Or is this a whole lot of FOMO and potentially some froth?
SIMEON HYMAN: Well, let’s look at the market context for a second. If you go back to Q1 earnings season. S&P 500 earnings grew about 25% year over year. Nasdaq 100 earnings grew almost 50% year over year year. So I like to think of this sort of as rational exuberance, as opposed to the famous Greenspan quote from about 30 out years ago. In other words, there are fundamental drivers for the momentum of the tech names, and that’s certainly extending onto the space enthusiasm. And look, there’s stuff there. I mean, this is 80% of the launch business. Starlink is up and running and making a lot of money. And the call option on AI, which was to some extent sort of verified, if you will, by the Google agreement just a week or so ago. There’s real stuff there.
CAROLINE WOODS: Okay. So broadening out a bit, we keep seeing the market hit new highs. But I’m curious where you’re seeing the money actually going aside from space, because the headlines and the reality aren’t always the same thing. So what are you seeing?
SIMEON HYMAN: We do of course. And we have a wide range of ETFs at pro shares with a large provider of leverage and inverse ETFs. We also have lots of other strategies like dividend growth strategies. And so we do have a good seat to see where the money is flowing from and what investors are picking up on. Certainly the technology trade has been an important one. But there’s and momentum. Look we have QQ which is our Nasdaq 100 Dorsey right momentum ETF. And indeed that’s been performing extremely well. But there are other opportunities for broadening that we’re seeing as well. We are starting to see folks look at those dividend growth stocks and look for alternatives in case they get a little skittish about the fact that the top ten stocks in the S&P 500 are now 40% of the index.
CAROLINE WOODS: What’s the biggest disconnect between what investors are talking about and what they’re actually buying?
SIMEON HYMAN: Well, I don’t think there is a disconnect in that regard. And in fact, the one thing that I would point out is almost a forgotten trade of late is actually allocations to small and mid cap stocks. And very quietly small caps have been performing really, really well this year.
CAROLINE WOODS: Outperforming the S&P 500.
SIMEON HYMAN: And if we think about interest rates its Fed Day. Look the fed may hike.
CAROLINE WOODS: Not today not.
SIMEON HYMAN: I don’t think anything is going to happen today. But there’s a little bit of pressure on rates. But it’s substantially mitigated by the the MOU and the bringing down of oil prices. Now the long end we suggest might still have some upward pressure because risk premium, term premium, all that stuff. But if inflation pressures come down a little bit the short term rates are are what small caps are sensitive to. So there’s an opportunity there as well.
CAROLINE WOODS: Do you look at the strength that we’ve been seeing in small caps is just a short term catch up trade though. Or do you look at it as the beginning of something more durable or a shift in leadership?
SIMEON HYMAN: Well, it’s not exactly a short term catch up because the underperformance has been 15 years in the making. I think the best way to think about it is, hey, if you have a reasonably constructed asset allocation and you took a pass on small caps for the last 15 years, and you one rethink having kind of your regular allocation, maybe 10% or whatever it would be, you know, per per kind of standard allocation. Just think about that as a prudent path going forward. It may not be the it may not be at the top of the charts every single week, but absolutely at half the price. The book of large caps. It should have a presence in most folks longer term asset allocation.
CAROLINE WOODS: How big of an allocation?
SIMEON HYMAN: If you do the math, you talk in small caps have about a 10% slice of the equity pie. And that’s what we used to call back in in my early days of talking about asset allocation. The look out the window test, the starting point for good asset allocation, is just how the world is laid out. And just to be more formal about it, you know, the pro-rata size of the market caps of each of those slices. So something in a 10% range.
CAROLINE WOODS: Makes it 10% to small cap break down the other 90% for us. Where should the everyday retail investors portfolio be going?
SIMEON HYMAN: It starts with the stock bond allocation. And here’s where you almost have to have whole two truths in your heart at the same time. Because folks, there are two reasons to have bonds in your portfolio. One is for risk reduction and the other is for diversification. Now risk reduction and diversification both took sort of a hit. If you go back to 2022 stocks and bonds went down together. But that was at the end of quantitative easing that artificially pushed down interest rates. And when there’s 50 basis points yield on a ten year Treasury, that price can’t go up if stocks fall. Now we have 4.5%. So the diversification role is there. And the risk mitigation role is there to particularly stay a little short duration. So there’s almost an opportunity to think about a barbell approach there. One of the on the short end of duration, one of the opportunities that we offer is interest rate hedged corporate bond ETFs. We have ticker IHG as investment grade highs high yield. And it’s a cool way. Cool is a very formal technical CFA term to get.
CAROLINE WOODS: If the bond market can.
SIMEON HYMAN: Be to get the nice spreads from corporate bonds and just mitigate the interest rate risk. And people get this a little mistaken to leverage. It’s actually an all time lows for the S&P 500. Maybe in the private markets we could chat. But in terms of publicly traded companies leverages actually quite low for for large cap stocks.
CAROLINE WOODS: Okay. So you’ve got the bond market out of the way. The diversification there. You talked about small caps. What about the rest of the the equities side of the portfolio. Yeah. Should that be going given the fact that the market is near all time highs, almost all of the major indices and the fact that names like space will be included in the Nasdaq, but not necessarily the S&P 500.
SIMEON HYMAN: So I think the bigger call, just like the small cap call, is the question of your exposure to international equities, which I would submit. Also, one should think about in the current environment as maybe I should kind of have that kind of regular weight. And again, if you do the sort of look out the window test, maybe that’s somewhere in the vicinity of 20% developed in another 5 or 10. In emerging markets, it’s it’s not dissimilar to the small cap story because you have valuations that are a substantial discount. Yes. You have a couple of pockets of extra interesting things. You got the chips in South Korea, but by and large you’re at a discount. And particularly if we all hope for humanitarian reasons, there’s a little bit of a peace dividend, hopefully not just in the Middle East but in the Ukraine as well. That can that can be a boost to to both develop and emerging market stocks as well.
CAROLINE WOODS: Okay. And then just in terms of what you think is actually going to lead this market higher from here, will it still be tech.
SIMEON HYMAN: It’s really tough to bet against momentum. But as I mentioned the momentum piece is supported by those fundamentals. The earnings are sky high and that’s really the extended opportunity here. But look there are ways to you know think about managing that opportunity. Another ETF that we lost recently is by b b b ticker BB. And it’s the S&P 500 buyback aristocrats companies that have bought back their shares consistently. So we’ve got shares coming into the market through IPOs. Everybody talks about buybacks. But an important thing about buybacks is if you just see a company to a buyback once the signal is ambiguous with by B, we look at companies that have bought back their shares consistently over the years, and that offers a particularly enduring signal that the company is expecting strong growth going forward, high quality, and it can be a nice way to complement the straight up, momentum driven, broader market. That’s that we’ve been talking about.
CAROLINE WOODS: What is the biggest risk to this market right now?
SIMEON HYMAN: I mean, recession is still the biggest risk and I’ll call it the biggest risk, but I’ll say it’s not so big. The business cycle still is classically the biggest risk to the economy. And that’s one of the things that we look at incessantly. And I think the risk might actually be even though it’s the biggest risk, I think it might be a little smaller than many people think, because the baseline that they’re looking at to see if the economy is overheating, that’s what causes the recession. Things get too hot and then they fall down. A classic measure to look at that is capacity utilization capacity in just measures. In the US, the amount of the productive capacity is being used. And traditionally the measure, the tipping point is 80. If you’re over 80, then you’re overheating. You might have a recession. We’re at 77 that people say 77. Wow, that’s close to 80. We must be overheating. But now I’ll tell you that the standard range historically is 75 to 85. So 77 is pretty low. The reason people think it’s overheating is for the first time in Covid it went into the 60s, but in the depths of the 70s it stayed in the low 70s. So it’s still the business cycle is still the biggest risk. But it looks like we’ve had that soft landing that we talked about, you know, a year or two ago seems to have happened.
CAROLINE WOODS: So if the biggest risk to the market isn’t that big of a risk, what does that mean about how much higher we can go from here?
SIMEON HYMAN: Look, you know, you can’t have 20, 30% returns well into the future. We know what the equity risk premium is. Historically, it’s somewhere between 4 and 6%. You add that to pick your point on the treasury curve. And if you look at 8 to 10% over the long term. So there’s nothing out there that screams that, that’s a outsized expectation. Remember that the earnings growth has actually brought down PE multiples. So PE multiples are actually lower than they were at the beginning of the year even though the market’s up. So that puts a little bit of context.
CAROLINE WOODS: So just to sum it up then knowing that we have to scale back our expectations in this market has already run quite a bit so far. What is the overall strategy that the everyday investor should really be thinking about right now?
SIMEON HYMAN: It’s got to be somewhere in that vicinity of your regular asset allocation, your your regular weights of stocks and bonds, and then a nice mix of equities to make sure you’re capturing the potential broadening into international limit and small caps.
CAROLINE WOODS: Do you buy any dip or do you wait for a big pullback.
SIMEON HYMAN: Well look the the the history of that is clear. It’s tough to time the market if you’re a long term investor. So buying the dip is a little bit of a trading activity. But staying invested for the long term is important. Should we hit up our our last little bit of news on the space front before.
CAROLINE WOODS: We yes, we we should note that there are ways to get, I guess, leveraged exposure to the space ETF through your new ETF or Pro shares.
SIMEON HYMAN: We’re really excited. Pro shares. We we began trading on Monday SPC and as Pro shares ultra space ETF. And that targets two times the daily performance of space. And it’s a way to get magnify a bullish view, get more exposure with less capital at risk. And you don’t have to worry about margin calls. You got a single ticker in your brokerage account.
CAROLINE WOODS: How I guess. What does that tell you, though, about how strongly investors want access to the name?
SIMEON HYMAN: Interestingly, single stock leverage ETFs are one of the largest components, one of the largest slices of ETF launches in the last year or so. So it is a tool that investors are embracing. And the way that you can think about it perhaps is in the following manner. I mentioned that IPO volumes are not particularly high right now. And the longer the longer times that that companies are staying private, that’s a little bit pent up demand. The regular sort of organic single stock in an index demand, that’s the second leg of the stool. And indeed that opportunity in the leverage single stock is kind of three nice legs of the stool for a very nice ecosystem, robust price discovery and liquidity.
CAROLINE WOODS: Okay. I think this is a great time to pivot to our rapid fire round of this or that. Going to start with the space edition of this or that, and then we’ll broaden it out. Are you ready? Quick questions quick answers. Space demand. New money or rotation.
SIMEON HYMAN: New money.
CAROLINE WOODS: Funding it. Cash or AI winners.
SIMEON HYMAN: Funding in cash.
CAROLINE WOODS: Funding the rotation into space.
SIMEON HYMAN: Oh cash.
CAROLINE WOODS: Enthusiasm FOMO or fundamentals.
SIMEON HYMAN: Fundamentals.
CAROLINE WOODS: Investor behaviors. Healthy or speculative? Healthy space. One off superstar or start of a broader IPO cycle.
SIMEON HYMAN: Broader IPO cycle.
CAROLINE WOODS: Investor mood right now. Confident or nervous underneath the surface.
SIMEON HYMAN: Confident.
CAROLINE WOODS: Broadening. Broadening it out from here. Small caps or large caps from here.
SIMEON HYMAN: Broadening both.
CAROLINE WOODS: I was broadening which has more room to run from here. Small caps are large caps. Large caps growth or value. Quality Nasdaq 100 or S&P 500. Both US or international?
SIMEON HYMAN: Both.
CAROLINE WOODS: Better hedge today. Gold or treasuries?
SIMEON HYMAN: Treasures.
CAROLINE WOODS: Treasuries or cash.
SIMEON HYMAN: Treasuries for a recession.
CAROLINE WOODS: Markets by year end. Higher or lower? Higher. How much higher?
SIMEON HYMAN: I’m not supposed to do targets.
CAROLINE WOODS: Single digit percentage. Double digit percentage.
SIMEON HYMAN: Something like that.
CAROLINE WOODS: One word to describe how you’re feeling about the market for the rest of 2026.
SIMEON HYMAN: Optimistic.
CAROLINE WOODS: I’ll leave it there. Simeon Hyman, thank you so much. Really appreciate your insights.
SIMEON HYMAN: Thanks for having me.
CAROLINE WOODS: That’s Simeon Hyman of Pro Shares. If you enjoyed that street talk, check out our full interview with Kevin Moen, where he reveals the names that he thinks is going to power the next phase of the AI revolution, and they’re not the Mag seven.